Annual Report of the Federal Reserve Board, 1987

'Rep ort x £^ 1987 Board of Governors of the Federal Reserve System Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Letter of Transmittal BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Washington, D.C., June 28, 1988 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-Fourth Annual Report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 1987. Sincerely, Alan Greenspan, 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 1987 3 INTRODUCTION 5 THE ECONOMY IN 1987 7 Household sector 7 Business sector 8 Government sector 9 Labor markets 10 Price developments 12 MONETARY POLICY AND FINANCIAL MARKETS IN 1987 13 Monetary policy in 1987 16 Monetary aggregates 18 Credit market developments 21 INTERNATIONAL DEVELOPMENTS 22 Foreign economies 24 U.S. international transactions 26 Foreign currency operations 27 MONETARY POLICY REPORTS TO THE CONGRESS 27 Report on February 19, 1987 46 Report on July 21, 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Part 2 Records, Operations, and Organization 65 RECORD OF POLICY ACTIONS OF THE BpARD OF GOVERNORS 65 Regulation D (Reserve Requirements of Depository Institutions) 65 Regulation D (Reserve Requirements of Depository Institutions) and Regulation Q (Interest on Deposits) 66 Regulation E (Electronic Fund Transfers) 67 Regulation F (Securities of State Member Banks) and Regulation H (Membership of State Banking Institutions in the Federal Reserve System) 67 Regulation H (Membership of State Banking Institutions in the Federal Reserve System) 68 Regulation K (International Banking Operations) 69 Regulation T (Credit by Brokers and Dealers) 69 Regulation U (Credit by Banks for the Purpose of Purchasing or Carrying Margin Stock) 70 Regulation Y (Bank Holding Companies and Change in Bank Control) 70 Regulation Z (Truth in Lending) 71 Policy statement 72 1987 discount rates 77 RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE 77 Authorization for domestic open market operations 79 Domestic policy directive 80 Authorization for foreign currency operations 81 Foreign currency directive 82 Meeting held on February 10-11, 1987 92 Meeting held on March 31,1987 100 Meeting held on May 19, 1987 107 Meeting held on July 7,1987 117 Meeting held on August 18,1987 125 Meeting held on September 22, 1987 132 Meeting held on November 3, 1987 142 Meeting held on December 15-16, 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

153 CONSUMER AND COMMUNITY AFFAIRS 153 Regulatory matters 156 Community affairs 157 Compliance with consumer regulations 159 Economic effect of Regulation E 160 Complaints against state member banks 161 Unregulated practices 162 Community Reinvestment Act 163 Consumer Advisory Council 164 Legislative recommendations 165 Recommendations of other agencies 167 LITIGATION 167 Bank holding companies—antitrust action 167 Bank Holding Company Act—review of Board actions 169 Other litigation involving challenges to Board procedures and regulations 173 LEGISLATION ENACTED 173 Competitive Equality Banking Act of 1987 177 BANKING SUPERVISION AND REGULATION 177 Supervision for safety and soundness 181 Supervisory policy 184 Regulation of the U. S. banking structure 188 International Activities of U. S. banking organizations 190 Enforcement of other laws and regulations 192 Federal Reserve membership 193 REGULATORY SIMPLIFICATION 193 Regulation F 193 Freedom of Information Act 194 Margin regulations 195 Regulation K 195 Regulation E 195 Interpretations on payment of interest 196 Reporting of currency transactions 197 FEDERAL RESERVE BANKS 197 Developments in the pricing of Federal Reserve services and in the payments mechanism 200 Examinations 201 Income and expenses 201 Federal Reserve Bank premises 202 Holdings of securities and loans 202 Volume of operations 203 Financial statements for priced services Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

211 BOARD OF GOVERNORS 211 Financial statements 217 STATISTICAL TABLES 218 1. Detailed statement of condition of all Federal Reserve Banks combined, December 31, 1987 220 2. Statement of condition of each Federal Reserve Bank, December 31, 1987 and 1986 224 3. Federal Reserve open market transactions, 1987 226 4. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities, December 31, 1985-87 227 5. Number and salaries of officers and employees of Federal Reserve Banks, December 31, 1987 228 6. Income and expenses of Federal Reserve Banks, 1987 232 7. Income and expenses of Federal Reserve Banks, 1914-87 236 8. Acquisition costs and net book value of premises of Federal Reserve Banks and Branches, December 31, 1987 237 9. Operations in principal departments of Federal Reserve Banks, 1984-87 238 10. Federal Reserve Bank interest rates, December 31, 1987 239 11. Reserve requirements of depository institutions 240 12. Initial margin requirements under Regulations T, U, G, and X 241 13. Principal assets and liabilities and number of insured commercial banks, by class of bank, June 30, 1987 and 1986 242 14. Reserves of depository institutions, Federal Reserve Bank credit, and related items—year-end 1918-87, and month-end 1987 246 15. Changes in number of banking offices in the United States, 1987 247 16. Mergers, consolidations, and acquisitions of assets or assumptions of liabilities approved by the Board of Governors, 1987 257 MAP OF FEDERAL RESERVE SYSTEM—DISTRICTS 259 FEDERAL RESERVE DIRECTORIES AND MEETINGS 260 Board of Governors of the Federal Reserve System 262 Federal Open Market Committee 263 Federal Advisory Council 264 Consumer Advisory Council 265 Thrift Institutions Advisory Council 266 Officers of Federal Reserve Banks, Branches, and Offices 287 INDEX Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Parti Monetary Policy and the U.S. Economy in 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction The national economy scored major and other indications of pressures that gains in 1987. Growth of real gross na- might have led to a significant departure tional product outstripped most expecta- from the longer-run trend toward price tions, and the unemployment rate stability. In these circumstances, monedropped below 6 percent for the first tary policy was characterized by a tentime in the 1980s. With such sectors as dency toward greater restraint through agriculture, mining, and manufacturing last October; this tendency was reflected benefiting considerably from an im- in a moderate rise in money market proved competitive position internation- interest rates, which in turn damped ally, the expansion of the economy was growth of the monetary aggregates. better balanced than in 1985-86. Wage While M3 grew at a pace equal to the increases remained moderate and con- lower bound of the range set for 1987 by tributed to favorable cost trends in many the Federal Open Market Committee, sectors; however, a rebound in oil M2 fell short of its range. After the prices, coupled with the effects of the plunge in the stock market in October, dollar's decline on the prices of im- the System focused its efforts primarily ported goods generally, pushed the rate on ensuring adequate liquidity in the of price inflation back up to the 4 percent economy, and interest rates subserange by most measures. quently reversed a good part of the rise The year was marked also by the that had occurred earlier in the year. sharpest-ever decline in the stock mar- By early 1988, however, conditions ket—a 508-point drop in the most in financial markets had not yet returned widely watched index—and continued fully to "normal," and the edginess of concern about the twin deficits in the participants continued to be reflected in federal budget and the trade accounts. volatility and fairly sizable risk pre- Some progress was made in reducing the miums. Moreover, the economy had budget deficit during 1987, and the trade shown some signs of weakness. In paraccount showed some improvement to- ticular, the fourth quarter of 1987 was ward the end of the year, but both defi- marked by a sharp rise in inventories cits remained large. in a few sectors, and indications of a At times last year, soaring commodity slackening in labor demand appeared prices and sharp declines in the dollar early in 1988. Against this backdrop, and bond prices signaled the possibility the System eased a bit further the presof greater inflationary dangers. With the sures on reserve positions of depository economy moving toward higher levels institutions. of resource utilization, the Federal Re- While the Federal Reserve has had to serve had to be especially alert to these be responsive to the near-term risks of an economic downturn, it has not lost sight of the potential influence of policy NOTE. This discussion of economic and finan- actions on longer-term trends in the cial developments in 1987 is adapted from the economy. The United States is in the Monetary Policy Report to the Congress Pursuant process of an important readjustment in to the Full Employment and Balanced Growth Act of 1978 (Board of Governors, February 1988). the balance of economic activity, after a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction period of several years in which growth Committee when it met in February of domestic spending outstripped the 1988 to chart its monetary policy stratpace of domestic production. Over that egy for the year. They also must be kept span, the trade balance moved into deep in the forefront as decisionmakers elsedeficit, and the nation began to amass a where in the government set policy. In huge net external debt. It is important to particular, continuing fiscal restraint is allow room for a significant improve- crucial if we are to free resources to ment in our trade balance, especially finance productivity-enhancing private given that the low rates of unemploy- investment while bringing about an imment and the high rates of capacity proved pattern of international transacutilization evident in many segments of tions. Moreover, additional efforts at industry suggest the need for added care bringing greater coherence to policies in maintaining progress toward price domestically and internationally will stability. promote greater stability in financial These considerations underlay the markets and greater internal and external decisions of the Federal Open Market balance to the economy. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1987 The economy completed a fifth consecu- both to stronger orders from abroad and tive year of expansion in 1987, with real to higher capital spending by domestic gross national product increasing almost producers. Improvement also was ap- 4 percent over the four quarters of the parent in the domestic energy sector, year.1 The overall growth in output not where, in response to the partial recovonly was greater than in 1986 but also ery in oil prices, oil drilling retraced a was better balanced across industries small part of its earlier precipitous deand regions of the country. In addition, cline, and in agriculture, where higher the rise in activity supported a net gain exports and continued federal support of more than 3 million jobs last year, boosted farm income and helped bring and the civilian unemployment rate about some firming in land prices. stood at 5.8 percent in December, nearly In addition, the composition of activa percentage point below its year-earlier ity moved toward a better balance belevel. tween domestic spending and domestic Virtually all broad measures of infla- production. Weak consumer spending tion, after dropping sharply in 1986, re- reduced the growth of domestic demand bounded in 1987 to about the pace seen in 1987. At the same time, domestic in 1984 and 1985. In large part, the production was supported by the pattern of price movements over the past increase in the international competitwo years reflected developments in oil tiveness of U.S. industry: the continued markets, where prices rebounded last improvement in productivity in manuyear after a marked decline in 1986. facturing and the moderate pace of in- However, prices of some imported con- crease in labor compensation permitted sumer goods and of a number of indus- U.S. firms to lower the foreign currency trial commodities at the producer level prices of their goods while expanding also rose sharply. In contrast, wage profits. Indeed, much of the improvetrends remained restrained last year, al- ment in economic conditions last year though tightening labor markets and the could be traced to the effects of this faster pace of inflation stemmed the pat- increase in competitiveness on the voltern of wage deceleration evident in pre- ume of imports and exports. Neverthevious years. less, the combination of a substantial As suggested above, a number of sec- increase in the value of oil imports and tors that had been depressed in recent rising prices of non-oil imports more years began to show signs of improve- than offset an improvement in real net ment in 1987. The turnaround was most exports, and the nominal trade deficit pronounced in manufacturing, where widened to almost $160 billion in 1987. production and employment, especially In addition, a further erosion of net inin capital goods and industrial materials come on investments and other service industries, picked up sharply in response transactions pushed the current account deficit above $160 billion. Although economic activity rose at a 1. Except where noted, all percent changes are brisk pace for 1987 as a whole, the Ocfrom the fourth quarter of the previous year to the fourth quarter of the year indicated. tober stock market crash added substan- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

6 The Economy in 1987 Indicators of Economic Performance Percent change, Q4 to Q4 Percent change, Q4 to Q4 Real Real personal income and consumption j 6 4 '^Consumption expenditures I [Millions of units Percent of disposable income Private housing starts Personal saving rate 1.5 Percent change, Q4 to Q4 Billions o: 1982 dollars Real business fixed investment Change in real business inventories l|I|ji Producers' durable equipment Percent change, Q4 to Q4 price index 1983 1985 1987 1983 1985 1987 All data are seasonally adjusted. The unemployment from the Department of Commerce, data are from the Department of Labor; the other data are Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1987 7 tial uncertainty to the prospects for con- major sales incentives and then of the tinued economic growth. The sharp drop sales tax deduction available only under in stock prices reduced household the old tax law. Nevertheless, domestic wealth considerably and raised the pos- auto sales were relatively sluggish sibility of a further slowing in consumer throughout 1987, despite the availability spending, domestic business invest- of special incentive programs on a wide ment, and housing construction. At range of models during much of the year-end, it was still too early to assess year. the ultimate economic effect of the stock Housing activity in 1987 was damped market decline, but that effect seemed by the upward movement in mortgage likely to be offset, at least partly, by the rates, continued high vacancy rates for decline in interest rates after the crash. multifamily units, and changes in the tax law. Total housing starts were 1.62 million for the year as a whole, about Household Sector 10 percent below the 1986 total and Spending by households, which had the lowest in five years. Single-family been a major contributor to growth in homebuilding began the year at a brisk earlier years, slowed considerably in pace but weakened considerably as con- 1987. Real consumer spending rose less ventional mortgage interest rates began than 1 percent, after a 4 percent gain in to rise in April, reaching about WVi 1986. In large part, the cutback in percent for fixed-rate loans by mid-Ocspending reflected smaller increases in tober. Although interest rates on mortreal disposable income. Substantial gages dropped substantially thereafter, growth in employment and in farm and the stimulative effect of that change on interest income fueled continued gains housing demand may have been offset in nominal incomes; but a pickup in by stock market losses and reduced conconsumer price inflation eroded much of sumer confidence. In the multifamily that rise and reduced the growth in real market, activity also weakened over the income to about 2 percent last year, year; near record-high vacancy rates on compared with 3V2 percent in 1986. rental units and tax-law changes that re- Moreover, although the rise in stock duced the profitability of rental housing prices added further to household wealth continued to deter building. through August and supported consumption, the subsequent stock market Business Sector decline returned equity wealth to 1986 levels. Business spending on plant and equip- In general, consumers cut back their ment rose about AVi percent in real expenditures for both durable and non- terms in 1987. In large part, investment durable goods, while spending on ser- spending was associated with the overall vices continued to increase at about the pickup in economic activity. However, pace of recent years. Within the durable financial conditions also were conducive goods category, sales of new cars fell to spending, with cash flows strong and from 1IV2 million units in 1986 to about the costs of external capital fairly attrac- 10!/4 million units last year. Some of that tive through much of the year. dropoff can be traced to an especially Outlays for equipment began the year slow pace of sales in early 1987, as on the weak side, with spending down consumers shifted automobile purchases sharply in the first quarter after firms into 1986 to take advantage first of shifted expenditures into late 1986 to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 The Economy in 1987 take advantage of the favorable treat- accumulation was most pronounced for ment of investment under the deprecia- home goods such as furniture and applition provisions of the old tax law. ances and for apparel. At auto dealers, However, investment in equipment re- stocks generally rose in 1987, and at bounded sharply in the second and third year-end, supplies appeared to be well quarters, especially investment in com- above desired levels despite the prevaputers and other office equipment, which lence of special incentive programs and had shown essentially no growth in production cutbacks late in the year. 1986. In contrast, spending on industrial Before-tax profits of nonfinancial corequipment was not especially brisk de- porations increased substantially in spite the strong gains in manufacturing 1987. Profits were especially strong in production. manufacturing, where a pickup in ship- Outlays for nonresidential structures ments, firming prices, and good control also turned up last year after a sharp of costs contributed to improved mardrop in 1986. Much of the turnaround gins. In other industries, before-tax reflected an improvement in the energy profits were little changed from 1986 sector in response to higher oil prices. In levels. However, after-tax profits for the particular, drilling of oil and gas wells sector as a whole fell a bit on an annual was up more than 20 percent over the average basis, as increases in corporate year after having dropped 40 percent in tax liabilities associated with the new tax 1986. Outside of the energy area, laws more than offset the overall rise in spending on structures was about un- profits. changed, after falling nearly 9 percent in 1986. Producers were somewhat less re- Government Sector luctant to expand industrial facilities because of the substantial rise in produc- Significant progress was made last year tion, while office construction, although toward reducing federal budget deficits. down a bit last year, held up surprisingly The deficit for fiscal year 1987, at $150 well in view of the high vacancy rates billion, was about one-third smaller than still prevailing in many locales. the record level of the previous year, and Business inventory investment gener- the administration and the Congress ally moved in line with sales over most reached agreement on a broad plan for of 1987, but a sharp accumulation of deficit-reduction actions totaling more stocks in the fourth quarter suggested the than $30 billion in fiscal 1988 and about possibility of excess inventory levels at $46 billion in fiscal 1989. some retailers. In manufacturing, inven- However, a number of factors that tories changed little on balance over the raised receipts and lowered outlays in first half of the year but rose consider- fiscal 1987 are not likely to be repeated, ably in the second half as activity picked and without further legislative action, up. Stockbuilding was most evident in deficits could expand again unless ecocapital goods industries; orders and nomic circumstances remain favorable. shipments strengthened substantially as About half the deficit reduction in fiscal producers added supplies in anticipation 1987 could be traced to these one-time of higher production levels. In the retail factors, as tax-reform effects boosted trade sector, inventories of goods other revenues, and asset sales and changes in than automobiles also rose over the year, the timing of certain payments reduced pushing the inventory-sales ratio to a outlays. The remainder of the reduction relatively high level by December. The in the deficit reflected strong growth in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1987 9 Government Surpluses and Deficits tion, energy, and intergovernmental Billions of dollars assistance. The state and local sector recorded a sizable deficit in its operating and capital accounts (which exclude social insurance funds), as expenditures expanded more rapidly than receipts. Many states took action in early 1987 to deal with eroding fiscal positions. About half of the states cut their budgets last year and two-thirds raised taxes, with many of the budget adjustments in energy and farm states. However, pressing needs to expand and upgrade schools, highways, and correctional institutions continue to squeeze many state and local budgets. Labor Markets Nonfarm payroll employment increased 3 million over the 12 months of 1987, as the pickup in economic activity led em- 1983 1985 1987 ployers to add workers at a brisk pace. The data on the federal government deficit are for fiscal The strengthening in hiring was wideyears and are on a budget basis; they are from the Depart- spread by industry, in contrast to earlier ment of the Treasury. The data on state and local governments are for operat- years, when the labor market was charing and capital accounts. They are on a national income acterized by sharp disparities across secaccounts basis, and they come from the Department of tors. Manufacturing employment edged Commerce. The total 1986 surplus of $7.4 billion for state and local up over the first half of the year and then governments contained about $4.7 billion of nonrecurring rose substantially in the second half in inflows from settlements involving oil company overresponse to the large gains in industrial charges. Outer Continental Shelf rents, and stripper-well charges, as well as shifting of some revenue-sharing pay- production. Expansion of jobs in the ments to fiscal 1986. trade, service, and finance industries rerevenues and a very small underlying mained sizable during most of 1987. rise in outlays. The economic expansion The demand for labor considerably boosted receipts, while, on the outlay outpaced the increase in labor supply, side, lower interest rates in fiscal 1987 and the civilian unemployment rate offset some of the increase in interest dropped nearly 1 percentage point over payments associated with the rise in the the year to 53A percent at year-end—the size of the national debt. In addition, the lowest level since 1979. The jobless rate improvement in the farm sector reduced for adult men moved down to about agricultural support payments, and 4!/2 percent by the end of last year, relower inflation in 1986 held down cost- flecting strong growth in the industrial of-living adjustments for many entitle- sector. The rate for adult women fell to ments. Spending restraint also had a around 43A percent early in the year, but noticeable effect: the rise in military changed little in the second half. spending slowed, and cuts in discretion- As the unemployment rate dropped ary programs reduced outlays for educa- sharply, wage increases, which had been Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

10 The Economy in 1987 Labor Market Conditions parently have made significant progress Net change, millions of persons, Q4 to Q4 in increasing efficiency and streamlining Nonfarm payroll employment operations, and output per hour in this iTotal 4 sector rose nearly V/i percent in 1987. 1 This advance in manufacturing produc- 1 11 2 tivity, coupled with continued slow ~ 0 growth in manufacturing wages, continued to put downward pressure on factory Manufacturing 2 unit labor costs last year. i t i Percent change, Dec. to Dec. Price Developments Employment cost index Total compensation Inflation rebounded in 1987, largely reflecting higher energy prices and continued price hikes for imported goods. The fixed-weight price index for GNP increased about 4 percent for the year as a whole., after a 2!A percent rise in 1986. The indexes for consumer prices and for producer prices suggested an even sharper acceleration in prices over 1987, 1983 1985 1987 owing to the greater importance of energy prices in those indexes. The con- Payroll employment covers the total nonfarm sector; sumer price index was up AV2 percent in the employment cost index is for private industry, excluding farm and household workers. All data are from the the 12 months ended December, after a Department of Labor. 1 percent rise in 1986; the producer price slowing for several years, leveled out; index, which includes only prices of dohowever, they showed little sign of ac- mestically produced goods, rose 2XA celeration. Hourly compensation, as percent over the year, after dropping 2VA measured by the employment cost percent in 1986. index, advanced 3!/4 percent in the 12 The overall rise in energy prices in months ended December, about the 1987 reflected both a sharp rebound in same pace as in 1986. The widespread prices early in the year and an additional moderate rise in compensation occurred runup in prices around midyear. Spot despite a substantial pickup in con- prices for West Texas Intermediate crude sumer-price inflation. As a result, real oil (the benchmark crude oil in the hourly compensation fell last year and United States) rose $3 per barrel in since 1984 has increased at an average January of last year to about $18.50 in annual rate of only about Vi percent. response to lower OPEC production Unit labor costs in the nonfarm busi- levels. Tensions in the Persian Gulf ness sector rose only \XA percent in boosted prices further during the sum- 1987, after a 2 percent increase in 1986. mer, to a high of around $20 per barrel The continued restraint in labor costs in early August. Precautionary stockprimarily reflected moderate growth in building during this period, coupled compensation—productivity gains for with higher levels of production by the sector as a whole have improved OPEC countries and the absence of any little from the sluggish pace of the major disturbance in the Persian Gulf, 1970s. In contrast, manufacturers ap- subsequently helped put downward Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1987 11 Consumer Prices year, reflecting a further adjustment to Percent change, Dec. to Dec. the net decline in oil prices since 1985. Outside of the energy area, price increases for goods picked up in 1987 while prices for nonenergy services rose about 4Vi percent, a bit less than in 1986. A jump in used car prices accounted for much of the acceleration in goods prices, but further increases in import prices associated with the falling exchange value of the dollar also were evident. As a result, retail prices for many items with high import proportions, such as women's and girls' apparel, photographic equipment, and toys 10 and music equipment, posted notable increases. Prices for many industrial commodities also rose considerably over the 20 course of 1987. In addition to the increase in crude oil prices, copper prices more than doubled, and steel scrap prices were up 36 percent by year-end. 10 To some extent, the sharp rise in commodity prices reflected the influence of dollar depreciation on markets for internationally traded goods. However, tem- 1983 1985 1987 porary supply shortages for some indus- The data are from the Department of Labor. trial metals and the firming in U.S. pressure on crude oil prices, which re- industrial activity undoubtedly also had treated to about $17 per barrel after late an important influence on commodity summer. Retail prices for gasoline and markets. In the agricultural sector, grain home heating oil closely followed these prices fell early in 1987 as farmers sold movements, rising about 20 percent large amounts of grain received through through August and then falling some- government programs; prices rebounded what in the latter part of the year. In in the latter part of the year as exports contrast, prices for natural gas and elec- picked up in response to the falling tricity were down or little changed last dollar. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

12 Monetary Policy and Financial Markets in 1987 In 1987 the Federal Reserve continued the year, emphasis in the conduct of to face the difficult task of charting open market operations shifted toward policy in an environment in which con- maintenance of steady and somewhat siderable uncertainties clouded the rela- easier money market conditions to protionship between the behavior of the mote a return of stability to financial monetary aggregates and the perform- markets generally and to cushion the ance of the economy. As a result, while effects of the stock market decline on the the Federal Open Market Committee set economy. targets for some of the monetary aggre- At its meeting in February 1987, the gates, it deemed necessary the mainte- FOMC established annual target ranges nance of a flexible approach in conduct- of 5V2 to 8V2 percent for both M2 and ing its operations, looking at a broad M3; both aggregates had increased a litrange of information in judging when or tle more than 9 percent in 1986, but if to adjust its basic instruments—re- slower growth was expected to be conserve availability and the discount rate sistent with the Committee's goal of —in response to deviations in monetary sustaining business expansion while growth from expected rates. Such fac- maintaining long-run progress toward tors as the pace of business expansion, price stability. The deceleration proved the strength of inflation and inflation ex- sharper than anticipated, and in July the pectations, and developments in ex- Committee stated that growth for the change markets played a major role in year around the lower ends of these governing the System's actions, and in ranges, or even below them, might be light of the behavior of these other fac- acceptable in certain circumstances. Vetors, growth in the targeted aggregates, locity had increased in the first half of M2 and M3, was permitted to run at or the year, partly under the influence of below the lower bounds of the estab- rising interest rates, and the Committee lished ranges. agreed that if inflationary forces were to During episodes beginning in the exhibit renewed strength and interest spring and then again in late summer, rates were to increase further in the secthe dollar came under sustained down- ond half of the year, continued slow ward pressure, and inflation expecta- money expansion might be appropriate. tions appeared to be on the rise, partially Rates did move upward again in the late in response to the dollar's weak per- summer, including an increase of Vi performance. With the economy expanding centage point in the discount rate to at rates sufficient to produce rising rates counter potential inflation. And M2 of resource utilization, the FOMC growth did in fact fall substantially short sought some firming of pressures on re- of the Committee's range, at 4 percent serve positions and increased the dis- for the year, while M3 growth, at 5Vi count rate in September. When stock percent, was at the lower end of its prices collapsed in mid-October, the re- range. sulting turmoil required that the focus of The velocity of M2 has exhibited a policy be on ensuring the liquidity of the substantial short-run sensitivity to financial system. Over the remainder of movements in market rates of interest. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 13 Although deregulation permits institu- what. In response to reductions in tions to keep rates on deposits in line interest rates abroad, to some flattening with market interest rates, in practice the in commodity prices, and to better news adjustment of rates on many instruments on the U.S. trade deficit, the dollar has been sluggish. In addition, savers firmed and interest rates declined apparently have become more attuned to broadly, with long-term rates falling alternative investment opportunities, re- somewhat more than short-term rates. sponding strongly to changes in relative When the FOMC met in July to rereturns. As a result, the sensitivity of view its target ranges for growth of money to movements in market interest money and credit, all of the monetary rates seems to have increased since de- aggregates had decelerated considerregulation. In 1987, as rates rose, savers ably. The weakness in monetary growth had incentives to favor market instru- did not reflect any evident weakness in ments, and their response held down the the economy; rather, the slower money growth of M2 and to a lesser extent M3, growth and accompanying strengthening causing the velocities of these aggre- in velocity appeared largely attributable gates to rise. This outcome was in to the rise in market rates of interest that marked contrast to 1986, when falling was fostered in part by the Federal Reinterest rates and inflation were reflected serve's response to adverse developin faster money growth and substantial ments with respect to the dollar and indeclines in velocity. flation. The Committee reaffirmed its 1987 growth ranges for M2 and M3; in doing so, it anticipated some pickup in Monetary Policy in 1987 the growth of M2 over the remainder of During the first half of 1987, monetary the year, but it indicated that growth for policy was carried out in an atmosphere all of 1987 near or even below the botof increasing concern about the course tom of the target ranges might be acceptof inflation, arising in part from heavy able for both aggregates, depending on downward pressure on the dollar. the behavior of their velocities and other Growth of the economy was noticeably financial and economic developments, increasing resource utilization, and in- notably the evolving strength of inflaflation was picking up, reflecting the tionary pressures. The Committee also effect of a weaker dollar on import decided not to set a target range for M1, prices as well as a rebound of oil prices given the unpredictability of the behavfrom low 1986 levels. When the dollar ior of this aggregate relative to economic came under heavy pressure in late activity. March, previously tranquil credit mar- For a short time after the July meetkets began to exhibit concern about the ing, the dollar rose further, but with the effect that declines of the dollar would release of trade data in mid-August that have on prices. Long-term interest rates, disappointed market participants, the in particular, moved up strongly. In dollar again came under substantial conjunction with some easing moves downward pressure. Yields on longabroad, the Federal Reserve sought term bonds moved up sharply, as the somewhat greater restraint in the provi- dollar's weakness against a backdrop of sion of reserves to the banking system. strength in the economy spurred con- Initially, this action produced further in- cerns about inflation and possible firmcreases in interest rates, but subse- ing of monetary policy. Interest rates in quently, financial pressures eased some- short-term markets also increased, but Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 Monetary Policy and Financial Markets by lesser amounts. In light of the poten- on October 19 in chaotic trading. Intertial for greater inflationary pressures, in est rates then fell markedly as investors part related to weakness in the dollar, sought refuge in the perceived safety of the Federal Reserve sought to reduce fixed-income assets, especially Treasury marginally the availability of reserves securities. Although most stock indexes through open market operations; it also recovered somewhat in the wake of the raised its discount rate Vi percentage crash, financial markets remained turbupoint in early September to 6 percent. lent, with bond and equity prices fluc- After the discount rate action, interest tuating widely. rates rose further, especially in short- In a financial environment of extraorterm markets. dinary turmoil and apparent fragility, the Stock prices, which had reached very Federal Reserve shifted the emphasis in high levels relative to earnings and had the conduct of open market transactions been falling since mid-August, plunged to providing reserves generously to en- Interest Rates Percent per year U.S. government bonds State and local government bonds 1984 1985 1986 1987 1988 All the data are monthly averages. The rate for A-rated utility bonds is the weighted aver- The federal funds rate is from the Federal Reserve. age of recently offered, 30-year investment-grade bonds The rate for three-month Treasury bills is the market adjusted to an A-rated basis by the Federal Reserve. rate on three-month issues on a discounted basis and is The rate for U.S. government bonds is their market from the Department of the Treasury. yield adjusted to 30-year constant maturity by the Trea- The rate for conventional mortgages is the weighted sury. average of 30-year, fixed-rate, level-payment mortgages The rate for state and local government bonds is a Bond at savings and loan associations and is from the Federal Buyer index based on 25 issues of 30-year revenue bonds Home Loan Mortgage Corporation. of mixed quality. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 15 Reserves, Money Stock, and Debt Aggregates Annual rate of change based on seasonally adjusted daia unless otherwise noted, in percent1 1986 1987 Item 985 1986 1987 Q4 Ql Q2 Q3 Q4 Depository institution reserves2 Total 15.3 20.1 6.1 24.3 16.4 8.0 -1.6 1.4 Nonborrowed 26.5 22 2 6.3 25.3 18.5 5.4 -.4 1.2 Required 15.1 20.3 6.3 22.8 16.5 8.4 -.5 .3 Monetary base3 8.8 9.8 7.9 10.8 11.1 6.9 5.1 7.7 Concepts of money4 Ml 12.0 15.6 6.3 17.2 13.2 6.6 .8 4.0 Currency and travelers checks 7.7 7.5 8.7 7.7 9.0 7.4 7.4 9.7 Demand deposits 8.8 11.8 -1.0 12.6 3.1 .4 -7.5 .1 Other checkable deposits 22.1 29.3 13.6 32.0 29.4 13.7 5.2 4.0 M2 8.9 9.4 4.0 9.0 6.5 2.7 2.8 4.0 Non-Mi component 7 9 7.4 3.3 6.3 4.2 1.3 3.5 4.0 MMDAs (n.s.a.), savings, and smalldenomination time deposits 7.4 3.0 5.3 4.5 2.5 3.4 General-purpose and broker/dealer money market mutual fund assets (n.s.a.) 9.3 17.4 6.3 12.7 6.9 -.6 4.6 13.7 Overnight RPs and Eurodollars (n.s.a.) . 19.8 16.1 4.0 25.1 13.3 -22.8 18.9 7.5 M3 7.7 9.1 5.4 7.5 6.5 4.7 4.5 5.5 Non-M2 components 3.4 8.2 10.9 1.5 6.7 13.0 11.0 11.2 Large-denomination time deposits 5.1 1.8 8.5 -6.8 1.4 9.8 7.8 14.4 Institution-only money market mutual fund assets (n.s.a.) 11.1 32.1 3.0 17.2 1.4 - 12.2 2.9 20.2 Large-denomination term RPs (n.s.a.) . . -4.0 31.1 29.9 35.5 18.5 71.6 25.6 -4.1 Term Eurodollars (n.s.a.) -5.3 4.7 14.4 6.0 31.1 -2.3 16.1 10.6 Domestic nonfinancial sector debt 13.3 13.3 9.8 13.0 10.8 8.9 8.2 9.8 Federal 15.2 14.7 8.9 11.8 12.2 8.7 5.9 7.5 Nonfederal 12.7 12.8 10.1 13.3 10.4 9.0 9.0 10.6 1. Changes are calculated from the average amounts service accounts at depository institutions, credit union outstanding in each quarter. Annual changes are measured share draft accounts, and demand deposits at thrift institufromQ4toQ4. tions. M2 is Ml plus money market deposit accounts 2. Data on reserves and the monetary base incorporate (MMDAs); savings and small-denomination time deposits adjustments for discontinuities associated with the imple- at all depository institutions (including retail repurchase mentation of the Monetary Control Act and other regula- agreements), from which have been subtracted all inditory changes to reserve requirements. vidual retirement accounts (IRAs) and Keogh accounts at 3. The monetary base consists of total reserves plus the commercial banks and thrift institutions; taxable and taxcurrency component of the money stock plus, for institu- exempt general-purpose and broker/dealer money market tions not having required reserve balances, the excess of mutual funds, excluding IRAs and Keogh accounts; overcurrent vault cash over the amount applied to satisfy night and continuing-contract RPs issued by commercial current reserve requirements. banks; and overnight Eurodollars issued to U.S. residents 4. Ml consists of currency; travelers checks of non- by foreign branches of U.S. banks worldwide. M3 is M2 bank issuers; demand deposits at all commercial banks plus large-denomination time deposits at all depository other than those due to depository institutions, the U.S. institutions; assets of institution-only money market mugovernment, and foreign banks and official insitutions, tual funds; large-denomination term RPs issued by comless cash items in the process of collection and Federal mercial banks and thrift institutions; and term Eurodollars Reserve float; and other checkable deposits, which consist held by U.S. residents in Canada and the United Kingdom of negotiable orders of withdrawal and automatic transfer and at foreign branches of U.S. banks elsewhere. sure that adequate liquidity would be An easing of pressures on reserve posiavailable to meet any unusual needs. tions also took place which, along with Nonborrowed reserves grew rapidly in some diminution of inflation expectalate October to accommodate both a tions, led to a partial reversal of earlier large increase in reserves required increases in interest rates. These actions against surging transaction deposits and helped to calm the financial markets, an enlarged demand for excess reserves. although conditions remained somewhat Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

16 Monetary Policy and Financial Markets unsettled over the rest of the year. Monetary Aggregates, Nonfinancial Early in 1988, as incoming data gave Sector Debt, and Reserves some signs of a softening in the econ- Billions of dollars omy, the Federal Reserve sought a slight -m*,. additional easing in pressures on reserve positions. This action was taken against the background of a more stable dollar in foreign exchange markets, which followed a renewed agreement among major industrialized countries, highly visible exchange market intervention, and better trade news. Interest rates generally moved somewhat lower in the first few months of 1988, and stock prices trended higher, though remaining well below levels preceding the October collapse. Monetary Aggregates Total domestic nonfinancial debt M2 increased only 4 percent in 1987, well below both the lower bound of its 5Vi to 8V2 percent annual growth range and its more than 9 percent rate of expansion over the preceding two years. The velocity of this aggregate picked up substantially, reversing a portion of its Ml sharp decline in 1985-86. The rise in 750 velocity may have reflected in part several special factors affecting the public's 725 demand for M2 balances in 1987; among them were a much-reduced rate of sav- 700 ing out of income and a preference for drawing upon liquid assets—rather than using consumer credit—to finance pur- 60 chases in the wake of tax reform measures reducing deductibility of nonmortgage interest payments. Much of the 50 pickup in velocity, however, appears attributable to increases in the competing returns on other assets, which raised the opportunity costs associated with hold- 1986 iyb, ing M2 balances. The ranges adopted by the FOMC for the monetary The widening gap between market aggregates and for total debt of the domestic nonfinancial sector were for the period from 1986:4 to 1987:4. rates and offering rates was most pro- The reserve aggregates have been adjusted to remove nounced for the more liquid retail de- discontinuities associated with changes in reserve requireposits, whose rates are changed infre- ments. Nonborrowed reserves include extended credit. The difference between these two measures is adjustment quently. Early in the year, opportunity and seasonal borrowing. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 17 costs on these accounts were still low Growth of Ml slowed to 614 percent and inflows were large. As market rates from the very rapid \5Vi percent inrose, however, yields on these ac- crease posted the previous year because counts became less and less attractive of a small decline in demand deposits and growth slowed; by late in the year, and a sharply lower expansion of other both savings and NOW accounts had checkable deposits. The velocity of Ml net monthly outflows. Also, money increased slightly, after a record postwar market deposit accounts declined, for decline in 1986. The sharp slowing of the first year since this component of M2 growth and the abrupt turnabout in its was introduced in late 1982. Expansion velocity are indicative of the increased of money market mutual funds was sensitivity of Ml to movements in marsluggish. ket interest rates that has emerged in In contrast to the very liquid retail recent years. As its comparatively larger deposits, small time deposits expanded deceleration in 1987 suggests, Ml now in 1987, after two years of zero or nega- appears to have a greater sensitivity to tive growth. Depository institutions tend changes in interest rates than the broader to keep the offering rates on these de- aggregates. posits fairly well in line with market In large measure, the greater sensitivalternatives of about the same maturity. ity of Ml reflects the increasing share of With intermediate-term rates rising more other checkable deposits in that aggrethan short rates in 1987, the spread be- gate. Because NOW accounts pay extween yields on small time instruments plicit interest, they serve as an attractive and those on more liquid retail accounts savings vehicle as well as a transaction widened considerably, providing depos- account. The available information sugitors with an incentive to shift funds into gests that owners of NOW accounts are small time deposits from the more liquid quite sensitive to changes in opportunity retail instruments. costs and shift savings balances between M3 was stronger than M2 over the these accounts and other, less liquid reyear, expanding 5*/2 percent and ending tail deposits. At the beginning of 1987, the year at the bottom of its 5Vi to 8!/2 market interest rates were very close to percent annual growth range. Its faster NOW account rates, and with the opporgrowth reflected heavy reliance by de- tunity cost so low, depositors apparently pository institutions on large time de- placed unusually large amounts of interposits and on certain other instruments est-sensitive funds in these accounts; as included in M3 but not in M2. Both market rates rose during 1987, they evicommercial banks and thrift institutions dently shifted these funds out of NOW stepped up their issuance of wholesale accounts in search of higher yields. managed liabilities to fund more asset The abrupt weakening of demand degrowth than could be accommodated by posits after two years of rapid expansion greatly reduced inflows of core deposits. suggests that this component of Ml also Even so, M3 growth was subdued rela- is sensitive to interest rates. Higher martive to earlier years, in part because ket interest rates obviously offer incenoverall needs for funds contracted as tives to economize on balances that earn asset expansion at banks and thrift insti- no interest. Higher rates also permit tutions slowed. In addition, banks relied business firms to reduce the balances heavily on managed liabilities obtained held with banks as compensation for from non-M3 sources, especially funds services provided by the banks but not borrowed from their foreign branches. paid for with fees; because banks can Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

18 Monetary Policy and Financial Markets earn greater returns by investing these FOMC's monitoring range of 8 to 11 funds when rates are higher, they reduce percent. Debt expansion moderated conthe balance requirements commensura- siderably from the 131A percent pace of tely. Substantial amounts of demand de- the two previous years but still rose posits are held under compensating-bal- faster than income. Growth of federal ance arrangements, and this helps to debt slowed in 1987, as some progress explain a high interest elasticity for de- was made in reducing the federal deficit. mand deposits. Over time, however, Borrowing by state and local governthere has been a gradual movement to- ments fell substantially, partly reflecting ward the substitution of explicit fees for the damping effect of higher borrowing compensating balances, and some re- costs and the availability of unspent ports indicate that such shifts may have funds from earlier financings. In the accelerated in late 1987, thereby con- household sector, overall growth of intributing to the steep declines in demand debtedness slowed. Use of consumer deposits near year-end. Higher mort- credit was held down by sluggish spendgage rates also may have contributed to ing and by a shift toward greater reliance weakness in demand deposits in 1987 by on home equity lines of credit in reslowing the pace of mortgage refinanc- sponse to the effects of tax reform in ing—an activity that tends to boost de- reducing the deductibility of interest mand deposits temporarily because the payments on consumer debt. A brisk amount being prepaid on an old mort- pace of home sales over most of the gage often is placed in escrow for a time year, however, helped sustain the in a demand deposit. growth of mortgage debt at about the The collapse of equity prices, which elevated pace of 1986. Despite some raised the average level of all the aggre- widening last year of the gap between gates a bit in the fourth quarter, affected internally generated funds and capital Ml most noticeably. Demand deposits expenditures, overall business borrowrose sharply around the time of the ing diminished. Businesses continued crash, reflecting the increased volume of to retire equity, however, through financial transactions that arose from the mergers, buyouts, and share repursurge in trading activity. Other check- chases, and the credit needed to finance able deposits also registered sizable in- these retirements boosted the expansion flows, as some funds withdrawn from of business indebtedness. the stock market probably were placed Despite the slower growth of debt and initially in these accounts. Outside of the overall strength of the economy in Ml, sizable amounts of funds were 1987 there still were some signs of strain transferred from equity mutual funds and financial fragility in portions of the into money market mutual funds, which economy. While expansion of total are included in M2. The boost to the household debt slowed, the growth of aggregates was concentrated in late Oc- household debt still outstripped that of tober and proved temporary; deposits re- disposable income, and the ratio of debt ceded over the month of November. to income reached new highs. For some individuals, the strains of heavy debt burdens apparently remain severe: the Credit Market Developments number of personal bankruptcies has The debt of domestic nonfinancial sec- been growing rapidly over the last three tors grew 93/4 percent in 1987, ending years and setting new records. On the the year at about the middle of the other hand, declines last year in the de- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 19 linquency rate on mortgage debt have developing countries weighed down the brought this indicator of financial stress stock prices of many large banks in more into line with historical standards. 1987, but investor reaction to the sec- The nonfinancial corporate sector re- ond-quarter decision to make provisions mained highly leveraged in 1987 and for substantial losses was generally thus potentially vulnerable to adverse positive and, at the time, share prices changes in the economic and financial rose for many banks taking this step. environment. A combination of strong Difficulties persisted over the year in debt issuance and massive net equity making progress in handling the ecoretirements boosted the aggregate debt- nomic and financial problems of many equity ratio of these corporations, of the developing countries, and in the measured at market values at year-end, fourth quarter a number of large banks after a two-year decline resulting from announced additional provisions for increases in stock prices. Moreover, losses on such debt and, in some inhigher interest rates along with addi- stances, write-offs of problem loans. tional debt boosted borrowing costs, After several years of improvement, keeping the net interest-coverage ratio at the financial condition of the thrift inabout the very low levels recorded dur- dustry deteriorated in 1987. Aggregate ing the last recession. Reflecting the earnings declined, with losses posted in weakening of the finances of some cor- the second and third quarters as a result porations, the pace of downgradings of of heavy provisions for losses on assets, corporate debt remained very high in including a one-time write-off of accu- 1987, and a record $9 billion of rated mulated insurance payments prepaid to corporate bonds were placed in default. the Federal Savings and Loan Insurance In the financial sector, the banking Corporation (FSLIC).1 However, as had industry was under some continuing been the case for some years, the aggrestress in 1987, which primarily reflected gate condition of the industry masked the well-publicized difficulties with en- extremes among individual institutions. ergy and developing-country loans and, Many are well capitalized and quite in some parts of the country, with agri- profitable, but severe problems with cultural and real estate loans as well. asset quality have left a substantial mi- Although most banks continued to be nority insolvent and suffering massive healthy and to enjoy reasonable profits, operating losses that are steadily worsouring energy and agricultural loans in sening. Before the passage in 1987 of recent years have led to record numbers legislation authorizing a recapitalizaof bank closings, principally of smaller banks in the Midwest and Southwest; problems with the quality of agricultural 1. In March 1987 the General Accounting Office loans appear to be diminishing, how- declared that the FSLIC was insolvent because it ever, as the agricultural sector shows would be unable to meet all its future obligations signs of improvement. on insured deposits at failed but not yet closed institutions. The Financial Accounting Standards Provisions by large banks for losses Board then ruled that the prepaid assessments, on troubled loans led to record losses in which were assets on the balance sheets of individ- 1987 for the banking industry as a whole ual thrift institutions, had to be written off immediand to substantial declines in the book ately. The FSLIC recapitalization plan included in value of shareholder equity of affected the Competitive Equality Banking Act of 1987 provides that the affected thrift institutions will banks. Doubts about the ultimate collecrecover the amount of this write-off over the next tibility of loans to some heavily indebted five years as new funds are raised for the FSLIC. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

20 Monetary Policy and Financial Markets tion, the FSLIC had been unable to take small securities firms failed, the market effective remedial action with respect to turbulence posed significant problems these insolvent institutions, owing to the for traders, specialists, and marketinadequacy of its own resources. Under makers on the stock exchanges; and, the terms of the recapitalization plan ap- more generally, financial markets gave proved as part of the Competitive Equal- evidence of fragility and instability that ity Banking Act, the newly created Fi- had not entirely disappeared by early nancing Corporation began raising the 1988. Under the circumstances, it is esfunds needed by the FSLIC through is- sential that the reexamination of our suance of long-term debt. market mechanisms and regulatory sys- The collapse of the stock market gave tems go forward, to identify any actions clear warning of the vulnerability of im- that may be needed to safeguard the portant elements of the financial system strength of our capital markets and lower to sudden shocks. Although only a few the risks of economic disruption. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

21 International Developments The adjustment of external imbalances Exchange Value of the Dollar and among major industrial countries that Interest Rate Differential began in 1986 gained momentum in Percentage points Ratio scale, March 1973 =100 1987. Real net exports by the United States (national income accounts, 1982 dollars) rose $16 billion, contributing Vi percentage point to the 1987 rise in gross national product. Meanwhile, real net exports by Japan and Germany declined. The weighted average rate of growth of domestic demand in 10 foreign industrial countries exceeded that of GNP in those countries, while the reverse was true for the United States. Domestic demand in that group of countries grew about 4 percent, significantly faster than 1975 1980 1987 in the United States. Growth in non- The exchange value of the U.S. dollar is its weighted average exchange value against currencies of other G-10 OPEC developing countries slowed countries using 1972-76 total trade weights adjusted by somewhat from the preceding year but relative consumer prices. remained in the neighborhood of 4 The differential is the rate on long-term U.S. government bonds minus the rate on comparable foreign securipercent. ties, both adjusted for expected inflation estimated by a Despite the sharp improvement in real 36-month centered moving average of actual inflation or by staff forecasts where needed. terms, the nominal U.S. external ac- All the data are quarterly. counts again posted record deficits for the year: $159 billion in the trade ac- 1 percent, in favor of the dollar, in the count and $161 billion in the current difference between estimated long-term account. By the end of the year, how- real interest rates in the United States ever, even the nominal trade deficit was and those in major foreign countries. beginning to decline. Also, the dollar's decline occurred The assessment by market partici- despite $100 billion of net official dollar pants of the outlook for adjustment of purchases by the monetary authorities of the nominal U.S. external position ap- 14 major countries, including the United peared to be an important factor in ex- States. Total official dollar purchases, change market developments in 1987. including some by smaller countries, Market disappointment on that score may have been as high as $140 billion. contributed to a further net decline of U.S. monetary authorities purchased I6V2 percent in the foreign exchange $8V2 billion net, of which about twovalue of the dollar against the currencies thirds was against Japanese yen and the of 10 major industrial countries, bring- remainder against German marks. Much ing the dollar's total depreciation from of the currency intervention arose from February 1985 to December 1987 to 44 the February 1987 Louvre accord among percent. The dollar's decline in 1987 the G-7 governments, reaffirmed in Deoccurred despite a net rise of more than cember, which declared the intent to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

22 International Developments "cooperate closely to foster stability of GNP, Demand, and Prices exchange rates around current levels/' Percent change from previous year After the turn of the year the dollar Gross national product firmed significantly, aided by the publi- Constant prices cation of trade figures for November and December that showed substantially lower nominal deficits. Foreign Economies Real economic growth in the major for- Total domestic demand eign industrial countries strengthened Constant prices somewhat in 1987. Economic activity was strong in Japan, Canada, and the United Kingdom, particularly in the latter half of the year. Growth was only moderate in the economies of continental Europe, with some slowing evident Foreign toward year-end. The pattern of real growth across the Consumer price index major foreign industrial countries was reflected in the changes in unemployment rates. In both Canada and the United Kingdom, unemployment rates fell sharply during the year and by yearend had declined to levels not reached since 1982. In Japan the unemployment 1983 1985 1987 rate decreased slightly on average over the year. In contrast, unemployment Foreign data are multilaterally weighted averages for rates in Germany and the other conti- the Group of Ten (G-10) industrial countries* using 1972-76 total trade weights, and are from foreign official nental European countries were little sources. changed in 1987 from rates observed Data for the United States are from the Departments of during the previous year. Commerce and Labor. The GNP and domestic demand data are quarterly; the The rate of inflation abroad rose consumer price data are monthly. somewhat in 1987 as the factors that had contributed to lowered inflation in 1986, and Switzerland exceeded their target particularly declining world oil prices, ranges for the growth of specific aggrewere lessened or even partially reversed. gates, as did France for one of its two Nevertheless, inflation remained at low targeted aggregates; the rate of money rates in the major foreign industrial growth in Japan rose from its already countries. In Japan and Germany, con- high 1986 pace. Fiscal policy abroad sumer prices in the fourth quarter were eased slightly from the generally reonly slightly above their levels at the end strained stance of 1986. Government of 1986; wholesale prices were slightly deficits as a fraction of GNP rose a little below their year-earlier levels. in Germany and Japan. In the United In most of the major foreign industrial Kingdom, unexpectedly strong growth countries the rate of growth of money in revenues moved the government fiscal remained quite rapid in 1987. Germany position into surplus. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 23 The aggregate current account surplus Hong Kong, South Korea, Singapore, of the 10 major foreign industrial coun- and Taiwan—increased $9 billion detries decreased about $10 billion in spite the accelerated growth of imports. 1987. Larger surpluses for Germany and In addition, after several years of declin- Japan were more than offset by deterior- ing or slow growth, both exports and ation in the balances of France, the imports expanded in 1987 for the heav- United Kingdom, and Italy. Despite in- ily indebted developing countries tarcreases in the dollar value of their cur- geted by the debt-relief plan of Treasury rent account surpluses, the adjustment of Secretary Baker—their combined trade trade volumes that began in 1986 in balance and current account improved Japan and Germany proceeded further. about $8 billion. Japanese export volume declined almost Efforts to provide additional financing 2 percent, while its import volume rose for the heavily indebted developing more than 8 percent. During 1987, Ger- countries faced growing difficulties durman export volume rose slightly, but ing 1987. Fatigue with the adjustment import volume expanded signficantly process increased. A key development more. was the February 1987 decision by Bra- The combined trade balances and cur- zil to suspend interest payments to banks rent accounts of developing countries on its external term debt. This action improved nearly $30 billion in 1987. A contributed to an atmosphere of general $ 13 billion improvement to near balance concern about the prospects for continin the combined current account of ued improvement in growth and adjustnon-OPEC developing countries was ment of the heavily indebted developing achieved largely through the growth of countries. However, in late 1987, Brazil exports. Imports expanded significantly reached a preliminary agreement on a for the first time since the onset of the plan to eliminate its arrearage in interest debt crisis in 1982. Rising oil revenue, payments; the accord set the stage for a attributable to higher prices, and un- normalization of Brazil's relations with changed imports led to a $16 billion its external bank creditors, including a improvement in the aggregate current rescheduling and the provision of new account balance of OPEC countries in money. Brazil resumed partial payment 1987. Developments in the oil market of interest at the end of 1987. had little effect on the overall current In May 1987, Citicorp announced a account of non-OPEC developing $3 billion addition to its reserves for countries. possible loan losses, citing its decision Rising prices of manufactures and to put its Brazilian loans on a cash basis. commodities contributed to the growth Most major U.S. banks and some forof trade in non-OPEC developing coun- eign commercial banks soon followed tries. In addition, the large 1986 im- Citicorp and announced major additions provement in the exchange-rate com- to reserves for loan losses. In December petitiveness of these countries was 1987, Bank of Boston initiated a round maintained in 1987. However, Taiwan of provisions and charge-offs by U.S. and South Korea, two of the major regional banks against loans to developnewly industrializing economies ing countries. These moves raised con- (NICs), increased the rate of apprecia- cern about the future capacity of comtion of their currencies against the dol- mercial banks to provide new loans to lar. The combined current account developing countries. surpluses of the four East Asian NICs— Some countries with large external Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

24 International Developments debts were able in 1987 to obtain sizable U.S. International Trade new bank loans—$7.7 billion for Mex- Billions of dollars ico and $2 billion for Argentina. In addition, the groundwork was laid in 1987 for a $1 billion new-money package for Colombia that was completed in early 1988. Financing through conventional new-money packages has been complemented by the development of a menu of financing options, including debt-forequity programs and bonds. Near the end of 1987, Mexico announced a plan Merchandise trade to exchange a portion of its debt for a Total imports new issue backed by zero-coupon notes issued by the U.S. Treasury. The results of the auction were announced in March 1988 with $2.6 billion in new bonds issued to retire $3.7 billion in public sector debt (an average discount of about 30 percent on the old debts). Important structural reforms were undertaken or continued in a number of countries, often supported by programs of the World Bank and the International Monetary Fund. The central role of these institutions in resolving the debt crisis was Non-oil imports reaffirmed. For example, agreement was 90 reached on an enhancement of the IMF's 1983 1985 1987 Structural Adjustment Facility and a re- The data are quarterly, seasonally adjusted at annual plenishment of the International Devel- rates, and are from the Department of Commerce. opment Association. A sizable general capital increase for the World Bank is ceeded the rise in income receipts from now awaiting approval by national abroad. The current account deficit for authorities. 1987 was $161 billion, up from $141 billion in 1986. The rise in the value of merchandise U.S. International Transactions exports in 1987 largely reflected a strong The U.S. merchandise trade and current increase in the volume of nonagriculaccount deficits widened in 1987 as a tural exports, which rose 20 percent whole but leveled off in the latter part of from the fourth quarter of 1986 to the the year. A $27 billion increase in ex- fourth quarter of 1987, an even stronger ports and a $41 billion increase in im- rate of increase than was recorded over ports yielded a trade deficit of $159 bil- the preceding four quarters. While there lion for the year, compared with $144 was a small pickup in economic growth billion in 1986. Net receipts on services in the rest of the world, much of the rise transactions declined $7 billion in 1987, appears to be associated with an immainly reflecting a rise in payments of provement in the price competitiveness investment income to foreigners that ex- of U.S. products resulting from the pre- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 25 U.S. International Transactions1 Billions of dollars, seasonally adjusted Quarter Year Transaction 1986 1987 1986 1987 Q4 Qi Q2 Q3 Q4 Current account -141 -161 -38 -37 -41 -43 -39 Merchandise trade balance -144 -159 -39 -39 -40 -40 -40 Exports 224 251 57 57 60 65 69 Imports -369 -410 -96 -96 -100 -105 -109 Investment income (net) 21 14 4 6 2 * 7 Direct investment, net 31 35 8 9 7 6 13 Portfolio investment, net -10 -21 -4 -4 -5 -5 -6 Other services (including military transactions) -2 _2 * Unilateral transfers, private and government -16 -13 -4 -3 -3 -3 -4 Private capital flows 84 84 25 26 21 39 -2 Bank-reported capital, net (outflows, —) 18 44 3 12 -1 24 9 U.S. net purchases (-) of foreign securities -3 -4 3 -1 -1 _2 Foreign net purchases ( + ) of U.S. Treasury securities . . . 8 -6 -3 _2 -3 1 Foreign net purchases of U.S. corporate bonds 54 27 12 9 7 8 3 Foreign net purchases of U.S. corporate stocks 17 15 10 8 5 -8 U.S. direct investment abroad -28 -38 -4 -10 -6 -6 -16 Foreign direct investment in United States 25 41 13 8 9 12 Other corporate capital flows, net -7 5 1 1 4 n.a. Foreign official assets in United States (increase, +) . . 35 44 14 10 20 U.S. official reserve assets, net (increase, -) 9 2 3 4 U.S. government foreign credits and other claims, net. -2 1 1 Total discrepancy 24 22 12 -5 7 3 17 Seasonal adjustment discrepancy. . . 4 3 _ 2 -5 4 Statistical discrepancy 24 '22 -8 9 13 1. Details may not add to totals because of rounding. SOURCE. U.S. Department of Commerce, Bureau of *Less than $500 million absolute value. Economic Analysis. vious decline in the dollar. The growth tinued to fall and thereby held down in the volume of exports was spread over significantly the increase in the implicit most major categories of trade and was deflator for imports. On a fixed-weight especially strong in sales of machinery, basis, non-oil import prices rose 7.0 particularly business machines. The vol- percent (Q4 to Q4). Most of the increase ume of agricultural exports also rose as in the volume of non-oil imports was grain sales to the Soviet Union and concentrated in capital goods, especially China increased and as U.S. suppliers of business machines. soybeans increased shipments when for- The value of oil imports rose in 1987 eign soybean production dropped off. from the low levels recorded in 1986. A The increase in the value of merchan- 21 percent increase in price (year to dise imports for 1987 reflected both ris- year) was accompanied by a 4 percent ing import prices (in response to the rise in volume. In 1987 the average price continuing decline in the dollar through of oil, at $17.17 per barrel, was above 1987) and an increase in volume. Signif- the 1986 average of $14.18 per barrel icant price rises were recorded for im- but well below the $25-$35 per barrel ported oil, other industrial supplies, recorded during the previous six years. consumer goods, and various machinery In the second half of 1987, oil prices categories; however, prices of some declined in response to excessive OPEC items, notably business machines, con- oil production and the accompanying Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

26 International Developments stock accumulations. The volume of in the fourth quarter brought the total for U.S. oil imports rose from an average of 1987 below the level for 1986. 6.2 million barrels per day in the first Foreign direct investment in the half of 1987 to an average of 7.3 million United States again reached record barrels per day in the second half of the levels in 1987 with a continued large year; much of the increase went into number of takeovers of major U.S. corinventories. porations by foreigners. Direct invest- The record $161 billion current ac- ment abroad by U.S. residents, as meacount deficit for 1987 was balanced by sured in dollars, continued to increase recorded net capital inflows of $138 bil- also, although dollar depreciation lion and a statistical discrepancy of $22 played a major role in explaining the billion. The net capital inflows brought increases. Despite large recent inflows, the U.S. net indebtedness to foreigners foreign direct investment in the United to about $400 billion at the end of 1987. States is still smaller than U.S. direct Official reserve holders, both U.S. investment abroad. and foreign, accounted for a large part of the recorded capital inflow in 1987 ($53 billion). The bulk of foreign official in- Foreign Currency Operations flows, $44 billion, were placed in U.S. Treasury securities. However, foreign Of the total $8,509 million of net interofficial holdings in the United States in- vention purchases of dollars by the Fedcreased by only a fraction of the increase eral Reserve and the Treasury, $4,223 in official reserves held by these coun- was for the System account. The Federal tries, as a substantial portion of the Reserve sold $2,038 million equivalent dollar proceeds of intervention in for- of German marks and $2,184 million eign exchange markets by several coun- equivalent of Japanese yen from its tries were apparently invested in the holdings of foreign currencies. The Sys- Euromarkets. tem realized profits of $1,139 million on Private capital flows were dominated these intervention sales. In addition, beby net inflows reported by banks, partic- cause of the rise in value of foreign ularly through interbank transactions. currencies against the dollar, the Federal These inflows probably reflected indi- Reserve gained $665 million on its rerectly the increased availability of funds maining foreign currency holdings. At in the Euromarkets resulting from place- year-end, the value of those balances, ments by official monetary authorities. predominantly marks, amounted to Inflows through securities transactions $7,773 million. were down sharply from 1986. Private The only activity on the Federal Reforeigners were net sellers of U.S. Trea- serve swap network in 1987 involved the sury securities and their purchases of final repayment, in February, of an Au- U.S. corporate bonds were down by gust 1986 drawing by the Bank of Mexhalf. On the other hand, private foreign ico. The drawing was part of a multinanet purchases of U.S. corporate stocks tional bridge loan to allow Mexico time were up sharply in the first three quarters to obtain more permanent financing of the year, though net sales of $8 billion from the IMF and the World Bank. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

27 Monetary Policy Reports to the Congress Given below are reports submitted to vate sectors. The Congress and the adthe Congress by the Federal Reserve ministration must follow up the steps on February 19 and July 21, 1987, already taken and make basic programpursuant to the Full Employment and matic changes that will ensure continu- Balanced Growth Act of1978. ing movement toward budgetary balance; failure to do so would be damaging to confidence and disruptive Report on February 19, 1987 to the financial markets. Many of our major trading partners, which have de- Monetary Policy and the Economic pended greatly on external surpluses to Outlook for 1987 buoy their economies over the past few The current economic expansion in the years, must act to open their markets United States has entered its fifth year, more fully and to foster sustained ranking it among the longest of the post- growth in domestic demand; without war period. While substantial imbal- such action, prospects for world growth ances and risks have emerged in the as well as for reducing our own trade course of the expansion that must be deficit would be impaired, the risks of dealt with forcefully and effectively, im- protectionism would rise, and prospects portant groundwork also has been laid for the dollar would be more uncertain. for continued growth through 1987 and And, if we are to capitalize on those beyond. Significantly, price trends thus trading opportunities and promote ecofar have remained favorable, reflecting nomic and financial stability at home, not only the dramatic drop in crude oil labor and management must avoid a reprices in early 1986 but also continued turn to the inflationary behavior of the restraint on labor costs in many sectors. past. Oil prices have firmed recently, Interest rates have moved lower and and the sizable decline in the dollar is stock prices higher, reducing the cost of likely to exert upward pressure on other capital for investment and enhancing prices in the months ahead; the chalwealth. Furthermore, processes are in lenge is to prevent such developments train that should help correct the major from triggering a cumulative priceimbalances that have been plaguing the wage spiral. economy: action has been taken to cut In that context, Federal Reserve polthe deficit in the federal budget, and the icy has a critical role to play. Monetary foreign exchange value of the dollar has expansion, while adequate to support moved to levels that have made U.S. orderly economic growth, needs to be firms more competitive in world markets consistent with continuing progress over and that should help correct the imbal- time in reducing the underlying rate of ance in the U.S. external accounts. inflation. As the experience of recent While the potential for further eco- years has demonstrated, such a policy— nomic progress thus appears consider- in part by bolstering confidence in finanable, those gains will be secured only if cial markets and providing a framework there is timely and constructive action of greater certainty for private decisionby decisionmakers in the public and pri- making—can make a substantial contri- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

28 Monetary Policy Reports bution to the maintenance of expansion The Federal Reserve encouraged conand the reduction of unemployment. In tinued economic expansion last year by the short run, a variety of factors—such supplying ample reserves for the bankas interest rate movements, regulatory ing system and reducing the discount changes, and institutional innovations, rate four times, by a total of 2 percentamong others—may alter considerably age points. A large portion of the rethe amount of funds the public wishes to serves provided were to accommodate hold in monetary form. Over time, how- the strong demand for Ml-type deposits. ever, expansion of the money stock Last year, Ml grew in excess of 15 measures clearly must moderate from percent and its velocity—the ratio of recent rates if destabilizing pressures are nominal gross national product to to be avoided. The Federal Open Market money—declined more than 9 percent, Committee has established targets for unprecedented during the postwar years. 1987 with that fact in mind, but it will In part, this rapid money growth recontinue to interpret the movements in flected the public's response to changes the monetary aggregates in light of de- in interest rates, which made it more velopments in the economy and in do- attractive to hold negotiable order of mestic and international financial mar- withdrawal (NOW) accounts and dekets and the potential for inflationary mand deposits. However, last year's pressures. growth was well in excess of what would be expected based on past rela- A Brief Review of the Past Year tionships among money, interest rates, Economic activity continued to expand and income. Growth in the broader agmoderately in 1986, at about the pace gregates was more in line with past exthat has prevailed, on average, since perience, taking account of interest rate mid-1984. This growth was sufficient to movements. Both M2 and M3 expanded create IVi million new payroll jobs, and almost 9 percent last year, ending 1986 the unemployment rate drifted down to just within the upper bound of their anthe area of 63A percent at year-end. nual target ranges. Further progress was made in 1986 In the credit markets, short-term rates toward the objective of overall price sta- of interest declined about 2 percentage bility. Wage and price behavior contin- points through the first three quarters of ued to be influenced by the anti-infla- the year. Since that time, short-term tionary thrust of policies put in place rates have backed up some, first reflectsome time ago—and by the ongoing ad- ing pressure around the end of the year justment of expectations to the new en- from a huge volume of tax-related transvironment. Thus, while the plunge in actions and more recently from invesworld crude oil prices contributed im- tors' response to stronger-than-anticiportantly to the sharp slowing in infla- pated economic news and concerns tion last year, prices outside the energy about weakness in the dollar. Longerarea also decelerated on average. Run- term bond rates have fallen more than 2 ning counter to past cyclical patterns, percentage points since the end of 1985, labor cost pressures remained subdued, with most of the decline occurring in the with nominal wage gains across a broad first four months of 1986 in response to range of occupations and industries con- an improved inflation outlook and slugtinuing to move toward less inflationary gish growth in economic activity. After rates—rates that are more consistent mid-April, Treasury bond rates flucwith trends in labor productivity. tuated in a relatively narrow range, but Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 29 corporate and municipal bond rates lar depreciation into import prices was trended lower—reaching the lowest limited by the ability of foreign exlevels since the late 1970s. porters and U.S. distributors to absorb The declines in interest rates contrib- much of the exchange rate swing in their uted to the vigorous pace of household profit margins. Also, American buyers spending last year by reducing borrow- apparently have developed strong prefing costs and boosting asset values. erences for certain foreign goods, and Housing starts, which are particularly the newly industrialized and developing sensitive to interest rate developments, countries continued to rely disproporrose a bit, despite the drag of a de- tionately on U.S. markets. With import pressed economy in regions heavily de- penetration remaining on an uptrend, pendent on oil and agriculture. In con- domestic production continued to extrast, capital spending declined over the pand less rapidly than domestic demand. course of the year, largely because of the The federal budget deficit also resharp cutback in oil drilling; more mains huge, despite substantial deficitbroadly, investment was restrained by reducing actions taken by the adminisan overhang of office and other commer- tration and the Congress. Official cial space and the weak pace of activity estimates suggest that the deficit for fisin major segments of the manufacturing cal 1987 will be in the range of $175 sector. billion—a good deal less than the record The disparity between household $221 billion figure of a year earlier but spending and business investment is in- still equal to a historically high 4 percent dicative of the imbalances that charac- of GNP. Further cuts in the federal defiterized the U.S. economy in 1986. In- cit are essential, in the context of movedeed, economic performance throughout ment toward better external balance, to the current expansion has varied consid- ensure that an adequate flow of domestic erably across industries and regions of saving is available to support needed the country. In some cases, such as agri- domestic investment. culture, special circumstances have played a role. But more fundamentally, Monetary Policy for 1987 the imbalances are rooted in the enor- As noted above, the members of the mous—and partly related—deficits in Federal Open Market Committee our external accounts and in the federal (FOMC) believe that a reduction in the budget. growth of the money supply measures, Although the foreign exchange value over time, will be needed if the economy of the dollar has fallen sharply from its is to achieve noninflationary growth and peak in early 1985—at least relative to external equilibrium. The precise timing the currencies of the major industrialized and degree of that moderation in monecountries—the nation's trade deficit tary expansion will depend on prevailing deepened last year. The increased price circumstances in the U.S. economy and competitiveness of U.S. producers con- in domestic and international financial tributed to a sizable improvement in real markets. The Committee has established export growth, but the pickup was target ranges for M2 and M3 of 5Vz to damped by the relatively slow pace of 8V2 percent from the fourth quarter of economic activity abroad. At the same 1986 to the fourth quarter of 1987, the time, the volume of imports continued to same as those tentatively agreed upon in rise rapidly through most of last year, in July. The ranges for M2 and M3 are V2 part because the pass-through of the dol- percentage point below those in effect Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

30 Monetary Policy Reports Ranges of Growth for Monetary which much slower growth of Ml would and Debt Aggregates be appropriate. For example, if, in the Percent change, fourth quarter to fourth quarter context of an expanding economy, inflationary forces appeared threatening, the Aggregate 1987 1986 dollar was exhibiting significant weak- M2 5Vi to 8I/2 6 to 9 M3 5Vi to 8'/2 6 to 9 ness on exchange markets, and the Debt 8 to 11 8 to 11 broader aggregates were growing rapidly, a less accommodative approach to reserve provision would be necessary. In for 1986 and are below the actual growth those circumstances, monetary velocity rates last year. Indeed, in an environ- likely would accelerate, and much ment without the dramatic movements in slower growth of Ml would be both a interest rates of recent years, only small natural and essential development. Conchanges in the velocity of these aggre- versely, it could be appropriate to acgates would be anticipated. Accord- commodate, in the short run, further sizingly, the Committee now expects able increases in Ml in circumstances growth of M2 and M3 this year to be in characterized by sluggish business activthe middle parts of their ranges. ity and maintenance of progress toward underlying price stability and interna- The FOMC elected not to establish a tional equilibrium. As this implies, the specific target range for Ml at this time Committee will continue to monitor Ml because of uncertainties about its underbehavior carefully, assessing the growth lying relationship to the behavior of the of the aggregate in the context of other economy and its sensitivity to a variety financial and economic developments. of economic and financial circumstances And, depending on circumstances, it is and assumptions at particular points in possible that at some time in the year the time. With the deregulation of deposit Committee might set more specific obrates and the attendant changes in the jectives for Ml. composition of Ml, the narrow money measure has become much more respon- The Committee will continue to monsive in the short run to changes in inter- itor the growth of debt. Growth of doest rates, and possibly to other factors mestic nonfinancial sector debt in recent affecting the portfolio decisions of years consistently has exceeded both the households. Moreover, only with the Committee's expectations and, more passage of time will it become possible important, the expansion of income by a to assess with any precision the longer- wide margin. This is a matter of conterm trend in growth of Ml, under cur- cern, for it has resulted in potential frarent institutional arrangements, relative gilities in the nation's financial structo nominal GNP. Given these circum- ture. Although the range for the debt stances, the appropriateness of different measure has been kept at 8 to 11 perrates of growth of Ml cannot be as- cent, the same as in 1986, that range sessed in isolation; rather, the movement implies a significant slowing from the of this aggregate necessarily will be almost 13 percent pace last year—but to evaluated in the light of expansion in M2 a rate still in excess of that expected for and M3, growth of the domestic econ- income. With a reduced federal deficit, omy, and emerging price pressures, borrowing by the federal government which in turn are partly related to will slow. Also, new constraints imchanges in the value of the dollar. posed by tax reform legislation should Clearly, there are circumstances in reduce the presence of state and local Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 31 governments in the financial markets. prices and a rebound in energy costs. As Borrowing by nonfinancial business indicated in the table, the central tenfirms is expected to grow at about the dency of the forecasts of Committee same rate as last year. Tax reform should members and other Reserve Bank Presiresult in some reduction in the volume of dents is for growth in real GNP of about equity shares retired in connection with 2V2 to 3 percent. Such an increase in mergers and other corporate restructur- output would be expected to generate ings, but such activity—and the atten- substantial gains in employment, and the dant borrowing—appears likely to re- jobless rate is projected to drift down a main significant, in some cases bit over the year. Prices, as measured by undermining the financial strength of the implicit deflator for GNP, are excorporations as they become more pected to rise 3 to 3*/2 percent. It should highly leveraged. Moreover, firms may be noted that the rise in energy and imhave a wider gap than last year between port prices likely will have a somewhat internally generated funds and invest- greater effect on consumer prices, so ment expenditures, owing in part to that measures such as the consumer higher corporate tax bills. price index may rise faster than the GNP Growth of household debt also is ex- deflator—a pattern that emerged in the pected to be about the same as last year. second half of 1986. Growth of consumer installment credit The forecasts of the Committee clearly is decelerating, but growth of members and the other Reserve Bank mortgage debt should be robust, reflect- Presidents assume that the Congress will ing both a good housing market and the make further progress in reducing the substitution of home equity lines of federal budget deficit. Continuing evicredit for installment borrowing. dence of fiscal restraint is viewed as crucial in maintaining financial conditions that are conducive to balanced Economic Projections growth and an improved pattern of inter- The Committee believes that its mone- national transactions. tary objectives are consistent with con- In the Committee's view, orderly tinued moderate growth in economic ac- growth in GNP has become increasingly tivity and a relatively modest upturn in dependent upon a substantial improveinflation in 1987 that would be attribut- ment in real net exports. The internaable almost entirely to higher import tional competitiveness of U.S. firms Economic Projections for 1987 Percent FOMC members and other FRB Presidents Measure Admini- Congressional Central stration Budget Office Range tendency GNP, change from fourth quarter to fourth quarter Nominal 4V2 to IV2 53/4 to 6!/2 6.9 6.5 Real 2 to 4 2»/2to3 3.2 3.0 Implicit deflator 2Vi to 4 3 to 314 3.6 3.4 Unemployment rate, average level in the fourth quarter 6V2 to 63/4i 61/2to63/4» 6.5 6.61 1. Civilian unemployment rate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

32 Monetary Policy Reports clearly has benefited from the decline in The effect of the dollar depreciation the dollar, and this should bolster export on prices is likely to be felt more growth and help curb the expansion in strongly in 1987. In addition, crude oil imports. But there still is considerable prices have rebounded in the past few uncertainty about some of the other fac- months, reversing part of the sharp drop tors affecting the external sector. In par- that occurred early last year. However, ticular, the increase in exports is contin- the favorable trend in wages and other gent on a satisfactory pace of economic costs, combined with sizable productivactivity abroad over time, on continued ity gains in manufacturing, provides the progress in handling international debt opportunity for absorbing these shortproblems, and on enhanced access to run price shocks while maintaining a foreign markets. On the import side, the sense of progress toward greater underimprovement is predicated on a substan- lying price stability. The Committee's tial rise in the relative price of foreign projections anticipate that neither signifgoods. That unfortunately carries with it icant capacity constraints nor strong some domestic inflationary risks, under- labor market pressures will develop and scoring the need for prudent fiscal and that domestic firms will not squander the monetary policies. opportunity to regain markets in a short- Slower growth of domestic demand is sighted effort to expand profit margins expected to release resources to the ex- unduly as demand for their products ternal sector in 1987. Consumer spend- increases. ing is projected to rise less rapidly than The central tendency projections of in 1986, given that the saving rate has real GNP and inflation are slightly lower fallen to an extremely low level and real than the forecasts of the administration. income gains in 1987 are likely to be However, given the uncertainty of ecodamped by rising energy and nonpetro- nomic forecasting, the differences are leum import prices. And while the sharp not significant, and, in fact, the adminisrise in the value of financial assets tration projections are well within the should continue to buoy household full range of expectations among Comspending, debt burdens remain trouble- mittee members and other Reserve Bank some for many families. Housing activ- Presidents. ity overall is expected to be well maintained, even though multifamily The Performance of the Economy building will be inhibited by high va- During the Past Year cancy rates and adverse tax changes. Nonresidential construction also will be The economy completed a fourth condepressed by a sizable overhang of office secutive year of expansion in 1986, with space; the recent firming in oil prices real gross national product increasing may well signal an end to the sharp about 2lA percent. The rise in overall contraction in oil drilling, but relatively activity last year was similar to the gains little improvement seems likely at cur- that have been recorded, on balance, rent price levels. In contrast, equipment since mid-1984 and was sufficient to spending by industry generally is antici- create 2*/2 million new payroll jobs. The pated to be supported by the continuing jobless rate for civilians continued to need to modernize and to cut costs, as edge down and, at year-end, was 63A well as by the improved sales prospects percent. associated with a more positive foreign Inflation slowed sharply in 1986, with trade outlook. virtually all broad measures of price Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 33 trends showing their smallest increases the current account deficit continued to in many years. Although the sharpness widen, reaching the $150 billion range of the deceleration owed much to spe- in 1986. cific developments in the markets for oil The federal budget deficit also inand other commodities, the favorable creased, hitting $221 billion in fiscal inflation performance also represented at 1986; the deficit vastly exceeded official a fundamental level the continuation of targets, as underestimates of program trends in wage and price behavior fos- costs and shortfalls in revenues offset the tered by policies in place since the early deficit-reducing actions taken by the adpart of the decade. ministration and the Congress. Recent Although output continued to grow in estimates suggest that the deficit for fis- 1986, the economy still was character- cal year 1987 will decline to the $175 ized by pronounced imbalances. These billion neighborhood, which is a good were reflected in marked disparities in deal less than that of a year earlier, but economic performance across industries considerably above the Gramm-Rudand regions of the country. In particular, man-Hollings target of $144 billion. domestic oil exploration and investment was cut back sharply, and only massive The Household Sector federal subsidies sustained many farm The household sector was the major conenterprises faced with sharply lower tributor to overall growth again last crop prices. In addition, major segments year. Consumer spending increased a of the industrial sector continued to robust 4 percent in real terms, even struggle with intense foreign competi- though income growth was only modertion, and relatively low rates of capacity ate, on average, for the second year in a utilization—along with a glut of office row. Real disposable income soared in space—depressed capital spending. the first half because of the plunge in The most serious imbalances continue energy prices, but dropped after midto be in the external sector and in the year, as wage and salary gains remained federal budget—developments that are sluggish and farm and interest income linked. Although the foreign exchange declined. Consequently, the personal value of the dollar against the other G-10 saving rate fell to around 4 percent, the currencies has declined roughly 40 per- lowest annual average in nearly 40 cent over the past two years, the nation's years. trade balance continued to deteriorate in Consumer spending has been bol- 1986. Growth in the volume of exports stered by lower interest rates, which did pick up in response to the enhanced have reduced borrowing costs and international competitiveness of U.S. boosted asset values. Rising stock prices firms, although the rebound was damped alone have added several hundred bilsomewhat by the relatively slow growth lions of dollars to household wealth of the economies of our major trading since late 1985. Household debt also partners. However, import volumes increased further last year, in part recontinued to expand rapidly through flecting the desire of consumers to limost of the year, in part because much quify the gains in their asset values. The of the swing in exchange rates appar- rise in debt was somewhat smaller than ently was absorbed in the profit margins in the preceding few years, but still large of foreign exporters and U.S. distribu- enough to push measures of debt burtors, thereby limiting increases in the dens to new highs. For a sizable number prices of imported goods. As a result, of families, especially in parts of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

34 Monetary Policy Reports country hard hit by economic adversi- The Business Sector ties, servicing these debts became more Business spending on plant and equipdifficult, as evidenced by higher con- ment declined 5Vi percent in real terms sumer loan delinquencies and charge- in 1986. Much of the drop in investment offs and high mortgage delinquencies. was attributable to the sharp cutback in The growth in consumption last year oil and gas well drilling, which fell alwas paced by strong gains in purchases most 50 percent over the year. But inof durable goods, while spending on vestment outside the energy sector also nondurables and services was up at was generally lackluster, as many firms about the same rate as in the preceding —especially in the tradable goods sector few years. Within the durables category, —trimmed expansion plans in light of sales of new cars rose to around 11 Vi relatively low rates of utilization of exmillion units. Effective prices of new isting capacity and continuing uncercars were held down by a series of tainties about future sales trends. Investbelow-market finance incentive pro- ment in computers and other office grams for domestic makes and by the machines remained on the reduced introduction of low-priced imports from growth path that has been evident since Korea and Yugoslavia. At the same the fading of the high-tech spending time, sales of Japanese and European boom in 1985, reflecting in part conmodels remained brisk, despite appreci- cerns about the productivity-enhancing able increases in their sticker prices. potential of some of these products. Outlays for other durables also rose sub- More broadly, transitory tax considerastantially last year, as purchases of home tions also helped to depress equipment electronics products advanced sharply spending in 1986. In late 1985, the and sales of furniture and appliances widely anticipated elimination of the inwere supported in part by the robust vestment tax credit prompted many pace of home sales in recent years. firms to accelerate spending from early Housing activity continued to expand 1986; although there also was some taxin 1986. Total housing starts edged up to related speedup of spending in late 1.8 million units for the year as a whole, 1986, it appears to have been comparatheir highest level since the late 1970s. tively small. Outlays for nonresidential Single-family homebuilding increased structures outside the energy area, which about 10 percent, bolstered not only by a rose extraordinarily rapidly over the first sizable decline in mortgage rates— few years of the expansion, fell in 1986. which brought fixed-rate loan rates back The decline in office construction, for to single-digits for the first time since which vacancy rates have reached ex- 1978—but also by continuing favorable traordinarily high levels, was especially demographic trends. In contrast, multi- sharp. family activity dropped off considerably Inventory investment generally reover the course of the year. In part, the mained subdued in 1986. In an environslowdown reflected the restraining influ- ment of sluggish orders and stable or ence of record-high vacancy rates on falling prices, manufacturers continued rental units, especially in key markets in to trim their stocks. In the retail and the South. Also, several provisions of wholesale trade sector, inventories of the recent tax legislation have reduced goods other than automobiles increased the profitability of building rental moderately for the second year in a row; housing. however, at year-end such stocks ap- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 35 peared to be roughly in line with near- currencies of other Group of Ten (G-10) term sales prospects. At auto dealers, countries from February 1985 to Dethere were sharp fluctuations in stocks, cember 1985, has fallen an additional 20 but little net change over the course of percent since that time. Because the the year; drops in inventories coincided U.S. inflation rate over the past two mainly with the timing of special incen- years was approximately the same as the tive programs that pushed sales to record average inflation rate in other G-10 levels as well as with a burst in sales in countries, the decline in the real value of December in anticipation of tax changes the dollar (that is, adjusted for relative in 1987. inflation rates) was similar to the nomi- Aftertax economic profits in the nonfi- nal decline. As measured by broader nancial corporate sector, although at exchange-rate indexes, which include fairly high levels relative to GNP, were the currencies of major developing essentially unchanged overall from 1985 countries as well, the real decline in the levels. There was considerable diversity value of the dollar was somewhat in the performance of individual indus- smaller, in part because some of those tries. The petroleum industry experi- countries allowed their currencies to deenced a sharp drop in profits associated preciate as part of an effort to improve with the fall in oil prices. On the other their external positions. On such broader hand, petroleum-using industries such measures, the appreciation of the dollar as chemicals and plastics fared relatively in real terms through early 1985 also well. was smaller. Given these movements in business The decline in the dollar over the past investment and corporate earnings, in- year was associated with a fall in interest ternal funds in the aggregate were nearly rates on dollar-denominated assets relasufficient to meet the basic financing tive to rates on assets denominated in needs of nonfinancial corporations. other currencies. Moreover, some cor- However, some firms continued to bor- rection of the dollar's external value was row heavily to fund massive retirements seen to be an essential element in the of equity in association with mergers, process of reducing over time the huge buyouts, and share repurchases. At the U.S. current account deficit—which wisame time, the drop in long-term interest dened to the $150 billion range in 1986 rates to the lowest levels in a decade —and restoring better balance in the afforded businesses the opportunity to United States and world economies. The improve their financial positions by sell- apparently muted response of the current ing bonds and retiring older, high-cou- account to the dollar's depreciation pon securities or short-term debt. through most of 1986 contributed to sharp downward pressure on the dollar The External Sector in early 1987. Widening U.S. trade and current ac- The volume of merchandise imports count deficits have aroused deep concern rose sharply in 1986, with increases because of their implications both for the widespread across products and counorderly expansion of the domestic econ- tries of origin. Petroleum imports surged omy and for international financial sta- as prices plunged and domestic producbility. The foreign exchange value of the tion contracted, and nonpetroleum imdollar, which had declined about 20 per- ports continued to grow at about the cent against a weighted-average of the rapid 1985 pace. In part, the sustained Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

36 Monetary Policy Reports strength of nonpetroleum imports re- vated the financial difficulties of many flected the relatively moderate increase developing nations, including oil-exto date in prices of these goods. As porting countries. measured by the index compiled by the Bureau of Labor Statistics, prices of The Government Sector nonpetroleum imports were up 8V2 per- Even though the administration and the cent over the year, with sizable increases Congress have taken significant actions for products such as automobiles, other in the past few years to reduce the fedconsumer goods, and some types of cap- eral budget deficit, it has remained huge. ital equipment. Nonetheless, the rise in In fiscal year 1986, the fiscal imbalance the overall index was somewhat smaller hit a record $221 billion, exceeding the than historical patterns would suggest, previous year's figure by more than $8 given the typical lags between move- billion. Revenue growth last year was ments in exchange rates and import restrained by the relatively moderate rise prices. The weak response of import in nominal income, while demands on a prices was attributable in part to the abil- number of programs, especially in the ity of exporters to the United States, agriculture and health areas, were whose profit margins had widened sub- strong. Although the budgetary program stantially during the period of dollar ap- put in place for FY 1987 was nominally preciation in the early 1980s, to absorb consistent with the Gramm-Rudmaninitially a large proportion of the dollar's Hollings deficit target of $144 billion, depreciation. In some cases where prices the administration and the Congressioof imported goods have risen, U.S. dis- nal Budget Office recently have pubtributors have absorbed some of that in- lished estimates in the $175 billion crease. Also, since early 1985, the dol- range, equal to about 4 percent of GNP lar has appreciated in real terms relative —still a high ratio historically. to the currencies of Canada and some Excluding changes in farm inventodeveloping countries, which account ries held by the Commodity Credit Corfor almost half of U.S. nonpetroleum poration (CCC), federal purchases of imports. goods and services rose appreciably last Meanwhile, the volume of merchan- year. Over the course of 1986, defense dise exports picked up last year. This purchases in real terms grew about 7 improvement mainly reflected the en- percent, similar to the increases that hanced international competitiveness of have been recorded since the early U.S. goods in foreign markets that 1980s. Excluding CCC purchases, real stemmed from the decline in the dollar, nondefense outlays, which have shown as the pace of foreign economic activity little net change in recent years, were generally remained sluggish. Growth essentially flat. last year for the major industrialized Purchases of goods and services by countries as a group was slower than in state and local governments rose briskly 1985, in part because of a pronounced last year, mainly reflecting a surge in deceleration in Japan, while activity in construction activity. An upswing in the many developing countries was damped school-age population in recent years by subdued growth in the industrialized has led to a step-up in school building, world and the continuing pressures asso- and numerous programs are under way ciated with the need to meet external to expand and improve basic infrastrucdebt-servicing obligations. Weakness in ture. The growth in overall outlays has world commodity prices also has aggra- been sustained despite concerns about Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 37 the financial condition of the sector. Ex- less than in 1985. The deceleration in cluding some special one-time inflows wages reflected the continued slack in —such as previously escrowed oil lease labor markets as well as the reduction in payments—the combined surplus of price inflation, and was widespread operating and capital accounts for the across industries and occupations. In the sector as a whole fell to near zero in unionized sector, wage increases have 1986. Many states, including most of been especially small, and a number of those in the energy and agricultural re- alternative, more flexible compensation gions, have responded to budgetary arrangements—including the substitupressures by raising taxes and cutting tion of lump-sum payments for general spending. wage increases—have been adopted. Compensation for white-collar workers, Labor Markets although continuing to rise more rapidly Nonfarm payroll employment increased than for other groups, also moderated in 2Vi million in 1986, about the same as 1986. the robust 1985 pace, and continued Unit labor costs in the nonfarm busistrong in January of this year. Hiring in ness sector were well contained last trade and services again was quite vigor- year, given the relatively moderate inous, with especially large increases for crease in wages and a small advance in business and health services. In contrast, labor productivity. Gains in output per manufacturing employment contracted hour, however, have averaged less than over the first three quarters of 1986. 1 percent per year since 1984, suggest- However, factory hiring picked up in the ing that the underlying trend in producautumn in response to an apparent firm- tivity for the business sector as a whole ing in industrial activity. Employment has improved only slightly from the very gains in nondurable industries, in which low pace of the 1970s and remains well output has risen steadily, have been below the pace of earlier in the postwar widespread in recent months; mean- period. In contrast, productivity in manwhile, hiring at firms producing durable ufacturing over the past three years has goods has remained spotty. increased about 3Vi percent per year, in The growth in jobs last year slightly part because intense foreign competition exceeded the rise in the labor force. As a has induced many producers to modernresult, the civilian unemployment rate ize their factories and streamline their edged down, to 63A percent at year-end. operations. Labor force participation maintained its upward trend; women continued to enter Price Developments the workforce in large numbers, in part The fixed-weighted price index for GNP responding to expanding job opportuni- rose about 2Vi percent in 1986, down ties, and participation rates for adult from an increase of 3Vi percent in 1985. men held steady. Overall, the number of The increase was the smallest in more persons employed relative to the work- than two decades. Some other popular ing-age civilian population reached 61 measures of prices decelerated even percent—a new high. more markedly. The consumer price Wages continued on a path of modera- index for goods and services rose only tion in 1986. Hourly compensation in about 1 percent, and the producer price the nonfarm private sector, as measured index for finished goods actually fell 2Vi by the employment cost index, rose percent. about 3V4 percent, 3A percentage point The greater deceleration in the CPI Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

38 Monetary Policy Reports and PPI than in the GNP price measure ergy services also slowed somewhat last is a reflection of the greater importance year but still rose around 5 percent, of energy prices in those indexes. The boosted by continued large increases for movements in energy prices over the medical services and higher premiums past year or so have been striking. World for various types of insurance. crude oil prices dropped from $26 per Prices for many basic industrial combarrel in late 1985 to the $11 per barrel modities continued to decline over the range around midyear; these prices first three quarters of 1986. Excess catrended up over the second half and re- pacity in some basic industries and the cently have risen to around $18 per bar- generally abundant world supplies of rel in the wake of the agreement on many primary commodities contributed production limits reached at the meeting importantly to the weakness in these of the Organization of Petroleum Ex- prices. Sluggish industrial activity in the porting Countries in late December. The United States and other large economies drop in crude oil prices in the first half also was a factor. Prices in a number of was reflected fairly rapidly in prices of these markets have turned up in recent gasoline and home heating oil, which months, possibly in response to the firmfell around 30 percent over the course of ing in U.S. industrial activity. Nonethethe year. There also were declines in less, industrial commodity prices still charges for electricity and natural gas, are well below the most recent peaks but they were much smaller than those reached in mid-1984. on refined petroleum products. On balance, retail energy prices declined 20 percent last year. The effects of the re- Monetary Policy cent firming in oil prices are already and Financial Markets evident in general indexes: the PPI in 1986 jumped 0.6 percent in January, owing The Federal Reserve faced continuing largely to the rebound in gasoline and challenges in 1986, not only in discernheating oil prices. ing the underlying trends in a complex Price increases outside the energy domestic and international economic area generally remained moderate in the setting, but also in specifying appropast year. Retail food prices rose 4 per- priate policy actions in a financial envicent, a bit more than in 1985, reflecting ronment marked by a rapid pace of the effects of last summer's heat wave in structural change. As in previous years, the Southeast. However, prices of retail and in keeping with the Full Employgoods excluding food and energy con- ment and Balanced Growth Act, money tinued to slow and, on balance, were up and credit aggregates were used as a only IVi percent. The influence of the means of assessing and characterizing depreciating dollar on consumer goods policy. At the same time, however, in prices was highly variable across sectors targeting and interpreting these aggreand relatively small overall. There were gates, and in reaching operational decisizable increases in dockside prices for sions with respect to the degree of reforeign cars and for some types of home serve pressures and the discount rate, the electronic and photographic equipment, evaluation of signals provided by a and retail prices of such goods have ac- broad range of economic and financial celerated. But there was little evidence indicators played a large role. of any significant aggregate impact on At its meeting in February 1986, the other consumer goods. Prices for nonen- Federal Open Market Committee estab- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 39 lished target growth ranges, measured ing range and the growth of nominal from the fourth quarter of 1985 to the GNP, as it had in previous years. The fourth quarter of 1986, of 3 to 8 percent Committee was concerned about the for Ml and 6 to 9 percent for both M2 burdens and potential instabilities assoand M3. The associated monitoring ciated with the persistence of rapid debt range for growth of domestic nonfinan- growth and felt that raising the monitorcial debt was set at 8 to 11 percent. ing range for debt would create an inap- Based on the experience of recent years, propriate benchmark for evaluating the Committee recognized that the rela- long-term trends. As such, the existing tionship between Ml and economic ac- range was maintained, but the FOMC tivity was subject to particularly great thought that debt growth could well exuncertainty. Accordingly, the FOMC ceed its upper bound. agreed to evaluate movements in Ml in The growth of M2 quickened in the light of their consistency with the pat- second half of the year, and M3 externs in other monetary aggregates, panded at a somewhat faster pace as developments in the economy and finan- well. However, both of the broader agcial markets, and potential inflationary gregates ended the year within—alpressures. though near the upper bounds of—their Ml was well above its annual target target ranges. The growth of Ml accelrange at the time of the July FOMC erated further in the second half of the meeting. The available evidence sug- year, resulting in a record postwar degested that the rapid growth of Ml re- cline in velocity for 1986. The growth of flected shifts in portfolios toward liquid nonfinancial debt slowed slightly in the assets in the context of declining market second half of the year, but still exinterest rates rather than excessive ceeded its monitoring range by nearly 2 money growth with potential inflation- percentage points. ary consequence. Against this back- Pressure on reserve positions of deground, the Committee concluded that pository institutions, as reflected in a Ml growth above the existing range relatively low volume of borrowing at would be acceptable, provided the Federal Reserve Banks, changed little broader aggregates expanded within over the course of 1986. The broadly their target ranges, price pressures re- accommodative thrust of policy also was mained subdued, and the economy con- manifest in the four reductions in the tinued to expand at a moderate pace. discount rate between March and Au- The Committee reaffirmed the target gust. In part, the discount rate cuts were ranges for M2 and M3 at its July meet- intended to keep this rate in line with the ing. Data at that time showed that both yields on short-term market instruments, of these aggregates had expanded near but they also were taken in the context of the midpoints of their ranges, and Com- hesitant worldwide economic growth, mittee members felt that growth within an improved inflation outlook, and those ranges for the year was still consis- growth of the broader monetary aggretent with the overall policy objectives of gates within their annual target ranges. reducing inflation further, promoting In setting monetary policy the FOMC sustainable growth in output, and con- focused considerable attention on the tributing to an improved pattern of inter- nation's trade deficit and on the foreign national transactions. In the first half of exchange value of the dollar. The Comthe year, the growth of domestic nonfi- mittee members generally viewed the nancial debt exceeded both its monitor- narrowing in the trade deficit as a key to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

40 Monetary Policy Reports achieving a sustainable and more even shift in the composition of M2: inflows expansion of activity across the econ- to transaction deposits, savings deomy. At the same time, however, the posits, money market deposit accounts, Committee was concerned that an un- and money market mutual fund shares duly precipitous decline of the dollar were very strong last year, while small against the currencies of our major trad- time deposits ran off, marking the secing partners could contribute to infla- ond consecutive year of zero or negative tionary pressures in the United States. growth. To help limit the effect on the value of The weakness in small time deposits the dollar, the first reduction in the dis- in 1985 and 1986 also could reflect "rate count rate was a coordinated action with shock." As existing time deposits maother major central banks; similarly, the tured, savers with high-yielding deposits reduction in April was accompanied by a acquired several years ago were unable cut in the Bank of Japan's discount rate. to reinvest the funds at comparable returns. A sizable portion of maturing de- Money, Credit, and Monetary Policy posits evidently was placed in liquid in- M2 expanded almost 9 percent in 1986, struments in M2 while savers searched placing this aggregate near the upper for other investment opportunities. bound of its annual growth target. Al- Yield-conscious investors also may have though in recent years this aggregate has been lured from time deposits by attracexhibited a tighter relationship with tive returns on some nondeposit instrunominal GNP than Ml, M2 velocity still ments. For example, stock and bond muregistered a decline of 4 percent last year tual funds grew rapidly in 1985 and and reached its lowest level in decades. 1986 after stagnating during most of the The buildup of M2 balances relative to 1970s and early 1980s, and the issuance income probably reflected incentives to of savings bonds was strong in the sumplace savings in various components of mer and fall before their minimum yield the aggregate whose offering rates were was lowered from IVi to 6 percent. falling more slowly than market interest M3 also ended 1986 near the upper rates. bound of its annual range, increasing 83/4 The slowest adjustments in rates on percent over the year. Growth of M3 retail deposits last year were made in close to that of M2 is not surprising, short-term accounts. Depository institu- given that M2 constitutes four-fifths of tions have been reluctant to adjust sav- the larger aggregate. The remaining ings deposit rates downward because share is dominated by large time demany of these accounts have represented posits and certain other managed liabilia stable, profitable source of funds for ties of depository institutions. Credit many years. Rates on NOW accounts growth at banks and thrift institutions also have fallen only slightly. Much remained quite strong last year, but with larger declines were registered on time the exception of the first quarter, the use deposits, reflecting not only quicker ad- of managed liabilities in M3 was light as justment to market rates but also the growth of core deposits largely was sufpattern of rate movements in the credit ficient to fund asset expansion. Large markets, where long-term rates fell CDs expanded only 3 percent on balance much more than short-term rates in late in 1986, with commercial banks paying 1985 and early 1986. The changing down their outstanding CDs during structure of deposit rates at banks and much of the year and thrift institutions thrift institutions has led to a pronounced also doing so in the fourth quarter. The Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 41 weakness in CDs was widespread as in- the three-month Treasury bill rate and stitutions relied more on other managed the average rate on NOW accounts at liabilities, such as term repurchase commercial banks shrank from 135 basis agreements (RPs), included in M3, and points to 53 basis points. Similarly, the advances from Federal Home Loan average rate on NOW accounts late last Banks, not included in M3. year was not far below that on six-month The broad shift to liquid assets greatly small time deposits. affected the behavior of Ml. The narrow The growth of demand deposits also monetary aggregate expanded more than accelerated last year, amounting to 15 percent in 1986, marking the second nearly 12 percent from the fourth quarter consecutive year of double-digit growth. of 1985 to the fourth quarter of 1986. As The velocity of Ml fell 9*/2 percent last with other checkable deposits, lower year, compared with a decline of 5lA short-term interest rates are an important percent in 1985. Since 1981 the velocity influence on the growth of demand deof Ml has declined 16 percent—a re- posits because they reduce incentives to markable development in view of its ten- economize on transaction balances. dency to climb about 3 percent per year Also, some demand deposits are held by in the previous two decades. business firms in exchange for services Much of the rapid growth in narrow provided by banks, and these compenmoney over the past two years appeared sating balance requirements typically to be related to the effects of the sharp are enlarged as market rates decline. decline in market interest rates on incentives to hold both NOW accounts and demand deposits. Since their peak in the Growth of Moneyand Debt1 latter part of 1984, short-term market Percentage change at annual rate interest rates have fallen about 5 per- Domestic centage points, to their lowest levels in non- Period Ml M2 M3 financial nine years, while NOW account rates sector have changed considerably less. Al- debt though more rapid money growth gener- Fourth quarter to ally would be expected in an environ- fourth quarter 1979 7.9 8.2 10.4 12.2 ment of declining rates, the expansion of 1980 7.3 8.9 9.6 9.6 Ml last year and in 1985 was in excess 1981 5.1 9.2 12.3 9.9 (2.4)2 of what would be indicated by the histor- 1982 8.6 9.1 9.9 8.9 ical relationships among money, interest 1983 10.2 12.1 9.8 11.5 rates, and income. 1984 5.4 7.9 10.7 13.9 1985 12.1 8.8 7.7 13.5 About half of the growth of Ml in (12.7)3 both 1985 and 1986 occurred in interest- 1986 15.2 8.9 8.8 12.9 bearing checkable deposits. Because de- Quarterly growth pository institutions have adjusted the 1986: 1 8.8 5.3 7.7 15.4 rates paid on NOW accounts only slug- 2 15.5 9.4 8.7 10.3 gishly, the spreads between the rates on 3 16.5 10.6 9.7 12.0 4 17.0 9.0 7.8 11.5 these deposits and those on substitutes have narrowed substantially. For exam- 1. Ml, M2, and M3 incorporate effects of benchmark and seasonal adjustment revisions made in February ple, between the first quarter of 1986, 1987. when interest rates on NOW accounts 2. Ml figure in parentheses is adjusted for shifts to were fully deregulated, and the fourth NOW accounts in 1981. 3. Ml figure in parentheses is the annualized growth quarter of last year, the spread between rate from the second to the fourth quarter of 1985. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

42 Monetary Policy Reports While these effects were important ele- tenance of a moderate gap between capiments behind the expansion of demand tal spending and internal funds. Growth deposits throughout 1986, the apparent of federal sector debt remained strong. response to declining interest rates was In implementing policy in 1986, the much larger than would be expected FOMC generally accommodated from historical experience. through open market operations the Another element in the growth of de- strong demand for reserves associated mand deposits apparently was the large with the rapid growth of transaction balvolume of financial transactions that oc- ances. In the context of prospects for curred in 1986. For example, because of slow growth of real economic activity, certain payment procedures—such as disinflationary trends in wages and funds held in escrow accounts and trans- prices, and growth of the broader moneferred by officer's check rather than by tary aggregates within their target wire—the massive volume of mortgage ranges, four reductions in the discount originations and prepayments last year rate were implemented between March could have influenced the movement of and August. demand deposits. In addition, a flurry of Early in the year, all the monetary financial transactions around year-end, aggregates slowed sharply, with M2 induced in part by impending tax law dropping below its annual target range. changes, temporarily boosted demand Also, evidence suggested that the econdeposits sharply. omy was growing sluggishly, and the Domestic nonfinancial debt expanded outlook for inflation improved as oil almost 13 percent last year, a slightly prices fell. In this environment, market slower pace than in the two previous interest rates began to decline in midyears but still above both the Commit- February, and the Federal Reserve retee's monitoring range and the growth of duced the discount rate Vi percentage nominal GNP.1 Debt issuance by the point to 7 percent in early March. At the state and local sector dropped off sub- time, there was concern that unilateral stantially from the pace set in 1985, action to lower interest rates might cause when it was boosted by borrowing in an excessive reaction in the foreign exanticipation of tax reform restrictions. In change market, where the dollar had the household sector, mortgage borrow- been under downward pressure. Acing strengthened, but a marked decrease cordingly, the reduction was timed to in the expansion of consumer install- correspond with similar actions by the ment credit from the elevated rates in central banks of West Germany, Japan, previous years contributed to a modera- and several other industrialized nations. tion in overall growth of household in- With the economy expanding slowly debtedness. A continuation of corporate and underlying price pressures continufinancial restructurings buoyed expan- ing to moderate, interest rates fell fursion of business debt, despite the main- ther throughout March and into April. By mid-April, most market interest rates had reached their lowest levels since the 1. When measured from the end of December to late 1970s. At that time, the Federal the end of December, domestic nonfinancial debt Reserve instituted another reduction in expanded IIV2 percent last year. The fourth- the discount rate to catch up with and to quarter-to-fourth-quarter growth cited in the text is ratify the declines in market rates. higher because of the surge in debt at the end of 1985 and the arithmetical effects of quarterly aver- After mid-April, interest rates rose for aging. a short time as market participants fo- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 43 cused on an upturn in oil prices, an in early fall. Economic indicators began acceleration in the growth of the mone- signaling a pickup in the pace of ecotary aggregates, and a further decline in nomic activity, and rising prices of oil the foreign exchange value of the dollar. and precious metals, along with the po- By the end of June, however, a steady tential effects of the cumulative decline flow of weak statistics began to reveal in the value of the dollar, seemed to anemic growth in real economic activity raise concerns about the outlook for inin the second quarter. An improvement flation. Over that period and through the in activity had been expected by the remainder of the year, the FOMC at- FOMC for the second half of the year, tempted to keep a steady degree of rebut the rebound now appeared likely to serve pressure, and market interest rates be less vigorous than previously antici- fluctuated within a fairly narrow range. pated and perhaps delayed because of Even so, short-term interest rates continued disappointing movements in moved higher as the year-end apour trade position and the effects of proached, owing, in part, to the exceppending tax reform legislation on busi- tional volume of tax-related transacness investment. Accordingly, shortly tions. As firms rushed to complete after the July FOMC meeting, the Board mergers and buyouts, and households approved another cut of V2 point in the stepped up their sales of assets to realize discount rate to 6 percent. capital gains, the demand for transaction The final reduction in the discount balances and business loans surged. This rate last year took place after the August heavy volume of financing also was re- FOMC meeting. The last two reductions flected in unusually strong reserve dein the discount rate in 1986 were mands by depository institutions. The adopted without similar action by for- System added reserves freely to accomeign central banks. Unilateral action to modate this demand, but the pressure lower interest rates carried the risk of nevertheless showed through to shortadding to the downward pressure on the term rates. Shortly after the turn of the dollar and possibly feeding a source of year, short-term rates moved back toinflationary pressure. However, the Fed- ward their earlier levels. The dollar, eral Reserve thought that prevailing eco- however, was under substantial downnomic and financial conditions war- ward pressure in early 1987; disappointranted such a risk, realizing that the ing figures on the U.S. trade deficit provision of reserves could be tightened prompted selling of the dollar on exthrough open market operations if ad- change markets, and this pressure intenverse developments were to arise. sified with reported suggestions by some While the value of the dollar fluc- U.S. policymakers that, particularly in tuated considerably after the reduction in the absence of more growth-oriented the discount rate in August, it showed no policies abroad, further dollar depreciadistinct downward movement until ar- tion might be necessary to correct the ound year-end. Short-term interest rates nation's external imbalance. declined about 1 percentage point over the summer months, moving either in Other Developments anticipation of, or in response to, the in Financial Markets reductions in the discount rate. Long- As long-term interest rates declined last term rates were about unchanged on bal- spring to their lowest levels in eight ance over the summer, but more concern years, the volume of corporate bond isabout interest rate prospects developed suance surged to record levels. Indeed, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

44 Monetary Policy Reports the volume of domestic corporate bonds nearly every other year of the postwar sold last year was nearly twice the pre- period. Concern that other firms also vious record set in 1985. Much of the may have problems in meeting their fibond issuance last year was used to re- nancial obligations is reflected in the fund higher-cost debt or to pay down pace of bond downgradings, which last short-term credit. With the stock market year totaled more than three or four continuing to register impressive gains times that of the late 1970s. last year, new equity issuance also Firms with downgraded debt typically reached record levels. Of the gross pro- find their securities trading at higher inceeds from new equity issues sold last terest rates in the secondary market. In year, about 30 percent was raised by general, however, quality spreads befirms issuing stock in the public market tween private debt securities of different for the first time. grades have been relatively stable in re- The retirement of high-coupon bonds, cent years, suggesting that investors the reduced dependence on short-term have not been alarmed at the credit qualcredit, and the issuance of new equity ity of corporations in the aggregate and shares tended to improve conventional have not attempted to limit their portfomeasures of corporate balance sheet lios to higher-rated issues.2 During the strength. However, massive volumes of first half of 1986, spreads between the outstanding equity were retired through yields on corporate bonds and Treasury mergers, acquisitions, buyouts, and securities widened considerably, but this other restructurings, resulting in the appeared to be related to the heavy volthird consecutive year of large net equity ume of corporate issues and a revaluaretirements. Reflecting the financing tion of call and refunding provisions on patterns in recent years, the aggregate long-term obligations. A narrowing of debt-equity ratio of nonfinancial corpo- these spreads early in 1987 has reversed rations, on a "book" basis, swelled to a much of the earlier increase. record level. When stated at market The expansion of household debt values, however, the robust gains in slowed last year as the growth of conshare prices have kept debt-equity ratios sumer installment credit receded to well below levels that generally pre- about 12 percent from the 15 to 20 pervailed during the 1970s. With interest cent pace of recent years. Nevertheless, rates trending down in recent years, in- installment debt continued to grow faster terest-coverage ratios have crept up, than income, and the ratio of such debt suggesting that the ability of firms in to income established another record. the aggregate to service their debt has With mortgage debt expanding rapidly, not deteriorated. These modest gains, the ratio of overall household debt to however, have been achieved in relatively benign market and economic circumstances. 2. The interest rate spreads between investment- Because of the large paydown of eqgrade and speculative issues widened about 50 uity, the ability of some corporations to basis points for a short time after the bankruptcy weather economic shocks has waned. filing by LTV Corporation in July. Low-rated or The weak financial structures of some unrated bonds also experienced substantial yield firms, along with strains in certain in- increases for a time later in the year, when concerns about the liquidity of that market segment dustries, led to more than $3 billion of surfaced in connection with the insider trading corporate bond defaults in 1986, an scandal; that widening has been reversed since the amount that dwarfs the experience in beginning of 1987. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 45 income also reached a new high. While for loan losses, and the System's capital assets of the household sector have in- surplus soon will be exhausted if losses creased sharply in recent years, many do not abate. The Congress last fall apindividuals have experienced difficulty proved regulatory accounting procein meeting their financial commitments. dures for the Farm Credit System that The number of personal bankruptcies ac- will allow the banks to report higher net celerated dramatically in 1985 and 1986, income figures than generally accepted with bankruptcies last year surging well accounting principles would permit. The beyond the historical experience. Strains higher reported income may ease some were particularly evident in the area of of the problems within the System relatcredit card debt, as delinquency rates on ing to the preservation of capital and revolving balances increased appreci- help to justify charging borrowers more ably. Delinquency rates on other catego- competitive rates. By themselves, howries of installment debt and mortgage ever, the accounting procedures do not loans fell some last year, although they provide substantive relief. were at much higher levels than in pre- The financial condition of the thrift vious expansions. For some households, industry as a whole has improved markdebt-servicing burdens were reduced edly since the early part of the decade, last year by the refinancing of high- but the difficulties of many institutions rate mortgages or the decline in interest have intensified. As interest rates fell payments on their adjustable-rate from their elevated levels in 1981 and mortgages. 1982, the average cost of funds at thrift While the economy has grown contin- institutions declined much more rapidly uously for more than four years, the than the average yield on their assets. expansion has been uneven and has left The industry as a whole returned to profcertain sectors under severe strains. The itability in 1983, and aggregate earnings problems faced by firms in the mining, have jumped since then. Net income for energy, agricultural, and many manu- the industry in 1986 probably was strong facturing industries are well known, as again, although it is likely to have been are those of a number of heavily in- below that of 1985. debted developing countries. The diffi- At the same time, asset quality probculties in these areas are feeding through lems have become increasingly importo the financial intermediaries supplying tant for a sizable number of these instithem credit. Last year, for example, 136 tutions. While some of these problems commercial banks failed—compared are associated with economically diswith a total of only seven in 1981. Many tressed regions of the country, overly of these institutions had heavy credit aggressive investment strategies of some exposures to the oil industry, while more institutions certainly have contributed than 40 percent of the failed banks held heavily. For 1986, about one-quarter of large amounts of agricultural loans. the thrift industry will report negative The impact of the distress in the farm net income, and the long-term prospects sector also has been severe for the Farm for many of these institutions are unfa- Credit System, the government-spon- vorable. Moreover, the Federal Savings sored agency that holds about 25 percent and Loan Insurance Corporation has inof outstanding farm debt in the United adequate resources to manage these States. The losses of the banks in the problems effectively. System probably exceeded $2 billion While the many stresses and financial last year, largely reflecting provisions vulnerabilities are not amenable to cor- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

46 Monetary Policy Reports rection through general monetary pol- Although some of the elements necesicy, they do influence the economic en- sary for sustaining economic growth are vironment and represent a potentially now beginning to fall into place, the disruptive and destabilizing element in economic outlook continues to be financial markets. The Federal Reserve clouded by a number of imbalances, has been called upon to play a positive risks, and uncertainties. The experience role through its regulatory and supervi- of the first half underscored, in particusory functions. For example, steps have lar, the dangers associated with a loss of been taken to reduce the risks associated market confidence in the dollar and the with large payments made by wire related potential for a rekindling of intransfer, and several proposals have flation expectations. The Federal Rebeen made to ensure the capital ade- serve, in implementing monetary polquacy of commercial banks. Many of icy, was sensitive to these dangers, the financial and sectoral stresses will while it continued to provide support for take considerable time to alleviate, and sustainable economic growth. During will require a stable monetary environ- the first part of the year, growth in ment, redress of the imbalances in the money and credit slowed from the rapid nation's federal budget and international pace of 1986, even though pressures on trade positions, and—importantly—pru- the reserve positions of depository instident private behavior, encouraged as tutions remained mild. Those pressures necessary by sound regulation. were increased somewhat in late April and May, however, as the dollar fell sharply against other key currencies, in- Report on July 21, 1987 flation expectations flared up, and longterm interest rates jumped to higher Monetary Policy and the Economic levels. In response to these steps, and to Outlook for 1987 and 1988 complementary policy actions taken The economy expanded at a somewhat abroad, the dollar has stabilized, and accelerated pace in the first half of 1987, interest rates have retreated somewhat and the civilian unemployment rate de- from their May highs. clined over the period to 6.1 percent in If the nation is to achieve an orderly June, the lowest level in this decade. transition to better external balance, one Moreover, the pattern of activity has marked by a minimum of financial or exhibited encouraging signs that a turn- inflationary pressures, responsible acaround in the trade sector is under way. tion by many parties—in addition to the An improvement in net exports in real Federal Reserve—will be necessary. terms appears to be providing a lift to Further progress in reducing our federal activity in the industrial sector, offset- budget deficit is essential: a failure to ting slower growth of domestic spending achieve this often-stated objective could and sustaining a moderate rise in overall only damage confidence in our ability to domestic production. However, the deal with our economic problems and process of restoring balance to the U.S. contribute to imbalances in financial external accounts has involved a sizable markets and the economy. In addition, increase in the prices paid for imported satisfactory growth in the other major goods. These price increases have oc- industrialized countries is crucial, as are curred at the same time that a rebound in efforts on all sides to maintain and imworld oil prices was carrying inflation prove the openness of the international rates above last year's modest pace. marketplace. The private sector also Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 47 must play a constructive role by remain- business purchases in the early months ing sensitive to wage and price practices of this year was a reflection of the accelthat promote the international competi- eration that had occurred at the end of tiveness of American business. 1986, motivated by tax considerations. However, consumers, in particular, Economic and Financial Background have shown signs of less exuberance in The economic expansion has now pro- their expenditure patterns after a period gressed well into its fifth year. Real of several years in which their willing- GNP rose at a 43/4 percent annual rate in ness to spend increasing proportions of the first quarter. However, much of the their income provided considerable increase in production reflected a re- thrust to business activity. A moderation building of business inventories that had of domestic spending growth is, of been drawn down late in 1986, and real course, a fundamental ingredient in GNP appears to have increased at an achieving better external balance withappreciably more moderate pace in the out putting excessive strains on available second quarter. Nonetheless, growth re- resources. mained strong enough to sustain a A key element in the recent trade dedowntrend in unemployment. velopments has been the steep drop in Beneath these solid gains in aggregate the foreign exchange value of the dollar economic activity have been welcome —almost 40 percent on a trade-weighted improvements in the fortunes of sectors basis against other G-10 currencies— that have failed to participate in the in- since early 1985. That decline, in concreasing prosperity of the past several junction with notable restraint on labor years. As suggested above, the most sig- costs, has greatly enhanced the competinificant development has been the tiveness of U.S. producers in internaemerging improvement in the nation's tional markets. At the same time, trade performance, which has begun to though, the depreciation has caused close the gap between the pace of prices of imported goods to increase— growth in the industrial sector and the sharply in some cases—and exacerbated rest of the economy; indeed, some seg- a bulge in prices coming from higher ments of manufacturing have reached energy costs. The rise in consumer relatively high levels of capacity utiliza- prices, averaging more than 5 percent at tion and strong profitability. Economic an annual rate over the first five months strains also appear to be easing in other of this year, was a disturbing departure troubled sectors. Oil-well drilling, while from recent experience. Moreover, as still at depressed levels, has turned up as the dollar exhibited continued weakness a consequence of the firming of world in the early spring, and with progress oil prices. Agricultural income was quite toward improvement in the U.S. current high last year, although it continued to account slower than many had anticibe heavily dependent on government pated, concerns mounted about inflation support; farmland values seem to have prospects. This was reflected for a time stabilized, and the amount of delinquent in rising prices of precious metals and farm loans has begun to decline. other actively traded commodities, an While the external sector has been event that only served to reinforce the strengthening, in real terms, in recent inflation fears that simultaneously were quarters, growth in domestic demand unsettling U.S. securities markets. has moderated considerably. To some In these circumstances, and with the extent, the slower rise in household and economic advance evidencing reason- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

48 Monetary Policy Reports able momentum, the Federal Reserve in involved; tax reform also may have late April and May adjusted its open damped growth in money as individuals market operations to impose a somewhat reduced their additions to deposit holdgreater, but still quite limited, degree of ings rather than using consumer credit, pressure on the reserve positions of de- on which interest is no longer fully taxpository institutions. This step was reas- deductible. Capital constraints on the suring to the markets. Coupled with growth of bank and thrift institution complementary actions by monetary au- assets may have limited the depositories' thorities abroad and more favorable efforts to seek funds, an effect likely to news on prices and U.S. merchandise express itself most fully at the level of trade flows, the firming of money mar- M3, which encompasses a broad range ket conditions contributed not only to a of depository-institution liabilities. turnaround in the dollar on exchange But it is another factor that appeared markets but also to a rally in bond most important, particularly in the case prices. On balance, however, short-term of M2. Changes in deposit rates have interest rates currently are about one- lagged changes in market rates—a behalf percentage point above their levels havior exhibited quite consistently in the at the time of the Board's February mon- period since most restrictions on deposit etary policy report to the Congress, and rates were removed. With market rates long-term rates are up about a full per- rising, financial assets other than those centage point. included in M2 became relatively more The rate of growth of the money stock attractive to the public, the opposite of measures M2 and M3 has been well developments in 1985 and 1986. This below that of last year and close to, or same phenomenon, reinforced by the below, the lower end of the target ranges normal downward adjustment of comadopted in February. This has been pensating balance requirements as rising viewed as acceptable by the Federal interest rates enable banks to earn more Open Market Committee (FOMC), on business demand deposits, had a given the inflation and exchange rate marked effect on Ml growth as well, developments described above, as well which slowed to a 10 percent annual rate as indications of greater than anticipated between the fourth and second quarters strength in the velocity of money (that (and a 13A percent rate between the is, the ratio of nominal GNP to money). fourth quarter and June); Ml velocity M2 rose at an annual rate of only 4 appears to have changed little in the percent between the fourth quarter and second quarter, after more than two June, appreciably below the 5V2 to 8V2 years of steep decline. percent growth range for the year, while Reflecting in large part the diminution M3 grew at a 5lA percent rate, a shade of the federal deficit and a slowing in below the lower bound of its identical state and local government borrowing, range. influenced by the Tax Reform Act, ag- The marked deceleration of monetary gregate credit expansion in the economy growth, and accompanying rise in M2 has slowed noticeably this year. The and M3 velocity after two years of de- debt of domestic nonfinancial sectors is cline, reflected a variety of influences. estimated to have expanded at about a Some unwinding of the buildup in bal- 93/4 percent annual rate through June, ances that occurred late last year in con- still high relative to the growth of nominection with a huge volume of tax-re- nal GNP, but less rapid than in the past lated transactions may have been several years and within the 8 to 11 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 49 percent monitoring range specified by Ranges of Growth for Monetary the Federal Open Market Committee. and Debt Aggregates Percent change, fourth quarter to fourth quarter Ranges for Money and Credit Growth 1988, in 1987 and 1988 Aggregate 1987 tentative At its meeting earlier this month, the M2 5Vi to 816 5 to 8 FOMC did not change the 1987 ranges M3 5Vi to 8V2 5 to 8 for money and credit growth that it had Debt 8 to 11 IVi to 10!/2 established in February. As indicated at that time, operating decisions will continue to be made not only with due re- range for growth of nonfinancial sector gard to the behavior of these aggregates, debt also was tentatively reduced by Vi but also in light of evidence on emerging percentage point, to IVi to IOV2 percent. trends in economic activity and inflation The Committee noted that Ml has and developments in domestic and inter- continued to exhibit considerable sensinational financial markets. At this junc- tivity to changes in interest rates, among ture, given the actual growth achieved in other factors, as illustrated by its sharp the first half, it seems likely that, absent deceleration in the first half of this year. major movements in interest rates that In view of this, and the still-limited exalter the incentives to hold monetary perience with the behavior of dereguassets, expansion in M2 and M3 around lated transactions accounts, the Comthe lower ends of their 5Vi to %Vi percent mittee decided not to set a specific target annual ranges may well be appropriate. range for Ml for the second half of Indeed, should the recent tendency to- 1987, and no tentative range was ward a strengthening in velocity, which adopted for 1988. In its policy deliberahas been particularly noticeable in the tions over the remainder of the year, the case of M2, persist, or if inflationary FOMC will take account of Ml growth pressures appear to be mounting, some in light of the behavior of its velocity, shortfall from the annual ranges might incoming information about the econwell be appropriate. With regard to the omy and financial markets, and the dedomestic debt aggregate, the FOMC an- gree of emerging price pressures. ticipated that the slower pace of debt growth in the first half would continue and that the aggregate would end the Economic Projections year well within the 8 to 11 percent As noted above, the Committee believes monitoring range. that the monetary objectives that it has Consistent with the objective of main- set are consistent with restraint on inflataining progress over time toward gen- tion in the context of continued modereral price stability, while supporting ate growth in economic activity and sustainable growth in economic activity, progress toward a sustainable external the FOMC decided to adopt on a tenta- position. As is indicated in the table on tive basis lower growth ranges for the next page, the central tendency of money and credit in 1988. The target the forecasts of Committee members and growth ranges for M2 and M3 were re- other Reserve Bank presidents is for duced Vi percentage point, to 5 to 8 growth in real GNP of 2Vi to 3 percent in percent, measured from the fourth 1987 and 1988. Between now and the quarter of 1987 to the fourth quarter of end of next year, this pace of activity is 1988. At the same time, the monitoring expected to generate jobs in about suffi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

50 Monetary Policy Reports cient number to match the expansion of coming quarters. Household spending is the work force. Consequently, the civil- expected to grow slowly, but stronger ian unemployment rate is not expected increases in business investment, espeto change appreciably from the 62/4 per- cially in equipment, are anticipated as cent average of the second quarter, al- industrial firms respond to more favorthough recent experience suggests that able sales trends. the projected growth of real GNP might Prices, as measured by the implicit lead to somewhat lower unemployment. deflator for GNP, are expected to rise Real net exports of goods and services 3^2 to 4 percent over the four quarters of are expected to strengthen further while 1987—slightly more than the central the growth of domestic demand remains tendency range reported to the Congress relatively subdued. The improved com- in February. For 1988, projections of the petitive position of U.S. producers re- increase in the GNP deflator center on 4 sulting in large part from the dollar de- percent. Assuming world oil prices are preciation of the past two years has only more stable, there should be no repetibegun to be reflected in trade flows, and tion of the rebound in domestic energy further improvement in the nation's ex- prices that raised the general rate of internal position should be realized in flation earlier this year. However, the acceleration in prices of non-oil imported goods that is occurring in the Economic Projections for 1987 and 19881 wake of the decline in the foreign exchange value of the dollar likely will Percent continue for a time to provide some im- FOMC members and other petus to inflation, even if the dollar is FRB Presidents Measure more stable over the period ahead, as Central Range assumed. The size of further increases in tendency import prices resulting from the depre- 1987 ciation to date will depend on the ag- GNP, change from fourth gressiveness with which foreign exquarter to fourth quarter porters and U.S. distributors seek to Nominal 53/4 to IVA 6lA to 7 restore profit margins that have been Real 2 to 33/4 21/2 to 3 Implicit deflator 3 to 4V4 Vh to 4 squeezed in the past two years. The view that inflation next year will not rise sig- Civilian unemployment nificantly from the pace projected for rate, average level in the fourth quarter 6.1 to 6.5 6.2 to 6.4 1987 is grounded in a belief that recognition of the potential for losses of 1988 market share and job opportunities will GNP, change from fourth continue to influence wage- and pricequarter to fourth quarter setting behavior. Nominal 5 to 8 53/4 to 7 While restraint on inflation is crucial Real 1 to 3 21/2 to 3 Implicit deflator Vh to 5 33/4 to 4i/4 in achieving an orderly adjustment as our massive external imbalance is cor- Civilian unemployment rected, so too is continued progress in rate, average level in the fourth quarter 5.9 to 6.8 6 to 6.5 reducing the federal budget deficit. Inflows of foreign capital will shrink in 1. The administration has yet to publish its midsession budget review, but spokesmen have indicated that earlier step with the reduction in our current forecasts will be revised. As a consequence, the custom- account deficit, and in that context exary comparison of FOMC forecasts and administration economic goals has not been included in this report. cessive federal borrowing requirements, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 51 as they put pressure on financial mar- Prices of non-oil imports, particularly kets, pose a threat to the ability of our for finished consumer goods and capital economy to fund necessary private capi- equipment, have been rising at rates in tal formation. excess of domestic prices in recent Finally, the members of the Commit- quarters, damping the demand for imtee and other Reserve Bank presidents ported goods. At the same time, goods also view the prospects for a healthy produced in the United States have be- U.S., and world, economy as depending come more competitive in world marsignificantly on the avoidance of further kets. The volume of exports, which protectionist measures here and abroad began to pick up noticeably in the secand on satisfactory economic growth in ond half of 1986, continued to expand in other major industrial countries. early 1987, although the rebound likely has been limited by slow economic growth abroad. The Performance of the Economy Toward the end of 1986, some manu- During the First Half of 1987 facturing industries—notably those pro- The economy continued to expand in the ducing textiles, apparel, steel, chemifirst half of 1987, and, in contrast to the cals, and paper—began to experience a pattern of the preceding four years, the firming in demand apparently associated composition of activity appeared to be with improved trade conditions. In the moving toward a better balance between first six months of 1987, production of domestic spending and domestic pro- office equipment and some other highduction. The overall growth in output tech capital goods as well as several during the first six months of the year led categories of industrial machinery also to a net gain in jobs of around \X/A mil- picked up. Moreover, domestic energy lion, a faster pace of hiring than during output stabilized, after having been a 1986. Moreover, the civilian unemploy- serious drag on industrial production last ment rate, which had hovered close to 7 year. On the whole, the pace of activity percent throughout most of last year, in the goods-producing sector moved moved down to 6.1 percent by June. back into line with the overall rise in Inflation picked up early this year, GNP. The index of industrial production with most broad indexes of prices post- increased at a 3 percent annual rate being increases substantially above those tween the third quarter of 1986 and the of the past several years. In large part, second quarter of 1987, after little the acceleration reflected developments change during the preceding year. in oil markets, where prices have retraced part of last year's decline. But The External Sector rising prices for other imported goods The dollar depreciated further against also began to surface at the retail level, other major currencies in the first half of and, at the producer level, prices paid 1987, with most of the adjustment confor raw materials and other supplies centrated in one episode early in January clearly turned up. Wage trends, how- and in another during a period of unsetever, have remained both stable and tled markets in the early spring. Since restrained. mid-May the dollar has retraced part of Higher inflation rates have been, in its recent decline, but, on a tradepart, a consequence of the ongoing ad- weighted basis against other G-10 curjustment of the U.S. economy to a lower rencies, remains about 6 percent below foreign exchange value of the dollar. its average level in December 1986, and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

52 Monetary Policy Reports almost 40 percent below its peak in Feb- lower dollar to boost foreign demand for ruary 1985. The underlying downward some U.S. farm products. pressure on the dollar during the first The adjustment in the U.S. trade pohalf was fueled by perceptions that prog- sition to date has occurred without much ress in reducing the U.S. current account impetus from economic expansion deficit had been slow and by disappoint- abroad. Growth of real GNP in other ment concerning prospects for policy industrial countries averaged less than adjustments, here and abroad, aimed at 2lh percent last year; moreover, ecorestoring better balance in the world nomic activity began to slow in the sececonomy. An offsetting factor until re- ond half of the year, and, at least in cently was the widening of interest rate Europe, the weakness continued into differentials between the United States early 1987. Export and import volumes and the other major industrialized coun- in Europe and Japan have begun to adtries, as rates rose in the United States just to the exchange rate movements of while declining abroad. the past two years, cutting into the The U.S. current account deficit stood growth generated by their external secat just under $150 billion in the first tors. While growth in domestic demand quarter of 1987, little changed, in nomi- has been maintained above the rate for nal terms, from the deficit in the second domestic production, it, too, has slowed half of 1986. The volume of merchan- and has not taken up the slack from a dise imports of goods other than oil has weak external sector. been about flat in recent quarters, after Outside of the industrial countries, rising steadily for three and one-half average growth last year was quite unyears. Demand has leveled off for a wide even and, on balance, provided only a range of imported industrial materials, limited offset to slower economic activconsumer goods, and capital equipment. ity in Europe and Japan. Weakness in oil This adjustment, however, occurred as markets held down OPEC growth while dollar prices for these goods began to the newly industrialized countries in pick up, and, thus, the value of non-oil Asia continued to expand strongly. In imports has continued to edge higher. Latin America, which is an important Demand for imported petroleum prod- market for U.S exports, output rose ucts dropped back early this year, but close to 4 percent for a third year, a with world oil prices higher, the U.S. oil marked turnaround from the 1982-83 import bill stayed at about its 1986 level. period when the onset of external financ- At the same time, the expansion in the ing difficulties seriously disrupted trade. volume of merchandise exports that Internal pressures to maintain reasonbegan in mid-1986 extended into early ably strong growth persist in these coun- 1987. The improvement in foreign sales tries; such growth could be facilitated by has been broadly based; in particular, an improved performance of the indusshipments abroad of industrial materials trial economies as a group. and capital goods, which account for the bulk of U.S. merchandise exports, both The Household Sector were up about 10 percent in real terms in Consumer spending weakened considerthe first quarter from the average in the ably in the first half of 1987, after three first half of 1986. The volume of agri- years in which real gains averaged 3% cultural exports also firmed somewhat percent per annum. In particular, houserecently, as sharply reduced support holds cut back sharply their purchases of prices appear to be combining with the durable goods and outlays for nondur- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 53 ables flattened out; spending for ser- 1986, despite the popularity of home vices, however, continued to trend up. equity loans, and growth of consumer Slower sales of new automobiles con- credit dropped sharply. To some extent, tributed importantly to the overall dece- the deceleration in consumer debt, as leration in consumer spending. During well as the slowdown in spending on the first half, sales of new cars averaged durable goods, may be a consequence of 10 million units at an annual rate, down the rapid rise in household debt burdens from a record 11 Vi million units in 1986. during the past several years. In addi- The slackening in demand was most no- tion, the new tax law diminished the ticeable for domestic makes and per- incentive to finance expenditures with sisted despite the continuation of special installment credit. Despite the slower incentive programs on a wide range of growth of consumer and mortgage debt, models. some indicators suggest that a consider- The deceleration in consumer outlays, able number of households still are havespecially for durables such as motor ing problems servicing existing liabilivehicles, furniture, and home appli- ties. Although some loan delinances, followed a period of several years quency rates dropped a bit, others rose during which a variety of factors were in the first quarter, as did personal working to encourage households to in- bankruptcies. crease their holdings of big-ticket items: Spurred by a decline in mortgage inrelatively moderate increases, or even terest rates, which reached a nine-year decreases, in the prices of many home low at the end of March, starts of new goods; declines in interest rates; and single-family homes averaged WA milpent-up demands from the period of eco- lion units at an annual rate from January nomic weakness in the early 1980s. As through April, the highest level since the those influences dissipated, and with the late 1970s. Sales of single-family personal saving rate reaching an histori- homes, which had been boosted by tax cally low level by late 1986, consumers considerations at the end of 1986, also apparently became more cautious in remained brisk through April. Subsetheir buying patterns. Nonetheless, sur- quently, the backup in mortgage rates to vey evidence still suggested that house- early-1986 levels resulted in some reholds' evaluations of market conditions duction in single-family homebuilding, for major purchases and of their personal to around the pace that prevailed last finances remained generally positive. fall. In the multifamily market, the During the first five months of 1987, downtrend in activity that began in early growth in nominal disposable income 1986 continued through the first half of picked up from its 1986 pace; but, with 1987. In the second quarter, multifamily consumer prices rising more rapidly, in- starts were one-third below last year's come growth in real terms was little peak. Despite the adjustment thus far to different from the 2 percent pace of the overbuilding and the reduced after-tax preceding two years. However, the ag- profitability of multifamily housing ingregate balance sheet of the household vestment, rental vacancy rates nationsector showed further improvement wide are still close to record highs. early this year. Asset holdings were bolstered especially by gains in stock The Business Sector prices, while debt accumulation slowed. Business spending on plant and equip- Growth of mortgage debt dropped back ment fell sharply in the first quarter of from the extraordinary pace of late 1987. For equipment, the weakness was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

54 Monetary Policy Reports concentrated in January and followed a was met to a considerable extent by tax-induced bunching of purchases in drawing down stocks, which were then late 1986. In subsequent months, ship- rebuilt at the beginning of this year. This ments of nondefense capital goods re- spring, inventory-sales ratios generally covered, leaving the average level for were not indicating serious imbalances, April and May, in nominal terms, PA with the notable exception of the auto percent above the third quarter of last industry. Domestic car makers boosted year. New orders for nondefense capital production in early 1987 in excess of goods also dipped at the beginning of the slackening sales, leading to a substantial year, but then strengthened noticeably as backlog of unsold cars on dealer lots. bookings for aircraft and for office and By June, a scaling back of assemblies computing equipment rose sharply. The had stemmed further accumulation, but recent level of orders appears consistent the industry entered the summer with with a continuation in the near term of stocks that were quite large by historical the moderate uptrend in spending on standards. equipment that has prevailed over the Before-tax profits of nonfinancial corpast two years. According to private porations, which had slipped a bit relasurvey responses concerning business tive to GNP since 1984, rose in the first capital spending plans for the year as a quarter. After-tax profits relative to GNP whole, firms still intend to direct the were up as well, although the rise was bulk of these purchases toward moderni- damped by increases in corporate tax zation and cost-saving improvements in liabilities associated with the new tax their production lines. law. Corporations paid out a slightly In contrast, the environment for ex- larger share of earnings as dividends in pansion of plant facilities and office the first quarter; nonetheless, internally space is still generally unfavorable. generated funds remained sizable rela- Large amounts of vacant and underused tive to investment outlays. space in both office buildings and factories began to take a toll on nonresidential The Government Sector construction last year. And, less favor- A substantial reduction in the federal able treatment of commercial structures budget deficit for fiscal year 1987 apunder the new tax code reinforced the pears in train, with the most recent estitendencies toward a lower level of activ- mate from the Congressional Budget ity in this sector. As a result, spending Office at $161 billion, compared with for commercial and industrial buildings $221 billion in fiscal 1986. Growth in dropped further in the first quarter of receipts has been extremely rapid; this 1987, to a level about 20 percent below reflects, in large part, a one-time surge a year earlier. The decline in spending in tax payments this April from individfor these types of buildings accounted uals who realized capital gains last Defor the overall weakness in nonresiden- cember, taking advantage of lower tax tial structures early this year, in the face rates under the old tax code. But more of an upturn in oil drilling and some fundamental progress in reducing increases in other categories. spending growth also appears to have A sizable swing in business invento- been made in the wake of the Grammries around the turn of this year was Rudman-Hollings legislation. Total outassociated with sharp, tax-induced fluc- lays have been rising at a rate of around tuations in sales. The surge in consumer 2 percent in the current fiscal year, a and business spending at the end of 1986 marked slowing from 8 percent per year Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 55 during the preceding five years. Al- the average monthly increase in nonfarm though entitlements spending is still in- payroll employment of just over creasing steadily, agricultural support 200,000 so far this year exceeds the pace payments and interest outlays have lev- of hiring in 1986. The improvement in eled off. Moreover, military spending labor demand has been fairly broadly has begun to respond to reductions in based. In manufacturing, a two-year defense authorizations and has slowed to string of cutbacks in durable goods inabout half its 1986 rate of increase. In dustries ended late last year, and hiring addition, there has been continued bud- picked up a bit in the nondurable goods getary restraint on discretionary domes- sector. As a result, factory employment, tic programs. On balance, these devel- overall, edged higher over the first six opments have held down the growth of months of 1987. In addition, the number federal purchases, which account for of jobs in oil and gas extraction stabiabout a third of total federal expendi- lized after the sharp retrenchment in tures; excluding changes in farm inven- 1986. At the same time, the expansion tories held by the Commodity Credit of jobs in the trade, services, and finance Corporation, real federal purchases were industries, despite some recent slowing, little changed between the second remained sizable. quarter of 1986 and the first quarter of The combination of strong gains in this year. employment and declining numbers of Real purchases of goods and services unemployed workers over the first half by state and local governments rose at a lowered the civilian jobless rate to 6lA 4 percent annual rate in the first quarter percent on average in the second quarter of 1987, close to the brisk pace of the from just under 7 percent at the end of past several years. The growth in outlays last year. The rate for adult men (aged continues to be boosted by efforts to 25 years and over), which had been upgrade basic infrastructures. This rise stuck at around 5V2 percent from in spending has outpaced growth in re- mid-1984 to late 1986, moved below 5 ceipts, however, and the sector's com- percent this spring; further improvebined operating and capital accounts ment also occurred for adult women, (that is, excluding social insurance whose unemployment rate in the past funds) moved into deficit in the first year has moved below that of their male quarter of this year. In many instances, a counterparts. current deficit does not signal any funda- Despite falling unemployment, availmental financial problem, as capital ex- able measures of labor compensation penditures are financed through bond showed little sign of acceleration early issues. Nonetheless, a good many units this year. Hourly compensation, as meaare experiencing a degree of difficulty, sured by the employment cost index, with oil-producing states under the most rose 3.1 percent in the 12 months ending stress. Many states are responding with in March, the same as the year-over-year plans to trim their general funds budgets; changes in the second half of 1986 and some are considering tax increases or are down nearly three-quarters of a percentplanning to retain the extra receipts gen- age point from a year earlier. A wide erated by changes in federal tax laws. gap persisted between the size of pay increases for white-collar workers and Labor Markets those in blue-collar occupations. None- Employment accelerated early in 1987, theless, the slowing in wage inflation and, despite a slowing in recent months, compared with a year earlier was rela- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

56 Monetary Policy Reports tively widespread by industry and occu- to the reductions in output to which pational group. An exception is the OPEC had agreed late in December. Northeast region where wages showed Higher crude oil costs were quickly no deceleration in the year ending in passed on to end-users, and by May March and increases were still outpacing consumer prices for gasoline and fuel oil those in other parts of the country by a had risen about 15 percent, retracing sizable margin. half of last year's decline. Spot prices The moderation in hourly compensa- of petroleum products moved up a bit tion increases has been the principal fac- further early in the summer as intor holding down labor costs, as produc- ventories tightened, and these increases tivity continues to be quite sluggish. were supported subsequently by the After declining in the second half of renewal of OPEC s agreement to control 1986, output per hour in the nonfarm production. business sector rebounded in the first In addition to the developments in quarter of 1987, but remained little dif- energy markets, the influence of a lower ferent from its year-earlier level. Since value of the dollar, as well as trade re- 1984, productivity gains in the nonfarm strictions, on the prices of imported business sector have averaged less than 1 goods became increasingly evident at percent per year. The trend has been the retail level in the first part of this much more favorable in the manufactur- year. The dockside prices of non-oil iming sector, where firms apparently have ports turned up in 1986 after several had some success in their efforts to boost years in which stable or declining import the efficiency of their production pro- prices had helped to restrain domestic cesses; indeed, productivity gains in inflation. Although price changes have U.S. manufacturing between 1985 and varied considerably among different cat- 1986 outstripped those recorded by other egories of imported goods, some of the major industrial countries. largest increases have been reported for consumer commodities, including Price Developments autos. Retail prices for a number of As expected, inflation rates have been items with higher-than-average import higher so far this year, largely reflecting proportions—such as apparel, footwear, a rebound in energy prices. The GNP and some other home goods—have fixed-weighted price index, a broad shown markedly faster increases than measure of inflation for goods and ser- during the past several years. These invices produced by the United States, creases contributed to a sharp acceleraincreased at about a 4 percent annual tion in the consumer price index for rate in the first quarter; it had risen 2Vi goods other than food and energy bepercent during 1986. Sharper accelera- tween December and May compared tions occurred in the consumer price with 1986 while the rise in prices of index, which was up at a 5Vi percent rate nonenergy services over the same period over the first five months of the year, and was slightly less rapid than last year. in the producer price index for finished At the domestic producer level, prices goods, which rose at a AV2 percent an- of finished consumer goods and capital nual rate over the six months ended in equipment other than food and energy June. rose at less than a 2 percent annual rate The rebound in energy prices began in over the first six months of the year. At January when spot prices of crude oil earlier stages of processing, however, jumped about $3 per barrel in response prices of domestically produced inter- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 57 mediate materials other than food and est rates. The range for debt was unenergy rose at a 4 percent annual rate, changed from 1986 but below the actual after two years of essentially no change. outcome in that year and other recent This acceleration reflected a sharp rise in years; thus, the Committee anticipated the prices of industrial chemicals and that debt growth also would slow this some other petroleum-related materials year. as well as increases in a number of other The Committee viewed a substantial categories. slowing in money and credit growth Prices of primary commodities other from the rapid pace of 1986 as likely to than petroleum also have increased so be consistent with continuation of susfar in 1987. In the agricultural sector, tainable economic expansion and concrop prices have retraced part of last ducive to further progress over time toyear's decline that occurred when ward reasonable price stability. Growth farmers sold large amounts of the grain of Ml also was expected to moderate they had received from the government considerably this year. However, the in lieu of cash payments. Prices of cattle Committee in February elected not to set and hogs also were up markedly into the a target range for Ml for 1987 because spring, but, with supplies improving, of the continuing uncertainties about the cattle prices have retraced much of their relationship of this aggregate to the advance, and hog futures prices point to economy. These uncertainties partly redeclines later this year. Prices of indus- flected the substantial sensitivity of its trial materials, with the exception of a velocity to changes in financial condibrief period early this year, have been tions that had been evident in recent rising fairly steadily since the early au- years, capped by a record postwar detumn of 1986. Spot prices for precious cline in the velocity of Ml over 1986. metals have been particularly sensitive Instead, the FOMC decided to continue to developments in foreign exchange evaluating movements in this aggregate markets and renewed market concerns in light of the behavior of its velocity, about inflation; after climbing sharply the rate of economic expansion, inflainto May, they fell back a bit with the tionary pressures, and developments in subsequent firming of the dollar. financial markets. Over the first half of 1987 monetary policy was conducted against a backdrop Monetary Policy and Financial of heightened concerns about inflation, Markets in the First Half of 1987 stimulated in part by substantial down- The Federal Open Market Committee at ward pressure on the dollar in foreign its meeting in February established 1987 exchange markets. At the same time, target ranges, measured from the fourth growth of money and credit aggregates quarter of 1986 to the fourth quarter of moderated considerably and the veloci- 1987, of 5V2 to SVi percent for both M2 ties of the broader monetary aggregates and M3. It also set a 1987 monitoring turned upward after several years of range for domestic nonfinancial debt of rapid money growth and falling veloci- 8 to 11 percent. The M2 and M3 ranges ties. Measured from the fourth quarter of represented a Vi percentage point reduc- 1986, M2 in June was below the lower tion from last year's target ranges, and end of its target growth range, while M3 the Committee expected growth to be was around the lower end of its range. well within the ranges, especially in the Meanwhile, growth in Ml slowed to a absence of dramatic movements in inter- 73/4 percent pace and debt expansion Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

58 Monetary Policy Reports moderated to a 93A percent rate. As conducted to keep pressures on the repressures on the dollar and inflation serve positions of depository institutions worries intensified in April and May, unchanged from last year. In January, interest rates began to rise substantially, strong credit and money demands assoespecially in long-term markets. In late ciated with a burst of tax-related finan- April and May the Federal Reserve cial activity in late 1986 began to abate, adopted a somewhat less accommoda- and short-term interest rates eased; howtive stance with respect to the provision ever, these rates remained above levels of reserves through open market opera- prevailing in the fall of last year. tions. These actions, together with mon- In foreign exchange markets, the doletary easing moves by key industrial lar had begun to decline in late Detrading partners, helped to stabilize the cember, after a period of some stability. dollar and calm inflation fears, contrib- The drop continued through January, uting to some decline in long-term interamid market concerns about the prosest rates and strengthening of the dollar. pects for correcting U.S. and foreign external imbalances. In late February, Money, Credit, and Monetary Policy the statement in Paris by the ministers of In its conduct of policy thus far this finance and central bank governors of year, the Federal Reserve has given a good deal of weight to a number of six major industrial countries that they considerations in addition to the mone- "agreed to cooperate closely to foster tary aggregates—principally recurrent stability of exchange rates around curepisodes of heavy downward pressure Growth of Money and Debt on the dollar, indications from long-term Percentage change at annual rate securities and commodity markets of Domestic heightened inflationary expectations, nonand evidence that the economy contin- Period Ml M2 M3 financial sector ued to advance at a pace sufficient to debt produce rising levels of resource utiliza- Fourth quarter to tion. Under these circumstances, inter- fourth quarter est rates tended to move higher, and the 1979 7.9 8.2 10.4 12.2 1980 7.3 8.9 9.6 9.6 patterns of rapid money growth and de- 1981 5.1 9.3 12.3 9.9 clining velocities of the last several (2.4)i years, when inflation and interest rates 1982 8.6 9.1 9.9 8.9 1983 10.2 12.1 9.8 11.5 were moving down, began to be re- 1984 5.4 7.9 10.7 13.9 versed. Growth of the broad aggregates 1985 12.1 8.8 7.7 13.4 remained around the lower bounds of 1986 15.3 8.9 8.8 13.2 their growth cones through most of the 1986:4 to 1987:2 . . . 9.9 4.5 5.3 9.8e first half of the year, although M2 dropped well below its long-run range 1986:4 to June 1987 7.7 4.0 5.3 9.8e later in the period. Growth of both M2 Quarterly average and M3 was considerably below the 1986: 1 8.8 5.3 7.7 15.5 2 15.5 9.4 8.7 10.2 pace of recent years, and their velocities 3 16.5 10.6 9.7 12.5 increased. Expansion of Ml also slowed 4 17.0 9.2 8.0 12.1 markedly, while growth of domestic 1987: 1 13.1 6.3 6.3 10.4 2 6.4 2.5 4.1 9.0e nonfinancial sector debt moderated. 1. Ml figure in parentheses is adjusted for shifts to Through the early spring of this year, NOW accounts in 1981. System open market operations were e estimated Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 59 rent levels," along with a discount rate long-term rates as many investors shied cut by the Bank of Japan, seemed to away from these instruments subject to stabilize the dollar for a time. substantial prepayment risk. The spread between private short- The effects of these developments term rates and Treasury bill rates wi- also were evident in short-term credit dened after Brazil announced a suspen- markets, where rates rose in April partly sion of interest payments to banks in in anticipation that monetary policy February, and subsequently widened would have to firm to contain pressures further as the Treasury's pay down of on prices and the dollar. In late April bills, which began early in the year, and again in May, the Federal Reserve picked up and foreign official institu- did move to tighten the availability of tions purchased bills with the proceeds nonborrowed reserves through open of dollars acquired in exchange market market operations. Short-term interest intervention. Reflecting the somewhat rates rose about Vi to 3A percentage point higher private short-term interest rates during April and May, and the prime and concomitant increases in funding rate was raised twice more, on May 1 costs, commercial banks raised the and May 15, in lA point increments. The prime rate by lA percentage point on System's firming actions, along with April 1. complementary moves abroad, helped to Long-term rates, which had not been stabilize the dollar and ameliorate the much affected by the transitory credit concerns about the inflation outlook. demands of late 1986, continued to drift Along with some better price news down in the early months of 1987, dis- and evidence of improvement in our playing little short-term volatility. The trade deficit, this policy appeared to implacid conditions in long-term markets part an improved tone to short-term and, were abruptly changed in late March, especially, long-term credit markets primarily by developments in the inter- over the latter part of May and June. national sphere. Announcements of Since May, most short-term rates have trade sanctions by the United States, posted declines of lA percentage point or persisting weakness of the dollar, and more. Longer-term markets generally disappointing trade figures all raised have registered greater gains, and in questions about continuing private de- early July long rates were off Vi to 3A mands for dollar assets, prospects for percentage point from their May highs. inflation, and the response of monetary The dollar, meanwhile, has shown more policy. The dollar dropped sharply in the dramatic improvement, regaining the last three weeks of March, and between ground it lost in April and May. late March and late April yields on 30- As interest incentives favoring market year government bonds rose about 1 per- instruments over monetary assets becentage point on balance. The exchange came more pronounced in the first half and bond markets became highly of the year, growth of the monetary agvolatile during this period, as the dollar gregates slowed. M2 decelerated in both continued to drop and inflation fears ap- quarters, expanding at only a 2l/i percent peared to be intensified by the publica- annual rate in the March to June period. tion of adverse price data. Mortgage In addition to the influence of rising rates and yields on mortgage pass- interest rates, tax reform may have through securities reacted very promptly weakened the public's demand for M2 to the deterioration in the bond markets assets, particularly household-type deand, indeed, rose more than most other posits, to the extent that it induced indi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

60 Monetary Policy Reports viduals to pay down consumer debt or to Growth in other liquid balances also finance expenditures out of liquid assets has been falling. Savings deposits, after rather than with credit. The velocity of expanding at around a 30 percent rate M2 is estimated to have risen in the first since the late summer of last year, and second quarters after declining in slowed in the second quarter and ad- 1985 and 1986. vanced at only a 10 percent rate in June, The slowing of M2 growth was ac- and money market deposit accounts companied by a marked change in the have been particularly weak this year. composition of deposit inflows away By contrast, small time deposits which from transactions and other highly liquid had run off over much of last year in an instruments and toward longer-term re- environment of falling short-term rates, tail deposits. This reversal of the pattern expanded significantly in June for the of portfolio shifts in 1985 and 1986 oc- first time since April 1986. Small time curred as rates on time deposits adjusted deposit growth this year has been espemore promptly to rising market rates cially strong at thrift institutions, reflectthan did yields on more liquid monetary ing elevated offering rates and, in certain components and the deposit rate curve cases, shifting to deposits in denominasteepened. tions under $100,000, as some of these Growth in transactions instruments institutions have encountered difficulties fell in the first half to a pace not seen in issuing large time deposits. since 1984, the last time interest rates Even with weak inflows to core derose on a sustained basis. Demand de- posits, the need among commercial posits, along with other checkable de- banks to tap wholesale managed liabiliposits (OCDs), were boosted smartly in ties was limited by a moderation in de- April as individuals prepared to pay tax mands for credit. M3 growth was further liabilities, which were swollen by capi- damped in the first half as banks obtal gains taken in 1986 to avoid higher tained funds from sources not encomrates under tax reform. On balance, passed by the monetary aggregates, inhowever, demand deposits have exhi- cluding borrowing from their foreign bited no sustained strength since late last branches and a sharp rise in Treasury summer. Among other factors, the rise deposits. Federal Home Loan Bank adin interest rates reduced the volume of vances to thrifts also were strong, aldemand deposits that businesses need to though below the pace of last year. M3 hold as compensating balances for bank growth fell below that of income in the services. As rates on time deposits and first half and its velocity apparently rose market instruments rose, OCDs became in both quarters, the first sustained ina less attractive savings vehicle. The crease in three years. progressive slowing this year of OCD Credit flows were reduced in the first growth, which had averaged close to 30 half of 1987, with total domestic nonfipercent during most of 1986, was inter- nancial sector debt expanding at around rupted only by the April surge. With a 93/4 percent annual rate, compared with demand deposits and OCDs both run- rates in excess of 13 percent in each of ning off in June, growth in Ml for the the preceding three years. Even so, exsecond quarter was down to a 6!/2 per- pansion of both the private and public cent rate. The velocity of Ml in the components of the debt aggregate consecond quarter is estimated to have been tinued to outstrip growth of income, as little changed after declining in each generally has been the case in the 1980s. quarter since 1984. Overall business credit demands con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 61 tinued to be buoyed in the first half by panded at a 93/4 percent annual rate in the heavy net share retirements associated first half of the year, down from the pace with mergers, buyouts, and other corpo- of 1986. rate restructurings. With long-term rates Borrowing by state and local governsubdued in the first three months of the ments has fallen off this year. Issuance year, firms concentrated their borrow- of municipal debt for new capital has ings in bond markets and short-term been slowed considerably by provisions business credit contracted. However, as of tax reform that narrowed the definilong-term markets deteriorated in April, tion of public-purpose debt and conbond issuance abated and business credit strained private-purpose offerings. In demands focused on the commercial addition, issuance of refunding bonds, paper market. By June, with some im- which was strong in the first quarter, provement in long-term markets, these slackened after April owing to higher financing patterns reversed again as interest rates. bond issuance picked up and growth of The financial system has continued to short-term business credit came to a evidence strains in 1987. Indications halt. that the agricultural sector is beginning Growth of consumer installment to stabilize have emerged, with loan decredit was considerably diminished dur- linquencies declining, land prices boting the first half. The reduced deductibi- toming out, and export volume firming; lity of consumer interest payments under the failure rate among agricultural banks the new tax code encouraged this devel- seems likely to have peaked. However, opment. The tax law change made use of the Farm Credit System, the nation's mortgage credit relatively more attrac- largest farm lender, lost considerable tive, and the active promotion by lenders sums in 1985 and 1986, and many of its of home equity lines of credit reinforced units continue to struggle with troubled tendencies toward substitution. In addi- loan portfolios. tion to credit taken down under home In addition to difficulties with agriculequity lines, mortgage growth in the first tural loans, commercial banks have been half was maintained by heavy volumes saddled with persisting problems in their of new and existing home sales. energy and developing country loan Federal government credit needs in portfolios. Although some banks remain the first half were held down by unusu- highly profitable, 19 percent lost money ally strong tax payments stemming from last year, compared with about 3 percent the retroactive repeal of the investment as the decade began; loan loss provisions tax credit and, principally, capital gains were the main cause of the earnings realized late last year. The budget problems. The banking system is likely showed a small surplus in the April to to post record losses this year owing to June period, after a $59 billion deficit in huge reserve provisions taken by large the first quarter. Net borrowing from the banks primarily as a consequence of depublic nevertheless rose in the second velopments in the international debt quarter on a seasonally adjusted basis as area. Despite the shrinkage in the book the Treasury replenished its cash bal- value of shareholder equity recognized ances, which had been drawn down by these actions, share prices rose at sharply in the initial months of the year. many banks announcing large increases The Treasury ran off bills in both in loan loss reserves. quarters, but continued to issue coupon Net operating income before taxes for securities in volume. Federal debt ex- solvent thrift institutions rose last year as Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

62 Monetary Policy Reports interest margins widened with falling FSLIC exceed its reserves by significant market rates, and thrifts overall have amounts. With premiums levied on raised their ratio of net worth to total member institutions already at a statuassets by taking advantage of strong tory maximum, some action clearly is stock prices to issue large volumes of called for to strengthen the FSLIC and equity. Nonetheless, at a significant mi- bolster its ability to deal with problem nority of thrifts, already negative net institutions. Plans currently under study worth positions have been aggravated by by Congress would involve using recontinued losses. Moreover, the prob- tained earnings from the Federal Home lems of some troubled institutions inten- Loan Banks to capitalize a financing corsified this year as the real estate market poration which, in turn, would issue obin certain areas of the country remained ligations and invest the proceeds in depressed and interest rates backed up. FSLIC capital stock. At this stage, these The difficulties of the thrift industry plans call for a maximum capacity to are mirrored in the situation of the Fed- issue debt of $8!/2 billion. This would be eral Savings and Loan Insurance repaid over an extended period of time Corporation. Estimates indicate that through FSLIC assessments on member current and potential claims against the institutions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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

65 Record of Policy Actions of the Board of Governors Regulation D (Reserve percent reserve requirement on the first Requirements of Depository $2 million of an institution's reservable Institutions) liabilities. It also provided for annual adjustments to that exemption based on December 2, 1987—Amendment deposit growth nationwide. Recent The Board amended Regulation D to growth in deposits warranted an increase increase (1) the amount of transaction in the amount subject to a zero percent account balances to which the lower re- reserve requirement from $2.9 million to serve requirement applies and (2) the $3.2 million, and the Board amended amount of reservable liabilities subject Regulation D accordingly. to a zero percent reserve requirement. The amendments are effective with the reserve computation period begin- Votes for these actions: Messrs. Greenspan and Johnson, Ms. Seger, ning on December 29, 1987, and with the Messrs. Angell, Heller, and Kelley.1 corresponding reserve maintenance period beginning on or after December 31, Under the Monetary Control Act of 1987. 1980, depository institutions, Edge and agreement corporations, and U.S. agen- Regulation D (Reserve cies and branches of foreign banks are Requirements of Depository subject to reserve requirements set by Institutions) and the Board. Initially, the Board set re- Regulation Q (Interest on serve requirements at 3 percent of an Deposits) institution's first $25 million in transaction balances and 12 percent on balances December 9, 1987—Revision and above that level. The act directs the Rescission of Interpretations and Board to adjust the amount subject to the Technical Amendments lower reserve requirement to reflect The Board approved revisions to certain changes in transaction balances nationpublished interpretations of Regulation wide. By the beginning of 1987, this Q and the rescission of others and made amount was $36.7 million. Recent technical amendments to Regulation D growth in such balances warranted an and related interpretations. increase of $3.8 million. The Board, therefore, amended Regulation D to in- Votes for these actions: Messrs. crease to $40.5 million the amount of Greenspan and Johnson, Ms. Seger, Messrs. Angell and Kelley. Absent and transaction accounts to which the lower not voting: Mr. Heller.1 reserve requirement applies. The Garn-St Germain Depository In- The expiration in 1986 of the Deposistitutions Act of 1982 established a zero tory Institutions Deregulation Act of 1980 removed the authority of the Board (and that of the other federal agencies 1. On this and subsequent pages, footnote 1 regulating financial institutions) to set indicates that there was a vacancy on the Board Digitizedw fhoer nF tRhiAs SaEctRio n was taken. ceilings on the rates of interest paid on http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

66 Board Policy Actions deposits. Provisions in Regulations D issuing debit cards or other devices and Q had been used to enforce ceilings for making point-of-sale transactions or on interest rates and to make distinctions by allowing consumers to use other between classes of deposits. With the cards to gain access to deposit accounts. expiration of the act, the Board removed Those requirements included sending those provisions in the regulations. The periodic statements of EFT transactions Board now has rescinded the interpreta- to consumers. tions of Regulation Q that were made The Board amended Regulation E to obsolete by the expiration of the act and eliminate the periodic statement requirethe related regulatory changes and has ments for those who provide EFT serrevised other provisions. Where appro- vices to consumers but do not hold conpriate, the Board has revised interpreta- sumer accounts, provided they (1) issue tions concerning distinctions between debit cards that indicate the name and classes of deposits and, in some cases, address or telephone number that should has moved them to Regulation D. be used to contact the service provider; Of the 47 interpretations of Regula- (2) furnish institutions with specified intion Q, 34 were rescinded, 3 were re- formation by which they can identify vised, 3 were left unchanged, and 7 transactions; (3) extend the time within were moved to Regulation D. The which consumers must report lost or stoamendments to Regulation D remove len debit cards; (4) include their address obsolete references to Regulation Q and and telephone number on receipts; and make technical changes and clarifica- (5) give certain other disclosures. Also, tions to the regulation and certain inter- the amendments require account-holdpretations. The technical amendments ing financial institutions to describe the are effective December 31, 1987. EFT transactions on the periodic statements they send to their customers. The Board took this action because of Regulation E (Electronic Fund concern that the high cost of sending the Transfers) periodic statements was impeding the growth of EFT systems using automated August 5, 1987—Amendments clearing houses and was hampering the The Board amended Regulation E to development and widespread use of eliminate, under certain circumstances, point-of-sale systems. The Board bethe requirements for periodic statements lieved that the changes would simplify for those organizations that offer elec- recordkeeping for consumers because tronic fund transfer (EFT) services but they would receive one statement of all do not hold consumer accounts. transactions for which they used a debit card, rather than receiving a statement Votes for this action: Mr. Johnson, Ms. from each establishment at which the Seger, Messrs. Angell, Heller, and Kelley. Absent and not voting: Mr. card was used. The amendments con- Volcker.1 tinue existing consumer protections and allow the reduction of costs of the over- Previously, organizations that offered all payment system, to the benefit of EFT services but did not hold consumer account-holding institutions, service accounts had to comply with most of the providers, and consumers. requirements of Regulation E. The regu- The amendments are effective Nolation established specific requirements vember 15, 1987, except for the periodic for organizations, such as retailers, that statement requirements for account- Digitizedp froorv FiRdeA SEEFRT services to consumers by holding institutions, which are effective http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 67 July 1, 1990, for institutions with less quired by the SEC for publicly held than $25 million in assets. Also, other companies. A bank with no foreign ofaccount-holding institutions are not re- fices and with less than $150 million in quired to comply with certain of the assets now may substitute its quarterly periodic statement requirements of the reports of condition and income for three regulation until July 1, 1990. of the four quarterly reports normally filed with the SEC on Form 10-Q. The amendments eliminate the need for regu- Regulation F (Securities of State latory revisions whenever the SEC Member Banks) and Regulation H amends its requirements for reporting or (Membership of State Banking disclosure. The new requirements are Institutions in the Federal Reserve effective with the first reports filed after System) January 1, 1988. December 18, 1987—Rescission and Amendments Regulation H (Membership of State Banking Institutions in the The Board amended its securities report- Federal Reserve System) ing requirements, effective January 1, 1988, by eliminating certain reports that January 21, 1987—Amendment banks had been required to file with the Board and replacing them with similar The Board amended Regulation H, efreports prescribed by the Securities and fective April 27, 1987, to implement Exchange Commission (SEC). The re- provisions of the Anti-Drug Abuse Act porting requirements had been in Regu- of 1986. lation F; the Board rescinded Regulation Votes for this action: Mr. Johnson, Ms. F, however, and amended Regulation H Seger, Messrs. Angell and Heller. Absent to include the revised requirements for and not voting: Mr. Volcker.2 disclosure and reporting. The Anti-Drug Abuse Act of 1986 Votes for these actions: Mr. Johnson, Ms. directed the Board and the other federal Seger, Messrs. Angell and Kelley. Absent and not voting: Messrs. Greenspan agencies that regulate banks to require and Heller.1 banking organizations under their jurisdiction to establish procedures ensuring The Securities Exchange Act of 1934 compliance with the Bank Secrecy Act. requires publicly held companies, in- The Bank Secrecy Act requires institucluding all those with more than 500 tions to keep records on certain customer shareholders and more than $ 1 million in deposit activities, currency transactions, assets, to make certain public disclo- and movements of monetary instruments sures and to file with the SEC various outside the United States, particularly if reports regarding changes in ownership those activities involve cash transactions or tender offers for their securities. The of $10,000 or more. The Anti-Drug act also authorizes the Board to adopt Abuse Act required that the agencies similar requirements for reporting and promulgate regulations by January 27, disclosure for state member banks and to 1987, and that institutions establish issue regulations substantially similar to those of the SEC. The amended Regulation H requires 2. On this and subsequent pages, footnote 2 that state member banks file information indicates that there were two vacancies on the Digitizedw foitrh F RthAeS EBRo ard in the same format re- Board when this action was taken. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

68 Board Policy Actions compliance procedures within three invested in qualified agricultural loans; months. (5) be in need of capital restoration; and The amendments to Regulation H re- (6) have a plan to restore its capital by quire member banks to have by April 27, the end of the amortization period. 1987, written procedures that, at a mini- Losses resulting from fraud or criminal mum, establish compliance procedures; abuse do not qualify for amortization. designate an individual to be responsible The Board's implementing rule defor overseeing and monitoring compli- scribes the procedures and standards apance; and provide for appropriate em- plicable to state member banks seeking ployee training regarding the require- to amortize losses under the statute and ments of the act. The act also authorizes the manner in which such amortizations agencies to issue cease and desist orders are to be taken. The rule is effective in or to assess penalties against institutions November; thus, the first financial statethat fail to establish compliance proce- ment that banks file under the new produres or to correct problems cited in an cedures is the 1987 year-end call report. examination. The other two federal banking agencies have adopted substantially similar regulations for the institutions they regulate. October 28, 1987—Amendment The Board amended Regulation H, effective November 9, 1987, to permit Regulation K (International banks to amortize losses on certain qual- Banking Operations) ified agricultural loans and other assets. August 10, 1987—Amendment Votes for this action: Messrs. Greenspan and Johnson, Ms. Seger, Messrs. Angell, The Board amended Regulation K to Heller, and Kelley.1 permit U.S. banking organizations to make certain investments abroad using The Competitive Equality Banking debt-for-equity swaps. Act of 1987 permits a bank to amortize Votes for this action: Messrs. Volcker losses on qualified agricultural loans re- and Johnson, Ms. Seger, Messrs. Heller flected on its financial statements be- and Kelley. Absent and not voting: tween December 31, 1983, and January 1, Mr. Angell.1 1992. A bank also may amortize losses incurred as a result of an appraisal of The Board amended Regulation K to other assets related to a qualified agricul- provide additional investment flexibility tural loan that it owned at any time be- to U.S. banking organizations abroad by tween January 1, 1983, and January 1. liberalizing the availability of debt-for- 1992. The act directs the federal banking equity swaps of foreign loans for equity agencies to issue implementing regula- investments. Swaps are useful primarily tions no later than November 9, 1987. in a country that has restricted or prohib- The statute establishes criteria for de- ited foreign creditors from expatriating termining whether an institution's losses its currency. are eligible for amortization. The statute Previously, Regulation K had permitrequires that a bank (1) have deposit ted U.S. banking organizations to hold insurance and be in satisfactory condi- up to 20 percent of the shares of nonfition; (2) be located in an area whose nancial companies and all of the shares economy is dependent on agriculture; of financial companies. The Board (3) have assets of $100 million or less; amended the regulation to eliminate the Digitized( 4fo)r hFRavAeS EaRt least 25 percent of its loans 20 percent restriction in certain cases. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 69 Regulation K now permits a U.S. bank- December 18, 1987—Amendment ing organization to acquire all the shares of a nonfinancial company in a debt-for- The Board amended Regulation T, efequity swap, provided the following fective January 25, 1988, to permit conditions are met: (1) the company brokers and dealers to assist in the exermust be in the process of being trans- cise of employee stock options. ferred from public ownership to private Votes for this action: Mr. Johnson, Ms. ownership; (2) the company being ac- Seger, Messrs. Angell and Kelley. Abquired must be located in a heavily insent and not voting: Messrs. Greenspan debted country; (3) the shares being ac- and Heller.1 quired in the swap must be held by the bank holding company or its subsidiary, Previously under Regulation T, inand not by a bank; and (4) the shares vestors could not pay for the purchase of must be divested within five years after a security from a cash account with the the acquisition, unless the Board grants proceeds of the sale nor withdraw funds an extension for up to five additional from a margin account if the withdrawal years. would lower the investor's equity in the account. The Board amended Regula- Regulation T (Credit by Brokers tion T to provide a simplified procedure and Dealers) by which broker-dealers can temporarily finance the acquisition of stock under August 20, 1987—Amendment employee stock-option programs. A broker-dealer now may advance funds The Board amended Regulation T, effor the exercise of an employee stock fective August 27, 1987, to permit option, for a short period of time, if the brokers and dealers to extend credit on a broker has evidence of the employee's good-faith basis on any mortgage-reentitlement to the security and assurance lated security. of the company's prompt delivery of the Votes for this action: Messrs. Greenspan, security. Johnson, Angell, and Heller. Absent and not voting: Ms. Seger and Mr. Kelley.1 The Secondary Mortgage Market En- Regulation U (Credit by Banks hancement Act attempts to facilitate parfor the Purpose of Purchasing ticipation by the private sector in the or Carrying Margin Stock) secondary market for mortgages by providing preferential treatment for mort- September 16, 1987—Amendment gage-related securities. The Board amended Regulation T by revising the The Board amended Regulation U, efdefinition of an over-the-counter margin fective September 23, 1987, to exempt bond to include any mortgage-related banks when extending margin credit in security. The revision permits a broker- an amount of $100,000 or less from dealer to extend credit in any margin executing Form FR U-l. account, on a good-faith basis, for any Votes for this action: Messrs. Greenspan mortgage-related security that is priand Johnson, Ms. Seger, Messrs. Angell, vately placed, provided the security rep- Heller, and Kelley.1 resents ownership in a residence and is rated in one of the two highest rating The amendment exempts a bank that categories by a nationally recognized makes a loan of $100,000 or less, serating service. cured directly or indirectly by margin Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

70 Board Policy Actions stock, from the requirement that it ob- eral circulation in the communities tain a purpose statement (Form FR U-l) served by the institution to be acquired. from the borrower. The amendment specifies the information to be included in the published announcement and requires that the news- Regulation Y (Bank Holding paper announcement appear within 10 Companies and Change days before or after the notification of in Bank Control) the Federal Reserve of the proposed change in bank control. If a public offer- June 10, 1987—Amendment ing of securities will occur in connection The Board amended Regulation Y, ef- with the change in control, however, the fective immediately, to implement Federal Reserve may delay publication amendments in the Change in Bank of the notice to coordinate with the publication requirements of federal securi- Control Act required by the Anti-Drug ties laws. Abuse Act of 1986. The amendment also provides that the Votes for this action: An action commit- Board will publish notice of a proposed tee of Mr. Johnson, Ms. Seger, and Mr. Heller. Absent and not voting: Messrs. change in control in the Federal Register Volcker and Angell.2 and will provide a public comment period of at least 15 days. The Board may A provision in the Anti-Drug Abuse decide not to publish the notice in the Act imposed new requirements on those Federal Register, or it may waive the who seek to acquire control of a bank or requirement for newspaper publication bank holding company, as well as on the if it determines that such action would federal agencies that oversee the institu- jeopardize the safety or soundness of the tions being acquired. The act requires organization being acquired, such as that the federal agency receiving notice when a bank is in danger of failing. of a proposed change in control publish notice of the acquisition in the commu- Regulation Z (Truth in Lending) nities where the organizations to be acquired are located. The notice must in- November 5, 1987—Amendment vite public comment on the proposed change in control, indicate where such The Board amended Regulation Z, efcomments should be directed, and name fective December 9, 1987, to implement all parties to the proposed acquisition a provision in the Competitive Equality and organizations to be acquired. Also, Banking Act of 1987 requiring creditors the Board must investigate the compe- to set a maximum rate of interest that tence, experience, integrity, and finan- will be charged on an adjustable-rate cial ability of each person named in a mortgage loan. notice of a change in bank control. To Votes for this action: Messrs. Greenspan complete the required investigations, the and Johnson, Ms. Seger, Messrs. Angell, Board may delay action on those pro- Heller, and Kelley.1 posals. The Board amended Regulation Y to A provision of the Competitive Equalimplement the new publication require- ity Banking Act states that any adjustments. The Board required that parties able-rate credit contract—whether openfiling a notice of a change in control end or closed-end—entered into on or publish an announcement of the pro- after December 9, 1987, that is secured posed acquisition in a newspaper of gen- by the borrower's dwelling must include Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 71 a limitation on the amount of interest cured by the consumer's principal that may be charged during the life of dwelling and to loans for purchasing a the loan contract. The legislation does home. The amendments require that the not limit interest rates on such loans; disclosures clearly explain the formula rather, it requires that lenders disclose or index that the lender will use to deterthe maximum rate that might be charged mine when and how the rate will be during the term of the loan. adjusted, as well as other important features about the loan program, including December 18, 1987—Amendment the timing and frequency of adjustments in the interest rate or payments; any lim- The Board amended Regulation Z, efitation on the rate that can be charged or fective October 1, 1988, to expand the on payment adjustments; and the presdisclosure requirements for closed-end ence or absence in the credit contract of adjustable-rate mortgages. a demand feature allowing the creditor Votes for this action: Mr. Johnson, Ms. to require immediate payment in full. Seger, Messrs. Angell and Kelley. Ab- Also, the lender must provide an illussent and not voting: Messrs. Greenspan tration of how the interest rate, payment, and Heller.1 and balance on a $10,000 mortgage loan For some time, the Board had been would have been adjusted, using actual working with the other members of the changes in the appropriate index or for- Federal Financial Institutions Examina- mula since 1977, if the rate had been tion Council to develop uniform disclo- administered under one of the lender's sure requirements for adjustable-rate ARM loan programs. (Lenders are remortgage (ARM) loans. The agencies quired to provide a history of the had been concerned that some con- changes in the formula or index used for sumers were not fully informed of the a particular ARM program and to update range of possible adjustments to their the data annually until a 15-year table is mortgage loans. Moreover, differences available.) The disclosures and historiin disclosure requirements among agen- cal information must be provided when a cies for the varying institutions they su- consumer receives an application form pervise made comparisons of adjust- or before the consumer pays a nonrefunable-rate programs difficult. The dable application fee, whichever is earagencies believed that uniform disclo- lier. sure requirements would facilitate con- In adopting these amendments, the sumers' shopping for loans and were Board stated that creditors could begin necessary to ensure that consumers re- operating under the new rules immediceive (1) adequate information about ad- ately. Compliance will be mandatory justable-rate mortgages during the loan- beginning October 1, 1988. application process and (2) comparable information from all lenders to which Policy Statement they apply. The amendments to Regulation Z re- April 22, 1987—Statement on the quire that a creditor provide consumers Responsibility of Bank Holding with a handbook describing adjustable- Companies to Act as Sources of rate mortgages in general terms and also Strength for Their Subsidiary Banks with detailed disclosures about the lender's ARM programs. The require- The Board authorized issuance of a polments apply to closed-end credit con- icy statement, effective immediately, to tracts of one year or longer that are se- remind bank holding companies of their Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

72 Board Policy Actions responsibility to serve as sources of discount rate during 1987, including strength for their subsidiary banks. the votes on those actions, follows this review. Votes for this action: Messrs. Volcker and Johnson, Ms. Seger, Messrs. Angell and Heller.2 Actions on the Basic Discount Rate The statement reaffirmed a long- During the first several weeks of the standing Board policy that holding com- year, the Board discussed but took no panies should use their available re- action on requests by a number of Fedsources to provide adequate capital eral Reserve Banks to reduce the basic funds to their subsidiary banks during discount rate by xh percentage point. A periods of financial stress or adversity. rate of 5!/2 percent had been in effect The Board issued the policy statement to since the second half of August 1986. In remind holding companies of its expec- the Board's judgment a lower rate was tation that they provide financial and not then warranted by conditions in fimanagerial strength to their subsidiary nancial markets or the behavior of the banks. monetary aggregates. The Board also Because it reiterated an existing pol- was concerned about the weakness of icy, the statement was effective immedi- the dollar in the foreign exchange marately. The Board indicated, however, kets. Nonetheless, with the outlook for that it would accept comments on the economic activity and prices subject to a policy through July 1, 1987. great deal of uncertainty, the Board decided to defer action rather than to approve or deny the pending reductions. Information that became available 1987 Discount Rates over the course of the first quarter sug- The Board approved one change in the gested on balance that business activity basic discount rate during 1987, an in- was expanding at a faster pace than in crease in early September from 5Vi per- the latter part of 1986, and concerns cent to 6 percent. During the year the about the outlook for inflation appeared Board also turned down four requests for to be growing. Concurrently, the dollar increases or decreases of Vi percentage remained under downward pressure in point in the basic rate submitted by indi- foreign exchange markets. Against that vidual Federal Reserve Banks. As de- background all of the requests for a scribed below, the Board renewed its lower rate were withdrawn by mid-Febtemporary, simplified seasonal credit ruary, and no further requests for a program for 1987 and also approved a change in the rate were submitted until new, simpler structure of rates, includ- after mid-April. ing a flexible rate, for loans made under Over a period of several weeks after the extended credit program. mid-April, a number of Federal Reserve The reasons for the Board's decisions Banks proposed increases of Vi percentare reviewed below. Those decisions age point in the basic rate. Broad measwere made in the context of the policy ures of consumer and producer prices actions of the Federal Open Market and commodity prices indicated a rising Committee and of general economic and rate of inflation in this period. The financial developments that are covered greater inflation was induced primarily in more detail elsewhere in this REPORT. by higher prices for energy and non-oil A listing of the Board's actions on the imports. And, as evidenced in part bv Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 73 developments in financial markets, in- Board approved an increase of Vi perflationary expectations appeared to be centage point in the basic rate, to 6 perintensifying, and the dollar remained cent. A sharp rise in long-term interest under considerable downward pressure. rates, notably in the early days of Sep- In its discussions during this period the tember, along with increasing commod- Board noted that economic and financial ity prices and some indications of conditions might be evolving in a direc- stronger economic growth had raised tion that could call for a higher discount questions about the outlook for inflation. rate, but with the overall expansion in The dollar was also under renewed business activity still relatively sluggish downward pressure in foreign exchange and conditions in domestic financial markets. In these circumstances the markets somewhat unsettled, the Board concluded that the increase would members wanted to proceed with cau- be desirable as a signal of the System's tion. In particular, a majority of the intent to deal effectively and in a timely members did not feel that a higher dis- way with potential inflationary prescount rate was needed then to reinforce sures. In particular, the increase might the firming actions initiated in late April be helpful as a means of moderating and during May through open market inflationary expectations and relieving operations. Accordingly, no action was pressures on the dollar in foreign extaken on the pending requests for a change markets, with beneficial implicahigher discount rate. tions for domestic long-term interest By late June, with measured inflation rates and the sustainability of the rates slowing and concerns about the expansion. outlook for inflation and the dollar ap- Following the sharp decline in stock parently subsiding, all of the requests for prices in mid-October, one Reserve a higher discount rate had been with- Bank requested a reduction of Vi perdrawn. During July, one Reserve Bank centage point in the basic rate while the proposed a reduction of Vi percentage other Reserve Banks indicated a preferpoint in the rate against the background ence for maintaining the existing rate. In of weaknesses in the regional economy its review of the proposal for a lower and uncertainties about the broader out- rate, the Board took account of the polook for the national economy. The pro- tentially adverse but quite uncertain efposed reductions were disapproved by the fect that unsettled conditions in financial Board at meetings in mid-July and late markets might have on the economic July. The Board concluded that prevailing expansion. The lower stock prices were economic and financial conditions did not associated with sizable declines in marwarrant a lower discount rate. ket interest rates after mid-October, and In mid-August and again late in that on balance, despite some continuing month, the Board turned down requests volatility in equity and debt markets, by one Reserve Bank to increase the financial conditions appeared to have litbasic rate by Vi percentage point. After tle discernible influence on overall busireview the Board concluded that, while ness activity during the closing weeks of a higher rate might well become desir- the year. In the circumstances, with the able in the near term, current economic dollar also remaining under downward and financial developments and the be- pressure, the Board decided to take no havior of the monetary aggregates did action on the proposed rate reduction, not call for an immediate increase. Sub- which remained pending through the end sequently, in early September, the of the year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

74 Board Policy Actions Renewal of Temporary Seasonal year the flexible rate was adjusted bi- Credit Program weekly and ranged from 7.15 percent to 8.50 percent. On January 28, 1987, the Board approved the renewal for 1987 of its tem- Structure of Discount Rates porary, simplified seasonal credit program. This program was originally The basic discount rate noted in this approved and implemented in 1985 as a report is the rate charged on loans to means of making funds available at the depository institutions for short-term addiscount window to agricultural banks justment credit.3 The basic rate also apexperiencing unusually strong loan de- plies to most seasonal credit, including mands. The program was intended to the regular seasonal program; under that complement the longstanding regular program, credit may be provided for peseasonal credit program and thereby to riods longer than those permitted under help ensure that small- and medium-size adjustment credit to assist smaller instibanks did not face liquidity constraints tutions in meeting regular needs arising in accommodating their farm borrowers from certain seasonal movements in over the planting and production cycle. their deposits and loans. Credit is also Under this temporary program, eligible provided at the basic discount rate under banks could borrow from the Federal the variable-rate option of the temporary Reserve to fund one-half of their loan seasonal program and at a rate Vi pergrowth in excess of 2 percent over a base centage point above the basic rate under level; such borrowing could not exceed the fixed-rate option of the temporary 5 percent of their deposits. The borrow- seasonal program. ings are available under either a fixed- Another category of discount-window rate or variable-rate option. credit relates to loans made over extended periods to depository institutions Extended Credit Program that are under sustained liquidity pressure. Such extended credit may also be On June 10, 1987, the Board, in the provided when exceptional circuminterest of simplification, approved a restances or practices adversely affect a structuring of the interest rates that are particular depository institution. As charged for credit advanced to deposinoted above, the interest rate on extory institutions for an extended period tended credit is set at the basic rate for for other than seasonal purposes. The the first 30 days of borrowing and bestructure then existing involved a mixcomes a higher, market-related rate ture of fixed and flexible rates that dethereafter. pended on the amount of time the credit As of December 31, 1987, the struchad been outstanding and the amount ture of discount rates was as follows: a that was borrowed. The new, simplified basic rate of 6 percent for short-term structure uses the basic discount rate for adjustment credit and for credit under the first 30 days of borrowing and a the regular seasonal program. A small flexible rate for any period after 30 days. The flexible rate is to be somewhat above the rates on market sources of 3. However, on exceptionally large adjustshort-term funds to depository institu- ment-credit borrowings that arise from computer tions but at least 50 basis points above breakdowns or other operating problems, the rate the basic discount rate. charged will be the highest established for loans to depository institutions, unless the operating prob- The new structure of rates took effect lem clearly is beyond the reasonable control of the on July 30, 1987; over the balance of the borrowing institution. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 75 volume of loans was outstanding at the of the Federal Reserve Bank of Dallas on basic rate under the temporary seasonal July 23 to reduce the basic discount rate program at year-end. That rate also ap- to 5 percent. plied to the first 30 days of borrowing on Votes for this action: Messrs. Volcker and an extended basis. The flexible rate on Johnson, Ms. Seger, Messrs. Angell, extended credit of more than 30 days Heller, and Kelley. Votes against this acwas 7.70 percent at the end of 1987. No tion: None.1 borrowings were outstanding under the large-borrowings program at year-end. August 17, 1987. The Board disapproved an action taken by the directors Votes on Reserve Bank Requests of the Federal Reserve Bank of Cleveto Change the Discount Rate land on August 13 to increase the basic discount rate to 6 percent. Under the provisions of the Federal Reserve Act, the boards of directors of Votes for this action: Messrs. Greenspan Federal Reserve Banks are required to and Johnson, Ms. Seger, Messrs. Angell, Heller, and Kelley. Votes against this acestablish rates on loans to depository tion: None.1 institutions at least every 14 days and to submit such rates to the Board of Governors for review and determination. Since August 31, 1987. The Board disaplate July 1987, Reserve Bank actions on proved an action taken by the directors the discount rate have included requests of the Federal Reserve Bank of Cleveinitially to establish and then to renew land on August 27 to increase the basic the formula for calculating the flexible discount rate to 6 percent. rate on extended credit. The Board votes Votes for this action: Messrs. Greenspan, listed below are those that involved Johnson, Angell, and Kelley. Votes changes in the basic discount rate, the against this action: None. Absent and not renewal of the temporary seasonal credit voting: Ms. Seger and Mr. Heller.1 program, and the simplification of the extended credit program. Votes involv- September 4, 1987. Effective Seping the reestablishment of existing rates tember 4, 1987, the Board approved acor the setting of market-related rates tions taken by the directors of the Fedunder the extended credit program are eral Reserve Banks of New York, not shown. All of those votes were Philadelphia, Cleveland, Atlanta, Chiunanimous. cago, and Kansas City to raise the basic discount rate from 5Vi to 6 percent. Votes on the Basic Discount Rate Votes for this action: Messrs. Greenspan, Johnson, Angell and Kelley. Votes July 13, 1987. The Board disapagainst this action: None. Absent and not proved an action taken by the directors voting: Ms. Seger and Mr. Heller.1 of the Federal Reserve Bank of Dallas on July 9 to reduce the basic discount rate from 5V2 percent to 5 percent. The Board subsequently approved similar actions taken by the directors of Votes for this action: Mr. Volcker, Ms. the Federal Reserve Bank of Richmond Seger, Messrs. Angell, Heller, and Kelley. Votes against this action: None. effective September 5; Minneapolis ef- Absent and not voting: Mr. Johnson.1 fective September 8; Boston, St. Louis, and San Francisco effective September July 27, 1987. The Board disap- 9; and Dallas effective September 11, Digitized pforor vFeRdA SaEnR a ction taken by the directors 1987. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76 Board Policy Actions Vote on Seasonal Credit Program new, simplified structure of interest rates On January 28, 1987, the Board re- on borrowings on an extended basis, newed the temporary, simplified sea- including use of the basic discount rate sonal credit program for 1987. for the first 30 days on such borrowing and a flexible rate somewhat above mar- Votes for this action: Messrs. Volcker and ket rates for borrowing beyond 30 days. Johnson, Ms. Seger, Messrs. Angell and Heller. Votes against this action: None. Votes for this action: Messrs. Volcker and Absent and not voting: None.2 Johnson, Ms. Seger, Messrs. Heller and Kelley. Votes against this action: None. Vote on Extended Credit Program Absent and not voting: Mr. Angell.1 On June 10, 1987, the Board approved a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

77 Record of Policy Actions of the Federal Open Market Committee The record of policy actions of the Fed- cise operations in the open market that eral Open Market Committee is pre- were called for to implement the general sented in the ANNUAL REPORT of the policy. Board of Governors pursuant to the re- During 1987 the policy record for quirements of section 10 of the Federal each meeting was released a few days Reserve Act. That section provides that after the next regularly scheduled meetthe Board shall keep a complete record ing and was subsequently published in of the actions taken by the Board and by the Federal Reserve Bulletin. the Federal Open Market Committee on Policy directives of the Federal Open all questions of policy relating to open Market Committee are issued to the Fedmarket operations, that it shall record eral Reserve Bank of New York as the therein the votes taken in connection Bank selected by the Committee to exewith the determination of open market cute transactions for the System Open policies and the reasons underlying each Market Account. In the area of domestic such action, and that it shall include in open market activities, the Federal Reits ANNUAL REPORT to the Congress a serve Bank of New York operates under full account of such actions. two separate directives from the Open The pages that follow contain entries Market Committee: an Authorization for relating to the policy actions at the meet- Domestic Open Market Operations and a ings of the Federal Open Market Com- Domestic Policy Directive. (A new Domittee held during the calendar year mestic Policy Directive is adopted at 1987, including the votes on the policy each regularly scheduled meeting.) In decisions made at those meetings as well the foreign currency area, the Commitas a resume of the basis for the deci- tee operates under an Authorization for sions. The summary descriptions of eco- Foreign Currency Operations and a Fornomic and financialc onditions are based eign Currency Directive. These four inon the information that was available to struments are shown below in the form the Committee at the time of the meet- in which they were in effect at the beginings, rather than on data as they may ning of 1987. Changes in the instruhave been revised later. ments during the year are reported in the It will be noted from the record of records for the individual meetings. policy actions that in some cases the decisions were made by unanimous vote Authorization for Domestic and that in other cases dissents were Open Market Operations recorded. The fact that a decision in In Effect January 1, 1987 favor of a general policy was by a large majority, or even that it was by unani- 1. The Federal Open Market Committee aumous vote, does not necessarily mean thorizes and directs the Federal Reserve Bank of New York, to the extent necessary that all members of the Committee were to carry out the most recent domestic policy equally agreed as to the reasons for directive adopted at a meeting of the the particular decision or as to the pre- Committee: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78 FOMC Policy Actions (a) To buy or sell U.S. Government tions, or acceptances in 15 calendar days or securities, including securities of the Federal less, at rates that, unless otherwise expressly Financing Bank, and securities that are direct authorized by the Committee, shall be deterobligations of, or fully guaranteed as to prin- mined by competitive bidding, after applying cipal and interest by, any agency of the reasonable limitations on the volume of United States in the open market, from or to agreements with individual dealers; provided securities dealers and foreign and interna- that in the event Government securities or tional accounts maintained at the Federal Re- agency issues covered by any such agreeserve Bank of New York, on a cash, regular, ment are not repurchased by the dealer pursuor deferred delivery basis, for the System ant to the agreement or a renewal thereof, Open Market Account at market prices, and, they shall be sold in the market or transfor such Account, to exchange maturing ferred to the System Open Market Account; U.S. Government and Federal agency secur- and provided further that in the event bankities with the Treasury or the individual ers acceptances covered by any such agreeagencies or to allow them to mature without ment are not repurchased by the seller, they replacement; provided that the aggregate shall continue to be held by the Federal amount of U.S. Government and Federal Reserve Bank or shall be sold in the open agency securities held in such Account (in- market. cluding forward commitments) at the close 2. In order to ensure the effective conduct of business on the day of a meeting of the of open market operations, the Federal Committee at which action is taken with re- Open Market Committee authorizes and dispect to a domestic policy directive shall not rects the Federal Reserve Banks to lend be increased or decreased by more than U.S. Government securities held in the $6.0 billion during the period commencing System Open Market Account to Governwith the opening of business on the day fol- ment securities dealers and to banks particilowing such meeting and ending with the pating in Government securities clearing close of business on the day of the next such arrangements conducted through a Federal meeting; Reserve Bank, under such instructions as (b) When appropriate, to buy or sell in the Committee may specify from time to the open market, from or to acceptance time. dealers and foreign accounts maintained at 3. In order to ensure the effective conduct the Federal Reserve Bank of New York, on a of open market operations, while assisting in cash, regular, or deferred delivery basis, for the provision of short-term investments for the account of the Federal Reserve Bank of foreign and international accounts main- New York at market discount rates, prime tained at the Federal Reserve Bank of New bankers acceptances with maturities of up to York, the Federal Open Market Committee nine months at the time of acceptance that (1) authorizes and directs the Federal Reserve arise out of the current shipment of goods Bank of New York (a) for System Open between countries or within the United Market Account, to sell U.S. Government States, or (2) arise out of the storage within securities to such foreign and international the United States of goods under contract of accounts on the bases set forth in paragraph sale or expected to move into the channels of l(a) under agreements providing for the retrade within a reasonable time and that are sale by such accounts of those securities secured throughout their life by a warehouse within 15 calendar days on terms comparable receipt or similar document conveying title to those available on such transactions in the to the underlying goods; provided that the market; and (b) for New York Bank account, aggregate amount of bankers acceptances when appropriate, to undertake with dealers, held at any one time shall not exceed $100 subject to the conditions imposed on purmillion; chases and sales of securities in paragraph (c) To buy U.S. Government securities, l(c), repurchase agreements in U.S. Governobligations that are direct obligations of, or ment and agency securities, and to arrange fully guaranteed as to principal and interest corresponding sale and repurchase agreeby, any agency of the United States, and ments between its own account and foreign prime bankers acceptances of the types au- and international accounts maintained at thorized for purchase under l(b) above, from the Bank. Transactions undertaken with such dealers for the account of the Federal Re- accounts under the provisions of this paraserve Bank of New York under agreements graph may provide for a service fee when for repurchase of such securities, obliga- appropriate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 79 Domestic Policy Directive quarter of 1986. With respect to Ml, the In Effect January 1, 19871 Committee recognized that, based on the experience of recent years, the behavior of that The information reviewed at this meeting aggregate is subject to substantial uncertainsuggests that economic activity continues to ties in relation to economic activity and grow at a moderate pace in the current prices, depending among other things on the quarter. Total nonfarm payroll employment responsiveness of Ml growth to changes in grew appreciably further in October and No- interest rates. In light of these uncertainties vember, and employment in manufacturing and of the substantial decline in velocity in also rose after declining on balance in pre- the first half of the year, the Committee devious months. The civilian unemployment cided that growth of Ml in excess of the rate remained at 7.0 percent in November for previously established 3 to 8 percent range the third consecutive month. Industrial pro- for 1986 would be acceptable. Acceptable duction picked up considerably in No- growth of Ml over the remainder of the year vember. Total retail sales rose moderately would depend on the behavior of velocity, last month after changing little on balance growth in the other monetary aggregates, over September and October. Housing starts developments in the economy and financial have weakened and business capital spend- markets, and price pressures. Given its rapid ing generally appears to have remained slug- growth in the early part of the year, the gish. Preliminary data for the U.S. merchan- Committee recognized that the increase in dise trade deficit in October suggest a total domestic nonfinancial debt in 1986 may moderate narrowing. Broad measures of exceed its monitoring range of 8 to 11 perprices have firmed somewhat in recent cent, but felt an increase in that range would months due to developments in food and provide an inappropriate benchmark for evalenergy markets. Labor cost increases this uating longer-term trends in that aggregate. year have remained moderate compared with For 1987 the Committee agreed on tentaother recent years. tive ranges of monetary growth, measured Growth of M2 slowed substantially in No- from the fourth quarter of 1986 to the fourth vember, while growth of M3 remained mod- quarter of 1987, of 5Vi to 8V2 percent for M2 erate. Expansion of these two aggregates for and M3. While a range of 3 to 8 percent for the year through November has been just Ml in 1987 would appear appropriate in the below the upper end of their respective light of most historical experience, the Comranges established by the Committee for mittee recognized that the exceptional uncer- 1986. In November growth of Ml acceler- tainties surrounding the behavior of Ml veated to a very rapid rate. Expansion in total locity over the more recent period would domestic nonfinancial debt remains appreci- require careful appraisal of the target range at ably above the Committee's monitoring the beginning of 1987. The associated range range for 1986. Short-term interest rates for growth in total domestic nonfinancial have risen somewhat since the November 5 debt was provisionally set at 8 to 11 percent meeting of the Committee, while long-term for 1987. rates have declined on balance. In foreign In the implementation of policy for the exchange markets the trade-weighted value immediate future, the Committee seeks to of the dollar against other G-10 currencies maintain the existing degree of pressure on has declined moderately on balance since the reserve positions. This action is expected to November meeting. be consistent with growth in M2 and M3 over The Federal Open Market Committee the period from November to March at an seeks monetary and financial conditions that annual rate of about 7 percent. Growth in Ml will foster reasonable price stability over will continue to be appraised in the light of time, promote growth in output on a sustain- the behavior of M2 and M3 and the other able basis, and contribute to an improved factors cited below. Slightly greater reserve pattern of international transactions. In fur- restraint or somewhat lesser reserve restraint therance of these objectives the Committee would be acceptable depending on the beagreed at the July meeting to reaffirm the havior of the aggregates, taking into account ranges established in February for growth of the strength of the business expansion, de- 6 to 9 percent for both M2 and M3, measured velopments in foreign exchange markets, from the fourth quarter of 1985 to the fourth progress against inflation, and conditions in domestic and international credit markets. 1. Adopted by the Committee at its meeting on The Chairman may call for Committee con- Dec. 15-16, 1986. sultation if it appears to the Manager for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80 FOMC Policy Actions Domestic Operations that reserve conditions of balances in that currency, plus outstanding during the period before the next meeting are contracts for future receipt, minus outstandlikely to be associated with a federal funds ing contracts for future delivery of that currate persistently outside a range of 4 to 8 rency, i.e., as the sum of these elements with percent. due regard to sign. 2. The Federal Open Market Committee Authorization for Foreign directs the Federal Reserve Bank of New York to maintain reciprocal currency ar- Currency Operations rangements ("swap" arrangements) for the In Effect January 1, 1987 System Open Market Account for periods up to a maximum of 12 months with the follow- 1. The Federal Open Market Committee au- ing foreign banks, which are among those thorizes and directs the Federal Reserve designated by the Board of Governors of the Bank of New York, for System Open Market Federal Reserve System under Section 214.5 Account, to the extent necessary to carry out of Regulation N, Relations with Foreign the Committee's foreign currency directive Banks and Bankers, and with the approval of and express authorizations by the Committee the Committee to renew such arrangements pursuant thereto, and in conformity with on maturity: such procedural instructions as the Committee may issue from time to time: A. To purchase and sell the following Amount foreign currencies in the form of cable Foreign bank (millions of dollars equivalent) transfers through spot or forward transactions on the open market at home and abroad, Austrian National Bank 250 including transactions with the U.S. Trea- National Bank of Belgium 1,000 sury, with the U.S. Exchange Stabilization Bank of Canada 2,000 National Bank of Denmark 250 Fund established by Section 10 of the Gold Bank of England 3,000 Reserve Act of 1934, with foreign monetary Bank of France 2,000 authorities, with the Bank for International German Federal Bank 6,000 Bank of Italy 3,000 Settlements, and with other international fi- Bank of Japan 5,000 nancial institutions: Bank of Mexico 700 Netherlands Bank 500 Austrian schillings Italian lire Bank of Norway 250 Belgian francs Japanese yen Bank of Sweden 300 Canadian dollars Mexican pesos Swiss National Bank 4,000 Danish kroner Netherlands guilders Bank for International Settlements Pounds sterling Norwegian kroner Dollars against Swiss francs 600 French francs Swedish kronor Dollars against authorized European German marks Swiss francs currencies other than Swiss francs 1,250 B. To hold balances of, and to have outstanding forward contracts to receive or to Any changes in the terms of existing swap deliver, the foreign currencies listed in para- arrangements, and the proposed terms of any graph A above. new arrangements that may be authorized, C. To draw foreign currencies and to shall be referred for review and approval to permit foreign banks to draw dollars under the Committee. the reciprocal currency arrangements listed 3. All transactions in foreign currencies in paragraph 2 below, provided that draw- undertaken under paragraph 1(A) above ings by either party to any such arrangement shall, unless otherwise expressly authorized shall be fully liquidated within 12 months by the Committee, be at prevailing market after any amount outstanding at that time was rates. For the purpose of providing an investfirst drawn, unless the Committee, because ment return on System holdings of foreign of exceptional circumstances, specifically currencies, or for the purpose of adjusting authorizes a delay. interest rates paid or received in connection D. To maintain an overall open position with swap drawings, transactions with forin all foreign currencies not exceeding $10.0 eign central banks may be undertaken at nonbillion. For this purpose, the overall open market exchange rates. position in all foreign currencies is defined as 4. It shall be the normal practice to arrange the sum (disregarding signs) of net positions with foreign central banks for the coordinain individual currencies. The net position in a tion of foreign currency transactions. In single foreign currency is defined as holdings making operating arrangements with foreign Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 81 central banks on System holdings of foreign Secretary on policy matters relating to forcurrencies, the Federal Reserve Bank of New eign currency operations; York shall not commit itself to maintain any C. From time to time, to transmit apspecific balance, unless authorized by the propriate reports and information to the Na- Federal Open Market Committee. Any tional Advisory Council on International agreements or understandings concerning the Monetary and Financial Policies. administration of the accounts maintained by 8. Staff officers of the Committee are authe Federal Reserve Bank of New York with thorized to transmit pertinent information on the foreign banks designated by the Board of System foreign currency operations to appro- Governors under Section 214.5 of Regula- priate officials of the Treasury Department. tion N shall be referred for review and ap- 9. All Federal Reserve Banks shall participroval to the Committee. pate in the foreign currency operations for 5. Foreign currency holdings shall be in- System Account in accordance with paravested insofar as practicable, considering graph 3 G(l) of the Board of Governors' needs for minimum working balances. Such Statement of Procedure with Respect to Forinvestments shall be in liquid form, and gen- eign Relationships of Federal Reserve Banks erally have no more than 12 months remain- dated January 1, 1944. ing to maturity. When appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. Foreign Currency Directive Government securities may be purchased from foreign central banks under agreements In Effect January 1, 1987 for repurchase of such securities within 30 calendar days. 1. System operations in foreign currencies 6. All operations undertaken pursuant to shall generally be directed at countering disthe preceding paragraphs shall be reported orderly market conditions, provided that promptly to the Foreign Currency Subcom- market exchange rates for the U.S. dollar mittee and the Committee. The Foreign Cur- reflect actions and behavior consistent with rency Subcommittee consists of the Chair- the IMF Article IV, Section 1. man and Vice Chairman of the Committee, 2. To achieve this end the System shall: the Vice Chairman of the Board of Gover- A. Undertake spot and forward purnors, and such other members of the Board chases and sales of foreign exchange. as the Chairman may designate (or in the B. Maintain reciprocal currency absence of members of the Board serving on ("swap") arrangements with selected foreign the Subcommittee, other Board Members central banks and with the Bank for Internadesignated by the Chairman as alternates, tional Settlements. and in the absence of the Vice Chairman of C. Cooperate in other respects with centhe Committee, his alternate). Meetings of tral banks of other countries and with internathe Subcommittee shall be called at the re- tional monetary institutions. quest of any member, or at the request of the 3. Transactions may also be undertaken: Manager for Foreign Operations, for the pur- A. To adjust System balances in light of poses of reviewing recent or contemplated probable future needs for currencies. operations and of consulting with the Man- B. To provide means for meeting Sysager on other matters relating to his responsi- tem and Treasury commitments in particular bilities. At the request of any member of the currencies, and to facilitate operations of the Subcommittee, questions arising from such Exchange Stabilization Fund. reviews and consultations shall be referred C. For such other purposes as may be for determination to the Federal Open Market expressly authorized by the Committee. Committee. 4. System foreign currency operations 7. The Chairman is authorized: shall be conducted: A. With the approval of the Committee, A. In close and continuous consultato enter into any needed agreement or under- tion and cooperation with the United States standing with the Secretary of the Treasury Treasury; about the division of responsibility for for- B. In cooperation, as appropriate, with eign currency operations between the System foreign monetary authorities; and and the Treasury; C. In a manner consistent with the obli- B. To keep the Secretary of the Treasury gations of the United States in the Internafully advised concerning System foreign cur- tional Monetary Fund regarding exchange arrency operations, and to consult with the rangements under the IMF Article IV. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

82 FOMC Policy Actions Meeting Held on for the fourth quarter as a whole in- February 10-11, 1987 creased at an annual rate of 3*/4 percent, the largest quarterly advance since late Domestic Policy Directive 1984. Recent gains were widespread, The information reviewed at this meet- with particularly sharp increases in ing suggested on balance that economic home goods and in defense and space activity was continuing to grow at a equipment. Production of business moderate pace. Nonfarm payroll em- equipment, however, remained lacklusployment expanded sharply in January, ter. Capacity utilization in manufacturpartly reflecting unusual seasonal devel- ing, mining, and utilities rose 0.2 peropments. Industrial production rose con- centage point in December to 79.6 siderably in December and over the percent, but was still below its level at fourth quarter as a whole. However, the end of 1985. consumer spending in real terms Consumer spending declined slightly changed little during the last quarter of in real terms in the fourth quarter as new 1986 and business capital spending gen- car and truck sales slumped. Auto sales erally appears to have remained slug- revived temporarily in December, when gish. Activity in the housing sector consumers took advantage of sales tax picked up toward year-end. The deficit deductions that were to be eliminated in the merchandise trade balance appar- after year-end, but fell dramatically in ently increased slightly in the fourth January. Consumer expenditures on quarter; however, net exports of goods items other than autos continued to rise and services, after adjusting for changes somewhat at the end of 1986 but at a in prices, improved somewhat during pace considerably slower than that expethe quarter. Basic trends in wage and rienced earlier in the year. price inflation still appear to have been Business investment appears to have moderate in recent months, although remained sluggish. On the equipment prices of oil and some other industrial side, capital outlays were depressed in commodities have turned up. the fourth quarter by the drop in motor Total nonfarm payroll employment vehicle purchases. However, that drop rose almost Vi million further in Jan- was almost offset by a pickup in spenduary, after picking up in the latter part of ing on other equipment, which was mothe year. Service-producing industries tivated in part by efforts to take advanwere responsible for much of this tage of the favorable depreciation growth. Outside the service-producing schedules for some types of equipment sector, the construction industry ac- placed in service before January 1, counted for the balance of job growth in 1987. Leading indicators of investment January, reflecting favorable weather spending suggested that overall outlays conditions during the survey reference will remain sluggish in the early months week. Manufacturing employment was of 1987. New orders for nondefense essentially unchanged in January, after capital goods other than aircraft dropped some improvement in the fourth quarter. in the last quarter of 1986. Also, outlays The civilian unemployment rate held at for nonresidential construction have 6.7 percent. continued to trend down in recent The industrial sector of the economy months, and the value of construction expanded appreciably in the latter part of put-in-place in December was more than the year. The index of industrial produc- 10 percent below a year earlier. tion rose 0.5 percent in December and Activity in the housing sector picked Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 83 up at the end of the year. Housing starts improvement in U.S. trade figures rose to an annual rate of 1.8 million shown when preliminary December data units in December, after drifting lower were released, along with indications of since late spring. Single-family starts a stronger U.S. economy, tended to rewere near the pace recorded earlier in lieve downward pressures on the dollar, the year. In addition, sales of both new which had rebounded from its lows in and existing homes rose in December late January. Indicators of economic acpartly in response to lower mortgage tivity in the major foreign industrial interest rates. Multifamily starts re- countries still showed low rates of exbounded in December, but declined for pansion. Available data for the U.S. the fourth quarter as a whole as merchandise trade deficit in the fourth high vacancy rates and recent tax quarter suggested a slight increase from changes constrained construction of the third quarter as nonpetroleum imrental housing. ports increased more than exports. How- Price and wage increases remained ever, after allowing for price changes, relatively moderate in the latter part of net exports of goods and services im- 1986, although the prices of a number of proved somewhat during the quarter. commodities, including oil, have posted At its meeting in December, the large gains in recent months. Consumer Committee adopted a directive that prices rose 0.3 percent in November and called for maintaining the existing de- 0.2 percent in December, remaining gree of pressure on reserve positions. within the range of monthly increases This action was expected to be consisevident since last summer. World crude tent with growth in both M2 and M3 at oil prices rose in mid-December follow- an annual rate of about 7 percent from ing the latest agreement by the Organi- November to March. The Committee zation of Petroleum Exporting Countries agreed that the growth in Ml would (OPEC) to restrict output, and that rise continue to be evaluated in light of the pushed retail energy prices up in De- behavior of the broader monetary aggrecember. At the same time, increases in gates and other factors. The members consumer food prices slowed after sev- also decided that slightly greater or eral months of sharp advances. Con- somewhat lesser reserve restraint would sumer prices, apart from food and en- be acceptable depending on the behavior ergy, continued to rise about in line with of the monetary aggregates, taking into the pace registered for 1986 as a whole. account the strength of the business ex- Wage increases slowed in 1986 from the pansion, developments in foreign exrates in other recent years. The trade-weighted value of the dollar against other G-10 currencies declined 1. These growth rates and all subsequent data on about 73/4 percent, on balance, since the the monetary aggregates reflect annual bench- December 15-16 FOMC meeting. Since marks and seasonal factors as published on Februthat meeting, the dollar has depreciated ary 12, 1987. The monetary aggregates are defined as follows: 10 percent against the mark and about 6 Ml comprises demand deposits at commercial percent against the yen. Over the period, banks and thrift institutions, currency in circulaexchange rates were affected in part by tion, travelers checks of nonbank issuers, negotidata on the U.S. trade balance for No- able order of withdrawal (NOW) and automatic vember. However, the announcement transfer service (ATS) accounts at banks and thrift institutions, and credit union share draft accounts. by the German Federal Bank in late Jan- M2 contains Ml and savings and small-denominauary of a cut in the discount rate and the tion time deposits (including money market de- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

84 FOMC Policy Actions change markets, progress against infla- seasonal borrowing averaged around tion, and conditions in domestic and $900 million in the statement period international credit markets. The inter- ending December 31. Borrowing remeeting range for federal funds was ceded to $290 million in the first half of maintained at 4 to 8 percent.1 January but bulged again in the second Growth of M2 and M3 accelerated in half, reflecting another rise in excess December before slowing a little in Jan- reserves. The federal funds rate dropped uary. Expansion of these two aggregates back to 6 percent or a little above after for 1986 as a whole was near the upper early January. end of their respective ranges estab- Most other short-term rates rose arlished by the Committee for the year. ound year-end as credit demands inten- Ml growth slowed in January from an sified and the federal funds market tightexceptionally rapid pace in late 1986. ened, but subsequently those increases Growth of the monetary aggregates was were largely reversed. On balance, rates boosted by an unusually large volume of on short-term Treasury securities were transactions around year-end prompted up about 25 basis points over the interin part by incentives to complete certain meeting period, while rates on private types of transactions before the new tax obligations were narrowly mixed. In law took effect at the start of 1987. As a long-term markets, yields on Treasury result of these transactions, demand de- securities also were higher than at the posits rose at an unprecedented rate from time of the December meeting, reflectmid-December through early January; ing market reactions to incoming ecoby late January the bulge in such de- nomic data, but rates in corporate and posits had run off. In addition, banks mortgage markets declined into more stepped up their issuance of managed typical alignment with Treasury rates. liabilities, especially CDs, over the past Stock prices soared to new highs over two months to help fund the rise in the intermeeting period. credit. The staff projections presented at this Paralleling the bulge in transaction meeting suggested that real gross nabalances around year-end, growth in tional product would continue to grow at total reserves surged in December, but a moderate rate through the end of 1987. then subsided during January. Excess A key element shaping the forecast conreserves also increased rapidly in De- tinued to be the prospects for an imcember. The federal funds rate rose provement in real net exports of goods sharply at year-end and adjustment plus and services. Export growth was expected to accelerate and import growth to slow as U.S. competitiveness increased. At the same time, the growth in posit accounts (MMDAs) at all depository institutions, overnight repurchase agreements (RPs) at domestic demand was expected to be commercial banks, overnight Eurodollars held at moderate, primarily reflecting the foreign branches of U.S. banks by U.S. residents damping influence of higher import other than banks, and money market mutual fund prices on real income gains, a less exshares other than those restricted to institutions). pansive fiscal policy, and the weakness M3 is M2 plus large-denomination time deposits at all depository institutions, large-denomination in nonresidential construction. In conterm RPs at commercial banks and savings and trast, equipment spending was projected loan associations, institution-only money market to grow moderately as domestic producmutual funds, and term Eurodollars held by U.S. tion expanded, and residential construcresidents in Canada and the United Kingdom and at foreign branches of U.S. banks elsewhere. tion was expected to provide some stim- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 85 ulus to economic activity over the a full range of 2 to 4 percent. Forecasts projection horizon. The rate of inflation of nominal GNP centered on growth was anticipated to rise somewhat as a rates of 53/4 to Wi percent and ranged result of the depreciation of the dollar from Axh to IVi percent. Estimates of the and a firming in world oil prices. How- civilian rate of unemployment in the ever, the remaining margins of slack in fourth quarter of 1987 were in a range of labor and product markets were ex- 6x/2 to 63/4 percent. With regard to the pected to exert a moderating influence rate of inflation, as indexed by the GNP on prices and wages during the year. deflator, the projections centered on In the Committee's discussion of the rates of 3 to V/i percent and had an economic situation and outlook, most of overall range of 2Vi to 4 percent. In the members viewed recent develop- making these forecasts, the members ments as pointing on balance toward took account of the Committee's objeccontinuing expansion at a moderate tives for monetary growth in 1987. The pace, in line with that experienced on members also assumed that future flucaverage over the past two to three years. tuations in the foreign exchange value of The members generally agreed that spe- the dollar would not be of sufficient cial factors—the delayed effects of the magnitude to have any significant effect dollar's depreciation and the turnaround on the projections. In addition, the in oil prices—were likely to contribute members anticipated that considerable to a modest upturn in the rate of inflation progress would be made in reducing the during 1987. The members acknowl- size of the federal budget deficit. edged that there were appreciable risks As they had at previous meetings, that economic activity and prices might members emphasized that sustained ecodeviate significantly from current expec- nomic expansion would depend to an tations, especially given the uncertain- important extent on the achievement of ties stemming from persisting—though significant improvement in the nation's hopefully diminishing—imbalances in balance of trade. While indications of the federal budget and the balance of some improvement in net exports were trade. Financial strains associated with multiplying, the members expressed a weaknesses in important sectors of the range of views regarding prospects for economy such as agriculture and energy the year ahead. On the export side, sevand generally rising debt burdens also eral observed that the outlook for relawere cited as sources of vulnerability in tively sluggish economic activity in key the economy. industrial nations—and indeed around In keeping with the usual practice at the world more generally—suggested meetings when the Committee considers that continuing gains in exports might be its long-run objectives for monetary relatively limited. Nonetheless, reports growth, the members of the Committee from many parts of the country indicated and the Federal Reserve Bank presidents that the depreciation of the dollar and the not currently serving as members had concomitant improvement in the comprepared specific projections of eco- petitive position of U.S. firms were nomic activity, the rate of unemploy- being reflected in new exporting opporment, and the overall level of prices. For tunities, if not in a substantial increase in the period from the fourth quarter of actual exports to date. 1986 to the fourth quarter of 1987, the With regard to imports, some forecasts for growth of real GNP had a members saw considerable potential for central tendency of 2xh to 3 percent and the substitution of domestic goods for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

86 FOMC Policy Actions foreign imports as prices of the latter growth in consumer spending, which rose. In this view the more recent depre- had been a mainstay of the expansion, ciation of the dollar would tend to be felt might provide less stimulus, especially more fully in import prices because for- in the context of an already low saving eign suppliers had less room than earlier rate. One member noted that the underto absorb a depreciated dollar through lying demand for new automobiles apreductions in their profit margins. Other peared to be relatively weak, after almembers were less optimistic about the lowing for the year-end surge related to outlook for imports. In their view, for- tax considerations and for the impact of eign competitors would tend to hold temporary sales incentive programs. down their prices to maintain their sales, Another commented, however, that reespecially given the ample availability duced withholdings of personal income of production resources worldwide. taxes were seen by some business firms Moreover, the import penetration into as a positive development for retail U.S. markets had become embedded in sales. contractual and other trading arrange- In the Committee's discussion of the ments that were difficult to change, and prospects for inflation, the members competitive gains against imports would generally agreed that the outlook rebe restrained to the extent that domestic mained basically favorable even though producers responded to rising import rising import prices and the apparent prices by raising their own prices, as had turnaround in oil prices could be exalready occurred in a major U.S. in- pected to result in somewhat higher dustry. However, as in the case of ex- average prices over the next several ports, a growing number of business quarters. Price competition remained incontacts were reporting increasing op- tense in many industries, notably those portunities to compete with imports on subject to competition from abroad, and the basis of price, including examples of recent labor contract settlements continactual or prospective sales to domestic ued favorable in terms of holding down firms that previously had tended to look business costs. Moreover, many busiabroad to meet their outsourcing ness firms were still making vigorous requirements. efforts to improve their operating effi- With regard to domestic develop- ciencies and otherwise to curb costs. ments bearing on the outlook, several Nonetheless, several members sugmembers commented that the evidence gested that the risks of a deviation, if of the last few months suggested, on the any, from current inflation forecasts apwhole, that the expansion retained mo- peared to be in the direction of more mentum despite its comparative longev- inflation. Some referred to the risk that ity. To some extent, the favorable year- rapid monetary growth and buildup of end statistics undoubtedly reflected liquidity might exert a delayed impact tax-related spending that had been on future prices, though there was no moved up from 1987 into late 1986, and current evidence of such an impact. One a number of members observed that the member expressed the view that a key recent statistics should therefore be uncertainty in the outlook for inflation viewed with a degree of caution. Look- was not so much the direct effects of ing ahead, members observed that over- rising import prices, but the price reall demands from domestic sectors sponses of competing domestic promight moderate over the year. They re- ducers. Members also noted that for ferred in particular to the possibility that technical reasons the rise in import and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 87 oil prices, to the extent that they oc- tion in money growth and the desirabilcurred, would have a relatively large ity of adopting reduced ranges from the effect on consumer prices. The latter, standpoints of both the substance and the because of their high visibility, could perception of an appropriately anti-inflaexacerbate inflationary expectations, tionary monetary policy. Moreover, a with adverse implications for future substantial slowing in money growth— price and wage decisions. Disappointing perhaps to around the middle of the progress toward reducing the federal ranges—could well be consistent with budget deficit also could tend to fuel satisfactory economic performance, inflationary sentiment. given the assessment of the economy by At this meeting the Committee com- Committee members and assuming conpleted the review, begun at the De- siderably less movement in interest rates cember meeting, of the ranges for than had been experienced in recent growth in the monetary and debt aggre- years. Members also commented that gates in 1987; those ranges had been set the ranges in question were likely to on a tentative basis in July in keeping provide adequate room for any policy with the requirements of the Full Em- adjustments that might be needed ployment and Balanced Growth Act of during the year, assuming that develop- 1978 (the Humphrey-Hawkins Act).2 ments bearing on policy formulation The tentative ranges included growth of did not diverge greatly from current 5Vi to 8V2 percent for both M2 and M3 expectations. for the period from the fourth quarter of While a range of5Vi to 8V2 percent for 1986 to the fourth quarter of 1987. In the M2 and M3 was acceptable to all of the case of Ml the Committee had indicated members, there was some sentiment for in July on a more tentative basis than slightly higher or lower ranges. Retenusual that it might retain the 1986 range tion of the slightly higher 6 to 9 percent of 3 to 8 percent for 1987, but there had ranges employed in 1986 would accombeen considerable sentiment against modate more comfortably the possibility using any numerical range for Ml at the of another sizable decline in the veloci- December meeting. The associated ties of the broader aggregates (that is, range for growth in total domestic nonfi- the ratios of nominal GNP to the aggrenancial debt had been set provisionally gates). Such a decline might be induced in July at 8 to 11 percent for 1987. if substantial further reductions in inter- During the Committee's discussion of est rates were needed to sustain ecoappropriate ranges for growth of M2 and nomic expansion. On the other hand, M3 in 1987, most of the members ex- slightly lower ranges would provide pressed a preference for retaining the more leeway on the downside in the tentative range of 5V2 to 8V2 percent for event that velocity growth rebounded both of the broader aggregates. That from the previous marked declines. Inrange represented a reduction of Vi per- sofar as the risks were on the side of centage point from the one that had been greater inflation, a rebound in velocity targeted for 1986. Several members appeared more likely and in such cirstressed the importance of some modera- cumstances a lower range could provide needed scope for a policy designed to maintain progress toward price stability. Turning to Ml, the members recog- 2. The review for 1987 was prepared as a Monnized that its prospective behavior reetary Policy Report pursuant to this legislation and transmitted to the Congress on February 19, 1987. mained subject to exceptional uncertain- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

88 FOMC Policy Actions ties. To a greater extent than for the growing rapidly. Conversely, relatively broader aggregates, the demand for Ml rapid expansion in Ml might be indibalances had become highly sensitive to cated—and accommodated—in a situamovements in interest rates over the tion in which economic activity was relcourse of recent years; this development atively sluggish, progress was being evidently reflected in considerable maintained toward achieving eventual measure the deregulation of deposit rate price stability and a sustainable pattern ceilings and a related increase in the of international transactions, and interinterest-bearing components of Ml as a est rates were declining. repository for savings as well as for A few of the members preferred that a transactions funds. Adaptations to de- specific, numerical range be established regulation were probably not completed for Ml growth in 1987, although they and in conjunction with an accelerated also wanted to make clear that growth pace of other financial innovations and outside the range might be desirable or a surging volume of financial transac- acceptable under some circumstances. tions, it had become very difficult to These members gave considerable emassess or predict the implications of spe- phasis to the possible usefulness of tarcific rates of Ml growth for the future geting on a narrow monetary aggregate, course of business activity and the rate as well as on the broader aggregates, in of inflation. underscoring the System's longer-run Accordingly, while most members commitment to an anti-inflationary polclearly wished to take account of icy. They also felt the Committee might changes in Ml in reaching policy judg- well want to increase emphasis on Ml in ments, they felt the meaning of fluctua- the future, and that a current target tions in Ml could only be appraised in would represent appropriate continuity. the light of other economic develop- Moreover, a specific range would have ments. Consequently, they did not want the advantage of indicating the Committo specify a numerical target range for tee's best judgment regarding approthis aggregate, at least at this time. priate Ml growth if economic and finan- Some slowing in 1987 was expected and cial conditions did not deviate markedly was felt to be necessary to sustain pro- from current expectations. In contrast, gress toward price stability, but the ap- one member felt that Ml provided little propriate amount of slowing was diffi- or no useful information at present and a cult to predict, given the uncertainties more predictable relationship between about velocity behavior. These members Ml and economic performance was not felt that it would not be meaningful to likely to be reestablished. Conseestablish a range that was so wide that it quently, the Committee should concenwould cover all foreseeable circum- trate instead on other broad financial agstances or a conventional range that gregates including the measure for might well need to be exceeded in either liquidity. direction. For example, relatively slow After discussion, the members agreed growth in Ml might be desirable—and that the Committee would need to monimight require some firming of reserve tor and evaluate Ml developments conditions—if in the context of expand- closely in the light of the behavior of its ing economic activity, inflation ap- velocity, the performance of the econpeared to be worsening, possibly be- omy, including the nature of emerging cause of a weakening dollar, and the price pressures, and conditions in dobroader monetary aggregates were mestic and international financial mar- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 89 kets. While the precise circumstances financial conditions and the behavior of under which Ml developments might the broader monetary aggregates. It was directly influence operating decisions understood that under some circumcould not be predicted, the members stances Ml might again be targeted excontemplated the possible desirability of plicitly during the year to provide a reintroducing Ml explicitly during the guide, along with M2 and M3, for the year as a benchmark, along with the short-run implementation of monetary broader monetary aggregates, for mak- policy. ing short-run operating decisions. For Thereupon, the Committee approved now, the Committee would indicate in the following paragraphs relating to its broad terms that the operational signifi- objectives for monetary and debt aggrecance of Ml could only be judged in the gates in 1987: perspective of concurrent economic and financial developments, including the The Federal Open Market Committee seeks monetary and financial conditions that behavior of M2 and M3. will foster reasonable price stability over The Committee members also agreed time, promote growth in output on a sustainon the desirability of continuing to mon- able basis, and contribute to an improved itor the growth of total domestic nonfi- pattern of international transactions. In furtherance of these objectives the Committee nancial debt. The growth in total debt established growth ranges of 5Vi to %Vi perhad exceeded the expansion in nominal cent for both M2 and M3, measured from the GNP by substantial margins in recent fourth quarter of 1986 to the fourth quarter of years, and some members expressed 1987. The associated range for growth in total domestic nonfinancial debt was set at 8 concern about the resulting increase in to 11 percent for 1987. the financial vulnerability of the econ- With respect to Ml, the Committee recogomy. One member observed that under nized that, based on experience, the behavior some circumstances a further rapid of that aggregate must be judged in the light growth in debt might lend some weight of other evidence relating to economic activity and prices; fluctuations in Ml have betoward implementing some policy recome much more sensitive in recent years to straint that also was deemed to be advis- changes in interest rates, among other facable for other reasons. The growth in tors. During 1987, the Committee anticipates total domestic nonfinancial debt was ex- that growth in Ml should slow. However, in the light of its sensitivity to a variety of pected to moderate considerably in influences, the Committee decided not to es- 1987, but it appeared likely to remain in tablish a precise target for its growth over the excess of the expansion in nominal year as a whole at this time. Instead, the GNP. The members agreed that the ten- appropriateness of changes in Ml during the tative range of 8 to 11 percent contem- course of the year will be evaluated in the light of the behavior of its velocity, developplated last July for 1987 continued to ments in the economy and financial markets, encompass likely developments. and the nature of emerging price pressures. At the conclusion of the Committee's In that connection, the Committee bediscussion, all of the members indicated lieves that, particularly in the light of the extraordinary expansion of this aggregate in that they favored, or could accept, the recent years, much slower monetary growth ranges for M2 and M3 and the monitorwould be appropriate in the context of coning range for total debt that had been tinuing economic expansion accompanied by adopted on a tentative basis in July. No signs of intensifying price pressures, perhaps numerical range would be established related to significant weakness of the dollar in exchange markets, and relatively strong for Ml growth in 1987, but Ml developgrowth in the broad monetary aggregates. ments would receive careful evaluation Conversely, continuing sizable increases in in the context of emerging economic and Ml could be accommodated in circum- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

90 FOMC Policy Actions stances characterized by sluggish business months. To a considerable extent, the activity, maintenance of progress toward un- anticipated slowing would represent a derlying price stability, and progress toward reversal of special factors that had coninternational equilibrium. As this implies, the Committee in reaching operational deci- tributed to faster expansion—including sions during the year, might target appro- a bulge in Ml—around the year-end. priate growth in Ml from time to time in the Because of the distortions created by light of circumstances then prevailing, inyear-end developments, the members cluding the rate of growth of the broader generally agreed that use of a January aggregates. base, instead of November as in the pre- Votes for this action: Messrs. Volcker, vious directive, or December, would Corrigan, Angell, Guffey, Heller, Johnconvey more meaningful information son, Keehn, Melzer, Morris, and Ms. Seger. Votes against this action: None. regarding the Committee's expectations Absent and not voting: Mrs. Horn. Mr for growth of the broader aggregates Keehn voted as alternate for Mrs. Horn. through the remainder of the first quarter. Given the uncertainties that In the Committee's discussion of pol- were involved and in keeping with the icy implementation for the weeks imme- Committee's decision on the longer-run diately ahead, most of the members in- targets, the members accepted a prodicated that they were in favor of posal not to indicate a numerical expecdirecting open market operations, at tation for the growth of Ml over the least initially, toward maintaining the period immediately ahead, but to note in existing degree of pressure on reserve a general way that the expansion of this positions. One member preferred to aggregate was likely to moderate submove promptly toward somewhat firmer stantially. Over a longer perspective, the reserve conditions. A number of others growth of the aggregates, especially observed that they would be prepared to Ml, might display a moderating trend as accept some firming later if recent indi- the effects of earlier declines in interest cations of some strengthening in eco- rates subsided. nomic activity were to persist in the con- With regard to possible adjustments text of further rapid monetary expansion during the intermeeting period, the and signs of growing inflationary pres- members generally felt that policy imsures. However, these members felt that plementation should be especially alert the desirability of an immediate move to the potential need for some firming of toward restraint had not been estab- reserve conditions. In this view, somelished. In particular, they felt that eco- what greater reserve restraint would be nomic and financial developments in the warranted if monetary growth did not period around the year-end needed to be slow in line with current expectations interpreted with caution, especially be- and there were concurrent indications of cause of the tax effects that were proba- intensifying inflationary pressures bly involved, and that confirming evi- against the background of stronger ecodence should be awaited before any nomic data. One indicator of the possiadjustments in policy implementation bility of potential pressures on prices were undertaken. might be a further tendency for the dol- The members anticipated that current lar to weaken. One member preferred a conditions in reserve markets were directive that did not contemplate any likely to be associated with slower easing during the weeks ahead, but most growth in M2 and M3 over the period of the members did not want to rule out ahead than the average pace in recent the possibility of some slight easing dur- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 91 ing the intermeeting period, although whole. Total retail sales rose substantially in they did not view the conditions for such December, largely reflecting a year-end surge in automobile sales, but were little a move as likely to emerge. changed on balance in the fourth quarter. At the conclusion of the Committee's Housing starts also strengthened in Dediscussion, all but one member indicated cember after trending lower since late spring. that they could vote for a directive that Business capital spending generally appears called for no change in the current de- to have remained sluggish. Available data for the U.S. merchandise trade deficit in the gree of pressure on reserve positions. fourth quarter suggest a slight increase from The members expected this approach to the third quarter; however, after allowing for policy implementation to be consistent price changes, net exports of goods and serwith some reduction in the growth of M2 vices improved somewhat during the quarter. In late 1986 consumer and producer prices and M3 to annual rates of about 6 to 7 generally were continuing to rise at moderate percent over the two-month period from rates, although prices of crude oil and some January to March. Over the same inter- other industrial commodities firmed. Labor val, growth in Ml was expected to mod- cost increases were more restrained in 1986 erate substantially from an extraordinar- than in other recent years. Growth of M2 and M3 picked up substanily high rate in the closing months of tially in December before slowing a little in 1986. The members indicated that some- January. For 1986 as a whole, expansion of what greater reserve restraint would be these two aggregates was near the upper end acceptable, and slightly less reserve re- of their respective ranges established by the straint might be acceptable, over the in- Committee for the year. Growth of Ml slowed in January from an exceptionally termeeting period depending on the berapid pace in late 1986. Expansion in total havior of the monetary aggregates, domestic nonfinancial debt remained appretaking into account the strength of the ciably above the Committee's monitoring business expansion, the performance of range for 1986. Although short-term interest rates generally firmed around year-end, on the dollar in foreign exchange markets, balance interest rates have shown small progress against inflation, and condimixed changes since the December 15-16 tions in domestic and international credit meeting of the Committee; rates on Treasury markets. The members agreed that the securities, including bonds, have risen a little intermeeting range for the federal funds over the period while rates on most private obligations have declined slightly. In foreign rate, which provides a mechanism for exchange markets the trade-weighted value initiating consultation of the Committee of the dollar against the other G-10 currenwhen its boundaries are persistently ex- cies has declined substantially on balance ceeded, should be left unchanged at 4 to since the December meeting. 8 percent. The Federal Open Market Committee seeks monetary and financial conditions that At the conclusion of the meeting, the will foster reasonable price stability over following domestic policy directive was time, promote growth in output on a sustainissued to the Federal Reserve Bank of able basis, and contribute to an improved pattern of international transactions. In fur- New York: therance of these objectives the Committee established growth ranges of 5Vi to SV2 per- The information reviewed at this meeting cent for both M2 and M3, measured from the suggests on balance that economic activity fourth quarter of 1986 to the fourth quarter of continues to grow at a moderate pace. Total 1987. The associated range for growth in nonfarm payroll employment grew sharply in total domestic nonfinancial debt was set at 8 January in part reflecting unusual seasonal to 11 percent for 1987. developments. The civilian unemployment With respect to Ml, the Committee recograte remained at 6.7 percent in January. In- nized that, based on experience, the behavior dustrial production increased considerably in of that aggregate must be judged in the light December and over the fourth quarter as a of other evidence relating to economic activ- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

92 FOMC Policy Actions ity and prices; fluctuations in Ml have be- Votes for the short-run operational paracome much more sensitive in recent years to graph: Messrs. Volcker, Corrigan, Anchanges in interest rates, among other fac- gell, Guffey, Heller, Johnson, Keehn, tors. During 1987, the Committee anticipates Morris, and Ms. Seger. Vote against this that growth in Ml should slow. However, in action: Mr. Melzer. Absent and not votthe light of its sensitivity to a variety of ing: Mrs. Horn. Mr. Keehn voted as alinfluences, the Committee decided not to es- ternate for Mrs. Horn. tablish a precise target for its growth over the year as a whole at this time. Instead, the Mr. Melzer favored some tightening appropriateness of changes in Ml during the of reserve conditions. He noted the course of the year will be evaluated in the light of the behavior of its velocity, develop- strong growth in bank loans in the Noments in the economy and financial markets, vember through January period and the and the nature of emerging price pressures. firm federal funds rate that had prevailed In that connection, the Committee bedespite the extraordinary pace of reserve lieves that, particularly in the light of the growth. In addition, he cited the recent extraordinary expansion of this aggregate in recent years, much slower monetary growth declines in the foreign exchange value of would be appropriate in the context of con- the dollar. Finally, looking ahead, he tinuing economic expansion accompanied by pointed out the potential for a further signs of intensifying price pressures, perhaps rise in inflationary expectations and, acrelated to significant weakness of the dollar in exchange markets, and relatively strong cordingly, he believed that prompt acgrowth in the broad monetary aggregates. tion toward restraint might avert the Conversely, continuing sizable increases in need for more substantial tightening Ml could be accommodated in circumlater. stances characterized by sluggish business activity, maintenance of progress toward un- At a telephone conference on Februderlying price stability, and progress toward ary 23, the Committee heard a report international equilibrium. As this implies, from the Chairman regarding the delibthe Committee in reaching operational decierations in Paris during the previous sions during the year, might target approweekend of the Ministers of Finance and priate growth in Ml from time to time in the light of circumstances then prevailing, in- Central Bank Governors of several cluding the rate of growth of the broader major industrial countries. The Commitaggregates. tee members discussed the possible im- In the implementation of policy for the plications of the decisions reached in immediate future, the Committee seeks to maintain the existing degree of pressure on Paris for U.S. intervention in the foreign reserve positions. This action is expected to exchange markets. be consistent with growth in M2 and M3 over the period from January through March at Meeting Held on annual rates of about 6 to 7 percent. Growth March 31,1987 in Ml is expected to slow substantially from the high rate of earlier months. Somewhat greater reserve restraint would, or slightly 1. Domestic Policy Directive lesser reserve restraint might, be acceptable depending on the behavior of the aggregates, The information reviewed at this meettaking into account the strength of the busi- ing suggested that economic activity has ness expansion, developments in foreign exrisen at a faster pace so far this year than change markets, progress against inflation, and conditions in domestic and international in the fourth quarter of 1986, while the credit markets. The Chairman may call for rate of price increase has accelerated Committee consultation if it appears to the slightly. The expansion in output appar- Manager for Domestic Operations that reently has reflected a rebuilding of invenserve conditions during the period before the tories and some improvement in the exnext meeting are likely to be associated with a federal funds rate persistently outside a ternal sector. Important components of range of 4 to 8 percent. domestic final demands seem to have Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 93 eased off in the early months of 1987 pears to have weakened in recent after a surge late in 1986. The pickup in months. Shipments of nondefense capiinflation primarily has reflected a re- tal goods fell on balance over the first bound in crude oil prices; wage pres- two months of the year after the tax-resures have remained subdued. lated surge in equipment outlays late last Data on employment and production year. New orders also have moved lower suggested a sizable advance in output in and outlays for nonresidential construcearly 1987. Total nonfarm payroll em- tion fell further in January, maintaining ployment rose more than 300,000 per the downtrend that began early last year. month over the first two months of the The large fluctuations in final sales year, appreciably faster than in 1986; that occurred around the turn of the year large gains were reported in construc- have been mirrored in changes in invention, trade, and services. In addition, the tories. Stocks rose sharply in January, average workweek has lengthened, and after being drawn down late last year. total hours worked by production and Notable swings in inventories occurred nonsupervisory personnel have risen for autos and machinery, where tax insharply from the fourth quarter. The centives may have had a greater effect civilian unemployment rate was 6.7 on the timing of purchases than on propercent in February for the third con- duction. In addition, some stockbuilding secutive month as increases in the labor was evident in manufacturing industries force matched the strong expansion in in which production has been relatively employment. strong. The index of industrial production Activity in the housing sector rerose 0.5 percent in February to a level mained vigorous in January and Februabout 1 percent above its fourth-quarter ary, with starts averaging more than 1.8 1986 average. Increased production of million units at an annual rate in both motor vehicles accounted for most of the months. The strength in starts appeared gain, but output of defense and space to reflect unusually good weather in the equipment, construction supplies, and Midwest. Single-family starts have been nondurable materials also posted further particularly robust. Multifamily starts, appreciable increases. Reflecting the re- by contrast, have remained weak becent strengthening in the industrial sec- cause of high vacancy rates and a less tor, the capacity utilization rate in- favorable tax environment for construccreased 0.2 percentage point in February tion of rental units. to 79.8 percent. Inflation picked up early this year, On the demand side, both consump- largely reflecting the pass-through of tion and business fixed investment have higher crude oil prices into prices of been relatively weak. Purchases of auto- final energy products. The CPI rose 0.4 mobiles, after a sharp drop in January, percent in February, after a 0.7 percent have recovered somewhat over the past increase a month earlier. Prices of gasotwo months, but are still well below the line and fuel oil posted further sizable fourth-quarter pace. Automakers have increases last month. Consumer food trimmed assembly schedules and have prices in February continued to rise at renewed sales incentive programs, but the pace that has prevailed since last dealer inventories have been building September. Excluding food and energy, up. Consumer spending on goods other increases in consumer prices slowed a than autos has advanced at a moderate bit in February. Spot prices for industrial rate. Business investment spending ap- materials have essentially leveled off in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

94 FOMC Policy Actions recent weeks after rising late last year. gates, taking into account developments Wage increases have remained moderate in the economy and in foreign exchange so far this year. and domestic credit markets. The inter- Economic activity in major foreign meeting range for federal funds was left industrial countries remained generally unchanged at 4 to 8 percent. weak in the fourth quarter of 1986 and Growth of the monetary aggregates early 1987, except in the United King- slowed sharply in February and March, dom. Debt-servicing problems beset and over the two months expansion in several important developing countries M2 and M3 was somewhat below the but progress was made in the negotia- Committee's expectations. In March, tions of a number of such countries with these aggregates appeared to be around commercial banks. the lower bounds of the 5Vi to 8!/2 per- The trade-weighted value of the dol- cent ranges established by the Commitlar against other G-10 currencies tee for the year. Some of the slower changed little in the period following the growth in the aggregates so far this year February 10-11 meeting of the Commit- appears to be related to a reversal of the tee until mid-March. The stability ap- bulge in deposits and bank lending assoparently was fostered to a considerable ciated with the surge in transactions beextent by the announcement that the fore year-end, but a more general modmajor industrial countries at a meeting in eration in the expansion of money Paris on February 22 had agreed to sup- balances also might be associated with port the prevailing structure of exchange completion of portfolio adjustments to rates. Since mid-March, however, the earlier declines in interest rates. Total dollar has come under strong downward and nonborrowed reserves fell slightly pressure, particularly against the Japa- over the past two months, as required nese yen, apparently triggered in part by reserves leveled off after the year-end intensified trade frictions between the bulge in transaction deposits, and excess United States and Japan. An improved reserves edged lower in line with their fiscal picture for the United Kingdom usual seasonal pattern. In the three comcontributed to a sharp rise in sterling. As plete reserve maintenance periods after a result, the Bank of England cut its the February FOMC meeting, adjustlending rates around mid-March; several ment plus seasonal borrowing averaged other European countries also lowered about $280 million. At the same time, official lending rates as their currencies the federal funds rate edged off from 6Vi strengthened against the German mark. percent to around 6 percent or a bit At its meeting in February, the Com- higher. mittee adopted a directive that called for Other interest rates changed little over maintaining the existing degree of pres- most of the intermeeting period before sure on reserve positions. M2 and M3 firming somewhat recently. Over the were expected to grow at annual rates of past few days concern about the dollar about 6 to 7 percent from January contributed to some pressure on rates, through March, while growth in Ml was particularly in long-term markets in expected to slow substantially from the which Treasury bond yields have risen high rates of previous months. The about 20 basis points. On balance, primembers decided that somewhat greater vate short-term rates rose about 15 basis reserve restraint would, or slightly lesser points over the intermeeting period, reserve restraint might, be acceptable while Treasury bill rates were about undepending on the behavior of the aggre- changed to 20 basis points lower; the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 95 differential probably reflected height- to have improved in many areas, buoyed ened concerns about credit quality relat- by greater success in meeting foreign ing to debt-servicing problems of devel- competition. Overall, economic activity oping countries and a paydown of bills seemed to have picked up in early 1987, by the Treasury. Equity prices rose though the improvement was due impormarkedly over the period. tantly to a buildup of inventories. Do- As at other recent meetings the staff mestic final demands were expected to projections suggested that real GNP grow at a relatively slow pace over the would grow at a moderate rate through year, with business spending for equipthe end of 1987. The rise in net exports ment and nonresidential construction remained critical to sustaining growth. likely to be retarding influences. Con- In response to the increased competitive- sumer spending on automobiles was ness of U.S. goods, growth in exports mentioned as another potentially weak was expected to continue to boost de- area of the economy, and problems permands on domestic production and sisted in agriculture and energy. The growth of imports was anticipated to members concluded as at previous meetslow. Gross domestic purchases were ings that the prospects for sustaining a expected to be sluggish, reflecting in moderate rate of expansion would depart the effects of a less expansive fiscal pend to an important extent on the policy and the influence of rising import achievement of significant gains in net prices on real income growth and con- exports. sumption. Business equipment spending The members saw encouraging signs was projected to resume a moderate up- that the trade deficit was narrowing in trend; however, construction of single- real terms if not yet in current dollar family homes was expected to edge terms. Business contacts in several parts down from the current pace, and activity of the country reported that the dollar's in office building and multifamily hous- depreciation was fostering growing deing could weaken substantially in re- mand for their products in export marsponse to overbuilding of such structures kets, although that experience was not in many areas and the effects of the new shared by businesses in all areas. On the tax law. Inflation was likely to pick up import side, many domestic producers reflecting the effects of the recent reindicated an increased ability to compete bound of crude oil prices as well as the with foreign goods. Nonetheless, the projected acceleration of import prices. outlook for foreign trade remained sub- However, remaining margins of slack ject to a great deal of uncertainty. Genin product and labor markets were erally weak economic growth abroad expected to limit overall inflationary was cited as a negative factor. Members pressures. acknowledged that the dollar's deprecia- In their discussion of the economic tion might help U.S. producers, but subsituation and outlook, Committee stantial further weakness in the dollar members generally agreed that recent carried considerable risks. A large addidevelopments on the whole were consis- tional decline would tend to damp detent with continuing expansion at a mod- mands and economic growth abroad, erate pace. Comments on business con- especially in the absence of stimulative ditions in several parts of the country policy actions in other major industrial tended to support a somewhat brighter countries. It could lead to substantially picture than had been reported at earlier greater inflationary pressures in the meetings. Business confidence appeared United States, with adverse impacts on Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

96 FOMC Policy Actions credit markets. While a few members Committee members agreed that domeswere of the view that the dollar sooner or tic business and financial conditions and later might need to decline somewhat growth of the monetary aggregates did further to correct the nation's trade im- not call for any change in the current balance—and such a decline should be degree of pressure on reserve positions, accepted if it occurred—most expressed at least at the start of the intermeeting concern about the implications of con- period. With regard to the weeks ahead, tinuing dollar depreciation under pre- a number of members noted that, while vailing circumstances. other developments in the economy and Members already were anticipating financial markets would need to be taken that the earlier depreciation of the dollar into account, continuing weakness in the along with the rebound in energy prices dollar would suggest the possibility that would be reflected in a somewhat higher some limited adjustment in policy imrate of inflation this year. Tending to plementation in a firming direction support that view were indications in would be appropriate. some parts of the country that prices of a In the course of the Committee's disnumber of products and services were cussion, a good deal of attention was rising somewhat more rapidly than ear- devoted to the implications for policy of lier. Nevertheless, the still ample avail- the currently strong downward pressure ability of production resources in most on the dollar in foreign exchange marindustries and continuing competition kets. Members agreed that the conduct from abroad were viewed as likely to of open market operations needed to be limit price increases, assuming the ab- especially sensitive to any tendency for sence of a substantial further drop in the the dollar to weaken significantly furdollar. It also was noted that recent labor ther. Some commented that, within the contract settlements were generally fa- framework of basically unchanged convorable in terms of their impact on busi- ditions of reserve availability, open ness costs. market operations should be conducted At its meeting in February the Com- with special caution to minimize uninmittee had agreed on policy objectives tended market impacts at times when the that called for monetary growth ranges dollar was under particular downward for the period from the fourth quarter of pressure. Several also indicated that if 1986 to the fourth quarter of 1987 of5Vi pressures increased enough so that interto 8V2 percent for both M2 and M3. The vention in the foreign exchange markets associated range for growth in total do- was not effective in stabilizing the dolmestic nonfinancial debt was set at 8 to lar, policy implementation might need to 11 percent. The Committee anticipated be adjusted to reduce reserve availability that growth in Ml would slow in 1987 somewhat during the intermeeting pefrom its very rapid pace in 1986 but the riod. In appraising the need for some members decided not to establish a nu- firming, the Committee would be mindmerical target for the year; instead, the ful of the adverse effects that a further appropriateness of Ml changes would be slide in the dollar could have on domesevaluated during the year in the light of tic interest rates, on inflation expectathe behavior of Ml velocity, develop- tions, and on the economy more generments in the economy and financial mar- ally over the longer run. The members kets, and the nature of emerging price also recognized that the problem was pressures. multilateral in nature and that the effec- In their discussion at this meeting, tiveness of any policy steps in the United Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 97 States would be greatly enhanced by approximating the expansion in nominal complementary actions abroad. income if interest rates remained around There was some divergence of views current levels. Most of the members felt regarding the circumstances under that more restrained monetary growth which any tendency for the dollar to fall would be acceptable, especially if it ocappreciably further should be resisted curred against the background of further through a reduced availability of re- downward pressures on the dollar. serves. Some members emphasized the While continued slow money growth desirability of relatively prompt, if lim- that held the broad aggregates below the ited, action to enhance the prospects for lower ends of their long-run ranges more stable exchange rates and also to could be a basis for concern, some reduce the need for stronger measures in shortfall in the growth of M2 and M3 the future. If successful, that approach would not seem to call for a more generwould minimize the rise in domestic in- ous provision of reserves in the period flation and interest rates over time and immediately ahead, given the earlier perhaps facilitate a reversal of interest monetary expansion, continuing moderrates. One member noted that the suc- ate growth of the economy, and weakcess of such an approach in stabilizing ness of the dollar in foreign exchange the dollar might be realized more markets. On the other hand, the promptly and certainly if the markets members would not welcome a resumpwere alerted to any firming action the tion of relatively rapid growth under Federal Reserve might undertake. Some current conditions. Some members sugother members preferred to move with gested that the Committee specify rates relative caution, if at all, in countering of acceptable growth of around 6 percent any further weakening in the dollar. for M2 and M3 from March to June. These members acknowledged that fail- Other members, reflecting the Commiture to arrest a considerable further de- tee's discussion that some shortfall in cline in the dollar might result in sub- monetary growth would be of less constantial upward pressures on longer-term cern than an overshoot under current domestic interest rates, especially given circumstances, suggested various ranges current market anxieties. At the same of growth for the broader aggregates, time, they stressed the uncertainties sur- with the ranges extending further below rounding the relationship between U.S. than above 6 percent. All the members interest rates and the behavior of the were able to accept a specification of 6 dollar and also the negative impact that a percent or less on the understanding that firmer policy could have on a possibly the Committee would need to reconsider fragile economic expansion, not only in its stance should monetary growth be the United States but around the world. extremely weak, especially in the con- With regard to the monetary aggre- text of a more sluggish economy than gates, the members generally viewed the was currently anticipated. recent slowdown in monetary growth as At the conclusion of the Committee's a welcome development in light of the discussion, all of the members indicated previously rapid expansion over an ex- that they favored or could accept a ditended period. In their assessment of the rective that called for no change in the outlook for the months immediately degree of pressure on reserve positions ahead, the members took account of an in the immediate future. There was a analysis which suggested some accelera- consensus in favor of allowing for possition in the growth of M2 and M3 to rates ble limited adjustments during the inter- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

98 FOMC Policy Actions meeting period toward some firming of of automobile sales, but on balance overall reserve conditions, with excessive consumer spending has been relatively flat over the past several months. Housing starts weakness in the dollar recognized as the strengthened further in February after rising potential development most likely to in December and January to their highest make such an adjustment appropriate. In level since late spring. Business capital particular, the members agreed that spending appears to have weakened in early 1987. Consumer and producer prices rose somewhat greater reserve restraint might more rapidly in early 1987, primarily reflectbe acceptable depending on the perforing sizable increases in energy prices. Labor mance of the dollar in foreign exchange cost increases have remained relatively modmarkets, but also taking into account the erate in recent months. behavior of the monetary aggregates, the Growth of M2 and M3 has slowed substrength of the business expansion, stantially from the pace in December and January, and for 1987 to date expansion of progress against inflation, and condithese two aggregates appears to have been tions in credit markets. This approach to around the lower ends of their respective policy implementation was expected to ranges established by the Committee for the be consistent with growth in M2 and M3 year. Growth of Ml, after moderating in January from an exceptionally rapid pace in at annual rates of around 6 percent or late 1986, also has slowed markedly further. less over the three-month period from Expansion in total domestic nonfinancial March to June. Over the same period debt appears to have moderated appreciably growth in Ml was expected to remain since year-end. Interest rates generally have fluctuated in a relatively narrow range since substantially below its pace in 1986. Bethe February 10-11 meeting of the Commitcause the behavior of Ml remained subtee, although they have firmed somewhat ject to unusual uncertainty, the Commit- recently. At a meeting in the latter part of tee decided to continue its practice of not February, the Finance Ministers and Central specifying a numerical expectation for Bank Governors of major industrial countries agreed to cooperate closely to foster stability its growth. The members agreed that the of exchange rates around then-current levels. intermeeting range for the federal funds However, after mid-March, the traderate, which provides a mechanism for weighted value of the dollar against the other initiating consultation of the Committee G-10 currencies declined further on balance, including a sizable decline against the yen. when its boundaries are persistently ex- The Federal Open Market Committee ceeded, should be left unchanged at 4 to seeks monetary and financial conditions that 8 percent. will foster reasonable price stability over At the conclusion of the meeting, the time, promote growth in output on a sustainable basis, and contribute to an improved following domestic policy directive was pattern of international transactions. In furissued to the Federal Reserve Bank of therance of these objectives the Committee at New York: its February meeting established growth ranges of 51/2 to 8V2 percent for both M2 and The information reviewed at this meeting M3, measured from the fourth quarter of suggests on balance that economic activity 1986 to the fourth quarter of 1987. The assohas been expanding at a faster pace than in ciated range for growth in total domestic the fourth quarter, with output apparently nonfinancial debt was set at 8 to 11 percent strengthened by a rebuilding of business in- for 1987. ventories and some improvement in foreign With respect to Ml, the Committee recogtrade. Total nonfarm payroll employment nized that, based on experience, the behavior rose strongly again in February. The civilian of that aggregate must be judged in the light unemployment rate remained at 6.7 percent of other evidence relating to economic activfor the third consecutive month. Industrial ity and prices; fluctuations in Ml have beproduction also increased appreciably further come much more sensitive in recent years to in February. Total retail sales have continued changes in interest rates, among other facto fluctuate substantially from month to tors. During 1987, the Committee anticipates month, largely reflecting the uneven pattern that growth in Ml should slow. However, in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 99 the light of its sensitivity to a variety of Mr. Stern. Votes against this action: influences, the Committee decided at the None. February meeting not to establish a precise target for its growth over the year as a whole. Instead, the appropriateness of changes in 2. Authorization for Domestic Ml during the course of the year will be Open Market Operations evaluated in the light of the behavior of its velocity, developments in the economy and Effective April 22, 1987, the Committee financial markets, and the nature of emerging approved a temporary increase of $3 bilprice pressures. lion, to $9 billion, in the limit between In that connection, the Committee be- Committee meetings on changes in lieves that, particularly in the light of the extraordinary expansion of this aggregate in System Account holdings of U.S. govrecent years, much slower monetary growth ernment and federal agency securities would be appropriate in the context of conspecified in paragraph l(a) of the Autinuing economic expansion accompanied by thorization for Domestic Open Market signs of intensifying price pressures, perhaps related to significant weakness of the dollar Operations. Subsequently, effective in exchange markets, and relatively strong May 6, 1987, the Committee approved a growth in the broad monetary aggregates. further increase of $2 billion, to $11 Conversely, continuing sizable increases in billion, in the intermeeting limit. These Ml could be accommodated in circumstances characterized by sluggish business increases were effective for the reactivity, maintenance of progress toward un- mainder of the intermeeting period endderlying price stability, and progress toward ing with the close of business on May international equilibrium. As this implies, 19, 1987. the Committee in reaching operational decisions during the year, might target appropriate growth in Ml from time to time in the Votes for the April 22 action: Messrs. light of circumstances then prevailing, in- Volcker, Corrigan, Angell, Boehne, cluding the rate of growth of the broader Boykin, Heller, Johnson, Keehn, Ms. aggregates. Seger, and Mr. Stern. Votes against this In the implementation of policy for the action: None. immediate future, the Committee seeks to maintain the existing degree of pressure on Votes for the May 6 action: Messrs. reserve positions. Somewhat greater reserve Volcker, Corrigan, Angell, Boehne, restraint might be acceptable depending on Boykin, Heller, Johnson, Keehn, and developments in foreign exchange markets, Ms. Seger. Votes against this action: taking into account the behavior of the ag- None. Absent and not voting: Mr. Stern. gregates, the strength of the business expansion, progress against inflation, and conditions in credit markets. This approach is The increases were approved on the expected to be consistent with growth in M2 recommendation of the Manager for Doand M3 over the period from March through mestic Operations. The Manager had June at annual rates of around 6 percent or advised on April 22 that outright purless. Growth in Ml is expected to remain substantially below its pace in 1986. The chases of securities in the intermeeting Chairman may call for Committee consulta- interval through April 21 had reduced tion if it appears to the Manager for Domestic the leeway under the usual $6 billion Operations that reserve conditions during the limit to about $l*/4 billion. On May 6, period before the next meeting are likely to be associated with a federal funds rate persis- the Manager advised that the leeway had tently outside a range of 4 to 8 percent. been reduced under the April 22 ceiling to a little over $100 million. Additional purchases of securities in excess of these leeways were necessary chiefly because Votes for this action: Messrs. Volcker, Corrigan, Angell, Boehne, Boykin, of unusually steep increases in Treasury Heller, Johnson, Keehn, Ms. Seger, and balances at the Federal Reserve Banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

100 FOMC Policy Actions Meeting Held on age. Total starts were at an annual rate of May 19, 1987 1.7 million units in April. Single-family starts rose during the month, but multifamily starts fell sharply as high vacancy Domestic Policy Directive rates and the elimination of some tax The information reviewed at this meet- advantages for investment in income ing suggested that economic activity has properties continued to depress apartbeen expanding at a moderate pace, de- ment construction. spite some weakness in the industrial Business fixed investment has shown sector. However, the rate of inflation has signs of improvement from the derisen in recent months, reflecting espe- pressed level early in the year. Shipcially the impact of higher prices for ments of nondefense capital goods rose energy and non-oil imports. and orders inched up in February and Labor demands grew at a brisk pace in March. Outlays for construction of com- April. The household survey indicated a mercial and industrial structures have sharp increase in employment and an continued trending down in recent unusually large decline in unemploy- months. New commitments, however, ment. As a result, the unemployment have firmed recently. rate fell to 6.3 percent, 0.4 percentage Inflation rates have been higher so far point below its first-quarter average. this year. The CPI rose at a 6.2 percent Payroll employment rose considerably annual rate between December and in April with gains concentrated again in March, compared with a rate of 2.5 pertrade and services. Manufacturing em- cent in the fourth quarter. Much of the ployment has changed little on balance first-quarter acceleration was caused by so far this year, and the factory work- the rebound in energy prices, which now week dropped sharply in April, partly appear to have adjusted to the bulk of the because of the observance of religious year-end runup in the price of imported holidays during the survey week. crude. Larger price increases also were The industrial production index de- posted for a number of consumer goods, clined 0.4 percent in April following a probably reflecting the influence of smaller drop in March. Most of the de- higher import prices. At the producer cline in output in April was associated level, too, large price increases were with cutbacks in motor vehicles, al- posted in a few industries that had been though small but widespread reductions subject to strong import competition, were evident in other areas. Cutbacks in such as chemicals and paper. Commodauto production and a pickup in sales ity prices began moving higher in the slowed the growth in dealer stocks, but latter part of 1986 and have risen noticethe level of stocks remained high. Out- ably since the Committee's meeting on side of autos, trade inventories did not March 31. However, wage growth has appear excessive, while inventory-sales continued at relatively moderate rates, ratios in manufacturing were near record with the index for average hourly earnlows. ings rising at about the same pace as in As a result of the higher auto sales, 1986. real consumer spending appeared to be In foreign exchange markets, the dolstrong. Excluding autos and noncon- lar was under heavy downward pressure sumer items, retail sales rose moderately over much of the intermeeting period, in April. Housing starts were down and intervention purchases were subsomewhat from their first-quarter aver- stantial. In the latter part of the period, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 101 the dollar was bolstered by slightly associated with a steep rise in transacfirmer monetary conditions in the United tions balances near midmonth. In the States and by easier conditions in Japan, second half of the month, as these pay- Germany, and the United Kingdom. On ments cleared, Treasury balances at Fedbalance, the dollar dropped 1 percent, eral Reserve Banks rose sharply and abwith declines of about 4 percent against sorbed reserves, at times more rapidly the yen and 3V2 percent against sterling, than had been estimated. This decline in the two strongest major currencies over reserves was largely offset by a sizable this interval. Economic activity in most volume of outright purchases of U.S. major foreign industrial nations contin- government securities, which necessiued to be relatively sluggish in the first tated two temporary increases in the inquarter, except in the United Kingdom termeeting limit on changes in the Sysand Italy. In March, the merchandise tem's portfolio, as well as by large trade deficit was close to the average for temporary injections of reserves through January and February and about the repurchase agreements. Nevertheless, same as the fourth-quarter rate. partly reflecting technical factors, bor- At its meeting in March, the Commit- rowing at the discount window rose subtee adopted a directive that called ini- stantially, averaging around $800 miltially for maintaining the existing degree lion over the intermeeting period. of pressure on reserve positions. The The federal funds rate firmed somemembers decided that somewhat greater what over the period. Most other interest reserve restraint might be acceptable de- rates also rose, with the largest increases pending on developments in foreign ex- occurring in long-term markets. The change markets, taking into account the downward pressures on the dollar crebehavior of the monetary aggregates, the ated uncertainty among market particistrength of the business expansion, pants about private demands for dollar progress against inflation, and condi- assets, the prospects for U.S. inflation, tions in domestic credit markets. M2 and and the response of monetary policy. In M3 were expected to grow at annual addition, rising commodity and prorates of about 6 percent or less from ducer prices both reflected and added to March through June, while growth in concerns about the inflation outlook. Ml was expected to slow substantially Most bond yields increased slightly over from the pace in 1986. The intermeeting a percentage point since the March range for federal funds was left un- meeting. Commitment rates for fixedchanged at 4 to 8 percent. rate mortgages rose somewhat more, re- In light of downward pressures on the flecting increased lender caution in a dollar, the provision of reserves was volatile rate environment. Short-term cautious at times during the intermeeting rates were up lA to 1 percentage point, period, and open market operations were including three lA percentage point inadjusted in a slightly less accommoda- creases in the prime rate. tive direction in late April. At the same Growth of all of the monetary aggretime, uncertainty associated with trans- gates picked up substantially in April. actions related to a huge volume of tax Ml was boosted by the tax-related surge payments in mid-April complicated the in transactions balances. Partly reflectmanagement of reserves during the in- ing these tax effects, growth in M2 also termeeting period. Demands for re- picked up, though remaining fairly modserves strengthened substantially, re- erate. Growth in M3 was boosted by the flecting increases in required reserves need to fund stronger expansion in bank Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

102 FOMC Policy Actions credit. The growth of the broader aggre- of various price measures thus far in gates was consistent with the Commit- 1987 was not unexpected, given the detee's expectations for the March to June preciation of the dollar, the energy situaperiod and left these aggregates in April tion, and supply conditions for some just below the lower ends of their ranges agricultural products. To a considerable established by the Committee for the extent, those developments appeared to year. Liquid deposits ran off at the end involve special factors that might norof April and in early May as the tax mally be expected to result in one-time payments cleared, reversing much of the adjustments to the general level of previous bulge in Ml. prices. However, it also was noted that The staff projections continued to the rising prices, including the upturn in suggest that real GNP would grow at a commodity prices in recent weeks, had moderate rate through the end of 1987. become associated with an appreciable A primary contributor to the projected deterioration in inflationary attitudes, growth remained the foreign sector. The judging from conditions in financial decline in the value of the dollar was markets and contacts with many busiexpected to make American products ness executives around the country. more competitive, boosting exports de- There were regional differences in inflaspite the effects of relatively weak for- tionary expectations, to be sure, and eign economic growth and damping ex- some members observed that reactions pansion in the volume of imports. The in financial markets had probably been growth in domestic purchases was likely overdone. Nonetheless, most of the to be restrained by constraints on gov- members believed that there was an inernment spending, high vacancy rates in creased risk of more inflation than they the office and rental housing markets, had expected earlier, particularly if inand increased mortgage rates. In addi- flationary attitudes became embedded in tion, rising import prices were expected future wage settlements. On the other to moderate the growth of real personal hand, some members pointed out that incomes and thus consumer expendi- underlying pressures on resources could tures, especially in the light of an al- remain damped and inflation relatively ready low personal saving rate. How- subdued, given the outlook for less than ever, business equipment spending was robust economic growth in the United projected to resume a moderate uptrend States and abroad and a worldwide overpartly in response to a growing export supply of some commodities. market. Inflation was expected to mod- The prospective behavior of the dollar erate after accelerating in the first in foreign exchange markets was a key quarter but to remain appreciably above uncertainty bearing on the outlook for the average pace in 1986. With output inflation and on that for overall business growing at a rate approximating that of activity. Earlier declines in the exchange potential GNP, the unemployment rate value of the dollar had resulted in higher was expected to remain close to the import prices—an adjustment process lower level achieved recently. that undoubtedly was still under way— In the Committee's discussion of cur- and further dollar depreciation, if it ocrent and prospective business condi- curred, would add to future inflation tions, the members gave attention to in- pressures. In this regard, members noted dications that inflationary expectations that some domestic producers were raishad worsened in recent weeks. Some ing their prices as those of competing commented that the somewhat faster rise imports went up, thereby adding to the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 103 inflation impact of a lower dollar. In culture and energy sectors were, at the general, however, while the deprecia- least, no longer intensifying. Business tion of the dollar had undoubtedly con- sentiment also appeared to have imtributed to inflationary expectations, di- proved in many parts of the country. rect evidence of an inflation impact on More generally, while the members recdomestic pricing was still fairly limited. ognized the risks of a shortfall from cur- With respect to the course of domestic rent projections, especially given the business activity, a number of members persisting weaknesses and financial commented that developments in recent problems in some sectors of the econmonths were in line with earlier projec- omy, current developments on the whole tions, and while there were both domes- appeared to be consistent with continutic and foreign risks to sustained expan- ing moderate growth in overall business sion, further growth at a moderate pace activity. remained a reasonable expectation. As At its meeting in February the Comat previous meetings, the members gen- mittee had agreed on policy objectives erally expected domestic demands to be that called for monetary growth ranges relatively sluggish over the quarters for the period from the fourth quarter of ahead, and they felt that significant 1986 to the fourth quarter of 1987 of SVi progress in reducing the nation's foreign to SVi percent for both M2 and M3. The trade deficit was needed to support the associated range for growth in total doexpansion. Some members expressed mestic nonfinancial debt was set at 8 to concern that the improvement in the 11 percent. The Committee anticipated trade balance would be limited over the that growth in Ml would slow in 1987 quarters ahead. While further progress from its very rapid pace in 1986, but the could be anticipated as exporters and members decided not to establish a nuimporters continued to adjust to a lower merical target for the year; instead, the value of the dollar, such progress might appropriateness of Ml changes would be be restrained in particular by sluggish evaluated during the year in the light of economic growth in foreign industrial the behavior of Ml velocity, developnations. Nonetheless, the members gen- ments in the economy and financial marerally expected continuing improvement kets, and the nature of emerging price in net exports and many felt that it would pressures. provide considerable impetus for do- In the Committee's discussion of polmestic growth. icy implementation for the weeks imme- On the domestic side no sector of the diately ahead, members noted that uneconomy was believed likely to contrib- settled reserve conditions associated ute much strength to the expansion, and with tax payments and related flows of weaknesses persisted in a number of key funds had produced a greater degree of sectors such as energy, agriculture, and pressure on reserve positions from time nonresidential construction. Moreover, to time in recent weeks than had deliberthe recent rise in mortgage rates was ately been sought, even after the slight likely to have some impact on housing firming move of late April. Market exdemand. However, in their review of pectations about Federal Reserve policy business developments in different parts intentions also seemed to contribute to of the country, several members re- higher short-term interest rates at times. ported on indications of some improve- All but one of the members indicated ment recently in local conditions and that they wished at least to maintain the others noted that difficulties in the agri- generally firmer reserve conditions that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

104 FOMC Policy Actions had prevailed most recently, even market operations would not be necesthough such conditions had not been sary, at least in the early part of the fully anticipated in Desk operations, and intermeeting period. a number felt that some slight further With regard to factors that might trigfirming might be appropriate. The ger some adjustment in open market members generally agreed that some operations during the intermeeting pefirming of reserve conditions had been riod, the members generally agreed that desirable to counter the apparent intensi- both inflationary developments and the fication of inflationary expectations in dollar should receive special emphasis. recent weeks and to help stabilize the In particular, should inflation or infladollar in the foreign exchange markets. tionary expectations seem to be intensi- In another view any monetary restraint fying or the dollar come under renewed beyond what had been sought recently downward pressure, the Committee would not be desirable because addi- would be ready to see some prompt furtional tightening would incur an undue ther finning of reserve conditions. At the risk of stalling the economic expansion same time, the members did not rule out at a time when, in this view, underlying the possibility of some easing during the inflation pressures were likely to remain period ahead, but they viewed the poin check. Most members saw a lesser tential need for a correction in that direcand relatively limited risk to the expan- tion as less likely. In keeping with the sion under current economic conditions Committee's usual approach toward poland one that needed to be accepted given icy implementation, any decision to alter the pressures on the dollar and the po- reserve objectives during the intermeettential for inflation. ing period should take account of the In the view of several Committee behavior of the monetary aggregates and members, the desired reserve restraint the overall performance of the economy. might be more appropriately achieved In their consideration of the near-term by means of an immediate increase in outlook for growth of the monetary agthe discount rate, providing a more overt gregates, the members took note of an means of reassuring financial markets analysis, which suggested that the with regard to the System's continuing broader aggregates would expand at commitment to an anti-inflationary pol- moderate rates over the balance of the icy; others felt a possible discount rate second quarter. The outsized tax payincrease should, in effect, be held in ments of mid-April had continued to afreserve for use if a more visible signal fect the broad aggregates as well as Ml became desirable. In any event, any de- through early May. Beyond that, M2 cision with respect to the discount rate was likely to grow a little more slowly lay with the Board of Governors, and all than income, given the slight restraining but one of the Committee members effects of the recent rise in interest rates agreed that, in the absence of a near- that would be felt in coming months. M3 term rise in the discount rate, open mar- expansion was less likely to be affected ket operations would be directed toward by interest rate movements, at least in some increase in the degree of reserve the near term, and was expected to be pressure beyond that sought in recent sustained by issuance of managed liabilweeks (but not necessarily greater than ities to support credit growth at deposithat prevailing recently). If the discount tory institutions. On a cumulative basis rate were increased shortly after the through June, growth in M2 would remeeting, such firming through open main somewhat below the lower bound Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 105 of the growth "cone" representing the percent or less for the three-month pe- Committee's 5V2 to 8V2 percent range riod from March to June. Over the same for the year, though within the parallel period growth in Ml was expected to lines associated with the end points of remain well below its pace in 1986; the that range; growth in M3 would be very members would continue to evaluate this near the lower bound of its growth cone aggregate in the light of the performance and well within its parallel band. Under of the broader monetary aggregates and prevailing circumstances, Committee other factors. The members agreed that members indicated that they were will- the intermeeting range for the federal ing to accept relatively limited growth in funds rate, which provides a mechanism the broader aggregates, at least for now, for initiating consultation of the Combut a few observed that such growth mittee when its boundaries are persissignaled the need for caution. Growth in tently exceeded, should be left un- Ml also was believed likely to moderate changed at 4 to 8 percent. greatly on average in May and June, At the conclusion of the meeting, the after its surge in April. However, be- following domestic policy directive was cause of the persisting uncertainties issued to the Federal Reserve Bank of about the behavior of Ml, most of the New York: members indicated a continuing preference for not specifying a numerical The information reviewed at this meeting growth expectation for this aggregate in suggests on balance that economic activity is the Committee's policy directive. expanding at a moderate pace in the current quarter. Total nonfarm payroll employment At the conclusion of the Committee's rose considerably further in April, with most discussion, all but one of the members of the gains continuing to be in the serviceindicated that they favored or could ac- producing sectors. The civilian unemploycept a directive that called for some in- ment rate fell to 6.3 percent from 6.6 percent in March. In April, industrial production decrease in the degree of reserve pressure clined after increasing at a moderate rate in beyond that sought in recent weeks, takthe first quarter. Total retail sales changed ing account of the possibility that such little but were up somewhat from their averfirming might be accomplished through age level in the first quarter. Housing starts an increase in the discount rate. Subse- were down somewhat in April from their first-quarter average. Recent indicators of quent to some initial firming in reserve business capital spending point to some reconditions through a reduced availabilcovery over the near term from a depressed ity of reserves or through an increase in level in the first quarter. Consumer and prothe discount rate, the members indicated ducer prices have risen more rapidly this that somewhat greater reserve restraint year, primarily reflecting sizable increases in prices of energy and non-oil imports. Labor would be acceptable, and somewhat cost increases have remained relatively modlesser reserve restraint might be accept- erate in recent months. able, over the intermeeting period de- Growth of M2 and M3 strengthened in pending on developments relating to in- April from a sluggish pace in February and March, but for 1987 to date expansion of flation and the performance of the dollar these two aggregates has been slightly below in foreign exchange markets, while also the lower ends of their respective ranges esgiving consideration to the behavior of tablished by the Committee for the year. Ml the monetary aggregates and the strength surged in April prompted by exceptionally of the business expansion. This ap- large tax payments. Expansion in total domestic nonfinancial debt has moderated proach to policy implementation was somewhat thus far this year. Most interest expected to be consistent with growth in rates have risen considerably since the March M2 and M3 at annual rates of around 6 31 meeting of the Committee, with the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

106 FOMC Policy Actions largest increases occurring in longer-term international equilibrium. As this implies, markets. the Committee in reaching operational deci- In foreign exchange markets, the dollar sions during the year might target approwas under heavy downward pressure over priate growth in Ml from time to time in the most of the intermeeting period and interven- light of circumstances then prevailing, intion purchases of dollars were substantial. cluding the rate of growth of the broader Recently the dollar has tended to stabilize, aggregates. but on balance its trade-weighted value In the implementation of policy for the against the other G-10 currencies declined immediate future, the Committee seeks to over the period. In March the merchandise increase somewhat the degree of reserve trade deficit was close to the average for pressure sought in recent weeks, taking into January and February. account the possibility of a change in the The Federal Open Market Committee discount rate. Somewhat greater reserve reseeks monetary and financial conditions that straint would, or somewhat lesser reserve will foster reasonable price stability over restraint might, be acceptable depending on time, promote growth in output on a sustain- indications of inflationary pressures and on able basis, and contribute to an improved developments in foreign exchange markets, pattern of international transactions. In fur- as well as the behavior of the aggregates and therance of these objectives the Committee at the strength of the business expansion. This its February meeting established growth approach is expected to be consistent with ranges of 5!/2 to 8V2 percent for both M2 and growth in M2 and M3 over the period from M3, measured from the fourth quarter of March through June at annual rates of around 1986 to the fourth quarter of 1987. The asso- 6 percent or less. Growth in Ml is expected ciated range for growth in total domestic to remain well below its pace during 1986. nonfinancial debt was set at 8 to 11 percent The Chairman may call for Committee confor 1987. sultation if it appears to the Manager for With respect to Ml, the Committee recog- Domestic Operations that reserve conditions nized that, based on experience, the behavior during the period before the next meeting are of that aggregate must be judged in the light likely to be associated with a federal funds of other evidence relating to economic activ- rate persistently outside a range of 4 to 8 ity and prices; fluctuations in Ml have be- percent. come much more sensitive in recent years to changes in interest rates, among other fac- Votes for this action: Messrs. Volcker, tors. During 1987, the Committee anticipates Corrigan, Angell, Boehne, Boykin, that growth in Ml should slow. However, in Heller, Johnson, Keehn, and Stern. Vote the light of its sensitivity to a variety of against this action: Ms. Seger. influences, the Committee decided at the February meeting not to establish a precise target for its growth over the year as a whole. Ms. Seger dissented because she did Instead, the appropriateness of changes in not want to lean on the side of any Ml during the course of the year will be tightening of reserve conditions beyond evaluated in the light of the behavior of its velocity, developments in the economy and the firming that had occurred since the financial markets, and the nature of emerging March meeting. She was concerned that price pressures. the degree of reserve pressure prevailing In that connection, the Committee berecently, which was somewhat greater lieves that, particularly in the light of the than intended, represented a risk to an extraordinary expansion of this aggregate in recent years, much slower monetary growth already weak economic expansion. She would be appropriate in the context of con- noted that the negative effects of recent tinuing economic expansion accompanied by increases in interest rates had not yet signs of intensifying price pressures, perhaps been felt in the economy. She also rerelated to significant weakness of the dollar in exchange markets, and relatively strong ferred to recent indications of moderatgrowth in the broad monetary aggregates. ing growth in the monetary aggregates, Conversely, continuing sizable increases in and she did not expect inflationary pres- Ml could be accommodated in circumsures to persist in the context of excess stances characterized by sluggish business production capacity and commodity suractivity, maintenance of progress toward un- Digitizedd feorrl yFiRngA SpEriRce stability, and progress toward pluses worldwide. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 107 Meeting Held on sector, however, auto assemblies have July 7, 1987 slowed in recent months due to relatively depressed sales and large dealer stocks. Domestic Policy Directive Partly because of the lagging auto sales, consumer spending in real terms The information reviewed at this meet- has been sluggish in recent months, ing suggested that economic activity ex- though above its first-quarter pace. Outpanded at a moderate pace in the second lays for services have continued to adquarter, as consumer expenditures grew vance steadily, but total auto sales at a relatively modest pace, business dropped back noticeably in May to the capital spending experienced some re- slow pace experienced in the first covery, and the trade deficit apparently quarter. Excluding autos, outlays for ducontinued to narrow in volume terms. rables have been flat on balance since Producer and consumer prices slowed in the end of 1986, while spending on non- May, after sizable increases earlier in durable goods has edged down. the year that reflected, to a considerable Housing activity has dropped back extent, higher energy prices. Rising im- from its elevated pace early this year. port prices also contributed to higher Total starts fell to an annual rate of 1.62 consumer prices. Wage increases have million units in May. Single-family remained relatively limited in recent starts were down appreciably, apparmonths. ently reflecting the upturn in mortgage Payroll employment rose modestly interest rates after March. Multifamily further in May and June, following sub- starts increased somewhat from an exstantial increases in the first four months tremely low level in April but remained of the year, with the gains again concen- below the first-quarter average. trated in the service-producing sector. Business fixed investment has re- Employment advances in the goods-pro- bounded after a tax-related decline at the ducing sector were lackluster as manu- beginning of the year. Shipments of facturing employment rose minimally. nondefense capital goods were about flat In June, the household survey indicated in April and May but on average were a small drop in employment, but the above the first-quarter level. Outlays for labor force fell noticeably. As a result, nonresidential structures turned up in the unemployment rate fell 0.2 percent- May, with the gains fairly widespread; age point to 6.1 percent; most of the and petroleum-drilling activity has condrop in employment was attributed to tinued to recover. In addition, new fewer young people than normal enter- orders for nondefense capital goods, exing the labor force as of the early June cluding aircraft, picked up in the spring survey week. and new commitments for nonresiden- The index of industrial production tial construction have moved up slightly. rose 0.5 percent in May; and following Inventory investment apparently upward revisions to the three preceding slowed in the second quarter from its months, the index was 2Vi percent (an- rapid first-quarter pace. Production cutnual rate) above the first-quarter aver- backs trimmed auto inventories, but the age. The recent growth reflects in part level of dealer stocks still was relatively the increased production of business high. Outside of autos, inventory equipment, especially high-technology changes have been relatively small in capital goods, and of a wide variety of recent months and inventory-sales ratios consumer goods. In the motor vehicles have remained low. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 FOMC Policy Actions The U.S. merchandise trade deficit in of the monetary aggregates and the nominal terms was about unchanged in strength of the business expansion. M2 the first quarter from its value in the final and M3 were expected to grow at annual quarter of 1986. Preliminary data sug- rates of around 6 percent or less from gest that the deficit declined in April as March through June, while growth in exports rose and imports fell from their Ml was expected to be well below its first-quarter rate. Economic activity has pace in 1986. The intermeeting range for remained sluggish in most major foreign federal funds was left unchanged at 4 to industrial nations so far this year. Real 8 percent. GNP and industrial production declined Adjustment plus seasonal borrowing sharply in Germany in the first quarter, at the discount window averaged $580 although industrial production picked up million for the three complete maintein April and May. Japan has shown the nance periods since the May meeting, reverse pattern with declines in indus- close to its average level around the time trial production registered in both April of that meeting. Borrowing during the and May. first full maintenance period after the Inflation rates slowed in May. The May meeting was heavy, particularly consumer price index (CPI) rose 0.3 over the long Memorial Day weekend percent, after more rapid increases ear- when an imminent increase in the dislier this year. Increases in retail energy count rate was expected by market parprices, which had boosted prices during ticipants. Total reserves decreased at an the first quarter, were smaller in April annual rate of about 2 percent between and May and accounted for much of the April and June, reflecting a fallofif in slower rise in consumer prices. How- required reserves associated with a net ever, the price of crude oil has advanced contraction in Ml. further since mid-April, which suggests M2 grew only a little on balance in upward pressure on retail energy prices May and June, bringing its growth rate in the period ahead. Excluding food and for the March to June period to 23A perenergy, the CPI has risen about 1 per- cent, and its Ml component declined centage point faster so far this year than over the two months. While some of the in 1986 partly because of more rapid weakness in May reflected the unwindincreases in consumer goods that have ing of the previous tax-related buildup, high import proportions. Wage inflation, more generally these aggregates appear in contrast, has remained relatively low to have been substantially affected by for the year to date. the increase in market interest rates At its meeting on May 19, the Com- among other factors this year. Expanmittee adopted a directive that called for sion in M3 was better maintained as increasing somewhat the degree of re- banks and thrift institutions continued to serve pressure from that sought in the fund a moderate pace of credit extenweeks just before the meeting, taking sion, and for the March to June period into account the possibility of a change this aggregate increased at an annual rate in the discount rate. The members of 5V2 percent. The growth of M2 in agreed that somewhat greater reserve re- 1987 through June left this aggregate straint would, or somewhat lesser re- below the lower end of the growth serve restraint might, be acceptable de- "cone" representing the Committee's pending on developments relating to 5Vi to 8V2 percent range for the year, and inflation and the dollar in foreign ex- growth of M3 around the lower end of change markets, as well as the behavior its 52/2 to 8V2 percent growth cone. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 109 Early in the intermeeting period inter- be sluggish over the forecast horizon. In est rates remained near the higher levels particular, the rise in import prices assoreached in the weeks before the May ciated with the fall in the dollar was meeting, as markets continued to reflect expected to hold down real income gains concerns about the course of inflation and thus consumer expenditures. Conand the dollar. However, rates subse- struction spending was anticipated to be quently declined in response to a sharp damped by high vacancy rates for office drop in some commodity prices, a firmer structures and rental housing and recent dollar, and an abatement of inflation increases in mortgage rates, while the fears. The federal funds rate continued expansion of government expenditures to average around 63A percent during the would likely be held down by budgetary intermeeting period, but other short- limitations. Business equipment spendterm interest rates were down 10 to 55 ing, however, should rise moderately in basis points on balance. Longer-term coming quarters, reflecting continued Treasury yields were about 60 basis modernization efforts and expanding dopoints lower and corporate bond rates mestic production. Inflation rates were declined about half that much. The com- forecast to edge down over the second mitment rate for fixed-rate mortgages half of this year but then to move up fell slightly since the May FOMC meet- again in 1988, primarily due to increases ing, but still was well above the low in nonpetroleum import prices. Moreestablished earlier in the year. Stock over, with the civilian unemployment price indexes increased strongly over rate projected to remain close to 6V* most of the period to record levels. percent, labor market slack would have The dollar strengthened somewhat a reduced influence in damping infladuring the intermeeting period, boosted tionary pressures. in part by the announcement of an eco- In the Committee's discussion of the nomic stimulus package in Japan as well economic situation and outlook, the as better than expected economic and members generally agreed that business price news for the United States. On activity was likely to expand at a moderbalance, the weighted-average foreign ate pace over the balance of the year. exchange value of the dollar against Greater uncertainty surrounded the outother G-10 currencies moved up by look for 1988, but most of the members about 33A percent since the May meet- felt that further moderate growth also ing, including increases of nearly 13A was a reasonable expectation for next percent against the yen and 33A percent year. In general, the members anticiagainst the mark. Over the same period, pated relatively sluggish expansion in bond rates rose substantially in Germany domestic demands over the projection and Japan, and with U.S. long-term horizon, and as at earlier meetings they rates declining somewhat, the rate dif- believed that sustained growth in overall ferentials narrowed. activity would depend to an important The staff projections suggested that extent on the achievement of significant real GNP would grow at a moderate rate improvement in the nation's balance of through the end of 1987 and perhaps trade. Most of the members anticipated a slow slightly from this pace in 1988. marginally higher rate of price increase Improvement in the external sector was in 1988. expected to be a major factor contribut- In keeping with the usual practice at ing to growth in overall output. Growth meetings when the Committee considers in domestic demand was anticipated to its long-run objectives for monetary Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 FOMC Policy Actions growth, the members of the Committee ciably faster growth would incur a conand the Federal Reserve Bank presidents siderable risk of increased inflationary not currently serving as members pre- pressures and the resulting distortions sented specific projections of economic would threaten the sustainability of the growth, the rate of unemployment, and expansion itself. Relatively rapid changes in the overall price level. With growth in domestic demands, in particuregard to the rate of expansion in real lar, would be inconsistent with needed GNP, the projections had a central ten- external adjustment. dency of 2V2 to 3 percent for 1987 as a In the Committee's discussion of varwhole and the same central tendency for ious factors bearing on the business out- 1988, though with a slightly wider range look, some members commented that of individual forecasts for next year. the growth in consumer demands Projections of growth in nominal GNP seemed likely to be reasonably well centered on ranges of 6lA to 7 percent maintained, especially in the services for 1987 and 5% to 7 percent for 1988. area, based on current trends and on The rate of unemployment was not ex- prior cyclical experience. Others gave pected to deviate significantly from cur- more weight to recent indications of rent levels; the central tendency of the softness in overall consumer spending forecasts was 6.2 to 6.4 percent for the and, in the context of increased confourth quarter of 1987 and 6.0 to 6.5 sumer debt burdens and a relatively low percent for the fourth quarter of 1988. saving rate, they saw relatively weak With respect to the rate of inflation, as growth as a more likely prospect for the indexed by the GNP deflator, the projec- next several quarters. The members gentions centered on rates of 33A percent for erally expected further improvement in 1987 and 4 percent for 1988. In making net exports as both importers and exthese forecasts, the members took ac- porters continued to adjust to a lower count of the Committee's objectives for value of the dollar, but the extent of such monetary growth established at this improvement remained subject to conmeeting. The members also assumed siderable uncertainty. The possibility of that fluctuations in the exchange va- relatively limited economic expansion in lue of the dollar would not be of suffi- key foreign industrial countries was cient magnitude to affect the projections again cited as a negative factor. With significantly. regard to the federal budget deficit, the While the central tendency of the members emphasized that further reducmembers' forecasts suggested some tions were essential to assure satisfacmoderation in the rate of expansion from tory economic performance over time. the pace currently indicated for the first The outlook for continuing progress in half of this year, business activity was lowering the deficit was uncertain, but thought likely to be better balanced in any reduction in the deficit would tend to that a number of previously depressed relieve pressures on financial markets, industries, notably in manufacturing, particularly in the context of diminished would benefit from further growth in net inflows of funds from abroad as the balexports. Some members commented ance of trade improved, and would enthat relatively moderate expansion in hance the ability of the domestic econline with that forecast by most of the omy to fund needed private capital members would represent a satisfactory formation. economic performance under foresee- The members differed to some extent able circumstances. In this view appre- in their assessments of the outlook for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 111 inflation, although most expected higher quarter of 1986 to the fourth quarter of import prices to contribute to slightly 1987. The associated range for growth greater price pressures in the period in total domestic nonfinancial debt was through 1988. In one view, there was a set at 8 to 11 percent. The Committee considerable risk that rising import had anticipated that growth in Ml would prices would have a sizable impact on slow in 1987 from its very rapid pace in domestic pricing decisions as well. That 1986, but the members had decided not risk might be augmented by efforts to to establish a numerical target for the raise wages in line with increasing infla- year; instead, the appropriateness of Ml tion, particularly with reduced levels of changes would be evaluated during the unemployment and possible pressures year in the light of the behavior of Ml on capacity in some industries exper- velocity, developments in the economy iencing strong export demand. Other and financial markets, and potential inmembers commented, however, that flationary pressures. most industries were still operating ap- In the course of the Committee's repreciably below capacity, including in view of the ranges for 1987, most of the many cases industries that had been de- members indicated a preference for not pressed earlier by the effects of the dol- changing the existing ranges set in Feblar's appreciation; some members also ruary, but some sentiment also was exnoted that most commodities remained pressed in favor of a slightly lower range in ample supply on world markets. A for M2. The members took account of key factor tending to limit inflationary the sharp deceleration in the growth of pressures was the continuing moderation the broader aggregates thus far in 1987, in overall wage increases, but the especially in M2. However, with the members recognized that a substantial advance in business activity evidencing upturn, if it were to occur, would deal a reasonable momentum and velocity major setback to the effort to restore showing signs of increasing in the conprice stability. The members also ob- text of rising interest rates associated served that potential developments in with a pickup in inflation and a weaker world oil prices were a major uncer- dollar, the members viewed such a detainty in the inflation outlook. velopment as acceptable. At this meeting the Committee re- According to a staff analysis prepared viewed its ranges for growth of mone- for this meeting, the relatively weak tary and debt aggregates in 1987 and growth in the monetary aggregates in the established tentative ranges for 1988 first half of the year appeared to reflect a within the framework of the Full Em- number of developments whose impact ployment and Balanced Growth Act of might be greatly diminished over com- 1978 (the Humphrey-Hawkins Act).1 At ing quarters. To some extent, special its meeting on February 10-11, 1987, factors related to the tax reform legislathe Committee had adopted growth tion may have helped to depress the ranges of 5Vi to 8V2 percent for both M2 growth in M2, while growth in M3 also and M3 for the period from the fourth was restrained by some unusual patterns in funding asset expansion at depository institutions. However, the available evidence suggested that a substantial portion of the slowing in monetary growth 1. The midyear Monetary Policy Report precould be attributed to relatively slow pared pursuant to this legislation was transmitted to the Congress on July 21, 1987. adjustments in deposit interest rates to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

112 FOMC Policy Actions rising market rates. Opportunity costs of gard for ongoing economic and financial holding money balances had increased developments, including the behavior of over the spring after an extended period the dollar in foreign exchange markets. of declines. By the time of the meeting, The members anticipated that growth rates on many components of the broad in the debt of nonfinancial sectors would aggregates had adjusted to the higher remain well within its monitoring range market rates and the impact of wider for the year, reflecting a marked reducopportunity costs on overall M2 and M3 tion from the expansion in other recent growth appeared to be abating. The years. The reduced rate of expansion analysis concluded that growth in M2 was in large measure the consequence of could be expected to pick up over the a lower federal deficit and some slowing balance of the year to a rate closer to the in state and local government borrowexpansion in nominal GNP, assuming ing. However, with growth in private steady reserve conditions and market in- debt remaining relatively strong and that terest rates near current levels, and for in federal debt still on the high side, the year as a whole M2 might expand at expansion in total nonfinancial debt apa rate around the lower end of the Com- peared likely to continue to exceed that mittee 's existing range. Growth in M3 in nominal GNP and average close to its also might strengthen somewhat over the pace of recent months over the balance balance of the year, leaving this aggre- of the year. gate well within its range. Turning to Ml, the members consid- In further discussion a number of ered whether or not a specific numerical members took the view that the existing range should be reestablished for its M2 range should not be "fine tuned" at growth over the balance of this year or this time despite the outlook for actual tentatively for 1988. The sharp slowing growth near the bottom of the range for of Ml growth thus far in 1987 following 1987 as a whole. The members recog- a long period of rapid expansion, while nized that in light of the weakness dur- appropriate in the circumstances of the ing the first half of the year and the first half of the year, provided further uncertainties that were involved, growth evidence that this aggregate had become in this aggregate might in fact be some- highly sensitive to movements in interest what below the lower end of the range rates and other factors. The members for 1987. The latter development, if it concluded that the prospective behavior occurred, would be acceptable provided of Ml remained subject to exceptional it was associated with some strengthen- uncertainties, and no member favored ing in M2 velocity and satisfactory eco- establishing a specific target range at this nomic performance; in particular, a very time. However, the behavior of this aglimited pickup in M2 growth might be gregate, evaluated in the light of other appropriate should the dollar tend to economic and financial developments, weaken or inflation concerns intensify. would be taken into account in imple- A number of members expressed con- menting policy over the second half of cern that a reduction in the M2 range at the year. The Committee also discussed this point might be misread as an indica- MIA—a narrower measure of aggregate tion of intended firming in monetary pol- transactions accounts that includes deicy. On the other hand, several members mand deposits plus currency in circulaobserved that they would not endorse an tion but excludes other checkable deeasier policy posture solely for the pur- posits from Ml. The members noted that pose of assuring M2 growth within the the characteristics of this aggregate DigitizedC foorm FmRAitSteEeR's existing range without re- probably also had changed in recent http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 113 years as households shifted transactions derlying inflationary pressures, provided that deposits from demand to NOW accounts economic activity is expanding at an acceptable pace. The monitoring range for growth and more businesses adopted sophistiin total domestic nonfinancial debt set in cated techniques for managing their cash February for the year was left unchanged at 8 balances. The velocity of this aggregate to 11 percent. had varied less than that of Ml, but With respect to Ml, the Committee recoggiven the uncertainties in its relationship nized that, based on experience, the behavior of that aggregate must be judged in the light to the economy and prices, the members of other evidence relating to economic activsaw no advantage at this time in intro- ity and prices; fluctuations in Ml have beducing Ml A as a formal guide to policy. come much more sensitive in recent years to At the conclusion of the Committee's changes in interest rates, among other factors. Because of this sensitivity, which has review, all of the members indicated that been reflected in a sharp slowing of the dethey favored, or could accept, a proposal cline in M1 velocity over the first half of the not to change the ranges for growth in year, the Committee again decided not to the broader aggregates or the monitoring establish a specific target for growth in Ml over the remainder of 1987 and no tentative range for nonfinancial debt that had been range has been set for 1988. The appropriateestablished in February for the year ness of changes in Ml this year will continue 1987. Growth in both M2 and M3 a- to be evaluated in the light of the behavior of round the lower ends of their ranges its velocity, developments in the economy might be acceptable depending on devel- and financial markets, and the nature of emerging price pressures. The Committee opments relating to their velocities and welcomes substantially slower growth of Ml attendant economic and financial condi- in 1987 than in 1986 in the context of contintions, notably the strength of inflation- uing economic expansion and some evidence ary pressures. No numerical range of greater inflationary pressures. The Committee in reaching operational decisions over would be established for Ml growth in the balance of the year will take account of 1987, or tentatively for 1988, but Ml growth in Ml in the light of circumstances developments, weighed in the context of then prevailing. The issues involved with emerging economic and financial condi- establishing a target for Ml will be carefully reappraised at the beginning of 1988. tions, would be taken into account in reaching operational decisions over the Votes for this action: Messrs. Volcker, balance of 1987, and the desirability of a Corrigan, Angell, Boehne, Boykin, numerical range for 1988 would be reas- Heller, Johnson, Keehn, Kelley, Ms. sessed early next year in the light of Seger, and Mr. Stern. Votes against this circumstances at that time. action: None. Thereupon, the Committee approved the following paragraphs relating to its With regard to the tentative ranges for objectives for the broader aggregates 1988, all but one member of the Comand nonfinancial debt in 1987 and the mittee felt that some reduction in the role of Ml: broader aggregates from their 1987 ranges would be consistent with the Committee's longer-run objective of The Committee agreed at this meeting to fostering progress toward price stability reaffirm the ranges established in February while also encouraging sustained expanfor growth of 5!/2 to 8V2 percent for both M2 and M3, measured from the fourth quarter of sion in business activity. A majority in- 1986 to the fourth quarter of 1987. The dicated a preference for reducing the M2 Committee agreed that growth in these ag- range by Vi percentage point. Of these, a gregates around the lower ends of their number commented that, should ecoranges may be appropriate in light of develnomic and financial conditions warrant, opments with respect to velocity and signs of Digitizedt hfoer FpoRtAenStEiaRl for some strengthening in un- they would be prepared to support a http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

114 FOMC Policy Actions further reduction of Vi percentage point and M3. The Committee provisionally when the tentative ranges were reviewed set the associated range for growth in total in February 1988. Some sentiment was domestic nonfinancial debt at IVi to IOV2 percent. expressed for lowering the M2 range by a full percentage point at this time on the Votes for this action: Messrs. Volcker, ground that such a reduction appeared Corrigan, Angell, Boehne, Boykin, Heller, Johnson, Keehn, Kelley, and fully consistent with satisfactory eco- Stern. Vote against this action: Ms. nomic growth and with the reduced rate Seger. of inflation that was anticipated and desired over the longer run; in this view a Ms. Seger dissented because she did smaller reduction might not appear suffi- not want to reduce at this time the tentaciently decisive with respect to restrain- tive M2 and M3 ranges for 1988 below ing inflation. However, one member ex- those established for this year. In her pressed concern that a reduction of more view the performance of key sectors of than Vi percentage point would establish the domestic economy implied a relaa lower limit that might not be consistent tively weak business expansion, and she with adequate economic growth, at least did not anticipate enough offsetting supinsofar as could be foreseen at this time. port from gains in foreign trade. In the In light of the uncertainties that were circumstances, inflationary pressures involved some members also indicated seemed likely to remain subdued, and that they could support a proposal to she concluded that a policy consistent widen the tentative range for M2 in the with monetary growth within this year's expectation that it might be narrowed ranges would probably be needed to suslater. Others objected to a wider range tain the expansion in 1988. She recogon the ground that, because of the Com- nized that the economic outlook was mittee's focus on the broader aggre- surrounded by a great deal of uncergates, such a range might be viewed as tainty, and she would be prepared to weakening the importance of the Com- lower the M2 and M3 ranges early next mittee's monetary targets. year if intervening developments At the conclusion of the Committee's seemed to warrant such a reduction. discussion, all but one of the members In the Committee's discussion of polindicated that they could accept a reduc- icy implementation for the weeks immetion of Vi percentage point in the tenta- diately ahead, all of the members inditive ranges for M2 and M3 and in the cated that they were in favor of monitoring range for nonfinancial debt continuing to direct open market operain 1988. It was understood that all these tions toward maintaining the existing ranges were provisional and that they, degree of reserve availability. Recent along with the possibility of establishing financial developments, including india numerical range for Ml, would be cations of some easing in inflationary reviewed in early 1988 in the light of sentiment and the emergence of a more intervening developments. stable dollar in foreign exchange mar- The following paragraph relating kets, along with evidence of continued to the ranges for 1988 was approved for moderate expansion in business activity inclusion in the domestic policy did not point to the need for any change directive: in reserve conditions at this time. The outlook for monetary expansion also For 1988, the Committee agreed on tenta- seemed consistent with such a stance tive ranges of monetary growth, measured since unchanged reserve conditions and from the fourth quarter of 1987 to the fourth Digitizedq fuoar rFteRrA oSf E1R9 88, of 5 to 8 percent for both M2 relatively stable market rates were http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 115 thought likely to be associated with for no change in the degree of pressure some strengthening in money growth on reserve positions. Some firming or over the third quarter. Even so, the cu- some easing of reserve conditions would mulative expansion of M2 through Sep- be acceptable depending especially on tember might still be somewhat below developments relating to inflation and the Committee's target range for the the performance of the dollar in foreign year; growth in M3 might move this exchange markets, while also taking acaggregate closer to the middle of the count of the behavior of the monetary Committee's 1987 range by September. aggregates and the strength of the busi- The outlook for growth in Ml remained ness expansion. This approach to policy uncertain, but a relatively moderate rate implementation was expected to be conof expansion in this aggregate over the sistent with growth of M2 and M3 at third quarter appeared consistent with annual rates of around 5 percent and IVi stable reserve conditions and the Com- percent respectively, over the threemittee's expectations for the broader month period from June to September. aggregates. Over the same period, growth in Ml was Most members felt that there should expected to resume after declining on be no presumption about the likely di- balance in May and June but to remain rection of any intermeeting adjustment well below its pace in 1986. Because the in policy implementation. The market behavior of Ml was still subject to unconcerns about inflation and downward usual uncertainty and in keeping with its pressures on the dollar that had argued decision regarding the longer-run target, for a relatively prompt firming of reserve the Committee decided to continue its conditions at the time of the May meet- practice of not specifying a numerical ing had eased somewhat, and growth in expectation for its short-run growth. The the monetary aggregates had been quite members agreed that the intermeeting restrained in recent months. One range for the federal funds rate, which member felt that policy implementation provides a mechanism for initiating should be especially alert to develop- consultation of the Committee when its ments that might call for some easing, boundaries are persistently exceeded, given the risks in this view that indica- should be left unchanged at 4 to 8 tors of business activity might prove to percent. be weaker than expected and a related At the conclusion of the meeting the belief that the risks of greater inflation following domestic policy directive was were limited. The members generally issued to the Federal Reserve Bank of indicated that attention should continue New York: to be given to developments bearing on The information reviewed at this meeting the outlook for inflation and the persuggests on balance that economic activity formance of the dollar in foreign ex- expanded at a moderate pace in the second change markets, but in keeping with the quarter. In May and June, total nonfarm Committee's usual approach to policy payroll employment rose modestly further, with most of the gains continuing to be in the implementation, any decision to alter reservice-producing sectors. The civilian unserve objectives during the intermeeting employment rate fell to 6.1 percent in June period would take account of the behav- and was down appreciably from its average ior of the monetary aggregates and the level in the first quarter. Industrial producoverall performance of the economy. tion increased substantially in May after rising moderately on balance in earlier months At the conclusion of the Committee's of the year. Consumer spending appears to discussion, all of the members agreed on have increased in the second quarter, but Digitized tfhoer FdReAsiSraEbRi lity of a directive that called housing starts were down somewhat further http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

116 FOMC Policy Actions in May to a level considerably below their With respect to Ml, the Committee recogfirst-quarter average. Recent indicators of nized that, based on experience, the behavior business capital spending point to some re- of that aggregate must be judged in the light covery, particularly in equipment outlays, of other evidence relating to economic activfrom a depressed level in the first quarter. In ity and prices; fluctuations in Ml have be- April the merchandise trade deficit was come much more sensitive in recent years to smaller than in March and below the monthly changes in interest rates, among other facaverage for the first quarter. The rise in con- tors. Because of this sensitivity, which has sumer and producer prices moderated in May been reflected in a sharp slowing of the debut for the year to date prices have risen more cline in Ml velocity over the first half of the rapidly than in 1986, primarily reflecting siz- year, the Committee again decided not to able increases in prices of energy and non-oil establish a specific target for growth in Ml imports. Wage increases have remained rela- over the remainder of 1987 and no tentative tively moderate in recent months. range has been set for 1988. The appropriate- M2 increased slightly in May and June ness of changes in Ml this year will continue while growth of M3 remained moderate. For to be evaluated in the light of the behavior of 1987 through June, expansion of M2 has its velocity, developments in the economy been below the lower end of the range estab- and financial markets, and the nature of lished by the Committee for the year, and emerging price pressures. The Committee growth of M3 around the lower end of its welcomes substantially slower growth of Ml range. Following a surge in April, Ml con- in 1987 than in 1986 in the context of contintracted on balance in May and June. Expan- uing economic expansion and some evidence sion in total domestic nonfinancial debt has of greater inflationary pressures. The Commoderated this year. mittee in reaching operational decisions over Most interest rates have declined some- the balance of the year will take account of what on balance since the May 19 meeting of growth in Ml in the light of circumstances the Committee. In foreign exchange mar- then prevailing. The issues involved with kets, the trade-weighted value of the dollar establishing a target for Ml will be carefully against the other G-10 currencies has risen on reappraised at the beginning of 1988. balance since the May meeting. In the implementation of policy for the The Federal Open Market Committee immediate future, the Committee seeks to seeks monetary and financial conditions that maintain the existing degree of pressure on will foster reasonable price stability over reserve positions. Somewhat greater reserve time, promote growth in output on a sustain- restraint or somewhat lesser reserve restraint able basis, and contribute to an improved would be acceptable depending on indicapattern of international transactions. In fur- tions of inflationary pressures and on develtherance of these objectives the Committee opments in the aggregates and the strength of agreed at this meeting to reaffirm the ranges the business expansion. This approach is exestablished in February for growth of 5Vi to pected to be consistent with growth in M2 %Vi percent for both M2 and M3, measured and M3 over the period from June through from the fourth quarter of 1986 to the fourth September at annual rates of around 5 and quarter of 1987. The Committee agreed that IV2 percent, respectively. Growth in Ml, growth in these aggregates around the lower while picking up from recent levels, is exends of their ranges may be appropriate in pected to remain well below its pace during light of developments with respect to veloc- 1986. The Chairman may call for Committee ity and signs of the potential for some consultation if it appears to the Manager for strengthening in underlying inflationary Domestic Operations that reserve conditions pressures, provided that economic activity is during the period before the next meeting are expanding at an acceptable pace. The moni- likely to be associated with a federal funds toring range for growth in total domestic rate persistently outside a range of 4 to 8 nonfinancial debt set in February for the year percent. was left unchanged at 8 to 11 percent. For 1988, the Committee agreed on tentative ranges of monetary growth, measured from the fourth quarter of 1987 to the fourth Votes for the short-run operational paraquarter of 1988, of 5 to 8 percent for both M2 graph: Messrs. Volcker, Corrigan, Anand M3. The Committee provisionally set the gell, Boehne, Boykin, Heller, Johnson, associated range for growth in total domestic Keehn, Kelley, Ms. Seger, and Mr. nonfinancial debt at IVi to IOV2 percent. Stern. Votes against this action: None. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 117 Meeting Held on August 18,1987 tion and mining, manufacturing, and commercial equipment. Retail sales posted large increases in 1. Domestic Policy Directive June and July, after a period of relatively sluggish growth earlier in the year. Au- The information reviewed at this meet- tomotive dealers and gasoline stations ing suggested that economic activity has recorded sizable sales gains in July, alcontinued to expand at a moderate pace though spending also increased at most in the current quarter. Labor demand has other types of stores. Upward revisions been strong and the unemployment rate to data for earlier months suggested that has declined further. The industrial sec- nominal spending had been well maintor apparently has benefited from in- tained recently at stores specializing in creased international competitiveness. general merchandise, apparel, and cer- In addition, spending by domestic sec- tain durable goods. tors has continued to advance with Housing activity has leveled off in spending on business equipment re- recent months after declining earlier. maining strong and retail sales picking Total starts were at an annual rate of up in recent months. Price increases, 1.61 million units in July, essentially although still appreciable, have been unchanged from the pace in May and somewhat smaller than in the early part June. During the month an increase in of the year, and wage inflation has held single-family starts offset a decline in at about the same slow pace as in 1986. multifamily units. Despite the rise in July, Household employment surged in single-family homebuilding remained July, and the civilian unemployment rate significantly below the robust pace reedged down 0.1 percentage point to 6.0 corded during the early months of the percent, bringing the cumulative decline year when mortgage rates were at a nineso far this year to 0.7 percentage point. year low. The decline in multifamily Payroll employment registered a sizable starts reflected the continuing influence of increase in July, after two months of high vacancy rates and tax law changes. slower growth. Hiring remained strong Capital spending appeared to be in services, but manufacturing employ- strengthening, especially for equipment. ment recorded its largest monthly gain in Real outlays for producers' durable three years, and construction employ- goods rebounded in the second quarter, ment was essentially unchanged in July after a steep tax-related decline in the following earlier declines. first quarter. In addition, recent data on Gains in employment were associated new orders suggested further gains in with a strong increase in industrial pro- spending on equipment in the period duction in July. The industrial produc- ahead. Outlays for nonresidential contion index rose 0.8 percent and was re- struction were little changed in the secvised upward for the previous two ond quarter after sharp declines over months. Advances in July were wide- most of the preceding two years; office spread among products and materials. building continued to decline in the sec- Output of consumer goods rose noticea- ond quarter, but spending was firm in bly with large increases in production of most other sectors, especially in petrolight trucks and consumer nondurables. leum drilling, which rose for a third Output of business equipment also regis- consecutive quarter. tered a strong increase as a result of Nonfarm inventory investment apparcontinued sharp advances for construc- ently slowed in the second quarter as Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 FOMC Policy Actions auto dealers' inventories leveled off after prices have persisted, partly reflecting a rapid first-quarter accumulation. heightened tensions in the Persian Gulf, Stockbuilding at nonauto trade estab- which pushed crude oil prices up further lishments picked up fairly sharply in in July. Prices of imports other than oil April and May, although serious inven- rose sharply in the second quarter for a tory imbalances were not evident. In fairly wide range of intermediate matemanufacturing, inventories increased rials and products. In addition, domestic slightly in the second quarter, but the producers have raised prices for mateinventory-sales ratio at the end of June rials. Wage inflation remained comparafell to the lowest level of the current tively moderate in the first half of 1987. expansion. At its meeting on July 7, the Commit- The U.S. merchandise trade deficit in tee adopted a directive that called for current dollars was higher in June than maintaining the existing degree of presin any previous month of 1987, but it sure on reserve positions. The members appeared to have changed little on aver- decided that somewhat greater or lesser age between the first and second quarters reserve restraint would be acceptable in nominal terms on a balance of pay- depending on indications of inflationary ments basis. In real terms, the deficit pressures and on developments in forrecorded a further improvement in the eign exchange markets, as well as on the second quarter despite an increase in the behavior of the monetary aggregates and quantity of imports of petroleum and the strength of the business expansion. petroleum products. Available data indi- M2 and M3 were expected to grow at cated some improvement in economic annual rates of 5 and IVi percent respecactivity in foreign industrial countries in tively, from June through September, the second quarter, compared with the while growth in Ml was expected to generally weak first-quarter results. In- remain below its pace in 1986 but to dicators of economic activity in the pick up from recent levels. The inter- United Kingdom suggested broad-based meeting range for federal funds was left strength. German construction activity unchanged at 4 to 8 percent. rebounded from its first-quarter drop, Growth in M2 picked up a little in although other indicators of German July but remained sluggish; for the year economic activity showed less strength. through July cumulative M2 growth fell In Japan, signs were mixed, but growth further below the 5Vi percent lower in the consumer and housing sectors bound of the range established by the seemed more robust in the latter part of Committee for 1987. The slightly faster the quarter. growth of M2 reflected a turnaround in Inflation rates have slowed in recent Ml, which edged up in July; demand months but have continued to run above deposits contracted, albeit less than in the pace in 1986. The recent slowdown June, while other checkable deposits has been concentrated among items rose moderately. M3 expanded at only a other than food and energy; after in- 2 percent rate in July as banks, expercreasing rapidly in the first four months iencing low loan demand, ran off large of the year, the CPI excluding food and CDs; in July this aggregate was someenergy rose 0.3 percent in May and 0.2 what below the growth cone associated percent in June. Consumer food prices with the Committee's 5Vi to 8V2 percent rose sharply in May and June; however, range for this year. Total reserves confarm commodity prices have fallen re- tinued to decline in July, but at a recently. Upward pressures on energy duced rate; the decline largely reflected Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 119 weakness in transactions deposits and about the inflation implications of Middecreases in excess reserves. Adjust- east tensions. ment plus seasonal borrowing at the dis- The staff projections suggested that count window averaged $466 million for real GNP would grow at a moderate rate the three reserve maintenance periods through the end of 1988. Improvement that ended since the meeting of the in the external sector was expected to Committee on July 7. provide substantial impetus for real Federal funds traded generally at 6*/2 growth, as changes in the foreign exto 63/4 percent during the intermeeting change value of the dollar helped to period. Most other private short-term boost U.S. exports and damp import rates were essentially unchanged, but growth. In contrast, growth in domestic rates on Treasury bills backed up consid- spending was anticipated to be relatively erably, particularly after legislative ac- subdued. Rising import prices assotion to raise the debt ceiling permitted a ciated with the fall in the value of the resumption of auctions. At the same dollar were likely to limit increases in time, pay downs of bills in weekly auc- real income and consumer spending; tions slowed from the pace earlier in the budgetary pressures would constrain year. In the longer-term markets, yields government purchases; and the rise in on Treasury and corporate bonds rose 25 mortgage interest rates and high vacancy to 35 basis points since the July meeting. rates were expected to curtail con- The pressures on prices of petroleum struction activity. Business equipment coupled with relatively strong economic spending, however, should rise at a data appeared to increase concerns about moderate pace in coming quarters. After inflation and credit demands in the fu- slowing in the second half of the year, ture. Even so, stock prices increased ap- inflation was expected to move back up preciably over the intermeeting period. in 1988 reflecting pressures from non-oil The dollar was about unchanged on import prices. Moreover, with the civilbalance since the July meeting of the ian unemployment rate projected to re- Committee in terms of a weighted aver- main around 6 percent, slack in the labor age of other G-10 currencies. It rose market would not have much of a dampsubstantially through much of the pe- ing influence on wages. As a result, riod, primarily in response to the ten- compensation increases were expected sions in the Middle East and the relative to rise noticeably next year. strength of the U.S. economy, but it In the Committee's discussion of the subsequently fell back after the publica- economic situation and outlook, tion of the June trade figures in mid- members commented that recent indica- August. The dollar was stronger against tors of business activity had a relatively the mark than against the yen, perhaps strong tone and tended to reinforce earreflecting a relatively sluggish outlook lier expectations that a moderate rate of for the German economy. Money mar- economic expansion would be susket conditions tightened somewhat in tained. Indeed, in the view of several Germany and more in the United King- members, the chances of any deviation dom and remained unchanged in Japan. from such expectations were on the side Long- term rates rose significantly in all of faster economic growth with attenthese countries, with the largest rise oc- dant risks of intensifying inflationary curring in Japan. The increase in Japa- pressures. Others, stressing the uncernese rates was attributed to signs of tainties that continued to cloud the outstronger economic activity and concerns look for economic activity, viewed the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 FOMC Policy Actions likelihood of a deviation from a moder- tainty in the outlook for economic exate growth scenario as more evenly bal- pansion; in particular, a number of anced and the risks of inflation as less members again questioned whether such worrisome. improvement would be substantial During the Committee's discussion enough to provide more than very modseveral members reported that local est support to the expansion. In this view business conditions appeared to have relatively sluggish growth in the econostrengthened, including evidence that mies of major trading partners and the some previously depressed manufactur- persistence of numerous trade barriers ing industries and also oil drilling and pointed to relatively limited gains in net agriculture had tended to stabilize or exports, at least over the quarters immewere showing increased signs of recov- diately ahead. Other members were ery. Business optimism also was re- somewhat more optimistic about the ported to have improved recently in outlook for trade despite recently disapmany areas. With regard to the outlook pointing trade data. They felt that the for investment, it was noted that a depreciation of the dollar and ongoing number of recent statistical indicators increases in the prices of many imports pointed on balance to stronger business had strengthened the competitive posicapital spending. Other favorable devel- tion of U.S. firms in both domestic and opments cited in this connection in- foreign markets. Such competitive gains cluded the surge in stock prices, indica- were already reflected in the stronger tions of potentially sizable profit gains in performance of many domestic manusome sectors of the economy, and the facturing industries and reports of inprospect that with the depreciation of the creasing export opportunities were dollar a larger share of the demand for multiplying. business equipment was likely to be met The members expressed some diverby domestic producers. Some members gence of views with regard to the outcommented that consumer spending look for inflation, but they generally probably would be reasonably well agreed that domestic pressures on prices maintained, if not robust, in light of the did not appear to be intensifying curimpact of income tax changes on dispos- rently and that wage increases had reable incomes, the strength of the stock mained moderate despite the faster rise market, and other factors. On the nega- in prices experienced earlier in the year. tive side, it was suggested that the Nonetheless, several members stressed growth in consumer expenditures might the risks of greater inflation over the be relatively restrained, in part because next several quarters, particularly if the sales of automobiles were likely in this expansion in economic activity proved view to remain weak on balance despite to be on the high side of their current the temporary fillip from sales incentive expectations. These members were conprograms. Some members also referred cerned that the economy might be at or to the emergence of unusually conserva- near the point where relatively rapid tive attitudes among business borrowers growth would result in more inflation, and farmers, at least in some parts of the given the substantial drop in unemploycountry. ment to a relatively low level this year; The members continued to view an long-term debt markets already reflected improvement in the trade balance as a heightened inflationary expectations. key factor but also as a major uncer- Another substantial increase in energy Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 121 prices clearly would exacerbate the in- for expansion in total domestic nonfiflationary pressures, but the outlook for nancial debt also was left unchanged at 8 energy was highly uncertain. to 11 percent for 1987. For 1988 the Other members agreed that inflation Committee had agreed on tentative obwas a potentially serious problem, but jectives for monetary growth that inthey saw a lesser risk of intensifying cluded reductions of Vi percentage point inflationary pressures. These members to ranges of 5 to 8 percent for both M2 tended to emphasize the possibility that and M3. The Committee had also reeconomic growth would remain rela- duced the associated range for growth in tively moderate or that gains would tend total domestic nonfinancial debt by Vi to be concentrated in previously de- percentage point to IV2 to lOVi percent pressed industries that had greater mar- for 1988. With respect to Ml, the Comgins of available labor and production mittee had decided at the July meeting capacity. Moreover, business managers not to set a specific target for growth were likely to persist in their efforts to over the remainder of 1987 or to estabcut costs and improve operating efficien- lish a tentative range for 1988. It was cies, as evidenced by recent labor nego- understood that all the ranges for 1988 tiations. Reference also was made to were provisional and that they would be broadly deflationary factors including reviewed early next year in the light of the moderate growth in the monetary intervening developments. The issues aggregates this year and an ample avail- involved with establishing a target for ability of labor and productive capacity, Ml would be carefully reappraised at the especially for basic commodities, in beginning of 1988. world markets. All of the members In the Committee's discussion of polagreed that a critical element in the in- icy implementation for the weeks immeflation outlook was the potential for ris- diately ahead, a majority of the members ing prices to be reflected at some point in favored unchanged conditions of reserve rising wages. Such a development availability, at least initially during the would represent a dangerous setback in intermeeting period, but some indicated the fight against inflation and would a preference for a modest firming. The greatly increase the costs of bringing members recognized that monetary polinflation under control. icy exerted its effects with a lag and that At its meeting in July the Committee inflationary forces should not be allowed had reviewed the basic policy objectives to gather momentum. However, several established in February for growth of the stressed the uncertainties that surmonetary and debt aggregates in 1987 rounded the outlook for prices and and had set tentative objectives for wages, and in the view of a majority, growth in 1988. For the period from the more evidence of sustained strength in fourth quarter of 1986 to the fourth the economy or of intensifying inflation quarter of 1987, the Committee had was needed before action toward firmer reaffirmed the ranges established in Feb- reserve conditions should be taken, parruary for growth of 51/2 to 8V2 percent for ticularly in the context of relatively slow both M2 and M3. The Committee monetary expansion. Some of these agreed that growth in these aggregates members also commented that the Comaround the lower ends of their ranges mittee would have an opportunity to remight be appropriate, depending on the view its decision within a few weeks, circumstances. The monitoring range given the relatively short interval until Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 FOMC Policy Actions the next scheduled meeting. Other indicated that they would find acceptable members gave somewhat greater em- somewhat faster growth in these aggrephasis to the potential for more inflation. gates than was currently projected, pro- In this view some slight firming at this vided that price pressures did not appear point would have a favorable effect on to be worsening and the dollar was not inflationary expectations and would subject to substantial weakness. incur very little recessionary risk. More- The members differed to some extent over, such a move could be readily re- in their views regarding the emphasis versed if changing conditions seemed to that should be given to various factors warrant such a step later. that might trigger intermeeting adjust- In their review of the outlook for ments, if any, in the degree of pressure monetary growth, the members took ac- on reserve positions. Most felt that polcount of a staff analysis that suggested icy implementation should be especially that monetary expansion was likely to alert to developments that might call for accelerate from its sluggish pace in re- somewhat firmer reserve conditions, cent months, assuming that interest rates particularly if the Committee decided remained around their current levels. against any initial firming in those con- The analysis contemplated that growth ditions. Other members believed that in the broader aggregates would return there should be no presumptions about to a pace closer to that in nominal GNP the likely direction of any intermeeting as the interactive effects of earlier in- adjustments, but they could accept a dicreases in interest rates and the lagged rective that looked to firming action as adjustments in offering rates on various the more likely direction of any adjusttypes of interest-bearing deposits ment. The members generally agreed abated. Recent monetary data tended to that developments relating to the outlook support that expectation. It was noted, for inflation should continue to receive however, that such faster monetary important weight in judging the need for growth was still likely to leave cumula- any policy changes during the intertive expansion in the broad aggregates meeting period. There was also considthrough September below the Commit- erable sentiment in favor of giving tee's ranges for the year, especially in increased attention to the overall perthe case of M2. Some members com- formance of the economy in this period, mented that relatively slow monetary given the recent signs of strength. In growth appeared appropriate in light of addition, several members commented the higher inflation and the increase in that a possible weakening of the dollar in inflationary expectations experienced the foreign exchange markets might call this year. The latter had contributed to for a policy response in the period higher market interest rates which had ahead, but some other members caucurbed demand for assets in the mone- tioned that dollar developments would tary aggregates and had raised velocity. need to be interpreted with particular The possibility of some further rise in care. It was noted in this regard that the velocity implied that limited monetary dollar was still appreciably above the expansion might remain consistent with lows it had reached in the spring, and in satisfactory economic performance. this view a judgment would need to be However, given the shortfall in the made as to whether any weakness in the growth of the broader aggregates from dollar related more to uncertainties their 1987 ranges, a number of members about oil market developments than to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 123 fundamental concerns about underlying At the conclusion of the meeting the inflationary pressures in the economy. following domestic policy directive was Nevertheless, Committee members gen- issued to the Federal Reserve Bank of erally remained sensitive to develop- New York: ments relating to the dollar. At the conclusion of the Committee's The information reviewed at this meeting discussion, all of the members indicated suggests on balance that economic activity is that they favored or could accept a di- expanding at a moderate pace in the current quarter. In July, total nonfarm payroll emrective that called for no change, at least ployment rose considerably further; the ininitially, in the degree of pressure on crease included continuing large gains in the reserve positions. With regard to possi- service-producing sector and a sizable adble adjustments during the intermeeting vance in manufacturing. The civilian unemployment rate fell slightly further to 6.0 perperiod, the members indicated that somecent. Industrial production increased what greater reserve restraint would be strongly in July after rising moderately on acceptable, while slightly lesser reserve balance in the first half of the year. Conrestraint might be acceptable, depending sumer spending grew at a reduced pace earon developments relating to inflation, lier in the year but retail sales posted large increases in June and July. Housing starts the strength of the business expansion, were unchanged in July and remained at their the performance of the dollar in foreign reduced second-quarter level. Recent indicaexchange markets, while also taking ac- tors of business capital spending point to count of the behavior of the monetary some strength, particularly in equipment outlays. The rise in consumer and producer aggregates. Unchanged conditions of reprices has been moderate in recent months, serve availability were expected to be but for the year to date prices generally have consistent with growth in M2 and M3 at risen more rapidly than in 1986, primarily annual rates of around 5 percent for the reflecting sizable increases in prices of enthree-month period from June to Sep- ergy and non-oil imports. Wage increases have remained relatively moderate in recent tember; given its performance in July, months. expansion in M3 was expected to be In foreign exchange markets, the tradesomewhat less than had been anticipated weighted value of the dollar in terms of the at the time of the July meeting. Over the other G-10 currencies was unchanged on balsame period, growth in Ml was ex- ance since the meeting of the Committee on July 7. In the second quarter the merchandise pected to pick up from its average pace trade deficit in current dollars was about the over the past several months but to resame as in the first quarter. main well below its rate of expansion in The monetary aggregates grew slowly in 1986. Because the behavior of Ml was July. For 1987 through July, expansion of still subject to unusual uncertainty and in both M2 and M3 has been below the lower ends of the ranges established by the Comkeeping with the decision not to set a mittee for the year, while growth in Ml has longer-run target for Ml, the Committee been well below its pace in 1986. Expansion decided to continue the practice of not in total domestic nonfinancial debt has specifying a numerical expectation for moderated this year. Most long-term interest rates have risen somewhat since the July its short-run growth. The members meeting; in short-term markets, Treasury bill agreed that the intermeeting range for rates also have increased somewhat while the federal funds rate, which provides a private rates are little changed. Stock prices mechanism for initiating consultation of have risen substantially since the latest the Committee when its boundaries are meeting. The Federal Open Market Committee persistently exceeded, should be left unseeks monetary and financial conditions that changed at 4 to 8 percent. will foster reasonable price stability over Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 FOMC Policy Actions time, promote growth in output on a sustain- In the implementation of policy for the able basis, and contribute to an improved immediate future, the Committee seeks to pattern of international transactions. In fur- maintain the existing degree of pressure on therance of these objectives the Committee reserve positions. Somewhat greater reserve agreed at its meeting in July to reaffirm the restraint would, or slightly lesser reserve reranges established in February for growth of straint might, be acceptable depending on 5Vi to SVi percent for both M2 and M3, indications of inflationary pressures, the measured from the fourth quarter of 1986 to strength of the business expansion, developthe fourth quarter of 1987. The Committee ments in foreign exchange markets, as well agreed that growth in these aggregates as the behavior of the aggregates. This aparound the lower ends of their ranges may be proach is expected to be consistent with appropriate in light of developments with growth in M2 and M3 over the period from respect to velocity and signs of the potential June through September at annual rates of for some strengthening in underlying infla- around 5 percent. Growth in Ml, while picktionary pressures, provided that economic ing up from recent levels, is expected to activity is expanding at an acceptable pace. remain well below its pace during 1986. The The monitoring range for growth in total Chairman may call for Committee consultadomestic nonfinancial debt set in February tion if it appears to the Manager for Domestic for the year was left unchanged at 8 to 11 Operations that reserve conditions during the percent. period before the next meeting are likely to For 1988, the Committee agreed on tenta- be associated with a federal funds rate persistive ranges of monetary growth, measured tently outside a range of 4 to 8 percent. from the fourth quarter of 1987 to the fourth quarter of 1988, of 5 to 8 percent for both M2 Votes for this action: Messrs. Greenspan, and M3. The Committee provisionally set Corrigan, Angell, Boehne, Boykin, the associated range for growth in total Heller, Johnson, Keehn, Kelley, Ms. domestic nonfinancial debt at IV2 to IOV2 Seger, and Mr. Stern. Votes against this percent. action: None. With respect to Ml, the Committee recognized that, based on experience, the behavior 2. Authorization for Domestic of that aggregate must be judged in the light Open Market Operations of other evidence relating to economic activity and prices; fluctuations in Ml have be- Effective August 19, 1987, the Commitcome much more sensitive in recent years to tee approved a temporary increase of $6 changes in interest rates, among other facbillion, to $12 billion, in the limit betors. Because of this sensitivity, which has tween Committee meetings on changes been reflected in a sharp slowing of the decline in Ml velocity over the first half of the in System Account holdings of U.S. year, the Committee again decided at the government and federal agency securi- July meeting not to establish a specific target ties specified in paragraph l(a) of the for growth in Ml over the remainder of 1987 Authorization for Domestic Operations. and no tentative range was set for 1988. The appropriateness of changes in Ml this year The increase was effective for the interwill continue to be evaluated in the light of meeting period ending with the close of the behavior of its velocity, developments in business on September 22, 1987. the economy and financial markets, and the nature of emerging price pressures. The Votes for this action: Messrs. Greenspan, Committee welcomes substantially slower Corrigan, Angell, Boehne, Boykin, growth of Ml in 1987 than in 1986 in the Heller, Johnson, Keehn, Kelley, Ms. context of continuing economic expansion Seger, and Mr. Stern. Votes against this and some evidence of greater inflationary action: None. pressures. The Committee in reaching operational decisions over the balance of the year This action was taken on the recomwill take account of growth in Ml in the light mendation of the Manager for Domestic of circumstances then prevailing. The issues Operations. The Manager had advised involved with establishing a target for Ml will be carefully reappraised at the beginning that the normal leeway of $6 billion for of 1988. changes in the System's account would Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 125 not be sufficient over the intermeeting cent in August, about three-quarters of a period because a large buildup in the percentage point lower than at the be- Treasury cash balance at Federal Re- ginning of the year. serve Banks was expected after the Sep- Retail sales have increased considertember tax date. ably in recent months. Auto sales have been boosted by end-of-model-year dis- Meeting Held on counts and financing incentives. How- September 22,1987 ever, a considerable decrease in domestic car sales in the first ten days of Domestic Policy Directive September suggested that the effective- The information reviewed at this meet- ness of the incentive programs might be ing suggested that economic activity was waning. Retail spending on consumer expanding in the current quarter at a goods excluding autos and gasoline conpace similar to that in the first half of the tinued to advance at a moderate pace in year. Output and employment appeared July and August to a level slightly above to have registered solid gains in the third the second-quarter average. Housing quarter, with particular strength in the starts edged down to an annual rate of industrial sector of the economy. On the 1.58 million units, as a decline in singlespending side, outlays for consumption family starts more than offset some inand business equipment have risen no- crease in multifamily construction. The ticeably this quarter, but construction run-up in mortgage interest rates during has been weak. Price advances have April and May has damped housing deeased in recent months after a sharp rise mand, as reflected in the reduced pace of earlier in the year, and wage increases housing starts and sales in recent have remained subdued. months. Multifamily starts have remained close to the average rate in the Industrial production rose further in second quarter but substantially below August after large gains in other recent that recorded during the first three months; the August level was more than months of the year. Business fixed in- 7 percent (annual rate) above the secondvestment appeared to be strengthening, quarter average. Business equipment and particularly for equipment. In July, materials have been the strongest composhipments of nondefense capital goods nents of industrial output in recent were 2V2 percent above the secondmonths, but advances have been widequarter average, and orders for these spread among major market groupings. goods rose substantially in recent Nonfarm payroll employment inmonths. Spending for nonresidential creased again in August; although the structures has continued to trend lower, gain was half the size of the July inalbeit at a slower rate than over the past crease, the average change in the two couple of years, partly because of remonths was close to the pace of the first newed strength in petroleum drilling. Inhalf of the year. The average workweek ventories in midsummer appeared to be also rose in August and, coupled with moderate in most segments of the nonthe employment gains, pushed up aggrefarm business sector. At auto dealers, gate hours of production and nonsuperthe quickened selling pace in August, visory workers significantly. Hiring recombined with scaled-back production, mained strong in services, but emreduced inventories to more comfortable ployment leveled off in manufacturing levels. For retailers other than auto after a large gain in July. The unemdealers, stocks increased at a relatively ployment rate was unchanged at 6.0 per- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 FOMC Policy Actions slow rate, and the inventory-sales ratio the August PPI was unchanged. The deedged down in August. As a result of celeration in these price measures from the apparently conservative inventory the pace in the first half of the year stance in manufacturing, factory stocks largely reflected a downturn in food have remained generally lean, with the prices and smaller energy price in- July inventory-shipments ratio near its creases. Producer prices for finished lowest point in the current cycle. foods fell sharply in August, and al- Preliminary data suggested that the though the effect of rising oil prices connominal U.S. merchandise trade deficit tinued to be evident, declines in both was essentially unchanged in July from spot and contract prices were likely to its June level despite substantial in- damp retail energy prices by early aucreases in the quantity and prices of oil tumn. Excluding food and energy, the imports. However, the July deficit was CPI rose in July at around the reduced larger than the second-quarter average. pace of the second quarter and the com- In real terms, the second-quarter deficit parable PPI increased moderately over on goods in the GNP accounts narrowed the first two months of the current only slightly further because a rebound quarter. in the quantity of oil and non-oil imports At its meeting on August 18, the largely offset a substantial rise in the Committee adopted a directive that quantity of exports. The surplus on ser- called for maintaining the existing devices in the GNP accounts narrowed in gree of pressure on reserve positions. real terms. The average pace of eco- The members decided that somewhat nomic growth in the major foreign in- greater reserve restraint would, or dustrial economies increased in the sec- slightly lesser reserve restraint might, be ond quarter after a very weak first acceptable depending on indications of quarter. A rebound in German GNP in inflationary pressures, the strength of the second quarter reversed a first- the business expansion, developments in quarter decline but left GNP no higher foreign exchange markets, as well as the than its third-quarter 1986 level. Real behavior of the monetary aggregates. GNP also resumed growing in the sec- M2 and M3 were expected to grow at ond quarter in France and Italy, while annual rates of around 5 percent from real GNP in Canada and the United June through September, while growth Kingdom showed continued strength. In in Ml was expected to pick up from the Japan, real GNP did not grow in the much reduced pace of recent months. second quarter on average as a more The intermeeting range for federal funds rapid rise in domestic demand was offset was left unchanged at 4 to 8 percent. by the negative contribution of the ex- Total and nonborrowed reserves reternal sector; however, industrial pro- sumed expansion in August, primarily duction picked up in June and July. because of higher levels of excess re- While cumulative surpluses in the trade serves. In the maintenance period after and current accounts of Japan and Ger- the August meeting, federal funds genmany for the year to date remained at or erally traded in a 6V2 to 63/4 percent near a record rate, data for recent range, though the rate moved a bit months indicate some adjustment, espe- higher around the end of August when cially for Japan. markets began to expect that the System Price increases have eased in recent would tighten policy. In light of the pomonths; the CPI and PPI for finished tential for greater inflation, associated in goods both rose 0.2 percent in July, and part with weakness in the dollar, a deci- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 127 sion was made in early September to increased in August from the sluggish reduce marginally the availability of re- pace of previous months. The acceleraserves through open market operations. tion of M2 in August partly reflected On September 4 the discount rate was faster growth in its Ml component as the raised from 5Vi percent to 6 percent. runoff in demand deposits ended and the After the discount rate increase, federal growth of other checkable deposits acfunds traded mainly in the 7 to 11A per- celerated slightly. The strongest growth cent area. In the two maintenance among nontransactions components of periods completed since the August M2 occurred in RP liabilities at banks, meeting, adjustment plus seasonal bor- which rose sharply in association with a rowings averaged about $530 million. surge in acquisitions of Treasury securi- Other interest rates rose substantially ties for trading accounts, and in money over the intermeeting period. Market in- market mutual funds. Bolstered by the terest rates moved up early in the period expansion in M2 and by faster growth in amid pressures on the dollar, concerns managed liabilities, M3 expanded at a about inflation, and expectations of pol- IVi percent annual rate in August. Over icy-firming actions by the Federal Re- July and August the broader monetary serve. Rates rose further after the in- aggregates increased at annual rates of 4 crease in the discount rate, particularly to 5 percent, and for the year through short-term rates; also, commercial banks August their cumulative growth reraised the prime rate by Vi percentage mained below the low ends of their tarpoint. On balance, market rates were up get ranges for 1987, with M2 substan- Vi to 3/4 percentage point over the inter- tially below its range. meeting period. Most stock price in- The staff economic projections had dexes reached new highs in late August changed only marginally since the Aubut subsequently retreated to levels 2Vi gust FOMC meeting. Somewhat to 6 percent below those at the time of stronger growth was anticipated over the the August meeting. near term, but real GNP still was ex- The weighted-average foreign ex- pected to expand at a moderate rate change value of the dollar in terms of the through the end of 1988. Improvement other G-10 currencies declined about in the external sector was projected to 2Vi percent in the weeks immediately provide substantial impetus for real following the August meeting. The main growth as changes in the foreign exfactor in the dollar's depreciation ap- change value of the dollar boosted U.S. peared to be greater pessimism about the exports and damped import growth. In pace of adjustment of external imbal- contrast, growth in domestic spending ances, following the release of U.S. would probably be relatively subdued. merchandise trade data that were worse Rising import prices associated with the than market participants had expected. fall in the value of the dollar were likely Moreover, prospects for growth abroad to limit increases in real income and relative to that in the United States sug- consumer spending; budgetary pressures gested only a limited contribution from probably would constrain government this source to external adjustment. The purchases; and rising mortgage rates and dollar rose somewhat later in the period high vacancy rates were expected to after the increase in the discount rate, damp construction activity. As in prereducing its net decline over the inter- vious forecasts, inflation was projected meeting period to about IV2 percent. to moderate in the second half of 1987, Growth in the monetary aggregates but to move back up in 1988, reflecting Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 FOMC Policy Actions pressures from rising import prices. ized currently as better balanced than Moreover, with the civilian unemploy- earlier, with favorable implications for ment rate projected to edge lower, the its sustainability. At the same time, pickup in prices was expected to push up some members believed that the risks of labor costs and compensation gains next appreciably more rapid expansion were year. relatively limited in the context of con- In the Committee's discussion of the siderable progress in reducing the fedeconomic situation and outlook, members eral budget deficit, restrained monetary commented that current indicators of expansion, and an increased level of inbusiness activity were generally favor- terest rates. Some members also noted able and pointed on balance to continu- that increasing domestic demands and ing expansion at a moderate pace. A the prospects for improvement in the number of members believed that any foreign trade balance had greatly redeviation from current expectations was duced the odds of a shortfall in the exlikely to be in the direction of faster pansion from current expectations. growth. However, some saw factors in The members continued to view the the outlook that would be likely to re- very large deficits in the federal budget strain any potential for a substantially and in the foreign trade balance as issues stronger expansion, and one view of fundamental concern. Although a stressed the vulnerability of the expan- great deal of progress had been made in sion to a slowdown. With regard to the reducing the federal deficit in the current outlook for inflation, members noted fiscal year, the outlook for needed furthat developments in financial markets ther progress was uncertain. The trade suggested some buildup in inflationary deficit also had improved in real terms, expectations, but they also stressed that though not in nominal terms, over the there was no current evidence of an up- course of recent quarters. The members turn in broad measures of inflation. generally expected at least some prog- Nonetheless, several expressed concern ress to be made on the latter basis as about the risks of some intensification in foreign trade patterns and prices were price and wage pressures. Others saw adjusted over time to the reduced value greater prospects that the rate of inflation of the dollar in foreign exchange marmight hold around current levels or pos- kets. However, the timing and extent of sibly decline. such improvement remained subject to In their discussion of specific devel- considerable uncertainty, and differing opments bearing on the outlook for do- views were expressed regarding the mestic business activity, members ob- most likely prospects for net exports and served that key economic indicators the underlying pressures on the dollar. provided evidence of appreciable mo- The members agreed that the vigor of mentum in the business expansion. Indi- the domestic expansion would depend to vidual members also reported that local a substantial extent on foreign trade debusiness conditions appeared to be velopments. Some members noted that strengthening in many parts of the coun- with shrinking margins of excess capactry, although recovery in some pre- ity in labor markets, overall domestic viously depressed areas or sectors of the demands would need to remain relaeconomy was still quite modest or tenta- tively moderate to provide room for tive, with current activity still well growth in export production; in that rebelow earlier peaks. It was suggested gard continuing progress in reducing the that the expansion could be character- federal budget deficit was essential. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 129 Turning to the outlook for inflation, monetary and debt aggregates in 1987 members commented that the sharp de- and established tentative objectives for cline in unemployment this year together expansion of those aggregates in 1988. with anecdotal evidence of labor short- For the period from the fourth quarter of ages in many areas of the country had 1986 to the fourth quarter of 1987, the not triggered any general increases in Committee reaffirmed the ranges estabwage rates thus far. Additionally, the lished in February involving growth of members did not see in recent indicators 5Vi to 8V2 percent for both M2 and M3. any evidence of an upturn in the general Given developments through midyear, level of prices. However, several ex- the Committee agreed that growth in pressed concern that the economy might these aggregates around the lower ends have reached the point where employ- of their ranges might be appropriate, ment and production levels would tend depending on the circumstances. The to be associated with stronger pressures monitoring range for expansion in total on wages and prices, particularly if the domestic nonfinancial debt also was left business expansion proved to be more unchanged at 8 to 11 percent for 1987. vigorous than was generally anticipated. For 1988 the Committee agreed on ten- Of particular concern was the prospect tative reductions of V2 percentage point that rising prices of internationally to growth ranges of 5 to 8 percent for traded goods could foster a more general both M2 and M3. The Committee also increase in domestic prices and lead to reduced the associated range for growth higher wages. Because such develop- in total domestic nonfinancial debt by Vi ments would reflect broader and more percentage point to IVi to IOV2 percent permanent cost factors, the inflation for 1988. With respect to Ml, the Comproblem would become much more dif- mittee decided at the July meeting not to ficult for policymakers. A number of set a specific target for the remainder of other members saw a lesser risk that 1987 or to establish a tentative range for inflation would intensify over the period 1988. It was understood that all the ahead. Highly competitive conditions ranges for 1988 were provisional and continued to characterize many markets, that they would be reviewed early next both domestic and international, and year in the light of intervening developbusinessmen were persisting in their efments. The issues involved with estabforts to curb their costs of production. It lishing a target for Ml would be carealso was noted that a portion of the gains fully reappraised at the beginning of in output and employment was occurring 1988. in previously depressed industries where In the Committee's discussion of polthe availability of labor and other proicy implementation for the weeks immeduction resources was concentrated. In diately ahead, most of the members inthis view monetary policy had been sufdicated that they were in favor of ficiently tight, with relatively low monedirecting open market operations, at tary growth, and in the context of a less least initially, toward achieving the inexpansionary fiscal policy, the economy creased degree of reserve pressure that was not seen as likely to generate exceshad been sought in recent weeks. No sive demand pressures over the next sevchange in policy would be involved, eral quarters. given the decision in early September to At its meeting in July the Committee reduce the availability of reserves; howreviewed the basic policy objectives that ever, because implementation of that it had set in February for growth of the decision had not yet been reflected in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 FOMC Policy Actions actual pressures on reserves or in money assets would respond to the higher marmarkets, an unchanged policy at this ket interest rates that had emerged and meeting would imply some slight firm- also on the extent to which depository ing from the actual reserve conditions institutions would adjust their offering that had prevailed recently. A few rates on interest-bearing deposits. In members expressed a preference for light of the uncertainties that were inmaintaining the existing degree of re- volved, judgments about appropriate serve pressure. The members agreed that rates of monetary growth would need to the differences in question were slight rely on accompanying economic and fiand that, against the background of ear- nancial developments. lier policy-firming actions, significant With regard to possible adjustments in further changes in policy were not desir- policy implementation during the interable at this time. In the latter connec- meeting period, the members generally tion, some members urged that particu- felt that there should be no presumptions lar caution be exercised in implementing about the likely direction of such adjustpolicy following today's meeting in ments, if any. A number of members order not to convey a misleading impres- commented that, taking account of earsion of the System's policy intentions. lier policy firming decisions, monetary In reaching their decisions the mem- policy was now appropriately positioned bers took account of a staff analysis that under the circumstances that were most suggested that even without any increase likely to prevail. While a few members in reserve pressures money growth was felt that the Committee should remain likely to remain fairly subdued over the especially alert to developments that months ahead. This outlook reflected in might call for somewhat firmer reserve large measure the expected effects on conditions, others did not want the dimoney demand of the increase in market rective to lean in the direction of still interest rates associated in part with the further firming, given the slight initial decisions in early September to achieve firming that was already contemplated. slightly firmer reserve conditions and to The members generally agreed that in raise the discount rate. In the circum- addition to developments relating to the stances, growth of M2 might continue at outlook for inflation, any reserve adjustabout its average pace of recent months ments during the intermeeting period and on a cumulative basis remain appre- should give weight to ongoing business ciably below the Committee's range for developments and the performance of the year. Growth in M3 might pick up the dollar in foreign exchange markets. marginally from its recent pace, ending In keeping with the Committee's usual the year around the lower limit of its approach, it also was understood that range for 1987. Given its particular sen- any decision to alter reserve objectives sitivity to interest rates, growth in Ml during the intermeeting period would for the balance of the year was expected take account of the behavior of monetary to slow further from its considerably re- aggregates. duced pace thus far in 1987. The The members generally supported a members recognized that projections of proposal to raise the existing intermeetmonetary growth necessarily involved a ing range for the federal funds rate by 1 wide range of uncertainty. In particular, percentage point to 5 to 9 percent. One developments in the months ahead member expressed concern that the would depend importantly on the un- higher range might be misinterpreted as known extent to which holders of money signaling future firming action. Others Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 131 pointed out, however, that the increase issued to the Federal Reserve Bank of was a technical adjustment intended to New York: take account of the rise in the federal funds rate over the course of recent The information reviewed at this meeting suggests on balance that economic activity is weeks and to provide a more symmetriexpanding in the current quarter at a pace cal range around the current rate. By similar to that in the first half of the year. itself the increase would have no signifi- Total nonfarm payroll employment rose furcance for policy. The federal funds ther in August after a large increase in July. range provides a mechanism for initiat- The civilian unemployment rate remained at 6.0 percent, well below its level at the start ing consultation of the Committee when of the year. Industrial production increased its boundaries are persistently exceeded. further in August following large gains in At the conclusion of the Committee's other recent months. Consumer spending, discussion, all of the members indicated bolstered by a rise in auto sales, posted a large increase in August. Recent indicators that they preferred or could accept a of business capital spending point to some directive that called for maintaining the strength, particularly in equipment outlays. slightly firmer degree of reserve pressure Housing starts fell in August to a level a little that had been sought in recent weeks. below their average in other recent months. Preliminary data suggest that the nominal With regard to possible adjustments dur- U.S. merchandise trade deficit was uning the intermeeting period, the changed in July from its June level but larger members indicated that somewhat than the second-quarter average. The rise in greater reserve restraint or somewhat consumer and producer prices has slowed in recent months, reflecting favorable price delesser reserve restraint would be acceptvelopments in food and energy. able depending on developments relat- Growth of the monetary aggregates ing to inflation, the strength of the busistrengthened in August, but for 1987 through ness expansion, the performance of the August, expansion of both M2 and M3 redollar in foreign exchange markets, mained below the lower ends of the ranges while also taking account of the behav- established by the Committee for the year; growth in Ml has been at a much reduced ior of the monetary aggregates. The pace in 1987. Expansion in total domestic contemplated provision of reserves was nonfinancial debt has moderated this year. expected to be consistent with growth in Interest rates have risen considerably since M2 and M3 at annual rates of around 4 the meeting on August 18. On September 4, percent and around 6 percent respec- the Federal Reserve Board approved an increase in the discount rate from 5Vi to 6 tively, for the four-month period from percent. In foreign exchange markets, the August to December. Growth in Ml was trade-weighted value of the dollar in terms of expected to remain relatively slow over the other G-10 currencies has depreciated on the same period. Because of the unusual balance since the latest meeting; some of the decline in the dollar early in the intermeeting uncertainty relating to the behavior of period was later reversed. Ml and in keeping with the decision not The Federal Open Market Committee to set a longer-run target for this aggre- seeks monetary and financial conditions that gate, the Committee decided to continue will foster reasonable price stability over the practice of not specifying a numeri- time, promote growth in output on a sustainable basis, and contribute to an improved cal expectation for its short-run growth. pattern of international transactions. In fur- The members agreed that the intermeet- therance of these objectives the Committee ing range for the federal funds rate agreed at its meeting in July to reaffirm the should be raised from 4 to 8 percent to 5 ranges established in February for growth of 5Vi to 8V2 percent for both M2 and M3 meato 9 percent. sured from the fourth quarter of 1986 to the At the conclusion of the meeting the fourth quarter of 1987. The Committee following domestic policy directive was agreed that growth in these aggregates Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 FOMC Policy Actions around the lower ends of their ranges may be This approach is expected to be consistent appropriate in light of developments with with growth in M2 and M3 over the period respect to velocity and signs of the potential from August through December at annual for some strengthening in underlying infla- rates of around 4 percent and around 6 pertionary pressures, provided that economic cent, respectively. Ml is expected to conactivity is expanding at an acceptable pace. tinue to grow relatively slowly. The Chair- The monitoring range for growth in total man may call for Committee consultation if it domestic nonfinancial debt set in February appears to the Manager for Domestic Operafor the the year was left unchanged at 8 to 11 tions that reserve conditions during the pepercent. riod before the next meeting are likely to be For 1988, the Committee agreed on tenta- associated with a federal funds rate persistive ranges of monetary growth, measured tently outside a range of 5 to 9 percent. from the fourth quarter of 1987 to the fourth quarter of 1988, of 5 to 8 percent for both M2 Votes for this action: Messrs. Greenspan, and M3. The Committee provisionally set Corrigan, Angell, Boehne, Boykin, the associated range for growth in total Heller, Kelley, Keehn, Johnson, Ms. domestic nonfinancial debt at IVi to IOV2 Seger, and Mr. Stern. Votes against this percent. action: None. With respect to Ml, the Committee recognized that, based on experience, the behavior On every business day from October of that aggregate must be judged in the light 19 to 30, 1987, the Committee conferred of other evidence relating to economic activity and prices; fluctuations in Ml have be- by telephone and reviewed the excome much more sensitive in recent years to tremely volatile conditions that had dechanges in interest rates, among other fac- veloped in financial markets. The tors. Because of this sensitivity, which has members agreed on the need for special been reflected in a sharp slowing of the deflexibility in open market operations cline in Ml velocity over the first half of the year, the Committee again decided at the during this period for meeting the liquid- July meeting not to establish a specific target ity requirements of the economic and for growth in Ml over the remainder of 1987 financial system. Such an approach to and no tentative range was set for 1988. The policy implementation was deemed to be appropriateness of changes in Ml this year consistent with the directive adopted at will continue to be evaluated in the light of the behavior of its velocity, developments in the meeting on September 22, but it was the economy and financial markets, and the understood that policy would have to be nature of emerging price pressures. The kept under particularly close review. Committee welcomes substantially slower growth of Ml in 1987 than in 1986 in the context of continuing economic expansion Meeting Held on and some evidence of greater inflationary November 3,1987 pressures. The Committee in reaching operational decisions over the balance of the year will take account of growth in Ml in the light 1. Domestic Policy Directive of circumstances then prevailing. The issues involved with establishing a target for Ml The economic information available at will be carefully appraised at the beginning this meeting was reviewed in the context of 1988. of the extraordinary developments in fi- In the implementation of policy for the nancial markets since the Committee immediate future, the Committee seeks to meeting on September 22. Over the pemaintain the degree of pressure on reserve positions sought in recent weeks. Somewhat riod, equity prices had fallen sharply and greater reserve restraint or somewhat lesser a record drop in mid-October was acreserve restraint would be acceptable de- companied by falling interest rates and pending on indications of inflationary presheightened preferences for safety and sures, the strength of the business expansion, liquidity. The economic effects of such developments in foreign exchange markets, as well as the behavior of the aggregates. developments were not yet clear. At the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 133 time of the meeting, data relating to With the expiration of the incentives at nationwide business activity were avail- the end of September, sales of domestic able only for the period prior to the autos dropped sharply. Purchases of mid-October collapse in stock prices. other goods were about unchanged last Such data showed that the economy had quarter because of continued softness in expanded at a fairly brisk pace in the the demand for big-ticket items as well third quarter; growth in the industrial as for most types of nondurables. sector was especially robust, spurred by However, outlays for services rose sharp pickup in business investment and appreciably. a further expansion in exports. Prices Housing activity through September continued to rise at a relatively moderate continued to be limited by the effects of rate in recent months, and even with higher mortgage interest costs and elefairly strong labor demands and a con- vated rental vacancy rates. Building persiderably reduced unemployment rate, mits were flat in September and, alwages accelerated only slightly. though starts picked up to an annual rate Industrial production rose somewhat of 1.67 million units, they remained further in September after a large in- well below the pace of early this year. crease earlier in the summer. In the third Business fixed investment was strong quarter as a whole, output was up nearly in the third quarter, paced by a surge in 9 percent at an annual rate, with large purchases of computers, a bulge in purgains in most major groupings. Produc- chases of motor vehicles, and a substantion of business equipment was espe- tial increase in spending on other types cially strong, apparently reflecting im- of equipment. Outlays on structures also proved foreign as well as domestic recorded a large rise, as petroleum drilldemand for U.S. products. Materials ing activity expanded sharply, spending output also continued to strengthen, but by public utilities increased appreciably, auto assemblies were reduced sharply in and office construction firmed. The ad- August and September. vance spending indicators available Labor demand, on balance, remained through September also pointed to constrong. Nonfarm payroll employment tinued strength. Recent events in finanrose again in September. Manufacturing cial markets were expected to lead to employment posted a sizable rise in the some reassessment of spending plans, third quarter, with widespread gains but investment outlays would be supacross both durable and nondurable ported in the near term by projects that goods industries. Job growth elsewhere, were already under way. however, has slowed; construction em- Inventory investment was held down ployment dropped in September, and in the third quarter by a sharp liquidation hiring in the finance, insurance, and real of stocks at automobile dealers. Based estate grouping was damped in part by on data available through August, the slower mortgage originations. The civil- level of stocks in other trade categories ian unemployment rate continued to rose somewhat further but generally did edge down in September, touching 5.9 not appear to be excessive in relation to percent. sales. In the manufacturing sector, the Retail sales declined somewhat in stronger orders received since last spring September, but consumer spending rose contributed to an increase in the pace of substantially in the third quarter, reflect- inventory accumulation that was fairly ing primarily an incentive-induced in- widespread by industry and by stage of crease in outlays on motor vehicles. fabrication; nonetheless, inventory- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 FOMC Policy Actions sales ratios in most industries remained but food prices rose. Excluding food and low at the end of August. energy items, consumer prices have The U.S. merchandise trade deficit in slowed a bit recently from the average July-August was estimated to have been pace over the first seven months of the marginally larger than in the second year. Price increases for finished goods quarter on a seasonally adjusted basis; at the producer level also have remained both imports and exports rose substan- moderate. However, prices for intermetially over the two months. A surge in diate and crude materials (apart from oil imports, most of which went into food and energy) have continued to rise domestic inventories, accounted for substantially, reflecting the higher levels about half of the July-August rise in of industrial activity, the lower extotal imports. Nonagricultural exports change value of the dollar, and the efcontinued to grow at a rapid pace, with fects on petroleum-based products of shipments of commercial aircraft show- earlier increases in crude oil prices. ing particular strength in July. Agricul- Wage trends have remained moderate, tural exports also picked up markedly. although increases in the past few Indicators of business conditions in months have been slightly larger than major foreign industrial countries gener- earlier in the year. ally suggested somewhat faster eco- At its meeting on September 22, the nomic expansion in the third quarter Committee adopted a directive that than the weak average pace of the first called for maintaining the degree of half of the year, while inflation abroad pressure on reserve positions that had remained low. In Japan, industrial pro- been sought since early September. The duction in the third quarter was noticea- members decided that somewhat greater bly above the average level for the first or somewhat lesser reserve restraint half of the year. The trade surplus was would be acceptable depending on indidown slightly in nominal terms in the cations of inflationary pressures, the third quarter, and more substantially in strength of the business expansion, dereal terms. At the same time, consumer velopments in foreign exchange marprices in Japan were slightly above their kets, as well as the behavior of the monyear-earlier level, while wholesale prices etary aggregates. Adjustment plus showed a smaller four-quarter decline seasonal borrowing in the first complete than in previous quarters. German in- reserve maintenance period following dustrial production rebounded signifi- the September meeting increased to a cantly in August, after declines in the daily average of about $725 million, previous two months, but the average boosted in part by unusual borrowing level for July-August was still below its related to Reserve Bank computer probyear-earlier level. Consumer prices in lems. Apart from higher levels around Germany in the third quarter were the quarter-end, federal funds traded in a slightly above their level of a year IVA to IVi percent range during that earlier. Output in the United Kingdom maintenance period. Federal funds and continued to grow at a healthy pace, other interest rates subsequently rose while that in France and Italy slowed through mid-October as market particisomewhat. pants appeared to anticipate monetary Increases in U.S. consumer prices tightening in an environment of firmer have been relatively moderate in recent policy abroad, concerns about the dolmonths. The CPI rose 0.2 percent in lar, and pessimism about the prospects September, as retail energy prices fell for domestic inflation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 135 After declining appreciably in the first lated to short sales. The federal funds half of the month, stock prices plunged rate dropped from above IVi percent just on October 19 in chaotic trading. Most before October 19 to 7 percent and interest rates fell sharply. The Commit- below immediately following the stock tee held daily telephone conferences in market collapse; borrowing at the disthe last two weeks of October to assess count window averaged $525 million in the extraordinary developments in finan- the reserve maintenance period ending cial markets. The members agreed on October 21 and excess reserves rose the need to assure adequate liquidity in a substantially, reflecting cautious reserve period of continuing volatility in domes- management by depository institutions. tic and international financial markets, During the early part of the current reand in particular on the need to meet serve maintenance period, federal funds promptly any unusual liquidity require- traded mostly in a 7 to 11A percent ments of the economic and financial sys- range, but more recently the funds rate tem in this period. They recognized that moved below 7 percent after large injecspecial flexibility in the conduct of open tions of reserves by the Desk. Borrowmarket operations was called for after ing in the current reserve maintenance the stock market collapse. Accordingly, period was running well below that in reserves were provided generously on a the previous period. daily basis, often at an atypically early Equity prices fluctuated sharply after hour. In the process, operations were their collapse on October 19, but most directed toward some easing in reserve major stock indexes have recovered to market conditions. The degree of pres- levels somewhat above their October sure that was sought on reserve positions lows. Markets for fixed-income securiwas reduced shortly after October 19 ties also were quite volatile after midand again late in the month, but actual October, but yields fell substantially on operations continued to be guided by balance, with rates on long-term Treaday-to-day developments. Growth in sury and high-grade corporate bonds renonborrowed reserves surged in late Oc- versing much of their runup since Autober as open market operations accom- gust. In recent days, bond markets modated substantially enlarged desires generally have retained their earlier for excess reserves and a large increase gains, as market participants have apin required reserves associated with a peared to reassess the outlook for the sharp rise in transactions deposits. economy, inflation, and monetary pol- In addition to providing liquidity to icy. In short-term markets, Treasury bill the financial markets through open mar- rates have shown net declines of around ket operations, the Federal Reserve as- IV4 percentage points since mid-Ocsisted the Treasury market by relaxing tober, in association with the easing of some of the constraints on its collateral- reserve conditions as well as increased ized lending of Treasury securities to demands for safe and liquid instruments, primary dealers. Committee members while rates on some private money maragreed on a temporary suspension of the ket instruments have fallen somewhat size limits1 imposed on loans of securi- less. In general, pressures in financial ties to individual dealers and the markets appeared to have moderated to requirement that such loans not be re- some extent, although the markets continued to be characterized by an unusual 1. Secretary's note: The temporary liberalizadegree of anxiety and uncertainty. tion of securities lending terms was terminated effective November 19, 1987. The dollar moved lower during the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

136 FOMC Policy Actions first half of October, especially after the end of 1988 than was expected at the release of U.S. trade data on October 14 time of the September meeting. The intensified market concern over the fail- economy would be supported to an exure of the U.S. current account balance tent by the decline in interest rates and to improve. Though the dollar firmed the lower dollar. However, the effects of temporarily immediately following the these developments on domestic deworldwide stock market collapse and re- mand and net exports were thought ports of Secretary Baker's meeting with likely to offset only part of the adverse German officials, by the latter part of impact of sharply lower equity prices on October the dollar again came under consumers and businesses. Consumpdownward pressure amid widespread tion was expected to be relatively subspeculation that dollar exchange rates dued in the quarters immediately ahead, under the Louvre accord would be al- reflecting the termination of automobile lowed to adjust downward. In addition, sales incentive programs as well as stock interest rates in the United States had market developments, but to pick up dropped substantially relative to those in later next year. Real business fixed inother major industrial countries. Over vestment was projected to grow at a the entire intermeeting period, the dol- slow pace given the outlook for sales. lar declined by about 4Vi percent in Housing construction was likely to drop terms of a weighted average of other somewhat in the near term, but that de- G-10 currencies. cline was forecast to be stemmed by The plunge in equity prices prompted lower mortgage rates. The outlook for moves to short-term liquid assets, and real net exports of goods and services growth of money, especially Ml, ap- remained favorable, but with domestic pears to have accelerated in October. demands weaker, the unemployment Demand deposits rose sharply around rate probably would move up somewhat. the time of the stock market collapse, Against this background, the projected perhaps reflecting the huge increase in increases in prices and wages over the financial transactions associated with the coming year were expected to be somemarket turmoil. M2 growth was bol- what less than previously expected. stered as well by an increase in assets of Nonetheless, some pickup in price presmoney market funds, which may have sures still might be observed in associabeen associated in part with shifts from tion with sizable increases in nonpetroequity market funds. Even so, growth in leum import prices. M2 through October was estimated to In the Committee's discussion of curhave remained well below its long-run rent and prospective economic developrange. Expansion in M3 was boosted by ments, the members focused on the poincreases in the managed liabilities of tential effects of the recent turbulence in banks, partly to finance a sharp rise in financial markets. They generally agreed security loans. This aggregate has con- that the sharp decline in stock prices and tinued to increase at about the lower the still unsettled conditions in financial bound of its range for the year. Growth markets portended weaker growth in of nonfmancial debt has remained a- economic activity, at least for the nearer round the middle of its long-run moni- term, but also a lower risk of any subtoring range. stantial pickup in inflation. Members The staff projection suggested that the stressed that, while the direction of the decline in equity prices would lead to adjustment was clear, it still was too weaker economic growth through the early to quantify the impact of the recent Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 137 disturbances in financial markets. No producers constituted elements of data were available on the overall per- strength in the business picture. The formance of the economy since mid-Oc- view also was expressed that both the tober. Most business contacts around the financial and the nonfinancial sectors of country reported little or no immediate the economy were better balanced than changes in retail sales activity or in busi- earlier in the current business expansion. ness investment plans, but uncertainties A less optimistic view pointed to the about prospective business conditions possibility that consumer and business clearly had increased. A more cautious spending might continue to be inhibited attitude had emerged in the business by the negative impact of stock price community and possibly also among declines on wealth positions, the cost of consumers. equity capital, and more generally on Members commented that the staff consumer and business confidence. One forecast of somewhat reduced economic member observed that a recession could growth over the next several quarters not be ruled out and incoming data on was a reasonable expectation, but one the economy would need to be scrutinthat presumed the return of confidence ized with special care for signs of greater and more normal conditions in financial weakness than now were expected. markets. Accordingly, the risks of a dif- The members continued to view furferent outcome, notably in the direction ther improvement in real net exports as a of more weakness, were viewed as much key to sustaining moderate expansion in greater than usual. The prospects for business activity, especially in the consatisfactory economic performance text of potentially weaker domestic declearly depended on the restoration of mands than had been anticipated earlier. generally stable financial conditions that The prospects for continuing gains would in turn foster the basic confidence seemed favorable, given the depreciathat was needed to sustain long-term in- tion of the dollar and indications of convestments in business capital and in the siderable improvements in the producdebt and equity markets. The timing of tivity of U.S. manufacturers. Tending to such a development could not be pre- support such an outlook were reports dicted, but the members agreed that from various parts of the country indiprogress in reducing the federal budget cating that many domestic firms were deficit could play a key role by relieving competing more effectively in export market concerns and uncertainties. In- markets and with importers. At the same deed, recently renewed efforts to cut the time, some members commented that budget deficit had contributed to a mar- improvement in the nation's nominal net ginal reduction of tensions in key finan- export position continued to be held cial markets. back by the vigorous efforts of foreign Despite the uncertainties that were in- firms to maintain market shares at the volved, a few members stressed that the expense of profit margins as their own outlook for sustained economic growth currencies appreciated in relation to the still could be viewed as basically prom- dollar. As they had at earlier meetings, ising. Available data indicated an appre- members observed that trade developciable momentum in the current expan- ments would depend to an important exsion, at least through the third quarter, tent on the economic performance of key and recent declines in interest rates foreign industrial nations. along with an increasing ability of do- Turning to the prospects for wages mestic firms to compete with foreign and prices, a number of members indi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

138 FOMC Policy Actions cated that they saw in recent develop- Ml, the Committee decided at the July ments a potential for somewhat less in- meeting not to set a specific target for the flation than they had anticipated earlier. remainder of 1987 or to establish a ten- The large decline in stock prices had tative range for 1988. It was understood reduced inflation expectations, and the that all the ranges for 1988 were proviweakening in the outlook for economic sional and that they would be reviewed growth implied less pressures on wages early next year in the light of intervening and prices. Other developments that developments. The issues involved with would tend to curb inflation included establishing a target for Ml would be indications of ongoing improvement of carefully reappraised at the beginning of labor productivity in manufacturing and 1988. the substantial slowdown in monetary In the Committee's discussion of polgrowth this year. On the other hand, icy implementation for the weeks immereference also was made to pressures on diately ahead, the members generally capacity in a number of industries, in- agreed on the basic desirability of directcluding some that competed actively ing open market operations toward with foreign producers. A sizable further maintaining the easier conditions that decline in the dollar, should it occur, had developed in money markets. This would exacerbate price and wage pres- would involve about the degree of pressures in those industries and in the econ- sure on reserve positions that had been omy more generally. sought most recently. The members rec- At its meeting in July the Committee ognized that the still unsettled conditions reviewed the basic policy objectives that in financial markets and related uncerit had set in February for growth of the tainties in the economic outlook might monetary and debt aggregates in 1987 continue to call for the more flexible and and established tentative objectives for accommodative approach to policy that expansion of those aggregates in 1988. had characterized operations since Oc- For the period from the fourth quarter of tober 19. This approach implied giving 1986 to the fourth quarter of 1987, the more weight than usual to money market Committee reaffirmed the ranges estab- conditions in order to facilitate the relished in February that included growth turn to a more normal functioning of of 5V2 to SVi percent for both M2 and financial markets and to minimize the M3. Given developments through mid- chances that the Committee's intentions year, the Committee agreed that growth would be misinterpreted. Such an apin these aggregates around the lower proach also could help to assure that ends of their ranges might be appro- shifting demands for liquidity and repriate, depending on the circumstances. serves would be accommodated without The monitoring range for expansion in undesirable fluctuations in money martotal domestic nonfinancial debt also ket conditions. As financial markets was left unchanged at 8 to 11 percent for continued to stabilize, open market 1987. For 1988 the Committee agreed operations would be phased into a more on tentative reductions of Vi percentage normal approach to policy that was orpoint to growth ranges of 5 to 8 percent iented more fully to a provision of refor both M2 and M3. The Committee serves keyed to pressures on reserve poalso reduced the associated range for sitions. The transition would need to be growth in total domestic nonfinancial executed with a great deal of caution debt by Vi percentage point to IV2 to under the still sensitive market circum- IOV2 percent for 1988. With respect to stances that were foreseen. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 139 Committee members agreed that the tions of monetary growth was considerlower interest rates that had emerged ably greater than usual. In particular, the since mid-October were needed to help extent to which heightened preferences offset the effects of the sharp decline in for liquidity and substantial variations in stock prices. It was acknowledged that the volume of financial transactions the interest rate reductions increased the might affect future demand for money risks for the dollar in the foreign ex- balances was difficult to gauge. Morechange markets, particularly in the ab- over, it was hard to assess how quickly sence of similar reductions abroad, but the money markets and depository instiin the opinion of a number of members tutions would move to reestablish a those risks were manageable. Some more normal structure of short-term members expressed concern, however, market and deposit interest rates and in that a further substantial depreciation in particular how fully the opportunity the dollar, if it were to materialize, costs of holding money balances would would have seriously adverse conse- be adjusted in the period ahead. On the quences for domestic prices and interest assumption that conditions in financial rates and might indeed trigger another markets would gradually return to more crisis in domestic and international fi- normal patterns but that some residual of nancial markets. the heightened demands for liquidity To the extent that market develop- would remain, the reserve conditions ments permitted a more normal focus on that were contemplated might be accomthe implementation of a desirable degree panied by somewhat faster growth in M2 of pressure on reserve positions, atten- and M3 in the current quarter than had tion might need to be given during the occurred in the third quarter. The memintermeeting period to a possible adjust- bers understood that such growth imment in such reserve conditions depend- plied expansion in M2 for the year that ing on economic and financial develop- would be well below the Committee's ments and the behavior of the monetary range and growth in M3 that was close aggregates. All of the members could to the lower end of its range. Growth in foresee possible adjustments in either Ml continued to be particularly difficult direction under alternative potential cir- to project in present circumstances, but a cumstances. However, in light of the considerable slowing after the October uncertainties that continued to dominate bulge was seen as likely over the balance financial markets and the risks that the of the quarter. recent developments could depress busi- Given the Committee's current apness activity, nearly all believed that proach to open market operations, the policy implementation should remain members anticipated that the federal especially alert to developments that funds rate would continue to fluctuate might call for somewhat easier reserve generally in a fairly narrow band close to conditions. recent levels. Nonetheless, most of the In keeping with the Committee's members agreed that the usual, relausual approach, it was understood that tively wide range to trigger a consultaany decision to alter reserve objectives tion should continue to be set for the during the intermeeting period should federal funds rate. A majority favored a take account of the behavior of the mon- reduction in the range from the current 5 etary aggregates. The members took to 9 percent to 4 to 8 percent. While the note of a staff analysis, which indicated midpoint of the current range would be that the uncertainty surrounding projec- centered approximately on the expected Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

140 FOMC Policy Actions average trading level, some members the bulge in October, growth in Ml in commented that a rise toward 9 percent the fourth quarter as a whole was exwould have destabilizing effects in the pected to be well above its average pace period ahead. Moreover, a 4 to 8 percent in the previous several months. Howrange might be viewed as more in keep- ever, because of the very substantial uning with the recent thrust in monetary certainty that still surrounded the outpolicy and the expectation that inter- look for Ml, the Committee decided to meeting adjustments, if any, were likely continue its practice of not specifying a to be in the direction of easier reserve numerical expectation for its growth. conditions. The members agreed that the intermeet- At the conclusion of the Committee's ing range for the federal funds rate, discussion, all of the members indicated which provides a mechanism for initiattheir support of a directive that called for ing consultation of the Committee when maintaining the degree of reserve pres- its boundaries are persistently exceeded, sure that had been sought in recent days. should be reduced from 5 to 9 percent to The members recognized that the vola- 4 to 8 percent. tile conditions in financial markets and At the conclusion of the meeting the related uncertainties in the business out- following domestic policy directive was look might continue to indicate the need issued to the Federal Reserve Bank of for special flexibility in the conduct of New York: open market operations. Such an approach to policy implementation would depend in particular on the strength of The economic information available at this meeting was reviewed against the backdrop demands for liquidity stemming from of extraordinary developments in financial recent and prospective developments in markets in the period since the previous financial markets. To the extent that the Committee meeting on September 22. Share functioning of those markets permitted a prices in the stock market were down sharply. Following a particularly large dereturn to more normal open market cline of stock prices in mid-October, interest operations, the members indicated that rates fell steeply and increases that had ocsomewhat lesser reserve restraint would curred during the first part of the intermeetbe acceptable, while slightly greater re- ing period subsequently were more than reversed on most types of debt obligations. serve restraint might be acceptable, de- Foreign exchange markets were relatively pending on the strength of the business calm over most of the intermeeting period, expansion, indications of inflation, the but the dollar came under significant downperformance of the dollar in foreign ex- ward pressure late in the period. change markets, with account also taken In the third quarter economic activity had expanded at a fairly brisk pace. Total nonof the behavior of the monetary aggrefarm payroll employment rose further in gates. The members believed that the September, with the manufacturing sector outlook for monetary growth over the continuing to record relatively sizable gains. months ahead was subject to unusual The civilian unemployment rate edged down to 5.9 percent. Industrial production inuncertainty, but the contemplated recreased somewhat further in September folserve conditions were thought likely to lowing large gains in other recent months. be consistent with somewhat faster Retail sales declined somewhat in Sepgrowth in M2 and M3 than had been tember, but consumer spending, bolstered by expected earlier; such growth might a rise in auto sales, posted a large increase over the third quarter. Business capital center on annual rates of around 6 to 7 spending was strong in the third quarter and percent for the period from September forward indicators pointed to continuing through December. Largely reflecting gains. Housing starts were up in September Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 141 but were little changed in the third quarter changes in interest rates, among other facfrom their second-quarter average. The nom- tors. Because of this sensitivity, which has inal U.S. merchandise trade deficit narrowed been reflected in a sharp slowing of the dein August, but the July-August average re- cline in Ml velocity over the first half of the mained above the second-quarter rate. The year, the Committee again decided at the rise in consumer and producer prices was July meeting not to establish a specific target relatively moderate in recent months follow- for growth in Ml over the remainder of 1987 ing more rapid increases earlier in the year. and no tentative range was set for 1988. The Growth of the monetary aggregates ap- appropriateness of changes in Ml this year peared to have strengthened in October, with will continue to be evaluated in the light of some of the strength reflecting heightened the behavior of its velocity, developments in demands for transaction balances and other the economy and financial markets, and the liquid assets in the latter part of the month. nature of emerging price pressures. The Even so, for 1987 through October, expan- Committee welcomes substantially slower sion of M2 evidently moved closer to, but growth of Ml in 1987 than in 1986 in the remained below, the lower end of the range context of continuing economic expansion established by the Committee for the year, and some evidence of greater inflationary while growth of M3 was around the lower pressures. The Committee in reaching operaend of its range. Expansion in total domestic tional decisions over the balance of the year nonfinancial debt has remained on a more will take account of growth in Ml in the light moderate trend in recent months. of circumstances then prevailing. The issues The Federal Open Market Committee involved with establishing a target for Ml seeks monetary and financial conditions that will be carefully reappraised at the beginning will foster reasonable price stability over of 1988. time, promote growth in output on a sustain- In the implementation of policy for the able basis, and contribute to an improved immediate future, the Committee seeks to pattern of international transactions. In fur- maintain the degree of pressure on reserve therance of these objectives the Committee positions sought in recent days. The Comagreed at its meeting in July to reaffirm the mittee recognizes that the volatile conditions ranges established in February for growth of in financial markets and uncertainties in the 5Vi to 8V2 percent for both M2 and M3 mea- economic outlook may continue to call for a sured from the fourth quarter of 1986 to the special degree of flexibility in open market fourth quarter of 1987. The Committee operations, depending, in particular, on deagreed that growth in these aggregates a- mands for liquidity growing out of recent or round the lower ends of their ranges may be prospective developments in financial marappropriate in light of developments with kets. Apart from such considerations, somerespect to velocity and signs of the potential what lesser reserve restraint would, or for some strengthening in underlying infla- slightly greater reserve restraint might, be tionary pressures, provided that economic acceptable depending on the strength of the activity is expanding at an acceptable pace. business expansion, indications of inflation- The monitoring range for growth in total ary pressures, developments in foreign exdomestic nonfinancial debt set in February change markets, as well as the behavior of for the year was left unchanged at 8 to 11 the monetary aggregates. While the outlook percent. for monetary growth over the months ahead For 1988, the Committee agreed on tenta- is subject to unusual uncertainty, the contive ranges of monetary growth, measured templated reserve conditions are expected to from the fourth quarter of 1987 to the fourth be consistent with growth in M2 and M3 over quarter of 1988, of 5 to 8 percent for both the period from September through De- M2 and M3. The Committee provisionally cember at annual rates of about 6 to 7 perset the associated range for growth in total cent, but more rapid growth is possible domestic nonfinancial debt at IVi to IOV2 should preferences for liquidity be particupercent. larly strong. Over the same period, growth in With respect to Ml, the Committee recog- Ml is expected to be well above its average nized that, based on experience, the behavior pace in the previous several months. The of that aggregate must be judged in the light Chairman may call for Committee consultaof other evidence relating to economic activ- tion if it appears to the Manager for Domestic ity and prices; fluctuations in Ml have be- Operations that reserve conditions during the come much more sensitive in recent years to period before the next meeting are likely to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

142 FOMC Policy Actions be associated with a federal funds rate persis- October. The ultimate effects of the detently outside a range of 4 to 8 percent. cline in stock prices and associated developments in financial markets Votes for this action: Messrs. Greenspan, Corrigan, Angell, Boehne, Boykin, remained uncertain. Available data sug- Heller, Johnson, Keehn, Kelley, Ms. gested that growth in output was moder- Seger, and Mr. Stern. Votes against this ating from a brisk pace in the third action: None. quarter. Spending indicators pointed to a considerable slowing in the expansion of 2. Authorization for Domestic domestic private final demands in the Open Market Operations current quarter. Prices and wages con- Effective November 4, 1987, the Com- tinued to increase at about the same pace mittee approved a temporary increase of as in earlier months of the year. $3 billion, to $9 billion, in the limit Industrial production rose 0.4 percent between Committee meetings on in November, following a strong rise in changes in System Account holdings of the previous month. In November, gains U.S. government and federal agency se- were widespread with the exception of curities specified in paragraph l(a) of the the motor vehicles industry. Capacity Authorization for Domestic Operations. utilization in mining, manufacturing, The increase was effective for the inter- and utilities rose slightly further in Nomeeting period ending with the close of vember, and the overall rate in manufacbusiness on December 16, 1987. turing was at its highest level since August 1984. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Boehne, Boykin, Total nonfarm payroll employment Heller, Johnson, Keehn, Kelley, Ms. continued to rise strongly over October Seger, and Mr. Stern. Votes against this and November. The manufacturing secaction: None. tor again recorded relatively large gains, with hiring increases widespread across This action was taken on the recom- durable and nondurable goods indusmendation of the Manager for Domestic tries. At the same time, job growth in Operations. The Manager had advised service industries continued at a brisk that the normal leeway of $6 billion for pace. Aggregate hours worked by prochanges in the System's Account proba- duction and nonsupervisory workers rebly would not be sufficient over the in- mained on a strong uptrend. The civilian termeeting period because of seasonal unemployment rate fell back to 5.9 perincreases in currency in circulation and cent in November. required reserves; such increases could Growth in consumer spending apbe enlarged even further if current finan- peared to have weakened thus far in the cial market tensions persisted. fourth quarter, mainly because of a drop in purchases of new cars after incentive programs ended in September, although Meeting Held on sales of other items also were weak. December 15-16,1987 Retail sales edged up in November after two months of substantial declines. 1. Domestic Policy Directive Spending on furniture and appliances The data on the economy reviewed at fell sharply in September and October this meeting largely reflected the impact and moved lower again in November. of developments that were under way Outlays for apparel recovered a bit in before the stock market collapse in mid- November, but spending on general Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 143 merchandise registered another decline. part large seasonal swings in both ex- Housing starts rebounded in No- ports and imports. Exports were up vember but their average level in Oc- slightly in October; about half of the tober and November remained some- increase was accounted for by a strong what below the averages in the second seasonal rise in agricultural products. and third quarters. The improvement in The rise in nonagricultural exports was November reflected a sharp rise in the concentrated in shipments of a variety of multi-family category, which had products to Canada while exports of dropped noticeably in October. Single- commercial aircraft dropped. Imports family starts edged up, supported by rose considerably in October. Most of lower interest rates, but remained below the increase was in non-oil products, their third-quarter average. The number particularly machinery imports and imof permits issued was about unchanged ports of passenger cars from Japan, in November. Canada, and Korea. The expansion in business fixed in- Economic growth in the major foreign vestment appeared to have decelerated industrial countries increased markedly markedly from the exceptional pace of in the third quarter. Real GNP rose subthe third quarter. Outlays for capital stantially in Japan mainly because of a equipment were damped by the drop in large increase in domestic demand, alauto sales and a sharp decline in pur- though net exports made a small positive chases of heavy trucks. Outside of motor contribution to growth; expansion in resvehicles, equipment demand remained idential investment was particularly strong early in the current quarter. Nom- strong. German GNP, which had deinal shipments of nondefense capital clined over the first half of the year, also goods, although down somewhat in Oc- increased sharply largely in response to tober, remained above the third-quarter domestic demand. Industrial production average. In addition, new orders moved data for October showed some further up further, suggesting that shipments expansion of activity in Japan and Gerwere likely to retain some momentum in many. Available data suggested that the near term. Spending for nonresiden- GDP growth in the third quarter was tial structures softened in recent months; strong in France, the United Kingdom, petroleum drilling appeared to have lev- and Canada, as well. eled off, and nonresidential construction The rise in most broad measures of put-in-place declined somewhat in Sep- prices and wages in recent months gentember and October. erally was close to that experienced ear- Inventory investment was strong in lier in the year. Retail energy prices October. Nonetheless, factory stocks re- dropped in October, and crude oil prices mained low relative to sales by historical edged down in recent weeks. However, standards. In the auto sector, production apart from energy, increases in conexceeded sales in both October and No- sumer prices picked up recently, includvember, and dealer stocks again rose to ing higher prices for food, new cars, relatively high levels. At other retail apparel, and rents. At the producer trade establishments, inventory accumu- level, prices of finished goods turned lation slowed in October. down in October, but prices for interme- The nominal U.S. merchandise trade diate and crude materials remained on a deficit appeared to have deteriorated strong uptrend. substantially in October from the aver- At its meeting on November 3, the age rate in the third quarter, reflecting in Committee adopted a directive that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 FOMC Policy Actions called for maintaining the degree of Federal funds traded mainly in the 63/4 pressure on reserve positions that had to 67/8 percent range over the intermeetbeen sought around the time of that ing period, close to the average level meeting. The Committee recognized around the time of the November meetthat the volatile conditions in financial ing. Most other short-term rates rose markets, including potential shifts in de- somewhat on balance. The increases apmands for liquidity, and uncertainties in parently reflected some ebbing of preferthe economic outlook might continue to ences for liquidity as financial markets call for a special degree of flexibility in calmed further. In addition, expectaopen market operations. Taking account tions of further ease in monetary policy of conditions in financial markets, the tended to diminish as incoming data members decided that somewhat lesser suggested continued, albeit moderate, reserve restraint would, or slightly expansion in the economy and as the greater reserve restraint might, be ac- dollar fell in foreign exchange markets. ceptable depending on the strength of To some extent rates on very short-term the business expansion, indications of instruments increased because of posiinflationary pressures, developments in tioning in advance of anticipated presforeign exchange markets, as well as the sures in money markets around the yearbehavior of the monetary aggregates. end. Yields on long-term Treasury The intermeeting range for the federal securities were up about 20 basis points funds rate was reduced by 1 percentage after early November, while corporate point to 4 to 8 percent. bond yields rose half that much. In con- During the interval since the No- trast, municipal bond yields and mortvember meeting, reserves continued to gage rates fell over the intermeeting pebe supplied on a more flexible basis than riod. Stock prices declined slightly usual to help maintain relatively steady further on balance. In general, while conditions in the money market at a time financial markets appeared to be funcof unusual sensitivity and uncertainty in tioning more normally, they remained financial markets generally. Adjustment unsettled with occasional episodes of plus seasonal borrowing tended to be unusually wide price swings and of relatively low and averaged about $225 flights to liquidity and quality echoing million during the two maintenance pe- the experience after mid-October. riods ending December 2. As evidence Since the November meeting, the forof a reduced willingness to borrow accu- eign exchange value of the dollar demulated, such borrowing behavior was clined about 5 percent on a weightedaccommodated through provision of average basis in terms of the other G-10 nonborrowed reserves in order to keep currencies. The dollar came under presmoney market conditions from firming. sure early in the period, partly because Borrowing declined somewhat further of market disappointment over U.S. efso far in the latest maintenance period. forts to reduce the budget deficit. In After expanding at a double-digit pace in early December concerted reductions in October, total and nonborrowed re- official interest rates by Germany and serves contracted in November, reflect- several other European countries tempoing a drop in required reserves asso- rarily boosted the dollar; over the entire ciated in large measure with the reversal intermeeting period short-term interest of the postcrash bulge in transactions rates declined about Vi percentage point, accounts and a lower average level of on average, in major foreign industrial demands for excess reserves. countries, while long-term rates were Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 145 down slightly on balance. However, markets, although these effects now the dollar's decline resumed, especially were projected to be more muted than after the very disappointing U.S. trade was expected in early November. In the figures for October were released on context of recent decisions to reduce the December 10. federal budget deficit, fiscal policy The monetary aggregates weakened would exert a moderately restraining substantially in November. While some impact on aggregate demand. As in the of the weakness reflected a runoff of the previous projection, consumer spending bulge in demand deposits that followed was projected to slow in coming the stock market plunge in October, de- quarters, but to strengthen later in 1988 mand deposits dropped below early Oc- as most of the adjustment to the lower tober levels. Other checkable deposits level of stock market wealth was comalso decreased. With the nontransactions pleted. Growth in spending for plant and portion of M2 expanding only slug- equipment was likely to slow in regishly, the level of M2 was about un- sponse to the sluggish pace of domestic changed in November. Only small time sales—offset only in part by further deposits and money fund shares showed growth in export sales—and the resultany strength, as their yields remained ing diminished requirements for addiattractive relative to rates on market in- tional capacity. The decline in mortgage struments and liquid deposits. To sup- interest rates was expected to stimulate a plement weak growth in core deposits, modest improvement in residential conbanks and thrift institutions issued man- struction. The external sector would aged liabilities at a robust pace in No- provide a substantial positive contribuvember, and flows into institution-only tion to activity over the entire projection money funds moved up sharply, as re- horizon. Prices were likely to rise at a turns on these funds lagged the down- moderate rate in 1988. Energy prices ward movement of market rates in late were expected to be flat, but nonpetro- October. Even so, M3 expanded at an leum import prices were projected to annual rate of only 43A percent. For the continue to place upward pressure on year through November, M2 and M3 inflation and nominal gains in compengrew respectively at rates well below sation were anticipated to increase. and at the lower ends of the 5Vi to 8V2 However, continuing efforts to improve percent annual ranges established by the competitiveness were expected to damp Committee. Ml growth also slowed real wages and labor costs over the prosharply this year. The reduced growth of jection horizon. these aggregates and a turnaround of In the Committee's discussion of the their velocities appeared to be attribut- economic situation and outlook, able primarily to the rebound in interest members referred to conflicting signs rates and opportunity costs in 1987 after with regard to the prospective strength steep declines in 1985 and 1986. of the business expansion. On the one The staff projection continued to point hand, employment and production had to relatively sluggish growth in eco- been well maintained in recent months nomic activity during the first part of and financial markets had calmed since 1988 and to some pickup later in the late October. To date, the sharp decline year. The contour of the projection was in stock prices appeared to have had dominated by the anticipated effects of little impact on domestic business activthe decline in stock prices and the ac- ity, perhaps because it had merely recompanying developments in financial versed a runup in earlier months of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 FOMC Policy Actions year and because it was associated with this year. Gains in exports were espea reduction in market interest rates. cially encouraging. The data indicating Moreover, recent declines in the foreign an improved real trade balance were exchange value of the dollar would help supported by members' observations to sustain the improvement in net ex- from around the country. Many business ports. In these circumstances, business contacts were reporting greatly eninvestment also might remain fairly hanced export opportunities as a result strong. Members cited favorable reports of the dollar's depreciation, although from businesses in many parts of the there were exceptions, and they also incountry that tended to support an opti- dicated that their ability to compete in mistic outlook for overall business activ- domestic markets against imported ity, although some areas or industries goods had improved. The members genhad recovered only slightly thus far from erally agreed that the foreign trade sector relatively depressed conditions. On the was positioned to make an appreciable negative side, a number of members ob- contribution to sustained expansion in served that the risks to the economy domestic economic activity at a time were in the direction of slower growth when growth in overall domestic dethan foreseen in the staff forecast. Con- mands might be weakening. However, sumer spending in particular had been the likely extent of actual gains from relatively weak, as evidenced by recent trade would depend to some degree on trends and the apparent need for wide- the strength of the economies of foreign spread discounting to buttress sales. industrial nations. Moreover, growth in disposable in- In further discussion members obcomes was believed likely to remain rel- served that, given the higher rate of utiatively sluggish, and together with an lization of domestic capital and labor already low saving rate and rising con- resources, substantial improvement in sumer debt burdens would tend to retard the nation's trade balance implied the expansion in retail sales. It also was need for relatively restrained growth in noted that the full effects of the decline domestic demands over time as more in stock prices might not yet have been production was diverted to export marfelt. In addition, money growth had kets. The adjustment in trade, which been quite weak, and at some point the appeared inevitable in light of the unsusslow growth might be reflected in in- tainable size of the current trade deficit comes and spending. Several members and the rapid growth in the nation's excommented that current projections ternal indebtedness, appeared feasible were subject to a great deal of uncer- over time without causing major disruptainty, especially in light of still unusu- tions in domestic business activity. ally sensitive conditions in domestic fi- However, such an adjustment would renancial markets and the uncertain quire the implementation of appropriate prospects for the dollar and the nation's fiscal, monetary, and trade policies by foreign trade balance. the United States and its major trading The members gave considerable at- partners. tention during the discussion to the out- Turning to the outlook for inflation, look for foreign trade and its implica- some members commented that inflations for domestic economic activity. tionary expectations seemed to have Recent data on nominal net exports were abated to some extent since the collapse disappointing, but real net exports had in stock prices during October. The deshown considerable improvement so far preciation of the dollar would continue Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 147 to exert upward pressures on domestic issues involved with establishing a target prices, but increases in wages and other for Ml would be carefully reappraised at costs did not appear to be worsening, the same time. and in the view of some members infla- At this meeting the Committee held a tion might be in the process of easing. preliminary discussion of issues relating Concern was expressed by a number of to its target ranges for monetary growth members, however, that wage and price in 1988. The behavioral characteristics pressures might well intensify if the of the aggregates in recent years were economy were to expand at an appreci- reviewed. Considerable attention was ably faster pace than many members devoted to the question of whether or not currently expected or if the dollar were to establish a target for Ml or some to decline substantially in the foreign possible alternative such as MIA or the exchange markets. monetary base. While no decisions were At its meeting in July the Committee made at this meeting, the members were reviewed the basic policy objectives that not currently inclined to reestablish a it had set in February for growth of the range for Ml, given the continued large monetary and debt aggregates in 1987 interest rate sensitivity of the demand for and established tentative objectives for this aggregate and the associated wide expansion of those aggregates in 1988. swings in its velocity. The Committee For the period from the fourth quarter of will complete its review of these issues 1986 to the fourth quarter of 1987, the and decide on its target ranges for 1988 Committee reaffirmed the ranges estab- at the February meeting. lished in February involving growth of In the Committee's discussion of pol- 5Vi to %xh percent for both M2 and M3. icy for the next intermeeting period, Given developments through mid-year, most of the members agreed that on balthe Committee agreed in July that ance economic and financial developgrowth in these aggregates around the ments called for unchanged conditions lower ends of their ranges might be ap- of reserve availability. Such a policy propriate, depending on the circum- was viewed as consistent with continustances. The monitoring range for ex- ing growth in the economy at a moderate pansion in total domestic nonfinancial pace. The members recognized that fidebt also was left unchanged at 8 to 11 nancial markets remained unsettled depercent for 1987. For 1988 the Commit- spite the emergence of a much calmer tee agreed on tentative reductions of Vi atmosphere since the latter part of Ocpercentage point to growth ranges of 5 to tober, and they believed that money 8 percent for both M2 and M3. The market conditions might be subject to Committee also reduced the associated considerable volatility around the yearrange for growth in total domestic nonfi- end. In this situation most of the nancial debt by Vz percentage point to members felt that open market opera- IVi to IOV2 percent for 1988. With re- tions should continue to be conducted spect to Ml, the Committee decided at with a special degree of flexibility and the July meeting not to set a specific should give considerable weight to contarget for the remainder of 1987 or to ditions in the money market, at least establish a tentative range for 1988. It over the nearer term, to accommodate was understood that all the ranges for shifting demands for liquidity and re- 1988 were provisional and that they serves and to temper potentially exceswould be reviewed in early 1988 in the sive fluctuations in short-term markets. light of intervening developments. The However, most of the members also fa- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

148 FOMC Policy Actions vored looking for opportunities to move lier. The members recognized that the toward more normal procedures for im- relationship between monetary growth plementing policy if financial markets and economic performance had been continued to stabilize. very imprecise in recent years. Nonethe- In the majority view the risks asso- less, money growth and the economy ciated with either firming or easing were not unrelated and the reemergence under current circumstances outweighed of a stronger linkage could not be ruled the potential benefits. It was noted, for out. In these circumstances, a continuaexample, that any significant firming tion of sluggish growth of the monetary would have unsettling effects on domes- aggregates needed to be monitored tic financial markets and the associated closely as a potential danger signal with rise in interest rates would pose consid- regard to the sustainability of the ecoerable risks to the economic expansion. nomic expansion. At the same time, many members felt The members also focused on the that any appreciable easing would not be question of possible adjustments in poldesirable currently, especially in light of icy implementation during the interthe dollar's weakness and the risks to meeting period. A majority felt that domestic financial markets and the econ- there should be no presumptions about omy that a sharp further decline in the the likely direction of such adjustments, dollar would incur. Other members if any. In their view the risks that ecoweighed such risks differently, including nomic and financial developments might one member who concluded that mone- differ significantly from current expectatary policy should move toward some- tions were fairly evenly balanced in both what easier reserve conditions in light of directions. A number of other members the potential for appreciably slower believed that the Committee should regrowth in the economy, given in this main especially alert to developments view the prospects for substantially re- that might call for somewhat easier reduced growth in domestic demands and serve conditions. In particular, these the possibility that improvement in the members felt that incoming information nation's foreign trade balance would not regarding the performance of the econprovide a sufficient offset. In light of the omy should be evaluated with particular differences among the members with re- care for evidence of a possible slowing gard to policy for the short run, includ- in the expansion. The members recoging the Committee's operating proce- nized that the performance of the dollar dures in the near term, and the in foreign exchange markets might have uncertainties surrounding financial mar- a key bearing on policy implementation kets and the economy, it was understood in this period. No member wanted to tie that the members might need to consult monetary policy exclusively to the dolon policy implementation before the lar, but some strongly emphasized that next scheduled meeting on February further substantial depreciation in the 9-10, 1988. dollar could have highly adverse reper- Several members expressed some cussions on domestic financial markets concern about the generally sluggish and the economy. growth in the monetary aggregates since During this meeting the members rethe early months of the year, including viewed the Committee's operating proindications of little or no growth in M2 cedures. These had been directed toward in recent weeks and much slower expan- greater emphasis on stabilizing money sion in M3 than had been expected ear- market conditions since the stock market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 149 collapse in October and had given rela- implementation keyed increasingly to a tively less attention to the implementa- desired degree of reserve pressure while tion of a specified degree of pressure on giving less emphasis than recently to reserve positions. The members gener- money market conditions. The members ally agreed that the Committee should recognized that the conduct of open return to its earlier operating procedures. market operations might continue to re- The latter were seen to possess a number quire a special degree of flexibility, of advantages, including greater scope given still quite sensitive conditions in for market forces to be reflected in financial markets and the uncertainties in money market conditions. Given the still the business outlook. Taking account of sensitive conditions in financial markets, conditions in financial markets, the however, the members expressed a members indicated that somewhat less range of views with regard to the appro- or somewhat more reserve restraint priate timing of a return to the Commit- would be acceptable, depending on the tee's former operating procedures. strength of the business expansion, indi- Some endorsed the prompt implementa- cations of inflation, the performance of tion of those procedures. However, a the dollar in foreign exchange markets, majority felt that a gradual shift toward with consideration also taken of the begreater emphasis on reserve objectives havior of the monetary aggregates. If should be implemented during the inter- current reserve conditions were mainmeeting period. Such an approach tained, the members expected growth in would continue to give some attention to M2 and M3 to pick up from the pace in moderating fluctuations in money mar- recent months to annual rates of about 5 ket conditions but would tolerate some- percent and 6 percent respectively over what greater fluctuations than had oc- the four-month period from November curred in recent weeks. A few members to March. Growth of Ml was expected disagreed and indicated a preference for to remain relatively limited over the retaining the recent operating proce- same period; because of the substantial dures at least for now. These members uncertainty that continued to surround emphasized that a normal or predictable the outlook for Ml, the Committee conrelationship between the provision of re- tinued its practice of not specifying a serves and money market conditions had numerical expectation for its growth. not been reestablished and was not likely The members agreed that the intermeetto reemerge in the near term, at least in ing range for the federal funds rate, the period through the year-end when which provides a mechanism for initiatinterest rates and reserves were expected ing consultation of the Committee when to be subject to considerable variations its boundaries are persistently exassociated with the bank statement date. ceeded, should be left unchanged at 4 to The procedures could be reviewed in 8 percent. early January and a decision delayed At the conclusion of the meeting the until then. following domestic policy directive was At the conclusion of the Committee's issued to the Federal Reserve Bank of discussion, all but two of the members New York: indicated their support of a directive that called for maintaining the existing de- The economic information reviewed at this meeting largely reflected the influence of gree of pressure on reserve positions and developments that were under way before the that would phase open market operations financial disturbances of mid-October. The into a more normal approach to policy extent to which those disturbances would Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 FOMC Policy Actions affect the economy remained uncertain. In- able basis, and contribute to an improved formation available for the current quarter pattern of international transactions. In fursuggested that the expansion in economic therance of these objectives, the Committee activity was moderating from a brisk pace in agreed at its meeting in July to reaffirm the the third quarter. Total nonfarm payroll em- ranges established in February for growth of ployment rose strongly further over October 5Vi to %Vi percent for both M2 and M3 meaand November, with the manufacturing sec- sured from the fourth quarter of 1986 to the tor recording relatively large gains. The ci- fourth quarter of 1987. The Committee vilian unemployment rate, at 5.9 percent in agreed that growth in these aggregates a- November, remained close to its level since round the lower ends of their ranges might be mid-year. Industrial production also in- appropriate in light of developments with creased considerably further over October respect to velocity and signs of the potential and November, following sizable advances for some strengthening in underlying inflasince late spring. Retail sales edged up in tionary pressures, provided that economic November after two months of substantial activity was expanding at an acceptable declines. Recent indicators of business capi- pace. The monitoring range for growth in tal spending suggested modest further total domestic nonfinancial debt set in Februgrowth after a surge in the third quarter. ary for the year was left unchanged at 8 to 11 Housing starts rose somewhat in November, percent. after slowing in October, but were little For 1988, the Committee agreed in July on changed from the average pace in the second tentative ranges of monetary growth, meaand third quarters. The nominal U.S. mer- sured from the fourth quarter of 1987 to the chandise trade deficit in October appeared to fourth quarter of 1988, of 5 to 8 percent for have deteriorated substantially from the both M2 and M3. The Committee provisionaverage rate in the third quarter. The rise in ally set the associated range for growth in broad measures of prices and wages in recent total domestic nonfinancial debt at VA to months generally has been close to that expe- IOV2 percent. rienced earlier in the year. With respect to M1, the Committee recog- Financial markets remained somewhat un- nized that, based on experience, the behavior settled. Stock and bond prices continued to of that aggregate must be judged in the light fluctuate over a relatively wide range during of other evidence relating to economic activthe period since the previous Committee ity and prices; fluctuations in Ml have bemeeting on November 3. On balance, share come much more sensitive in recent years to prices fell somewhat further in this period. changes in interest rates, among other fac- Changes in long-term yields were mixed tors. Because of this sensitivity, which had while short-term interest rates rose, espe- been reflected in a sharp slowing of the decially on short-maturity private market in- cline in M1 velocity over the first half of the struments. The trade-weighted foreign ex- year, the Committee again decided at the change value of the dollar in terms of the July meeting not to establish a specific target other G-10 currencies declined considerably for growth in Ml over the remainder of 1987 further. and no tentative range was set for 1988. The The monetary aggregates weakened in appropriateness of changes in Ml this year November after strengthening in October in would continue to be evaluated in the light of conjunction with a temporary surge in de- the behavior of its velocity, developments in mands for transaction balances and other liq- the economy and financial markets, and the uid assets in the latter part of that month. For nature of emerging price pressures. The 1987 through November, expansion of M2 Committee welcomed substantially slower fell somewhat further below the lower end of growth of Ml in 1987 than in 1986 in the the range established by the Committee for context of continuing economic expansion the year, while growth of M3 remained and some evidence of greater inflationary around the lower end of its range. Growth of pressures. The Committee indicated in July Ml was close to that of nominal GNP for the that in reaching operational decisions over year to date and expansion in total domestic the balance of the year it would take account nonfinancial debt remained well within the of growth in Ml in the light of circumstances Committee's monitoring range for the year. then prevailing. The issues involved with The Federal Open Market Committee establishing a target for M1 will be carefully seeks monetary and financial conditions that reappraised at the beginning of 1988. will foster reasonable price stability over In the implementation of policy for the time, promote growth in output on a sustain- immediate future, the Committee seeks to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 151 maintain the existing degree of pressure on over an extended period. She also reserve positions. The Committee recognizes wanted to continue to focus on money that still sensitive conditions in financial market conditions in System open marmarkets and uncertainties in the economic outlook may continue to call for a special ket operations and in particular to degree of flexibility in open market opera- counter upward pressures on short-term tions. Taking account of conditions in finan- interest rates. cial markets, somewhat lesser reserve restraint or somewhat greater reserve restraint would be acceptable depending on the 2. Authorization for Domestic strength of the business expansion, indica- Open Market Operations tions of inflationary pressures, developments in foreign exchange markets, as well as the Effective December 17, 1987, the Combehavior of the monetary aggregates. The mittee approved a temporary increase of contemplated reserve conditions are ex- $3 billion, to $9 billion, in the limit pected to be consistent with growth in M2 between Committee meetings on and M3 over the period from November through March at annual rates of about 5 changes in System Account holdings of percent and 6 percent, respectively. Over the U.S. government and federal agency sesame period, growth in Ml is expected to curities specified in paragraph l(a) of the remain relatively limited. The Chairman may Authorization for Domestic Operations. call for Committee consultation if it appears to the Manager for Domestic Operations that The increase was effective for the interreserve conditions during the period before meeting period ending with the close of the next meeting are likely to be associated business on February 10, 1988. with a federal funds rate persistently outside a range of 4 to 8 percent. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Boehne, Boykin, Votes for this action: Messrs. Greenspan, Heller, Johnson, Keehn, Kelley, Ms. Corrigan, Angell, Boehne, Boykin, Seger, and Mr. Stern. Votes against this Heller, Keehn, Kelley, and Stern. Votes action: None. against this action: Mr. Johnson and Ms. Seger. This action was taken on the recommendation of the Manager for Domestic Mr. Johnson dissented because he be- Operations. The Manager advised that lieved that policy implementation the normal leeway of $6 billion for should continue to focus on maintaining changes in System Account holdings of generally stable conditions in the money securities probably would not be suffimarket, at least through the year-end, cient to accommodate desirable reducpending the emergence of more settled tions in the intermeeting period because conditions in financial markets and a of seasonal declines in currency in cirmore predictable relationship between culation and required reserves. reserve objectives and money market On January 5, 1988, the Committee conditions. He also preferred a directive held a meeting by telephone conference that gave greater weight to the possibil- to review monetary and financial develity for some easing, given potential de- opments since mid-December and to asvelopments during the intermeeting sess the Committee's decisions at the period. December meeting to begin to redirect Ms. Seger dissented because she fa- its operating procedures towards more vored some slight easing of reserve con- emphasis on achieving a desirable deditions in light of her concern about the gree of pressure on reserve positions. In downside risks in the economy, espe- the period after the stock market colcially in the context of sluggish growth lapse in October, open market operain reserves and the monetary aggregates tions had been guided to an important Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

152 FOMC Policy Actions extent by the objective of restoring and In the implementation of policy for the sustaining stability in the money market, immediate future, the Committee seeks to maintain the existing degree of pressure on and less attention was given than prereserve positions. The Committee agrees that viously to the implementation of objecthe passing of time and the year-end should tives relating to reserve conditions. permit further progress toward restoring a In the Committee's discussion most of normal approach to open market operations, the members agreed that with the further although still sensitive conditions in financial markets and uncertainties in the economic passage of time since the October disturoutlook may continue to call for some flexibances in financial markets and with bility in operations. Taking account of condiyear-end pressures in the money market tions in financial markets, somewhat lesser now unwinding, further progress could reserve restraint or somewhat greater reserve restraint would be acceptable depending on be made toward restoring the Committhe strength of the business expansion, inditee's earlier approach to open market cations of inflationary pressures, developoperations. The members recognized ments in foreign exchange markets, as well that conditions in financial markets were as the behavior of the monetary aggregates. The contemplated reserve conditions are exstill somewhat unsettled and that the repected to be consistent with growth in M2 lationship between reserves and money and M3 over the period from November market conditions had not been reestab- through March at annual rates of about 5 lished on a fully normal or predictable percent and 6 percent, respectively. Over the basis. In the circumstances and in light same period, growth in Ml is expected to remain relatively limited. The Chairman may of the uncertainties in the economic outcall for Committee consultation if it appears look, it was agreed that some amount of to the Manager for Domestic Operations that flexibility might continue to be needed in reserve conditions during the period before the conduct of open market operations. the next meeting are likely to be associated with a federal funds rate persistently outside To reflect and endorse the further a range of 4 to 8 percent. progress toward the operating procedures in use before mid-October, the Vote for this action: Messrs. Greenspan, Committee decided to amend the rele- Corrigan, Angell, Boehne, Boykin, Heller, Johnson, Keehn, Kelley, and vant reference in the operational para- Stern. Vote against this action: Ms. graph of its directive issued at its De- Seger. cember meeting. The amendment encompassed solely a change in empha- Ms. Seger dissented because she continsis relating to operating procedures and ued to believe that open market operadid not include any change in the Com- tions should be directed toward some mittee's short-run policy objectives. slight easing. She also felt that financial At the conclusion of this telephone markets remained too unsettled to warmeeting, the Committee voted to change rant any shift at this time in operational the operational paragraph of its directive procedures toward more emphasis on reto read as follows: serve objectives. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

153 Consumer and Community Affairs In 1987 the Federal Reserve Board used EFT services without imposing substanits rulewriting and enforcement author- tial compliance costs on financial instiity to maintain statutory protections for tutions or significantly reducing conconsumers while easing regulatory bur- sumer protections. dens. This report examines in detail the To take advantage of the exemption activities of the Federal Reserve System from the periodic statement requirein support of those goals. ment, providers of point-of-sale EFT services must take these steps: • Issue consumers a debit card that includes the name and address or tele- Regulatory Matters phone number they can use to contact The Board amended Regulations E and the service provider about errors or other Z and proposed further amendments to problems. Regulation Z. The Board also proposed • Include on each transaction receipt Regulation CC, to carry out the provi- the address and telephone number for sions of the Expedited Funds Availabil- reporting errors. ity Act. In other regulatory matters, the • Transmit, in accordance with Regu- Board cooperated in the production of lation E, the information needed to idenbrochures to clarify for consumers the tify the transaction, including the termiprocess of applying for a mortgage and nal location, to the account-holding cosponsored a conference to aid bankers financial institution. in setting up programs for basic banking • Inform the consumer in the initial and home equity lines of credit that are disclosure statement that the provider responsive to concerns of consumers. should be notified in the event of an error. • Extend the periods available to the consumer for notice of errors (from 60 to Regulation E 90 days) and for notice of lost or stolen (Electronic Fund Transfers) debit cards (from 2 to 4 business days). In August the Board amended Regula- The amendments also require action E (Electronic Fund Transfers) to count-holding financial institutions to eliminate the requirement to issue peri- include a description of these EFT transodic statements for institutions that pro- actions on the periodic statements they vide EFT services but do not themselves provide to their customers. To reduce hold consumer accounts. The amend- costs and help institutions comply with ments, which were effective November the new requirements, disclosure of the 15, 1987, apply to retailers (such as terminal location will not be required gasoline stations or supermarkets) that until July 1, 1990. In addition, financial offer point-of-sale EFT services to con- institutions with assets of $25 million or sumers and use automated clearing- less will not be required to comply with houses to access consumer accounts held any aspect of these amendments to the at financial institutions. The Board be- regulation (except to cooperate with the lieves that the amendments should facili- service provider in the investigation of Digitizedt afotre FtRhAeS dEeRv elopment of point-of-sale errors) until July 1, 1990. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 Consumer and Community Affairs Regulation Z vide a common approach to ARM dis- (Truth in Lending): closures. Until now, the Board, the Adjustable Interest Rate Limits Federal Home Loan Bank Board, the Comptroller of the Currency, and the In November the Board amended Regu- Department of Housing and Urban Delation Z (Truth in Lending) to require velopment all have had different disclocreditors that offer adjustable-rate loans sure requirements for these loans. The secured by a dwelling to set a limit on differences may have hampered conthe maximum interest rate that may be sumers in comparing ARMs before encharged. The amendment, which impletering into these transactions. The differments a provision of the Competitive ences have also proved burdensome to Equality Banking Act of 1987, applies mortgage lenders seeking to take full to closed-end transactions (such as tradiadvantage of the secondary market betional second mortgages) and open-end cause of the need to satisfy more than plans (such as home equity lines of one regulation. For example, lenders credit) made on or after December 9, who originate mortgages for possible 1987, the effective date of the law. Desale either to a federal savings and loan termination of the maximum rate is left association or a national bank typically to the creditor's discretion. have had to make disclosures under the rules of two agencies. Regulation Z: Adjustable-Rate Mortgages In December the Board amended Regu- Regulation Z: lation Z to require creditors to give con- Home Equity Lines of Credit sumers more information about the variable-rate feature of closed-end, ad- In December the Board proposed to justable-rate mortgages with maturities amend Regulation Z to require that credlonger than one year. The amendment, itors give consumers more detailed diseffective October 1, 1988, applies to closures about home equity lines of mortgages secured by the consumer's credit early in the credit process. The principal dwelling and requires creditors disclosures would apply to home equity to give consumers an educational book- lines of credit secured by a consumer's let about adjustable-rate mortgages; to principal dwelling; they would have to give a detailed description of the vari- be given to the consumer at the time of able-rate feature; and to give an example application or before the consumer pays based on historical data that shows the a nonrefundable fee, whichever is eareffect of actual changes in index values lier. These disclosures would have to be on a $10,000 loan. This information segregated from other information given must be provided at the time the con- to the consumer. They would include sumer gets an application form or before notice of whether the creditor could terthe consumer pays a nonrefundable fee, minate or change the terms of the plan. whichever is earlier. For plans with a variable-rate feature, These revisions address concerns creditors would have to specify the about the adequacy of information given index used to calculate rate adjustments, to consumers who apply for adjustable- the frequency of rate adjustments, and a rate mortgages; they are expected to be history of changes in the index. Crediadopted shortly by the other federal tors also would be required to give conagencies that regulate financial institu- sumers a brochure describing home eq- Digitized t i f o or n F s. R M AS o E r R eo ver, the new rules will pro- uity plans. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 155 Regulation CC preempt certain provisions of Wisconsin (Expedited Funds Availability) law. The ECOA authorizes the Board to consider inconsistencies between In December the Board proposed a new the act and state laws relating to credit regulation, Regulation CC, to carry out discrimination. the Expedited Funds Availability Act, The Board determined that because which is title VI of the Competitive Wisconsin is a community property Equality Banking Act of 1987. The act state, the state and federal laws do not and proposed regulation address the conflict in regard to inquiries about marpractice of some depository institutions ital status. of delaying access to deposits, a practice The Board also considered a state that may cause problems for customers. provision that allows a nonapplicant They require, among other things, that spouse unilaterally to terminate an acdepository institutions make funds decount. Because Regulation B prohibits posited into accounts available within specified time schedules and disclose an institution from refusing to grant an their policies on funds availability. individual account to a creditworthy applicant on the basis of marital status, the The time schedules differ based on federal and state laws appear to be inseveral factors, including the type of consistent. The Board determined not to deposit and relative locations of the depreempt, however, basing its decision pository and paying banks. The act on a provision of the ECOA that allows allows financial institutions to delay accreditors to take into account state propcess for certain types of deposits for erty laws directly or indirectly affecting longer periods. These deposits include creditworthiness. deposits to a new account; checks for large dollar amounts; deposits that the institution has reasonable cause to be- Regulation AA lieve are uncollectible; deposits of (Credit Practices Rule) checks that have been returned unpaid and redeposited; and deposits to ac- In January the Board granted a request counts that have been overdrawn repeat- from New York State for an exemption edly. Depository institutions are re- from Regulation AA (Credit Practices quired to make disclosures before Rule). That rule prohibits banks and opening accounts, to existing cus- their subsidiaries from using certain tomers, on deposit slips and automated creditor remedies to enforce consumer teller machines, and in branch lobbies. credit obligations and from "pyramid- In the proposed regulation, the Board ing" late charges; it also affords special included model disclosure forms to protections for cosigners. To qualify for make it less burdensome and less costly an exemption, the state must have a law for financial institutions to comply with that protects consumers at least as well the new requirements. The act and regu- as the corresponding federal provision. lation will be effective September 1, Because the New York law covers 1988. only transactions involving $25,000 or less, transactions above that amount remain subject to the federal rule. Regulation B However, the Board determined that (Equal Credit Opportunity) compliance with New York law will In September the Board determined that constitute compliance with the federal the Equal Credit Opportunity Act requirements. Digitized( fEorC FORAAS) ERa nd Regulation B do not The Board also received an applicahttp://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 Consumer and Community Affairs tion from the State of California for an case studies of successful programs at exemption from the cosigner provisions their respective institutions. of the Credit Practices Rule. The Board Community Affairs published notice of the application in July; final action is expected in early The Federal Reserve System continued 1988. to gather and disseminate information about community development strategies and techniques to help banks, hold- Interpretations ing companies, and others address the In 1987 the Board continued to offer economic needs of their local communilegal interpretations and guidance in up- ties, including areas with low- and moddates to the official staff commentaries erate-income neighborhoods. These on Regulation B (Equal Credit Opportu- strategies and techniques have emphanity), Regulation E (Electronic Fund sized the value of partnerships among Transfers), and Regulation Z (Truth in cities, communities, and banks. In many Lending). These commentaries, which instances they have offered reliable ways are published by April 1 each year, help of achieving the aims of the Community financial institutions and others apply Reinvestment Act to meet community the regulations to specific situations. credit needs and to address the problem of disinvestment. To support the Community Affairs program, the Board offered training for Mortgage Brochures the Reserve Banks' Community Affairs In response to a congressional request, Officers (CAOs) and their staffs. A twothe Federal Reserve Board and the Fed- week course presented by the Developeral Home Loan Bank Board prepared ment Training Institute in Baltimore three brochures to improve consumer sought to ensure that the CAOs are well understanding of the mortgage application versed in community development lendprocess. These brochures—on refinanc- ing. The CAOs used the knowledge of ings, lock-ins, and closing costs—are development issues gained during this scheduled for publication early in 1988. training program to educate banks and They were prepared in consultation with other organizations about becoming innumerous trade and consumer groups volved in community development. and government agencies. During the year, the Reserve Banks sponsored 63 seminars and workshops, ranging from half-day forums that cen- Conference on Basic Banking tered on specific issues to three-day conand Home Equity Lines of Credit ferences that explored a variety of topics In October the Board cosponsored a con- related to community investment, comference on basic banking and home eq- munity revitalization, and rehabilitation uity lines of credit with the American financing. With the Office of the Comp- Bankers Association and the Consumer troller of the Currency, the Board also Bankers Association. More than 100 cosponsored a conference on commubankers from 26 states attended. The nity development corporations (CDCs) conference was intended to help bankers that are subsidiaries of national banks or design basic banking and home equity bank holding companies. The aim was programs that are responsive to con- to inform bankers who seek to promote sumer concerns. The speakers at the housing and economic development in Digitizedc ofonr fFeRreAnScEeR, mainly bankers, presented low-income neighborhoods about the http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 157 flexible financial strategies available tional Association of Counties, and the through CDCs. Council for Urban Economic Develop- In meetings with community develop- ment and to community groups such as ment practitioners in the private and National Peoples Action and the Associpublic sectors, members of the commu- ation of Community Organizations for nity affairs staffs at the Reserve Banks Reform Now (ACORN). In all, the detailed successful programs and strate- CAOs and their staffs reached over 650 gies that might be duplicated. These out- audiences in 1987 through speeches, reach efforts by all the Reserve Banks conferences, meetings, and neighborhelped bankers to address the needs of hood tours. communities. For example, they helped bankers to develop housing programs in New Jersey and Rhode Island; prompted Compliance with banks to work together to address com- Consumer Regulations munity development in Camden, New Jersey, and Columbus and Cincinnati, Data from the five federal agencies that Ohio; and attracted the involvement of supervise financial institutions and from banks in local government programs in other federal supervisory agencies indi- Nashville, Tennessee, and New York cate that compliance with the Truth in City. A seminar on revolving loans for Lending Act and the Equal Credit Opcommercial revitalization, sponsored by portunity Act declined slightly from the Richmond Federal Reserve Bank, 1986 levels, while compliance with the helped banks in Gal ax and Winchester, Electronic Fund Transfer Act remained Virginia, to establish revolving loan substantially the same. This section pools at favorable rates in their towns. summarizes data on compliance gath- In other meetings, the staffs of the ered from the regulatory agencies cover- Reserve Banks discussed community ing the reporting period July 1, 1986, to development issues with representatives June 30, 1987.l of bank holding companies, community groups, city government officials, Truth in Lending Act banks, and trade associations. Through (Regulation Z) these discussions the participants learned more about the credit needs of According to aggregate data from the their respective communities. In addi- Board, the Federal Deposit Insurance tion, examiners made hundreds of con- Corporation (FDIC), the Office of the tacts with individuals and organizations Comptroller of the Currency (OCC), the in the communities of the banks they Federal Home Loan Bank Board were examining. (FHLBB), and the National Credit In 1987 the staffs of the Reserve Union Administration (NCUA), 54 per- Banks were invited to speak before cent of examined institutions had no 101 groups concerning the Community violations under Regulation Z; the pro- Reinvestment Act and community de- portion for 1986 was 62 percent. The velopment, a significant increase from OCC, the FDIC, and the NCUA noted previous years. Although many of the presentations were primarily for bankers, many also were made to regional workshops sponsored by the Department 1. Not all the federal agencies that regulate financial institutions use the same method to comof Housing and Urban Development, the pile data on compliance. However, the data sup- Digitized Afomr FeRriAcaSnE RP lanners Association, the Na- port the general conclusions presented here. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 Consumer and Community Affairs declines in compliance, while the Board plaints to trace companies suspected of and the FHLBB reported little change violating the Federal Trade Commission from 1986. Among institutions super- Act and the Truth in Lending Act. A vised by the Board, the OCC, and the number of actions have been brought in NCUA that were not in full compliance, federal district courts alleging violations half had fewer than five violations. This of the act's requirements for prompt norecord indicates substantial compliance tification of returns and crediting of even among institutions with violations. refunds. (The other agencies do not collect data To heighten the awareness of conon the frequency of violations.) Finan- sumers and creditors concerning their cial institutions were most frequently rights and responsibilities, the FTC iscited for failing to give accurate disclo- sued several new publications: "Lost or sures of the following items: Stolen: Credit and ATM Cards," "Tele- • The annual percentage rate. marketing Travel Fraud," "Telephone • The number, amount, and timing of Investment Fraud," and "How to Write payments scheduled to repay the obliga- Readable Credit Forms." tion. The Department of Transportation • The finance charge. (DOT) reported a satisfactory level of • The amount financed. compliance with the Truth in Lending The violation next in frequency was Act by foreign and domestic air carriers the failure to make disclosures clearly subject to its jurisdiction. As the result and conspicuously, in writing. The of consumer inquiries investigated by FDIC issued one cease-and-desist order, the agency, DOT entered into a consent and the OCC issued three formal en- order with an air carrier that included forcement actions involving violations provisions relating to the act. The other of Regulation Z. Under the Regulation Z agencies that enforce the act—the Interagency Enforcement Policy Guide, Packers and Stockyards Administration 164 institutions supervised by the of the Department of Agriculture and the Board, the FHLBB, the FDIC, and the Farm Credit Administration—also re- OCC reimbursed $1.2 million to 10,507 ported satisfactory levels of compliance. accounts. In 1986, $1.3 million was reimbursed to 12,252 accounts. The Federal Trade Commission Equal Credit Opportunity Act (FTC) continued its compliance pro- (Regulation B) gram to enforce the requirements of Regulation Z regarding credit advertis- The five financial regulatory agencies ing, with an emphasis on advertisers of reported a slight decline in the overall real estate and automobile credit. Most level of compliance with the Equal companies contacted by the commission Credit Opportunity Act. In the aggrepromptly brought their programs into gate, the number of institutions that had compliance, and three companies signed no violations declined from 79 percent consent decrees. in 1986 to 74 percent for the 1987 re- In the past year the FTC, in conjunc- porting period. However, the three tion with the National Association of agencies that collect data on violation Attorneys General, began a major new frequency (the Board, the OCC, and the enforcement program against fraud in NCUA) reported that among the institutelemarketing and other fraud involving tions not in full compliance, 75 percent charges to credit cards. The program had fewer than five violations, a number Digitized ufoser sF RdAatSaE gRa thered from consumer com- that suggests substantial compliance. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 159 The most frequent violations of Regula- were not in full compliance, 87 percent tion B were the following items: had fewer than five violations. • Failing to provide a written notice The five most frequent violations of of adverse action that contains the infor- Regulation E involved the failure to give mation required by the regulation. the following disclosures: • Failing to give notice of the action • A written statement outlining the taken within 30 days of receiving a com- terms and conditions of the EFT service. pleted application. • A statement of the consumer's lia- • Failing to request information for bility for unauthorized transfers. monitoring purposes on applications in- • A notice explaining procedures for volving the purchase or refinancing of a resolving errors and the consumer's primary residence. rights. • Failing to provide the specific rea- • The types of electronic fund transsons for adverse action. fers that the consumer may make and • Illegally requiring the signature of any dollar and frequency limitations. an applicant's spouse or other cosigner. • A periodic notice of the procedures The OCC and the FHLBB each issued for resolving disputes. a formal enforcement action that in- The other agencies responsible for encluded provisions addressing ECOA forcing the Electronic Fund Transfer violations. Act, the Department of Transportation The FTC continued an investigative and the Securities and Exchange Comprogram in which testers pose as credit mission, reported a satisfactory level of applicants to monitor compliance with compliance. the ECOA. During this reporting period, the FTC settled an ECOA case in litiga- Economic Effect of Regulation E tion, entered into a consent decree with a creditor, and amended a consent decree In accordance with statutory requirewith another creditor. As part of its on- ments, the Board monitors the effects of going consumer education effort, the the Electronic Fund Transfer Act on the FTC issued a new brochure, "Credit costs and benefits of EFT service to fiand Older Americans." Other agencies nancial institutions and consumers. Dur- —the Department of Transportation, the ing 1987, the economic effect of the act Interstate Commerce Commission, the broadened as more financial institutions Small Business Administration, the Se- offered EFTs and more consumers used curities and Exchange Commission, and them. Approximately two-thirds of the the Packers and Stockyards Administra- depository institutions in the United tion—reported satisfactory compliance States now provide EFT services that are with the ECOA among the entities they covered by the requirements of the act supervise. and by Regulation E. Demand for EFT services has contin- Electronic Fund Transfer Act ued to grow. Consumers gained greater (Regulation E) access to EFT services through the The five financial regulators reported expansion of shared ATM networks. that 90 percent of the institutions they Depository institutions processed apexamined were in full compliance with proximately 350 million debit-card Regulation E. This level of compliance transactions per month for consumer acis substantially the same as last year's. counts. While most of those transactions Among the institutions examined by the were initiated at the country's 70,000 DigitizedB foora FrRd,A SthEeR OCC, and the NCUA that ATMs, about 7 million transactions per http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

160 Consumer and Community Affairs month were carried out at electronic consumer EFT transactions in individual point-of-sale terminals. The number of institutions. merchant terminals capable of support- Data from the Board's Consumer ing direct-debit POS transactions is ex- Complaint Control System confirm that pected to grow rapidly from its current consumers have no serious problems level of approximately 75,000. with EFT. Only 74 of the 2,621 com- In 1987 the Board adopted amend- plaints processed in 1987 involved ments to Regulation E that are expected EFTs. The Federal Reserve System forto make POS electronic transactions eas- warded 29, which did not pertain to state ier and less costly for merchants to offer, member banks, to other agencies for resalthough they impose new responsibili- olution. Of the remaining 45, none inties and costs on depository institutions. volved a violation of the regulation. The amendments are expected to facili- Because the costs of industry practate the growth of electronic POS sys- tices that would have evolved in the tems controlled by merchants, thereby absence of statutory requirements are offering consumers a less expensive unknown, the incremental costs assomethod of payment. ciated with the act, like the benefits, are More and more consumers are elect- difficult to quantify. But the compliance ing to receive payroll or government cost of an EFT transaction is probably transfer payments by electronic direct not high enough to compromise the cost deposit; and more corporations offer di- advantage such transactions have over rect deposit of payroll. In the public check-based transactions. sector, about 46 percent of social secu- As EFT systems mature, as transacrity recipients now receive monthly ben- tion volume builds, and as start-up costs efits electronically. The number of mili- for compliance are amortized, complitary personnel who receive payroll and ance costs imposed by the act per EFT other benefits by automated direct de- transaction and per dollar of transferred posit is growing, and the Internal Reve- funds are likely to decline. nue Service offers electronic deposit of individuals' income tax refunds. Complaints against The benefits to consumers from the State Member Banks Electronic Fund Transfer Act are difficult to measure because they cannot be In 1987 the Federal Reserve System reisolated from consumer protections that ceived a total of 2,621 complaints (see would have been provided in any case. accompanying table). Within this total, Statistics from examination reports do 907 were against state member banks, not suggest widespread violation of the which the Federal Reserve investigates consumer rights established by the act. and resolves. The System referred the Moreover, in 1987, according to reports remaining 1,714 complaints, involving by the federal agencies that regulate fi- other creditors and businesses, to the nancial institutions, the proportion of in- appropriate enforcement agencies. Most stitutions that were not in full compli- of the complaints (2,163) were made in ance was, as in 1986, only one in ten. letters; 450 were made by telephone, The violations involved primarily the and 8 were made in person. The Board failure to provide one or more disclo- also received 217 written inquiries consures to consumers. Eighty-seven per- cerning consumer credit laws and bankcent of the institutions cited for noncom- ing practices. In responding, the Board's pliance had fewer that five violations, a staff gave consumers brochures on the Digitizeds mfora lFlR nAuSmERbe r in light of the volume of general issues plus explanations of laws, http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 161 Consumer Complaints Received filed against state member banks in by the Federal Reserve System, 1987, classified according to bank funcby Subject, 19871 tions: loans, deposits, electronic fund Subject Number transfers, trust services, and others. Of the 907 complaints received, approxi- Regulation B (Equal Credit Opportunity) 162 mately 58 percent concerned loan func- Regulation E tions, including alleged discrimination (Electronic Fund Transfers) 74 Regulation M (Consumer Leasing) 4 on a prohibited basis, credit denial on a Regulation Q (Interest on Deposits) 98 nonprohibited basis, and disclosure of Regulation Z (Truth in Lending) 748 Regulation BB credit costs. About 22 percent involved (Community Reinvestment) 1 Fair Credit Reporting Act 122 practices concerning deposit accounts, Fair Debt Collection Practices Act 50 including disputes about interest. Fair Housing Act 2 Holder in due course 2 Transfer agents 7 Unregulated bank practices 1,254 Other2 97 Unregulated Practices Total 2,621 1. Comprises 907 complaints about state member Under section 18(f) of the Federal Trade banks, over which the Federal Reserve has jurisdiction, Commission Act, the Federal Reserve and 1,714 complaints about other lenders, which the Board is authorized to identify unfair or Federal Reserve referred to the appropriate agencies. 2. Primarily miscellaneous complaints against busi- deceptive banking practices and adopt ness entities. regulations that prohibit them. The Board has a system to monitor complaints about banking practices that are not addressed by an existing regulation regulations, and banking practices spe- but that may be unfair or deceptive. The cific to their complaints or inquiries. Board identifies unregulated practices The Board's staff continues regularly that are the subject of 15 or more comto review and assess the System's han- plaints per quarter, or 50 or more for the dling of complaints. The staff samples year. About one-fourth, or 332, of the the handling of complaints about state 1,254 complaints received in 1987 about member banks for adherence to System unregulated practices met that criterion. policies; and, through follow-up ques- These concerned denial of credit based tionnaires, it attempts to gauge com- on credit history (99); denial based on plainants' perceptions of how well the other nonprohibited factors, such as the process works. Approximately 86 per- lack of sufficient assets (66); discrepancent of the respondents found the expla- cies in accounts (56); excessive time to nations clear and understandable; 92 clear checks, including delayed availpercent were satisfied with the speed in ability of funds (54); and other unreguhandling their complaints; and 83 per- lated lending practices (57). Each of cent found the resolution of their com- these categories accounts for a small plaints acceptable. All of the respon- fraction (4 percent or less) of all condents indicated that they were treated sumer complaints received by the Syscourteously by the Federal Reserve staff tem. Many of the complaints about deand that they would contact the Federal nials based on credit history indicated Reserve again if they had other problems that the applicant did not realize the imwith banks. plications of a poor credit history or a The accompanying table summarizes lack of borrowing experience on the de- Digitized tfhoer FnRaAtuSrEeR a nd resolution of complaints cision about creditworthiness. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

162 Consumer and Community Affairs Consumer Complaints Received by the Federal Reserve System, by Function and Resolution, 1987 Type of complaint Loan function Type of resolution Total D n is a c t r io im n i- Other f D un ep ct o io si n t E t l r e a f c n u t s n r f o d e n rs ic se T r r v u ic st es Other Complaints about state member banks Number 907 104 418 198 45 7 135 Percent 100 11 46 22 5 1 15 Complaints about state member banks, by type Insufficient information1 .... 41 4 13 13 0 0 11 Information furnished to complainant2 163 27 86 25 1 1 23 Bank legally correct No accommodation 311 33 137 69 29 1 42 Accommodation made3 . . . 99 11 52 14 10 2 10 Clerical error, corrected .... 137 14 70 29 0 1 23 Factual dispute4 36 2 17 9 1 2 5 Bank violation, resolved5. . . . 7 2 13 0 0 1 Possible bank violation, unresolved6 7 0 2 5 0 0 0 Customer error 12 2 2 3 10 4 Pending, December 31 94 9 38 28 3 0 16 Complaints referred to other agencies7 1,714 59 980 337 29 15 294 Total, all complaints 2,621 163 1,398 535 74 22 429 1. The staff has been unable, after follow-up corre- that can be resolved only by the courts. Consumers wishspondence with the consumer, to obtain sufficient infor- ing to pursue the matter may be advised to seek legal mation to process the complaint. counsel or legal aid, or to use small claims court. 2. When it appears that the complainant does not un- 5. In these cases a bank appears to have violated a law derstand the law and that there has been no violation on or regulation and has taken corrective measures voluntarthe part of the bank, the Federal Reserve System explains ily or as indicated by the Federal Reserve System. the law in question and provides the complainant with 6. When a bank appears to have violated a law or other pertinent information. regulation, customers are advised to seek civil remedy 3. In these cases the bank appears to be legally correct through the courts. Cases that appear to involve criminal but has chosen to make an accommodation. irregularity are referred to the appropriate law enforce- 4. These cases involve factual disputes not resolvable ment agency. by the Federal Reserve System and contractual disputes 7. Complaints about nonmember institutions. Community Reinvestment Act may withhold approval of certain applications if the CRA record of the institu- The Board is required by the Commu- tion is not satisfactory. nity Reinvestment Act to encourage in- During the 1987 reporting period stitutions under its jurisdiction to help (July 1, 1986, through June 30, 1987), meet the credit needs of their communi- Federal Reserve personnel examined ties, including the needs of low- and 576 state member banks for compliance moderate-income neighborhoods, in with the CRA. The record of almost all keeping with the safe and sound opera- of these banks was satisfactory or better. tion of the institutions. The Board as- During calendar year 1987, the sesses the CRA record of state member number of protests against applications banks during regular examinations; and filed by state member banks or bank it takes an institution's CRA perfor- holding companies, based on CRA permance into account when acting on ap- formance, increased significantly. plications filed by state member banks Thirty-six applications were protested in Digitizeda fnodr FbRaAnSk EhRo lding companies. The Board 1987, compared with 20 in 1986. Ten http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 163 protests were withdrawn following ne- giving disclosures for home equity lendgotiated agreements between applicants ing earlier than is required for other and protestants. In 10 other instances, forms of open-end credit, and it supthe applications were approved after the ported their segregation from other conapplicant made commitments to im- tract terms. Members also urged that prove its CRA performance. By year- model forms be adopted to ease creditor end 31 of the applications had been ap- compliance and facilitate comparison proved by the Board, and 5 were still shopping. pending. At its June meeting, the CAC supported the early disclosure of essential terms in credit card applications mailed Consumer Advisory Council to consumers. These disclosures would The Consumer Advisory Council (CAC) include annual percentage rates, varimet in March, June, and October to ad- able-rate information, and any fees and vise the Board on its responsibilities grace periods. The CAC also recomunder financial protection laws and to mended that "take one" applications for discuss other issues relating to consumer credit cards available at retail outlets financial services. The CAC has 30 such as shops and restaurants include a members, representing the interests of telephone number or address where conconsumers and the financial services in- sumers can obtain cost information. dustry. Its meetings are open to the In October the CAC discussed holds public. on deposited checks and the disclosures At each of its 1987 meetings, the mandated by the Expedited Funds Avail- CAC considered the advantages and dis- ability Act, which goes into effect Sepadvantages of home equity lines of tember 1, 1988. The legislation calls for credit and the adequacy of current dis- institutions to give specific, detailed declosure requirements. The CAC's inter- scriptions of their check-hold policies to est was sparked by the growing popular- consumers. The CAC was asked about ity of these programs and concerns about giving institutions the option of a more the potential risk to consumers. The general notice if they place holds only in CAC focused on those characteristics certain cases. Many institutions, for exthat increase the risk to consumers: bal- ample, offer next-day availability with loon payments, interest-only payments, only a few exceptions, such as when a and credit standards that base approval check is deposited to a new account. solely on equity in the home without Without this option, these institutions considering the homeowner's income may be inclined to hold all check deand ability to repay. The Council also posits for the longer periods allowed by reviewed industry actions that promote the statute. Many members of the CAC the responsible use and marketing of supported such an alternative. home equity lines. Also in October the CAC suggested The CAC was briefed on current two revisions to the Board's Regulation Truth in Lending disclosures for home Q (Interest on Deposits), which governs equity lines and the possible need for the advertising of interest on deposits by additional or different disclosures. state member banks. One suggestion ad- Members supported the disclosure of all dressed the practice by some banks of account terms and conditions, especially not paying interest on that portion of a features that give a creditor the right to consumer's deposit that must be held in terminate a plan and demand immediate reserve. The CAC recommended that Digitizedr feopr aFyRmASenEtR in full. The CAC favored the Board require banks to calculate the http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

164 Consumer and Community Affairs percentage yield on the full amount of mittee on Banking, Finance and Urban the consumer's deposit. The second Affairs on proposed legislation related to suggestion dealt with the calculation of disclosures of prices and terms in credit compound interest. Currently, some in- card applications and to a nationwide stitutions use 360 days in calculating the ceiling on credit card interest rates. In yearly interest. The CAC recommended April the Board testified about these requiring the percentage yield to be same issues before the Subcommittee on based on 365 days. Consumer Affairs of the Senate Com- In 1987, the CAC commended the mittee on Banking, Housing, and Urban Reserve Banks for their programs en- Affairs. couraging economic development activities by state member banks. It sug- Credit Card Disclosure gested that the Reserve Banks also Under the proposed legislation, card issponsor conferences to help state suers would have to give full disclosures member banks develop internal manage- on prices and terms in all credit card ment programs for compliance with the applications and solicitations. Cur- CRA; a committee devised materials rently, disclosures are required in solicithat could be used at such conferences. tations only when the creditor advertises In 1987 the CAC also considered the certain price information. following issues: The Board reiterated its support for • The possible effects of a legislative additional disclosures that will give conproposal requiring banks to cash govern- sumers information that is both adequate ment checks for nondepositors, free of and early enough to enable comparison charge. shopping. The Board believes that any • The Federal Reserve's educational disclosure rules should be structured so outreach efforts. as not to overload consumers with less • Efforts by industry trade groups to important information and should apply encourage the offering of basic financial evenhandedly to all competitors. The services to low- and moderate-income Board believes it is unlikely that the consumers. proposals under consideration would • The enforcement of private agree- lessen advertising of credit cards, given ments negotiated by community groups the limited increase in disclosures. The under the CRA with bank holding com- Board also believes that any increase in panies and state member banks. costs to the industry could be minimized • Expanded powers for banks, start- by allowing creditors sufficient time to ing with insurance brokerage services. implement the changes. Legislative Recommendations Credit Card Rate Ceilings The Board opposes a federal ceiling on In 1987 the Board testified before sub- credit card interest rates. It believes that committees of the House and Senate on credit is most efficiently distributed legislation dealing with credit cards and when interest rates are set in a market home equity lines of credit. free of artificial restraints. In support of its views, the Board cited a staff analy- Credit Card Disclosures sis, prepared in response to a congresand Interest Rates sional request, on the economic effects In March the Board submitted a state- of a rate cap. Efforts to constrain credit ment to the Subcommittee on Consumer rates could have undesirable side effects DigitizedA foffra FirRsA aSnEdR Coinage of the House Com- in the form of a reduction in credit availhttp://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 165 ability, especially for the consumers that about home equity lines of credit. The these bills seek to aid. Moreover, a ceil- Board's proposal would require crediing on credit rates might encourage less tors to give consumers more detailed efficient means for offsetting the costs of disclosures about these lines of credit. credit card operations. In the November testimony, the Board also addressed proposals for im- Home Equity Lines of Credit posing substantive restrictions on home equity lines. The Board opposed any In October the Board testified before the restrictions on these products except Subcommittee on Consumer Affairs and those necessary to prevent misleading or Coinage of the House Committee on abusive practices; however, the Board is Banking, Finance and Urban Affairs. It unaware of any evidence that such probaddressed proposed legislation that lems currently exist. The Board also bewould amend the Truth in Lending Act lieves that, because restrictions could to establish requirements on disclosures affect a creditor's ability to offer this and advertising for home equity lines of type of product, consumers who might credit. The Board supports additional otherwise enjoy the advantages of a disclosures for home equity plans. Dishome equity line could be adversely afclosures about these plans, it believes, fected. The Board urged Congress not to should alert consumers to the most imrestrict the terms and conditions of home portant information about the cost of the equity programs unless there is evidence credit transaction. It suggested that the of a clear and unequivocal need for such timing, format, and content of the disaction. closures currently required for home equity lines of credit may not be adequate. In November the Board reiterated these Recommendations of views in testimony before the Subcom- Other Agencies mittee on Consumer Affairs of the Senate Committee on Banking, Housing, Each year the Board asks the agencies and Urban Affairs. As already dis- with enforcement responsibilities under cussed, the Board in December pro- Regulations B, E, and Z for recommenposed amendments to Regulation Z to dations of changes to the regulations or address the concern that consumers may the underlying acts. In 1987 the agencies not be receiving adequate information submitted no recommendations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

167 Litigation During 1987 the Board of Governors dated October 6, 1986, that court upheld was named in 47 pending lawsuits, the the Board's order (800 F.2d 1534). A same number as in 1986. Of the 21 new petition for certiorari to the U.S. Sulawsuits filed in 1987, 12 raised ques- preme Court (No. 86-1023) was denied tions under the Bank Holding Company on April 20, 1987 (107 S. Ct. 1887). Act, compared with 9 in 1986. As of In Florida Bankers Association v. December 31, 1987, 25 cases were Board of Governors, Nos. 84-3883 and pending, 15 of which involve questions 84-3884 (11th Circuit, filed December under the Bank Holding Company Act. 21, 1984) and Florida Department of Banking v. Board of Governors, Nos. 84-3831 and 84-3832 (11th Circuit, filed November 11, 1984), consolidated, pe- Bank Holding Companies— titioners sought review of Board orders Antitrust Action dated November 1, 1984, approving the In 1987 no bank holding company ac- applications of Bankers Trust New York quisitions or mergers that had been ap- Corporation and Bank of Boston Corpoproved by the Board were challenged by ration to expand activities of trust comthe U.S. Department of Justice under pany subsidiaries (Federal Reserve Bulantitrust laws, and no such cases were letin, vol. 71, January 1985, pp. 51 and pending from previous years. 55). The cases were voluntarily dismissed on June 3, 1987. In CBCy Inc. v. Board of Governors, Bank Holding Company Act— No. 86-1001 (10th Circuit, filed January Review of Board Actions 2, 1986), petitioner seeks review of the In Florida Bankers Association et al. v. Board's amendment to Regulation Y re- Board of Governors, Nos. 84-3269 and quiring certified financial statements in 84-3270 (11th Circuit, filed April 20, annual reports for bank holding compa- 1984), petitioners sought review of a nies with assets of $150 million or more Board order dated March 23, 1984, ap- (50 Fed. Reg. 50950, December 13, proving an application by U.S. Trust 1985). The case is pending. Corporation, New York, New York, to In Independent Community Bankers expand the activities of its trust company Association of South Dakota v. Board of subsidiary in Florida (Federal Reserve Governors, No. 86-5373 (8th Circuit, Bulletin, vol. 70, April 1984, p. 371). filed October 3, 1986), petitioners seek On May 20, 1985, the court reversed the review of a Board order dated Sep- Board's order of approval (760 F.2d tember 15, 1986, approving the applica- 1135). By order dated January 27, 1986, tion of Michigan National Corporation the Supreme Court granted the petition to acquire a nationally chartered credit of intervenor U.S. Trust Company for card bank in South Dakota (Federal Recertiorari (No. 85-193), vacated the serve Bulletin, vol. 72, November 1986, court of appeals judgment, and re- p. 792). The case is pending. manded the case back to the court of In Independent Insurance Agents of appeals (474 U.S. 1098). In an opinion America, Inc. v. Board of Governors, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 Litigation Nos. 86-1572, 86-1573, 86-1576 (D.C. application of Chase Manhattan Corpo- Circuit, filed October 24, 1986), peti- ration to underwrite and deal in morttioners sought review of a Board order gage-related securities to a limited examending provisions of Regulation Y tent (Federal Reserve Bulletin, vol. 73, concerning permissible insurance activi- September 1987, p. 729). The case is ties for bank holding companies. On pending. December 29, 1987, the court affirmed In National Association of Casualty the Board regulations but denied the pe- and Surety Agents et al. v. Board of tition for review on grounds of ripeness. Governors, Nos. 87-1354 and 87-1355 In Grimm et al. v. Board of Gover- (D.C. Circuit, filed July 29, 1987), petinors, No. 87-4006 (2nd Circuit, filed tioners seek review of Board orders January 16, 1987), petitioners sought dated June 29, 1987, and July 2, 1987, review of a Board order approving the permitting Sovran Financial Corporation acquisition by BankEast Corporation of and MNC Financial, Inc., to retain in- Royal/Grimm & Davis, Inc., a discount surance agency activities (Federal Rebrokerage firm (Federal Reserve Bulletin, serve Bulletin, vol. 73, August 1987, vol. 73, February 1987, p. 137). The case p. 672, and September, p. 740). The was dismissed on June 24, 1987. case is pending. In Bankers Trust New York Corp. v. In Board of Trade of Chicago et al. v. Board of Governors, No. 87-1035 (D.C. Board of Governors, No. 87-2389 (7th Circuit, filed January 23, 1987), peti- Circuit, filed September 1, 1987), petitioner sought review of a Board order tioners seek review of a Board order conditionally approving Bankers Trust's dated August 5, 1987, approving the application to engage in placement of application of Security Pacific Corporacommercial paper to a limited extent tion to engage in brokerage clearing and (Federal Reserve Bulletin, vol. 73, Feb- other services through wholly owned ruary 1987, p. 138). A stipulation of subsidiaries (Federal Reserve Bulletin, dismissal in the case was filed on Oc- vol. 73, October 1987, p. 815). The tober 30, 1987. case is pending. In Lewis v. Board of Governors, Nos. In Independent Community Bankers 87-3455 and 87-3545 (1 lth Circuit, filed Association of South Dakota v. Board of June 25, 1987), petitioners seek review Governors, No. 87-397 (petition for of Board orders dated May 29, 1987, certiorari to the U.S. Supreme Court, and July 1, 1987, approving applications filed September 3, 1987), petitioners of Chemical New York Corporation and sought review of the judgment of the of Manufacturers National Corporation Court of Appeals (820 F.2d 428) to expand activities of trust company upholding a Board order dated July 12, subsidiaries in Florida (Federal Reserve 1985, which approved the application of Bulletin, vol. 73, July 1987, p. 609, and First City Bancorporation of Texas to September, p. 735). This case has been acquire a nationally chartered credit card stayed pending the resolution of pro- bank in South Dakota (Federal Reserve ceedings in a related case in the same Bulletin, vol. 71, September 1985, judicial circuit. p. 716). On January 11, 1988, the Su- In Chase Manhattan Corporation v. preme Court denied the petition for cer- Board of Governors, No. 87-1333 (D.C. tiorari (56 U.S.L.W. 3459, January 12, Circuit, filed July 20, 1987), petitioner 1988). seeks review of a Board order dated July In Citicorp v. Board of Governors, 17, 1987, conditionally approving the No. 87-1475 (D.C. Circuit, filed Sep- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 169 tember 9, 1987), petitioner seeks review Financial Institutions of a Board order dated August 10, 1987, Supervisory Act denying petitioner relief from certain conditions on prior approvals of acquisi- In Adkins v. Board of Governors, No. tions of thrift institutions. The case is 86-3853 (4th Circuit, filed May 8, pending. 1986), petitioner sought review of the In Independent Insurance Agents of Board's assessment of civil money pen- America, Inc. v. Board of Governors, alties against him. By order dated April No. 87-4118 (2nd Circuit, filed Sep- 28, 1987, the court dismissed the appeal tember 17, 1987), petitioner seeks re- for want of jurisdiction (818 F.2d 28). view of a Board order dated September In Adams et al. v. Board of Gover- 10, 1987, granted at the request of Mer- nors, No. 87-5311MN (8th Circuit, filed chants National Corporation, determin- July 13, 1987), the plaintiffs appeal the ing that nonbanking prohibitions of the decision of a district court (659 F.Supp. Bank Holding Company Act do not 948) holding that the Board did not vioapply to activities of banks (Federal Re- late the Right to Financial Privacy Act serve Bulletin, vol. 73, November 1987, when it reviewed and copied plaintiffs' p. 876). The case is pending. records at a national bank. The case is In Independent Insurance Agents of pending. America, Inc., etal. v. Board of Gover- In Northeast Bancorp, Inc., et al. v. nors, No. 87-1686 (D.C. Circuit, filed Board of Governors, No. 87-1365 (D.C. November 19, 1987), petitioner seeks Circuit, filed July 31, 1987), petitioners review of a Board order dated October seek review of the Board determination 20, 1987, approving the application of that an officer and director who consents U.S. Bancorp to acquire Peoples Ban- to be removed from a national bank is Corporation (Federal Reserve Bulletin, also barred from serving in a holding vol. 73, December 1987, p. 941). The company. The case is pending. case is pending. In Anonymous Bank v. Board of Gov- In National Association of Casualty ernors, No. 87-1661 (S.D. Fla., filed and Surety Agents et al. v. Board of September 4, 1987), a case placed under Governors, No. 87-1801 (D.C. Circuit, seal by court order, plaintiffs sought to filed December 21, 1987), petitioners set aside a Board order suspending a seek review of a Board order dated No- bank director and officer from a state vember 9, 1987, approving the applica- member bank. A motion to dismiss the tion of Security Pacific Corporation to case as moot is pending. retain certain insurance agency activities (Federal Reserve Bulletin, vol. 74, January 1988, p. 75). The case is pending. Glass-Steagall Act In Securities Industry Association v. Board of Governors, No. 86-5667 (D.C. Other Litigation Involving Circuit, filed October 30, 1986), plain- Challenges to Board Procedures tiff appealed the district court's order of and Regulations October 27, 1986, dismissing plaintiff's In 1987, actions were taken, were pend- complaint, which sought a declaration ing, or were dismissed under the Fin- that a discount broker subsidiary of a ancial Institutions Supervisory Act, bank holding company participated in a the Glass-Steagall Act, and the Farm public offering of securities in violation Credit Act. of the Bank Holding Company Act. By Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 Litigation order dated June 25, 1987, the court ious bank holding companies to underdismissed the action as moot. write and deal in certain securities to a In Securities Industry Association v. limited extent through a securities sub- Board of Governors, No. 87-1030 (D.C. sidiary (Federal Reserve Bulletin, vol. Circuit, filed January 20, 1987), peti- 73, June 1987, p. 473, and July, tioner sought review of a Board order p. 607). The case is pending. Several dated December 24, 1986, approving other cases involve similar petitions for the application of Banker's Trust to en- review, which have been withdrawn gage in placement of commercial paper pending a decision in this case. These to a limited extent (Federal Reserve Bul- cases are as follows: Securities Industry letin, vol. 73, February 1987, p. 138). Association v. Board of Governors, The case was dismissed on December 2, Nos. 87-4091 and 87-4093 (2nd Circuit, 1987. filed July 1, 1987), No. 87-4095 (2nd In Securities Industry Association v. Circuit, filed July 15, 1987), No. Board of Governors, No. 86-1429 (peti- 87-4115 (2nd Circuit, filed September 9, tion for certiorari to the U.S. Supreme 1987), and No. 87-4135 (2nd Circuit, Court, filed March 3, 1987), petitioners filed October 8, 1987). challenge a Board decision of June 4, In Securities Industry Association v. 1985, approving the placement methods Board of Governors, No. 87-562 (petiof Bankers Trust Company in selling tion for certiorari to the U.S. Supreme third-party commercial paper. By mem- Court, filed October 2, 1987), petitioner orandum orders dated February 4 and sought review of the July 7, 1987, order 18, 1986, the district court invalidated of the Court of Appeals upholding a the Board's decision and permanently Board order dated June 13, 1986, apenjoined Bankers Trust from employing proving National Westminster Bank's their placement methods (627 F.Supp. acquisition of a company offering in- 695, 628 F.Supp. 1438). By order dated vestment advice and securities broker- December 23, 1986, the court of appeals age (Federal Reserve Bulletin, vol. 72, reversed the district court and reinstated August 1986, p. 584). On January 11, the Board's decision (807 F.2d 1052). A 1988, the Supreme Court denied the pepetition for certiorari to the Supreme tition for certiorari (56 U.S.L.W. 3459, Court was denied on June 22, 1987 (107 January 12, 1988). S. Ct. 3228). In Securities Industry Association v. In Securities Industry Association v. Board of Governors, No. 87-4161 (2nd Board of Governors, No. 87-1169 (D.C. Circuit, filed December 24, 1987), peti- Circuit, filed April 17, 1987), petitioner tioner seeks review of a Board order seeks review of a Board order dated dated December 14, 1987, approving March 18, 1987, approving the applica- the application by Bank of New England tion by Chase Manhattan Corporation to Corporation to underwrite and deal in underwrite and deal in commercial paper certain securities (Federal Reserve Bulto a limited extent (Federal Reserve Bul- letin, vol. 74, February 1988, p. 133). letin, vol. 73, May 1987, p. 367). The The case is pending. case is pending. In Securities Industry Association v. Farm Credit Act Board of Governors, No. 87-4041 (2nd Circuit, filed May 1, 1987), petitioner Several cases have been filed in various seeks review of Board orders dated April federal courts seeking injunctive relief 30 and May 18, 1987, authorizing var- and damages relating to loans made to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 171 plaintiff farmers by commercial banks court's dismissal of plaintiff's action and the Farm Credit System. These seeking damages resulting from an alcases have been dismissed in favor of leged violation by the Board and Banethe federal defendants. In Kurkowski et Ohio National Bank of federal statutes al. v. Wilkinson et al., No. 85-0-916 governing monetary credit and bank- (8th Circuit, filed October 16, 1985), ruptcy (815 F.2d 78). Farmer et al. v. Wilkinson et al., No. In Optical Coating Laboratory, Inc. 4-85-1448 (D. Minn., filed October 21, v. United States, No. 288-86C (U.S. 1985), and Kolb et al. v. Wilkinson et Claims Court, filed May 6, 1986), plainal., No. C85-4184 (N.D. Iowa, filed tiff sought damages in an action based October 22, 1985), plaintiffs sought on the expiration of a contract. The case damages and injunctive relief relating to was settled on October 23, 1987. loans to plaintiff by the Farm Credit Sys- In Jenkins et al. v. Board of Govertem. Farmer was dismissed on January nors, No. 87-1336 (D.C. Circuit, filed 21, 1987; Kolb was dismissed on March July 18, 1986), petitioner seeks review 27, 1987; and on August 26, 1987, the of a Board order dated May 21, 1986, court in Kurkowski affirmed the district granting an application for membership court's dismissal of the action. In Myers in the Federal Reserve System {Federal et al. v. Federal Reserve Board, No. Reserve Bulletin, vol. 72, July 1986, p. 85-1427 (D. Idaho, filed November 18, 477). The case is pending. 1985), plaintiffs sought damages and in- In Howe v. United States et al., No. junctive relief related to loans made to 86-889 (petition for certiorari to the plaintiffs by commercial banks. The U.S. Supreme Court, filed November case was dismissed on September 22, 26, 1986), petitioner sought review of 1987. the July 30, 1986, order of the Court of Appeals affirming the district court's dismissal of the action on April 18, Other Actions 1986, that challenged the constitutional- In Urwyler et al. v. Internal Revenue ity of the current monetary system. A Service etal., No. 85-2877 (9th Circuit, petition for certiorari was denied by the filed December 9, 1985) and Wight et al. Court on January 27, 1987 (107 S. Ct. v. Internal Revenue Service et al., No. 952). 85-2826 (9th Circuit, filed November In Melcher v. Federal Open Market 26, 1985), plaintiffs appealed from Committee, No. 86-5692 (D.C. Circuit, orders dismissing their complaint that filed December 16, 1986), appellant the Sixteenth Amendment to the U.S. sought review of a district court decision Constitution was not properly ratified (644 F. Supp. 510) upholding the constiand that the use of Federal Reserve notes tutionality of the methods used to select constitutes illegal gambling. On Febru- certain members of the Federal Open ary 11, 1987, the court in Urwyler af- Market Committee. On December 18, firmed the district court's order of dis- 1987, the court affirmed the ruling of the missal (811 F.2d 1509). On March 5, district court on the constitutionality of 1987, the court in Wight affirmed the the selection methods but held that the district court's order of dismissal (812 district court should have dismissed the F.2d 1412). suit on grounds of equitable discretion. In Lewis v. Volcker et al., No. In Jones v. Volcker, No. 87-0427 (D. 86-3210 (6th Circuit, filed March 5, D.C, filed February 19, 1987), plaintiff 1986), the court affirmed the district brought an action to enjoin alleged dis- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

172 Litigation criminatory practices. The case was dis- award of a contract by the Reserve Bank missed on June 18, 1987. for air transportation of checks. A stipu- In Brown v. United States Congress et lation of dismissal was entered in the al., No. 87-5586 (9th Circuit, filed case on September 18, 1987. March 2, 1987), plaintiff appeals the In Barrett v. Greenspan, No. 87-2280 dismissal of his complaint seeking dam- (D. D.C., filed August 17, 1987), plainages for alleged discrimination in home tiff seeks to enjoin an alleged discrimifinancing and a mandatory injunction re- natory practice. The case is pending. garding the Board's monetary policy. In Teichgraeber v. Board of Gover- The case is pending. nors, 87-2505-0 (D. Kans., filed Oc- In Air Continental, Inc. v. Federal tober 16, 1987), plaintiff seeks to re- Reserve Bank of Boston et al., No. quire disclosure of certain documents 87-1877-N (D. Mass., filed July 23, under the Freedom of Information Act. 1987), plaintiff sought review of the The case is pending. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

173 Legislation Enacted Competitive Equality years. This title also allows such banks Banking Act of 1987 to reappraise the value of real property acquired in connection with agricultural Public Law 100-86, the Competitive loans and to amortize any consequent Equality Banking Act of 1987 (CEBA), loss over seven years. was approved on August 10, 1987, and Title IX reaffirms the intent of Conconsists of 12 titles. Title I (Competitive gress to back federally insured deposits Equality Amendments of 1987) extends by the full faith and credit of the United the Bank Holding Company Act States. (BHCA) to encompass certain financial Title X provides that Treasury checks institutions (commonly referred to as outstanding for more than one year will "nonbank banks") that had previously not be paid, but that nonetheless, the avoided regulation under the act. underlying obligation of the government Title II imposes a moratorium on ceris not extinguished by such nonpayment. tain nonbanking activities from March Title XI requires the FDIC to pay in- 6, 1987, to March 1, 1988. terest on certain nonnegbtiable ("yel- Titles III and IV provide for the recalow") certificates found to be insured pitalization of the Federal Savings and deposits. Loan Insurance Corporation (FSLIC) Title XII requires a study, among and contain other provisions designed to other things, of competitive issues in the aid the thrift industry. payments system and requires the Board Title V (Financial Institutions Emerof Governors of the Federal Reserve gency Acquisitions Amendments of System to limit the interest that may be 1987) enhances and expands the provirequired on adjustable rate mortgages. sions for emergency interstate acquisi- The following summary describes tions of failing institutions under the titles I, II, V, and VI in more detail. Garn-St Germain Depository Institutions Act of 1982 and exempts the agen- Title I cies regulating depository institutions from the sequestration requirements of 1. The definition of "bank" under the the Balanced Budget and Emergency BHCA is expanded to include any insti- Deficit Control Act of 1985. tution insured by the Federal Deposit Title VI (Expedited Funds Availabil- Insurance Corporation (FDIC) as well as ity Act) provides for the improved avail- any institution that both accepts transacability of deposited funds. tion accounts and makes commercial Title VII (Credit Union Amendments loans. The amended definition excludes of 1987) primarily amends the Federal the following types of institutions: Credit Union Act to improve the opera- • Federally insured thrift institutions. tion and regulation of credit unions. • Credit unions. Title VIII allows agricultural banks • Trust companies serving solely in a (generally those with 25 percent or more trust or fiduciary capacity that have no of their loans used to finance the produc- FDIC insured deposits that are marketed tion of agricultural products) to amortize through an affiliate; do not accept deany loss on agricultural loans over seven mand accounts or other deposits subject Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

174 Legislation Enacted to withdrawal by check or similar means additional bank, FSLIC-insured institufor payment to third parties or others; tion, or federal savings bank other than receive deposits almost exclusively in a through an emergency acquisition. bona fide fiduciary capacity; and do not • The company acquires control of have borrowing privileges at a Federal more than 5 percent of the shares or Reserve Bank or access to other services assets of an additional bank, FSLIC-inof the Federal Reserve System. sured institution, or federal savings • Credit card banks that engage only bank. Acquisition of more than 5 perin credit card operations; do not accept cent is permissible in certain cases, demand deposits or deposits that may be including a temporary or emergency withdrawn by check or similar means for acquisition. payment to third parties or others; do not • Any bank subsidiary of the comhave savings or time deposits of less pany violates the limitations placed on than $100,000; do not accept deposits at grandfathered nonbank banks, described not more than one office; and do not in the following paragraph. make commercial loans. 3. Nonbank banks held by companies • Industrial banks that are required by not treated as BHCs because of the state law in effect or under consideration grandfathered provisions of the CEBA on March 5, 1987, to obtain FDIC insur- may not take any of the following ance and that meet at least one of the actions: following three conditions: (1) do not • Engage in any activity in which accept transaction accounts, (2) have they were not lawfully engaged as of total assets of less than $100 million, or March 5, 1987. (3) has not come under the control of • Offer or market products or services any company since August 10, 1987. of an affiliate that are not permissible for The definition of "bank" also excludes bank holding companies under section industrial banks that do not meet the 4(c)(8) of the BHCA nor permit their above test but that do not directly, indi- products or services to be offered or rectly, or through an affiliate engage in marketed by an affiliate that engages in any activity in which they were not law- activities that are not permissible for fully engaged as of March 5, 1987. An bank holding companies under section exempted industrial bank loses its ex- 4(c)(8) unless the products or services emption if it incurs an overdraft at a were being so offered and marketed in Federal Reserve Bank on behalf of an the same manner as of March 5, 1987. affiliate and the overdraft was not • Permit or incur any overdraft at a inadvertent. Federal Reserve Bank on behalf of an • Edge or Agreement corporations. affiliate other than a fully secured over- • Certain foreign organizations. draft on behalf of a primary dealer or an 2. Any company that on March 5, inadvertent overdraft. 1987, controlled a nonbank bank cov- • Increase their assets at an annual ered by the CEBA and was not a bank rate greater than 7 percent. holding company on August 9, 1987, 4. Any nonbank bank and any of its shall not be treated as a bank holding affiliates are subjected to the anti-tying company by virtue of the company's restrictions of the BHCA, that is, neither control of that bank. A company loses one may give a discount on its products this exemption if any of the following and services on condition that the cusevents occur: tomer purchase services from the other. • The company acquires control of an These restrictions also apply to exempt Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 175 trust companies, credit card banks, and management interlocks between industrial banks. member banks and companies that are 5. A bank holding company that ac- primarily engaged in underwriting is exquired a nonbank bank before the date of tended to insured nonmember banks beenactment of the CEB A may retain it on ginning on March 6, 1987; the extension the following conditions: (1) the non- expires on March 1, 1988. Affiliations bank bank does not engage both in the and interlocks existing on March 5, taking of demand deposits and in com- 1987, are not covered by the extension. mercial lending and (2) it does not in- 9. Last, title I amends portions of the crease the number of locations from Federal Home Loan Bank Act and the which it conducts its business after provisions of the National Housing Act March 5, 1987. These restrictions cease covering mutual holding companies and to apply on the date the acquisition would savings and loan holding companies and become permissible under section 3(d) of expands the leasing authority of national the BHCA (the Douglas Amendment). banks. 6. Any company, other than a bank as defined by the BHCA as amended by the Title II CEB A, that acquires an Edge or Agreement corporation after March 5, 1987, 1. All federal banking agencies are will be treated as a bank holding com- prohibited from taking the following pany for purposes of the BHCA. How- actions: ever, section 3 of the BHCA, which • Approve an application or issue a concerns the acquisition of banks, gen- regulation that would increase the real erally will not apply to such a company. estate powers in the United States of 7. Section 23B is added to the Federal banks, foreign banks, or holding Reserve Act, under which certain trans- companies. actions between a member bank and an • Authorize or allow any bank holdaffiliate must be made under the same ing company, insured bank, foreign circumstances and on the same terms bank, or any of their subsidiaries or affiland conditions as would be extended to a iates, to engage in the United States to nonaffiliated company. This requirement any extent (1) in the flotation, unincludes transactions between the bank derwriting, public sale, dealing, or disand third parties in which the affiliate has tribution of securities if that approval an interest or is a participant or the pro- would require the agency to determine ceeds from which are used for the bene- that the entity would not be engaged fit of the affiliate. The restriction also principally in such activities, (2) in seapplies to transactions in which the affil- curities activities not legally authorized iate acts as a broker or receives a fee for in writing prior to March 5, 1987, or (3) services. in the operation of a nondealer market- Section 23B also prohibits banks in place in options. their fiduciary capacity from purchasing • Approve an application or issue a securities from an affiliate unless author- regulation that would increase the insurized by the trust agreement or by state ance powers of banks, foreign banks, or law, or from purchasing, as principal or holding companies beyond those authorfiduciary, securities underwritten by an ized for bank holding companies under affiliate. section 4(c)(8) of the BHCA. 8. The prohibition under the Glass- • Approve an acquisition by a bank Steagall Act preventing affiliations and holding company or foreign bank of any Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

176 Legislation Enacted company, including a state bank, unless banks, then the interstate acquisition of the bank holding company or foreign the failing bank's holding company or bank has agreed to limit the insurance its nonfailing affiliated banks may be activities in the United States of that permitted. company or state bank to those permit- 3. Two years after its interstate acquited under section 4(c)(8) of the BHCA. sition of a failing institution, an out-of- • Permit a national bank to expand its state bank holding company may acquire insurance activities into places where it additional banks in the state on the same was not conducting these activities on terms as if it were an in-state bank hold- March 5, 1987. ing company. 2. The foregoing restrictions on fed- 4. No bank in danger of closing may eral banking agencies do not prohibit an be sold without the express concurrence agency from acting if the order or regu- of the state supervisory agency. lation involved is not effective until after March 1, 1988. Title VI 3. Grandfather rights conferred upon 1. Depository institutions must make deforeign banks or other companies by posited funds available to depositors section 8(c) of the International Banking within specified time schedules that are Act of 1978 terminate two years after the based on several factors, including the foreign bank or other company becomes type of deposit and the relative locations a bank holding company. The Board of of the depository and paying banks. Governors is authorized to extend the 2. Exempted from the schedules for grandfather provision on a case-by-case funds availability are new accounts, basis for up to three years. large deposits, checks that have been returned and redeposited, accounts that Title V have been overdrawn repeatedly, and 1. Emergency interstate acquisitions of checks that the depository institution banks in danger of closing are permitted has reasonable cause to believe are under the following conditions: in the uncollectible. case of an individual bank, if the failing 3. Depository institutions must disbank has assets of more than $500 mil- close to their customers their policies on lion; in the case of affiliated banks, if the the availability of funds. aggregate assets of the failing banks are 4. The Board of Governors has broad more than $500 million and equal more authority to adopt regulations to improve than 33 percent of the total assets of all the system for clearing of checks so that the affiliated insured banks. checks may be cleared and returned 2. If an out-of-state bank or bank within the times established by the manholding company has acquired one or dated availability schedules. more failing affiliated banks that have 5. Depository institutions that fail to assets of at least 33 percent of the aggre- comply with any provision of this title gate assets for all the affiliated insured are subject to civil liability. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

177 Banking Supervision and Regulation One of the Federal Reserve's principal soundness of financial institutions: onresponsibilities is the supervision and site examinations and inspections, surregulation of commercial banking or- veillance and monitoring, and enforceganizations. In carrying out its duties, ment and other supervisory actions. the Federal Reserve supervises and regulates state member banks, bank holding Examinations and Inspections companies and their nonbank subsidi- The on-site review of operations is an aries; the international activities of integral part of ensuring the safety and banks and bank holding companies; and soundness of financial institutions. Exthe U.S. banking and nonbanking operaminations of state member banks and ations of foreign banks. Many of these Edge corporations and inspections of supervisory activities are coordinated bank holding companies and their subwith those of other federal and state regsidiaries entail (1) an appraisal of the ulatory agencies. quality of the institution's assets; (2) an Supervisory coordination is also imevaluation of management, including portant at the international level. In 1987 internal policies, operations, and procethe Federal Reserve, together with the dures; (3) an assessment of the key fiother U.S. federal banking agencies and nancial factors of capital, earnings, asset supervisory authorities from the leading and liability management, and liquidity; industrial countries, took an important and (4) a review for compliance with step toward achieving more consistent applicable laws and regulations.1 standards for assessing the financial soundness of international banking organizations. This step was the develop- State Member Banks ment of a risk-based capital proposal in The Federal Reserve is the primary fedconjunction with the Basle Committee eral supervisor and regulator of stateon Banking Regulations and Supervi- chartered commercial banks that are sory Practices. The effort to better co- members of the Federal Reserve Sysordinate supervisory policies among tem. At the end of 1987 there were countries with important financial 1,105 state member banks, accounting centers recognizes the growing interna- for about 8 percent of all insured commercial banks and about 18 percent of tionalization of banking and financial the assets of all such banks. markets. When implemented, the proposal will contribute to a more stable 1. The Board's Division of Consumer and international banking system and reduce Community Affairs is responsible for reviewing a source of competitive inequality aris- compliance with consumer and civil rights laws. The responsibility is accomplished mainly through ing from differences in national superviexaminations by specially trained Reserve Bank sory requirements. examiners. These regulatory responsibilities are described in the section of this REPORT covering consumer and community affairs. Compliance Supervision for Safety with other statutes and regulations, which is and Soundness treated in this section, is the responsibility of the Board's Division of Banking Supervision and Reg- The Federal Reserve conducts the folulation and the Reserve Banks, whose examiners lowing activities to ensure the safety and check for safety and soundness. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 Banking Supervision and Regulation The Federal Reserve in 1986 in- nors has the authority to enter into writcreased the frequency of scheduled ex- ten agreements with, or issue cease and aminations and inspections of state desist orders against, state member member banks and bank holding compa- banks and bank holding companies, and nies. In general, the guidelines call for persons associated with such organizastate member banks to be examined at tions, that engage in unsafe or unsound least annually. Except for large or trou- practices or that violate applicable laws bled banks, examination by either a Re- or regulations. The Board may also asserve Bank or state banking agency will sess civil money penalties for violations meet that requirement. In 1987, 1,068 of a cease-and-desist order, of the Bank state member banks were examined at Holding Company Act, or of certain least once by either the Federal Reserve provisions of the Federal Reserve Act. or a state banking agency. Altogether, In 1987 the Reserve Banks recomthe state agencies conducted 319 exami- mended and the Board's staff initiated nations of state member banks, and the and worked on 131 enforcement cases Federal Reserve conducted 835 exami- that involved 341 separate actions, such nations, some of them jointly with the as cease and desist orders, removals, state agencies. and civil money penalties, most dealing with unsafe or unsound banking prac- Bank Holding Companies tices; 33 cases involving 62 actions were In 1987 the number of bank holding completed by year-end. The Board comcompanies decreased by 22 to a total of pleted 17 civil money penalty actions 6,443. These organizations control and assessed a total of $204,100 against 9,340 commercial banks, which hold 92 a bank holding company and 9 individpercent of the assets of all insured com- uals; by year-end 1987, the Board colmercial banks in the United States. lected $82,750, with the remainder of Most large bank holding companies, the assessments to be paid in accordance as well as small companies with signifi- with agreed-upon schedules. A descripcant nonbank assets, are inspected an- tion of all formal supervisory actions nually under the new policy. Others are during the year and the reasons for them inspected at least every three years or, in are made available to the public in the the case of the smallest companies that Board's twice-yearly "Report on Formal do not have nonbank assets, on a sample Enforcement Actions." basis. The inspection focuses on the operations of the parent holding com- International Activities pany and its nonbank subsidiaries. The The Federal Reserve is responsible for susubsidiary banks are examined by the pervising several international activities. appropriate federal banking regulatory agencies. In 1987, System examiners made 2,560 on-site inspections and 73 Edge and Agreement Corporations off-site inspections. State examiners Edge corporations are international made 43 inspections of bank holding banking organizations chartered by the companies. Board to provide all segments of the U.S. economy with a means of financing international trade, especially exports. Enforcement Actions An agreement corporation is a company and Civil Money Penalties that enters into an agreement with the Under the Financial Institutions Super- Board not to exercise any power that is visory Act of 1966, the Board of Gover- impermissible for an Edge corporation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 179 In 1987 the Federal Reserve conducted commercial banks. Together, these forexaminations of 64 Edge and agreement eign banks at year-end controlled apcorporations. proximately 20 percent of U.S. banking assets. Foreign-Office Operations The Federal Reserve has broad auof U.S. Banking Organizations thority to supervise and regulate foreign The Federal Reserve conducts examina- banks that engage in banking in the tions of the international operations of United States through branches, agenstate member banks, Edge corporations, cies, commercial lending companies, and bank holding companies primarily at Edge corporations, or banks. In exercisthe banking organizations' head offices ing this authority, the Federal Reserve in the United States, where the ultimate relies on examinations conducted by the responsibility for foreign offices lies. To appropriate federal or state regulatory verify and supplement the results of the agency. Although states have primary head-office examinations, the Federal authority for examining state-licensed, Reserve performs on-site reviews of im- uninsured branches and agencies, the portant foreign offices at least every Federal Reserve participated in the exthree years. In 1987 the Federal Reserve amination of 100 such offices during the examined 10 foreign branches of state past year. member banks and 28 foreign subsidiaries of Edge corporations and bank holding companies. In 1987 the Federal Specialized Examinations Reserve System, in coordination with The Federal Reserve conducts specialthe Office of the Comptroller of the Cur- ized examinations in the following areas rency, conducted extensive on-site ex- of bank activity: electronic data processaminations of merchant banking activi- ing, trust activities, government securities of U.S. banking organizations in the ties dealing and brokering, municipal United Kingdom and Australia. All the securities dealing and clearing, and seexaminations abroad were conducted curities transferring. with the cooperation of the local supervisory authorities. Electronic Data Processing Under the Interagency EDP Examination Program, the Federal Reserve ex- U.S. Activities of Foreign Banks amines the electronic data processing Foreign banks continue to be significant (EDP) activities of state member banks, participants in the U.S. banking system. Edge and agreement corporations, and As of December 31, 1987, 246 foreign independent centers that provide EDP banks operated 428 state-licensed services to these institutions. In 1987, branches and agencies, of which 32 are System examiners conducted 233 oninsured by the Federal Deposit Insurance site EDP reviews. In addition, the Fed- Corporation; at year-end these foreign eral Reserve reviews reports of EDP exbanks also operated 85 branches and aminations issued by other bank agencies licensed by the Office of the regulatory agencies on organizations Comptroller of the Currency, of which 2 that provide data processing services to have FDIC insurance. Foreign banks state member banks. also directly owned 18 Edge corporations and 12 commercial lending compa- Trust Activities nies. In addition, foreign banks held a The Federal Reserve examines trust de- 25 percent or greater interest in 85 U.S. partments of state member banks, trust Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

180 Banking Supervision and Regulation companies that are members of the Fed- The four agencies registered with the eral Reserve System, and certain foreign Board were examined in 1987. and domestic trust company subsidiaries of bank holding companies. At the end Transfer Agents of 1987, 454 of these institutions ex- System examiners conducted separate isted, about 10 percent of the total reviews of state member banks and bank number of institutions in the industry. holding companies that act as transfer These 454 institutions held about 45 agents. Transfer agents countersign and percent of the total assets administered monitor the issuance of securities, regisby all such banks, trust companies, and ter the transfer of securities, and exsubsidiaries. During 1987, Federal Re- change or convert securities. During serve Examiners conducted 180 exami- 1987 the Board examined 72 of the 162 nations to review the trust functions of banks and bank holding companies regthese institutions. istered as transfer agents with the Board. Government Securities Dealers Surveillance and Monitoring and Brokers Under the Government Securities Act of The Federal Reserve monitors the finan- 1986, the Board is responsible for exam- cial condition of state member banks and ining government securities dealers and bank holding companies. The surveilbrokerage activities of state member lance program supplements the Federal banks and foreign banks for compliance Reserve's on-site examination program with the act and the Treasury Depart- with automated screening systems that ment's implementing regulations, which identify organizations with poor or debecame effective July 25, 1987. Forty- teriorating financial profiles. These aufour state member banks and one agency tomated systems rely heavily on quarof a foreign bank filed notices with the terly financial statements submitted by Board that they are government securi- the banking organizations. The surveilties dealers or brokers not otherwise ex- lance program also aids in the allocation empt by Treasury Department regula- of the System's examination resources tions. Specialized examination by focusing early attention on those procedures relating to government se- banking institutions that appear to have curities activities were adopted by the recently encountered financial prob- Federal Reserve in November 1987. lems. These organizations may then be subject to accelerated examinations or Municipal Securities Dealers may warrant closer supervision. and Clearing Agents In 1987 the System continued to The Securities Act Amendments of 1975 strengthen its surveillance program by made the Board responsible for super- revising its screening techniques while vising state member banks and bank maintaining the electronic transmission holding companies that act as municipal of surveillance results between the Resecurities dealers or as clearing agen- serve Banks and the Board. The excies. In 1987 the Board examined 27 of change of automated information expethe 52 state member banks registered dites the surveillance process and makes with the Board that deal in municipal current information more readily availsecurities. A clearing agency acts as a able to the System. In addition, procecustodian of securities involved in trans- dures to monitor stock prices of bank actions settled by bookkeeping entries. holding companies were strengthened. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 181 These procedures are designed to aid the Committee on Banking Regulations and search for causes of any decline in mar- Supervisory Practices, which comprises ket value relative to the overall market, the Group of Ten countries plus possibly before a deterioration is re- Luxembourg. flected in the next quarterly financial The specific objectives of the riskstatements. based capital framework are to (1) help Also in 1987 changes were made to strengthen the stability of the internathe Bank Holding Company Perfor- tional financial system; (2) provide a mance Report, which is used as a sur- fairer and more consistent system for veillance tool, to reflect new capital re- comparing the capital positions of bankquirements and their associated ing organizations from different counreporting requirements. The report is tries; (3) take risk considerations into distributed to the reporting bank holding explicit account in assessing capital adecompanies and is available to the public. quacy, including risks associated with off-balance-sheet activities; and (4) avoid discouraging banks from holding Supervisory Policy liquid, low-risk assets. The Basle In 1987 the Board made or initiated sev- Agreement provides a common frameeral changes in its supervisory guide- work for defining the elements of capital lines. The following sections summarize —with emphasis on common stockthese changes and review other activities holders' equity—and a single capital during the year to enhance the supervi- adequacy standard to be met after a fivesory program. year transitional period. The Board issued for public comment on March 1, 1988, the revised risk- Supplemental Measure based capital measure in the Basle of Adjusted Capital Agreement. In February 1987 the Federal Reserve issued for public comment a joint pro- Problem Loans in Agriculture posal between the three U.S. bank regulatory authorities (the Federal Deposit The policy of forbearance introduced by Insurance Corporation, the Federal Re- the three federal bank regulatory agenserve, and the Office of the Comptroller cies in 1986 for banks with problem of the Currency) and the Bank of Eng- loans in the agricultural sector continued land to supplement its capital adequacy in 1987. This policy calls for the Reguidelines for state member banks and serve Banks to exercise appropriate forbank holding companies. This joint pro- bearance in applying capital adequacy posal superseded the proposed risk- guidelines for banks that are essentially based capital measure issued for public sound and well-managed if they demoncomment in January 1986. strate a clear potential for restoring their After receiving most of the public capital position over a reasonable period comments on the 1987 proposal, the of time. Banks seeking such "capital four institutions deferred action in order forbearance" are required to notify their to seek agreement on a risk-based capital Reserve Bank when loan losses have measure with a larger number of coun- caused their capital ratios to fall to levels tries. As a result of those discussions, a materially below the minimum regulaproposed framework for risk-based tory standards. Notification is to be folcapital was developed by the Basle lowed by a comprehensive operating Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 Banking Supervision and Regulation plan for restoring capital to normal ing courses offered by the Federal Relevels. In 1987, four state member banks serve and by the Federal Financial Instiwere approved for capital forbearance. tutions Examination Council (see the In 1987 the Congress enacted the section below on staff training). Competitive Equality Banking Act of 1987 (CEBA), requiring the three fed- Work on Accounting Standards eral bank regulatory agencies to issue regulations permitting agricultural banks The Board and its staff are continuing to with assets of less than $100 million to work on eliminating, to the greatest examortize losses on agricultural loans and tent possible, differences between regurelated real or personal property over a latory reporting requirements and generperiod not to exceed seven years. To ally accepted accounting principles. implement this statute, Regulation H Board staff members have served on was amended, effective November 9, various advisory committees of the Fi- 1987. However, the period for public nancial Accounting Standards Board comments extends to January 1988. (FASB) and are participating in that Banks seeking to amortize losses on group's project on financial instruqualified agricultural loans are required ments. Staff members also provide comto apply to their Reserve Bank for accep- mentary on proposals issued by FASB tance into the program, must have capi- and by the American Institute of Certital in need of restoration, and must have fied Public Accountants that affect bankreasonable procedures for restoring cap- ing organizations. ital to acceptable levels. In a related action, effective De- Reducing Risk in Large-Dollar cember 31, 1987, the Federal Financial Electronic Payment Systems Institutions Examination Council amended the regulatory reports for these In July 1987 the Board adopted an inbanks. These revised reports permit terim statement of its policy on reducing losses eligible for deferral to be rein- risks on large-dollar transfer systems. stated as new items in the asset and This interim policy supercedes the polequity sections of the balance sheet. The icy statement adopted by the Board in resulting increases in the capital account May 1985 and implemented in March shall be treated as primary capital for 1986. purposes of determining the adequacy of Large-dollar funds transfer networks the bank's capital. are an integral part of the payments and clearing mechanism. A daylight overdraft occurs when a depository institution sends funds over Fedwire in excess Relations with the States of the balance in its reserve or clearing The Board in 1987 provided $100,000 to account, or sends more funds over a the Education Foundation of State Bank private network than it has received. Supervisors. Established by the Confer- The Board's May 1985 policy stateence of State Bank Supervisors, the ment required privately owned largefoundation offers technical courses to dollar payment networks using Federal state bank examiners. The Board also Reserve net settlement services to (1) authorized the Federal Reserve Banks to require each of its participants to estabprovide scholarships to examiners em- lish a limit on the maximum net transfer ployed by state banking agencies to help amount that it is willing to receive from Digitizedt hfoerm F RcAoSvEeRr expenses in attending train- each other participant ("bilateral net http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 183 credit limit") and (2) establish for each the four areas of supervision and regulaof its participants a maximum amount of tion—examinations, inspections, applinet transfers ("sender net debit cap") that cations, and surveillance—and stresses the participant can transfer over that net- the interdependence among these areas. work. The policy also strongly encour- During 1987 the Federal Reserve conaged each depository institution incur- ducted sixty-seven sessions of various ring daylight overdrafts on Fedwire or courses. The core banking program participating on a private network to a- comprised four sessions of an introducdopt a cross-system sender net debit cap tory course, six sessions of an intermedesigned to limit the amount of risk an diate course, and five sessions of an institution presents across all systems com- advanced course; each course lasted bined. The interim policy statement mo- three weeks. A new course was predifies the May 1985 policy as follows: sented this year, bank holding company • Reduces the current sender net inspections, with sixteen sessions. The debit cap by 25 percent in two stages— other offerings were twenty-one sessions 15 percent on January 14, 1988, and the of a course on effective writing for bankbalance on May 19, 1988, unless subse- ing supervision staff, nine sessions of a quent events suggest that the second step credit analysis course, two sessions of a would disrupt the payments system or bank holding company applications financial markets. course, one session on cash flow and • Exempts depository institutions liquidity analysis, and three courses of from self-evaluation guidelines if their one session each on consumer compliboard of directors approves a de minimis ance. Also, System staff attended seven net debit cap of the smaller of 20 percent courses conducted jointly by a financial of adjusted primary capital or $500,000. institutions regulator and the Federal • Imposes a $50 million limit on Bureau of Investigation on white-collar book-entry securities transfers over crime and bank failures. Fedwire. The System participated in courses • Subjects the clearing procedures of offered by the Federal Financial Instituprimary dealers to review by the Federal tions Examination Council (FFIEC) in Reserve Bank of New York. specialized areas of income property • Permits interaffiliate Fedwire lending, trust departments, off-balancetransfers resulting in daylight over- sheet risk, international banking, elecdrafts, provided certain safeguards are tronic data processing, activities of muobserved. nicipal securities dealers, asset and • Permits holding companies of de- liability management, payment system pository institutions to centralize their risks, white-collar crime, management, wire transfer operations at one or more conducting meetings with management, of their subsidiaries, provided certain and instructor training. The FFIEC consafeguards are observed. ducted 115 sessions of these programs The interim policy will remain in ef- during 1987. fect pending reevaluation of the Board's During 1987 the Federal Reserve Sysrisk reduction program. tem provided scholarship assistance to the states for training their examiners in Federal Reserve and FFIEC schools. Through this program, 499 state exam- Staff Training iners were trained, 312 of them in Fed- System staff training emphasizes analyt- eral Reserve courses and 187 in FFIEC Digitizedi fcoarl F aRnAdS EsuRp ervisory themes common to programs. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

184 Banking Supervision and Regulation In 1987 the Federal Reserve trained Regulation of 1,424 persons in System schools and the U.S. Banking Structure 884 in FFIEC schools, for a total of 2,308: 1,731 from the System, 499 from The Board administers the Bank Holdthe states, and 78 from foreign central ing Company Act, the Bank Merger banks. Act, and the Change in Bank Control Act for state member banks and bank holding companies. In doing so, the Federal Financial Institutions Federal Reserve acts on a variety of pro- Examination Council posals that directly or indirectly affect During 1987 the Federal Reserve Board the structure of U.S. banking at the of Governors adopted several policies local, regional, and national levels. The recommended by the FFIEC.2 The Board also has primary responsibility for Board joined the other constituent agen- regulating the international operations of cies of the FFIEC in approving a policy domestic banking organizations and the statement encouraging trade associa- U.S. banking operations of foreign tions and individual depository institu- banks, whether conducted directly tions to offer basic financial services to through a branch or agency or indirectly low- and moderate-income consumers. through a subsidiary commercial lend- The Federal Reserve also endorsed a ing company. In addition, the Board has FFIEC recommendation when it encour- established regulations for the interstate aged all state member banks and bank banking activities of these foreign banks holding companies to adopt internal and for foreign banks that control a U.S. codes of conduct or written procedures subsidiary commercial bank. to assist officers, directors, employees, agents, and attorneys in complying with Bank Holding Company Act the 1986 amendments to the Bank Bribery Act. By law, a company must obtain the The Federal Reserve joined with the Board's approval if it is to form a bank other FFIEC agencies in awarding a holding company by acquiring control of contract to CompuServe, Inc., under one or more banks. Moreover, once which the company would be the collec- formed, a bank holding company must tion agent for the electronic transfer of receive the Board's approval before ac- Call Reports by banks. The new system quiring additional banks or nonbanking should be in operation by March 1988. companies. The FFIEC also approved changes in In reviewing an application filed by a reporting requirements to reduce the bank holding company, the Board conburden on financial institutions. siders factors relating to the convenience and needs of the community to be served, the applicant's financial and managerial resources, the prospects of both the applicant and the firm to be acquired, and the competitive effects of 2. The FFIEC consists of representatives of the the proposal. Board of Governors of the Federal Reserve Sys- In 1987 the Federal Reserve acted on tem, the Federal Deposit Insurance Corporation, 1,631 bank holding company and related the Federal Home Loan Bank Board, the National applications. The Federal Reserve ap- Credit Union Administration, and the Office of the Comptroller of the Currency. proved 446 proposals to organize bank Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 185 Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1987 Action under authority delegated by Board of Governors Direct action Staff Director of Proposal Board o b f y G th o e vernors Di S v u is R p io e e r g n v u i o l s a f i t o i B n o a n a n 1 n k d ing Se O o c f r f e f t i t h c a e e ry1 Rese F r e v d e e r B al anks Total Approved Denied Approved Denied Approved Approved Permitted Formation of holding company . . . 40 1 0 0 3 403 0 447 Merger of holding company 12 ) 0 0 4 75 0 92 Retention of bank 0 0 0 0 0 00 0 Acquisition Bank 55 1 0 0 22 298 0 376 Nonbank 245 2 0 0 23 173 210 653 Acquisition of bank service corporation2. . . . 0 0 0 0 0 4 43 47 Other 2 0 14 0 0 0 0 16 Total 354 5 14 0 52 953 253 1,631 1. Official staff of the Board of Governors. which contains standards patterned after those of the Bank 2. Approved under the Bank Service Corporation Act, Holding Company Act. holding companies and denied 1, ap- other agencies on the competitive factors proved 375 bank acquisitions by existing involved in the transaction. bank holding companies and denied 1, During 1987 the Federal Reserve apand approved 651 requests to acquire proved 87 merger applications: 5 were nonbank companies that are engaged in approved by the Board; and under auactivities closely related to banking and thority delegated by the Board, the Secdenied 2. Data on these and related bank retary of the Board approved 3 and the holding company decisions are shown in Reserve Banks approved 79. As rethe accompanying table. quired by law, each merger is described in this REPORT, in table 16 of the Statistical Tables section. Bank Merger Act When the Office of the Comptroller of The Bank Merger Act requires that all the Currency or the Federal Deposit Inproposed bank mergers be acted upon by surance Corporation has jurisdiction the appropriate federal bank regulatory over a merger, the Board is asked to agency. If the bank surviving the merger comment on the competitive factors to is a state member bank, the Federal Re- assure comparable enforcement of the serve has primary jurisdiction. Before antitrust provisions of the act. The acting on a proposed bank merger, the Board and those agencies have adopted Federal Reserve considers factors relat- standard terminology for assessing coming to the community's convenience and petitive factors in bank merger cases to needs, the financial and managerial re- assure consistency in administering the sources and prospects of the existing and act. On behalf of the Board, the Reserve proposed institutions, and the competi- Banks submitted 822 reports on compettive effects of the proposal. The Board itive factors to the OCC and the FDIC must also consider the views of certain in 1987. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

186 Banking Supervision and Regulation Change in Bank Control Act sion and Regulation, and to the Secretary of the Board. The Change in Bank Control Act of The delegation of responsibility for 1978 requires persons seeking control of applications permits staff members to a bank or bank holding company to ob- work more efficiently at both the Board tain approval from the appropriate fed- and the Reserve Banks by removing roueral banking agency before the transac- tine cases from the Board's agenda. tion occurs. Under the act, the Board is During 1987, 83 percent of the applicaresponsible for reviewing changes in the tions were acted on under delegated control of state member banks and of authority. bank holding companies. In so doing, it must review the financial condition, competence, experience, and integrity Timely Processing of the acquiring person; it must consider of Applications the effect on the financial condition of The Federal Reserve maintains target the bank or bank holding company to dates and procedures for the processing be acquired; and it must determine the of applications. These target dates proeffect on competition in any relevant mote efficiency at the Board and the market. Reserve Banks and reduce the burden on The federal banking agencies are re- applicants. The time allowed for a deciquired to publish notice of each pro- sion is 60 days; during 1987, 93 percent posed change in control and to invite of the decisions met this standard. public comment, particularly from per- In 1987, all but 1 of the 87 applicasons located in the markets served by the tions for bank mergers were processed institution to be acquired. The federal within 60 days. Nearly all of the 822 banking agencies are also required to reports on the competitive factors of assess the qualifications of each person proposed mergers were processed within seeking control; the Board routinely 30 days. Of the 204 change of control makes such a determination and verifies notices involving state member banks or information contained in the proposal. bank holding companies, 183 were han- In 1987 the Federal Reserve System dled within 60 days. acted on 204 proposed changes in con- The Federal Reserve also holds its trol of state member banks and bank processing of international applications holding companies. The Reserve Banks to a 60-day standard. In 1987 the Federal consented to 189 proposals; under au- Reserve acted on 86 international applithority delegated by the Board, the Sec- cations, 92 percent of which it handled retary of the Board consented to 4; and within the time allowed. the Board consented to 11 and disapproved 1. Board Policy Decisions Delegation of Applications and Developments in Bank-Related Activities The Board has delegated certain regulatory functions—including the authority In 1987 the Board approved several new to approve, but not to deny, certain nonbanking activities for individual types of applications—to the Reserve bank holding companies. It also had Banks, to the Staff Director of the under consideration other proposed non- Board's Division of Banking Supervi- banking activities, including real estate Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 187 investment and development, the opera- Proposals to Engage tion of healthy thrift institutions, and in New Nonbanking Activities expanded securities brokerage. At year-end the Board had under consideration proposals to engage in several new nonbank activities. A pending ap- Approval of Permissible plication requested permission to pro- Nonbanking Activities vide full-service retail securities broker- In 1987 the Board for the first time ap- age by combining the execution of proved the following activities for indi- securities transactions with the provision vidual bank holding companies: (1) un- of investment advice. Also, in light of derwriting and dealing on a limited basis changing economic and regulatory cirin commercial paper, certain municipal cumstances, the Board solicited public revenue bonds of investment quality (in- comment on whether it should amend cluding "public ownership" industrial Regulation Y to permit the acquisition development bonds), mortgage-related and operation of healthy thrift institusecurities on 1—4 family residential real tions. The Board also had under considestate, and third-party securities repre- eration a proposal to permit bank holdsenting an interest in or backed by a ing companies to engage in real estate diversified pool of consumer loans or investment activities under specific conreceivables; and (2) engaging in securi- ditions. The conditions are designed to ties brokerage, clearing, and other ser- ensure that the activity does not result in vices in connection with a system for the unsafe or unsound banking practices, trading of options on U.S. government unfair competition, conflicts of interest, securities. However, the Competitive or other adverse effects. Equality Banking Act of 1987, enacted In connection with the Board's proon August 10, 1987, included a morato- posed rulemaking governing real estate rium that prohibited bank holding com- activities by bank holding companies, panies from utilizing these new securi- the Board solicited public comment on ties powers until March 1, 1988. whether it should attempt to better insu- The Board also approved the follow- late banks and savings banks from the ing activities for individual bank holding related risks by requiring that these real companies: (1) furnishing their institu- estate activities be conducted through a tional brokerage customers with com- nonbank subsidiary of the bank holding bined brokerage, investment advisory, company. The Board also solicited puband discretionary investment manage- lic comment on the need for imposing ment services in limited instances; (2) special capital requirements for bank providing cash management services holding companies that control banks and discretionary management of short- engaged in such real estate activities. term monies for institutional clients in a In 1987 the Board approved the forbrokerage subsidiary; (3) providing ad- mation of bank holding companies in visory services as a futures commission connection with the conversion of mumerchant with respect to futures con- tual savings banks to stock savings tracts on stock indexes and options on banks. In this regard certain mutual savsuch futures contracts; and (4) providing ings banks that established bank holding economic and community development companies also engaged in real estate advice to organizations and institutions investment and development under the that operate programs designed primar- explicit authorization of the Competitive ily to promote community welfare. Equality Banking Act of 1987 (see the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 Banking Supervision and Regulation chapter, elsewhere in this volume, on by bank holding companies, 89 of which legislation enacted). were acted on by the Reserve Banks on behalf of the Board. Applications Public Notice by State Member Banks of Board Decisions State member banks must obtain the Each decision by the Board that involves permission of the Board to open new a bank holding company, bank merger, domestic branches, to make investments change in control, or international bankin bank premises that exceed 100 per- ing proposal is effected by an order or cent of capital stock, and to add to the announcement. Orders state the decision capital base from sales of subordinated along with the essential facts of the apdebt. State member banks must also give plication and the basis for the decision; six months' notice of their intention to announcements state only the decision. withdraw from membership in the Fed- All orders and announcements are reeral Reserve, although the Board may leased immediately to the public; they shorten or eliminate the notice period in are also reported in the Board's weekly specific cases. These matters are nor- H.2 statistical release and in the monthly mally handled under delegated authority Federal Reserve Bulletin. Announceby the Federal Reserve Banks or, in the ments of applications and notices recase of certain investments in bank ceived by the System but not yet acted premises or proposed sales of subordi- on are made in the H.2 release. nated debt, by the Staff Director of the Board's Division of Banking Supervi- International Activities sion and Regulation. of U.S. Banking Organizations The Board has four principal statutory Stock Repurchases responsibilities in supervising the interby Bank Holding Companies national operations of U.S. banking or- A bank holding company sometimes ganizations. It must provide authorizapurchases its own shares from its share- tion and regulation of foreign branches holders. When the company borrows the of member banks; of overseas investmoney to buy the shares, the transaction ments by member banks, Edge corporaincreases the debt of the bank holding tions, and bank holding companies; and company and simultaneously decreases of investments by bank holding compaits equity. Relatively large repurchases nies in export trading companies. In admay undermine the financial condition dition the Board is required to charter of a bank holding company and its bank and regulate Edge corporations and their subsidiaries. The Board's regulations investments. require holding companies to give advance notice of repurchases that retire 10 Foreign Branches percent or more of their consolidated of Member Banks equity capital. The Board may object to stock repurchases by holding companies Under provisions of the Federal Reserve that fail to meet certain standards, in- Act and of Regulation K, member banks cluding the Board's capital guidelines. in most cases must seek Board approval During 1987 the Federal Reserve re- to establish branches in foreign counviewed 91 proposed stock repurchases tries. In reviewing proposed foreign Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 189 branches, the Board considers the re- in states other than that of the parent, quirements of the law, the condition of provided that the business is strictly rethe bank, and the bank's experience in lated to international transactions; and international business. In 1987 the (2) their powers to make foreign invest- Board approved the opening of five for- ments are broader than those of member eign branches. banks because they may invest in for- By the end of 1987, 153 member eign financial organizations, such as fibanks were operating 902 branches in nance companies and leasing compaforeign countries and overseas areas of nies, as well as in foreign banks. By the the United States; 127 national banks end of 1987, there were 119 Edge corpowere operating 772 of these branches, rations, which had 60 branches. The and 26 state member banks were operat- Board requires each Edge corporation ing the remaining 130 branches. that is engaged in banking to maintain a ratio of equity to risk-assets of at least 7 International percent. Banking Facilities Foreign Investments The Board amended its Regulations D and Q to permit the establishment of Under authority of the Federal Reserve international banking facilities (IBFs) in Act and the Bank Holding Company the United States as of December 3, Act, U.S. banking organizations may 1981. An IBF is essentially a set of asset engage in activities overseas with the and liability accounts that is segregated authorization of the Board. To a signififrom the accounts of the office establish- cant extent, the Board's Regulation K ing the IBF. Deposits from, and credit permits such investments without prior extended to, foreign residents or other Board review. In 1987 the Board re- IBFs generally may be booked at these viewed and permitted 53 foreign investfacilities free from domestic reserve re- ments by member banks, Edge and quirements and interest rate limitations. agreement corporations, and bank hold- Subject to conditions specified by the ing companies. In most cases, the appli- Board, IBFs may be established by U.S. cant requested permission to increase an depository institutions, by Edge and existing investment. agreement corporations, and by U.S. branches and agencies of foreign banks. Export Trading Companies By the end of 1987, 543 IBFs had been In 1982 the Bank Export Services Act established. amended section 4 of the Bank Holding Company Act to permit bank holding Edge and Agreement companies, their subsidiary Edge or Corporations agreement corporations, and bankers' Under sections 25 and 25(a) of the Fed- banks to invest in export trading compaeral Reserve Act, Edge and agreement nies, subject to certain limitations and corporations may engage in interna- after Board review. The purpose was to tional banking and foreign financial allow effective participation by bank transactions. These corporations, which holding companies in the financing and are usually subsidiaries of member development of export trading compabanks, provide their owner organiza- nies. In 1987 the Federal Reserve acted tions with the following powers: (1) they affirmatively on the 3 notifications remay conduct a deposit and loan business ceived for the establishment of export Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 Banking Supervision and Regulation trading companies. Since 1982 the Securities Regulation Board has acted affirmatively on such notifications by 45 bank holding Under the Securities Exchange Act of companies. 1934, the Board is responsible for regulating credit in certain transactions in- Enforcement of Other Laws volving the purchase or carrying of seand Regulations curities. In fulfilling its responsibility under the act, the Board limits the This section describes the Board's reamount of credit that may be provided sponsibilities for the enforcement of by securities brokers and dealers (Regulaws, rules, and regulations other than lation T), by banks (Regulation U), and those specifically related to bank safety by other lenders (Regulation G). Reguand soundness and the integrity of the lation X extends these credit limitations, banking structure. or margin requirements, to certain borrowers and to certain credit extensions, Bank Secrecy Act such as credit obtained from foreign Through the examination process, the lenders by U.S. citizens. Federal Reserve determines whether the Brokers and dealers are examined for institutions it supervises are complying compliance with Regulation T by the with the recordkeeping and reporting re- Securities and Exchange Commission, quirements of the Currency and Foreign the National Association of Securities Transactions Reporting Act (the Bank Dealers, and the national securities ex- Secrecy Act). Among the stipulations in changes. The three federal bank superthe act to combat unlawful currency visory agencies examine banks under transactions is the requirement that fi- their respective jurisdictions for complinancial institutions (and selected other ance with Regulation U. businesses) report to the Internal Reve- Other lenders are examined for comnue Service certain cash transactions of pliance with Regulation G by the Board, more than $10,000. the National Credit Union Administra- As mandated by the passage of the tion, the Farm Credit Administration, or Anti-Drug Abuse Act of 1986, Board the Federal Home Loan Bank Board acstaff members worked with the other cording to the jurisdiction involved. At federal financial institutions to develop the end of 1987 there were 531 "Gregulations that ensure compliance with lenders," of which 313 were subject to the Bank Secrecy Act. The regulations the Board's supervision. Of these 313, were enacted January 27, 1987, and be- 169 were subject to regular inspection came effective April 27, 1987. by the Federal Reserve System. During In 1987 Board staff members partici- the year, Federal Reserve examiners inpated in a number of industry-wide sem- spected 60 G-lenders for compliance inars sponsored by various banking trade with the Federal Reserve's margin associations. The seminars informed requirements (these lenders are inmore than 7,000 bankers on the new spected on either a biennial or triennial regulations and law as well as recent basis, according to the type of credit changes to existing statutes. Board staff extended). members continue to actively participate Regulations U and G in general imin the interagency working group on the pose credit limits on loans whose pur- Bank Secrecy Act, headed by the De- pose is the purchasing or carrying of partment of the Treasury. publicly held equity securities and that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 191 are secured by such securities. awarded in connection with their em- Regulation T limits the amount of ployment. The amendment simplifies credit that brokers and dealers may ex- the method by which brokers and dealers tend when securities serve as collateral may temporarily finance the acquisition for credit that is used to purchase or of stock under employee stock option carry securities. This collateral must programs without violating the general consist of stocks and bonds traded on principles of Regulation T. The broker national securities exchanges, of certain will now be able to treat the receipt of an over-the-counter (OTC) stocks that the exercise notice as if it were the stock Board designates as having characteris- itself. tics similar to those of stocks listed on Under section 8 of the Securities Exnational exchanges, or of bonds meeting change Act, a nonmember domestic or certain requirements. foreign bank may lend to brokers or The Board's Division of Banking Su- dealers posting registered securities as pervision and Regulation monitors the collateral only if the bank has filed an market activity of all over-the-counter agreement with the Board that it will stocks to determine what stocks are sub- comply with all the statutes, rules, and ject to the Board's margin regulations. regulations applicable to member banks In 1987 the Board published the result- regarding credit on securities. During ing "List of Marginable OTC Stocks" in the year, the Board processed 15 such February, May, August, and November. agreements. The November list consisted of 3,329 In 1987 the Securities Regulation stocks. Section of the Board's Division of In August 1987 the Board amended Banking Supervision and Regulation is- Regulation T, revising the definition of sued 57 interpretations of the margin "OTC margin bond" to include any regulations. Those that presented suffi- "mortgage related security" as defined in ciently important or novel issues were the Secondary Mortgage Market En- published in the "Securities Credit hancement Act of 1984. The principal Transactions Handbook," which is part effect of the amendment permits a of the Federal Reserve Regulatory Serbroker-dealer to give good faith loan vice. These interpretations serve as a value in a margin account to any mort- guide to the margin regulations. gage-related security that is privately Under section 15c of the Securities placed. Most publicly offered mortgage- Exchange Act, as amended by the Govrelated securities were already eligible ernment Securities Act of 1986, all fifor credit at a broker-dealer. nancial institutions that act as govern- In September 1987 the Board ment securities brokers or dealers must amended Regulation U to reduce the pa- notify their designated federal superviperwork burden for banks that take mar- sory agencies of their activities (progin stock as collateral for loans. As a vided they are not exempted by the U.S. result, banks are no longer required to Treasury). The Board has the responsiuse Form FR U-l for loans of $100,000 bility for adopting the form for this noor less that are secured directly or indi- tice, as well as for that of the notice to be rectly by margin stocks. filed when these institutions are no In December 1987 the Board longer acting as government securities amended Regulation T, effective Jan- brokers or dealers. The Board adopted uary 25, 1988, enabling broker-dealers Form FR G-FIN and Form FR G-FINW to help employees exercise stock options in May 1987. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

192 Banking Supervision and Regulation Loans by State Member Banks to their Executive Officers, 1986-87 Range of interest Period Number Amount (dollars) rates charged (percent) October 1-December 31, 1986 1,383 28,147,628 3.0-20 January 1-March 31, 1987 1,360 22,218,894 5.5-21 April l-June30, 1987 1,323 27,296,011 1.0-21 July 1-September 30, 1987 1,991 20,813,768 5.5-21 Financial Disclosure Loans to Executive Officers by State Member Banks Under section 22(g) of the Federal Re- Under the Board's Regulation F, state serve Act, each state member bank must member banks must disclose certain in- include with each quarterly report of formation of interest to investors, in- condition a report of all extensions of cluding financial reports and proxy state- credit made by the bank to its executive ments, if they issue securities registered officers since the date of the bank's preunder the Securities Exchange Act of vious report of condition. The accompa- 1934. Board staff members review the nying table summarizes these data for information for compliance with the reg- the last quarter of 1986 and the first three ulation. At the end of 1987, 37 state quarters of 1987. member banks, most of which are of small or medium size, were registered Federal Reserve Membership with the Board under Regulation F. The disclosure rules of Regulation F At the end of 1987, 5,751 banks were are required by statute to be substantially members of the Federal Reserve Syssimilar to those issued by the Securities tem, a decrease of 244 from the previous and Exchange Commission. In 1987 the year. Board completed a comprehensive revi- Member banks operated 30,021 sion of Regulation F. To ease compli- branches on December 31, 1987, a net ance, the revision requires banks subject increase of 1,565 for the year. Member to Regulation F to use the forms pre- banks accounted for 41 percent of all scribed by the Securities and Exchange commercial banks in the United States Commission and receive annual audits and for 65 percent of all commercial of their financial statements. Small banking offices. banks would have the option of filing simplified quarterly reports. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

193 Regulatory Simplification The Board of Governors established the with the Board the information and Regulatory Improvement Project in forms prescribed by the SEC. Because 1978 and reaffirmed its commitment to the remaining regulatory requirements regulatory improvement by creating a are brief, the Board decided to incorpo- Regulatory Policy and Planning Com- rate them in Regulation H, which apmittee in 1986. The program was estab- plies to state member banks generally, lished to minimize the burdens imposed thereby eliminating Regulation F. by regulation, to ensure that considera- To ease compliance for small banks, tion is given to minimizing the economic the Board will allow banks that have no impact of regulation on small business, foreign offices and whose assets total to afford interested parties the opportu- less than $150 million to substitute the nity to participate in designing regula- balance sheet and income statement tions and to comment on them, and to from the quarterly report of condition ensure that regulations are written in the bank must file with the Board (Fedsimple and clear language. The program eral Financial Institutions Examination also involves periodic review of all ex- Council Form 034) for the quarterly fiisting regulations for adherence to these nancial statements required in the SEC's objectives. Form 10-Q. The Board concluded that no substantive purpose would be served by requiring small banks to file two forms detailing similar information. Regulation F The Securities Exchange Act of 1934 requires that publicly held companies Freedom of Information Act make certain public disclosures and file various reports with the Securities and In the spring of 1987, the Board issued Exchange Commission. The act pro- for comment a revision of its "Rules vides that the Federal Reserve Board Regarding Availability of Information." exercise, with respect to state member These rules cover three broad areas: rebanks, the authority granted to the SEC quests under the Freedom of Information with regard to disclosure and reporting. Act, which the Board's Secretary han- The Board meets this responsibility dles; subpoenas, inquiries regarding law through its Regulation F, which virtually enforcement, and similar matters, which duplicates the requirements of the SEC the Board's General Counsel addresses; disclosure and reporting regulations. and the routine disclosure of supervisory Because only 36 state member banks information to other bank supervisory are currently subject to Regulation F, agencies, which the Director of the and because Regulation F differs little Board's Division of Banking Supervifrom the rules and regulations issued by sion and Regulation and staff members the SEC, the Board believed that it at the Federal Reserve Banks have tradiwould be appropriate to replace its regu- tionally handled. lation on securities disclosure with a re- This regulation was extensively requirement that state member banks file vised for the first time since its promul- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

194 Regulatory Simplification gation in 1967. The revision incorpo- without violating the general principles rates many procedures developed by the of Regulation T. staff or suggested by the courts during In general, the structure of a cash that time that were never added to the account does not permit a person to pay regulation. In addition, the revision for the purchase of a security with the clarifies the Board's rules for responding proceeds of its sale, nor does the structo subpoenas as well as to requests for ture of a margin account allow a withinformation from the public and from drawal of cash that lowers a customer's law enforcement agencies. equity in the account. The amendment Beyond the simplification and clarifi- permits the creditor to treat the receipt of cation of its language, the regulation an exercise notice as if it were the stock was divided into five parts. The regula- itself. tion contains new and expanded defini- The Board also amended the definitions of terms and includes (1) a descrip- tion in Regulation T of over-the-counter tion of the way the Board processes margin bond so as to permit brokers and requests under the Freedom of Informa- dealers to extend credit, on the basis of tion Act (FOIA); (2) further delegation good faith, on any mortgage-related seof authority to the Board's General curity. The Secondary Mortgage Market Counsel to act on requests for informa- Enhancement Act of 1984 basically retion by law enforcement agencies and quires a mortgage-related security to be others; (3) additional provisions regard- rated in one of the two highest rating ing the availability of information to fed- categories by at least one nationally receral and state supervisors of financial ognized rating organization. The securiinstitutions; (4) requirements for disclo- ties must also be secured either directly sure by financial institutions of examina- or indirectly by residential or mixed resition or inspection reports to appropriate dential-commercial mortgages. agents of such institutions; and (5) pro- The amendment should facilitate parvision for notifying submitters of confi- ticipation by the private sector in the dential commercial or financial informa- secondary market for mortgages. It tion that requests for that information should also provide harmony with the have been made under the FOIA, and recently adopted measure of the Securiprocedures for requesting confidential ties and Exchange Commission regardtreatment of such information and for ing the maintenance margin rule of the addressing the proposed disclosure of New York Stock Exchange. The revised information that a submitter believes definition will encompass mortgage-reshould not be disclosed. lated securities that have been privately placed and therefore did not meet the requirements in the existing definition. Margin Regulations In addition, the Board amended Regu- The Board amended Regulation T lation U to exempt banks from the re- (credit by brokers and dealers) to enable quirement of executing Federal Reserve broker-dealers to help employees exer- Form U-l when they make loans of cise stock options awarded in connection $100,000 or less that are secured diwith their employment. rectly or indirectly by margin stock. The The amendment simplifies the method elimination of this requirement is exby which brokers and dealers may tem- pected to reduce by nearly half the porarily finance the acquisition of stock number of times a bank must complete under employee stock-option programs this form. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Regulatory Simplification 195 Regulation K transaction accounts, the amendments will eliminate some duplication of infor- In August, the Board liberalized the pro- mation. Because consumers will convisions of Regulation K to permit certain tinue to receive periodic statements from investments abroad by U.S. banking or- their financial institutions that reflect ganizations through swaps of debt for electronic fund transfers to and from equity. their accounts, they will lose no infor- The purpose of the amendment is to mation through this change. The savings provide additional flexibility to U.S. to the exempted businesses and to the banking organizations in investing in payments system as a whole are likely to companies whose ownership is being be substantial. transferred from the public sector to the The amendments will, however, reprivate sector in heavily indebted devel- quire account-holding financial instituoping countries. The eligible countries tions to include a description of these would be those that have restructured EFT transactions on periodic statements sovereign debt held by foreign creditors to their customers even if they do not since 1980. provide electronic transfers themselves. The amendment permits a U.S. bank- The burden of providing that informaing organization to acquire as much as tion is not likely to be great for such 100 percent of the shares of a foreign institutions as a group. Most point-ofnonfinancial company in certain circum- sale (POS) transactions will involve acstances; the percentage of stock held in counts at financial institutions that alnonfinancial corporations can generally ready are set up to comply with the be only 20 percent. Because the amend- requirements for periodic statements. ment is not intended to permit perma- Seventy-nine percent of all commercial nent investments in nonbank concerns, banks already offer at least one EFT the equity interests acquired must be di- service that requires compliance with vested when it becomes feasible. Regulation E; and larger banks, which hold most consumer asset and transaction accounts, are even more likely to offer EFT services. The Board eased the Regulation E burden on institutions with assets of $25 The Federal Reserve Board approved million or less by exempting them from amendments to Regulation E, Electronic any requirements regarding POS/ACH Fund Transfers (EFT), that eliminate the transactions until July 1, 1990. requirement for periodic statements to consumers from providers of EFT ser- Interpretations on Payment vices that do not hold consumer acof Interest counts. The amendments should facilitate the development of point-of-sale The statutory authority to set ceilings on EFT services that make use of the auto- interest rates on time and savings demated clearinghouse (ACH) system for posits and to prescribe rules regarding processing, without imposing heavy early withdrawals from time deposits costs on financial institutions or reduc- expired on March 31, 1986. In early ing essential consumer protections. 1986 the Board revised and simplified its By exempting business like super- Regulation Q, which governed the paymarkets, gasoline retailers, and other ment of interest on deposits. merchants, which do not hold consumer In 1987 the Board rescinded thirty- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

196 Regulatory Simplification four interpretations that had become ob- Under the regulations, a bank's comsolete, revised the three remaining inter- pliance program must be in writing, appretations that applied to payment of proved by the board of directors, and interest, and transferred seven interpre- noted in the minutes. It must, at a minitations to Regulation D to help distin- mum, consist of internal controls to asguish between classes of deposits for sure ongoing compliance, and it must purposes of reserve requirements. provide for independent testing of compliance by bank personnel or by an outside party. The regulation may be burdensome Reporting of Currency for banks whose existing internal opera- Transactions tions are not complex and for banks that In January 1987, as mandated by the do not normally conduct large cash Anti-Drug Abuse Act, the Board or- transactions with their customers; theredered banks to adopt procedures assur- fore, the Board and other federal agening compliance with the requirements of cies that regulate financial institutions the Bank Secrecy Act regarding the re- have developed model forms for these porting of cash transactions. banks to use in following the regulation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

197 Federal Reserve Banks Developments in the Pricing the financial statements for priced serof Federal Reserve Services vices). Check operations for the year and in the Payments Mechanism generated $500.6 million in revenue and a net of $5.1 million in other income and In 1987 the Federal Reserve Banks fully expenses. The number of checks hanrecovered their costs of providing priced dled by the Reserve Banks was 17.0 services, as required by the Monetary billion, an increase of 4.8 percent from Control Act of 1980. The System as a 1986. whole recovered 104.6 percent of its In March the Board approved a prooperating expenses and imputed costs, posal that had been issued for public compared with 104.3 percent in 1986. comment in November 1986 to allow Revenue at the Reserve Banks from Federal Reserve Banks to provide a reall priced services totaled $768.8 mildeposit service for small-dollar checks lion, and costs were $735.2 million (see that are returned because of insufficient the end of this chapter for the pro forma or uncollected funds. Under this service, income statement and other financial Reserve Banks intercept dishonored statements for priced services for 1987). checks and redeposit them on behalf of These figures include the income and the collecting institution. expenses related to clearing balances, In August the Congress passed the the value of priced float, and the PSAF Expedited Funds Availability Act, (the private sector adjustment factor— which becomes effective September 1, the taxes and costs of capital that the 1988. Among other things, the act sets System would have incurred if it were a forth schedules within which depository private firm). The net revenue of the institutions must make funds deposited Federal Reserve System from priced in customer transaction accounts availservices in 1987 was $33.6 million. able for withdrawal and requires institu- In November 1986 the Board retions to disclose to their customers their quested public comment on factors to be policies on such availability. In Deconsidered when it reviews proposals to cember the Board issued for public comconsolidate Reserve Bank priced serment a series of proposals to implement vices across District lines. In July 1987 the act, including ways to improve the the Board approved a modified set of return of unpaid checks to the bank of factors, which range from the effect of first deposit. the proposed consolidation on users and The Board requested comment on a other providers of the service to responproposed regulation (Regulation CC) to siveness to changes in the financial implement the availability and discloindustry. sure requirements and to place new responsibilities on depository institutions to speed the return of unpaid checks; Check Collection these responsibilities would reduce the The operating and imputed costs of risk to banks of first deposit arising from check collection by the Federal Reserve the availability requirements of the act. in 1987 were $447.1 million (see the Specifically, the proposal provides rules table on income by service and note 9 in to (1) expedite returns to the bank of first Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

198 Federal Reserve Banks deposit, (2) expand the requirements for times the paper check is handled. Trunnotification of large-dollar returned cation may also permit savings in transchecks, and (3) reduce the number of portation and in the costs of storage, returned checks. These objectives are equipment, and personnel for the paying accomplished by modifying the duties of bank. the paying bank, the returning bank, and The Board also proposed to make perthe bank of first deposit in the return manent its extended MICR capture serprocess. vice, which has also been offered on a Also proposed were several changes pilot basis. Extended MICR capture to Regulation J, which governs the col- offers many of the benefits of truncation lection of checks and other items by without stopping the flow of the paper Federal Reserve Banks, so that it con- check. forms to the new rules proposed in Reg- Public comment was requested on ulation CC. other possible new Federal Reserve In conjunction with the proposed reg- services and longer-term initiatives ulations, the Board suggested new Fed- aimed at improving the check-collection eral Reserve services to speed the return system. The longer-term initiatives inprocess. These services, which are de- clude investigation of machine-readable signed to facilitate bank compliance endorsements for checks and the potenwith the proposed regulatory require- tial of using digitized image processing ments, include acceptance and process- to improve the productivity and the qualing of any returned check by a Federal ity of the check-collection system. The Reserve Bank and the delivery of returns Board also requested comment on acby Federal Reserve Banks directly to the tions it should consider regarding debank of first deposit. Reserve Banks layed disbursement. would also speed the processing of returned checks. Electronic Payments Currently, the Federal Reserve does not explicitly price returned checks; in- The Federal Reserve System is conductstead, the costs of handling returns are ing a strategic study of its electronic incorporated in the Reserve Banks' for- payments services. In 1987 the study ward collection fees. The Board pro- identified business requirements for the posed to price returns explicitly, impos- 1990s and evaluated alternative operating fees for returned checks on the ing systems. In 1988 the Federal Repaying or the returning bank that de- serve will issue a request for proposals posits returns with the Federal Reserve. to test new equipment, and steps will be In addition, the Board proposed mak- taken to improve the reliability of the ing the Federal Reserve's pilot program Reserve Banks' operating environment. on check truncation into a permanent Finally, the Federal Reserve will conservice. In truncation, the physical duct market research to define more prechecks are not delivered to the paying cisely the future business requirements bank; instead, the line of information for its electronic payment services. printed along the bottom of the check is captured through the technology of mag- Automated Clearinghouse netic-ink character recognition (MICR) and presented to the paying bank elec- Operating and imputed costs of providtronically. The benefits of truncation in- ing automated clearinghouse (ACH) clude expeditious check processing and services in 1987 were $32.6 million; Digitized r e fo t r u F rn R A a S n E d R a reduction in the number of revenues were $37.3 million. For the http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 199 year, 475.1 million commercial transac- tem also encrypted most of its data links tions were processed in 1987, a 31.0 with depository institutions and will enpercent increase over 1986. crypt the rest once the transition to stan- In June 1987 the Board approved a dard communications protocols has been change to accounting procedures that completed. Finally, the System is planwill require depository institutions to ac- ning to employ message authentication cept ACH debit transactions that settle as an additional security measure. on holidays or other days when the insti- To reduce the risk of disruption to tutions are closed or to defer the debit service, the Reserve Banks have been until the next business day and pay for pursuing ways to permit one Reserve the resulting float. Bank to process work for another during In December the Board approved op- a serious interruption in operations. In erational changes designed to reduce addition, the Federal Reserve Bank of risk in the ACH mechanism. The New York has established its own rechanges require uniform procedures by mote contingency processing center for the Reserve Banks to monitor ACH funds and securities processing. credit payments originated by deposi- For a discussion of Board efforts to tory institutions in weak financial posi- reduce risk in large-dollar electronic tion; earlier deposit deadlines for returns payment systems, see pp. 182-83, in of ACH debit transactions of $2,500 or the chapter on banking supervision and greater; and uniform float-accounting regulation. procedures for depository institutions originating credit transactions that settle on holidays or other days when the insti- Coin and Currency tutions are closed. The staff continued its analysis of the In its coin and currency operations, the proposal offered in December 1986 re- Federal Reserve continued to focus on garding ex post monitoring procedures the effectiveness of controls, the effiand the finality of ACH transactions. No ciency in processing, and the maintefinal action was taken in 1987. nance of high quality in the currency in circulation. In 1987, four Federal Reserve Districts provided transportation of cash Wire Transfer of Funds by armored carrier and five Districts The number of wire transfers originated provided wrapped coin to depository during 1987 increased 7.1 percent over institutions. 1986 to 53.3 million. This service cost The System completed its testing of $59.6 million, and it generated revenue equipment to improve the verification, of $69.7 million. counting, sorting, and destruction of In 1987 the basic fee for funds currency. In November the Board transfers was reduced from $0.55 to awarded a contract to Recognition $0.50. In addition, fees for electronic Equipment, Inc., to manufacture and access to the Reserve Banks were ad- maintain the new equipment, which is justed to reflect the actual costs of data expected to meet the System's needs for communications. currency processing through the 1990s. The System made substantial progress The Federal Reserve continued to during 1987 in converting all on-line work with the Department of the Treadepository institutions to standard proto- sury to deter the counterfeiting of U.S. cols for data communications. The Sys- currency. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 Federal Reserve Banks Definitive Securities was developed by the Federal Reserve and Noncash Collection on behalf of the Treasury and was completely implemented by the end of 1987. The System received $19.0 million in The Federal Reserve sells Treasury revenue for definitive safekeeping and securities in its role as fiscal agent. In noncash collection services in 1987; the 1987, a pilot program for savings bonds cost of these services was $18.0 million. began at the Pittsburgh Branch of the The average number of definitive securi- Federal Reserve Bank of Cleveland, ties issues and deposits maintained in where all savings bonds previously issafekeeping accounts at the Reserve sued over the counter by depository in- Banks decreased 1.0 percent in 1987, to stitutions in Ohio will be issued. The 163,000. The number of items for nonresults of the pilot program, which will cash collection decreased 11.8 percent, continue through April 1988, will be to 3.8 million. Bearer or coupon municiused to evaluate whether a centralized pal securities have not been issued since approach to processing over-the-counter 1983 because of revisions to the tax law bond sales is efficient, acceptable to in that year. As volume declines, Rebuyers, and appropriate. serve Banks continue to reduce costs while maintaining high levels of service; Float the results on both counts at each Bank Federal Reserve float increased to a are measured against System standards. daily average of $454 million in 1987, compared with $446 million in 1986. Securities and Fiscal The costs of all Federal Reserve float Agency Services associated with priced services are re- The Federal Reserve provides book- covered each year. entry (computerized) securities services for the Department of the Treasury and Examinations for certain federally sponsored agencies, such as the Federal National Mortgage The Board's Division of Federal Re- Association and the Federal Home Loan serve Bank Operations examines the 12 Mortgage Corporation. The Treasury Reserve Banks and their 25 Branches establishes the fees the Reserve Banks each year, as required by section 21 of charge institutions for these transfers. the Federal Reserve Act. The results of Book-entry services for federal agency the audits are given to the management securities are treated as a Federal Re- and directors of the respective Banks serve priced service; these services in- and to the Board of Governors. Also, to curred costs of $6.6 million and earned assess conformance with the policies isrevenue of $8.3 million in 1987. The sued by the Federal Open Market Com- Federal Reserve processed 2.1 million mittee, the division annually audits the such transfers during the year, an in- accounts and holdings of the Federal Recrease of 19.9 percent from 1986. serve System Open Market Account at In March, the Board reduced the fees the Federal Reserve Bank of New York it charges to depository institutions for and the foreign currency operations contransfer of book-entry securities in order ducted by that Bank. The division furto align more closely the costs and reve- nishes copies of these reports to the nues from this service. Committee. The examination proce- The system for handling securities dures used by the division are reviewed transactions in book-entry form for indi- each year by a private firm of certified vidual investors, called Treasury Direct, public accountants. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 201 Income, Expenses, and Distribution of Net Earnings of Federal Reserve Banks, 1987 and 19861 Thousands of dollars Item 1987 1986 Current income 17,633,012 17,464,152 Current expenses 1,146,911 1,156,868 Operating expenses2 1,033,288 1,049,159 Earnings credits granted 113,623 107,709 Current net income 16,486,101 16,307,284 Net addition to (deduction from) current net income .... 1,843,573 1,975,893 Cost of unreimbursed services to Treasury3 46,958 Assessments by the Board of Governors 252,545 278,118 For expenditures of Board 81,870 97,338 For cost of currency 170,675 180,780 Net income before payments to Treasury 18,030,171 18,005,060 Dividends paid 117,499 109,588 Payments to Treasury (interest on Federal Reserve notes) 17,738,880 17,803,518 Transferred to surplus 173,792 91,954 1. Details may not add to totals because of rounding. 3. In 1987 the Federal Reserve began explicitly ac- 2. Operating expenses reflect the 1987 implementation counting for the cost of reimbursable services performed of Financial Accounting Standards Board Statement No. on behalf of the U.S. Treasury for which reimbursement 87, Employer's Accounting for Pensions. In 1987 the is not received. In the past, such reimbursed costs were effect of this statement on expenses was a credit (reduc- reflected in "net addition to (deduction from) current net tion) of $49 million. income." Income and Expenses with $17,804 million in 1986. This sum The accompanying table summarizes the consists of all net income after dividends income, expenses, and distribution of and the amount necessary to bring the net earnings of the Federal Reserve surplus of the Banks to the level of capi- Banks for 1987 and 1986. tal paid-in. Income was $17,633 million in 1987, In the Statistical Tables section of this approximately the same as 1986. Total REPORT, table 6 details income and exexpenses were $1,229 million ($1,033 penses of each Federal Reserve Bank for million in operating expenses, $114 mil- 1987, and table 7 shows a condensed lion in earnings credits granted to depos- statement for each Bank for 1914-87. A itory institutions, and $82 million in as- detailed account of the assessments and sessment for expenditures by the Board expenditures of the Board of Governors of Governors). The cost of currency was appears in the next section—Board of $171 million. Income from financial Governors, Financial Statements. services was $645 million. The profit and loss account showed a Federal Reserve Bank Premises net addition of $1,844 million, primarily resulting from gains on the sale of assets During 1987 the Board of Governors denominated in foreign currencies. Stat- authorized construction of an operations utory dividends to member banks totaled center for the Reserve Bank of New $117 million, $8 million more than in York and a program for the construction 1986. The rise reflected an increase in of a new building for the Helena Branch. the capital and surplus of member banks Construction of a new building for the and a consequent increase in the paid-in Charlotte Branch continued. Table 8, in capital stock of the Reserve Banks. the Statistical Tables section of this RE- Payments to the U.S. Treasury in the PORT, shows the cost and book values of form of interest on Federal Reserve premises owned or occupied by the Fed- Digitized n fo o r t e F s R t A o S ta E l R ed $17,739 million, compared eral Reserve Banks and Branches and of http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 Federal Reserve Banks Securities and Loans of Federal Reserve Banks, 1985-87 Millions of dollars, except as noted U.S. Item and year Total government Loans securities1 Average daily holdings2 1985 176,688 175,359 1,329 1986 193,354 192,514 840 1987 . 217,392 216,722 670 Earnings 1985 16,954 16,843 111 1986 16,199 16 142 57 1987 . . 16,418 16,371 47 Average interest rate (percent) 1985 .... 9.60 9.60 8.38 1986 . 8.38 8.38 6.84 1987 7.55 7.55 6.99 1. Includes federal agency obligations. 2. Based on holdings at opening of business. real estate acquired for future banking- lion, and loans decreased $170 million. house purposes. From 1986 to 1987, the average rate of interest decreased from 8.38 percent to 7.55 percent on holdings of U.S. gov- Holdings of Securities and Loans ernment securities and increased from The accompanying table presents hold- 6.84 percent to 6.99 percent on loans. ings, earnings, and average interest rates on securities and loans of the Federal Volume of Operations Reserve Banks for the years 1985-87. Average daily holdings of securities Table 9, in the Statistical Tables section and loans during 1987 were $217,392 of this REPORT, shows the volume of million, an increase of $24,038 million operations in the principal departments over 1986. Holdings of U.S. govern- of the Federal Reserve Banks for the ment securities increased $24,208 mil- years 1984-87. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 203 FEDERAL RESERVE BANKS PRO FORMA BALANCE SHEET FOR PRICED SERVICES As of December 31 (millions) 1987 1986 SHORT-TERM ASSETS (Note 1) Imputed reserve requirements on clearing balances . $ 219.6 $ 251.8 Investment in marketable securities 1,610.4 1,846.2 Receivables 58.3 59.7 Materials and supplies 4.9 5.1 Prepaid expenses 6.7 6.0 Net items in process of collection (float) 675.7 300.1 Total short-term assets $2,575.5 $2,468.8 LONG-TERM ASSETS (Note 2) Premises 224.5 200.3 Furniture and equipment 110.9 118.2 Leases and leasehold improvements 3.0 4.3 Prepaid pension costs 18.7 Total long-term assets 357.1 322.8 TOTAL ASSETS. . . $2,932.7 $2,791.6 SHORT-TERM LIABILITIES Clearing balances and balances arising from early credit of uncollected items $2,505.7 $2,398.1 Short-term debt 69.9 70.7 Total short-term liabilities $2,575.5 $2,468.8 LONG-TERM LIABILITIES Obligations under capital leases 1.2 1.6 Long term debt 107.2 102.1 Total long-term liabilities 108.4 103.7 TOTAL LIABILITIES 2,684.0 2,572.5 EQUITY 248.7 219.1 TOTAL LIABILITIES AND EQUITY (Note 3). $2,932.7 $2,791.6 Details may not add to totals because of rounding. The accompanying notes are an integral part of these financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

204 Federal Reserve Banks FEDERAL RESERVE BANKS PRO FORMA INCOME STATEMENT FOR PRICED SERVICES For the years ended December 31 (millions) 1987 1986 INCOME (Note 4) Services provided to depository institutions $649.7 $627.7 EXPENSES (Note 5) Production expenses 506.8 497.5 INCOME FROM OPERATIONS 142.9 130.3 IMPUTED COSTS (Note 6) Interest on float $ 27.4 $ 23.8 Interest on debt 16.1 13.3 Sales taxes 7.4 7.3 FDIC insurance 1.8 52.7 1.5 45.8 INCOME FROM OPERATIONS AFTER IMPUTED COSTS 90.2 84.5 OTHER INCOME AND EXPENSES (Note 7) Investment income 119.1 114.2 Earnings credits 114.1 5.0 106.3 8.0 INCOME BEFORE INCOME TAXES 95.2 92.4 IMPUTED INCOME TAXES (Note 8) 32.3 34.8 NETINCOME $ 62.9 $ 57.6 MEMO Targeted return on equity (Note 8) $ 29.3 $ 27.3 Details may not add to totals because of rounding. The accompanying notes are an integral part of these financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 205 FEDERAL RESERVE BANKS PRO FORMA INCOME STATEMENT FOR PRICED SERVICES, BY SERVICE (Note 9) For the year ending December 31, 1987, in millions Definitive Com- Wire safekeeping mercial transfer Com- and check and net mercial noncash Book-entry Cash Total collection settlement ACH collection securities services INCOME FROM SERVICES . . . $649.7 $500.6 $69.7 $37.3 $19.0 $8.3 $14.8 OPERATING EXPENSES 506.8 401.0 56.6 30.5 16.9 6.3 14.2 INCOME FROM OPERATIONS . 142.9 99.6 13.2 6.7 2.1 2.0 .6 IMPUTED COSTS 52.7 46.1 3.0 2.1 1.1 .3 .1 INCOME FROM OPERATIONS AFTER IMPUTED COSTS . 90.2 53.5 10.1 4.6 1.0 1.8 .6 OTHER INCOME AND EXPENSES, NET 5.0 5.1 (•1) * * * * INCOME BEFORE INCOME TAXES $ 95.2 $ 58.6 $10.1 ; 4.6 1.0 $1.8 $ .5 *Less than $500,000 in absolute value. Details may not add to totals because of rounding. The accompanying notes are an integral part of these financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

206 Federal Reserve Banks FEDERAL RESERVE BANKS REVENUE AND EXPENSE OF LOCALLY PRICED SERVICES (Note 10) Millions of dollars Total Operating Float Total Net Revenue Cost Cost Cost Revenue Commercial check collection Boston 35.0 27.4 3.8 31.2 3.8 New York 65.6 54.8 2.4 73.7 8.3 Philadelphia 24.0 17.8 1.0 18.8 5.2 Cleveland 29.2 24.0 1.2 25.1 4.0 Richmond 45.6 36.7 1.7 38.4 7.2 Atlanta 58.4 46.4 .8 47.2 11.2 Chicago 67.9 53.4 3.1 56.6 11.4 St. Louis 23.4 18.6 1.8 20.4 3.1 Minneapolis 28.6 23.9 (.1) 23.8 4.8 Kansas City 32.1 27.3 .9 28.2 3.9 Dallas 35.4 29.6 1.2 30.8 4.6 SanFrancisco 55.4 39.8 3.3 43.1 12.3 System total 500.6 399.7 21.1 420.8 79.7 Definitive safekeeping and noncash collection Boston 9 .7 * .7 .2 New York 3.3 2.9 * 2.9 .5 Philadelphia 1.3 1.1 * 1.1 .2 Cleveland 2.0 1.9 .1 1.9 .1 Richmond 9 1.0 * 1.0 (.1) Atlanta 3.0 2.4 * 2.4 .5 Chicago 2.6 2.1 * 2.1 .5 St. Louis 1.1 1.2 * 1.2 (.1) Minneapolis 1.2 1.0 .1 1.1 .1 Kansas City 1.6 1.4 * 1.4 .2 Dallas 1.2 1.1 * 1.2 * San Francisco * .1 * .1 (.1) System total 19.0 16.9 * 17.0 2.0 Cash services Boston .6 .6 ... .6 * New York * * ... * * Philadelphia 1.5 1.5 ... 1.5 .1 Cleveland 1.9 1.7 ... 1.7 .1 Richmond 1 .1 ... .1 * Atlanta 1 .1 ... .1 * Chicago 7 .7 ... .7 .1 St. Louis 3 .2 ... .2 * Minneapolis 2.4 2.3 ... 2.3 .2 Kansas City .4 .4 ... .4 * Dallas * * ... * * San Francisco 6.7 6.6 ... 6.6 .1 System total 14.8 14.2 14.2 .6 •Less than $500,000 in absolute value. Details may not add to totals because of rounding. The accompanying notes are an integral part of these financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 207 FEDERAL RESERVE BANKS PRICED SERVICES VOLUMES (Note 11) Thousands of items,except as noted Percent change 1987 1986 1985 1986-87 1985-86 Funds transfers 53,278 49,900 45,110 7.1 10.6 Commercial ACH 475,114 362,557 282,528 31.0 28.3 Commercial checks . 17,007,924 16,225,812 15,450,612 4.8 5.0 Securities transfers 2,061 1,719 5,498i 19.9 n.a.1 Definitive safekeeping 163 165 159 -1.0 3.9 Noncash collection 3,803 4,312 4,637 -11.8 -7.0 Cash transportation 357 363 376 -1.4 -3.6 1. Effective Oct. 1, 1985, only the book-entry transfers ment agency securities for the first three quarters, any comof government agency securities are considered priced. Be- parison of such volumes is not applicable. cause the 1985 figures include U.S. Treasury and govern- The accompanying notes are an integral part of these financials tatements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

208 Federal Reserve Banks FEDERAL RESERVE BANKS NOTES TO FINANCIAL STATEMENTS method, which uses the Federal Reserve's Planning and FOR PRICED SERVICES Control System (PACS) to ascertain directly the value of assets used solely in priced services operations and to apportion the value of jointly used assets between priced PRO FORMA BALANCE SHEET services and nonpriced services. Also, long-term assets includes an estimate of the assets of the Board of Gover- (1) SHORT-TERM ASSETS nors directly involved in the development of priced ser- The imputed reserve requirement on clearing balances vices. and investment in marketable securities reflect the Federal Long-term assets include amounts for capital leases and Reserve's treatment of clearing balances maintained on leasehold improvements and for prepaid pension costs deposit with Reserve Banks by depository institutions. associated with priced services. Effective January 1, For presentation of the balance sheet and the income 1987, the Federal Reserve Banks implemented Financial statement, clearing balances are reported in a manner Accounting Standards Board Statement No. 87, Emcomparable to the way correspondent banks report com- ployers' Accounting for Pensions. Accordingly, the Repensating balances held with them by respondent institu- serve Banks recognized a credit to expenses and an intions. That is, respondent balances held with a correspon- crease of $18.7 million in this long-term asset account in dent are subject to a reserve requirement established by 1987. the Federal Reserve. This reserve requirement must be satisfied with either vault cash or with nonearning bal- (3) LIABILITIES AND EQUITY ances maintained at a Reserve Bank. Following this A matched-book capital structure has been used for model, clearing balances maintained with Reserve Banks those assets that are not "self-financing" in determining for priced service purposes are subjected to imputed reliability and equity amounts. Short-term assets are fiserve requirements. Therefore, a portion of the clearing nanced with short-term debt. Long-term assets are fibalances held with the Federal Reserve is classified on the nanced with long-term debt and equity in a proportion asset side of the balance sheet as required reserves and is equal to the ratio of long-term debt to equity for the bank reflected in a manner similar to vault cash and due from holding companies used in the private sector adjustment bank balances normally shown on a correspondent bank's factor (PSAF) model. (The PSAF model uses the 25 balance sheet. The remainder of clearing balances is aslargest bank holding companies as a basis to impute the sumed to be available for investment. For these purposes, taxes that would have been paid and the return on capital the Federal Reserve assumes that all such balances are that would have been provided had Federal Reserve invested in three-month Treasury bills. priced services been furnished by a private-sector firm.) Receivables represent (1) amounts due the Reserve Other short-term liabilities include clearing balances Banks for priced services that have been provided to maintained at Reserve Banks and deposit balances arising institutions for which payment has not yet been received from float. Other long-term liabilities consist of obligaand (2) that share of suspense-account and difference-actions on capital leases. count balances related to priced services. The amount shown for materials and supplies represents the inventory value of such short-term assets neces- PRO FORMA INCOME STATEMENT sary for the ongoing operations of priced service areas. Prepaid expenses represent items such as salary advances The income statement reflects income and expenses for and travel advances for priced service personnel. priced services. Included in these amounts are the im- The account "Net items in the process of collection" puted costs of float, imputed financing costs, and the represents the amount of float as of the balance-sheet date income related to clearing balances. and is the difference between the value of items in the process of collection (including checks, coupons, securi- (4) INCOME ties, wire transfers, and automated clearinghouse (ACH) Income represents charges to depository institutions for transactions) and the value of deferred-availability items. priced services. This income is realized through one of The cost base for providing services that must be recovtwo methods: direct charges to an institution's account or ered under the Monetary Control Act includes the cost of charges against accumulated earnings credits. float incurred by the Federal Reserve during the period, valued at the federal funds rate. Conventional accounting procedures would call for the gross amount of items in the (5) PRODUCTION EXPENSES process of collection and deferred availability items to be Production expenses include direct, indirect, and other included on a balance sheet. However, the gross amounts general administrative expenses of the Federal Reserve have no implications for income or actual or imputed Banks for providing priced services. Also included are the costs, and inclusion of the gross amounts could lead to expenses of staff members of the Board of Governors misinterpretations of the assets employed in the provision working directly on the development of priced services, of priced services that must be financed. Therefore, only which were $1.7 million in 1987 and in 1986. The credit the net amount is shown. The net amount represents the to expenses resulting from implementation of FASB 87 assets that involve a financing cost. (see note 2) is reflected in production expenses. (2) LONG-TERM ASSETS (6) IMPUTED COSTS Long-term assets on the balance sheet have been allo- Imputed float costs represent the value of float to be Digitizedc afoterd FtRo ApSricEedR services with the direct determination recovered, either explicitly or through per-item fees, durhttp://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 209 ing the period. Float costs include those for checks, book- return on equity that the Federal Reserve would have entry securities, noncash collection, ACH, and wire earned had it been a private business firm, based on the transfers. bank holding company model. These items are among the The following table depicts the daily average recovery components of the PSAF (see note 6). of float by the Federal Reserve Banks for 1987, in millions of dollars. INCOME STATEMENT, PRO FORMA BY SERVICE In the table, unrecovered float includes that generated by services to government agencies or by other central (9) The income statement by service reflects revenue, bank services. operating expenses, and imputed costs except for income Income on clearing balances represents increased in- taxes. The effect of implementing FASB 87 (see note 2) is come on clearing balances as a result of reducing imputed reported only in the "total" column in this table and has reserve requirements through the use of a cash-items-in- not been allocated to individual priced services. process-of-collection deduction for float when calculating Imputed costs includes float and interest on debt, sales the reserve requirement. This income then reduces the taxes, and the FDIC assessment. Float costs are based on float required to be recovered through other means. the actual float incurred in each priced service. Other As of adjustments and direct charges refer to midweek imputed costs are allocated among priced services accordclosing float and inter-territory check float, which may be ing to the ratio of operating costs less shipping costs in recovered from depositing institutions through adjust- each priced service to the total cost of all priced services ments to the institution's reserve or clearing balance or by less the total shipping costs of all priced services. valuing the float at the federal funds rate and billing the Other income and expenses consists of income on institution directly. clearing balances and the cost of earnings credits for the Float recovered through per-item fees is valued at the Federal Reserve. Because clearing balances relate directly federal funds rate and has been added to the cost base to the Federal Reserve's offering of priced services, the subject to recovery in 1987. income and cost associated with these balances are spread to each service based on the ratio of income from each Daily average service to total income. (millions) Taxes and the after-tax targeted rate of return on equity, Total float .... $804.8 as shown on the pro forma income statement, have not Unrecovered float 48.2 been spread by service since these elements relate to the Float subject to recovery 756.6 organization as a whole. Sources of recovery of float Income on clearing balances . . 91.7 REVENUE AND EXPENSES As of adjustments 350.8 OF LOCALLY PRICED SERVICES Direct charges . . . 128 7 Per-item fees 185.4 (10) This table depicts the financial results for each Reserve Bank in providing locally priced services. The Also included in imputed costs is the interest on debt financial results for each Reserve Bank shown here do not assumed necessary to finance priced service assets and the include the dollars to be recovered through the PSAF and sales taxes and FDIC insurance assessment that the Fed- the net income on clearing balances. Therefore, to reconeral Reserve would have paid had it been a private-sector cile net revenue by priced service shown in this table with firm. These imputed costs are among the components of that shown in the preceding table, adjustments must be the PSAF (see note 3). made for imputed interest on debt, sales taxes, FDIC assessment, Board expenses for priced services and net (7) OTHER INCOME AND EXPENSES income on clearing balances. Other income and expenses consist of income on clearing balances and the cost of earnings credits granted to PRICED SERVICES VOLUMES depository institutions on their clearing balances. Income (11) This table shows the number of items handled by on clearing balances represents the average couponthe Federal Reserve in its priced services operations and equivalent yield on three-month Treasury bills applied to the percentage changes in these numbers in recent years. the total clearing balance maintained, adjusted for the Volume for the wire transfer of funds is the number of effect of reserve requirements on clearing balances. Exbasic transactions originated; ACH volume is the total penses for earnings credits are derived by applying the number of commercial items processed; commercial average federal funds rate to the required portion of the check volume reflects the total commercial checks colclearing balances, adjusted for the net effect of reserve lected, including both processed and fine-sort items; volrequirements on clearing balances. ume for securities transfers is the number of basic transfers originated on-line; volume for definitive safe- (8) INCOME TAXES AND RETURN ON EQUITY keeping is the average number of issues or receipts main- Imputed income taxes are calculated at the effective tax tained; noncash collection volume is the number of items rate derived from the PSAF model (see note 3). The assessed fees; and cash transportation volume is the targeted return on equity represents the after-tax rate of number of armored-carrier stops. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

211 Board of Governors Financial Statements The financial statements of the Board for by Price Waterhouse, independent pubthe years 1987 and 1986 were examined lie 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, 1987 and 1986, 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 in 1987 standards for financial and compliance audits contained in the Standards for Audits of Governmental Organizations, Programs, Activities, and Functions issued by the General Accounting Office, 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 26, 1988 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

212 Board Financial Statements BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BALANCE SHEETS As of December 31 1987 1986 ASSETS CURRENT ASSETS Cash $ 7,705,996 $ 8,646,210 Accounts receivable 908,883 2,045,873 Stockroom and cafeteria inventories, at cost . 244,963 285,843 Prepaid expenses and other assets 760,903 627,054 Total current assets 9,620,745 11,604,980 PROPERTY, BUILDINGS AND EQUIPMENT, Net (Note 3) 6633,,335566,,992244 64,827,375 OTHER ASSETS 429,357 1,708,506 Total assets . . . 73,407,026 78,140,861 LIABILITIES AND FUND BALANCE CURRENT LIABILITIES Accounts payable $ 4,593,746 $ 4,655,794 Accrued payroll and related taxes 2,547,172 2,861,053 Accrued annual leave 4,185,226 3,896,398 Other liabilities 237,951 478,716 Total current liabilities 11,564,095 11,891,961 COMMITMENTS AND CONTINGENCIES (Note 5) FUNDBALANCE 61,842,931 66,248,900 Total liabilities and fund balance $73,407,026 $78,140,861 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Financial Statements 213 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF REVENUES AND EXPENSES AND FUND BALANCE For the years ended December 31 1987 1986 BOARD OPERATING REVENUES Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $ 81,869,800 $ 97,337,500 Other revenues (Note 4) 3,645,891 3,169,567 Total operating revenues $ 85,515,691 $100,507,067 BOARD OPERATING EXPENSES Salaries 53,811,021 53,259,376 Retirement and insurance contributions 6,245,296 5,401,797 Depreciation and losses (gains) on disposals 7,530,325 6,156,450 Postage and supplies 3,218,518 3,490,423 Utilities 3,195,502 2,970,714 Travel 2,834,715 2,537,670 Software 2,764,635 1,957,564 Repairs and maintenance 2,731,026 2,083,894 Contractual services and professional fees 2,235,129 2,127,597 Equipment and facility rentals 1,398,787 2,598,055 Printing and binding 1,867,291 2,022,535 Other (Note 4) 2,089,415 2,150,807 Total operating expenses. 89,921,660 86,756,882 BOARD OPERATING REVENUES (UNDER) OVER EXPENSES (4,405,969) 13,750,185 ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES Assessments levied on Federal Reserve Banks for currency costs 170,700,082 180,779,673 Expenses for currency printing, issuance, retirement, shipping, and research costs 170,700,082 181,219,573 CURRENCY ASSESSMENTS (UNDER) EXPENSES .... — (439,900) TOTAL REVENUES (UNDER) OVER EXPENSES (4,405,969) 13,310,285 FUND BALANCE, Beginning of year 66,248,900 52,938,615 FUND BALANCE, End of year $ 61,842,931 $ 66,248,900 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

214 Board Financial Statements BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF CHANGES IN FINANCIAL POSITION For the years ended December 31 1987 1986 SOURCES OF CASH Board operations Net revenues (under) over expenses $(4,405,969) $13,310,285 Add items not affecting cash Depreciation and losses (gains) on disposals 7,530,325 6,156,450 Accrued annual leave 288,828 89,350 Decrease (increase) in accounts receivable, inventories, and prepaid expenses and other assets 1,044,021 (973,764) (Decrease) in accounts payable, accrued payroll and related taxes, and other liabilities (616,694) (1,564,704) Funds provided by operations 3,840,511 17,017,617 Proceeds from disposals of furniture and equipment 33,334 2,277,264 Total sources 3,873,845 19,294,881 USES OF CASH Capital expenditures for: Buildings 841,044 303,557 Furniture and equipment 5,252,164 16,781,375 (Decrease) increase in other non-current assets (1,279,149) 1,708,506 Total uses 4,814,059 18,793,438 (940,214) 501,443 (DECREASE) INCREASE IN CASH CASH BALANCE, Beginning of year 8,646,210 8,144,767 CASH BALANCE, End of year $ 7,705,996 $ 8,646,210 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Financial Statements 215 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM NOTES TO FINANCIAL STATEMENTS fair value of the assets of the System's Plan exceeded the projected benefit obligations by 70 percent. Based on DECEMBER 31, 1987 and 1986 these calculations and similar calculations performed for 1986, it was determined that employer funding contributions were not required for the years 1987 and 1986 and (1) SIGNIFICANT ACCOUNTING POLICIES the Board was not assessed a contribution for these years. Board Operating Revenues and Expenses—Assess- Excess Plan assets will continue to fund future years' ments made on the Federal Reserve Banks for Board contributions. operating expenses and capital expenditures are calcu- Board contributions to the Civil Service Plan directly lated based on expected cash needs. These assessments, match employee contributions. The Board's contributions other operating revenues, and operating expenses are re- to the Civil Service Plan totaled $547,000 in 1987 and corded on the accrual basis of accounting. $565,000 in 1986. Issuance and Redemption of Federal Reserve Notes— Employees of the Board may also participate in the The Board incurs expenses and assesses the Federal Re- Federal Reserve System's Thrift Plan. Under the Thrift serve Banks for the cost of printing, issuing, shipping and Plan, members may contribute up to a fixed percentage of retiring Federal Reserve Notes. These assessments and their salary. Board contributions are based upon a fixed expenses are separately reported in the statements of reve- percentage of each member's basic contribution and were nues and expenses because they are not Board operating $1,491,000 in 1987 and $1,337,000 in 1986. transactions. The Board also provides certain health benefits for Property, Buildings and Equipment—The Board's retired employees. The cost of providing the benefits is property, buildings and equipment are stated at cost less recognized by expensing the insurance premiums which accumulated depreciation. Depreciation is calculated on a were $166,800 in 1987 and $98,300 in 1986. straight-line basis over the estimated useful lives of the assets, which range from 3 to 10 years for furniture and (3) PROPERTY, BUILDINGS, AND EQUIPMENT equipment and from 10 to 50 years for building equipment and structures. The following is a summary of the components of the Other Assets—The Board has made prepayments for Board's fixed assets, at cost, net of accumulated depreciacomputer equipment to be received in future years. In tion. addition, maintenance on this and other computer equipment received during 1986 and 1987 has been prepaid As of December 31 through January 1989. Other Assets includes the equip- 1987 1986 ment prepayments and the portion of the prepaid maintenance services which will be received in 1989. As the Land and equipment is received and maintenance service provided, improvements. $ 1,301,314 $ 1,301,314 the furniture and equipment account and the appropriate Buildings 62,903,355 62,062,311 expense account will be charged accordingly. Furniture and Contingency Processing Center—The Board operates equipment . . . 37,005,912 31,955,505 on behalf of the Federal Reserve System a contingency 101,210,581 95,319,130 processing center to handle data processing requirements Less accumulated during emergency situations. The Board recovers from depreciation . . 37,853,657 30,491,755 the Federal Reserve Banks a proportionate amount of the operating expenses of the center in the form of fees. Total property, buildings and (2) RETIREMENT BENEFITS equipment . . . $ 63,356,924 $64,827,375 Substantially all of the Board's employees participate in either the Retirement Plan for Employees of the Federal Reserve System or the Civil Service Plan. The System's (4) OTHER REVENUES AND OTHER EXPENSES Plan is a multiemployer plan which covers employees of The following are summaries of the components of the Federal Reserve Banks, the Board, and the Plan Ad- Other Revenues and Other Expenses. ministrative Office. Employees of the Board who entered on duty prior to 1984 are covered by a contributory For the years defined benefits program under the plan. Employees of ended December 31 the Board who entered on duty after 1983 are covered by a 1987 1986 non-contributory defined benefits program under the plan. The Civil Service Plan is a defined contribution plan. Other Revenues Contributions to the System's Plan are actuarially de- Contingency termined and funded by participating employers at Processing amounts prescribed by the Plan's administrator. No sepa- Center fees $1,593,050 $1,543,761 rate accounting is maintained of assets contributed by the Sale of participating employers and net pension cost for the pe- publications . . . 1,418,513 1,124,482 riod is the required contribution for the period. As of Miscellaneous 634,328 501,324 January 1, 1987, actuarial calculations showed that the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

216 Board Financial Statements (4) OTHER REVENUES AND OTHER EXPENSES—Cont. ally seek injunctive or declaratory relief against the Board rather than monetary awards. It is the opinion of Board Total other counsel that such lawsuits involving monetary awards do revenues $3,645,891 $3,169,567 not represent a material liability to the Board. Other Expenses Subsidies and (6) FEDERAL FINANCIAL INSTITUTIONS contributions. . . $ 649,919 $ 703,213 EXAMINATION COUNCIL Tuition, registrations The Board is one of the five member agencies of the and membership Federal Financial Institutions Examination Council (the fees 517,097 587,670 "Council"). During 1987 and 1986, the Board paid Cafeteria operations, $162,000 and $137,000, respectively, in assessments for net 560,282 520,450 operating expenses of the Council. These amounts are Miscellaneous 362,117 339,474 included in subsidies and contributions for 1987 and Total other 1986. expenses $2,089,415 $2,150,807 The Board serves as custodian for the Council's cash amount. This cash is not reflected in the accompanying financial statements. It also processes accounting transactions, including payroll for most of the Council em- (5) CONTINGENCIES ployees, and performs other administrative services for The Board has been named as a defendant in various which the Board is reimbursed by the Council. litigation involving challenges to, or appeals from, ac- The Board is not reimbursed for the costs of personnel tions or proposed actions of the Board pursuant to statu- who serve on the Council and on the various task forces tory requirement or authorization. Such lawsuits gener- 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

218 Tables Detailed Statement of Condition of All Federal Reserve Banks Combined, December 31, 19871 Thousands of dollars ASSETS Gold certificate account 11,078,290 Special drawing rights certificate account 5,018,000 Coin 408,990 Loans and securities Loans to depository institutions 3,815,798 Federal agency obligations Bought outright 7,553,086 Held under repurchase agreement 1,315,470 U.S. Treasury securities Bought outright Bills 107,690,760 Notes 82,973,430 Bonds 28,241,544 Total bought outright 218,905,734 Held under repurchase agreement 3,645,235 Total securities 222,550,969 Total loans and securities 235,235,323 Items in process of collection Transit items 6,410,778 Other items in process of collection 1,586,402 Total items in process of collection 7,997,180 Bank premises Land 108,704 Buildings (including vaults) 531,660 Building machinery and equipment 167,815 Construction account 83,167 Total bank premises 782,642 Less depreciation allowance 185,531 597,111 Bank premises, net 705,815 Other assets Furniture and equipment 562,770 Less depreciation 309,469 Total furniture and equipment, net 253,301 Denominated in foreign currencies2 7,772,873 Interest accrued 2,631,681 Premium on securities 1,514,275 Due from Federal Deposit Insurance Corporation 2,623,472 Overdrafts 21,165 Prepaid expenses 76,885 Suspense account 79,209 Real estate acquired for banking-house purposes 9,018 Other 150,464 Total other assets 15,132,343 Total assets 275,575,941 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 219 1.—Continued LIABILITIES Federal Reserve notes Outstanding (issued to Federal Reserve Banks) 253,312,894 Less held by Federal Reserve Banks 40,421,693 Total Federal Reserve notes, net 212,891,201 Deposits Depository institutions 41,782,986 U.S. Treasury, general account 5,312,879 Foreign, official accounts 244,195 Other deposits Officers' and certified checks 18,815 International organizations 137,272 Others 875,414 Total other deposits 1,031,501 Deferred credit items 7,185,896 Other liabilities Discount on securities 2,758,450 Sundry items payable 54,166 Suspense account 201,592 All other 18,901 Total other liabilities Total liabilities CAPITAL ACCOUNTS Capital paid in 2,047,087 Surplus 2,047,087 Other capital accounts4 0 Total liabilities and capital accounts 275,575,941 1. Amounts in boldface type indicate items in the 3. In closing out the other capital accounts at year-end, Board's weekly statement of condition of the Federal the Reserve Bank earnings that are payable to the Trea- Reserve Banks. sury are included in this account pending payment. 2. Of this amount $1,125.7 million was invested in 4. During the year, includes undistributed net income, securities issued by foreign governments, and the balance which is closed out on Dec. 31. was invested with foreign central banks and the Bank for International Settlements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 Tables 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1987 and 1986 Millions of dollars Total Boston Item 1987 1986 1987 1986 ASSETS Gold certificate account 11,078 11,084 706 703 Special drawing rights certificate account 5,018 5,018 314 314 Coin 408 485 27 26 Loans To depository institutions 3,815 1,565 47 43 Other 0 0 0 0 Acceptances held under repurchase agreements . . . Federal agency obligations Bought outright 7,553 7,829 466 464 Held under repurchase agreements 1,316 2,314 0 0 U.S. Treasury securities Bought outright1 218,906 197,625 13,502 11,702 Held under repurchase agreements 3,645 13,691 0 0 Total loans and securities 235,235 223,024 14,015 12,209 Items in process of collection 7,990 10,273 501 621 Bank premises 705 661 93 92 Other assets Denominated in foreign currencies2 7,773 9,475 257 284 Mother 7,359 7,345 275 209 Interdistrict Settlement Account 0 0 -1,124 1,444 Total assets 275,566 267,365 15,064 15,902 LIABILITIES Federal Reserve notes 212,890 195,360 12,503 12,260 Deposits Depository institutions 41,784 48,107 1,863 2,870 U.S. Treasury, general account 5,313 7,588 0 0 Foreign, official accounts 244 287 5 5 Other 1,027 923 34 21 Total deposits 48,368 56,905 1,902 2,896 Deferred credit items 7,179 9,012 355 497 3,035 2,342 168 127 Other liabilities and accrued dividends3 271,472 263,619 14,928 15,780 Total liabilities CAPITAL ACCOUNTS 2,047 1,873 68 61 Capital paid in 2,047 1,873 68 61 Surplus 0 0 0 0 Other capital accounts Total liabilities and capital accounts 275,566 267,365 15,064 15,902 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes outstanding (issued to Bank) 253,313 231,603 15,123 14,393 LESS: Held by Bank 40,423 36,243 2,620 2,133 Federal Reserve notes, net 212,890 195,360 12,503 12,260 Collateral for Federal Reserve notes Gold certificate account 11,078 11,084 Special drawing rights certificate account 5,018 5,018 Other eligible assets 0 0 U.S. Treasury and federal agency securities 196,794 179,258 Digitized Tfootra Fl cRolAlaSteEraRl 212,890 195,360 http://fraser.stlouisfed.org/ For notes see end of table. Federal Reserve Bank of St. Louis

Tables 221 2.—Continued New York Philadelphia Cleveland Richmond 1987 1986 1987 1986 1987 1986 1987 1986 3,177 3,146 385 431 664 650 933 959 1,489 1,489 162 162 314 314 461 461 16 14 24 20 28 33 63 81 2,787 134 131 178 63 206 181 231 0 0 0 0 0 0 0 0 2,430 2,539 229 251 453 460 638 673 1,316 2,314 0 0 0 0 0 0 70,430 64,079 6,624 6,328 13,130 11,605 18,497 16,985 3,645 13,691 0 0 0 0 0 0 80,608 82,757 6,984 6,757 13,646 12,271 19,316 17,889 934 1,311 478 595 294 375 422 701 33 32 46 47 32 32 111 100 1,874 2,341 365 436 466 569 420 483 1,571 2,038 190 115 284 203 368 280 1,449 -5,576 -599 -466 136 247 -1,736 -158 91,151 87,552 8,035 8,097 15,864 14,694 20,358 20,796 70,471 61,693 5,706 5,513 12,987 12,482 16,550 17,150 11,653 14,639 1,648 1,945 2,124 1,528 2,902 2,645 5,313 7,588 0 0 0 0 0 0 130 174 7 * 7 9 9 8 8 438 516 28 8 42 27 61 45 17,534 22,917 1,683 1,960 2,175 1,564 2,971 2,698 875 1,158 369 381 317 298 383 564 1,189 852 83 71 159 128 226 182 90,069 86,620 7,841 7,925 15,638 14,472 20,130 20,594 541 466 97 86 113 112 114 101 541 466 97 86 113 112 114 101 0 0 0 0 0 0 0 0 91,151 87,552 8,035 8,097 15,864 14,694 20,358 20,796 75,709 65,671 9,048 7,908 15,192 13,896 21,052 19,955 5,238 4,068 3,342 2,395 2,205 1,414 4,502 2,805 70,471 61,693 5,706 5,513 12,987 12,482 16,550 17,150 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

222 Tables 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1987 and 1986—Continued Millions of dollars Atlanta Chicago Item 1987 1986 1987 1986 ASSETS Gold certificate account 596 507 1,383 1,394 Special drawing rights certificate account 203 203 656 656 Coin 37 47 31 29 Loans To depository institutions 39 73 19 Other 0 0 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 335 312 876 873 Held under repurchase agreements 0 0 0 0 U.S. Treasury securities Bought outright1 9,722 7,885 25,385 22,040 Held under repurchase agreements 0 0 0 0 Total loans and securities 10,096 8,270 26,280 23,002 Items in process of collection 615 815 620 1,013 Bank premises 57 51 70 43 Other assets Denominated in foreign currencies2 707 111 1,057 1,279 Allother 228 158 3,185 3,319 Interdistrict Settlement Account 1,742 1,489 2,605 2,975 Total assets 14,281 12,317 35,887 33,710 LIABILITIES Federal Reserve notes 9,206 7,557 30,029 27,064 Deposits Depository institutions 3,922 3,430 4,325 5,008 U.S. Treasury, general account 0 0 0 0 Foreign, official accounts 14 12 20 20 Other 52 28 145 103 Total deposits 3,988 3,470 4,490 5,131 Deferred credit items 604 867 522 752 121 87 324 261 Other liabilities and accrued dividends3 3,919 11,981 35,365 33,208 Total liabilities CAPITAL ACCOUNTS 181 168 261 251 Capital paid in 181 168 261 251 Surplus 0 0 0 0 Other capital accounts Total liabilities and capital accounts 14,281 12,317 35,887 33,710 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes outstanding (issued to Bank) 13,288 12,545 31,890 29,158 LESS: Held by Bank 4,082 4,988 1,861 2,094 Federal Reserve notes, net 9,206 7,557 30,029 27,064 1. Includes securities loaned—fully guaranteed by 3. Includes exchange-translation account reflecting the U.S. Treasury securities pledged with Federal Reserve monthly revaluation at market exchange rates of foreign- Banks—and excludes securities sold and scheduled to be exchange commitments. bought back under matched sale-purchase transactions. 4. Includes special investment account at the Federal 2. Valued monthly at market exchange rates. Reserve Bank of Chicago in Treasury bills maturing within 90 days. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 223 2.—Continued St. Louis Minneapolis Kansas City Dallas San Francisco 1987 1986 1987 1986 1987 1986 1987 1986 1987 1986 351 366 169 168 562 598 669 692 1,483 1,470 160 160 66 66 216 216 307 307 670 670 28 26 13 20 31 43 29 40 81 106 38 37 10 206 68 152 416 195 16 21 0 0 0 0 0 0 0 0 0 0 218 230 114 113 300 321 448 501 1,046 1,092 0 0 0 0 0 0 0 0 0 0 6,322 5,816 3,290 2,856 8,693 8,118 12,986 12,655 30,325 27,556 0 0 0 0 0 0 0 0 0 0 6,578 6,083 3,414 3,175 9,061 8,591 13,850 13,351 31,387 28,669 502 568 435 492 1,454 1,527 572 710 1,163 1,545 20 20 23 24 47 46 20 20 153 154 241 284 256 313 334 426 661 786 1,135 1,497 130 104 81 60 181 162 257 214 609 483 723 -1 T 78 -100 -106 6 -80 -3,099 154 8,733 7,610 4,454 4,396 11,786 11,503 16,371 16,040 33,582 34,748 6,942 3,043 2,838 8,380 8,293 12,312 11,250 24,761 23,371 1,165 1,021 848 884 1,689 1,425 2,985 3,675 6,660 9,037 0 0 0 0 0 0 0 0 0 0 5 4 5 5 6 7 13 12 22 24 21 12 16 12 31 28 56 41 103 82 1,191 1,037 869 901 1,726 1,460 3,054 3,728 6,785 9,143 407 504 371 495 1,402 1,495 498 610 1,076 1,391 77 64 45 40 108 93 157 136 378 301 8,617 7,494 4,328 4,274 11,616 11,341 16,021 15,724 33,000 34,206 58 58 63 61 85 81 175 158 291 271 58 58 63 61 85 81 175 158 291 271 0 0 0 0 0 0 0 0 0 0 8,733 7,610 4,454 4,396 11,786 11,503 16,371 16,040 33,582 34,748 8,804 7,467 4,035 3,383 10,963 11,665 15,852 14,236 32,357 31,236 1,862 1,578 992 545 2,583 3,372 3,540 2,986 7,596 7,865 6,942 5,889 3,043 2,838 8,380 8,293 12,312 11,250 24,761 23,371 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

224 Tables 3. Federal Reserve Open Market Transactions, 19871 Millions of dollars Type of transaction Jan. Feb. Mar. Apr. U.S. TREASURY SECURITIES Outright transactions (excluding matched transactions) Treasury bills Gross purchases . . 997 Gross sales 583 Exchange 0 Redemptions 0 Others within 1 year Gross purchases . . 0 Gross sales 0 Maturity shift 611 Exchange 0 Redemptions 0 1 to 5 years Gross purchases . . 0 Gross sales 0 Maturity shift -591 Exchange 0 5 to 10 years Gross purchases . 0 Gross sales 0 Maturity shift. . . -20 Exchange 0 More than 10 years Gross purchases . Gross sales Maturity shift. . . Exchange All maturities Gross purchases . Gross sales Redemptions . . . Matched transactions Gross sales Gross purchases Repurchase agreements2 Gross purchases Gross sales Net change in U.S. Treasury securities 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 . . . . oooo 191 1,062 4,226 3,581 0 653 0 0 0 800 0 0 0 0 1,232 0 0 0 1,855 1,762 1,375 -4,954 -1,799 -522 0 0 0 0 0 3,642 252 0 0 -1,650 -1,762 -1,373 4,354 1,799 522 0 0 914 0 0 0 -204 0 -3 400 0 0 0 0 669 0 0 0 0 0 0 200 0 0 997 191 1,062 10,683 583 3,833 0 653 0 800 0 0 63,865 82,086 72,306 83,822 65,145 81,387 73,476 82,494 36,373 0 5,657 37,653 46,897 3,168 5,657 23,881 -8,830 -8,308 2,231 22,474 ooo 4,714 6,171 -1,567 10,397 ooo 0 857 -857 -9,165 ooo 0 0 37 897 9,265 897 5,908 0 3,320 2,231 25,794 1. Sales, redemptions, and negative figures reduce 2. In July 1984 the Open Market Trading Desk disconholdings of the System Open Market Account; all other tinued accepting bankers acceptances in repurchase figures increase such holdings. Details may not add to agreements. totals because of rounding. •Less than $500,000 in absolute value. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 225 3.—Continued May June July Aug. Sept. Oct. Nov. Dec. Total 1,697 575 575 499 4,528 1,095 3,388 0 22 912 0 0 300 0 0 0 0 0 0 0 0 0 0 4,572 0 3,657 0 0 0 535 0 0 443 300 670 0 0 0 0 300 0 0 4,063 1,715 1,437 2,723 1,500 816 2,247 -1,336 -1,812 -613 -1,787 -917 -1,178 -3,728 0 0 0 0 * 0 70 0 1,394 0 5 2,551 0 50 0 0 200 0 0 0 0 -1,804 -1,715 -1,397 -2,122 -1,500 -761 -1,900 1,111 1,812 613 1,612 917 1,178 3,278 0 312 0 0 619 0 0 0 0 0 0 0 0 0 -2,259 0 -40 -601 0 -55 -347 150 0 0 100 0 0 300 0 251 0 0 493 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 75 0 0 75 0 0 150 1,697 3,066 575 504 8,633 1,395 4,108 0 22 1,112 0 300 300 0 0 0 4,572 0 3,657 0 70 91,642 87,228 80,304 60,731 61,321 77,497 85,288 92,137 87,128 80,037 62,594 61,347 73,779 85,494 59,340 24,167 3,298 9,013 34,080 65,675 15,853 73,111 22,108 2,058 12,311 34,080 57,380 18,751 oooo 18,983 6,050 0 9,029 479 3,658 0 300 1,400 21,502 -1,742 -20,388 0 70 2,589 10,231 0 452 -1,400 -17,974 1,742 18,938 596 2,441 0 0 0 -3,529 0 950 445 1,858 0 0 0 0 0 500 4,259 37,171 0 6,802 0 9,099 104,833 950,923 105,917 950,935 23,512 314,620 25,264 324,666 -11,580 5,002 -4,136 -931 4,702 5,673 1,346 3,591 11,235 oo* 16,071 19,428 -3,357 -14,936 ooo 0 0 59 3,907 929 2,910 996 997 -126 5,999 -4,262 ooo 2,369 3,298 -929 -1,861 ooo 0 0 0 0 0 0 0 0 56 13 276 7,174 18,523 6,786 9,718 80,353 7,174 15,607 7,425 10,679 81,351 0 2,860 -640 -975 -1,274 4,702 8,533 706 2,617 9,961 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

226 Tables 4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities, December 31, 1985-871 Millions of dollars Increase or December 31 decrease (-) Description 1987 1986 1985 1987 1986 U.S. Treasury securities, total 222,551 211,316 181,327 11,235 29,989 By term 1-15 days2 11,364 20,480 9,307 -9,117 11,173 16-90 days 46,112 53,611 43,462 -7,499 10,148 91 days to 1 year 76,827 62,239 56,364 14,588 5,875 1-5 years 47,512 36,469 35,650 11,043 818 5-10 years 15,313 15,451 14,785 -138 666 More than 10 years 25,424 23,066 21,759 2,358 1,308 By type of holding Held outright Treasury bills3 107,691 103,775 85,425 3,916 18,350 Treasury notes 82,973 68,126 67,647 14,848 479 Treasury bonds 28,242 25,724 24,726 2,518 997 Held under RPs 3,645 13,691 3,529 -10,046 10,163 Federal agency obligations, total 8,869 10,143 9,921 -1,274 222 By term 1-15 days2 1,561 2,704 1,836 -1,143 868 16-90 days 691 808 961 -118 -153 91 days to 1 year 1,653 1,224 1,471 428 -247 1-5 years 3,416 3,854 4,056 -437 -202 5-10 years 1,358 1,178 1,187 180 -9 More than 10 years 189 374 409 -185 -35 By type of holding Held outright Banks for Cooperatives4 0 0 21 0 -21 Federal Farm Credit Banks 2,294 2,486 2,477 -192 8 Federal Home Loan Banks 2,251 2,252 2,260 -1 -8 Federal Home Loan Mortgage Corporation. 0 0 0 0 0 Federal Intermediate Credit Banks4 0 30 50 -30 -21 Federal Land Banks 200 236 236 -36 0 Farmers Home Administration 99 101 101 -3 0 Federal National Mortgage Association . . . 2,490 2,490 2,847 0 -357 Government National Mortgage Association participation certificates 51 67 67 -16 0 U.S. Postal Service 37 37 37 0 0 Washington Metropolitan Area Transit Authority 117 117 117 0 0 General Services Administration 14 14 14 0 0 Held under RPs 1,315 2,314 1,693 -998 620 1. Details may not add to totals because of rounding. 3. Includes the effects of matched sale-purchase 2. Includes the effects of temporary transactions (re- agreements. purchase agreements and matched sale-purchase agree- 4. There were no outstanding issues as of December ments). 31, 1987. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 227 5. Number and Salaries of Officers and Employees of Federal Reserve Banks, December 31, 1987 President Other officers Employees Total Federal Reserve Number Ban B k r a ( n in c c h l e u s d ) ing ( A d s o a n l l n a la u r r y a s l ) N b u e m r - ( s A d a o n la l n l r a u i r e a s s l ) F ti u m ll e - P ti a m rt e - ( s A d a o n la l n l r a u i r e a s s l ) N b u e m r - ( s A d a o n la l n l r a u i r e a s s l ) Boston 158,500 54 3,723,400 1,306 285 37,164,817 1,646 41,046,717 New York 184,000 156 12,480,175 3,580 59 101,302,870 3,796 113,967,045 Philadelphia 139,100 53 3,720,050 1,090 102 27,698,503 1,246 31,557,653 Cleveland 130,000 60 3,823,500 1,269 59 29,606,480 1,389 33,559,980 Richmond 140,100 82 5,214,500 1,777 145 39,943,877 2,005 45,298,477 Atlanta 151,600 69 4,527,340 2,029 85 46,764,778 2,184 51,443,718 Chicago 165,900 85 5,456,350 2,468 23 60,774,081 2,577 66,396,331 St. Louis 139,000 57 3,419,000 1,194 89 27,225,940 1,341 30,783,940 Minneapolis 124,000 43 2,729,000 948 150 23,652,777 1,142 26,505,777 Kansas City 137,200 57 3,698,100 1,564 63 36,334,075 1,685 40,169,375 Dallas 134,700 58 3,650,350 1,499 50 37,985,968 1,608 41,771,018 San Francisco .... 158,200 105 6,962,359 2,241 70 58,228,478 2,417 65,349,037 Total 1,762,300 879 59,404,124 20,965 1,180 526,682,644 23,036 587,849,068 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

228 Tables 6. Income and Expenses of Federal Reserve Banks, 1987 Dollars Item1 Total Boston New York Philadelphia Cleveland CURRENT INCOME Loans 224,337,751 1,917,148 4,067,423 2,486,347 555,846 U.S. Treasury and federal agency securities 16,371,408,317 988,284,179 5,400,422,500 497,305,569 965,834,554 Foreign currencies 343,891,458 11,370,870 82,832,938 16,170,383 20,633,487 Priced services 644,671,864 43,296,664 92,217,810 30,841,255 39,224,730 Other 48,702,234 809,719 30,526,084 889,303 524,982 Total 17,633,011,623 1,045,678,580 5,610,066,755 547,692,857 1,026,773,599 CURRENT EXPENSES Salaries and other personnel expenses 621,702,802 40,942,252 126,490,442 32,804,520 35,421,989 Retirement and other benefits2 72,262,440 7,700,723 21,846,131 6,846,173 7,662,126 Fees 11,356,898 2,677,871 1,715,866 396,036 1,541,325 Travel 22,154,937 989,061 2,904,949 864,401 1,848,241 Postage and other shipping costs 81,349,721 3,791,390 9,372,823 4,494,244 5,961,285 Communications 12,291,137 1,004,866 1,803,489 580,393 613,487 Materials and supplies 47,282,152 2,633,883 8,925,389 2,637,819 2,906,632 Building expenses Taxes on real estate 21,709,940 2,717,750 3,719,593 1,543,565 1,105,534 Property depreciation 26,078,430 2,595,585 2,804,496 1,592,223 1,392,909 Utilities 22,906,014 1,956,696 3,375,315 2,200,418 1,579,732 Rent 17,118,511 518,712 10,229,545 34,954 291,357 Other 19,568,292 1,329,624 3,612,884 1,169,662 1,256,195 Equipment Purchases 4,693,541 117,615 0 192,157 147,584 Rentals 33,857,448 913,218 6,403,641 941,340 3,872,916 Depreciation 75,801,603 4,811,721 13,306,148 4,037,707 4,190,763 Repairs and maintenance .... 42,467,351 2,695,600 7,656,658 2,230,631 1,832,152 Earnings-credit costs 113,622,771 6,967,265 12,607,198 8,970,750 10,452,713 Other 45,976,990 2,481,616 9,456,644 1,949,376 3,034,681 Shared costs, net3 (0) (2,344,539) 922,741 2,422,670 (199,352) Recoveries (33,011,836) (6,933,981) (3,607,239) (2,407,815) (3,102,496) Expenses capitalized4 (2,936,662) (137,879) (4,494) (13,747) (170,253) Total 1,256,252,479 77,429,049 243,542,219 73,487,477 81,639,520 Reimbursements (109,341,780) (4,447,155) (22,483,934) (13,872,836) (7,754,031) Net expenses 1,146,910,699 72,981,894 221,058,285 59,614,641 73,885,489 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 229 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 1,736,475 3,712,153 179,483,497 3,662,935 2,553,425 5,393,686 16,924,161 1,844,655 1,374,138,059 700,134,754 1,858,905,221 469,887,307 240,913,926 648,680,179 980,240,459 2,246,661,609 18,592,591 31,361,478 46,776,722 10,668,119 11,348,418 14,772,365 29,245,742 50,118,345 53,254,196 71,662,436 85,444,353 29,119,192 36,598,916 42,412,464 46,023,487 74,576,360 757,809 1,069,584 2,439,365 444,395 7,919,496 500,175 1,020,337 1,800,986 1,448,479,130 807,940,405 2,173,049,158 513,781,948 299,334,181 711,758,869 1,073,454,186 2,375,001,954 46,705,249 53,887,408 73,649,535 32,102,945 27,436,918 41,637,812 40,465,427 70,158,305 9,079,585 10,448,374 15,394,091 6,414,115 5,255,500 8,357,309 7,953,691 14,507,114 690,652 623,148 976,388 500,330 640,716 362,559 175,327 1,056,680 1,897,198 1,861,872 3,395,675 1,190,819 1,000,818 1,713,372 1,510,417 2,978,114 6,446,858 9,242,630 8,776,070 4,396,562 5,652,721 6,279,971 4,481,368 12,453,799 884,222 1,651,193 1,490,546 586,949 496,584 927,613 806,229 1,445,566 4,347,044 4,769,580 5,091,460 3,035,497 1,886,626 3,150,925 3,045,110 4,852,187 1,878,785 1,278,842 2,480,900 480,449 2,602,347 1,029,840 599,533 2,272,802 3,750,950 1,649,157 1,808,035 866,936 1,064,887 2,157,173 1,263,970 5,132,109 2,004,700 2,016,601 2,677,065 1,422,359 733,701 1,354,972 997,135 2,587,320 536,290 617,865 2,911,715 398,798 143,503 152,408 1,129,148 154,216 1,613,142 1,013,412 4,107,548 822,664 1,282,260 783,115 618,536 1,959,250 422,975 305,469 292,536 387,783 812,904 98,812 153,340 1,762,366 1,751,817 2,182,870 7,052,171 635,296 686,756 1,471,066 4,111,571 3,834,786 7,245,424 9,322,316 8,251,222 3,363,252 3,786,940 4,182,929 5,585,359 7,717,822 3,985,412 4,882,341 6,633,033 1,937,139 2,085,310 2,175,795 2,153,482 4,199,798 8,253,737 11,524,717 22,891,037 4,346,714 6,083,365 7,364,904 4,968,604 9,191,766 4,694,380 3,864,194 6,513,840 1,905,369 2,612,926 2,329,387 2,750,690 4,383,887 (547,415) 1,083,254 (5,698,244) 1,198,082 1,612,562 724,042 974,987 (148,789) (4,655,683) (1,607,276) (2,581,148) (1,279,644) (649,998) (1,054,230) (1,854,336) (3,277,990) (228,842) (246,616) (1,194,756) (136,362) (40,523) (275,552) (431,031) (56,607) 100,756,480 120,371,351 164,918,719 64,576,052 65,186,823 84,924,222 81,458,557 147,164,501 (7,278,223) (7,657,603) (12,305,001) (8,008,682) (3,137,907) (5,285,013) (4,762,934) (12,348,461) 93,478,257 112,713,748 152,613,718 56,567,370 62,048,916 79,639,209 76,695,622 134,816,040 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

230 Tables 6. Income and Expenses of Federal Reserve Banks, 1987—Continued Dollars Item1 Total Boston New York Philadelphia Cleveland PROFIT AND LOSS Current net income 16,486,100,920 972,696,687 5,438,210,961 488,078,216 952,888,109 Additions to and deductions from current net income Profits on sales of U.S. Treasury and federal agency securities 41,880,453 2,581,259 13,476,274 1,268,641 2,511,011 Gains on foreign exchange transactions 1,804,276,954 59,541,139 434,830,746 84,801,017 108,256,617 Other additions 55,554,014 9,655 149,447 4,394 20,142 Total additions 1,901,711,422 62,132,054 448,456,467 86,074,051 110,787,770 Deductions from current net income 58,159,791 81,620 734,903 1,707,036 691 Net additions to or deductions (-) from current net income .... 1,843,551,631 62,050,433 447,721,564 84,367,015 110,787,079 Cost of unreimbursed Treasury services 46,957,714 2,401,304 7,180,347 5,692,929 3,094,742 Assessments by Board Board expenditures5 81,869,800 2,685,100 20,642,300 3,789,200 4,822,900 Cost of currency 170,674,979 10,687,354 53,905,512 4,817,304 10,906,391 Net income before payment to U.S. Treasury 18,030,150,057 1,018,973,362 5,804,204,366 558,145,797 1,044,851,155 Dividends paid 117,499,115 3,925,706 30,455,531 5,537,791 6,719,445 Payments to U.S. Treasury (interest on Federal Reserve notes) 17,738,879,542 1,007,693,456 5,698,704,285 541,827,706 1,036,752,610 Transferred to surplus 173,771,400 7,354,200 75,044,550 10,780,300 1,379,100 Surplus, January 1 1,873,315,300 60,913,200 466,001,350 86,465,500 111,314,300 Surplus, December 31 2,047,086,700 68,267,400 541,045,900 97,245,800 112,693,400 1. Details may not add to totals because of rounding. 3. Includes distribution of costs for projects performed 2. The effect of the 1987 implementation of Financial by one Bank for the benefit of one or more other Banks. Accounting Standards Board Statement No. 87—Em- 4. Includes expenses for labor and materials temporarployers' Accounting for Pensions—is recorded in the ily capitalized and charged to activities when the products Total column only and has not been distributed to each are consumed. District. Accordingly, the sum of the Districts will not 5. For additional details, see the last four pages of the equal the Total column for this category or for Total net preceding section: Board of Governors, Financial Stateexpenses, and New York will not add to current net ments. income. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 231 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 1,355,000,873 695,226,657 2,020,435,439 457,214,577 237,285,265 632,119,660 996,758,564 2,240,185,913 3,539,914 1,856,554 4,853,276 1,209,895 629,043 1,664,198 2,488,080 5,802,309 97,430,956 164,189,203 245,381,666 55,932,586 59,541,139 77,583,909 153,363,541 263,424,435 55,809 54,868 11,267 11,083 5,188 6,370 55,163,681 62,111 101,026,678 166,100,625 250,246,209 57,153,564 60,175,370 79,254,476 211,015,302 269,288,855 17,474 39,828 92,749 175,233 75,795 68,889 55,112,843 52,729 101,009,204 166,060,797 250,153,460 56,978,331 60,099,575 79,185,587 155,902,459 269,236,126 3,444,186 3,418,707 5,130,721 3,395,799 1,474,494 2,317,109 2,504,748 6,902,629 4,405,700 7,318,500 10,908,600 2,502,800 2,648,900 3,486,500 6,876,700 11,782,600 14,984,887 6,603,187 23,647,602 5,146,068 2,479,900 7,246,209 9,829,561 20,421,004 1,433,175,304 843,947,060 2,230,901,976 503,148,242 290,781,546 698,255,429 1,133,450,013 2,470,315,807 6,431,001 10,391,773 15,356,719 3,462,222 3,694,052 4,897,411 9,863,209 16,764,254 1,413,975,853 821,025,637 2,205,614,207 499,441,120 285,617,694 689,209,867 1,105,796,204 2,433,220,902 12,768,450 12,529,650 9,931,050 244,900 1,469,800 4,148,150 17,790,600 20,330,650 101,151,450 168,259,850 251,372,000 57,774,950 61,134,850 80,653,350 157,534,150 270,740,350 113,919,900 180,789,500 261,303,050 58,019,850 62,604,650 84,801,500 175,324,750 291,071,000 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

232 Tables 7. Income and Expenses of Federal Reserve Banks, 1914—871 Dollars Assessments by Period, or Federal Current Net Net additions Board of Governors Reserve Bank income expenses or 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 -2,127,889 4,095,497 7,580,913 1952 456,060,260 92,051,063 1,583,988 4,121,602 8,521,426 1953 513,037,237 98,493,153 -1,058,993 4,099,800 10,922,067 1954 438,486,040 99,068,436 -133,641 4,174,600 6,489,895 1955 412,487,931 101,158,921 -265,456 4,194,100 4,707,002 1956 595,649,092 110,239,520 -23,436 5,339,800 5,603,176 1957 763,347,530 117,931,908 -7,140,914 7,507,900 6,374,195 1958 742,068,150 125,831,215 124,175 5,917,200 5,973,240 1959 886,226,116 131,848,023 98,247,253 6,470,600 6,384,083 1960 1,103,385,257 139,893,564 13,874,702 6,533,700 7,455,011 1961 941,648,170 148,253,719 3,481,628 6,265,100 6,755,756 1962 1,048,508,335 161,451,206 -55,779 6,654,900 8,030,028 1963 1,151,120,060 169,637,656 614,835 7,572,800 10,062,901 1964 1,343,747,303 171,511,018 725,948 8,655,200 17,229,671 1965 1,559,484,027 172,110,934 1,021,614 8,576,396 23,602,856 1966 1,908,499,896 178,212,045 996,230 9,021,600 20,167,481 1967 2,190,403,752 190,561,166 2,093,876 10,769,596 18,790,084 1968 2,764,445,943 207,677,768 8,519,996 14,198,198 20,474,404 1969 3,373,360,559 237,827,579 -557,553 15,020,084 22,125,657 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 233 7.—Continued Payments to U.S. Treasury Transferred Transferred Dividends Interest on to surplus to surplus paid Franchise Under Federal Reserve (section 13b) (section 7) tax section 13b notes 217,463 1,742,775 6,804,186 1,134,234 l',i 34,234 5,540,684 48,334,341 5,011,832 2,703^894 70,651,778 5,654,018 60,724,742 82,916,014 6,119,673 59,974,466 15,993,086 6,307,035 10,850,605 -659,904 6,552,717 3,613,056 2,545,513 6,682,496 113,646 -3,077,962 6,915,958 59,300 2,473,808 7,329,169 818,150 8,464,426 7,754,539 249,591 5,044,119 8,458,463 2,584,659 21,078,899 9,583,911 4,283,231 22,535,597 10,268,598 17,308 -2,297,724 10,029,760 -7,057,694 9,282,244 2,011,418 11,020,582 8,874,262 -916,855 8,781,661 -60,323 6,510,071 8,504,974 '. '. '. 291,661 27,695 607,422 7,829,581 227,448 102,880 352,524 7,940,966 176,625 67,304 2,616,352 8,019,137 119,524 -419,140 1,862,433 8,110,462 24,579 -425,653 4,533,977 8,214,971 82,152 -54,456 17,617,358 8,429,936 141,465 -4,333 570,513 8,669,076 197,672 49,602 3,554,101 8,911,342 244,726 135,003 40,327,362 9,500,126 326,717 201,150 48,409,795 10,182,851 247,659 262,133 81,969,625 10,962,160 67,054 27,708 81,467,013 11,523,047 35,605 75,233,818 86,772 8,366,350 11,919,809 166,690,356 18,522,518 12,329,373 193,145,837 21,461,770 13,082,992 196,628,858 21,849,490 13,864,750 254,873,588 28,320,759 14,681,788 291,934,634 46,333,735 15,558,377 342,567,985 40,336,862 16,442,236 276,289,457 35,887,775 17,711,937 251,740,721 32,709,794 18,904,897 401,555,581 53,982,682 20,080,527 542,708,405 61,603,682 21,197,452 524,058,650 59,214,569 22,721,687 910,649,768 -93,600,791 23,948,225 896,816,359 42,613,100 25,569,541 687,393,382 70,892,300 27,412,241 799,365,981 45,538,200 28,912,019 879,685,219 55,864,300 30,781,548 1,582,118,614 -465,822,800 32,351,602 1,296,810,053 27,053,800 33,696,336 1,649,455,164 18,943,500 35,027,312 1,907,498,270 29,851,200 36,959,336 2,463,628,983 30,027,250 39,236,599 3,019,160,638 39,432,450 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

234 Tables 7. Income and Expenses of Federal Reserve Banks, 1914-87—Continued Dollars Assessments by Period, or Federal Current Net Net additions Board of Governors Reserve Bank income expenses or 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 ,023,678,474 (400,365,922) 71,551,000 152,135,488 1984 18,068,820,742 ,102,444,454 (412,943,156) 82,115,700 162,606,410 1985 18,131,982,786 ,127,744,490 1,301,624,294 77,377,700 173,738,745 1986 17,464,528,361 ,156,867,714 1,975,893,356 97,337,500 180,779,673 1987 17,633,011,623 ,146,910,699 1,796,593,9172 81,869,800 170,674,979 Total, 1914-87 218,984,053,284 16,535,876,088 2,516,133,525 1,186,604,208 1,803,266,357 Aggregate for each Bank, 1914-87 Boston 10,848,879,304 1,090,535,395 72,101,026 42,930,786 105,229,233 New York 62,995,337,192 3,359,021,096 666,841,844 306,465,986 438,485,583 Philadelphia 9,265,221,643 873,121,912 112,696,756 58,146,218 86,154,009 Cleveland 15,166,380,180 1,121,951,990 95,960,801 93,502,590 114,293,705 Richmond 17,275,843,408 1,293,376,966 121,317,542 61,444,776 172,331,506 Atlanta 8,964,178,239 1,403,345,106 228,582,698 87,321,760 113,863,060 Chicago 32,269,158,745 2,175,707,020 292,710,361 169,599,672 251,920,841 St. Louis 7,613,054,013 889,177,640 60,001,912 37,308,072 69,851,972 Minneapolis 4,000,971,259 750,880,296 83,389,153 35,230,315 31,957,029 Kansas City 9,598,113,136 1,040,095,559 108,909,533 50,878,009 88,484,537 Dallas 12,505,804,676 929,860,216 254,088,197 75,535,473 107,121,445 San Francisco 28,481,111,490 1,658,005,380 419,533,698 168,240,551 223,573,437 Total 218,984,053,284 16,535,876,088* 2,516,133,525 1,186,604,208 1,803,266,357 1. Details may not add to totals because of rounding. capital of the Federal Deposit Insurance Corporation 2. For 1987 and subsequent years, includes the cost of (1934), and $3,657 net upon elimination of sec. 13b services provided to the Treasury by Federal Reserve surplus (1958); and was increased by transfer of Banks for which reimbursement was not received. $11,131,013 from reserves for contingencies (1945), 3. The $2,175,758,899 transferred to surplus was re- leaving a balance of $2,047,086,698 on Dec. 31, 1987. duced by direct charges of $500,000 for charge-off on 4. See note 2, table 6. Bank premises (1927), $139,299,557 for contributions to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 235 7.—Continued Payments to U.S. Treasury Dividends Transferred Transferred paid Fran ta c x hise sec U ti n o d n e r 13b Fed In er te a r l e R st e o se n rve (s t e o c t s io u n rp l 1 u 3 s b) ( t s o e c s t u io rp n l u 7 s ) 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 91,954,150 117,499,115 17,738,879,542 173,771,400 2,034,414,472 149,138,300 2,188,893 197,612,943,251 (3,657) 2,175,758,8993 84,619,472 7,111,395 280,843 9,511,775,570 135,411 78,362,225 552,984,048 68,006,262 369,116 58,408,180,374 (433,412) 578,302,471 110,896,688 5,558,901 722,406 8,131,451,583 290,661 111,576,022 168,965,677 4,842,447 82,930 13,632,784,356 (9,906) 125,927,193 101,792,775 6,200,189 172,493 15,642,114,052 (71,517) 119,799,708 136,084,434 8,950,561 79,264 7,257,055,223 5,491 186,056,040 282,238,913 25,313,526 151,045 29,380,294,602 11,682 276,631,804 65,237,538 2,755,629 7,464 6,545,604,652 (26,515) 63,139,478 56,820,217 5,202,900 55,615 3,137,667,303 64,874 66,481,863 84,874,737 6,939,100 64,213 8,346,753,737 (8,674) 88,941,450 121,480,077 560,049 102,083 11,345,575,961 55,337 179,602,228 268,419,895 7,697,341 101,421 26,273,685,838 (17,089) 300,938,417 2,034,414,472 149,138,300 2,188,893 197,612,943,251 (3,657) 2,175,758,899 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

236 Tables Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks and Branches, December 31, 19871 Aquisition 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 80,228,571 5,360,169 107,625,421 92,004,797 Annex . 27,840 89,202 44,538 161,580 120,441 NEW YORK 3,436,277 21,384,365 21,735,584 46,556,226 29,433,141 Annex . . . 477,863 1,136,219 745,855 2,359,936 828,704 Buffalo 887,844 2,693,268 2,258,313 5,839,426 3,163,937 PHILADELPHIA . 1,876,601 53,111,019 5,938,678 60,926,298 46,222,478 CLEVELAND 1,074,281 8,305,578 5,028,695 14,408,554 8,734,217 1,224,363 Cincinnati 2,246,599 13,537,723 7,528,477 23,312,798 13,630,908 Pittsburgh 1,658,376 7,258,210 3,307,043 12,223,629 9,899,896 RICHMOND 3,912,575 55,775,336 14,314,313 74,002,223 57,021,484 Annex 522,733 3,725,466 3,924,584 8,172,784 3,845,754 Baltimore 6,474,484 26,826,903 3,842,189 37,143,576 33,318,176 Charlotte 1,902,406 15,484,515 946,943 18,333,865 16,950,727 ATLANTA 1,166,106 5,422,799 3,503,791 10,092,696 4,919,404 Birmingham 3,000,016 1,905,770 1,046,244 5,952,029 4,164,209 Jacksonville 1,058,262 19,192,963 778,381 21,029,606 19,092,537 895,313 Annex 107,925 76,236 15,843 200,003 148,838 Miami 3,607,531 11,965,974 2,111,664 17,685,170 15,191,691 Nashville 592,342 1,474,678 1,269,709 3,336,729 1,454,947 New Orleans 3,087,693 2,792,698 1,476,257 7,356,649 4,791,145 283,753 CHICAGO 4,511,942 64,474,534 13,651,202 82,637,677 64,984,328 Annex 53,066 548,119 215,796 816,981 735,224 Detroit 797,734 3,447,307 2,857,387 7,102,428 4,848,002 ST. LOUIS. 700,378 10,658,479 5,252,991 16,611,848 9,676,175 Little Rock. 1,148,492 2,082,669 1,010,869 4,242,031 2,614,553 Louisville. . 700,075 2,868,417 1,131,238 4,699,730 2,751,124 Memphis . . 1,135,623 4,216,382 2,126,755 7,478,760 4,928,773 MINNEAPOLIS. 1,394,384 26,664,805 7,692,189 35,751,378 22,623,095 Helena 289,619 104,184 68,689 462,491 329,872 1,262,491 KANSAS CITY 1,798,804 9,404,917 8,645,556 19,849,278 16,514,855 149,948 Denver 2,997,746 3,209,227 3,509,204 9,716,177 7,308,639 Oklahoma City 646,386 3,919,647 1,696,840 6,262,872 4,538,370 Omaha 6,534,583 11,019,238 1,401,083 18,954,904 18,424,163 2,220,765 DALLAS.. . 3,772,588 5,960,954 3,737,706 13,471,248 10,629,464 El Paso 262,477 1,348,665 393,301 2,004,443 1,676,869 Houston 2,049,064 2,847,212 921,537 5,817,813 5,168,140 San Antonio . 482,284 2,266,107 658,346 3,406,737 2,861,069 SAN FRANCISCO. . 15,541,937 67,431,240 16,434,132 99,407,309 87,742,694 Los Angeles 4,005,429 46,425,752 8,334,890 58,766,072 57,318,641 2,981,050 Portland 207,381 1,824,468 649,432 2,681,280 2,320,443 Salt Lake City 480,222 1,975,190 1,229,972 3,685,383 2,836,762 Seattle 274,772 1,977,592 1,757,520 4,009,884 2,545,548 Total 108,939,420 607,062,597 168,553,906 884,555,923 698,314,232 9,017,682 1. Details may not add to totals because of rounding. 4. Covers acquisitions for banking-house purposes and 2. Includes expenditures for construction at some of- bank premises formerly occupied and being held pending fices, pending allocation to appropriate accounts. sale. 3. Excludes charge-offs of $17,698,968 before 1952. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 237 9. Operations in Principal Departments of Federal Reserve Banks, 1984-87 Operation 1987 1986 1985 1984 Millions of pieces (except as noted) Loans (thousands) 25 19 24 33 Currency received and counted 16,881 15,408 14,655 13,422 Currency verified and destroyed 5,217 5,584 5,744 5,329 Coin received and counted 19,871 20,461 19,691 19,201 Checks handled U.S. government checks 568 585 592 598 Postal money orders 146 140 130 135 All other1 17,006 16,226 15,965 15,178 Issues, redemptions, and exchanges of U.S. Treasury and federal agency securities 191 204 171 168 Transfer of funds2 53 50 45 42 Food stamps redeemed 2,210 2,216 2,322 2,536 Millions of dollars Loans 151,323 193,424 307,856 852,777 Currency received and counted 216,151 197,516r 182,095 183,419 Currency verified and destroyed 44,907 47,842 51,081 50,164 Coin received and counted 3,517 3,088 3,226 3,624 Checks handled U.S. government checks 610,678 606,029 538,261 529,895 Postal money checks 12,511 11,103 9,486 9,085 All other1 11,453,158 10,546,900r 9,557,753 9,553,515 Issues, redemptions, and exchanges of U.S. Treasury and federal agency securities 90,056,338 75,447,899 65,866,333 50,327,014 Transfer of funds2 142,046,780 125,028,070 109,126,369 98,003,445 Food stamps redeemed 10,322 10,475 10,195 9,941 1. In the Report for 1984, data included checks han- 2. In the Report for 1984, data included transfers prodled by more than one Federal Reserve office. cessed by both sending and receiving Federal Reserve offices, r = Revised. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

238 Tables 10. Federal Reserve Bank Interest Rates, December 31, 1987 Loans to depository institutions Bank Adjustment credit Extended credit2 and seasonal credit1 First 30 days After 30 days of borrowing3 of borrowing All Federal Reserve Banks. . 6 6 7.70 1. Adjustment credit is available on a short-term basis 2. Extended credit is available to depository instituto help depository institutions meet temporary needs for tions, where similar assistance is not reasonably available funds that cannot be met through reasonable alternative from other sources, when exceptional circumstances or sources. After May 19, 1986, the highest rate established practices involve only a particular institution or when an for loans to depository institutions may be charged on institution is experiencing difficulties adjusting to changadjustment credit loans of unusual size that result from a ing market conditions over a longer period of time. major operating problem at the borrower's facility. 3. For extended-credit loans outstanding more than 30 Seasonal credit is available to help smaller depository days, a flexible rate somewhat above rates on market institutions meet regular, seasonal needs for funds that sources of funds ordinarily will be charged, but in no case cannot be met through special industry lenders and that will the rate charged be less than the basic discount rate arise from a combination of expected patterns of move- plus 50 basis points. The flexible rate is reestablished on ment in their deposits and loans. A temporary simplified the first business day of each two-week reserve mainteseasonal program was established on March 8, 1985, and nance period. At the discretion of the Federal Reserve the interest rate was fixed at Vi percent above the rate on Bank, the time period for which the basic discount rate is adjustment credit. The program was reestablished on Feb. applied may be shortened. See section 201.3 (b)(2) of 18, 1986, and again on Jan. 28, 1987; the rate could be Regulation A. either the same as that for adjustment credit or a fixed rate Yi percent higher. See sections 201.3 (a) and 201.3 (b)(l) of Regulation A. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 239 11. Reserve Requirements of Depository Institutions1 Depository institution requirements after implementation of the Ty d p e e p o o f s i d t e in p t o e s r i v t, a l a 2 nd Monetary Control Act Percent of deposits Effective date Net transaction accounts*<* $0 million-$40.5 million 3 12/15/87 More than $40.5 million 12 12/15/87 Nonpersonal time deposits5 By original maturity Less than Wi years 3 10/6/83 Wi years or more 0 10/6/83 Eurocurrency liabilities All types 3 11/13/80 1. Reserve requirements in effect on Dec. 31, 1987. serve ratio. With respect to NOW accounts and other Required reserves must be held in the form of deposits transactionl <accounts, the exemption applies only to such with Federal Reserve Banks or vault cash. Nonmembers accounts thhaatt would be subject to a 3 percent reserve may maintain reserve balances with a Federal Reserve requirement. Bank indirectly on a pass-through basis with certain ap- 3. Transaction accounts include all deposits on which proved institutions. the account holder is permitted to make withdrawals by For previous reserve requirements, see earlier editions negotiable or transferable instruments, payment orders of of the ANNUAL REPORT and of the Federal Reserve Bulle- withdrawal, and telephone and preauthorized transfers in tin. Under provisions of the Monetary Control Act, de- excess of three per month for the purpose of making pository institutions include commercial banks, mutual payments to third persons or others. However, MMDAs savings banks, savings and loan associations, credit and similar accounts subject to the rules that permit no unions, agencies and branches of foreign banks, and Edge more than six preauthorized, automatic, or other transfers corporations. per month, of which no more than three can be checks, 2. The Garn-St Germain Depository Institutions Act are not transaction accounts (such accounts are savings of 1982 (Public Law 97-320) requires that $2 million of deposits subject to time deposit reserve requirements). reservable liabilities (transaction accounts, nonpersonal 4. The Monetary Control Act of 1980 requires that the time deposits, and Eurocurrency liabilities) of each depos- amount of transaction accounts against which the 3 peritory institution be subject to a zero percent reserve re- cent reserve requirement applies be modified annually by quirement. The Board is to adjust the amount of reserv- 80 percent of the percentage increase in transaction acable liabilities subject to this zero percent reserve counts held by all depository institutions, determined as requirement each year for the succeeding calendar year by of June 30 each year. Effective Dec. 15, 1987, for institu- 80 percent of the percentage increase in the total reserv- tions reporting quarterly and Dec. 29, 1987, for instituable liabilities of all depository institutions, measured on tions reporting weekly, the amount was increased from an annual basis as of June 30. No corresponding adjust- $36.7 million to $40.5 million. ment is to be made in the event of a decrease. On Dec. 15, 5. In general, nonpersonal time deposits are time de- 1987 the exemption was raised from $2.9 million to $3.2 posits, including savings deposits, that are not transaction million. In determining the reserve requirements of de- accounts and in which a beneficial interest is held by a pository institutions, the exemption shall apply in the depositor that is not a natural person. Also included are following order: (1) net NOW accounts (NOW accounts certain transferable time deposits held by natural persons less allowable deductions); (2) net other transaction ac- and certain obligations issued to depository institution counts; and (3) nonpersonal time deposits or Eurocur- offices located outside the United States. For details, see rency liabilities starting with those with the highest re- section 204.2 of Regulation D. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

240 Tables 12. Initial Margin Requirements under Regulations T, U, G, and X1 Percent of market value Short sales, Effective date T only2 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 1958Jan. 16. . 50 50 Aug. 5 . . 70 70 Oct. 16 . 90 90 1960July 28. . 70 70 1962July 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 1972Nov. 24. 65 50 65 1974Jan. 3 . . 50 50 50 1. These regulations, adopted by the Board of Gover- percent of the current market value of the stock underlynors pursuant to the Securities Exchange Act of 1934, ing the option. On Sept. 30, 1985, the Board changed the limit the amount of credit to purchase and carry "margin required initial margin, allowing it to be the same as the securities" (as defined in the regulations) when such credit option maintenance margin required by the appropriate is collateralized by securities. Margin requirements on exchange or self-regulatory organization; such maintesecurities other than options are the difference between nance margin rules must be approved by the Securities the market value (100 percent) and the maximum loan and Exchange Commission. Effective Jan. 31, 1986, the value of collateral as prescribed by the Board. Regulation SEC approved new maintenance margin rules, permitting T was adopted effective Oct. 15, 1934; Regulation U, margins to be the price of the option plus 15 percent of the effective May 1, 1936; Regulation G, effective Mar. 11, market value of the stock underlying the option. 1968; and Regulation X, effective Nov. 1, 1971. 2. From Oct. 1, 1934, to Oct. 31, 1937, the require- On Jan. 1, 1977, the Board of Governors for the first ment was the margin "customarily required" by the time established in Regulation T the initial margin re- brokers and dealers. quired for writing options on securities, setting it at 30 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 241 13. Principal Assets and Liabilities and Number of Insured Commercial Banks, by Class of Bank, June 30, 1987 and 19861 Asset and liability items shown in millions of dollars Member banks Nonmember Item Total banks Total National State June 30, 1987 Loans and investments 1,992,386 1,467,711 1,173,851 293,861 524,675 Gross loans 1,532,022 1,159,438 930,664 228,773 372,584 Net loans 1,519,130 1,150,525 923,797 226,728 368,604 Investments 460,364 308,274 243,186 65,088 152,090 U.S. Treasury and federal agency securities 292,788 191,313 154,428 36,885 101,476 Other 167,576 116,961 88,758 28,202 50,615 Cash assets 216,948 168,199 131,859 36,340 48,749 Deposits, total 1,896,414 1,365,438 1,096,984 268,454 530,975 Interbank 64,964 57,059 41,804 15,254 7,906 Other transaction 572,220 423,361 333,940 89,420 148.860 Other nontransaction 1,433,542 1,002,982 820,075 182,907 430,560 Equity capital 172,146 123,081 96,681 26,400 49,065 Number of banks 13,805 5,794 4,696 1,098 8,011 June 30, 1986 Loans and investments 1,847,118 1,361,849 1,087,706 274,143 485.269 Gross loans 1,429,444 1,086,336 869,688 216,648 343,108 Net loans 1,414,905 1,076,284 861,931 214,353 338.621 Investments 417,673 275,513 218,018 57,495 142,160 U.S. Treasury and federal agency securities 253,181 161,625 131,620 30,006 91,556 Other 164,492 113,888 86,398 27,489 50,604 Cash assets, total 220,130 170,619 134,416 36,203 49,511 Deposits 1,804,922 1,298,092 1,048,022 250,070 506,830 Interbank 63,272 56,239 39,361 16,878 7,034 Other demand 539,061 402,171 318,154 84,017 136,890 Other time and savings 1,342,981 933,763 769,894 163,869 409,218 Equity capital 173,517 127,067 98,440 28,627 46,450 Number of banks 14,175 5,956 4,870 1,086 8,219 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

242 Tables 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-87, and Month-End 19871 Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding US. Treasury and Spe- Treafederal agency securities draw- sury Period Held Other Gold ing cur- Bought r u e n p d u e r r - Loans Float2 ot A he ll r3 R F e e s d e 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 outright chase assets4 icate standagree- ac- ing6 ment count 1918 . . . 239 239 0 1,766 199 294 0 2,498 2,873 1,795 1919 . . . 300 300 0 2,215 201 575 0 3,292 2,707 1,707 1920 . . . 287 287 0 2,687 119 262 0 3,355 2,639 1,709 1921 . . . 234 234 0 1,144 40 146 0 ,563 3,373 1,842 1922 . . . 436 436 0 618 78 273 0 ,405 3,642 1,958 1923 . . . 134 80 54 723 27 355 0 1,238 3,957 2,009 1924 . . . 540 536 4 320 52 390 0 ,302 4,212 2,025 1925 . . . 375 367 8 643 63 378 0 ,459 4,112 1,977 1926 . . . 315 312 3 637 45 384 0 1,381 4,205 1,991 1927 . . . 617 560 57 582 63 393 0 1,655 4,092 2,006 1928 . . . 228 197 31 1,056 24 500 0 1,809 3,854 2,012 1929 . . . 511 488 23 632 34 405 0 1,583 3,997 2,022 1930 . . . 739 686 43 251 21 372 0 1,373 4,306 2,027 1931 . .. 817 775 42 638 20 378 0 1,853 4,173 2,035 1932 . . . 1,855 1,851 4 235 14 41 0 2,145 4,226 2,204 1933 . . . 2,437 2,435 2 98 15 137 0 2,688 4,036 2,303 1934 . . . 2,430 2,430 0 7 5 21 0 2,463 8,238 2,511 1935 . .. 2,431 2,430 1 5 12 38 0 2,486 10,125 2,476 1936 . . . 2,430 2,430 0 3 39 28 0 2,500 11,258 2,532 1937 . .. 2,564 2,564 0 10 19 19 0 2,612 12,760 2,637 1938 . . . 2,564 2,564 0 4 17 16 0 2,601 14,512 2,798 1939 . . . 2,484 2,484 0 7 91 11 0 2,593 17,644 2,963 1940 . . . 2,184 2,184 0 3 80 8 0 2,274 21,995 3,087 1941 . . . 2,254 2,254 0 3 94 10 0 2,361 22,737 3,247 1942 . . . 6,189 6,189 0 6 471 14 0 6,679 22,726 3,648 1943 . . . 11,543 11,543 0 5 681 10 0 12,239 21,938 4,094 1944 . . . 18,846 18,846 0 80 815 4 0 19,745 20,619 4,131 1945 . . . 24,252 24,252 0 249 578 2 0 15,091 20,065 4,339 1946 . . . 23,350 23,350 0 163 580 1 0 24,093 20,529 4,562 1947 . . . 22,559 22,559 0 85 535 1 0 23,181 22,754 4,562 1948 . . . 23,333 23,333 0 223 541 1 0 24,097 24,244 4,589 1949 . . . 18,885 18,885 0 78 534 2 0 19,499 24,427 4,598 1950 . . . 20,778 20,725 53 67 1,368 3 0 22,216 22,706 4,636 1951 . . . 23,801 23,605 196 19 1,184 5 0 25,009 22,695 4,709 1952 . . . 24,697 24,034 663 156 967 4 0 25,825 23,187 4,812 1953 . . . 25,916 25,318 598 28 935 2 0 26,880 22,030 4,894 1954 . . . 24,932 24,888 44 143 808 1 0 25,885 21,713 4,985 1955 . . . 24,785 24,391 394 108 1,585 29 0 26,507 21,690 5,008 1956 . . . 24,915 24,610 305 50 1,665 70 0 26,699 21,949 5,066 1957 . . . 24,238 23,719 519 55 1,424 66 0 25,784 22,781 5,146 1958 . . . 26,347 26,252 95 64 1,296 49 0 27,755 20,534 5,234 1959 . . . 26,648 26,607 41 458 1,590 75 0 28,771 19,456 5,311 1960 . . . 27,384 26,984 400 33 1,847 74 0 29,338 17,767 5,398 1961 . . . 28,881 30,478 159 130 2,300 51 0 31,362 16,889 5,585 1962 . . . 30,820 28,722 342 38 2,903 110 0 33,871 15,978 5,567 1963 . . . 33,593 33,582 11 63 2,600 162 0 36,418 15,513 5,578 1964 . . . 37,044 36,506 538 186 2,606 94 0 39,930 15,388 5,405 Digitized for FRASER http://fraseFr.osr tnloouteiss sfeeed l.aosrt gtw/ o pages of table. Federal Reserve Bank of St. Louis

Tables 243 14.—Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with Other reserves8 Cur- Trea- Federal Reserve Banks Other qu R i e re - d Federal rency sury Federal clear- Reserve c t c u i i i o n l r a n - - h i c n o a g l s d s h 7 - T s r u e r a y - e F i o g r n - Other R co e a u s c e n - r t v s e 4 a b n in a c l g e - s c b a i a l p l i i n a i t t d i - a e l s 4 R F B W e e a s d n e i e t r k r h v a s e l r c C e a o n n u i c n d r- y 9 qu R ir e e - d10 c E es x s - 10 4,951 288 51 96 25 118 0 0 ,636 0 1,585 51 5,091 385 31 73 28 208 0 0 ,890 0 1,822 68 5,325 218 57 5 18 298 0 0 ,781 0 0 0 4,403 214 96 12 15 285 0 0 ,753 0 1,654 99 4,530 225 11 3 26 276 0 0 ,934 0 0 0 4,757 213 38 4 19 275 0 0 ,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

244 Tables 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items Year-End 1918-87, and Month-End 1987'—Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding U.S. Treasury and S c p ia e l - Treafederal agency securities draw- sury Period Held Other Gold ing cur- 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 outright12 chase assets4 icate standagree- 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 0 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 1970 . . . 62,142 62,142 0 335 4,261 57 1,123 67,918 10,732 400 7,147 1971 . . . 70,804 69,481 1,323 39 4,343 261 1,068 76,515 10,132 400 7,710 1972 . . . 71,230 71,119 111 1,981 3,974 106 1,260 78,551 10,410 400 8,313 1973 . . . 80,495 80,395 100 1,258 3,099 68 1,152 86,072 11,567 400 8,716 1974 . . . 85,714 84,760 954 299 2,001 999 3,195 92,208 11,652 400 9,253 1975 . . . 94,124 92,789 1,335 211 3,688 1,126 3,312 102,461 11,599 500 10,218 1976 . . . 104,093 100,062 4,031 25 2,601 991 -3,182 110,892 11,598 1,200 10,810 1977 . . . 111,274 108,922 2,352 265 3,810 954 2,442 118,745 11,718 1,250 11,331 1978 . . . 118,591 117,374 1,217 1,174 6,432 587 4,543 131,327 11,671 1,300 11,831 1979 . . . 126,167 124,507 1,660 1,454 6,767 704 5,613 140,705 11,172 1,800 13,083 1980 . . . 130,592 128,038 2,554 1,809 4,467 776 8,739 146,383 11,160 2,518 13,427 1981 . . . 140,348 136,863 3,485 1,601 1,762 195 9,230 153,136 11,151 3,318 13,687 1982 . . . 148,837 144,544 4,293 717 2,735 1,480 9,890 63,659 11,148 4,618 13,786 1983 . . . 160,795 159,203 1,592 918 1,605 418 8,728 172,464 11,121 4,618 15,732 1984 . . . 169,627 167,612 2,015 3,577 833 0 12,347 186,384 11,096 4,618 16,418 1985 . . . 191,248 186,025 5,223 3,060 988 0 15,302 210,598 11,090 4,718 17,075 1986 . . . 221,459 205,454 16,005 1,565 1,261 0 17,475 241,760 11,084 5,018 17,567 1987 . . . 231,420 226,459 4,961 3,815 811 0 15,837 251,883 11,078 5,018 18,177 1987 Jan. . . 211,062 207,037 4,025 513 716 0 18,040 230,331 11,075 5,018 17,611 Feb . . 201,897 201,897 0 514 1,023 0 16,746 220,180 11,059 5,018 17,656 Mar. . 204,128 204,128 0 1,587 5,241 0 16,622 227,578 11,081 5,081 17,717 Apr . . 229,922 212,795 17,127 2,464 126 0 17,194 249,706 11,076 5,018 17,764 May. . 214,987 214,987 0 832 922 0 15,139 231,880 11,070 5,018 17,810 June.. 220,985 217,931 3,054 972 1,579 0 15,680 239,216 11,069 5,018 17,851 July . . 216,723 212,494 4,229 634 507 0 16,446 234,310 11,069 5.018 17,900 Aug. . 214,861 214,861 0 566 510 0 15,752 231,689 11,068 5.018 17,952 Sept.. 219,564 219,564 0 1,941 248 0 17,070 238,823 11,075 5.018 18,014 Oct .. 228,097 216,886 11,211 587 609 0 17,738 247,031 11,085 5.018 18,071 Nov. . 228,804 221,130 7,674 790 428 0 15,450 245,472 11,082 5,018 18,127 Dec. 231,420 226,459 4,961 3,815 811 0 15,837 251,883 11,078 5,018 18,177 1. For a description of figures and discussion of their 6. Includes currency and coin (other than gold) issued significance, see Banking and Monetary Statistics, directly by the Treasury. The largest components are 1941-1970 (Board of Governors of the Federal Reserve fractional and dollar coins. For details see "Currency and System, 1976), pp. 507-23. Coin in Circulation," Treasury Bulletin. 2. Beginning with 1960, figures reflect a minor change 7. Coin and paper currency held by the Treasury, as in concept; see Federal Reserve Bulletin, vol. 47 (Febru- well as any gold in excess of the gold certificates issued to ary 1961), p. 164. the Reserve Bank. 3. Principally acceptances and, until Aug. 21, 1959, 8. Beginning in November 1979, includes reserves of industrial loans, authority for which expired on that date. member banks. Edge corporations, and U.S. agencies and 4. For the period before Apr. 16, 1969, includes the branches of foreign banks. Beginning on Nov. 13, 1980, total of Federal Reserve capital paid in, surplus, other includes reserves of all depository institutions. capital accounts, and other liabilities and accrued divi- 9. Between Dec. 1, 1959, and Nov. 23, 1960, part was dends, less the sum of bank premises and other assets, and allowed as reserves; thereafter all was allowed. was reported as "Other Federal Reserve accounts"; there- 10. Estimated through 1958. Before 1929, data were after, "Other Federal Reserve assets" and "Other Federal available only on call dates (in 1920 and 1922 the call Reserve liabilities and capital" are shown separately. dates were Dec. 29). Beginning on Sept. 12, 1968, the Digitized fo5r. FFRorA thSeE pRer iod before Jan. 30, 1934, includes gold amount is based on close-of-business figures for the rehttp://frasheelrd. sintl oFeudiesrfael dR.eosregrv/ e Banks and in circulation. serve period two weeks before the report date. Federal Reserve Bank of St. Louis

Tables 245 14.—Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with Other reserves8 Cur- Trea- Federal Reserve Banks Other qu R i e re - d Federal rency sury Federal clear- Reserve c t c u i i i o n l r a n - - h i c n o a g l s d s h 7 - T s r u e r a y - e F i o g r n - Other R co e a u s c e n - r t v s4 e a b n in a c g l e - s c b a i a l p l i i n i a t t d i - a e l s 5 R F B W e e a s d n e i e t r k r h v a s e l r c C e a o n n u i c d n r- y 9 qu R ir e e - d10 ces E s x 10 - -13 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 l,41914 0 0 2,669 27,060 6,781 35,268 -1,360 79,743 185 2,113 418 1,2751* 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 -1,1O315 93,717 460 10,393 352 1,357 0 0 3,063 25,158 8,628 35,461 -1,535 103,811 392 7,114 379 1,187 0 0 3,292 26,870 9,421 37,615 -1,265 114,645 240 4,196 368 1,256 0 0 4,275 31,152 10,538 42,694 -893 125,600 494 4,075 429 1,412 0 0 4,957 29,792 11,429 44,217 -2,835 136,829 441 3,062 411 617 0 0 4,671 27,456 13,654 40,558 675 144,774 443 4,301 505 781 0 117 5,261 25,111 15,576 42,145 - 1,442 154,908 429 5,033 328 1,033 0 436 4,990 26,053 16,666 41,391 1,328 171,935 479 3,661 191 851 0 1,013 5,392 20,413 17,821 39,179 -945 183,796 513 5,316 253 867 0 1,126 5,952 20,693 n.a. n.a. n.a. 197,488 550 9,351 480 1,041 0 1,490 5,940 27,141 n.a. n.a. n.a. 211,995 447 7,588 287 917 0 1,812 6,088 46,295 n.a. n.a. n.a. 230,205 454 5,313 244 1,027 0 1,687 7,129 40,097 n.a. n.a. n.a. 205,342 465 15,746 226 453 0 ,786 7,201 32,802 n.a. n.a. n.a. 205,964 510 3,482 201 539 0 ,810 6,110 35,323 n.a. n.a. n.a. 207,799 518 3,576 268 577 0 1,817 6,682 40,156 n.a. n.a. n.a. 210,263 531 29,688 343 533 0 1,812 7,057 33,337 n.a. n.a. n.a. 213,534 514 6,383 320 372 0 1,779 6,511 36,365 n.a. n.a. n.a. 215,162 492 13,774 318 458 0 1,775 6,847 34,327 n.a. n.a. n.a. 215,898 470 5,365 262 281 0 1,747 6,520 37,754 n.a. n.a. n.a. 216,467 463 3,763 295 284 0 1,709 6,964 35,782 n.a. n.a. n.a. 216,785 460 9,120 456 419 0 1,706 6,663 37,321 n.a. n.a. n.a. 219,855 467 8,898 236 477 0 1,733 7,950 41,589 n.a. n.a. n.a. 225,090 465 3,594 352 450 0 1,717 7,968 40,064 n.a. n.a. n.a. 230,205 454 5,313 244 1,027 0 1,687 7,129 40,094 n.a. n.a. n.a. 11. Beginning on Dec. 1, 1966, includes federal 14. For the period before July 1973, includes certain agency obligations held under repurchase agreements and deposits of domestic nonmember banks and foreignbeginning on Sept. 29, 1971, federal agency issues owned banking institutions held with member banks and bought outright. redeposited in full with Federal Reserve Banks in connec- 12. Includes, beginning in 1969, securities loaned— tion with voluntary participation by nonmember institufully guaranteed by U.S. government securities pledged tions in the Federal Reserve System program of credit with Federal Reserve Banks—and excludes securities sold restraint. and scheduled to be bought back under matched sale-pur- As of Dec. 12, 1974, the amount of voluntary nonchase transactions. member bank and foreign-agency and branch deposits at 13. Beginning with week ending Nov. 15, 1972, in- Federal Reserve Banks that are associated with marginal cludes $450 million of reserve deficiencies on which reserves are no longer reported. However, two amounts Federal Reserve Banks are allowed to waive penalties for are reported: (1) deposits voluntarily held as reserves by a transition period in connection with bank adaptation to agencies and branches of foreign banks operating in the Regulation J as amended, effective Nov. 9, 1972. Allow- United States and (2) Euro dollar liabilities. able deficiencies are as follows (beginning with first state- 15. Adjusted to include waivers of penalties for rement week of quarter, in millions): 1973—Ql, $279; Q2, serve deficiencies, in accordance with change in Board Digitized$ f1o72r ;F QR3A, $S1E12R; Q4, $84; 1974—Ql, $67; Q2, $58. The policy effective Nov. 19, 1975. http://frastreanrs.sititolonu piesrfieodd .eonrdge/d with the second quarter of 1974. Federal Reserve Bank of St. Louis

246 Tables 15. Changes in Number of Banking Offices in the United States, 19871 Commercial banks2 Mutual savings Type of office All Member Nonmember banks and change banks Total Non- Non- Total National State Insured insured3 Insured insured Banks, Dec. 31, 1986. . 15,208 14,848 5,992 4,882 1,110 8,233 623 359 1 Changes during 1987 New banks 217 212 101 59 42 111 0 5 0 Ceased banking operation -240 -238 -81 -66 -15 -126 -31 -2 0 Banks converted into branches -532 -531 -274 -239 -35 -254 -3 -1 0 Other4 -180 -281 15 7 8 32 -328 101 0 Net change -735 -838 -239 -239 0 -237 -362 103 0 Banks, Dec. 31,1987. . 14,473 14,010 5,753 4,643 1,110 7,996 261* 462 1 Branches and additional offices, Dec. 31, 1986.. . . 46,272 43,917 28,398 23,219 5,179 15,432 87 2,350 5 Changes during 1987 De novo 1,117 960 583 478 105 370 7 157 0 Banks converted into branches 532 531 274 239 35 254 3 10 Discontinued -960 -942 -736 -638 -98 -205 -1 -18 0 Sale of branch 0 0 12 13 -1 -12 0 0 0 Other4 1,692 1,558 1,498 1,285 213 47 13 134 0 Net change 2,381 2,107 1,631 1,377 254 454 22 274 0 Branches and additional offices, Dec. 31,1987.... 1. Preliminary. Final dat4a8 ,w6i5l3l be4 a6v,a0i2la4b le3 i0n, 0t2h9e An-24,596 4. I5nc,4lu3d3e s in1te5r,c8l8as6s chang1e0s9. 2,624 5 nual Statistical Digest, 1987, forthcoming. 5. This figure no longer includes 344 branches of for- 2. Includes stock savings banks and nondeposit trust eign banks that were previously counted as banks. companies. 3. As of Dec. 31, 1987, includes 2 noninsured national trust companies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 247 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1987 Security Bank, Marshalltown, Iowa, to acquire ket, and the proposal would have no significant certain assets and liabilities o/Hawkeye Bank & eflFect on competition. Trust, Eldora, Iowa The banking factors and considerations relating to the convenience and needs of the community are SUMMARY REPORT BY THE ATTORNEY GENERAL consistent with approval. (11/25/86) The proposed transaction would not be significantly adverse to competition. Farmers State Bank of West Concord, West Concord, Minnesota, to acquire the deposits of BASIS FOR APPROVAL BY THE FEDERAL RESERVE Farmers National Bank in West Concord, West (1/9/87) Concord, Minnesota Security Bank (Applicant) has assets of $163.3 million and Hawkeye Bank & Trust (Bank) has SUMMARY REPORT BY THE ATTORNEY GENERAL deposits of $16.0 million. Applicant and Bank are No report received. Request for report on the comnot located in the same market, and the proposal petitive factors was dispensed with, as authorized would have no significant effect on competition. by the Bank Merger Act, to permit the Federal The banking factors and considerations relating Reserve System to act immediately to safeguard to the convenience and needs of the community are depositors of Farmers National Bank in West consistent with approval. Concord. BASIS FOR APPROVAL BY THE FEDERAL RESERVE Intrawest Bank of Grand Junction, Grand (3/5/87) Junction, Colorado, to acquire certain deposits Farmers State Bank of West Concord (Applicant) of American National Bank of Grand Junction, has assets of $12.9 million, and Farmers National Grand Junction, Colorado Bank in West Concord (Bank) has deposits of $9.1 SUMMARY REPORT BY THE ATTORNEY GENERAL million. No report received. Request for report on the com- The OCC has recommended immediate action petitive factors was dispensed with, as authorized by the Federal Reserve System to prevent the probby the Bank Merger Act, to permit the Federal able failure of Bank. Reserve System to act immediately to safeguard depositors of American National Bank of Grand Demotte State Bank, Demotte, Indiana, to ac- Junction. quire certain assets and liabilities of Morocco BASIS FOR APPROVAL BY THE FEDERAL RESERVE State Bank, Morocco, Indiana (1/8/87) SUMMARY REPORT BY THE ATTORNEY GENERAL Intrawest Bank of Grand Junction (Applicant) has No report received. Request for report on the comassets of $116.0 million and American National petitive factors was dispensed with, as authorized Bank of Grand Junction (Bank) has deposits of by the Bank Merger Act, to permit the Federal $7.6 million. Reserve System to act immediately to safeguard The Office of the Comptroller of the Currency depositors of Morocco State Bank. (OCC) has recommended immediate action by the Federal Reserve System to prevent the probable BASIS FOR APPROVAL BY THE FEDERAL RESERVE failure of Bank. (3/20/87) Demotte State Bank (Applicant) has assets of Bank of New York Company, New York, New $59.8 million, and Morocco State Bank has de- York, to merge with Long Island Trust Com- posits of $16.2 million. pany, N.A., Garden City, New York The State Banking Commissioner has recommended immediate action by the Federal Reserve SUMMARY REPORT BY THE ATTORNEY GENERAL System to prevent the probable failure of Bank. (12/17/86) The proposed transaction would not be significantly adverse to competition. Commerce Union Bank, Nashville, Tennessee, to merge with United Citizens Bank of Chatham BASIS FOR APPROVAL BY THE FEDERAL RESERVE County, Ashland City, Tennessee (1/16/87) Bank of New York Company (Applicant) has SUMMARY REPORT BY THE ATTORNEY GENERAL assets of $21 billion and Long Island Trust Com- (2/13/87) pany, N.A. (Bank), has assets of $2 billion. Ap- The proposed transaction would not be signifiplicant and Bank are not located in the same mar- cantly adverse to competition. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

248 Tables 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1987—Continued BASIS FOR APPROVAL BY THE FEDERAL RESERVE Prudential Bank, Denver, Colorado, to merge (3/25/87) with Commonwealth State Bank, Glendale, Commerce Union Bank (Applicant) has assets of Colorado $2.3 million, and United Citizens Bank of SUMMARY REPORT BY THE ATTORNEY GENERAL Chatham County (Bank) has assets of $17.4 mil- No report received. Request for report on the comlion. Applicant and Bank operate in the same petitive factors was dispensed with, as authorized banking market. On a pro forma basis, Applicant's by the Bank Merger Act, to permit the Federal market share is within Department of Justice and Reserve System to act immediately to safeguard Board guidelines. depositors of Commonwealth State Bank. The banking factors and considerations relating to the convenience and needs of the community are BASIS FOR APPROVAL BY THE FEDERAL RESERVE consistent with approval. (4/9/87) Prudential Bank (Applicant) has assets of $15.1 million, and Commonwealth State Bank (Bank) Farmers Bank and Savings Company, Pom- has assets of $7.8 million. eroy, Ohio, to acquire the assets and liabilities of The State Banking Commissioner has recomthe Tuppers Plains Branch of Bank One, mended immediate action by the Federal Reserve Athens, N. A., Athens, Ohio System to ensure continuation of Bank's services. SUMMARY REPORT BY THE ATTORNEY GENERAL First American Bank, Rosemead, California, to (2/13/87) merge with First Arroyo Bank, South Pasadena, The proposed transaction would not be signifi- California cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (1/14/87) (3/26/87) The proposed transaction would not be signifi- Farmers Bank and Savings Company (Applicant) cantly adverse to competition. has assets of $48.2 million, and the Tuppers Plains Branch (Branch) has assets of $4.2 million. Appli- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cant and Branch are both located in the Meigs (4/16/87) County banking market. On a pro forma basis, First American Bank (Applicant) has assets of $74 Applicant's market share is within Justice Depart- million, and First Arroyo Bank (Bank) has assets ment and Board guidelines. of $45 million. Applicant and Bank operate in the The banking factors and considerations relating Los Angeles metropolitan banking market. On a to the convenience and needs of the community are pro forma basis, Applicant's market share is consistent with approval. within Department of Justice and Board guidelines. The banking factors and considerations relating Bank of Lenawee, Adrian, Michigan, to acquire to the convenience and needs of the community are Hudson State Savings Bank, Hudson, Michigan consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL Chemical Bank Clare, Clare, Iowa, to acquire (2/12/87) certain assets and liabilities o/The Mount Pleas- The proposed transaction would not have a signifiant branch of Michigan National Bank-Valley, cantly adverse effect on competition. Midland, Michigan BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/31/87) SUMMARY REPORT BY THE ATTORNEY GENERAL (3/11/87) Bank of Lenawee (Applicant) has assets of $96.2 The proposed transaction would not have a signifimillion, and Hudson State Savings Bank (Bank) cantly adverse effect on competition. has assets of $38.9 million. Applicant and Bank compete in the Lenawee County, Michigan, bank- BASIS FOR APPROVAL BY THE FEDERAL RESERVE ing market. On a pro forma basis, Applicant's (4/17/87) market share is within Department of Justice and Chemical Bank (Applicant) has assets of $122 Board guidelines. million, and The Mount Pleasant branch of Michi- The banking factors and considerations relating gan National Bank (Branch) has deposits of $4 to the convenience and needs of the community are million. Applicant and Bank operate in the same consistent with approval. banking market. On a pro forma basis, Applicant's Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 249 16.—Continued market share is within Department of Justice and Reserve System to act immediately to safeguard Board guidelines. depositors of First State Bank. The banking factors and considerations relating BASIS FOR APPROVAL BY THE FEDERAL RESERVE to the convenience and needs of the community are (5/15/87) consistent with approval. Farmers & Merchants B&TC (Applicant) has assets of $68.2 million and will acquire deposits of Pacific Western Bank, San Jose, California, to $19.5 million from First State Bank (Bank). The merge with County Bank & Trust, Santa Cruz, State Banking Commissioner has recommended California immediate action by the Federal Reserve System to SUMMARY REPORT BY THE ATTORNEY GENERAL ensure continuation of Bank's services. (4/2/87) The banking factors and considerations relating The proposed transaction would not be signifi- to the convenience and needs of the community are cantly adverse to competition. consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (4/17/87) Forest Hill State Bank, Forest Hill, Maryland, Pacific Western Bank (Applicant) has assets of to acquire certain assets and liabilities of the $470.6 million, and County Bank & Trust (Bank) Darlington branch of Equitable Bank, N.A., has assets of $476.6 million. Applicant and Bank Baltimore, Maryland operate in the same banking market. On a pro SUMMARY REPORT BY THE ATTORNEY GENERAL forma basis, Applicant's market share is within (5/13/87) Department of Justice and Board guidelines. The proposed transaction would not be signifi- The banking factors and considerations relating cantly adverse to competition. to the convenience and needs of the community are consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (5/26/87) Professional Bank, Englewood, Colorado, to Forest Hill State Bank (Applicant) has assets of merge with American Bank of Commerce, $125 million and will acquire $7 million in assets Denver, Colorado of the Darlington branch of Equitable Bank, N. A. (Branch). Applicant and Branch operate in the SUMMARY REPORT BY THE ATTORNEY GENERAL Baltimore market. On a pro forma basis, Appli- No report received. Request for report on the comcant's market share is within Department of Justice petitive factors was dispensed with, as authorized and Board guidelines. by the Bank Merger Act, to permit the Federal The banking factors and considerations relating Reserve System to act immediately to safeguard to the convenience and needs of the community are depositors of American Bank of Commerce. consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (5/6/87) Professional Bank (Applicant) has assets of $5.0 Provident Bank, Cincinnati, Ohio, to merge million, and American Bank of Commerce (Bank) with Hamilton County State Bank, Lockland, has assets of $22.5 million. The State Banking Ohio Commissioner has recommended immediate ac- SUMMARY REPORT BY THE ATTORNEY GENERAL tion by the Federal Reserve System to ensure con- No report received. Request for report on the comtinuation of Bank's services. petitive factors was dispensed with, as authorized The banking factors and considerations relating by the Bank Merger Act, to permit the Federal to the convenience and needs of the community are Reserve System to act immediately to safeguard consistent with approval. depositors of Hamilton County State Bank. BASIS FOR APPROVAL BY THE FEDERAL RESERVE Farmers & Merchants B&TC, Aberdeen, (6/12/87) South Dakota, to acquire deposits of First State Provident Bank (Applicant) has assets of $1.4 Bank, Sisseton, South Dakota million, and Hamilton State Bank (Bank) has SUMMARY REPORT BY THE ATTORNEY GENERAL assets of $8.7 million. No report received. Request for report on the com- The State Banking Commissioner has recompetitive factors was dispensed with, as authorized mended immediate action by the Federal Reserve by the Bank Merger Act, to permit the Federal System to ensure continuation of Bank's services. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

250 Tables 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1987—Continued Chase Bank of Ohio, Mentor, Ohio, to acquire has assets of $3.1 billion, and the six branches of certain assets and liabilities of the Atrium I United National Bank (Branches) have assets of Branch of Bank One, Milford, N.A., Milford, $95.3 million. Ohio The banking factors and considerations relating to the convenience and needs of the community are SUMMARY REPORT BY THE ATTORNEY GENERAL (5/14/87) consistent with approval. The proposed transaction would not be signifi- Farmers and Merchants Bank, Huron, South cantly adverse to competition. Dakota, to acquire Security State Bank, BASIS FOR APPROVAL BY THE FEDERAL RESERVE Doland, South Dakota (6/18/87) SUMMARY REPORT BY THE ATTORNEY GENERAL Chase Bank of Ohio (Applicant) has assets of No report received. Request for report on the com- $456.4 million, and the Atrium Branch of Bank petitive factors was dispensed with, as authorized One (Branch) has assets of $247,000 and deposits by the Bank Merger Act, to permit the Federal of $8.4 million. Applicant and Bank operate in the Reserve System to act immediately to safeguard Cincinnati banking market. On a pro forma basis, depositors of Security State Bank. Applicant's market share is within Department of Justice and Board guidelines. BASIS FOR APPROVAL BY THE FEDERAL RESERVE The banking factors and considerations relating (9/23/87) to the convenience and needs of the community are Farmers and Merchants Bank (Applicant) has consistent with approval. assets of $104.5 million, and Security State Bank (Bank) has deposits of $19.5 million. The State Prudential Bank, Denver, Colorado, to acquire Banking Commissioner has recommended immethe assets and liabilities of Citizens Bank of diate action by the Federal Reserve System to Glendale, Denver, Colorado ensure continuation of Bank's services. The banking factors and considerations relating SUMMARY REPORT BY THE ATTORNEY GENERAL to the convenience and needs of the community are No report received. Request for report on the comconsistent with approval. petitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Century Bank Orchard Road, Arapahoe Reserve System to act immediately to safeguard County, Colorado, to merge with Century Bank depositors of Citizens Bank of Glendale. Southeast, N.A., Greenwood Village, Colorado BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (8/27/87) No report received. Request for report on the com- Prudential Bank (Applicant) has assets of $20.3 petitive factors was dispensed with, as authorized million, and Citizens Bank of Glendale (Bank) has by the Bank Merger Act, to permit the Federal assets of $3.6 million. The State Banking Com- Reserve System to act immediately to safeguard missioner has recommended immediate action by depositors of Century Bank Southeast, N.A. the Federal Reserve System to ensure continuation of Bank's services. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (9/24/87) The banking factors and considerations relating Century Bank Orchard Road (Applicant) has assets to the convenience and needs of the community are of $11.3 million, and Century Bank Southeast, consistent with approval. N.A. (Bank), has assets of $19.7 million. The State Banking Commissioner has recommended Norstar Bank of Upstate New York, Albany, immediate action by the Federal Reserve System to New York, to acquire certain assets and liabilities ensure continuation of Bank's services. of six branches of United National Bank, Calli- The banking factors and considerations relating coon, New York to the convenience and needs of the community are SUMMARY REPORT BY THE ATTORNEY GENERAL consistent with approval. (8/14/87) The proposed transaction would not have a signifi- Independent Bank-South Michigan, Leslie, cantly adverse effect on competition. Michigan, to acquire four branches of Michigan National Bank, Lansing, Michigan BASIS FOR APPROVAL BY THE FEDERAL RESERVE (9/22/87) SUMMARY REPORT BY THE ATTORNEY GENERAL Norstar Bank of Upstate New York (Applicant) (8/12/87) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 251 16.—Continued The proposed transaction would not be signifi- to the convenience and needs of the community are cantly adverse to competition. consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE The Commercial Bank, Bel Air, Maryland, to (10/1/87) Independent Bank-South Michigan (Applicant) acquire three branches of Maryland National has assets of $49.4 million, and the four branches Bank, Baltimore, Maryland of Michigan National Bank (Branches) have de- SUMMARY REPORT BY THE ATTORNEY GENERAL posits of $28 million. Applicant and Branches (9/25/87) operate in the same banking market. On a pro The proposed transaction would not have a signififorma basis, Applicant's market share is within cantly adverse effect on competition. Department of Justice and Board guidelines. BASIS FOR APPROVAL BY THE FEDERAL RESERVE The banking factors and considerations relating (10/23/87) to the convenience and needs of the community are The Commercial Bank (Applicant) has assets of consistent with approval. $150 million, and the three branches of Maryland National Bank (Branches) have deposits of $16 Star Valley State Bank, Afton, Wyoming, to million. Applicant and Branches operate in sepaacquire the deposits of American National Bank rate banking markets. of Afton, Afton, Wyoming The banking factors and considerations relating SUMMARY REPORT BY THE ATTORNEY GENERAL to the convenience and needs of the community are No report received. Request for report on the com- consistent with approval. petitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Bank One Mansfield, Mansfield, Ohio, to ac- Reserve System to act immediately to safeguard quire the Gallion branch of Chase Bank of depositors of American National Bank of Afton. Ohio, Mentor, Ohio BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (10/15/87) (10/16/87) Star Valley State Bank (Applicant) has assets of The proposed transaction would not have a signifi- $54.6 million and American National Bank of cantly adverse effect on competition. Afton (Bank) has deposits of $10.6 million. The OCC has recommended immediate action by the BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11/4/87) Federal Reserve System to ensure continuation of Bank's services. Bank One Mansfield (Applicant) has assets of $318.5 million, and the Gallion branch of Chase The banking factors and considerations relating Bank of Ohio (Branch) has assets of $17.5 million. to the convenience and needs of the community are Applicant and Branch do not operate in the same consistent with approval. banking market. First Bank of Mules hoe, Muleshoe, Texas, to The banking factors and considerations relating merge with First State Bank of Bovina, Bovina, to the convenience and needs of the community are Texas consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the com- Johnstown Bank & Trust Co., Johnstown, petitive factors was dispensed with, as authorized Pennsylvania, to merge with The First National by the Bank Merger Act, to permit the Federal Bank of Avonmore, Avonmore, Pennsylvania Reserve System to act immediately to safeguard SUMMARY REPORT BY THE ATTORNEY GENERAL depositors of First State Bank of Bovina. (10/16/87) The proposed transaction would not have a signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE (10/22/87) cantly adverse effect on competition. First Bank of Muleshoe (Applicant) has assets of BASIS FOR APPROVAL BY THE FEDERAL RESERVE $33.2 million, and First State Bank of Bovina (11/6/87) (Bank) has assets of $16.3 million. The State Johnstown Bank & Trust Co. (Applicant) has Banking Commissioner has recommended imme- assets of $417 million, and The First National diate action by the Federal Reserve System to Bank of Avonmore (Bank) has assets of $12.1 ensure continuation of Bank's services. million. Applicant does not currently operate in The banking factors and considerations relating Bank's market. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

252 Tables 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1987—Continued The banking factors and considerations relating Texas Capital Bank-Ft. Bend, Richmond, to the convenience and needs of the community are Texas, to merge with Bancfirst-Austin, N.A., consistent with approval. Austin, Texas SUMMARY REPORT BY THE ATTORNEY GENERAL The Merrill Trust Company, Bangor, Maine, to No report received. Request for report on the commerge with Norstar Bank of Maine, Portland, petitive factors was dispensed with, as authorized Maine by the Bank Merger Act, to permit the Federal SUMMARY REPORT BY THE ATTORNEY GENERAL Reserve System to act immediately to safeguard (10/23/87) depositors of Bancfirst-Austin, N. A. The proposed transaction would not have a signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse effect on competition. (12/10/87) BASIS FOR APPROVAL BY THE FEDERAL RESERVE Texas Capital Bank-Ft. Bend (Applicant) has (11/9/87) assets of $36.2 million, and Bancfirst-Austin, The Merrill Trust Company (Applicant) has assets N.A. (Bank), has assets of $24.6 million. Appliof $853 million and Norstar Bank of Maine (Bank) cant and Bank do not operate in the same banking has assets of $800 million. Applicant and Bank market. The State Banking Commissioner has reccompete in the Bangor banking market. On a pro ommended immediate action by the Federal Reforma basis, Applicant's market share is within the serve System to ensure continuation of Bank's Department of Justice and Board guidelines. services. The banking factors and considerations relating The banking factors and considerations relating to the convenience and needs of the community are to the convenience and needs of the community are consistent with approval. consistent with approval. Valley Bank of Nevada, Las Vegas, Nevada, to merge with Security Bank of Nevada, Reno, Nevada SUMMARY REPORT BY THE ATTORNEY GENERAL Mergers Approved Involving Wholly Owned (10/14/87) Subsidiaries of the Same Bank Holding The proposed transaction would not be signifi- Company cantly adverse to competition. In each of the following cases, the summary report BASIS FOR APPROVAL BY THE FEDERAL RESERVE by the attorney general indicates that the transac- (11/30/87) tion would not have a significantly adverse effect Valley Bank of Nevada (Applicant) has assets of on competition because the proposed merger is $1.5 billion and Security Bank of Nevada (Bank) essentially a corporate reorganization. The Board has assets of $483 million. Applicant and Bank of Governors, the Federal Reserve Bank, or the compete in four common banking markets. On a Secretary of the Board of Governors, whichever pro forma basis, Applicant's market share is approved the application, determined that the comwithin Department of Justice and Board guide- petitive effects of the proposed transaction, the lines. financial and managerial resources and prospects The banking factors and considerations relating of the banks concerned, as well as the convenience to the convenience and needs of the community are and needs of the community to be served, were consistent with approval. consistent with approval. Assets Institution1 (millions of Date of approval dollars) M&I Marshall & Ilsley Bank, Milwaukee, Wisconsin 2,226 1/30/87 Merger M&I Bay View State Bank, Milwaukee, Wisconsin 66 M&I Silver Spring Bank, Milwaukee, Wisconsin 67 Commerce Union Bank of Rutherford County, Wisconsin 56 M&I of Greenfield, Greenfield, Wisconsin 48 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 253 16.—Continued Assets Institution1 (millions of Date of approval dollars) Texas Capital Bank-Richmond, Richmond, Texas 39 3/11/87 Merger Texas Capital Bank-Katy, N.A., Katy, Texas 24 Community Bank-Northwest, Houston, Texas 7 4/15/87 Merger Community Bank 1-10 West, N.A., Katy, Texas 15 Security Bank Northeast, Richmond, Michigan 128 4/30/87 Merger Security Bank of Almont, Almont, Michigan 30 Carney Bank, Boynton Beach, Florida 15 5/7/87 Merger Carney Bank of Broward County, Sunrise, Florida 10 First of America Bank-Central, Lansing, Michigan 444 7/15/87 Merger First of America Bank-Charlotte, Charlotte, Michigan 23 First of America Bank, Grand Ledge, Michigan 17 Norstar Bank of Long Island, Hempstead, New York 1,176 8/4/87 Merger Norstar Bank of Commerce, New York, New York 449 Norstar Bank of Upstate New York, Albany, New York .... 2,724 8/5/87 Merger Norstar Bank of Hudson Valley, N.A., Newburgh, New York 632 Central Bank, Monroe, Louisiana . 439 9/29/87 Merger Lincoln Bank and Trust Company, Ruston, Louisiana 90 Provident Bank, Cincinnati, Ohio 1,084 9/23/87 Merger Midwest Bank and Trust Company, Cleveland, Ohio 176 State Bank of Freeport, Freeport, Illinois 152 9/30/87 Merger Rock City Bank, Rock City, Illinois 15 Old Kent Bank & Trust Co., Grand Rapids, Michigan 3,000 10/9/87 Merger Old Kent Bank of Kentwood, Kent wood, Michigan 23 Central Bank of the South, Birmingham, Alabama 3,479 10/23/87 Merger Central Bank, Cahaba Heights, Alabama 2 Peoples Bank of Bloomington, Bloomington, Illinois 205 10/27/87 Merger The First National Bank of Normal, Normal, Illinois 99 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

254 Tables 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1987—Continued Assets Institution1 (millions of Date of approval dollars) Old Kent Bank & Trust Company, Grand Rapids, Michigan 2,900 10/30/87 Merger Old Kent Bank of Greenville, Greenville, Michigan 62 Old Kent Bank of Fremont, Fremont, Michigan 54 Old Kent Bank and Trust Co., Grand Rapids, Michigan . . . 10/30/87 Merger 2,900 Old Kent Bank of Fremont, Fremont, Michigan 62 First Community Bank-Adrian, Buckhannon, West Virginia 11/13/87 Merger 49 First Community Bank-Princeton, Princeton, West Virginia Glendale Bank of Pennsylvania, Philadelphia, Pennsylvania 133 11/16/87 Merger 27 William Penn Bank, Philadelphia, Pennsylvania Comerica Bank, Detroit, Michigan 27 11/25/87 Merger Comerica Bank, Novi, Michigan 7,324 Comerica Bank, Sterling Heights, Michigan 62 Comerica Bank, Livonia, Michigan 137 Comerica Bank, Southfield, Michigan 153 Comerica Bank, Troy, Michigan 198 Comerica Bank, Warren, Michigan 192 330 Chemical Bank Bay Area, Bay City, Michigan 11/17/87 Merger 122 Chemical Bank Cass City, Cass City, Michigan 27 First Trust & Savings Bank of Kankakee, Kankakee, Illinois 11/27/87 Merger 166 First Trust & Savings Bank of Bradley, Bradley, Illinois . . . 19 Valley Bank & Trust Company, Salt Lake City, Utah 12/1/87 Merger 787 Silver King State Bank, Park City, Utah 29 First Virginia Bank-Commonwealth, Grafton, Virginia .... 12/1/87 Merger 40 First Virginia Bank-Surry, Surry, Virginia 17 First Nebraska Bank-Valley, Valley, Nebraska 12/29/87 Merger 12 First Nebraska Bank, Brainard, Nebraska 16 First Nebraska Bank, Decatur, Nebraska 6 First Nebrasks Bank, N.A., Emerson, Nebraska 16 First Nebraska Bank, N.A., Stanton, Nebraska 15 First Nebraska Bank, N.A., Columbus, Nebraska 10 1. Each proposed transaction was to be effected under the charter of the first-named bank. The entries are in chronological order of approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 255 16.—Continued Mergers Approved Involving a Nonoperating and without regard to the acquisition of the surviv- Institution with an Existing Bank ing bank by the holding company, the merger would have no effect on competition. The Board of The following transactions have no significant ef- Governors, the Federal Reserve Bank, or the Secfect on competition; they merely facilitate the ac- retary of the Board of Governors, whichever apquisition of the voting shares of a bank or banks by proved the application, determined that the proa holding company. In such cases the summary posal would, in itself, have no adverse competitive report by the attorney general indicates that the effects, and that the financial factors and considertransaction will merely combine an existing bank ations relating to the convenience and needs of the with a nonoperating institution; in consequence, community were consistent with approval. Assets Institution1 (millions of Date of dollars)2 approval Orrville Interim Bank, Orrville, Ohio 1/5/87 Merger Orrville Savings Bank, Orrville, Ohio 59 Hardy County Bank, Inc., Wardensville, West Virginia 1/9/87 Merger Capon Valley Bank, Wardensville, West Virginia 36 Morgan County Bank, Falkville, Alabama 1/28/87 Merger Madison County Bank, New Hope, Alabama Central Bank of the South, Falkville branch, Birmingham, Alabama First Virginia Bank-Clinch Valley, Richlands, Virginia 4/3/87 Merger Clinch Valley Bank & Trust Company, Richlands, Virginia 71 The New Colonia Bank, Opelika, Alabama 4/9/87 Merger Colonial Bank, Montgomery, Alabama 150 Alpine Bank & Trust Co., Glenwood Springs, Colorado 4/22/87 Merger Alpine Bank, Glenwood Springs, Colorado 13 Newport News Interim Bank, Newport News, Virginia 5/8/87 Merger American Bank, Newport News, Virginia 22 Sandusky Interim Bank, Sandusky, Ohio 5/28/87 Merger Citizens Banking Company, Sandusky, Ohio 168 Iron and Glass Interim Bank, Pittsburgh, Pennsylvania 6/8/87 Merger Iron and Glass Bank, Pittsburgh, Pennsylvania 78 Liberty State Interim Bank 8/14/87 Merger Liberty State Bank, Mount Carmel, Pennsylvania 47 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

256 Tables 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1987—Continued Assets Institution1 (millions of Date of approval dollars) Second BHN Acquisition Bank, Manchester, New Hampshire. 9/15/87 Merger Suncook Bank, Suncook, New Hampshire 102 L.T. Interim Bank, East St. Louis, Missouri. 9/17/87 Merger Lindell Trust Company, St. Louis, Missouri. 107 Wiles Interim Bank, Niles, Ohio 9/18/87 Merger The Security Dollar Bank Company, Niles, Ohio 64 First of America Bank-Manistee, Manistee, Michigan. . . 10/13/87 Merger Manistee Bank and Trust Company, Manistee, Michigan 112 Princeton Bank of Pennsylvania, Philadelphia, Pennsylvania 10/17/87 Merger Princeton Bank of Pennsylvania, N.A., Philadelphia, Pennsylvania . . CB Bank, South Haven, Michigan 11/9/87 Merger Citizens Trust & Savings Bank, South Haven, Michigan . 137 Newco Bank, Ypsilanti, Michigan 11/16/87 Merger Ypsilanti Savings Bank, Ypsilanti, Michigan 138 New Bank of Mora, Mora, Minnesota . 11/24/87 Merger Kanabee State Bank, Mora, Minnesota 39 Traders Interim Bank, Spencer, West Virginia 11/26/86 Merger Traders Bank, Spencer, West Virginia 63 New Valley Bank, Grand Forks, North Dakota 11/27/87 Merger Valley Bank & Trust Company, Grand Forks, North Dakota 84 The Lunenburg County Bank, Kenbridge, Virginia 12/1/86 Merger Community Bank of Lunenburg, Kenbridge, Virginia . . . 24 Lapeer Interim Bank, Lapeer, Michigan 12/14/87 Merger Lapeer County Bank & Trust Company, Lapeer, Michigan 125 1. Each proposed transaction was to be effected under 2. Where no assets are listed, the bank is newly organthe charter of the first-named bank. The entries are in ized and not in operation, chronological order of approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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

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

260 Directories and Meetings Board of Governors of the Federal Reserve System December 31,1987 Term expires ALAN GREENSPAN of New York, 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 EDWARD W. KELLEY, JR., of Texas January 31, 1990 MARTHAR. SEGER of Michigan January 31, 1998 H. ROBERT HELLER of California January 31, 1996 OFFICE OF BOARD MEMBERS OFFICE OF THE SECRETARY JOSEPH R. COYNE, Assistant to the Board WILLIAM W. WILES, Secretary DONALD J. WINN, Assistant to the Board BARBARA R. LOWREY, Associate Secretary LYNN SMITH FOX, Special Assistant JAMES MCAFEE, Associate Secretary to the Board BOB S. MOORE, Special Assistant LEGAL DIVISION to the Board MICHAEL BRADFIELD, General Counsel J. VIRGILMATTINGLY, JR., Deputy General Counsel DIVISION OF MONETARY AFFAIRS RICHARD M. ASHTON, Associate DONALD L. KOHN, Director General Counsel DAVID E. LINDSEY, Deputy Director OLIVER IRELAND, Associate General Counsel BRIAN MADIGAN, Assistant Director RICKIR. TIGERT, Assistant General Counsel RICHARD D. PORTER, Assistant Director MARYELLEN A. BROWN, Assistant NORMANDR.V. BERNARD, Special Assistant to the General Counsel to the Board DIVISION OF RESEARCH OFFICE OF STAFF DIRECTOR AND STATISTICS FOR MANAGEMENT MICHAEL J. PRELL, Director S. DAVID FROST, Staff Director EDWARD C. ETTIN, Deputy Director EDWARD T. MULRENIN, Assistant JARED J. ENZLER, Associate Director StaffDirector THOMAS D. SIMPSON, Associate Director PORTIA W. THOMPSON, Equal Employment LAWRENCE SLIFMAN, Associate Director Opportunity Programs Officer ELEANOR J. STOCKWELL, Associate Director MARTHA BETHEA, Deputy Associate Director OFFICE OF STAFF DIRECTOR FOR PETER A. TINSLEY, Deputy FEDERAL RESERVE BANK ACTIVITIES Associate Director THEODORE E. ALLISON, StaffDirector MARKN. GREENE, Assistant Director MYRON L. KWAST, Assistant Director SUSAN J. LEPPER, Assistant Director OFFICE OF THE EXECUTIVE MARTHA S. SCANLON, Assistant Director DIRECTOR FOR INFORMATION DAVID J. STOCKTON, Assistant Director RESOURCES MANAGEMENT JOYCE ZICKLER, Assistant Director ALLEN E. BEUTEL, Executive Director LEVON H. GARABEDIAN, Assistant Director STEPHEN R. MALPHRUS, Associate Director (Administration) 1. The designations as Chairman and Vice Chairman expire on August 10, 1991, and August 4, 1990, respectively, unless the services of these members of the Board shall have terminated sooner. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 261 DIVISION OF INTERNATIONAL DIVISION OF BANKING SUPERVISION FINANCE AND REGULATION—Continued EDWIN M. TRUMAN, Staff Director ROBERTS. PLOTKIN, Assistant Director LARRY J. PROMISEL, Senior SIDNEY M. SUSSAN, Assistant Director Associate Director LAURA M. HOMER, Securities Credit Officer CHARLES J. SIEGMAN, Senior Associate Director DIVISION OF CONSUMER DAVID H. HOWARD, Deputy AND COMMUNITY AFFAIRS Associate Director ROBERT F. GEMMILL, Staff Adviser GRIFFITH L. GARWOOD, Director DONALD B. ADAMS, Assistant Director GLENN E. LONEY, Assistant Director PETER HOOPER, III, Assistant Director ELLEN MALAND, Assistant Director KAREN H. JOHNSON, Assistant Director DOLORES S. SMITH, Assistant Director RALPH W. SMITH, JR. , Assistant Director DIVISION OF PERSONNEL DAVID L. SHANNON, Director DIVISION OF FEDERAL RESERVE JOHNR. WEIS, Assistant Director BANK OPERATIONS CHARLES W. WOOD, Assistant Director CLYDEH. FARNSWORTH, JR., Director ELLIOTT C. MCENTEE, Associate Director DIVISION OF SUPPORT SERVICES DAVID L. ROBINSON, Associate Director C. WILLIAM SCHLEICHER, JR. , Associate ROBERT E. FRAZIER, Director Director GEORGE M. LOPEZ, Assistant Director DAVID L. WILLIAMS, Assistant Director CHARLES W. BENNETT, Assistant Director JACK DENNIS, JR. , Assistant Director EARLG. HAMILTON, Assistant Director OFFICE OF THE CONTROLLER JOHNH. PARRISH, Assistant Director GEORGE E. LIVINGSTON, Controller LOUISE L. ROSEMAN, Assistant Director STEPHEN J. CLARK, Assistant Controller FLORENCE M. YOUNG, Adviser DARRELL R. PAULEY, Assistant Controller DIVISION OF BANKING SUPERVISION DIVISION OF HARDWARE AND AND REGULATION SOFTWARE SYSTEMS WILLIAM TAYLOR, Staff Director BRUCE M. BEARDSLEY, Director FRANKLIN D. DREYER, Deputy Director2 THOMAS C. JUDD, Assistant Director DON E. KLINE, Associate Director ELIZABETH B. RIGGS, Assistant Director ROBERT J. ZEMEL, Assistant Director FREDERICK M. STRUBLE, Associate Director WILLIAM A. RYBACK, Deputy Associate Director DIVISION OF STEPHEN C. SCHEMERING, Deputy APPLICATIONS DEVELOPMENT Associate Director AND STATISTICAL SERVICES RICHARD SPILLENKOTHEN, Deputy WILLIAM R. JONES, Director Associate Director DAY RADEBAUGH, Assistant Director HERBERT A. BIERN, Assistant Director RICHARD C. STEVENS, Assistant Director JOE M. CLEAVER, Assistant Director PATRICIA A. WELCH, Assistant Director ANTHONY CORNYN, Assistant Director JAMES I. GARNER, Assistant Director JAMES D. GOETZINGER, Assistant Director OFFICE OF THE INSPECTOR GENERAL MICHAEL MARTINSON, Assistant Director BRENT L. BOWEN, Inspector General 2. On loan from the Federal Reserve Bank of Chicago. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

262 Directories and Meetings Federal Open Market Committee December 31,1987 Members ALAN GREENSPAN, Chairman, Board of Governors E. GERALD CORRIGAN, Vice Chairman, elected member by Federal Reserve Bank of New York WAYNE D. ANGELL, Board of Governors EDWARD G. BOEHNE, elected member by Federal Reserve Banks of Boston, Philadelphia, and Richmond ROBERT H. BOYKIN, elected member by Federal Reserve Banks of Atlanta, St. Louis, and Dallas H. ROBERT HELLER, Board of Governors MANUEL H. JOHNSON, Board of Governors SILAS KEEHN, elected member by Federal Reserve Banks of Cleveland and Chicago EDWARD W. KELLEY, JR., Board of Governors MARTHA R. SEGER, Board of Governors GARY H. STERN, elected member by Federal Reserve Banks of Minneapolis, Kansas City, and San Francisco Alternate Members ROBERT P. BLACK, elected by Federal Reserve Banks of Boston, Philadelphia, and Richmond ROBERT P. FORRESTAL, elected by Federal Reserve Banks of Atlanta, St. Louis, and Dallas W. LEEHOSKINS, elected by Federal Reserve Banks of Cleveland and Chicago ROBERT T. PARRY, elected by Federal Reserve Banks of Minneapolis, Kansas City, and San Francisco THOMAS M. TIMLEN, elected by Federal Reserve Bank of New York Officers DONALD L. KOHN, DAVID E. LINDSEY, Secretary and Staff Adviser Associate Economist NORMAND R.V. BERNARD, MICHAEL J. PRELL, Assistant Secretary Associate Economist ROSEMARY R. LONEY, ARTHUR J. ROLNICK, Deputy Assistant Secretary Associate Economist MICHAEL BRADFIELD , HARVEY ROSENBLUM , General Counsel Associate Economist ERNEST T. PATRIKIS, KARL A. SCHELD, Deputy General Counsel Associate Economist EDWIN M. TRUMAN, CHARLES J. SIEGMAN, Economist (International) Associate Economist RICHARD W. LANG, THOMAS D. SIMPSON, 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 1987, the Federal Open Market the Federal Open Market Committee in this Committee held eight regularly scheduled REPORT.) Digitizedm foere FtiRngAsS E(sRe e Record of Policy Actions of http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 263 Federal Advisory Council December 31,1987 Members District 1—John P. La Ware, Chairman and Chief Executive Officer, Shawmut Bank, N.A., Boston, Massachusetts District 2—John F. McGillicuddy, Chairman of the Board and Chief Executive Officer, Manufacturers Hanover Trust Company, New York, New York District 3—Samuel A. McCullough, President and Chief Executive Officer, Meridian Bancorp, Inc., Reading, Pennsylvania District A—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—Charles T. Fisher, III, Chairman and President, National Bank of Detroit, Detroit, Michigan District 8—Donald N. Brandin, Chairman of the Board and Chief Executive Officer, Boatmen's Bancshares, Inc., St. Louis, Missouri 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—Gerald W. Fronterhouse, Chairman of the Board and Chief Executive Officer, RepublicBank Corporation, Dallas, Texas District 12—John D. Mangels, President, Rainier Bancorporation, Chairman, Rainier National Bank, Seattle, Washington Officers John G. Medlin, Jr., President Julien L. McCall, Vice President Herbert V. Prochnow, Secretary William J. Korsvik, Associate Secretary Directors John F. McGillicuddy D.H. Ankeny, Jr. F. Phillips Giltner Meetings of the Federal Advisory Council ing industry, one from each Federal Reserve were held on February 5-6, April 30-May 1, District, is required by law to meet in Wash- September 10-11, and December 3-4, 1987. ington at least four times per year and is The Board of Governors met with the council authorized by the Federal Reserve Act to on February 6, May 1, September 11, and consult with and advise the Board on all December 4, 1987. The council, which is matters within the jurisdiction of the Board, composed of 12 representatives of the bank- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

264 Directories and Meetings Consumer Advisory Council December 31,1987 Members EDWIN B. BROOKS, President, Security Federal Savings and Loan Association, Richmond, Virginia JONATHAN A. BROWN, Director, BankWatch, Washington, D.C. JUDITH N. BROWN, Treasurer, American Association of Retired Persons, Edina, Minnesota MICHAEL S. CASSIDY, Senior Vice President, Chase Manhattan Bank, New York, New York THERESA FAITH CUMMINGS, Social Services Consultant, Springfield, Illinois RICHARD B. DOBY, State Bank Commissioner, State of Colorado, Denver, Colorado RICHARD H. FINK, President, Citizens for a Sound Economy, Washington, D.C. NEIL J. FOGARTY, Attorney, Hudson County Legal Services, Jersey City, New Jersey STEPHEN GARDNER, Assistant Attorney General, State of Texas, Dallas, Texas KENNETH A. HALL, President, (South Division) First United Bank, Picayune, Mississippi STEVEN W. HAMM, Administrator, South Carolina Department of Consumer Affairs, Columbia, South Carolina ELENA HANGGI, President, Association of Community Organizations for Reform Now (ACORN), Little Rock, Arkansas ROBERT J. HOBBS, Senior Attorney, National Consumer Law Center, Boston, Massachusetts ROBERT W. JOHNSON, Professor of Management and Director, Credit Research Center, Purdue University, West Lafayette, Indiana RAMON E. JOHNSON, Professor of Finance, University of Utah, Salt Lake City, Utah JOHNM. KOLESAR, President, Ameritrust Development Bank, Cleveland, Ohio ALANB. 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 RICHARD L.D. MORSE, Professor of Family Economics, Kansas State University, Manhattan, Kansas HELEN E. NELSON, President, Consumer Research Foundation, Mill Valley, California SANDRA R. PARKER, Chairman, Banking Committee, Richmond United Neighborhoods, Richmond, Virginia JOSEPH L. PERKOWSKI, Chief Executive Officer, Minneapolis Federal Employees Credit Union, Minneapolis, Minnesota BRENDAL. 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, Crossland Savings F.S.B., Salt Lake City, Utah EDWARD J. WILLIAMS, Senior Vice President, Consumer Banking Group, Harris Trust and Savings Bank, Chicago, Illinois MICHAEL ZOROYA, Retail Services Consultant, The May Department Stores, St. Louis, Missouri Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 265 Consumer Advisory Council—Continued Officers EDWARD N. LANGE, Chairman STEVEN HAMM, Vice Chairman The Consumer Advisory Council met with resentatives of consumer and community inmembers of the Board of Governors on terests. It was established pursuant to the March 19-20, June 25-26, and October 1976 amendments to the Equal Credit Op- 22-23, 1987. The council is composed of portunity Act to advise the Board on conacademics, state government officials, repre- sumer financial services, sentatives of the financial industry, and rep- Thrift Institutions Advisory Council December 31,1987 Members Gerald M. Czarnecki, President and Chief Executive Officer, Altus Bank, A Federal Savings Bank, Mobile, Alabama John C. Dicus, President, Capitol Federal Savings and Loan Association, Topeka, Kansas Betty Gregg, President and Chief Executive Officer, Desert Schools Federal Credit Union, Phoenix, Arizona Jamie J. Jackson, President, Commonwealth Financial Group, Houston, Texas Thomas A. Kinst, President and Chief Executive Officer, Land of Lincoln Savings and Loan, Hoffman Estates, Illinois Ray Martin, Chairman and Chief Executive Officer, Coast Savings and Loan Association, Los Angeles, California Donald F. McCormick, Chairman of the Board, Howard Savings Bank, Livingston, New Jersey Janet M. Pavliska, President and Chief Executive Officer, Bank Five for Savings, Arlington, Massachusetts Herschel Rosenthal, President, Flagler Federal Savings and Loan Association, Miami, Florida William G. Schuett, President and Chief Executive Officer, Security Savings and Loan Association, Milwaukee, Wisconsin 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 MICHAEL R. WISE, President JAMIE J. JACKSON, Vice President The members of the Thrift Institutions Advi- unions, savings and loan associations, and sory Council met with the Board of Gover- savings banks, consults with and advises the nors on February 12, May 5, September 17, Board on issues pertaining to the thrift inand November 17, 1987. The council, which dustry and on various other matters within is composed of representatives from credit the Board's jurisdiction. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

266 Directories and Meetings Officers of Federal Reserve Banks, Branches, and Offices December 31, 19871 BANK, Chairman2 President Vice President Branch, ox 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 R. Opel E. Gerald Corrigan Virginia A. Dwyer Thomas M. Timlen Buffalo Mary Ann Lambertsen John T. Keane PHILADELPHIA .... Nevius M. Curtis Edward G. Boehne George E. Bartol III William H. Stone, Jr. CLEVELAND3 Charles W. Parry W. Lee Hoskins John R. Miller William H. Hendricks Cincinnati OwenB. Butler Charles A. Cerino4 Pittsburgh James E. Haas Harold J. Swart4 RICHMOND3 Leroy T. Canoles, Jr. Robert P. Black Robert A. Georgine Jimmie R. Monhollon Baltimore Gloria L. Johnson Robert D. McTeer4 Charlotte Wallace J. Jorgenson Albert D. Tinkelenberg4 Culpeper John G. Stoides4 ATLANTA Bradley Currey, Jr. Robert P. Forrestal Larry L. Prince Jack Guynn Delmar Harrison4 Birmingham A.G. Trammell Fred R. Hen4 Jacksonville Andrew A. Robinson James D. Hawkins4 Miami Robert D. Apelgren Patrick K. Barron4 Nashville C. Warren Neel Donald E. Nelson New Orleans Caroline G. Theus 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 Griffin Thomas C. Melzer Robert L. Virgil, Jr. James R. Bowen Little Rock James R. Rodgers John F. Breen Louisville Raymond M. Burse James E. Conrad Memphis Katherine H. Smythe Paul I. Black, Jr. MINNEAPOLIS John B. Davis, Jr. Gary H. Stern Michael W. Wright Thomas E. Gainor Helena Warren H. Ross Robert F. McNellis Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 267 BANK, Chairman2 President Vice President Branch, or facility Deputy Chairman First Vice President in charge of Branch KANSAS CITY Irvine O. Hockaday, Jr. Roger Guffey Robert G. Lueder Henry R. Czerwinski Denver James E. Nielson Enis Alldredge, Jr. Oklahoma City Patience S. Latting William G. Evans Omaha Kenneth L. Morrison Robert D. Hamilton DALLAS Bobby R. Inman Robert H. Boykin Hugh G. Robinson William H. Wallace Tony J. Salvaggio4 El Paso Mary Carmen Saucedo Sammie C. Clay Houston Walter M. Mischer, Jr. Robert Smith, III4 San Antonio Robert F. McDermott Thomas H. Robertson SAN FRANCISCO . . . Fred W. Andrew Robert T. Parry Robert F. Erburu Carl E. Powell John F. Hoover4 Los Angeles Richard C Seaver Thomas C. Warren5 Portland Paul E. Bragdon AngeloS. Carella4 Salt Lake City Don M. Wheeler E. Ronald Liggett4 Seattle John W. Ellis Gerald R. Kelly4 1. A current list of these officers appears each month in New Jersey; Jericho, New York; Utica at Oriskany, New the Federal Reserve Bulletin. York; Columbus, Ohio; Columbia, South Carolina; 2. The Chairman of a Federal Reserve: Bank, by stat- Charleston, West Virginia; Des Moines, Iowa; Indianapoute, serves as Federal Reserve Agent. lis, Indiana; and Milwaukee, Wisconsin. 3. Additional offices of these Banks are located at 4. Senior Vice President. Lewiston, Maine; Windsor Locks, Connecticut; Cranford, 5. Executive Vice President. Conference of Chairmen matters of common interest and to consult with and advise the Board of Governors. The chairmen of the Federal Reserve Banks On October 6, 1986, Silas Keehn, Presiare organized into the Conference of Chairdent of the Federal Reserve Bank of Chimen, which meets to consider matters of cago, was elected Chairman of the confercommon interest and to consult with and ence for 1987, and Karen N. Horn, President advise the Board of Governors. Such meetof the Federal Reserve Bank of Cleveland, ings, attended also by the deputy chairmen, was elected Vice Chairman. Joan M. De were held in Washington on June 1 and 2 and Rycke of the Federal Reserve Bank of Chi- December 2 and 3, 1987. cago was appointed Secretary, and Robert J. The Executive Committee of the Confer- Leto of the Federal Reserve Bank of Cleveence of Chairmen during 1987 comprised land was appointed Assistant Secretary. Joseph A. Baute, Chairman; Robert J. Day, On February 10, 1987, Gary H. Stern, Vice Chairman; and Leroy T. Canoles, Jr., President of the Federal Reserve Bank of member. Minneapolis, replaced Mrs. Horn as Vice On December 3, 1987, the Conference Chairman of the conference, and Carolyn A. elected its Executive Committee for 1988, Verret of the Federal Reserve Bank of Minnaming Robert J. Day as Chairman, Robert neapolis became Assistant Secretary. F. Erburu as Vice Chairman, and John R. Opel as the other member. Conference of Presidents Conference of First Vice Presidents The presidents of the Federal Reserve Banks are organized into the Conference of Presi- The Conference of First Vice Presidents of dents, which meets periodically to consider the Federal Reserve Banks was organized in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

268 Directories and Meetings 1969 to meet periodically for the considera- ing member banks in each Federal Reserve tion of operational and other matters. District. Class B and Class C directors repre- On October 20, 1986, Daniel M. Doyle, sent the public and are chosen with due, but First Vice President of the Federal Reserve not exclusive, consideration to the interests Bank of Chicago, was elected Chairman of of agriculture, commerce, industry, services, the conference for 1987, and William H. labor, and consumers; they may not be of- Hendricks, First Vice President of the Fed- ficers, directors, or employees of any bank or eral Reserve Bank of Cleveland, was elected bank holding company. In addition, Class C Vice Chairman. Joan M. De Rycke of the directors may not be stockholders of any Federal Reserve Bank of Chicago was ap- bank or bank holding company. pointed Secretary, and Robert J. Leto of the For the election of Class A and Class B Federal Reserve Bank of Cleveland, was ap- directors, the Board of Governors classifies pointed Assistant Secretary. the member banks of each Federal Reserve On February 13, 1987, Thomas E. Gainor, District into three groups. Each group, which First Vice President of the Federal Reserve comprises banks with similar capitalization, Bank of Minneapolis, replaced Mr. elects one Class A director and one Class B Hendricks as Vice Chairman of the confer- director. The Board of Governors designates ence, and Carolyn A. Verret of that Bank one Class C director as chairman of the board became Assistant Secretary. of directors and Federal Reserve Agent of each District Bank and appoints another Class C director as deputy chairman. Directors Federal Reserve Branches have either five The following list of directors of Federal or seven directors, a majority of whom are Reserve Banks and Branches shows for each appointed by the parent Federal Reserve director the class of directorship, the princi- B&nk; the others are appointed by the Board pal business affiliation, and the date the term of Governors. One of the directors appointed expires. Each Federal Reserve Bank has nine by the Board is designated annually as chairmembers on its board of directors: three man of the board of that Branch in a manner Class A and three Class B directors, who are prescribed by the parent Federal Reserve elected by the stockholding member banks, Bank. and three Class C directors, who are ap- For the name of the chairman and deputy pointed by the Board of Governors of the chairman of the board of directors of each Federal Reserve System. Directors are cho- Reserve Bank and of the chairman of each sen without discrimination as to race, creed, Branch, see the preceding table, "Officers of color, sex, or national origin. Federal Reserve Banks, Branches, and Class A directors represent the stockhold- Offices." Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 269 Term expires District 1—BOSTON Dec. 31 Class A Homer B. Ellis, Jr Director, Factory Point National Bank, Manchester Center, Vermont 1987 William C. Bullock, Jr. ... Chairman and President, Merrill Bankshares Company, Bangor, Maine 1988 Robert L. Newell Chairman, Hartford National Corporation, Hartford, Connecticut 1989 Class B 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 Richard M. Oster President and Chief Executive Officer, Cookson America, Inc., Providence, Rhode Island .... 1989 Class C 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 Richard N. Cooper Maurits C. Boas Professor of International Economics, Harvard University, Cambridge, Massachusetts 1989 District 2—NEW YORK Class A Robert W. Moyer Vice Chairman 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 Alberto M. Paracchini .... Chairman of the Board and President, Banco de Ponce, Ponce, Puerto Rico 1989 Class B 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, New York 1988 John A. Georges Chairman and Chief Executive Officer, International Paper Company, New York, New York 1989 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

270 Directories and Meetings Term expires Class C Dec 31 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 John R. Opel Chairman of the Executive Committee, International Business Machines Corp., Armonk, New York 1989 BUFFALO BRANCH Appointed by the Federal Reserve Bank 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 Harry J. Sullivan President, Salamanca Trust Company, Salamanca, New York 1989 Appointed by the Board of Governors Joseph Yantomasi Consultant, United Auto Workers, Buffalo, New York 1987 Mary Ann Lambertsen .... Vice President, Human Resources, Fisher-Price, East Aurora, New York 1988 Matthew Augustine President and Chief Executive Officer, Eltrex Industries, Inc., Rochester, New York 1989 District 3—PHILADELPHIA Class A Ronald H. Smith President and Chief Executive Officer, CCNBBank,N.A., New Cumberland, Pennsylvania 1987 Clarence D. McCormick . . President, The Farmers and Merchants National Bank, Bridgeton, New Jersey 1988 George A. Butler Chairman and Chief Executive Officer, First Pennsylvania Bank, N. A., Philadelphia, Pennsylvania 1989 Class B Charles F. Seymour Chairman and Chief Executive Officer, Jackson-Cross Company, Philadelphia, Pennsylvania 1987 Nicholas Riso President and Chief Executive Officer, Giant Food Stores, Inc., Carlisle, Pennsylvania .... 1988 Carl E. Singley Partner, White, McCleland & Singley, Philadelphia, Pennsylvania 1989 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 271 Term expires Class C Dec. 31 George E. Bartol III Chairman of the Board, Hunt Manufacturing Company, Philadelphia, Pennsylvania 1987 Nevius M. Curtis Chairman and Chief Executive Officer, Delmarva Power, Wilmington, Delaware 1988 Peter A. Benoliel Chairman of the Board, Quaker Chemical Corporation, Conshohocken, Pennsylvania . . . 1989 District 4—CLEVELAND Class A Raymond D. Campbell . . . Chairman, President, and Chief Executive Officer, Independent State Bank of Ohio, Columbus, Ohio 1987 William A. Stroud Chairman, First-Knox National Bank, Mount Vernon, Ohio 1988 Frank Wobst Chairman and Chief Executive Officer, Huntington Bancshares Incorporated, Columbus, Ohio 1989 Class B Richard D. Hannan Chairman of the Board and President, Mercury Instruments, Inc., Cincinnati, Ohio 1987 Daniel M. Galbreath President, John W. Galbreath, Columbus, Ohio 1988 Laban P. Jackson, Jr Chairman of the Board, International Spike, Inc., Lexington, Kentucky 1989 Class C Robert D. Storey Partner, Burke, Haber & Berick, Cleveland, Ohio 1987 John R. Miller Former President and Chief Operating Officer, The Standard Oil Company (Ohio), Cleveland, Ohio 1988 Charles W. Parry Former Chairman and Chief Executive Officer, Aluminum Company of America, Pittsburgh, Pennsylvania 1989 CINCINNATI BRANCH Appointed by the Federal Reserve Bank Sherrill Cleland President, Marietta College, Marietta, Ohio .... 1987 Jerry L. Kirby Chairman of the Board and President, Citizens Federal Savings & Loan Association, Dayton, Ohio 1987 Robert A. Hodson President and Chief Executive Officer, 1st Security Bank, Hillsboro, Ohio 1988 Robert M. Duncan President and Chief Executive Officer, First National Bank of Louisa, Louisa, Kentucky 1989 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

272 Directories and Meetings Term expires Appointed by the Board of Governors Dec. 31 Don Ross Owner, Dunreath Farm, Lexington, Kentucky. . . 1987 Kate Ireland National Chairman, Frontier Nursing Service, Wendover, Kentucky 1988 Owen B. Butler Chairman of the Board (Retired), The Procter & Gamble Company, Cincinnati, Ohio 1989 PITTSBURGH BRANCH Appointed by the Federal Reserve Bank Charles L. Fuellgraf, Jr. ... Chief Executive Officer, Fuellgraf Electric Company, Butler, Pennsylvania 1987 James S. Pasman, Jr Chairman and Chief Executive Officer, Kaiser Aluminum & Chemical Corporation, Oakland, California 1987 Lawrence F. Klima President, The First National Bank of Pennsylvania, Erie, Pennsylvania 1988 Thomas H. O'Brien President and Chief Executive Officer, PNC Financial Corp., Pittsburgh, Pennsylvania.... 1989 Appointed by the Board of Governors 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 Karl M. von der Heyden . . Senior Vice President-Finance and Chief Financial Officer, H. J. Heinz Company, Pittsburgh, Pennsylvania 1989 District 5—RICHMOND Class A Robert F. Baronner Chairman of the Board and Chief Executive Officer, One Valley Bank, N.A., and President and Chief Executive Officer, One Valley Bancorp of West Virginia, Inc., Charleston, West Virginia 1987 K. Donald Menefee Chairman of the Board and Chief Executive Officer, Madison National Bank, and Chairman of the Board and President, James Madison Limited, Washington, D.C 1988 Chester A. Duke President and Chief Executive Officer, Marion National Bank, Marion, South Carolina 1989 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 273 Term expires Class B Dec. 31 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 Thomas B. Cookerly President, Broadcast Division, Allbritton Communications, Washington, D.C 1989 Class C Hanne M. Merriman Washington, D.C 1987 Robert A. Georgine President, Building & Construction Trades Department, AFL-CIO, Washington, D.C.. . . 1988 Leroy T. Canoles, Jr President, Kaufman & Canoles, Norfolk, Virginia 1989 BALTIMORE BRANCH Appointed by the Federal Reserve Bank 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 Charles W. Hoff III President and Chief Executive Officer, Farmers and Mechanics National Bank, Frederick, Maryland 1989 Appointed by the Board of Governors Gloria L. Johnson Regional Vice President and Director of Stores, Bloomingdale's Department Stores, Kensington, Maryland 1987 Thomas R. Shelton President, Case Foods, Inc., Salisbury, Maryland 1988 John R. Hardesty, Jr President, Preston Energy, Inc., Kingwood, West Virginia 1989 CHARLOTTE BRANCH Appointed by the Federal Reserve Bank James M. Culberson, Jr. . . Chairman and President, The First National Bank of Randolph County, Asheboro, North Carolina 1987 J. Donald Collier Orangeburg, South Carolina 1988 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

274 Directories and Meetings Term expires James G. Lindley Chairman and Chief Executive Officer, South Dec. 31 Carolina National Corporation, and Chairman, President, and Chief Executive Officer, The South Carolina National Bank, Columbia, South Carolina 1988 John A. Hardin Chairman of the Board and President, First Federal Savings Bank, Rock Hill, South Carolina 1989 Appointed by the Board of Governors Vacancy 1987 G. Alex Bernhardt President, Bernhardt Industries, Inc., Lenoir, North Carolina 1988 Wallace J. Jorgenson President, Jefiferson-Pilot Communications Company, Charlotte, North Carolina 1989 District 6—ATLANTA Class A E. B. Robinson, Jr Chairman and Chief Executive Officer, Deposit Guaranty National Bank and Deposit Guaranty Corporation, Jackson, Mississippi 1987 Virgil H. Moore, Jr Chairman and Chief Executive Officer, First Farmers and Merchants National Bank, Columbia, Tennessee 1988 Mary W. Walker Vice Chairman, The National Bank of Walton County, Monroe, Georgia 1989 Class B Horatio C. Thompson .... President, Horatio Thompson Investments, Inc., Baton Rouge, Louisiana 1987 Bernard F. Sliger President, Florida State University, Tallahassee, Florida 1988 Paul W. Green President and Chief Executive Officer, American Cast Iron Pipe Company, Birmingham, Alabama 1989 Class C Jane C. Cousins President, Cousins Properties, Miami, Florida 1987 Larry L. Prince President and Chief Operating Officer, Genuine Parts Company, Atlanta, Georgia . . 1988 Bradley Currey, Jr President, Rock-Tenn Company, Norcross, Georgia 1989 BIRMINGHAM BRANCH Appointed by the Federal Reserve Bank Willard L. Hurley Chairman and Chief Executive Officer, First Alabama Bancshares, Inc., Birmingham, Alabama 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 275 Term expires William F. Childress President, First American Federal Savings Dec. 31 and Loan Association, Huntsville, Alabama . . 1988 Milton A. Wendland Owner-Operator, Autauga Farming Company, Autaugaville, Alabama 1988 John H. Newman President and Chief Executive Officer, First National Bank of Scottsboro, Scottsboro, Alabama 1989 Appointed by the Board of Governors 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 NeldaP. Stephenson President, Nelda Stephenson Chevrolet, Inc., Florence, Alabama 1989 JACKSONVILLE BRANCH Appointed by the Federal Reserve Bank Buell G. Duncan, Jr Chairman of the Board and Chief Executive Officer, Sun Bank, N.A., Orlando, Florida . . . 1987 Robert R. Deison Chairman of the Board and President, Andrew Jackson State Savings and Loan Association, Tallahassee, Florida 1988 George W. Gibbs III President, Atlantic Dry Dock Corporation, Jacksonville, Florida 1988 A. Bronson Thayer Chairman and Chief Executive Officer, First Florida Banks, Inc., Tampa, Florida . . . 1989 Appointed by the Board of Governors Andrew A. Robinson Director, Florida Institute of Education, University of North Florida, Jacksonville, Florida 1987 E. William Nash, Jr President, South-Central Operations, The Prudential Insurance Company of America, Jacksonville, Florida 1988 Saundra H. Gray Co-Owner, Gemini Springs Farm, DeBary, Florida 1989 MIAMI BRANCH Appointed by the Federal Reserve Bank 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 James H. Robinson President, Sun Bank/South Florida, N.A., Digitized for FRASER Fort Lauderdale, Florida 1989 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

276 Directories and Meetings Term expires Appointed by the Board of Governors o . 3] ec Robert D. Apelgren President, Apelgren Corporation, Pahokee, Florida 1987 Sue McCourt Cobb Attorney, Greenberg, Traurig, Askew, Hoffman, Lipoff, Rosen, andQuentel, P.A., Miami, Florida 1988 Jose L. Saumat President, Kaufman and Roberts, Inc., Miami, Florida 1989 NASHVILLE BRANCH Appointed by the Federal Reserve Bank Will A. Hildreth President and Chief Executive Officer, First National Bank of Loudon County, Lenoir City, Tennessee 1987 W. L. Calloway, Jr Chairman, Quality Lawn Systems, Inc., Nashville, Tennessee 1988 Shirley A. Zeitlin President, Shirley Zeitlin & Co. Realtors, Nashville, Tennessee 1988 Dennis C. Bottorff Chairman and Chief Executive Officer, Sovran Financial Corporation/Central South, Nashville, Tennessee 1989 Appointed by the Board of Governors 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 Patsy R. Williams Partner, Rhyne Lumber Company, Newport, Tennessee 1989 NEW ORLEANS BRANCH Appointed by the Federal Reserve Bank James G. Boyer Chairman, President, and Chief Executive Officer, Premier Bank of Lake Charles, N. A., 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 Robert S. Gaddis President and Chief Executive Officer, Commercial National Bank & Trust Co., Laurel, Mississippi 1989 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 277 Term expires Appointed by the Board of Governors Dec. 31 Caroline G. Theus President, Inglewood Land and Development Company, Alexandria, Louisiana 1987 Sharon A. Perlis President, Sharon A. Perlis, (APLC), Metairie, Louisiana 1988 James A. Hefner President, Jackson State University, Jackson, Mississippi 1989 District 7—CHICAGO Class A 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 of America Bank-LaPorte, N. A., LaPorte, Indiana 1988 B. F. Backlund President and Chief Executive Officer, Bartonville Bank, Bartonville, Illinois ... 1989 Class B Edward D. Powers Chairman of the Board, Mueller Company, Decatur, Illinois 1987 Max J. Naylor Farmer, Jefferson, Iowa 1988 Paul J. Schierl President and Chief Executive Officer, Fort Howard Paper Company, Green Bay, Wisconsin 1989 Class C Marcus Alexis Dean, College of Business Administration, 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 Robert J. Day Chairman and Chief Executive Officer, USG Corporation, Chicago, Illinois 1989 DETROIT BRANCH Appointed by the Federal Reserve Bank 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 Ronald D. Story Chairman and President, The Ionia County National Bank of Ionia, Ionia, Michigan .... 1989 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

278 Directories and Meetings Term expires Appointed by the Board of Governors Dec. 31 Robert E. Brewer Senior Vice President (Retired), Accounting Administration & Financial Services, K Mart Corporation, Troy, Michigan 1987 Phyllis E. Peters Director, Professional Standards Review, Touche Ross & Company, Detroit, Michigan 1988 Richard T. Lindgren President and Chief Executive Officer, Cross & Trecker Corporation, Bloomfield Hills, Michigan 1989 District 8—ST. LOUIS Class A 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 David W. Kemper II Chairman and Chief Executive Officer, Commerce Bank of St. Louis, N.A., Clayton, Missouri, and President and Chief Executive Officer, Commerce Bancshares, Inc., Kansas City, Missouri. . . . 1989 Class B Jesse M. Shaver President, JMS Corporation, Louisville, Kentucky 1987 Robert J. Sweeney President and Chief Executive Officer, Murphy Oil Corporation, El Dorado, Arkansas 1988 Frank M. Mitchener, Jr. ... President, Mitchener Farms, Inc., Sumner, Mississippi 1989 Class C W. L. Hadley Griffin Chairman of the Executive Committee, Brown Group, Inc., St. Louis, Missouri .... 1987 Robert L. Virgil, Jr Dean, Washington University School of Business, St. Louis, Missouri 1988 H. Edwin Trusheim Chairman, President, and Chief Executive Officer, General American Life Insurance Company, St. Louis, Missouri 1989 LITTLE ROCK BRANCH Appointed by the Federal Reserve Bank Wilbur P. Gulley, Jr Chairman of the Board, Savers Federal Savings and Loan Association, Little Rock, Arkansas 1987 W. Wayne Hartsfield President and Chief Executive Officer, First National Bank, Searcy, Arkansas 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 279 Term expires Robert C. Connor, Jr President, Union National Bank of Little Rock, Dec. 31 Little Rock, Arkansas 1988 Patricia M. Townsend .... President, Townsend Company, Stuttgart, Arkansas 1989 Appointed by the Board of Governors Sheffield Nelson Attorney at Law, Little Rock, Arkansas 1987 James R. Rodgers Airport Manager, Little Rock Regional Airport, Little Rock, Arkansas 1988 L. Dickson Flake President, Barnes, Quinn, Flake & Anderson, Inc., Little Rock, Arkansas . . . 1989 LOUISVILLE BRANCH Appointed by the Federal Reserve Bank John E. Darnell, Jr Chairman of the Board, The Owensboro National Bank, Owensboro, Kentucky 1987 R. I. Kerr, Jr Chairman of the Board and Chief Executive Officer, Great Financial Federal, Louisville, Kentucky 1987 Allan S. Hanks Director, The Anderson National Bank of Lawrenceburg, Lawrenceburg, Kentucky .... 1988 Morton Boyd President, First Kentucky National Corporation, Louisville, Kentucky 1989 Appointed by the Board of Governors 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 Thomas A. Alvey Delegate and Past President, Owensboro Council of Labor, Owensboro, Kentucky 1989 MEMPHIS BRANCH Appointed by the Federal Reserve Bank 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 Michael J. Hennessey .... President, Munro & Company, Inc., Wynne, Arkansas 1989 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

280 Directories and Meetings Term expires Appointed by the Board of Governors Dec. 31 G. Rives Neblett Neblett and Havens, Attorneys at Law, Shelby, Mississippi 1987 Katherine Hinds Smythe . . . President, Memorial Park, Inc., Memphis, Tennessee 1988 Sandra B. Sanderson President and Chief Executive Officer, Sanderson Plumbing Products, Inc., Columbus, Mississippi 1989 District 9—MINNEAPOLIS Class A Thomas M. Strong President, Citizens State Bank, Ontonagon, Michigan 1987 Duane W. Ring President, Norwest Bank La Crosse, N.A., La Crosse, Wisconsin 1988 Charles W. Ekstrum President and Chief Executive Officer, First National Bank, Philip, South Dakota 1989 Class B William L. Mathers President, Mathers Land Company, Miles City, Montana 1987 Richard L. Falconer District Staff Manager, Northwestern Bell, Minneapolis, Minnesota 1988 Keith D. Bjerke Owner, Spruce Row Farm, Northwood, North Dakota 1989 Class C Michael W. Wright Chairman 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 John B. Davis, Jr President Emeritus, Macalester College, St. Paul, Minnesota 1989 HELENA BRANCH Appointed by the Federal Reserve Bank F. Charles Mercord President and Managing Officer, First Federal Savings Bank of Montana, Kalispell, Montana 1987 Noble E. Vosburg President and Chief Executive Officer, Pacific Hide and Fur Corporation, Great Falls, Montana 1988 Robert H. Waller President and Chief Executive Officer, First Interstate Bank of Billings, N. A., Billings, Montana 1988 Appointed by the Board of Governors Warren H. Ross President, Ross 8-7 Ranch, Inc., Chinook, Montana 1987 Marcia S. Anderson President, Bridger Canyon Stallion Station, Inc., Digitized for FRASER Bozeman, Montana 1988 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 281 Term expires District 10—KANSAS CITY Dec. 31 Class A 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 Harold L. Gerhart, Jr President and Chief Executive Officer, First National Bank, Newman Grove, Nebraska . . . 1989 Class B S. Dean Evans, Sr Partner, Evans Grain Company, Salina, Kansas 1987 Jerry D. Geist Chairman and President, Public Service Company of New Mexico, Albuquerque, New Mexico 1988 Richard D. Harrison Chairman and Chief Executive Officer, Fleming Companies, Inc., Oklahoma City, Oklahoma 1989 Class C 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 Fred W. Lyons, Jr President and Chief Executive Officer, Marion Laboratories, Inc., Kansas City, Missouri.... 1989 DENVER BRANCH Appointed by the Federal Reserve Bank 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 .... President, Jackson State Bank, Jackson Hole, Wyoming 1988 Roger L. Reisher Co-Chairman, FirstBank Holding Company of Colorado, Lake wood, Colorado 1989 Appointed by the Board of Governors 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 James C. Wilson Management Consultant, Longmont, Colorado . . 1989 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

282 Directories and Meetings Term expires OKLAHOMA CITY BRANCH Dec. 31 Appointed by the Federal Reserve Bank William H. Crawford Chairman and Chief Executive Officer, First National Bank and Trust Company, Frederick, Oklahoma 1987 William O. Alexander .... Chairman, Continental Federal Savings and Loan Association, Oklahoma City, Oklahoma 1988 W. Dean Hidy Chairman of the Board, Triad Bank, N.A., Tulsa, Oklahoma 1988 Appointed by the Board of Governors Patience S. Latting Oklahoma City, Oklahoma 1987 John F. Snodgrass President and Trustee, The Samuel Roberts Noble Foundation, Inc., Ardmore, Oklahoma 1988 OMAHA BRANCH Appointed by the Federal Reserve Bank 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 John R. Cochran President and Chief Executive Officer, Norwest Bank Nebraska, N.A., Omaha, Nebraska .... 1988 Appointed by the Board of Governors Kenneth L. Morrison President, Morrison Enterprises, Hastings, Nebraska 1987 Janice D. Stoney President and Chief Executive Officer, Northwestern Bell Telephone Company, Omaha, Nebraska 1988 District 11—DALLAS Class A Gene Edwards Director and Consultant, First National Bank of Amarillo, Amarillo, Texas 1987 Charles T. Doyle Chairman and Chief Executive Officer, Gulf National Bank, Texas City, Texas 1988 Robert G. Greer Chairman of the Board, Tanglewood Bank, N.A., Houston, Texas 1989 Class B Robert L. Pfluger Rancher, San Angelo, Texas 1987 Robert Ted Enloe III President, Lomas & Nettleton Financial Corporation, Dallas, Texas 1988 Gary E. Wood Director of Governmental Relations, Digitized for FRASER Baylor University, Waco, Texas 1989 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 283 Term expires Class C Dec. 31 Bobby R. Inman Chairman of the Board and Chief Executive Officer, Westmark Systems Inc., Austin, Texas 1987 Hugh G. Robinson President, City place Development Corporation, Dallas, Texas 1988 Leo E. Linbeck, Jr Chairman and Chief Executive Officer, Linbeck Construction Corporation, Houston, Texas . . . 1989 EL PASO BRANCH Appointed by the Federal Reserve Bank Henry B. Ellis President and Chief Credit Officer, MBank El Paso, N.A., El Paso, 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 Humberto F. Sambrano . . . Partner, Urban General Contractors, Inc., El Paso, Texas 1988 David L. Stone President, The Portales National Bank, Portales, New Mexico 1989 Appointed by the Board of Governors Mary Carmen Saucedo .... Vice President, Saucedo Brothers, Inc., El Paso, Texas 1987 Peyton Yates President, Yates Drilling Company, Artesia, New Mexico 1988 John R. Sibley President, Delaware Mountain Enterprises, Carlsbad, New Mexico 1989 HOUSTON BRANCH Appointed by the Federal Reserve Bank Thomas B. McDade Vice Chairman (Retired), Texas Commerce Bancshares, Inc., Houston, Texas 1987 David E. Sheffield Director, First Victoria National Bank, Victoria, Texas 1987 Jeff Austin, Jr President, First National Bank of Jacksonville, Jacksonville, Texas 1988 Jenard M. Gross Chairman of the Board and Chief Executive Officer, United Savings Association of Texas, Houston, Texas 1989 Appointed by the Board of Governors Andrew L. Jefferson, Jr. . . Attorney, Jefferson, Mims and Plummer, Houston, Texas 1987 Gilbert D. Gaedcke, Jr. ... Chairman of the Board and Chief Executive Officer, Gaedcke Equipment Company, Houston, Texas 1988 Walter M. Mischer, Jr President, The Mischer Corporation, Digitized for FRASER Houston, Texas 1989 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

284 Directories and Meetings Term expires SAN ANTONIO BRANCH Dec. 31 Appointed by the Federal Reserve Bank 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, First RepublicBank Austin, Austin, Texas 1987 Jane Flato Smith Rancher, San Antonio, Texas 1988 C. Ivan Wilson Chairman of the Board and Chief Executive Officer, First City Bank of Corpus Christi, Corpus Christi, Texas 1989 Appointed by the Board of Governors 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 Lawrence E. Jenkins Vice President, Austin Division, Lockheed Missiles & Space Co., Inc., Austin, Texas . . . 1989 District 12—SAN FRANCISCO Class A Donald J. Gehb President and Chief Executive Officer, Alameda Bancorporation and Alameda First National Bank, Alameda, California 1987 Spencer F. Eccles Chairman and Chief Executive Officer, First Security Corporation, Salt Lake City, Utah . . . 1988 Rayburn S. Dezember .... Chairman, President, and Chief Executive Officer, Central Pacific Corporation, and Chairman, American National Bank, Bakersfield, California 1989 Class B George H. Weyerhaeuser . . President and Chief Executive Officer, Weyerhaeuser Company, Tacoma, Washington , 1987 Togo W. Tanaka Chairman, Gramercy Enterprises, Inc., Los Angeles, California 1988 John C. Hampton President, Willamina Lumber Company, Portland, Oregon 1989 Class C Fred W. Andrew Partner, Andrew & Williamson Sales Co., Bakersfield, California 1987 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 285 Term expires Carolyn S. Chambers President and Chief Executive Officer, Chambers Dec. 31 Communications Corp., Eugene, Oregon .... 1988 Robert F. Erburu Chairman of the Board and Chief Executive Officer, The Times Mirror Company, Los Angeles, California 1989 LOS ANGELES BRANCH Appointed by the Federal Reserve Bank Robert R. Dockson Chairman of the Board, CalFed, Inc., and California Federal Savings and Loan Association, Los Angeles, California 1987 Howard C. McCrady Chairman of the Board and Chief Executive Officer, Valley National Bank of Arizona, Phoenix, Arizona 1988 William L. Tooley Chairman, Tooley & Company, Investment Builders, Los Angeles, California 1988 Fred D. Jensen Chairman of the Board, President, and Chief Executive Officer, National Bank of Long Beach, Long Beach, California 1989 Appointed by the Board of Governors Richard C. Seaver Chairman, Hydril Company, Los Angeles, California 1987 Thomas R. Brown, Jr Chairman of the Board, Burr-Brown Corporation, Tucson, Arizona 1988 Yvonne Brathwaite Burke . Partner, Jones, Day, Reavis & Pogue, Los Angeles, California 1989 PORTLAND BRANCH Appointed by the Federal Reserve Bank 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 Wayne E. Phillips, Jr Vice President, Phillips Ranch, Inc., Baker, Oregon 1989 Appointed by the Board of Governors Sandra A. Suran Partner, Peat, Marwick, Mitchell & Co., Portland, Oregon 1987 G. Johnny Parks Former Northwest Regional Director, International Longshoremen's and Warehousemen's Union, Portland, Oregon ... 1988 Paul E. Bragdon President, Reed College, Portland, Oregon 1989 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

286 Directories and Meetings Term expires SALT LAKE CITY BRANCH Dec. 31 Appointed by the Federal Reserve Bank Lela M. Ence Executive Director, University of Utah Alumni Association, Salt Lake City, Utah 1987 Fred C. Humphreys Director and Former Chairman of the Board, Moore Financial Group, Boise, Idaho 1987 Gerald R. Christensen .... Chairman and President, First Federal Savings and Loan Association, Salt Lake City, Utah . . 1988 Ronald S. Hanson President, Zions First National Bank, Salt Lake City, Utah 1989 Appointed by the Board of Governors 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 Robert N. Pratt President and Chief Operating Officer, Bonneville Pacific Corporation, Salt Lake City, Utah 1989 SEATTLE BRANCH Appointed by the Federal Reserve Bank John N. Nordstrom Co-Chairman of the Board, Nordstrom, Inc., Seattle, Washington 1987 William S. Randall Chairman, President, and Chief Executive Officer, First Interstate Bank of Washington, N.A., Seattle, Washington . . . 1987 W.W. Philip Chairman of the Board and Chief Executive Officer, Puget Sound Bancorp, Tacoma, Washington 1988 H. H. Larison President, Columbia Paint Company, Spokane, Washington 1989 Appointed by the Board of Governors 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 Carol A. Nygren Managing Partner, Laventhol & Horwath, Seattle, Washington 1989 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

289 Index Acceptances, bankers {See Bankers Bank holding companies— acceptances) Continued Accounting standards, 182 Change in Bank Control Act, 186 Agriculture Delegation of applications, 186 Department of, 158 Examination, inspection, and regulation, Farm Credit Act, litigation, 169, 170 177-81 Loans International activities, 188 Amortization of losses, 68 Legislative recommendations, 164 Supervisory policy ,181 Litigation, 167-72 Title VIII, Competitive Equality Banking Number and assets, 178 Act of 1987, 173 Policy statement, 71 American Bankers Association, 156 Stock purchases by, 188 American Institute of Certified Public Bank Holding Company Act {See also Accountants, 182 Regulations: Y) American Planners Association, 157 Legislative recommendations and Anti-Drug Abuse Act of 1986, 67, 70, 190, litigation, 167, 173 196 Provisions, 178, 183 Assets and liabilities Bank Holding Company Performance Banks, by class, 241 Report, 181 Board of Governors, 211-16 Banking offices, changes in number, 246 Federal Reserve Banks, 220-23 Banking supervision and regulation by Association of Community Federal Reserve System, 177-92 Organizations for Reform Now Bank Merger Act, 185 (ACORN), 157 Bank mergers and consolidations, 247-56 Audits {See Examinations, inspections, Bank of England, 181 regulations, and audits) Bank Secrecy Act, (Currency and Foreign Transactions Reporting Act) 67, 190, Balance of payments {See International 196 developments, review of 1987) Basic banking, conference, 156 Balanced Budget and Emergency Deficit Basle Committee on Banking Regulations Control Act of 1985, 173 and Supervisory Practices, 177, 181 Bankers acceptances Board of Governors {See also Federal Authority to purchase and to enter into Reserve System) repurchase agreements, 77-78 Cash, sources, uses, and balance at end of Federal Reserve Banks 1987,211-16 Holdings, 202, 218, 220, 222 Consumer Advisory Council {See Income, 201,228-31 Consumer Advisory Council) Open market transactions, 224 Financial statements, 211-16 Repurchase agreements, 11-18, 218, Interpretations {See Interpretations) 220, 222, 224 Litigation, 167-72 Bank Bribery Act, 184 Members and officers, 260-61 Bank Export Services Act, 189 Policy actions {See Policy actions) Bank holding companies {See also Pricing of Federal Reserve services Regulations: Y) {See Fees) Antitrust action, 167 Publications {See Publications) Applications by, processing and notice of Regulations {See Regulations) board decisions, 186 Regulatory simplification, 193-96 Board decisions, 188 Salaries, 227 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

290 Index Branch banks Currency and Foreign Transactions Federal Reserve (See Federal Reserve Reporting Act (See Bank Secrecy Act) Banks, Branches) Foreign branches of U.S. banking organizations, 179, 188-90 Daylight overdrafts, 182-83 Definitive securities, 200 Depository institutions Checks (See Check clearing and Call reports (See Condition statements) collection) Capital accounts Interest on deposits (See Interest on Banks, by class, 236 Federal Reserve Banks, 218, 220, 222 deposits) Check clearing and collection Reserve requirements (See Regulations: Fees for Federal Reserve services, 197 D) Float (See Float) Reserves and related items, 242-45 Volume of operations, 237 Services to (See Fees) Commercial banks (See also Insured Deposits Banks, by class, 241 commercial banks) Checks (See Check clearing and Banking offices, changes in number, 246 collection) Supervision and regulation by Federal Federal Reserve Banks, 218, 220, 222, Reserve System, 177-92 243, 245 Transfers of funds (See Transfers of funds) Interest rates (See Interest on deposits) Community Reinvestment Act, Reserve requirements (See Reserve Examination under, 156, 157, 162 requirements of depository Competitive Equality Banking Act of 1987, institutions) 19, 20, 68, 70, 154, 155, 173-76, 182, Development Training Institute, 156 187, 188 Directors, Federal Reserve Banks and Comptroller of the Currency, 154, 156, 157, Branches, list, 268-86 181, 185 Discount rates at Federal Reserve Banks CompuServe, Inc., 184 (See Interest rates) Condition statements of Federal Reserve Dividends Banks, 218, 220-23 Federal Reserve Banks, 201, 228, 233, Consumer Advisory Council, 163, 264 235 Consumer and community affairs, 153-65 Consumer Bankers Association, 156 Consumer Complaint Control System, 160 Earnings of Federal Reserve Banks Council for Urban Economic Development, (See also Federal Reserve Banks, 157 income and expenses), 201, 228-31, Credit (See also Loans) 232-35 Equal Credit Opportunity (See Truth in Economy in 1987,5-11 Lending Act) Edge and agreement corporations Extended program, 74 Examinations, 177 Federal Reserve seasonal program, International activities, 178, 188 renewal, 73 Educational activities (See Training) Mortgage Electronic Fund Transfer Act Adjustable rate, disclosure Compliance with, 157 requirements, 70 Economic effects, 159 Loans, maximum interest rates, policy Electronic fund transfers (See Transfers of action, 70 funds and Regulations: E) Related securities, extensions, policy Electronic payment systems, reducing risk in action, 69 large-dollar transfers, 182-83 Credit Practices Rule (See Regulations: AA) Employee stock options, amendment, 69 Credit Union Amendments of 1987, 173 Equal Credit Opportunity Act Currency and coin services, 199 Compliance with, 157 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 291 Equal Credit Opportunity Act—Continued Federal Reserve Act—Continued Regulation B (See Regulations: B) Provisions, 178, 187, 188 Examinations, inspections, regulation, and Federal Reserve Banks audits Assessments for expenses of Board of Bank holding companies, 177-183 Governors, 213, 228, 232, 234 Federal Reserve Banks, 200 Bank premises, 201, 218, 220, 222, 236 International banking activities, 178, 188 Branches Specialized, 179 Charlotte, 201 State Member Banks, 177 Directors, 268 Surveillance and monitoring program, 180 Helena, 201 Expedited Funds Availability Act, 163, 173, Pittsburgh, 200 197 Premises, 201,236 Expenses (See Income and expenses) Vice presidents in charge, 266 Export Trading Companies, 189 Capital accounts, 219, 220, 222 Extended credit program, 74 Chairmen and deputy chairmen, 266 Check collection, 197 Coin and currency service, 199 Farm Credit Act, 170 Condition statement, 218, 220 Farm Credit Administration, 158, 190 Delegated authority, 186 Federal Advisory Council, 263 Deposits, 219, 220, 222, 243, 245 Federal agency securities Directors, list, 268-86 Authority to purchase and to enter into Dividends paid, 201, 228, 233, 235 repurchase agreements, 77-78, 99, Examination or audit, 200 124, 142, 151 Income and expenses, 201, 204, 205 Federal Reserve Bank holdings and Interest rates, 72-73, 238 earnings, 202, 220, 222, 224, 226, Loans and securities, 202, 218, 220, 222, 242 226, 228, 242, 244 Federal Reserve open market New York Bank, 199, 200, 201 transactions, 1987, 224 Officers and employees, number and Repurchase agreements, 77-78, 218, 220, salaries, 227 222, 224, 226 Operations, volume, 202, 207, 237 Federal Deposit Insurance Corporation, 157, Payments mechanism, developments in, 173, 181, 185 182-83, 197-200 Federal Financial Institutions Premises, 201 Examination Council, 71, 182, 183, Presidents and first vice presidents, 227, 184 266-67 Federal Home Loan Bank Act, 175 Pricing of services, 197, 203-07, 228 Federal Home Loan Bank Board, 154, 156, Priced services balance sheet, 203 157, 190 Priced services financial statements, Federal Home Loan Mortgage Corporation, 203-09 200 Profit and loss, 230 Federal National Mortgage Association, 200 Richmond Bank, 157 Federal Open Market Committee Seasonal credit program, renewal, 73 Examinations, 200 Training (See aIso Training), 156, 183 Litigation, 3, 12 Federal Reserve Board (See Board of Meetings, 82-152 Governors) Members and officers, 262 Federal Reserve Bulletin, 188 Policy actions, 77-152 Federal Reserve notes Federal Register, 70 Condition statement data, 218-23 Federal Reserve Act Cost of issuance and redemption, 201, 213 Examinations, 200 Interest paid to U.S. Treasury on, 201 Legislative recommendations and Litigation, 167 litigation, 175 Federal Reserve Regulatory Service, 191 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

292 Index Federal Reserve System (See also Board of General Accounting Office, 19 Governors) Glass-Steagall Act, 169 Banking supervision and regulation by, Gold certificate accounts of Reserve Banks 177-92 and gold stock, 218, 220, 222, 242, 244 Chairman and deputy chairman, 266 Government Securities Act of 1986, 179 Consumer affairs (See Consumer and community affairs) Housing and Urban Development, Foreign currency operations (See Foreign Department of, 154, 157 currencies) Home equity lines of credit Income and expenses, 1983-87, 201, 206 Conference, 156 Map of Federal Reserve Districts, 257 Legislative recommendations, 165 Membership, 192 Pricing of services, 197-200, 228 Income and expenses Training (See also Training), 183 Board of Governors, 211-16 Federal Savings and Loan Insurance Federal Reserve Banks, 201, 204, 205, Corporation, 19, 173 228-31,232-35 Federal Trade Commission, 158, 159, 161 Federal Reserve System, 1983-87, 201, Fees, Federal Reserve services to depository 206 institutions Insured commercial banks (See also Automated clearinghouse service, 198 Commercial banks) Check clearing and collection, 197 Assets and liabilities, 241 Coin and currency, 199 Banking offices, changes in number, 246 Electronic payments, 198 Number, by class of bank, 241 Float, 200 Interest on deposits (See Interest rates) Securities and noncash collection, 200 Regulation Q (See Regulations: Q) Securities and fiscal agency services, 200 Interest rates Wire transfer of funds, 199 Annual percentage rate, 164—65 Financial Accounting Standards Board, 19, Credit cards, 164-65 182 Federal Reserve Banks Financial Institutions Emergency Changes, 72, 75-76 Acquisitions Amendments of 1987, 173 Structure of discount rate, 74 Financial Institutions Supervisory Act of Table, 237 1966,169,178 Internal Revenue Service, 160, 190 Financial markets and monetary policy, International Banking Act of 1978, 176 12-20 International banking activities, 188 Financing Corporation, 20 International banking facilities, 189 Float (See also Check clearing and International banking operations (See collection), 197, 198, 199, 200 Regulations: K) Foreign banking and financing (See International developments, review of 1987, Regulations: K) 21-26 Foreign branches of U.S. banking International Development Association, 24 organizations (See Branch banks) International Monetary Fund, 24 Foreign currencies International Monetary Fund, Structural Authorization and directive for operations Adjustment Facility, 24 in, and review of documents, 26,11, International transactions, 24—26 80,81 Interpretations of Regulations, Q, 195 Federal Reserve income on, 228 Interstate Commerce Commission, 159 Freedom of Information Act, 193 Investments Full Employment and Balanced Growth Act Banks, by class, 241 of 1978, 27 Federal Reserve Banks, 218, 220, 222 Foreign, by U.S. banking organizations, Garn-St Germain Depository Institutions 189 Act of 1982, 65, 173 State member banks, 241 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 293 Justice, Department of, 167 Monetary policy—Continued Review of 1987, 3-11 Labor market developments, 9 Mutual savings banks, 246 Legislation enacted (See also specific act), 173-76 National Association of Attorneys Legislative recommendations General, 158 Board of Governors, 164 National Association of Counties, 157 Other agencies with enforcement National banks (See also Member banks) responsibilities, 165 Assets, liabilities, and capital accounts, "List of Marginable OTC Stocks," 191 241 Litigation Banking offices, changes in number, 246 Bank holding companies, 167-69 National Credit Union Administration, 157, Board procedures and regulations, other 190 challenges to, 169-72 National Housing Act, 175 Loans (See also Credit) National Peoples Action, 157 Agricultural (See Agriculture) Nonmember depository institutions Banks, by class, 241 Assets and liabilities, 241 Executive officers of state member banks, Banking offices, changes in number, 246 192 Federal Reserve Banks Over-the-counter marginable stocks, 191 Depository institutions, 218, 220, 222, 228, 242, 244 Packers and Stockyards Administration, Holdings and income, 202, 218, 220, 158, 159 222, 226, 228, 230, 242, 244 Payments mechanism (See also Fees), Interest rates, 72-76, 238 197-200 Volume of operations, 237 Policy actions Real estate (See Mortgage loans) Board of Governors Discount rates at Federal Reserve Magnetic-ink character recognition, 198 Banks, 72-76 Margin credit regulation (See Regulations: Regulations, 65-71 T and U) Statements and other actions, 71 Margin requirements, 65, 190-92, 240 Federal Open Market Committee (See Member banks (See also Depository also System Open Market Account), institutions and National banks) 77-152 Assets, liabilities, and capital accounts, Presidents and vice presidents of Federal 241 Reserve Banks Banking offices, changes in number, 246 Conferences, 267 Borrowings and loans (See Loans) List, 266-67 Foreign branches, 188 Salaries of presidents, 227 Membership in Federal Reserve System, Priced services financial statements, 203-09 192 Prices, 10 Number, 241 Pricing of Federal Reserve services, Reserve requirements, 239 197-200, 203, 228 Reserves and related items, 242-45 Profit and loss, Federal Reserve Banks, 228 State member banks (See State member Publications banks) "Credit and Older Americans," 159 Surveillance and monitoring program, 180 Federal Reserve Bulletin, 188 Transfers of funds (See Transfers of Federal Reserve Regulatory Service, 191 funds) "How to Write Readable Credit Forms," Monetary Control Act of 1980, 197 158 Monetary policy "List of Marginable OTC Stocks," 191 Financial markets relative to, 12-20 "Lost or Stolen: Credit and ATM Cards," Reports to Congress, 27-62 158 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

294 Index Publications—Continued Repurchase agreements—Continued "Securities Credit Transactions Federal agency securities (See Federal Handbook," 191 agency securities) "Telemarketing Travel Fraud," 158 Treasury securities (See Treasury "Telephone Investment Fraud," 158 securities) Mortgage brochures, 156 Reserve requirements of depository institutions Real estate loans (See Mortgage loans) Regulation D (See Regulations: D) Recognition Equipment, Inc., 199 Securities, 190-92 Regulation of banking organizations Table, 239 (See Banking supervision and Reserves and related items, 243 regulation by Federal Reserve System) Rules Regarding Availability of Regulations (See also Regulatory Information, 193 Improvement Project and Rules Rules Regarding Delegation of Authority, Regarding Delegation of Authority) 186 B, Equal Credit Opportunity, 155, 156, 158 Salaries D, Reserve Requirements of Depository Board of Governors, 213 Institutions, 65, 189 Federal Reserve Banks, 227 E, Electronic Fund Transfers, 66, 153, Schools (See Training) 156, 159, 195 Seasonal credit program, renewal, 73 F, Securities of State Member Banks, 67, Secondary Mortgage Market Enhancement 192, 193 Act of 1984, 69, 191, 194 H, Membership of State Banking Securities (See also specific types) Institutions in the Federal Reserve Credit, 240 System, 67, 193 Definitive, 200 J, Collection of Checks and Other Items Over-the-counter, 191 and Wire Transfers of Funds, 198 Securities Exchange Act of 1934, 190, 191, K, International Banking Operations, 68, 192, 193 188, 195 Securities and Exchange Commission, 42, Q, Interest on Deposits, 65, 163, 189, 195 159, 190, 192, 193, 194 T, Credit by Brokers and Dealers, 69, 194 Securities Credit Transactions Handbook, U, Credit by Banks for the Purpose of 191 Purchasing or Carrying Margin Securities of member state banks (See Stocks, 69, 194 Regulations: F) Y, Bank Holding Companies and Change Small Business Administration, 159 in Bank Control, 70 Special drawing rights, 218, 220, 222, 242, Z, Truth in Lending, 70, 154, 156, 157 244 AA, Credit Practices Rule, 155 Spending CC, Expedited Funds Availability, 155, Business, 7 197, 198 Government, 8 Regulation Z Interagency Enforcement Household, 7 Policy Guide, 158 State member banks (See also Member Regulatory Improvement Project, 193-96 banks) Regulatory Policy and Planning Committee, Applications by, 188 193 Assets and liabilities, 241 Regulatory simplification, 193-96 Banking offices, changes in number, 246 Report on Formal Enforcement Actions, 178 Complaints against, 160 Repurchase agreements Examinations and inspections, 177 Authority to purchase and to enter into, Financial disclosure by, 192 77-78 Fees (See Fees) Bankers acceptances (See Bankers Interest on deposits (See Interest on acceptances) deposits) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 295 State member banks—Continued Transfers of funds—Continued Loans to executive officers, 192 Check clearing and collection (See Check Membership in Federal Reserve System, clearing and collection) 192 Daylight overdrafts in wire transfers, Mergers and consolidations (See Bank 182-83 mergers and consolidations) Federal Reserve operations, volume, 237 Number, 177, 241 Pricing of Federal Reserve services Reserve requirements (See Reserve 197-200, 203-09, 228 requirements of depository Transportation, Department of, 158, 159 institutions) Treasury, Department of, 199, 200, 201 Stock market credit (See Securities, Credit) Treasury securities Supervision of banking organizations (See Authority to buy, to enter into repurchase Banking supervision and regulation by agreements, and to lend, 11-IS, 99, Federal Reserve System) 124, 142 System Open Market Account Bank holdings, by class of bank, 241 Audit, 200 Federal Reserve Banks Domestic Open Market Operations, Holdings, 202, 218, 220, 222, 226, Authorization for, 77, 99, 124, 142, 242, 244 151 Income, 201,228-31 Domestic Policy Directive, 79, 82-99, Transfers by, 200 100, 107, 117, 125, 132, 142 Open market transactions, 224 Foreign Currency Directive, 81 Repurchase agreements, Foreign currency operations, Authorization for, 77-78 Authorization for, 77, 80-81 Board policy statement, 71 Tables, 218, 220, 222, 224, 226, 242, 244 Truth in Lending Act Thrift Institutions Advisory Council, 265 Annual percentage rate, 164—65 Training, 156, 183 Compliance with, 157, 158 Transfer Agents, 179 Regulation Z (See Regulations: Z) Transfers of funds (See also Fees and Regulations: E) World Bank, 24 FRB 1—10,000—0688C Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis