Annual Report of the Federal Reserve Board, 1988

€/Innual 'Report X^> 1988 Board of Governors of the Federal Reserve System Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Letter ofTransmittal BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Washington, D.C., May 15, 1989 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-Fifth Annual Report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 1988. 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 1988 3 INTRODUCTION 5 THE ECONOMY IN 1988 5 The household sector 7 The business sector 8 The government sector 9 The labor markets 10 Price developments 12 MONETARY POLICY AND FINANCIAL MARKETS IN 1988 12 Monetary policy in 1988 15 Monetary aggregates 16 Credit market developments 19 INTERNATIONAL DEVELOPMENTS 20 Foreign economies 22 U.S. international transactions 24 Foreign currency operations 25 MONETARY POLICY REPORTS TO THE CONGRESS 25 Report on February 23, 1988 41 Report on July 13,1988 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Part 2 Records Operations, and Organization y 63 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS 63 Regulation C (Home Mortgage Disclosure) 63 Regulation D (Reserve Requirements of Depository Institutions) 64 Regulation K (International Banking Operations) 65 Regulation T (Credit by Brokers and Dealers) 65 Regulation Y (Bank Holding Companies and Change in Bank Control) 65 Regulation CC (Availability of Funds and Collection of Checks) 67 Policy statements 68 1988 discount rates 73 RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE 73 Authorization for domestic open market operations 75 Domestic policy directive 76 Authorization for foreign currency operations 78 Foreign currency directive 78 Meeting held on February 9-10, 1988 89 Meeting held on March 29, 1988 97 Meeting held on May 17, 1988 104 Meeting held on June 29-30, 1988 114 Meeting held on August 16, 1988 121 Meeting held on September 20, 1988 126 Meeting held on November 1, 1988 134 Meeting held on December 13-14, 1988 143 CONSUMER AND COMMUNITY AFFAIRS 143 Regulatory matters 147 Community affairs 148 Examination procedures 149 Compliance with consumer regulations 151 Economic effect of the Electronic Funds Transfer Act 152 Complaints against state member banks 153 Unregulated practices 154 Community Reinvestment Act 155 Consumer Advisory Council 156 Testimony and legislative recommendations 158 Recommendations of other agencies Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

159 LITIGATION 159 Bank holding companies—antitrust action 159 Bank Holding Company Act—review of Board actions 160 Other litigation involving challenges to Board procedures and regulations 163 LEGISLATION ENACTED 163 Omnibus Trade and Competitiveness Act of 1988 164 Management Interlocks Revision Act of 1988 164 Anti-Drug Abuse Act of 1988 165 Fair Credit and Charge Card Disclosure Act of 1988 165 Home Equity Loan Consumer Protection Act of 1988 166 Women's Business Ownership Act of 1988 166 Housing and Community Development Act of 1987 167 BANKING SUPERVISION AND REGULATION 168 Risk-based capital 168 Supervision for safety and soundness 172 Supervisory policy 174 Regulation of the U.S. banking structure 178 International activities of U. S. banking organizations 179 Enforcement of other laws and regulations 182 Federal Reserve membership 183 REGULATORY SIMPLIFICATION 183 Availability of information 183 Home mortgage disclosure 183 Debt-equity swaps 184 Issuance of foreign currency deposits 184 OTC margin bond 184 Efforts to assist regulatory compliance 185 FEDERAL RESERVE BANKS 185 Regulation CC 186 Other developments in the pricing of Federal Reserve services and in the payments mechanism 189 Examinations 189 Income and expenses 190 Federal Reserve Bank premises 191 Holdings of securities and loans 191 Volume of operations 191 Financial statements for priced services Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

197 BOARD OF GOVERNORS FINANCIAL STATEMENTS 203 STATISTICAL TABLES 204 1. Detailed statement of condition of all Federal Reserve Banks combined, December 31, 1988 206 2. Statement of condition of each Federal Reserve Bank, December 31,1988andl987 210 3. Federal Reserve open market transactions ,1988 212 4. Federal Reserve Bank holdings of U. S. Treasury and federal agency securities, December 31, 1986-88 213 5. Number and salaries of officers and employees of Federal Reserve Banks, December 31, 1988 214 6. Income and expenses of Federal Reserve Banks,1988 218 7. Income and expenses of Federal Reserve Banks, 1914-88 222 8. Acquisition costs and net book value of premises of Federal Reserve Banks and Branches, December 31, 1988 223 9. Operations in principal departments of Federal Reserve Banks, 1985-88 224 10. Federal Reserve Bank interest rates, December 31, 1988 225 11. Reserve requirements of depository institutions 226 12. Initial margin requirements under Regulations T, U, G, and X 227 13. Principal assets and liabilities and number of insured commercial banks, by class of bank, June 30, 1988 and 1987 228 14. Reserves of depository institutions, Federal Reserve Bank credit, and related items—year-end 1918-88, and month-end 1988 232 15. Changes in number of banking offices in the United States ,1988 233 16. Mergers, consolidations, and acquisitions of assets or assumptions of liabilities approved by the Board of Governors, 1988 241 FEDERAL RESERVE DIRECTORIES AND MEETINGS 242 Board of Governors of the Federal Reserve System 244 Federal Open Market Committee 245 Federal Advisory Council 246 Consumer Advisory Council 247 Thrift Institutions Advisory Council 248 Officers of Federal Reserve Banks, Branches, and Offices 271 INDEX 280 MAPS OF THE FEDERAL RESERVE SYSTEM Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Parti Monetary Policy and the U S. Economy in 1988 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction Overall, 1988 was another year of that had begun in October of 1987. progress for the U.S. economy, with Growth of M2 and M3 was fairly rapid further substantial increases in output during this period, nearly reaching the and employment and a significant im- upper bounds of the annual target ranges provement in the balance of trade. Al- established by the Federal Open Market though the dramatic stock market break Committee. of October 1987 seemed to slow real As it became clear in the spring of activity for a time around the start of 1988 that the economy still was strong, 1988, the underlying strength of the econ- the focus of Federal Reserve policy omy soon showed through, and apart shifted. For much of the year, the rapid from losses of farm output caused by the growth of spending and a continued drought, growth proceeded at a relatively tightening of markets for labor and strong pace throughout the year. products caused concern about a worsen- Inflation remained in check during ing of inflation. A sharp upswing in real 1988. Even so, developments were a bit net exports of goods and services that had worrisome as, for a second year, in- begun in 1987 continued into 1988; while creases in prices were somewhat larger this upturn was a welcome and necessary than in earlier years of the expansion. part of the adjustment of the U.S. econ- Part of the pressure on prices in 1988 omy toward a better balance in its external came in the food area and reflected the accounts, it also intensified the demands influence of the drought. However, with on U.S. producers at a time when the labor markets tightening, the rise of utilization of domestic labor and capital wages and total hourly compensation already was quite high. Accommodating quickened and affected prices more the improvement in our external position generally. while limiting the risk of heightened Federal Reserve policy mirrored the inflation required restraint on the growth changing economic circumstances of of domestic demand. 1988. Early in the year, as in late 1987, The shift by the Federal Reserve the Federal Reserve sought to limit toward restraint was reflected in a tightrepercussions from the plunge in stock ening of the reserve market that began in prices and, in particular, to guard against late March and continued, in several the possibility of a significant con- steps, into 1989. Short-term market traction in business activity. Pressures interest rates moved up during this peon the reserve positions of depository riod, influenced both by the System's institutions were eased a bit further in tightening and the strength of the econearly 1988, and interest rates edged omy, and the Board of Governors apdown for a time, extending the declines proved a Vi percentage point increase in the discount rate in August, to 6Vi percent. Growth of M2 moderated after NOTE. This discussion of economic and financial the spring and ended the year just below developments in 1988 is adapted from the Monetary the middle of the 1988 target range. The Policy Report to the Congress Pursuant to the Full growth of M3 also ebbed over the last Employment and Balanced Growth Act of 1978 (Board of Governors, February 1989). two quarters of the year as the needs of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction banks and thrifts to fund credit expansion growth. But also crucial is further slackened. progress toward balance in the federal Short-term interest rates at the end of budget, along the lines specified in the 1988 were about 2Vi percentage points Gramm-Rudman-Hollings legislation. higher than they were early in the spring. In that regard, any steps taken now to Long-term interest rates, by contrast, ensure continuing progress toward apchanged little on net over that same propriate fiscal restraint over the longer period; and the stock market moved up term would likely have a particularly fairly steadily over the course of the year, salutary effect on the expectations of recovering more than a third of the losses businesses and investors and would of the previous October. These favorable thereby enhance considerably the longtrends in the bond and stock markets, in run prospects for noninflationary the face of rising short-term interest rates, growth. • suggested that investors maintained a relatively optimistic view of the long-run prospects for the U.S. economy. If that optimism is, in fact, to be justified by events, then both private citizens and the government must continue to work to correct economic imbalances that remain and to address new challenges. In the private sector, business and labor are in the process of adjusting to a world economy that has become far more competitive than it was over much of the postwar period, and only part of that adjustment was accomplished in 1988. Further progress will demand a continuing commitment on the part of U.S. firms to capitalize on the enhanced competitiveness resulting from the depreciation of the dollar since 1985. That commitment must take the form not only of continued cost control and price restraint but also of more intense efforts at marketing abroad and investment in new capacity where constraints are visible. Failure on these counts would almost certainly leave the U. S. economy considerably less well off over the long haul. Government policy can encourage businesses to make the longer-range commitments needed to bring about better balance in the economy and to foster longer-run growth. A monetary policy directed steadfastly at movement toward price stability is an essential ingredient for promoting sustainable Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1988 The U.S. economy completed a sixth The rise in real GNP in 1988 would year of expansion in 1988. Real gross have been about 3Vi percent but for a national product rose about 2% percent severe drought, one of the worst of this over the course of the year, the number of century, which caused huge losses of jobs increased more than 3Vi million, farm output. These losses accounted for and the unemployment rate remained on most of the slowdown in GNP growth a downward course, closing the year at that occurred after the first quarter of 5.3 percent, its lowest level in 14 years.1 1988. Fortunately, inventories of farm Progress also was made toward restoring products had been sizable coming into external balance, as the merchandise 1988, and a drawdown of stocks helped trade deficit fell sharply. to buffer households and others from the The year began on a note of uncer- disruption to output. Within the farm tainty. The sharp break in the stock sector, the drought strained the finances market in the fall of 1987 had raised of some producers, but the financial concern that the economy might falter, condition of many others was not seriand some signs of weakness did emerge ously affected, and the sector as a whole around the start of 1988. By early spring, remained stronger fundamentally than in however, it became clear that the expan- the first half of the 1980s, when the boom sion still had considerable vigor, particu- of the previous decade was unwinding. larly from rising exports and a boom in In most of the nonfarm economy, the capital spending. Households, mean- growth of activity was robust in 1988. while, adjusted fairly readily to the loss Production in the manufacturing sector of wealth in the stock market, and con- increased 5Vi percent, nearly matching sumer spending rose at a strong pace the previous year's gain, and factory throughout the year. Toward the end of employment rose sharply. Employment the year, net exports and capital spending also continued to grow rapidly in retail softened, but there was enough impetus and wholesale trade and among the from other sectors to keep real GNP on a providers of business and health serfirm upward course. vices. However, oil drilling activity, The rate of inflation, which had picked which had turned up in 1987 when oil up in 1987, remained somewhat higher in prices were rising, weakened over 1988, 1988 than in earlier years. The step-up in intensifying economic stresses in some 1987 had resulted mainly from a rebound parts of the country. in the price of oil and the passthrough of higher prices for imports. In 1988, by contrast, extra price pressures reflected The Household Sector the effect of drought on the price of food and, more generally, a widespread pickup At the start of 1988, concern about the in labor costs in the domestic economy. possible effect of the stock market break on the real economy centered on the household sector. The drop in share values had pared roughly one-half trillion 1. Except where noted, percent changes are over the four quarters of the year indicated. dollars from household wealth, and the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

6 The Economy in 1988 Indicators of Economic Performance Percent change, Q4 to Q4 Percent change, Q4 to Q4 Real GNP Real personal income and consumption Disp,. , Consumption expenditures Millions r»f unit* annual rate Percent of disposable income Private housing starts Personal saving rate Single-family 1.0 0.5 Multifamily Percent change, Q4 to Q4 Billions of 1982 dollars Real business fixed investment Changes in real business inventories 30 60 Structure 5 Lull 1 L Producers durable equipment 30 • ii - 0 10 30 • .u • Percent Percent change, Q4 to Q4 Civilian unemployment rate GNP fixed-weight price index 1984 1986 1988 1984 1986 1988 The data are seasonally adjusted. The unemployment the Department of Commerce, data are from the Department of Labor; the rest are from Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1988 7 degree to which spending would be cut in cycles of the 1970s and early 1980s, response to this loss of wealth was not activity in the single-family market was clear. stable over the entire period from 1983 to In the event, the loss of wealth may 1988. Nonetheless, total housing starts in indeed have trimmed consumer demand. 1988 were down sharply from earlier The personal saving rate rose after the years of the expansion because of the big crash, and over the next year it was on drop in construction of multifamily units. average about 1 percentage point higher than in the year preceding the crash. But The Business Sector with exports and capital investment booming, the growth of jobs and real incomes Virtually all indicators of business activremained strong in 1988, and the uncer- ity exhibited strength in 1988. Business tainties spawned by the crash soon gave sales, in nominal terms, rose 9 percent way to renewed optimism among house- over the year. Hiring was brisk in most holds. Thus, after the initial jump in the sectors, and operating rates rose further; saving rate, real consumption expendi- in the industrial sector, capacity utilizatures grew at about the same pace as the tion at the end of 1988 was at its highest trend in real after-tax income; the rise level since 1979. Corporate profits reover the year was about 3 % percent. mained healthy. Consumer spending for durable goods A surge in spending for business was brisk in 1988. The unit sales of light equipment that had begun in 1987 extrucks and vans surged in 1988, maintain- tended through the first half of 1988, ing the exceptional strength that has been when outlays grew in real terms at an evident during the current expansion, annual rate of about 20 percent. The and the sales of domestically produced surge was led by sizable investment in automobiles moved up a bit from the high-technology items - computers, com- 1987 pace. Among the household dur- munication equipment, and the like—but ables, real outlays for furniture and outlays for other types of equipment also appliances, which had slowed in 1987, were strong. The rise in equipment increased 7 percent during 1988, renew- spending slowed after midyear, and some ing the strength that had been evident weakness became evident toward the end over the 1983-86 period. of the year. At year-end, however, most Real residential investment fell slightly indicators suggested that the underlying in the first half of 1988; but it turned up in trend in equipment spending still was the second half and by the fourth quarter positive. was a little above the level of a year Business spending for new construcearlier. Starts of multifamily housing tion declined in 1988, reversing the units, which had slumped in 1987, fell moderate increase of the previous year. further in the first quarter of 1988 and Commercial construction, the biggest then flattened out over the remainder of item in the total, continued to be rethe year. In the single-family sector, starts strained in 1988 by the big overhang of declined somewhat in the first half of vacancies that grew out of the building 1988 but then rebounded; activity in the boom of the mid-1980s. Gas and oil fourth quarter was the highest since the drilling, following the lead of oil prices, third quarter of 1987. By historical fell back from the pace of late 1987, but standards, these swings in single-family remained above the lows of 1986. Constarts were relatively mild; indeed, in struction of buildings for industrial use comparison with the boom and bust was little changed over 1988; although Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 The Economy in 1988 capacity utilization was high in manufac- flected a drought-induced reduction in turing, many producers appeared to be the farm inventories owned or financed limiting their needs for additional space by the Commodity Credit Corporation by shifting toward technologies that use (CCC), a reduction that is counted as a more compact equipment, by economiz- negative federal purchase. Excluding this ing on inventories, or by conserving on inventory swing, federal purchases were space in other ways. down about 1 percent over the year—the Inventory investment, which had been first decline since 1976. Over the eight sizable in late 1987, moderated in 1988, years preceding 1988, real federal purand with sales on an upward trajectory, chases other than those of the CCC had stock overhangs were not a problem for risen at an average pace of nearly 5 most businesses. In manufacturing, percent, considerably faster than the stocks grew more rapidly in 1988 than growth of real GNP. The downturn in they have in recent years, but much of the 1988 reflected cuts in the defense area; accumulation was in industries in which other non-CCC federal purchases rose orders and shipments also were generally somewhat over the year. strong; the ratio of inventories to sales On a budget basis, total federal outlays, for all of manufacturing moved down which are almost three times as great as during the year from the already low levels of late 1987. In retail trade, concern about a possible overhang of the Government Surpluses and Deficits stocks of nondurables eased during the Billions of dollars year, and stocks at year-end did not appear to be burdensome. By contrast, Federal government auto dealers' stocks rose sharply in the fourth quarter; at the end of the year, auto manufacturers seemed likely to turn toward enhanced sales incentives and, perhaps, a lower assembly rate in an effort to pare inventories. For all of manufacturing and trade combined, the ratio of inventories to sales varied little over the course of 1988 and was near the lower end of the range in which it had been since the business expansion began. State and local government 20 The Government Sector 10 Budgetary constraints limited the growth of government purchases in 1988, both at 10 the federal level and among many state and local governments. The federal gov- 1984 1986 1988 ernment's purchases of goods and services—the part of federal spending that The data on the federal government are for fiscal years. They are on a budget basis and come from the Department adds directly to GNP - fell 3 Vi percent in of the Treasury. real terms from the fourth quarter of The data on state and local governments are for operat- 1987 to the fourth quarter of 1988. ing and capital accounts. They are on a national income accounts basis and come from the Department of Roughly two-thirds of the decline re- Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1988 federal purchases alone, were up 6 summer, employment expanded strongly percent for fiscal 1988 as a whole. throughout the year. Entitlements, demands on deposit The continued rise in employment last insurance agencies, and net interest year led to a tightening of labor markets payments all rose. Meanwhile, the and called attention to limits on the growth of federal receipts slowed in potential growth of the supply of labor 1988 from the rapid pace of the previous and of output. Growth of the workingyear. Receipts from social security taxes age population has slowed in the 1980s, rose more than 10 percent, in part and the increase during 1988 was the because of a rate increase in January smallest annual rise in more than two 1988, The growth in receipts from decades. This slowing of population personal income taxes slowed, however, growth in the 1980s has led in turn to a as increases in employment and nominal more moderate rate of growth in the incomes were offset by final reductions labor force, even as the rate of labor force in income tax rates legislated in 1986. participation, especially for adult women, The federal budget deficit in fiscal year has continued to rise. A big boost to 1988 was $155 billion, slightly above output during the expansion has come the level of the previous year. from the hiring of unemployed workers; The purchases of goods and services however, with the unemployment rate at by state and local governments rose close less than 5V4 percent at the end of 1988, to 3 Vi percent in real terms over the four the labor force was more fully utilized quarters of 1988, more than in 1987 but less than the average rate of growth over the preceding three years. Spending for construction was little changed for 1988 Labor Market Conditions as a whole, although some pickup was Net change, millions of persons, Q4 to Q4 evident in the fourth quarter. Employ- Nonfarm payroll employment ment in the state and local sector increased 350,000 during 1988; a large I Un TAotal—] f—| 4 share of the rise was among the teachers and other school workers needed to meet L IL + the growth in the number of elementary — 0 students. Manufacturing—^ i Percent change, Dec. to Dec. The Labor Markets Employment cost index The rise in the number of jobs during Total compensation 1988 was somewhat above that of 1987 and brought the total increase in payroll llllll employment since late 1982 to about 18^2 million. Virtually all parts of the economy shared in last year's gain. Manufacturing jobs rose 400,000; construction employment was up 300,000; close to 1 million new jobs were created 1984 1986 1988 in retail and wholesale trade; and service Payroll employment covers the total nonfarm sector; the employment grew by 1.3 million jobs. employment cost index is for private industry, excluding farm and household workers. The data are from the Except for a brief slowdown in the Department of Labor. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

10 The Economy in 1988 than at any time in the last decade and a the previous year, and all of them— half. including the CPI-rose more rapidly The tightening of labor markets in than in earlier years of the expansion. In 1988 was associated with a pickup in the contrast to 1987, when the indexes were rise of wages and labor costs. The boosted by a rebound in energy prices employment cost index for wages and and rising prices for imports, the inflasalaries in the private nonfarm sector tionary pressures in 1988 were augincreased a bit more than 4 percent over mented by larger increases in labor costs the year—almost 1 percentage point more in the U.S. economy and the drought's than in 1987. The pickup was most influence on agricultural prices. pronounced among white collar workers The drought's effects on retail food and in the service-producing industries. prices appeared quickly, with increases The cost of benefits provided to employ- on a wide variety of items evident by ees rose 63A percent over the year, nearly summer. Over the year as a whole, the twice the increase of 1987; the rise increase in consumer food prices was 5 lA reflected both the hike in the payroll tax at percent—about 2 percentage points above the start of 1988 and a surge in the cost of the average of the preceding five years. health benefits. Total compensation per hour—wages and salaries plus benefits — rose nearly 5 percent over the four Prices quarters of 1988, after two years in which Percent change, Dec. to Dec. the annual increases had been in the Producer finished goods neighborhood of 3 VA percent. i: Productivity gains slackened somewhat in 1988. The rise in output per hour in the nonfarm business sector over the four quarters of the year was only 0.7 percent—about xh percentage point below the average over this decade. This slippage in productivity growth in 1988, combined with the faster rate of increase in hourly compensation, resulted in a 4 Consumer percent rise in unit labor costs in the nonfarm business sector over the four quar- • • • • II ters of 1988—well above the average rate of increase during the previous fivey ears. Consumer excluding food and energy Price Developments Commodities less The broader measures of prices — includ- Services less energy food and energy 1IUU ing the GNP price measures, the producer price index, and the consumer price index (the latter two measured from December to December)—all showed inflation to be in a range of 4 to AVi percent in 1988. Except for the CPI, which had moved up at a 4Vfe percent rate in 1987, these 1984 1986 1988 measures showed some acceleration from The data are from the Department of Labor. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1988 11 Energy prices at the consumer level, particularly for oil and gasoline, had risen sharply in 1987 but were little changed in 1988-a pattern that resulted mainly from the continued gyrations in world oil markets. The price of crude oil moved lower for much of 1988 as the efforts of OPEC to restrain production unraveled. In late 1988, however, a new agreement by OPEC to limit production, coupled with production shortfalls in non-OPEC countries and higher-thanexpected oil consumption, caused spot prices to rise sharply once again, back toward the upper end of the range in which they generally have been since the summer of 1986. Price increases for goods and services other than food and energy were larger in 1988 than in 1987. The pickup, while fairly moderate, was widespread and probably reflected, in large part, the acceleration in hourly compensation and unit labor costs. By contrast, the pressures from rising import prices appeared to be a bit less pronounced than in 1987. Even so, higher prices for imports probably were an influence in some areas; the retail prices of apparel, for example, rose nearly 5 percent for the second year in a row. The price increases for industrial commodities slowed in 1988 after steep increases during 1987; by most measures, however, the year-to-year rate of rise in these prices remained somewhat above that of inflation in general. The producer prices of intermediate inputs, excluding food and energy, rose more than 7 percent during 1988, reflecting the high levels of capacity utilization in a number of industries, as well as the tightening of labor markets. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

12 Monetary Policy and Financial Markets in 1988 In 1988, as in other recent years, the Monetary Policy in 1988 Federal Reserve maintained a flexible approach to monetary targeting by re- During the early months of 1988, the sponding to emerging conditions in the Federal Open Market Committee sought economy and in financial markets as well to counter any economic weakness that as to growth of the monetary aggregates could result from the stock market break themselves. and to ensure the smooth functioning of Early in the year, when the potential domestic financial markets. In the real for fallout from the stock market crash economy, sales had softened late in 1987, still was an overriding concern, mone- and inventories had risen sharply. Coutary policy was eased, augmenting pled with some softening in labor market policy moves that had been taken in the indicators early in 1988, these data fourth quarter of 1987. But as it became seemed to point toward a greater risk of clear that the economy still was strong cumulative weakening in real activity. In and that the potential for heightened addition, the financial markets remained inflation was increasing, the Federal somewhat unsettled during this period, Open Market Committee tightened and the Federal Reserve placed special reserve conditions in a series of steps emphasis on monitoring domestic finanbeginning in the spring and continuing cial markets for signs of any new distress. into 1989. Against this backdrop, reserve conditions Before the tightening began, the mon- were eased slightly in early February, etary aggregates had been running close contributing to reductions in short- and to the top of their 1988 growth ranges; long-term interest rates. but growth of the aggregates slowed after By early spring, however, the incomthe spring, and they closed the year in the ing economic data were suggesting that middle portions of their 1988 target the real economy, rather than weakening, ranges. actually was still moving ahead with In the credit markets the growth of considerable momentum. Bond yields domestic nonfinancial debt in 1988 was increased during this period, as the slightly below that of 1987 and noticeably indications of economic strength contraslower than in previous years of the dicted the earlier market forecasts of a expansion. Even so, debt continued to slowing economy and raised concerns grow faster than nominal GNP, largely about an uptrend in inflation. Because of reflecting the continued heavy demands the increased risk for higher wage and of the federal government and the in- price inflation—and in the context of creased financing needs of corporations. rapid growth in M2 and M3 - the Federal With the overall economy still quite Reserve firmed reserve conditions in a healthy in 1988, the incidence of financial series of steps beginning in March and stress among households and nonfinan- culminating in early August, when the cial businesses was not widespread. discount rate was hiked Vi percentage However, in the financial sector, the point, to 6!/2 percent. These moves problems of the thrift institutions brought about substantial increases in worsened. short-term interest rates; but they were Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 13 accompanied by only small increases in In view of the policy restraint already in Treasury bond yields, as investors viewed place—which was being reflected in a Federal Reserve actions as heading off a slower rate of growth in the monetary long-term acceleration of inflation. The aggregates—the Federal Open Market upturn in short-term interest rates, cou- Committee postponed any further action pled with more optimistic expectations of pending more information on the course future inflation, also helped boost the of the economy. The foreign exchange foreign exchange value of the dollar value of the dollar declined through much during this period. of the autumn, partly in response to a rise In late summer and early autumn, some in foreign interest rates relative to those indicators suggested that economic in the United States and partly in response growth might have started to moderate. to investors' concern over the lack of Interest Rates Long-term A-rated utility bonds Recently offered U.S. government bonds State and local government bonds 1984 1985 1986 1987 1988 1989 All the data are monthly averages. The rate for A-rated utility bonds is the weighted average The federal funds rate is from the Federal Reserve. for recently offered 30-year investment-grade bonds ad- The rate for three-month Treasury bills is the market rate justed to an A-rated basis by the Federal Reserve. on three-month issues on a discounted basis and is from the The rate for U. S. government bonds is their market yield Department of the Treasury. adjusted to 30-year constant maturity by the Treasury. The rate for conventional mortgages is the weighted The rate for state and local government bonds is a Bond average for 30-year fixed-rate mortgages with level Buyer index based on 25 issues of 30-year revenue bonds of payments at savings and loan associations and is from the mixed quality. Federal Home Loan Mortage Corporation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 Monetary Policy and Financial Markets progress in reducing the U.S. federal mittee resumed a tightening of reserve budget deficit and a slower rate of im- conditions that began in November and provement in the U.S. trade deficit. extended into the new year. As a result, Inlate fall, data suggested thatprevious short-term market interest rates rose. In monetary restraint had not been sufficient contrast, bond yields continued to fluctuto relieve the potential for higher infla- ate narrowly, signaling the market's tion, and the Federal Open Market Com- continued confidence that inflationary Reserves, Money Stock, and Debt Aggregates Annual rate of change based on seasonally adjusted data unless otherwise noted, in percent' 1987 1988 Item 1986 1987 1988 Q4 Ql Q2 Q3 Q4 Depository institution reserves2 Total 19.8 6.0 3.2 2.5 3.5 5.8 4.3 -.7 Nonborrowed 21.7 6.1 .7 2.4 1.5 -6.5 2.5 5.3 Required 19.9 6.1 3.2 1.4 2.9 7.2 4.0 -1.4 Monetary base3 9.8 7.9 7.0 8.2 8.1 7.4 6.7 5.0 Concepts of money 4 Ml 15.6 6.4 4.3 5.0 3.2 6.4 5.2 2.3 Currency and travelers checks 7.5 8.6 8.0 9.8 9.5 7.9 7.2 6.7 Demand deposits 11.7 -.8 -1.2 1.1 -4.7 1.1 .4 -1.8 Other checkable deposits 29.4 13.8 7.7 5.7 7.1 11.0 8.7 3.3 M2 9.3 4.2 5.2 4.9 6.1 6.9 3.8 3.6 Non-Mi component 7.3 3.5 5.5 4.9 7.1 7.1 3.3 4.1 MMDAs (n.s.a.), savings, and smalldemonimation time deposits 6.0 3.2 5.8 3.8 7.9 7.2 3.9 3.6 General-purpose and broker/dealer money market mutual fund assets (n.s.a.) 17.4 5.8 7.5 11.8 19.5 3.2 -2.9 9.8 Overnight RPs and Eurodollars (n.s.a.) 16.0 4.3 -5.8 9.2 -14.0 2.6 -3.3 -8.8 M3 9.1 5.7 6.4 6.4 6.7 7.2 5.8 5.1 Non-M2 components 8.2 11.8 10.7 12.1 9.1 8.3 13.4 10.5 Large-denomination time deposits 1.7 9.3 11.0 13.8 8.5 9.1 13.4 11.3 Institution-only money market mutual fund assets (n.s.a.) 32.1 2.9 -.7 19.9 44.3 -30.8 -23.3 11.1 Term RPs (n.s.a.) 31.7 33.2 15.0 .9 7.5 28.4 13.0 8.3 Term Eurodollars (n.s.a.) 4.3 13.9 14.5 11.2 -22.7 20.1 47.7 13.1 Domestic nonfinancial sector debt. 13.3 9.8 8.7 9.9 8.0 8.6 8.4 8.8 Federal 14.7 9.0 8.1 7.6 8.0 8.3 7.1 8.0 Nonfederal 12.9 10.0 8.9 10.7 8.0 8.7 8.8 9.0 1. Changes are calculated from the average amounts share draft accounts, and demand deposits at thrift outstanding in each quarter. Annual changes are measured institutions. M2 is Ml plus money market deposit accounts from Q4 to Q4. (MMDAs); savings and small-denomination time deposits 2. Data on reserves and the monetary base incorporate at all depository institutions (including retail repurchase adjustments for discontinuities associated with regulatory agreements), from which have been subtracted all individchanges in reserve requirements. ual 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; current vault cash over the amount applied to satisfy wholesale overnight and continuing-contract repurchase current reserve requirements. agreements (RPs) issued by commercial banks; and 4. Ml consists of currency; travelers checks of nonbank overnight Eurodollars issued to U.S. residents by foreign issuers; demand deposits at all commercial banks other branches of U.S. banks worldwide. M3 is M2 plus largethan those due to depository institutions, the U.S. govern- denomination time deposits at all depository institutions; ment, and foreign banks and official institutions, less cash assets of institution-only money market mutual funds; items in the process of collection and Federal Reserve wholesale term RPs issued by commercial banks and thrift float; and other checkable deposits, which consist of institutions; and term Eurodollars held by U. S. residents in negotiable orders of withdrawal and automatic transfer Canada and the United Kingdom and at foreign branches of service accounts at depository institutions, credit union U.S. banks elsewhere. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 15 pressures would be contained. This con- Monetary Aggregates, Nonfinancial fidence, together with the firming of Sector Debt, and Reserves policy, contributed to a renewed strength- Billions of dollars ening of the foreign exchange value of M2 the dollar toward the end of the year. 8% 320° Range ; 3100 Monetary Aggregates 3000 "~I% M2 expanded 5 lA percent over the four Actual 2900 quarters of 1988, a rate just below the middle of its 4-to-8 percent target range. 1 i i i t i i i l i l t! i i Although demands for M2 were supported by strong growth in income and spending, they were reduced by increases 3900 in its opportunity cost—that is, the difference between market interest rates and 3700 the yields on M2-type instruments. Early in the year, the opportunity cost of _L i i i i i i. i i i holding M2 had declined in response to Total domestic nonfinancial debt decreases in market interest rates in late 9200 1987 and early 1988 relative to deposit rates. The lower opportunity cost led to 8800 strong growth in M2 and a decline in its velocity-the ratio of nominal GNP to 8400 M2 - in the firstq uarter. But after March, deposit rates lagged behind the rise in market rates, and the velocity of M2 Ml increased; over the year, the rise in 810 velocity was close to 2 percent. The response of offering rates on de- 780 posit accounts to changes in market rates was especially sluggish in the last part of 750 1988. One reason for this sluggishness i i I i i ' i i i i i i i i 1 may have been regulatory pressure on Reserves thrifts and the closing of many insolvent 62 institutions, which often had been overly Total aggressive in pricing deposits. The extent 60 to which thrifts were offering higher rates 58 than banks on small time deposits was Nonborrowed greatly reduced during this period, and 56 partly as a consequence, growth of retail I i i i i i j i i deposits was much stronger at banks than 1987 1988 at thrifts. The ranges adopted by the FOMC for the monetary The patterns of change in deposit rates aggregates and for total debt of the domestic nonfinancial sector were for the period from 1987:4 to 1988:4. and market interest rates also affected the The reserve aggregates have been adjusted to remove composition of M2 growth during 1988. discontinuities associated with changes in reserve require- During the first half of 1988, liquid retail ments. Nonborrowed reserves include extended credit. The difference between these two measures is adjustment deposits (such as interest-bearing check- and seasonal borrowing. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

16 Monetary Policy and Financial Markets ing accounts) expanded at a strong pace, advances—which are not included in largely reflecting increases in their rela- M3—had a moderating effect on the tive attractiveness stemming from de- growth ofM3 in 1988. clines in market interest rates and, to a At AlA percent, Ml growth last year lesser extent, in rates on small time de- was down more than 2 percentage points posits. However, the growth of these from its rate in 1987. Growth of interestdeposits slowed markedly over the last bearing checking accounts moderated, half of 1988, following the reversal in the while demand deposits continued running pattern of interest rate movements. off. As in recent years, the growth of Ml Growth in small time deposits was partic- displayed great sensitivity to changes in ularly robust throughout 1988. Their market rates of interest. Households expansion in the early months of the year shifted savings balances between NOW may have resulted, in part, from shifts in accounts and those M2 components, such household investment preferences away as small time deposits, whose yields from stocks and toward the safety of responded to increases in market rates these savings instruments. Later, rising much more quickly than those on NOW yields on small time deposits relative to accounts. Because substitutions of this those on more liquid deposits led house- type are internalized within M2, M2 has holds to shift funds from the latter displayed less sensitivity to interest rates accounts to the former. than has Ml in this decade. Demand M3 grew 6 Vi percent last year, placing deposits are the other component of Ml it slightly above the midpoint of its 4-to-8 highly sensitive to interest rates; they percent target range. This increase from declined again in 1988, partly reflecting a 5% percent growth rate in 1987 re- increases in their opportunity costs and flected a modest pickup in the issuance of declines in compensating balances. Commanaged liabilities in M3 to fund credit pensating balances, funds that businesses expansion at banks and thrift institutions. must hold in non-interest-bearing ac- M3 followed a trajectory near the upper counts to compensate banks for services, end of its target range in the first half of fall when interest rates rise. 1988, but moderated thereafter in association with slowing credit growth at Credit Market Developments depository institutions. For the year, large time deposits and other managed The debt of domestic nonfinancial sectors liabilities included in M3 but not in M2 increased nearly 8% percent during grew rapidly, as inflows into M2-type 1988, placing it near the midpoint of the deposits were insufficient for banks to Federal Open Market Committee's monfinance their desired pace of asset expan- itoring range of 7 to 11 percent and sion. This was particularly true in the somewhat below the 93A percent rise of second half of the year, when M2 growth the previous year. The growth of federal moderated. debt slowed a little from the 1987 pace. To some extent, the pickup in M3 In addition, the expansion in nonfederal growth last year also reflected a greater debt moderated as state and local governreliance by banks on managed liabilities ments trimmed debt issuance and as included in M3 than on non-money-stock households expanded their mortgage debt instruments, such as bank borrowings at a less robust pace in response to higher from overseas branches. In contrast, as mortgage rates. Growth of business debt in other recent years, thrift institutions' picked up a bit from its 1987 pace, with heavy use of Federal Home Loan Bank short-term debt growing faster than long- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 17 term debt. Corporate borrowing was securitized form has increased from particularly strong, reflecting increased about one-tenth to more than one-third. external financing needs for capital invest- The spread between interest rates on ment and for mergers, buyouts, and stock fixed-rate mortgages, which have an repurchases. Overall, the expansion of average life of roughly 10 years, and debt in the nonfinancial sectors in 1988 yields on 10-year Treasury notes did not was well below the pace of the mid-1980s change appreciably over 1988, which but still exceeded the growth of nominal also indicates that the mortgage markets GNR continued functioning well despite the With the economy growing strongly problems of many savings and loan and the financial markets settling down associations. after their initial skittishness following In contrast to those of the thrift industhe stock market break, evidence of try, profits of U.S. commercial banks financial stress among businesses and were reasonably strong in 1988, even households was not widely apparent in after excluding the one-time jump in 1988. Nevertheless, financial develop- fourth quarter earnings associated with ments in certain markets and sectors the resumption of debt payments by warranted the attention of policymakers. Brazil. Moreover, most large money- Of particular note were the worsening center banks with a significant amount of condition of the thrift industry, the need loans to developing countries have conto achieve sounder capitalization of com- tinued to build capital, which provides a mercial banking organizations, and the cushion against default losses. Efforts to rising indebtedness of businesses in- raise equity gained force from the agreevolved in restructuring activity. ment by bank supervisory authorities of As the year wore on, the dimensions of major industrial countries to set more the problems facing the thrift industry stringent, risk-based standards of capital became clearer. The losses of the industry adequacy. These standards, to be fully declined somewhat during the second phased in by 1992, place a greater half of the year, but this relative improve- emphasis on equity capital, take into ment appeared largely to reflect the account the off-balance-sheet activities assistance provided to more than 200 of banks, and provide a more uniform institutions by the Federal Savings and regulatory treatment of banks based in Loan Insurance Corporation. For the different countries. year as a whole, the industry's losses In 1988, as in 1987, banks lent conexceeded $12 billion. siderable sums to finance mergers and The turmoil in the thrift industry has leveraged buyouts. Although banks have not noticeably disrupted mortgage activ- reported that these loans have had a lower ity. In part, the development of a deep rate of loss than all other business loans secondary mortgage market has sepa- combined, and although LBO borrowers rated the origination of loans from the typically obtain some insurance against need to fund them. For this reason, the higher loan rates, concern remains about base of mortgage credit has been broad- bank exposure to losses in the event of an ened in recent years, making the provi- adverse turn in business conditions. For sion of mortgages far less dependent on this reason, the Federal Reserve is monthe condition of any one type of financial itoring closely the developments in this institution or on the regional supply of area; in particular, it has revised its bank loanable funds. During the 1980s the examination guidelines to ensure that share of home mortgage credit held in loans from member banks used to finance Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

18 Monetary Policy and Financial Markets buyouts and other highly levered corporate restructurings meet prudent credit standards. Leveraged buyouts and other mergers and restructurings led to a record pace of net equity retirements by nonfinancial corporations in 1988. Despite the large volume of this activity in recent years, the overall corporate debt-to-equity ratio is not out of line with observations since the early 1970s, a stability that reflects the increased market valuation of equities since the early 1980s. Much of the financialr estructuring of recent years has been a response to fundamental economic factors; it may impose a discipline on corporate management, which in turn can stimulate efforts to improve productivity. Nevertheless, heavy commitments of cash flow to service debt reduce a firm's ability to cope with stresses or industry-specific shocks. To some extent, the substitution of debt for equity is motivated by simple tax-saving considerations, such as the full deduction for interest payments and the double taxation of dividends. For these reasons, reforming the corporate tax system should be a component of public policy in addressing this difficult issue. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

19 International Developments Economic growth in 10 major foreign adjustment process. The dollar recovered industrial countries continued strong at a somewhat in December on the basis of 3 lA percent pace over the four quarters of further tightening by the Federal Re- 1988. Growth in non-OPEC developing serve. On balance, the dollar appreciated countries averaged about 4 percent in about V/i percent in nominal terms, 1988, nearly the same as in the previous December to December, against a year. Some progress toward the adjust- weighted average of the currencies of the ment of external imbalances among ma- foreign Group-of-10 (G-10) countries. jor industrial countries was achieved. The dollar appreciated substantially Real net exports by the United States against continental European currencies, (national income accounts, 1982 dollars) while declining moderately against the rose $20 billion, contributing nearly Vi Japanese yen and more against the Canapercentage point to the rise in gross dian dollar. When adjusted for relative national product. Nearly all of this in- consumer price levels, the dollar apprecrease in real net exports was in the first ciated somewhat more than in nominal half of the year, however, as the rate of terms, as the U.S. inflation rate exceeded growth of domestic demand picked up in the weighted average inflation rate of the second half while it slowed in several other major industrial countries. of the major foreign countries. In nominal terms the U.S. trade deficit declined to $127 billion for 1988, $33 billion less Exchange Value of the Dollar than in 1987. The current account deficit and Interest Rate Differential totaled $135 billion, a $19 billion im- Percentage points Ratio scale. March 1973 = 100 provement from the previous year. The dollar moved over a considerable range in exchange markets during 1988, but on a weighted average basis, its net change over the year was fairly small. After recovering from its year-end 1987 lows, the dollar fluctuated narrowly until mid-April, when it began to appreciate Long-term — 80 sharply. The dollar rose from mid-April real interest to late August, at first under the influence rate differential U.S. minus foreign of Federal Reserve monetary tightening and subsequently of monthly trade re- 1975 1980 1985 1988 ports that brightened the market's outlook The exhange value of the U.S. dollar is its weighted for U.S. external adjustment. The dollar average exchange value against currencies of other Group held fairly steady through September; of 10 (G-10) industrial countries using 1972-76 total trade then it declined in October and November weights adjusted by relative consumer prices. The differential is the rate on long-term U.S. government with a reversal of market perceptions of bonds minus the rate on comparable foreign securities, relative monetary stances among major both adjusted for expected inflation estimated by a 36countries and with trade reports that month centered moving average of actual inflation or by staff forecasts where needed. seemed to suggest a stalling of the All the data are quarterly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

20 International Developments Central bank interventions, frequently centage points in 1988 amid increases in concerted pursuant to G-7 understand- wage pressure, and unemployment in ings on exchange market arrangements, both Germany and Italy also moved sought to limit the extremes of the dollar's lower. After registering a sharp decline movements, and gross official purchases in the previous year, the Canadian unemand sales of dollars were quite large ployment rate edged down further in during the year. Net intervention pur- 1988 to a low level for that economy. chases of dollars by 14 major central Japanese unemployment rates remained banks were quite small, however, in a very low range—even falling slightly amounting to only about $2 billion, in during the year—amid additional signs sharp contrast to the 1987 total of $100 that Japanese labor markets were tight. billion by these same central banks. U.S. Unemployment rates in most other indusintervention, alone, amounted to net sales trial countries were about unchanged. of a little more than $1 billion for the combined accounts of the Federal Reserve and of the Exchange Stabilization GNP, Demand, and Prices Fund of the Treasury. Percent change from previous year Gross national product Foreign Economies Constant prices 10 Strong economic growth in the major foreign industrial countries continued in 1988, although some signs of slowing were evident near year-end. Real growth in Japan was particularly noteworthy, with significant strength in both exports and virtually all major components of Total domestic demand Constant prices private demand. Germany and the related economies of continental Europe ex- 10 panded somewhat less rapidly, though still at rates above most expectations, as the investment boom of the previous year carried over into 1988. In the United Kingdom, rapid growth was supported primarily by a surge in both consumption Consumer price index and investment. In Canada, strong investment expenditures sustained vigorous activity during the first half of the year, Foreign with some evidence of slower growth emerging in later months. United States Unemployment rates in foreign industrial economies continued to move downward on average. Although unemploy- 1984 1986 1988 ment levels in many instances still were Foreign data are multilaterally weighted averages for the (G-10) countries, using 1972-76 total trade weights, and high by historical standards, signs of are from foreign official sources. labor market tightness were evident in Data for the United States are from the Departments of some countries. Unemployment in the Commerce and Labor. The GNP and domestic demand data are quarterly: the United Kingdom declined about 2 perconsumer price data are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 21 Monetary conditions were generally Asia, which had been increasing for easier early in the year in the wake of the several years, fell more than $3 billion in October 1987 stock market crash, but 1988, apparently having peaked in 1987 economic activity proved more robust at $31 billion. The $8 billion decline in than expected. As the year wore on, Taiwan's surplus more than accounted indications of increased inflationary pres- for the decline in the surplus of this sure prompted authorities in many coun- group; imports to Taiwan surged as a tries to tighten monetary conditions. result of exchange rate appreciation, the Increases in inflation rates were relatively liberalization of import restrictions, and small in most countries, with the conspic- increased official imports of gold. uous exception of the United Kingdom, The current account deficit of OPEC but signs of a pick-up in some other countries increased $10 billion in 1988, countries emerged toward the end of the to $15 billion. Oil export revenues deyear. U.K. authorities engineered a sharp clined somewhat, with the effect of lower increase in short-term interest rates after oil prices more than offsetting higher mid-year as the rate of inflation in that export volumes. The combined current country moved above 6 percent. account balance of non-OPEC develop- Despite the general shift to less accom- ing countries in 1988 fell about $8 billion, modative monetary stances as 1988 pro- to a $3 billion deficit in 1988. The trade gressed, monetary growth exceeded offi- surplus of this group fell $4 billion, to cial targets in several countries during $15 billion. Rising prices of manufacthe year. Key money aggregates in both tures and commodities and rising vol- Germany and the United Kingdom came umes contributed to the growth of trade in above target ranges; money growth in in non-OPEC developing countries. Im- Japan remained quite rapid but was a bit ports expanded significantly for the secbelowits 1987 pace. Fiscal policy abroad, ond year in a row. as gauged by cyclically adjusted budget The current account deficit of the deficits calculated by the Organization heavily indebted countries targeted by for Economic Cooperation and Develop- the U.S. debt initiative announced by ment, was broadly neutral in its impact Secretary of the Treasury Baker in 1985 on aggregate demand. was roughly unchanged from a year The combined current account surplus earlier, at about $9 billion. The trade of the foreign G-10 countries declined surplus of this group expanded nearly $4 about $30 billion in 1988, with much of billion in 1988, to about $30 billion. the change attributable to a significant Brazil posted a record trade surplus of deterioration in the U.K. current account about $19 billion. position. Germany, among the countries Economic progress in the heavily with large surpluses, maintained a strong indebted developing countries continued volume of exports, and had a current to be uneven in 1988. Several countries account surplus that was little changed on (Chile, Colombia, Morocco, and the balance. In Japan, the growth of imports Philippines) continued to achieve good rose, and the current account surplus rates of economic growth, while ecocontracted by $7.5 billion, but export nomic activity in other countries stagvolume also remained strong, and the nated. Brazil, which had interrupted pace of external adjustment seemed to some interest payments to banks in slow toward year-end. February 1987, normalized its relations The combined current account surplus with the international community in of the newly industrializing economies of 1988. A stand-by agreement with the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

22 International Developments International Monetary Fund, a $62 current account deficit for 1988 was $ 135 billion rescheduling package, and $5.2 billion, down from $154 billion in 1987. billion in new loans enabled Brazil to The rise in the value of merchandise clear all its arrears to banks. Chile exports in 1988 largely reflected a strong continued to make progress in managing increase in the volume of nonagricultural its external debts in 1988 through buy- exports, which rose almost 20 percent backs, conversions, and debt for equity over the four quarters of 1988, a rate only swaps, thereby reducing its external debt a bit below that over the preceding four to banks further in 1988. Argentina, on quarters. Much of the rise in U. S. exports the other hand, began in 1988 to incur appeared to be associated with an imsignificant interest arrearages to banks. provement in the price competitiveness During 1988, Mexico implemented a of U.S. products, resulting from the sustained adjustment program aimed at earlier depreciation of the dollar and inflation control, fiscal consolidation, and the continued good performance of prostructural transformation of its external ductivity and unit labor costs in U.S. sector. In support of these policies, the manufacturing. U.S. Treasury and the Federal Reserve announced in October 1988 that they were prepared to develop a short-term bridge loan of up to $3.5 billion pending U.S. International Trade Mexico's development of loan programs Billions of dollars with the World Bank and the IMF. Early Balances in 1989, however, Mexico indicated that it would not need this facility. 100 U.S. International Transactions current account ^—*s- Merchandise trade The U.S. merchandise trade and current account deficits fell substantially in 1988. Ratio scale, billions of 1982 dollars A $70 billion increase in merchandise exports and a $37 billion increase in Merchandise trade 450 merchandise imports yielded a trade deficit of $127 billion for the year, 300 compared with a deficit of $ 160 billion in 1987. Meanwhile, a $15 billion decline Total exports in net receipts on service transactions mainly reflected a reversal of capital 1 i i L 150 gains on the stock of U.S. direct invest- Ratio scale, 1982 = 100 ment abroad as the 1987 depreciation of GNP fixed-weight price index the dollar was followed by a small no appreciation in 1988. Excluding the • mports influence of capital gains and losses, net services improved by $3 billion in 1988 as increases in operating income from U.S. direct investment income abroad and receipts from other services were not 1984 1986 1988 quite offset by rising payments to foreign- The data are quarterly, seasonally adjusted at annual ers on their portfolio investments. The rates, and are from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 23 Demand for U.S. exports was also 1988 reflected developments on pricing supported by fairly strong economic and volume. Significant price rises were growth in the rest of the world. The recorded for industrial supplies (exgrowth in export volume was spread over cluding oil), and smaller rises were most major categories of trade and was recorded for consumer goods, automoespecially strong in capital goods (partic- tive products, and various categories of ularly computers and computer parts). machinery. However, prices of some Although the fourth-quarter volume of items, notably oil and computers, fell and agricultural exports was about the same thereby held down significantly the inin 1988 as in 1987, increased deliveries crease in the implicit deflator for imports in the first half of 1988 (particularly to the in the national income accounts. On a Soviet Union) raised the total for the year fixed-weight basis, non-oil import prices 8 percent above that for 1987. Prices rose rose 7.4 percent. Most of the increase in because of the drought, and the value of the volume of non-oil imports was conagricultural exports in 1988 was 30 centrated in capital goods, especially percent higher than in 1987. computers and computer parts. Exclud- The increase in the value of merchan- ing computers and parts, the volume of dise imports over the four quarters of non-oil imports increased 1 percent. U.S. International Transactionsl Billions of dollars, seasonally adjusted Quarter Year Transaction 1987 1988 1987 1988 Q4 Ql Q2 Q3 Q4 Current account -154 -135 -34 -37 -34 -33 -32 Merchandise trade balance -160 -127 -41 -35 -30 -29 -32 Exports 250 320 68 75 79 82 84 Imports 410 446 109 110 110 111 116 Investment income, net 20 3 13 -2 -1 5 Direct investment, net 42 31 19 7 5 6 12 Portfolio investment, net -21 -28 -6 -6 -7 -7 -7 Other services (including military transactions) -1 2 * 1 1 * Unilateral transfers, private and government -13 -14 -4 -3 -3 -3 -4 Private capital flows -8 41 17 14 Bank-related capital, net (outflows, -) 47 21 6 18 1 2 U.S. net purchases (-) of foreign securities -4 -7 -2 -4 2 -2 -3 Foreign net purchases (+) of U.S. Treasury securities .. -8 20 7 5 3 4 Foreign net purchases of U.S. corporate bonds 27 28 3 9 7 9 Foreign net purchases of U.S. corporate stock 15 -1 * 1 1 -2 U.S. direct investment abroad -44 -20 20 -7 1 -5 -9 Foreign direct investment in United States 42 42 12 7 13 13 Other corporate capital flows, net 5 -3 2 -7 n.a. Foreign official assets in United States (increase, +).. 45 39 20 25 -3 11 U.S. official reserve assets, net (increase, -) 9 -4 4 2 -7 2 U.S. government foreign credits and other claims, net 1 4 1 -1 -1 2 3 Total discrepancy 18 17 16 4 -13 24 1 Seasonal adjustment discrepancy 0 0 3 4 -5 5 Statistical discrepancy 18 17 13 0 -10 29 -4 1. Details may not add to totals because of rounding. SOURCE. Department of Commerce, Bureau of Eco- •Less than $500 million absolute value. nomic Analysis. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

24 International Developments The value of oil imports declined in interest earnings rather than exchange 1988 as a decline in price more than offset market intervention during 1988. an increase in volume. The price of oil Private capital inflows were also large dropped about $5 per barrel during 1988, ($75 billion) and were mainly accounted reaching a low point of $12.90 per barrel for by securities transactions. Private in the fourth quarter. The average price foreigners purchased, net, $20 billion in of oil in 1988 was about $14.40 per U.S. Treasury securities in 1988, in barrel, less than the 1987 average, $17.33 contrast to $8 billion in net sales in 1987. per barrel, and well below the range Private foreign purchases of U.S. corporecorded during the 1980-1985 period, rate bonds were substantial, as in 1987, $25-$35 per barrel. Oil prices declined but there were small net sales of U.S. during 1988 in response to OPEC oil corporate stocks. production in excess of quotas. In an Recorded U.S. direct investment accord reached in December, however, abroad fell in 1988, in part because of the OPEC agreed to limit production, and effect of currency translation oh reinspot prices moved up sharply. The vol- vested earnings and also because of the ume of U.S. oil imports rose from an sale of assets by petroleum companies. average of 7.4 million barrels per day in Acquisitions of European companies by the first three quarters of the year to U.S. investors accelerated sharply in almost 8 million barrels per day in the anticipation of the 1992 unification of the fourth quarter in response to the earlier European market, but they were of far price decline. Oil imports in 1987 had smaller scale than foreign acquisitions of averaged 6.8 million barrels per day. U.S. companies. The substantial U.S. current account deficit in 1988 ($135 billion) was bal- Foreign Currency Operations anced by recorded net capital inflows of $119 billion and a statistical discrepancy Intervention sales of dollars against of $17 billion. These net capital inflows marks by U.S. authorities exceeded their brought the officially recorded U.S. net purchases of dollars against yen. Of the indebtedness to foreigners to about $500 net intervention total of $1,039 million billion at the end of 1988, though this is sold, $600 million was for the Federal probably overstated if full account were Reserve System account. The System taken of current market values of U.S. realized profits of $435 million from its direct investment assets abroad. intervention transactions. The rise in the Official reserve holders, both U.S. and value of the dollar against foreign curforeign, accounted for a large part of the rencies over the year resulted in translarecorded capital inflow in 1988 ($35 tion losses of $1,121 million on System billion). The bulk of the foreign official holdings of foreign currencies. At yearinflows of $39 billion were invested in end the value of those balances, primarily U.S. Treasury securities. Increases in marks, was $9,129 million. The System reserves held in the United States were added to its balances of foreign curparticularly large for certain smaller rencies during the year through purchases industrial countries and newly industrial- against dollars from other official instituized countries. Reserve holdings in the tions. The only activity in the Federal Re- United States by the G-10 countries also serve's Reciprocal Currency (Swap) Netincreased; this change largely reflected work was a drawing of $700 million by the shifting of dollar investments from the Bank of Mexico in August, a drawthe Euromarkets and the accumulation of ing completely repaid in September. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

25 Monetary Policy Reports to the Congress Given below are reports submitted to the toward greater restraint through last Congress by the Federal Reserve on October; this was reflected in a moderate February 23, 1988, and July 13, 1988, rise in money market interest rates, which pursuant to the Full Employment and in turn damped growth of the monetary Balanced Growth Act of 1978. aggregates. While M3 grew at a pace equal to the lower bound of the range set for the year by the Federal Open Market Report on February 23,1988 Committee, M2 fell short of its range. After the plunge in the stock market in Monetary Policy and the Economic October, the System focused its efforts Outlook for 1988 primarily on ensuring adequate liquidity The national economy has scored major in the economy, and since that time gains in the past year. Growth of real interest rates have reversed a good part of gross national product at 3% percent the rise that occurred earlier in 1987. over the four quarters of 1987 outstripped However, conditions in financial marmost expectations, and the unemploy- kets have yet to return fully to "normal," ment rate dropped below 6 percent for and the edginess of participants continues the first time in this decade. With such to be reflected in volatility and fairly sectors as agriculture, mining, and man- sizable risk premia. Moreover, there ufacturing benefiting considerably from have been some signs of weakness in the an improved competitive position inter- economy recently. In particular, the nationally, the expansion of the economy fourth quarter of 1987 was marked by a was better balanced than in 1985-86. sharp rise in inventories in a few sectors, Wage increases remained moderate and and there were indications of a slackening contributed to favorable cost trends in in labor demand early this year. Against many sectors; however, a rebound in oil this backdrop, the system eased a bit prices, coupled with the effects of the further the pressures on reserve positions dollar's decline on the prices of imported of depository institutions in the past goods generally, pushed the rate of price several weeks. inflation back up to the 4 percent range by But while the Federal Reserve has had most measures. to be responsive to the risks of an eco- At times last year, soaring commodity nomic downturn, it has not lost sight of prices and sharp declines in the dollar and the potential influence of policy actions bond prices signaled the possibility of on longer-term trends in the economy. greater inflationary dangers. With the The United States is in the process of an economy moving toward higher levels of important readjustment in the balance of resource utilization, the Federal Reserve economic activity, after a period of had to be especially alert to these and several years in which growth of domesother indications of pressures that might tic spending outstripped the pace of have led to a significant departure from domestic production. Over that span, the the longer-run trend toward price stabil- trade balance moved into deep deficit, ity. In these circumstances, monetary and the nation began to amass a huge net policy was characterized by a tendency external debt. It is important to allow Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

26 Monetary Policy Reports room for a significant improvement in Ranges of Growth for Monetary our trade balance, especially given that and Debt Aggregates high rates of capacity utilization and low Percent change, fourth quarter to fourth quarter unemployment evident in many segments Aggregate 1988 1987 of industry suggest the need for added care in maintaining progress toward price M2 4to8 5*4 to 8 V4 stability. M3 4to8 51/2 togi/2 Debt 7toll 8toll These considerations underlay the decisions of the Federal Open Market Committee when it met earlier this month were to exhibit renewed strength and to chart its monetary policy strategy for interest rates were to increase further in 1988. Such considerations also must be the second half of the year, continued kept in the forefront as decisionmakers slow money expansion might be approelsewhere in the government set policy. priate. Rates did move upward again in In particular, continuing fiscal restraint the late summer, including an increase of is crucial if we are to free up resources to Vi percentage point in the discount rate finance productivity-enhancing private to counter potential inflation. M2 growth investment while bringing about an im- did in fact fall substantially short of the proved pattern of international transac- Committee's range, at 4 percent for the tions. Moreover, additional efforts at year, while M3 growth, at 5Vi percent, bringing greater coherence to policies was at the lower end of its range. domestically and internationally will The velocity of M2 has exhibited a promote greater stability in financial substantial short-run sensitivity to movemarkets and greater internal and external ments in market rates of interest. Albalance to the economy. though deregulation has made it possible for institutions to keep rates on deposits Monetary Policy Plans for 1988 in line with market interest rates, in Decisions regarding the ranges for money practice the adjustment of rates on many and credit growth in 1988 were shaped in instruments has been sluggish. In addipart by the experience of 1987. Last tion, savers seemingly have become more February, the FOMC established annual attuned to alternative investment opportarget ranges of 5Vi to %Vi percent for tunities, responding strongly to changes both M2 and M3; both aggregates had in relative returns. As a result, the increased more than 9 percent in 1986, sensitivity of money to movements in but slower growth was expected to be market interest rates seems to have consistent with the Committee's goal of increased since deregulation. In 1987, as sustaining business expansion while rates rose, savers had incentives to favor maintaining long-run progress toward market instruments, and their response price stability. held down the growth of M2, and to a The deceleration proved sharper than lesser extent M3, resulting in increases in anticipated, and in July, the Committee their velocities. This outcome was in stated that growth for the year around the marked contrast to 1986, when falling lower ends of these ranges, or even below interest rates and inflation were reflected them, might be acceptable in certain in faster money growth and substantial circumstances; velocity had increased in declines in velocity. the first half of the year partly under the For 1988, the Committee set ranges of influence of rising interest rates, and the 4 to 8 percent for growth of M2 and M3. Committee agreed that if inflation forces Expansion of money within these ranges, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 27 whose midpoints are one percentage appears likely to outpace that of income, point lower than those of the ranges for as it has for the past several years; last year, would be expected to support although the debt of governmental units economic growth at a pace that is consis- may not grow as rapidly as it did last tent with continued external adjustment year, continued rapid expansion of priand progress over time toward price vate debt is probable, unless the current stability. In light of the experience of tide of corporate restructurings ebbs. recent years, which have been marked by The Committee decided not to establarge swings in velocity, the ranges were lish a range for M1 in 1988. It is especially widened somewhat. Institutional change difficult to anticipate the relationship is a source of continuing "noise" in the between growth in this aggregate and the relationship of money growth to eco- performance of the economy. The charnomic activity; in addition, there clearly acter of this aggregate had been affected is a strong, systematic sensitivity of more than the broader monetary aggrevelocity to changes in market rates of gates by deregulation, because it now interest. This sensitivity means that even contains a large volume of interestsmall changes in rates occasioned by earning accounts that serve as savings as variations in spending or prices can have well as transactions vehicles. The rates sizable effects on the quantity of money on these accounts have proven especially the public wishes to hold. Combined with slow to respond to market rates, and an uncertain outlook for the economy and inflows to these accounts are very sensiinflation, this implies that wider ranges tive to differentials in interest returns. are needed to encompass possible out- Because flows into and out of NOW comes for monetary growth consistent accounts frequently involve other retail with satisfactory economic performance deposits, they do not greatly affect M2 or in 1988. Thus, while the Committee at M3, but do result in sizable variations in this time expects that growth of M2 and Ml growth. Moreover, demand depos- M3 will be around the middle of their its, which have demonstrated increased ranges, the outcome could differ if signifsensitivity to rate movements in recent icant changes in interest rates are required years, also are being affected by evolving to counter unanticipated weakness in practices in payments for bank services aggregate demand or an intensification of and in business cash management. inflation. In carrying out policy, the Committee will continue to assess the Economic Projections behavior of the aggregates in light of As table 2 indicates, the uncertainties information about the pace of business attending the present economic situation expansion and the source and strength of are reflected in a considerable range of price pressures, with attention to the forecasts among Committee members performance of the dollar on foreign and other Reserve Bank presidents. Howexchange markets and other indicators of ever, the central-tendency ranges shown the impact of monetary policy. encompass the vast majority of forecasts The Committee will continue to moni- and point to growth in real GNP of 2 to tor the growth of debt in 1988. The 2Vi percent in 1988. expansion of the debt of domestic nonfi- This pace of activity would be expected nancial sectors is expected to slow some- to generate appreciable gains in employwhat from the 9!/2 percent pace of 1987, ment over the year—about in line with to around the middle portion of a 7 to 11 labor force growth—and the civilian percent range. Growth of debt, however, unemployment rate is projected to change Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

28 Monetary Policy Reports Economic Projections for 1988 Percent FOMC members and other FRB Presidents Admini- Measure stration Central Range tendency GNP, change from fourth quarter to fourth quarter Nominal 4to61/2 6.4 Real V4to3 2to2V4 2.4 Implicit deflator 2Vi to 4 3.9 Unemployment rate, average level in the fourth quarter 5% to6 5.81 little on balance between now and the end 1988, as the economy moves toward a of 1988. Prices, as measured by the better balance between domestic spendimplicit price deflator for GNP, are ing and domestic production. Consumer expected to rise 314 to 3% percent, not demand probably will be damped to a appreciably different from the pace last degree by the loss of household wealth year; consumer prices likely will increase associated with the decline in stock prices a little faster than the deflator. The last fall. Some increase in personal saving central-tendency forecasts encompass the would be beneficial to the economy, as it administration's projections for real GNP, would aid investment and help reduce but are a bit more optimistic on prospects our dependence on foreign capital. Howfor price inflation. ever, a severe retrenchment by consum- Higher real net exports of goods and ers could have a significant deflationary service are expected to provide a major effect; fortunately, the indications from impetus to U.S. economic activity in surveys of household attitudes are that 1988. As reflected by the rapid growth of the sharp drop in confidence that occurred real exports of goods and services of immediately after the October shock has more than 15 percent last year, the been substantially reversed. Housing international competitiveness of U.S. activity should pick up some in coming producers has improved significantly. By months as a result of the recent decline in and large, U.S. manufacturers have let mortgage rates. In addition, business the foreign currency prices of their spending on plant and equipment should products decline with the depreciation of be buttressed by the desire to build upon the dollar, achieving enhanced profitabil- the progress made in regaining internaity through greater volume and aggres- tional competitiveness and by already sive efforts to increase efficiency and high levels of capacity utilization in a control costs. This enhanced competitive- number of major industries. ness is expected to provide a further Although real GNP should rise moderboost to export growth this year, while ately for the year as a whole, the pattern the increases in the relative prices of of growth may be uneven over time. An foreign goods apparently now in train adjustment to the runup in inventories should curb import growth. As a result, that occurred in the fourth quarter of some improvement in the nation's current 1987 could produce relatively slow outaccount balance is anticipated this year. put growth during the first part of the In contrast, domestic demand is ex- year. Such an adjustment appears in pected to remain relatively subdued in process in the auto sector, in light of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 29 domestic automakers' current assembly The Performance of the Economy schedules; there may also be similar During the Past Year patterns in a few other sectors, but at this The economy completed a fifth consecutime there are no signs that deep cutbacks tive year of expansion in 1987, with real in production will be necessary. gross national product increasing about Although no significant change is VA percent over the four quarters of the anticipated in the overall pace of inflation year.l The overall growth in output not this year, the primary source of the rise in only was greater than in 1986, but was prices is likely to change. Assuming better balanced across industries and relative stability in world oil prices, regions of the country. In addition, the domestic energy prices should increase rise in activity supported a net gain of only a bit this year after their sharp more than three million jobs last year, rebound in 1987. However, prices of and the civilian unemployment rate stood non-oil imports likely will continue to at 5.8 percent in January of this year, rise substantially further in the wake of nearly a percentage point below its yearthe decline in the foreign exchange value ago level. of the dollar in 1987, providing continu- Virtually all broad measures of inflaing impetus to domestic inflation. This tion—after dropping sharply in 1986— impulse to prices associated with the rebounded in 1987 to about the pace seen dollar's depreciation is an unavoidable in 1984 and 1985. In large part, the component of the process of correcting pattern of price movements over the past external imbalance, as an increase in the two years reflected developments in oil relative price of foreign goods encourmarkets, where prices rebounded last ages exports and discourages imports. year after a sharp drop in 1986. How- However, if we are to maintain and extend the progress made in the 1980s ever, prices also rose sharply for some toward price stability, it is crucial that imported consumer goods and, at the business and labor continue to exercise producer level, for a number of industrial restraint in price and wage behavior. The commodities. In contrast, wage trends forecasts of the FOMC members and remained restrained last year, although other Reserve Bank presidents anticipate tightening labor markets and the faster that such a pattern will persist through pace of inflation stemmed the pattern of this year. It is important, too, that the wage deceleration evident in previous Congress remain mindful of the effects of years. legislation on the cost structure of Amer- As suggested above, a number of ican industry. sectors that had been depressed in recent years began to show signs of improve- The forecasts of the Federal Reserve ment in 1987. The turnaround was most policymakers also assume further pronounced in manufacturing, where progress in reducing the federal budget production and employment, especially deficit. Continuing evidence of fiscal in capital goods and industrial materials restraint is viewed as crucial in mainindustries, picked up sharply, in response taining financial conditions that are conboth to stronger orders from abroad and ducive to balanced growth and to an to higher levels of capital spending by improved pattern of international transdomestic producers. However, improveactions. It is critical, in that regard, that the package of deficit-reduction measures 1. Except where noted, all percent changes are agreed to in December for 1988 and 1989 from the fourth quarter of the previous year to the be fully implemented. fourth quarter of the year indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

30 Monetary Policy Reports ment also was apparent in the domestic be offset at least in part by the decline in energy sector, where, in response to the interest rates since the crash. partial recovery in oil prices, oil drilling retraced a small part of its earlier precip- The External Sector itous decline, and in agriculture, where The dollar depreciated by 14 percent in higher exports and continued federal nominal terms over the course of 1987 support boosted farm income and helped relative to a trade-weighted average of bring about some firming in land prices. the currencies of the other G-10 coun- In addition, the composition of activity tries, leaving the dollar by the end of the moved toward a better balance between year at a level almost 45 percent below its domestic spending and domestic produc- February 1985 peak and close to its 1980 tion. Weak consumer spending reduced low. Although consumer prices in the the growth of domestic demand in 1987, United States rose somewhat more rapwhile domestic production was supported idly on average than in major foreign by the increased international competi- countries, the depreciation of the dollar tiveness of U. S. industry as the continued was almost as great in real terms. Howimprovement in productivity in manufac- ever, the dollar fell only about 6V2 turing and the moderate pace of increase percent in real terms over the year against in labor compensation permitted U.S. an average of eight leading developing firms to lower the foreign currency prices countries. The decline in the exchange of their goods while expanding profits. value of the dollar was resisted by Indeed, much of the improvement in substantial official intervention purchases economic conditions last year could be of dollars and an apparent movement of traced to the effects of this increased differentials in long-term real interest competitiveness on the volume of imports rates between the United States and major and exports. Nevertheless, the combina- foreign countries in favor of the dollar. tion of a substantial increase in the value Nonetheless, some depreciation in the of oil imports and rising prices of non-oil dollar evidently was seen by participants imports more than offset an improvement in foreign exchange markets as a necesin real net exports, and the nominal trade sary element in the adjustment of the deficit widened to almost $160 billion in huge U.S. current account deficit. 1987. In addition, a further erosion of net The U.S. merchandise trade deficit income on investments and other service widened for 1987 as a whole, but leveled transactions pushed the current account off on balance in the latter part of the deficit above $160 billion. year. The volume of imports increased, Although economic activity rose at a reflecting a moderate expansion in both brisk pace for 1987 as a whole, the oil and non-oil imports. Moreover, non- October stock market crash added sub- oil import prices moved up further in stantial uncertainty to the prospects for response to the continuing decline in the continued economic growth at year-end. dollar through 1987, and, with oil prices The sharp drop in stock prices reduced also up sharply, imports rose substanhousehold wealth considerably, raising tially in value terms. Higher imports the possibility of a further slowing in were matched, to a large extent, by consumer spending, domestic business merchandise exports, which also grew investment, and housing construction. It briskly in 1987. Most of this growth was is too early to assess what the ultimate in real terms, as prices of most exports economic effect of the stock market increased only moderately in the face of decline will be, but that effect likely will the substantial decline in the dollar, and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 31 prices of a few important products, such stock market decline returned equity as computers, continued to decline. wealth to 1986 levels. Moreover, the expansion of foreign sales In general, consumers cut back their last year was broadly based. Shipments expenditures for both durable and nonduabroad of capital goods showed particular rable goods, while spending on services strength, and the volume of agricultural continued to increase at about the pace of exports also rose, as grain sales to the recent years. Within the durables cate- Soviet Union and China increased and as gory, sales of new cars fell from 11V4 foreign soybean production dropped off. million units in 1986 to about 10 lA Economic expansion abroad strength- million units last year. Some of that ened only slightly in 1987, providing dropoff can be traced to an especially only limited support for the improvement slow pace of sales in early 1987, as in the U.S. trade position. In the other consumers shifted automobile purchases industrial countries, economic activity into 1986 to take advantage first of major picked up somewhat by the middle of the sales incentives and then of the sales tax year after a slow start, but on average real deduction available only under the old GNP grew less than 3 percent over the tax law. Nevertheless, domestic auto year. Outside of the industrial countries, sales were relatively sluggish throughout real economic growth was uneven and on last year, despite the availability much of average tended to slow from its pace in the time of special incentive programs on 1986. Activity expanded at a rapid rate in a wide range of models. the newly industrialized countries of Associated with the more cautious Asia, but slowed in Latin America, with spending patterns of consumers in 1987 a sharp decline in Brazilian growth more was a slowing in household debt accumuthan offsetting a small expansion in lation. Consumer installment debt decel- Mexico. In the OPEC countries, output erated sharply as households apparently fell as oil export volumes were con- limited their borrowing because of high strained in an effort to raise oil prices. debt burdens and shifted toward home equity loans in response to the reduced The Household Sector incentive, under the new tax law, to Spending by households, which had been finance expenditures with nonmortgage a major contributor to growth in past credit. And, despite the growing popularyears, slowed considerably in 1987. Real ity of home equity loans, growth of mortconsumer spending rose less than 1 gage debt also slowed last year as interest percent last year, after a 4 percent gain in rates moved higher. Evidence as to the 1986. In large part, the cutback in ability of consumers to service their spending reflected smaller increases in existing liabilities in 1987 was mixed. real disposable income. Substantial em- Delinquency rates for mortgage loans ployment growth and increases in farm fell somewhat, but delinquency rates for and interest income fueled continued consumer loans changed little over the gains in nominal incomes, but a pickup in year while loan charge-offs rose. consumer price inflation eroded much of Housing activity in 1987 was damped that rise and reduced real income growth by the upward movement in mortgage to about 2 percent last year, versus 3Vi rates, continued high multifamily vapercent in 1986. Moreover, although the cancy rates, and changes in the tax law. rise in stock prices added further to Total housing starts were 1.62 million household wealth through August and for the year as a whole, about 10 percent supported consumption, the subsequent below the 1986 total and the lowest in five Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

32 Monetary Policy Reports years. Single-family homebuilding began energy sector in response to higher oil the year at a brisk pace, but weakened prices. In particular, oil and gas drilling considerably as conventional mortgage was up more than 20 percent over the interest rates rose beginning in April, year after having dropped by 40 percent reaching about 11 Vi percent for fixed- in 1986. Outside of the energy area, rate loans by mid-October. Although spending on structures was flat, after interest rates on mortgages have dropped falling nearly 9 percent in 1986. Producsubstantially since then, the stimulative ers were somewhat less reluctant to impact of that change on housing demand expand industrial plant facilities owing to may have been offset thus far by stock the substantial rise in industrial producmarket losses and reduced consumer tion, while office construction, although confidence. In the multifamily market, down a bit last year, held up surprisingly activity also weakened over the past year, well in view of the very high vacancy as near record-high vacancy rates on rates that have persisted in recent years. rental units and tax-law changes that Business inventory investment generreduced the profitability of rental housing ally moved in line with sales over most of continued to deter building in that sector. 1987, but a sharp accumulation of stocks in the fourth quarter suggested the possi- The Business Sector bility of excess inventory levels at some Business spending on plant and equip- retailers. In manufacturing, inventories ment rose about 3 % percent in real terms changed little on balance over the first in 1987. In large part, investment spend- half of the year, but rose considerably in ing was associated with the overall pickup the second half as activity picked up. in economic activity. However, financial Stockbuilding was most evident in capital conditions also were conducive to spend- goods industries, where orders and shiping, with cash flows strong and the costs ments strengthened substantially, as proof external capital fairly attractive ducers added supplies in anticipation of through much of the year. higher production levels. In the retail For equipment, the year began on the trade sector, inventories of goods other weak side, with first-quarter spending than automobiles also rose over the year, down sharply after firms shifted expendi- pushing the inventory-sales ratio to a tures into late 1986 to take advantage of relatively high level by December. The the favorable treatment of investment accumulation was most pronounced for under the depreciation provisions of the home goods such as furniture and appliold tax law. However, investment in ances and for apparel. At auto dealers, equipment rebounded sharply in the stocks generally rose in 1987, and, at second and third quarters of last year. year-end, supplies appeared to be well Much of the strength was in the computer above desired levels despite the prevaand other office equipment area, where lence of special incentive programs and expenditures picked up in 1987 after production cutbacks late in the year. essentially no growth in 1986. In con- Before-tax profits of nonfinancial cortrast, spending on industrial equipment porations increased substantially last was not especially brisk despite the strong year. Profits were especially strong in gains in manufacturing production. manufacturing, where the volume of Outlays for nonresidential structures shipments picked up and firming prices also turned up last year after a sharp drop and good cost control contributed to in 1986. Much of the turnaround in improved margins. In other industries, spending reflected an improvement in the before-tax profits were little changed Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 33 from 1986 levels. However, after-tax accounts (which exclude social insurance profits fell a bit on an annual average funds), as expenditures expanded more basis last year for the sector as a whole, rapidly than receipts. Many states took as increases in corporate tax liabilities action in early 1987 to deal with eroding associated with the new tax laws more fiscal positions. About half of the states than offset the overall rise in profits. cut their budgets last year and two-thirds raised taxes, with many of the budget The Government Sector adjustments in energy and farm states. Last year, there was significant progress However, pressing needs to expand and toward reducing federal budget deficits. upgrade schools, highways, and correc- The FY1987 deficit, at $150 billion, was tional institutions continue to squeeze about a third lower than the record level many state and local budgets. of the previous year, and the administration and Congress reached agreement on Labor Markets deficit reduction actions totaling more Employment increased 3 million over the than $30 billion in FY1988 and about $46 12 months of 1987, as the pickup in billion in FY1989. However, a number economic activity led employers to add of factors that raised receipts and lowered workers at a brisk pace. In contrast to outlays in FY1987 are not likely to be prior years, when the labor market was repeated, and—absent further legislative characterized by sharp disparities across action—deficits could expand again un- sectors, the strengthening in hiring in less there are particularly favorable eco- 1987 was widespread by industry. In nomic circumstances. manufacturing, employment edged up About half the deficit reduction could over the first half of the year and then rose be traced to these one-time factors, as substantially in the second half in retax-reform effects boosted revenues, and sponse to the sharp gains in industrial asset sales and changes in the timing of production. Moreover, the expansion of certain payments reduced outlays. The jobs in the trade, service, and finance remainder of the reduction in the deficit industries remained sizable during most reflected strong revenue growth and a of 1987, although hiring in trade and very small underlying rise in outlays. finance apparently slowed somewhat in The economic expansion boosted re- the latter part of the year in the wake of ceipts, while, on the outlay side, lower sluggish consumer spending and the stock interest rates in FY1987 offset some of market crash. the increase in interest payments associ- The demand for labor considerably ated with the rise in the size of the national outpaced increases in labor supply, and debt. In addition, the improvement in the the civilian unemployment rate dropped farm sector reduced agricultural support nearly 1 percentage point over the year to payments, and lower inflation in 1986 5 % percent at year-end—the lowest level held down cost-of-living adjustments for since 1979. The jobless rate for adult many entitlements. Spending restraint men moved down to about 4 Vi percent by also had a noticeable effect: the rise in the end of last year, reflecting strong military spending slowed, and cuts in growth in the industrial sector. The rate discretionary programs reduced outlays for adult women fell to around 4% for education, energy, and intergovern- percent early in the year, but changed mental assistance. little in the second half. The state and local sector recorded a As the unemployment rate dropped sizable deficit in its operating and capital sharply, wage increases, which had been Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

34 Monetary Policy Reports decelerating for several years, leveled while the producer price index, which out; however, they showed little signs of includes only prices of domestically acceleration last year. Hourly compensa- produced goods, rose 2lA percent over tion, as measured by the employment the year, after dropping 2*4 percent in cost index, advanced 3 lA percent in the 1986. 12 months ended December, about the The overall rise in energy prices in same pace as in 1986. The moderate rise 1987 reflected both a sharp rebound in in compensation, which was fairly wide- prices early last year and an additional spread across industries and occupations, runup in prices around midyear. Spot occurred despite a substantial pickup in prices for West Texas Intermediate crude consumer price inflation. As a result, real oil (the benchmark crude oil in the United hourly compensation fell last year and States) rose $3 per barrel in January of has averaged only about a Vi percent last year to about $18.50 per barrel in increase annually since 1984. response to lower OPEC production Unit labor costs in the nonfarm busi- levels. Tensions in the Persian Gulf ness sector rose only VA percent last boosted prices further during the summer year, after a 2 percent increase in 1986. to a high of around $20 per barrel in early The continued restraint in labor costs August. Precautionary stockbuilding durprimarily reflected moderate compensa- ing this period, coupled with higher levels tion growth, as productivity gains for the of production by OPEC and the absence sector as a whole have improved little of any major disturbance in the Gulf, from the sluggish pace of the 1970s. In subsequently helped put downward prescontrast, manufacturers apparently have sure on crude oil prices, and oil prices made significant progress in increasing since late last summer have retreated to efficiency and streamlining operations, about $17 per barrel. Retail prices for and output per hour in this sector rose gasoline and home heating oil closely nearly 3 Vi percent in 1987. This advance followed movements in crude oil prices, in manufacturing productivity, coupled rising around 20 percent through August with continued slow growth in manufac- and then falling somewhat in the latter turing wages, continued to put downward part of the year. In contrast, prices for pressure on factory unit labor costs last natural gas and electricity were down or year. little changed last year, reflecting a further adjustment to the net decline in oil prices since 1985. Price Developments Outside of the energy area, price Inflation rebounded in 1987, largely increases for goods picked up last year, reflecting higher energy prices and con- while prices for nonenergy services rose tinued price hikes for imported goods. about AVi percent, a bit less than in 1986. The fixed-weighted price index for GNP A jump in used car prices accounted for increased about 4 percent for the year as a much of the acceleration in goods prices, whole, after a 2lA percent rise in 1986. but further increases in import prices The consumer price and producer price associated with the falling exchange value indexes suggested an even sharper accel- of the dollar also were evident in 1987. eration in prices over 1987, owing to the As a result, retail prices for many items greater importance of energy in those with high import proportions, such as indexes. The consumer price index was women's and girls' apparel, photographic up AVi percent in the 12 months ended equipment, and toys and music equip- December, after a 1 percent rise in 1986, ment, posted notable increases last year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 35 Prices for many industrial commodi- gates, M2 and M3, was permitted to run ties also rose considerably over the at or below the established ranges. course of 1987. In addition to the increase During episodes beginning in the in crude oil prices, copper prices more spring and then again in late summer, the than doubled last year, and steel scrap dollar came under sustained downward prices were up 36 percent by year-end. pressure and inflationary expectations To some extent, the sharp rise in com- appeared to be on the rise, partially in modity prices reflects the influence of response to the dollar's weak perfordollar depreciation on markets for inter- mance. With the economy expanding at nationally traded goods. However, tem- rates sufficient to produce rising rates of porary supply shortages for some indus- resource utilization, the FOMC sought trial metals and the firming in U.S. some firming of pressures on reserve industrial activity undoubtedly also had positions and increased the discount rate an important influence on commodity in September. When stock prices colmarkets. In the agricultural sector, grain lapsed in mid-October, the resulting prices fell early in 1987 as farmers sold turmoil required that the focus of policy large amounts of grain received through be on ensuring the liquidity of the finangovernment programs, but rebounded in cial system. Over the remainder of the the latter part of the year as exports year, emphasis in the conduct of open picked up in response to the falling dollar. market operations shifted toward maintenance of steady and somewhat easier money market conditions to promote a Monetary Policy and Financial return of stability to financial markets Markets in 1987 generally and to cushion the effects of the stock market decline on the economy. In 1987, the Federal Reserve continued to face the difficult task of charting policy Behavior of Money and Credit in an environment in which considerable M2 increased only 4 percent in 1987, uncertainties clouded the relationship well below both the lower bound of its between the behavior of the monetary 5Vi to 8!/2 percent annual growth range aggregates and the performance of the and its more than 9 percent rate of economy. As a result, while the Federal expansion over the preceding two years. Open Market Committee set targets for The velocity of this aggregate picked up some of the monetary aggregates, it was substantially, reversing a portion of the deemed necessary to maintain a flexible sharp decline that occurred in 1985-86. approach in conducting its operations, The rise in velocity may have reflected in looking at a broad range of information in part a number of special factors affecting judging when or if to adjust its basic the public's demand for M2 balances in instruments—reserve availability and the 1987, including a much-reduced rate of discount rate—in response to deviations saving out of income and a preference for in monetary growth from expected rates. drawing upon liquid assets—rather than Such factors as the pace of business using consumer credit—to finance purexpansion, the strength of inflation and chases, the latter in the wake of tax inflation expectations, and developments reform measures reducing deducibility in exchange markets played a major role of nonmortgage interest payments. Howin governing the System's actions, and in ever, much of the pickup in velocity light of the behavior of these other appears attributable to increases in the factors, growth in the targeted aggre- competing returns on other assets, which Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

36 Monetary Policy Reports raised the opportunity costs associated needs for funds as asset expansion at with holding M2 balances. banks and thrifts slowed. In addition, The widening gap between market banks relied heavily on managed liabilirates and offering rates was most pro- ties obtained from non-M3 sources, nounced for the more liquid retail de- especially funds borrowed from their forposits, where rates are changed very eign branches. infrequently. Early in the year, opportu- Growth of Ml slowed to 6*4 percent nity costs on these accounts were still low from the very rapid 15 V2 percent increase and inflows were large. As market rates posted the previous year, owing to a rose, though, yields on these accounts small decline in demand deposits and a became increasingly less attractive and sharply lower expansion of other checkgrowth slowed; by late in the year, there able deposits. The velocity of Ml inwere net monthly outflows from both creased slightly, after a record postwar savings and NOW accounts. Also, money decline a year earlier. The sharp slowing market deposit accounts declined, for the of growth and the abrupt turnabout in its first year since this component of M2 was velocity are indicative of the increased introduced in late 1982. Expansion of sensitivity to movements in market intermoney marketmutual funds was sluggish. est rates that has emerged for Ml in In contrast to the very liquid retail recent years. As suggested by its compardeposits, small time deposits expanded in atively larger deceleration in 1987, Ml 1987, after two years of zero or negative now appears to have a greater sensitivity growth. Depository institutions tend to to changes in interest rates than the keep the offering rates on these deposits broader aggregates. fairly well in line with market alternatives In large measure, the greater sensitivof about the same maturity. With ity of Ml reflects the increasing share of intermediate-term rates rising more than other checkable deposits. Because NOW short rates in 1987, the spread between accounts pay explicit interest, they serve yields on small time instruments and as an attractive savings vehicle as well as those on more liquid retail accounts a transactions account. The available widened considerably, providing depos- information suggests that owners of itors with an incentive to shift funds into NOW accounts are quite sensitive to small time deposits from the more liquid changes in opportunity costs, shifting retail instruments. savings balances between these accounts M3 was stronger than M2 over the and other, less liquid retail deposits. At year, expanding 5V2 percent and ending the beginning of 1987, market interest the year at the bottom of its 5Vi to SV2 rates were very close to NOW account percent annual growth range. Its faster rates, and with the opportunity cost so growth reflected heavy reliance by depos- low, depositors apparently placed unusuitory institutions on large time deposits ally large amounts of interest-sensitive and on certain other instruments included funds in these accounts; as market rates in M3 but not in M2. Both commercial rose during 1987, these funds evidently banks and thrift institutions stepped up were shifted out of NOW accounts in their issuance of wholesale managed search of higher yields. liabilities to fund more asset growth than The abrupt weakening of demand decould be accommodated by greatly re- posits after two years of rapid expansion duced inflows of core deposits. Even so, suggests that this component of Ml also M3 growth was subdued relative to prior is sensitive to interest rates. Higher years, reflecting in part reduced overall market interest rates obviously provide Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 37 Growth of Money and Debtl deposits in 1987 by slowing the pace of Percent change at annual rate mortgage refinancing—an activity that tends to boost demand deposits tempo- Debt of rarily because the amount being prepaid domestic Period Ml M2 M3 non- on an old mortgage often is placed in financial sectors escrow for a time in a demand deposit account. Fourth quarter to fourth quarter The collapse of equity prices boosted 1979 . 7.7 8.2 10.4 12.3 the average level of all the aggregates a 1980 . 7.5 8.9 9.5 9.6 1981 5.2 9.3 12.3 10.0 bit in the fourth quarter, but M1 was most (2.5)2 1982 8.7 9.1 9.9 8.9 noticeably affected. Demand deposits 1983 10.2 12.1 9.8 11.3 rose sharply around the time of the crash, 1984 5.3 7.6 10.4 14.2 1985 . 12.0 8.9 7.7 13.3 reflecting the increased volume of finan- (12.9)3 cial transactions arising from the surge in 1986 15.6 9.4 9.1 13.2 1987 6.2 4.0 5.4 9.6 trading activity. Other checkable deposits also registered sizable inflows, as Quarterly growth 1987: 1 13.2 6.5 6.5 10.5 some funds withdrawn from the stock 2 6.6 2.6 4.7 8.7 market probably were placed initially in 3 .8 2.8 4.5 8.1 4 3.9 4.0 5.6 9.7 these accounts. Outside of Ml, sizable amounts of funds were transferred from 1. Ml, M2, and M3 incorporate effects of benchmark and seasonal adjustment revisions made in February 1988. equity mutual funds into money market Certain technical redefinitions affecting only Ml were mutual funds, which are included in M2. made at the same time. 2. Ml figure in parentheses is adjusted for shifts to The boost to the aggregates was concen- NOW accounts in 1981. trated in late October and proved tempo- 3. Ml figure in parentheses is the annualized growth rary, with deposits receding over the rate from the second to the fourth quarter of 1985. month of November. incentives to economize on balances that The debt of domestic nonfinancial earn no interest. Higher rates also permit sectors grew 9 Vi percent last year, ending business firms to reduce the amount of the year at the middle of the Committee's balances held with banks as compensa- monitoring range of 8 to 11 percent. Debt tion for services provided but not paid for expansion moderated considerably from with fees; because banks can earn greater the 13 VA pace of the two previous years, returns by investing these funds when but still rose faster than income. Federal rates are higher, they reduce the balance debt growth slowed in 1987, as some requirements commensurately. Substan- progress was made in reducing the fedtial amounts of demand deposits are held eral deficit. Borrowing by state and local under compensating balance arrange- governments fell substantially, partly ments, which helps to explain a high reflecting the damping effect of higher interest elasticity for demand deposits. borrowing costs and the availability of Over time, though, there has been a unspent funds from earlier financings. In gradual movement toward the substitu- the household sector, overall growth of tion of explicit fees for compensating indebtedness slowed. Sluggish spending balances, and some reports indicate that and shifts toward greater reliance on such shifts may have accelerated in late home equity lines of credit, in response 1987, thereby contributing to the steep to the effects of tax reform in reducing declines in demand deposits near year- deducibility of interest payments on end. Higher mortgage rates also may consumer debt, held down use of conhave contributed to weakness in demand sumer credit. However, a brisk pace of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

38 Monetary Policy Reports home sales over most of the year helped all of the monetary aggregates had decelsustain the growth of mortgage debt at erated considerably. The weakness in about the elevated pace of 1986. Despite monetary growth did not reflect any some widening last year of the gap evident weakness in the economy, howbetween internally generated funds and ever; rather, the slower money growth, capital expenditures, business borrowing and accompanying strengthening in vediminished in both short- and long-term locity, appeared largely attributable to markets. However, businesses continued the rise in market rates of interest fostered to retire equity last year through mergers, in part by the Federal Reserve's response buyouts, and share repurchases, and the to adverse developments with respect to credit needed to finance these retire- the dollar and inflation. The Committee ments boosted the expansion of business decided to reaffirm its 1987 growth indebtedness. ranges for M2 and M3; in doing so, it anticipated some pickup in the growth of Implementation of Monetary Policy M2 over the remainder of the year, but it During the first half of 1987, monetary indicated that growth for all of 1987 near policy was carried out in an atmosphere or even below the bottom of the target of increasing concerns about the course ranges might be acceptable for both of inflation, arising in part from heavy aggregates, depending on the behavior of downward pressure on the dollar. Growth their velocities and other financial and of the economy was bringing about economic developments, notably the noticeable increases in resource utiliza- evolving strength of inflationary prestion, and inflation was picking up, reflect- sures. The Committee also decided not to ing the effect of a weaker dollar on import set a target range for Ml, given the prices as well as a rebound of oil prices unpredictability of the behavior of this from low 1986 levels. When the dollar aggregate relative to economic activity. came under heavy pressure in late March, For a short time after the July meeting, previously tranquil credit markets began the dollar rose further but, with the to exhibit concern about the effect that release of trade data in mid-August that declines of the dollar would have on disappointed market participants, the prices. Long-term interest rates, in par- dollar again came under substantial downticular, moved up strongly. In conjunc- ward pressure. Long-term bond yields tion with some easing moves abroad, the moved up sharply, as the dollar's weak- Federal Reserve sought somewhat greater ness against a backdrop of strength in the restraint in the provision of reserves to economy spurred concerns about inflathe banking system. Initially, this action tion and possible firming of monetary produced further increases in interest policy. Interest rates in short-term marrates, but subsequently, financial pres- kets also increased, but by lesser amounts. sures eased somewhat. In response to In light of the potential for greater reductions in interest rates abroad, to inflationary pressures, in part related to some flattening in commodity prices, and weakness in the dollar, the Federal to better news on the U.S. trade deficit, Reserve sought to reduce marginally the the dollar firmed and there was a broad availability of reserves through open decline in interest rates, with long-term market operations; it also raised its rates falling somewhat more than short- discount rate Vi percentage point in early term rates. September to 6 percent. After the discount rate action, interest rates rose When the FOMC met in July to review further, especially in short-term markets. its growth ranges for money and credit, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 39 Stock prices, which had reached very and financial fragility in portions of the high levels relative to earnings and had economy. been falling since mid-August, plunged The nonfinancial corporate sector reon October 19 in chaotic trading. The mained highly leveraged and thus potenstock market drop prompted a marked tially vulnerable to adverse changes in decline in interest rates as investors the economic and financial environment. sought refuge in the perceived safety of A combination of strong debt issuance fixed-income assets, especially Treasury and massive net equity retirements securities. Although most stock indexes boosted the aggregate debt-equity ratio recovered somewhat in the wake of the of these corporations, measured at marcrash, financial markets remained turbu- ket values at year-end, after a two-year lent, with bond and equity prices fluctu- decline resulting from increases in stock ating widely. prices. Moreover, higher interest rates In a financial environment of extraor- along with additional debt boosted bordinary turmoil and apparent fragility, the rowing costs, keeping the net interest- Federal Reserve shifted the emphasis in coverage ratio at about the very low the conduct of open market transactions levels recorded during the last recession. to providing reserves generously to en- Reflecting the weakening of the finances sure that adequate liquidity would be of some corporations, the pace of downavailable to meet any unusual needs. gradings of corporate debt remained very Nonborrowed reserves grew rapidly in high in 1987, and a record $9 billion of late October to accommodate both a large rated corporate bonds were placed in increase in reserves required against default. surging transactions deposits and an The household sector also exhibited a enlarged demand for excess reserves. An few signs of strain on personal finances. easing of pressures on reserve positions As noted previously, the pace of expanalso took place which, along with some sion of total household debt slowed last diminution of inflation expectations, led year, likely reflecting reduced deductibilto a partial reversal of earlier increases in ity of consumer interest under the new interest rates. These actions helped to tax code and weaker consumer spending. calm the financial markets, although However, the growth of household debt conditions remained somewhat unsettled still outstripped that of disposable inover the rest of the year. come, and the ratio of debt to income Early in 1988, as incoming data sug- reached new highs. For some individugested that economic expansion over the als , the strains posed by high debt burdens first part of the year might be weak, bond apparently remain quite severe, as the rates dropped substantially and the Fed- number of personal bankruptcies has eral Reserve sought some slight addi- been growing rapidly over the last three tional easing in desired pressures on years and setting new records. On the reserve positions. Better trade news other hand, recent declines in the delinbolstered confidence in the dollar, and quency rate on mortgage debt have the monetary aggregates showed signs of brought this indicator of financial stress renewed strength. more into line with historical standards. The banking industry was under some Other Developments in Financial Markets continuing stress in 1987, primarily Despite the slower growth of debt and the reflecting well-publicized difficulties with overall strength of the economy last energy and developing country loans, but year, there still were some signs of strain in some parts of the country with agricul- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

40 Monetary Policy Reports tural and real estate loans as well. Al- been true for some years now, the though most banks continue to be healthy aggregate condition of the industry and enjoy reasonable profits, souring masked extremes among individual energy and agricultural loans in recent thrifts. Many thrifts are well capitalized years have led to record numbers of bank and quite profitable, but severe problems closings, principally of smaller banks in with asset quality have left a substantial the midwestern and southwestern por- minority insolvent and suffering massive tions of the country; however, problems operating losses that are steadily worsenwith the quality of agricultural loans ing. Prior to the passage in 1987 of appear to be diminishing as the agricul- legislation authorizing a recapitalization, tural sector shows signs of improvement. the FSLIC had been unable to take Provisioning by large banks for losses effective remedial action with respect to on troubled loan portfolios led to record these insolvent institutions, owing to the losses in 1987 for the banking industry inadequacy of its resources. Under the and to substantial declines in the book terms of the recapitalization plan apvalue of shareholder equity of affected proved as part of the Competitive Bankbanks. Doubts regarding the ultimate ing Equality Act, the newly-created collectibility of loans to some heavily Financing Corporation has begun raising indebted developing countries weighed the funds needed by the FSLIC through down the stock prices of many large issuance of long-term debt. banks in 1987, but investor reaction to The stock market collapse gave very the second-quarter decision to make clear warning of the vulnerability of provisions for substantial losses was important elements of the financial sysgenerally positive, and at the time share tem to sudden shocks. Although only a prices rose for many banks taking this few small securities firms failed, the step. Difficulties persisted over the year market turbulence produced significant in making progress in handling the eco- problems for traders, specialists, and nomic and financial problems of many of market makers on the stock exchanges; the developing countries, and in the and, more generally, financial markets fourth quarter a number of large banks gave evidence of fragility and instability announced additional provisioning for that have not entirely disappeared even losses on such debt and, in some in- yet. Under the circumstances, it is essenstances, write-offs of problem loans. tial that the reexamination of our market After several years of improvement, mechanisms and regulatory systems go the financial condition of the thrift indus- forward, to identify any actions that try deteriorated in 1987. Aggregate earn- might be needed to safeguard the strength ings declined, with losses posted in the of our capital markets and lower the risks second and third quarters as a result of of economic disruption. heavy provisions for losses on assets, including a one-time write-off of accumulated insurance payments prepaid to the Federal Savings and Loan Insurance institutions. The Financial Standards Accounting Board then ruled that the prepaid assessments, Corporation (FSLIC).2 However, as has which were assets on the balance sheets of individual thrift institutions, had to be written off immediately. The FSLIC recapitalization plan included in 2. In March 1987, the General Accounting the Competitive Equality Banking Act of 1987 Office declared the FSLIC was insolvent because it provides that the affected thrifts will recover the would be unable to meet all its future obligations on amount of this writeoff over the next five years as insured deposits at failed but not yet closed new funds are raised for FSLIC. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 41 Report on July 13,1988 ment to achieving price stability over time, the Federal Open Market Committee (FOMC) in February lowered its Monetary Policy and the Economic 1988 target growth ranges for M2 and Outlook for 1988 and 1989 M3 to 4 to 8 percent. The economy continued to expand rap- At the beginning of the year, the idly in the first half of 1988, displaying conduct of monetary policy was impressive resilience in the wake of last complicated by exceptional uncertainty fall's stock market break. Especially about the state of the economy. Some encouraging has been the fact that the signs of weakness had begun to emerge, expansion in activity this year has been seemingly lending support to the widely propelled largely by rising exports and held view that economic activity would business investment, which bodes well falter after the stock market break. In for the restoration of better balance in the particular, inventories had accumulated economy. at a rapid rate in the fourth quarter of With the industrial sector continuing 1987, producing some overhang of to enjoy greater growth, capacity utiliza- stocks at the retail level. Moreover, tion rates have crept higher. At the same other indicators suggested that the rate time, the civilian unemployment rate has of increase in labor demand had declined since year-end, and the average slackened. At the same time, financial of 5 Vi percent in the second quarter was markets seemed to be somewhat fragile, the lowest in nearly 15 years. Despite the as conditions had not yet returned to tightening of labor markets, wage in- normal following the plunge in stock creases to date have been notably re- prices. The Federal Reserve thus was strained, on balance, helping to contain faced with the challenge of countering cost pressures in many sectors. Most the apparent near-term weakness of the measures of price inflation among fin- economy, while taking account of the ished goods and services also have shown longer-range need to ensure that growth little if any pickup, although basic com- in domestic demand would not become modity prices have risen considerably, excessive. most recently reflecting the effects of In this situation, and with the dollar drought on agricultural markets. firming on foreign exchange markets, During the first half of the year, the the Committee loosened slightly further Federal Reserve continued to direct its the easier reserve conditions that had policies toward providing monetary and been adopted following the stock market financial conditions that would foster plunge. Market interest rates edged price stability over time, promote sustain- down, which —in conjunction with able economic growth, and contribute to earlier declines in rates—helped lift M2 an improved pattern of international and M3 to near the top of their 1988 transactions. It was recognized that target ranges and resulted in a modest progress toward these goals in 1988 fall in their velocities (the ratio of would require relatively slow growth of nominal GNP to the money supply) domestic demand, which would allow during the first quarter. Given the risk the economy to accommodate rising that economic activity was weakening, external demands on U.S. producers as well as the still unsettled conditions in without generating overall inflationary financial markets, the Committee pressures. Consistent with continued viewed the more rapid growth in money external adjustment and with its commit- as appropriate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

42 Monetary Policy Reports By early spring, however, the bulk of Monetary Plans for the Remainder the incoming data indicated that business of 1988 and for 1989 activity had, in fact, remained robust. Additional information available later in At its meeting last month, the Federal the second quarter confirmed the Open Market Committee agreed to retain strength of the economy, and high and the target growth ranges of 4 to 8 percent rising levels of resource utilization for M2 and M3, measured from the pointed to a greater potential for a fourth quarter of 1987 to the fourth buildup of inflationary pressures. The quarter of 1988. In addition, the Commitcosts of allowing inflation to reintensify tee retained the monitoring range of 7 to were seen as quite high, based on the 11 percent for the debt of domestic experience of the early 1980s, when the nonfinancial sectors and again set no reversal of the inflation process led range for M1. Recognizing the variability unavoidably to sizable losses in output of the relationship of these measures to and to an extended period of high the performance of the economy, the unemployment. Committee agreed that operating deci- Against this backdrop, the Committee sions would continue to be made not only tightened reserve conditions somewhat in light of the behavior of the monetary in a series of moves beginning in late aggregates, but also with due regard to March. Market interest rates responded developments in the economy and finanto the strength in the economy and to the cial markets, including attention to the Federal Reserve's actions by moving sources and extent of price pressures and upward. Over the past four months, most to the performance of the dollar in forshort-term interest rates have increased eign exchange markets. around 1 percentage point on balance. In the absence of any significant eco- Long-term rates generally rose substan- nomic and financial disturbances, the tially through late May, but have declined Committee expected growth in M2 to a little on net since then. The better moderate over the remainder of the year, performance of the bond market recently placing the aggregate around the middle has occurred at a time when investor of its target range at year-end. Growth in sentiment toward investment in dollar- M3 this year is expected to exceed that of denominated assets has been buoyed by M2 but to remain comfortably within its better trade statistics and may also have range, on the assumption that asset reflected favorable market response to expansion at depository institutions the Federal Reserve's demonstrated re- would remain fairly robust in the second solve to fight inflation. half. The debt of domestic nonfinancial Despite the Committee's tightening sectors is expected to remain near the actions, M2 and M3 continued to expand middle of its monitoring range, which rapidly through April, in response to would put its growth for the year around earlier decreases in interest rates and to a the slowest annual pace registered in the bulge in transactions balances associated past decade. with unusually large individual tax pay- For 1989, the Committee set, on a ments. As the tax-related surge unwound tentative basis, target growth ranges of 3 and the influence of higher interest rates to 7 percent for M2 and 3 Vi to 7 Vi percent began to be felt, the two broad aggregates for M3, measured from the fourth quarter grew at a reduced pace in May and June, of 1988 to the fourth quarter of 1989; the and ended the first half of the year in the monitoring range over the same period upper halves of their target ranges. for domestic debt was set at 6^2 to IOV2 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 43 Ranges of Growth for Monetary and represents, in a sense, the "base" of and Credit Aggregates the broader monetary aggregates.1 The Percent change, fourth quarter to fourth quarter Committee decided against establishing a range for the monetary base because it Provisional for Aggregate 1987 1988 1989 seemed unlikely to provide a more reliable guide for policy than the aggregates M2 5%to8V4 4to8 3to7 M3 5% to 8% 4 to 8 3V4to7% for which ranges already are established. Debt 8 to 11 7 to 11 6% to 10% Although the base has been less variable in relation to economic activity and prices percent (table 1). Although uncertain than Ml, its velocity nonetheless has about how strong the economy might be fluctuated appreciably and rather unpreover the coming year or so, the Commit- dictably from year to year. tee recognized that, given the current high levels of resource utilization, it was Economic Projections necessary to be particularly attentive to As is indicated in table 2, the central inflationary risks. An acceleration of tendency of the forecasts of Committee inflation could undermine the sustainabil- members and nonvoting Reserve Bank ity of the economic expansion and the presidents—premised on the monetary international competitive position of U. S. policy objectives outlined above—is for producers. The lower ranges tentatively growth in real GNP of 2 % to 3 percent in adopted for 1989 were believed consis- 1988, with a modest slowing of expansion tent with a monetary policy that would in 1989. Such a pace of growth likely curb any tendency for inflation to worsen would generate employment gains suffiand would contribute over time to the cient to hold the civilian unemployment restoration of price stability. However, rate close to its average second-quarter the Committee also noted that develop- level of 5 Vi percent. Prices, as measured ments over the next half year could alter by the implicit deflator for GNP, are substantially the rates of money growth generally expected to rise 3 to 3 3A percent needed to foster satisfactory economic over the four quarters of 1988, similar to performance in 1989 and beyond. Conse- last year's rate of advance. For 1989, quently, it stressed the provisional nature projections of the increase in the GNP of its decision and the possibility that the deflator are of course more uncertain, ranges for 1989 might need to be adjusted and the central-tendency range widens to when they are reviewed early next year. 3 to 4 V6 percent. The Committee again decided not to The administration forecast for 1988 is set a range for Ml, given the sharp quite similar to the central tendency of swings in its velocity in recent years, forecasts of FOMC members and nonvotresulting in part from its increased sensi- ing presidents. For 1989, the administrativity to movements in market interest tion is projecting stronger growth of real rates since deposits were deregulated. In output than indicated by the FOMC considering narrow monetary measures, forecasts, but its expectation for inflation the Committee also has discussed whether is in the middle of the range of FOMC the monetary base could play a useful forecasts. The administration's projecrole in the conduct of policy. This tion of nominal GNP in both years is measure comprises the major monetary around the upper end of the centralliabilities of the Federal Reserve System—currency in the hands of the public and reserves of depository institutions- 1. The characteristics of the base and its behavior are discussed in detail in the appendix to this report. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

44 Monetary Policy Reports Economic Projections for 1988 and 1989 Percent FOMC members and nonvoting FRB presidents Measure Administration Range Central tendency 1988 Change, from fourth quarter to fourth quarter Nominal GNP 4to7 5% to 6% 6.6 RealGNP lto3V4 2% to 3 3.0 Implicit deflator for GNP 2% to 4 3 to 3% 3.5 Civilian unemployment rate, average level in the fourth quarter 5*4 to 6*4 5*4 to5% 5.5 1989 Change, from fourth quarter to fourth quarter Nominal GNP 4 to 7*4 5to7 7.1 Real GNP ... Ito3 2to2y2 3.3 Implicit deflator for GNP 2to5 3 to 4*4 3.7 Civilian unemployment rate, average level in the fourth quarter 5to7 5y2to6 5.3 tendency ranges and within the full more moderate growth of overall activranges, suggesting that the administra- ity, economy-wide spending on new plant tion's economic forecast and the FOMC's and equipment may not rise as swiftly as monetary ranges are broadly compatible. it has on average over the past year. Even Continued improvement in the external so, within manufacturing, improved sector is expected to provide the main profitability and higher capacity utilizaimpetus to U.S. economic growth over tion have stimulated a healthy pickup in the next year and a half. Real exports of capital spending, which should continue goods should remain on a strong upward for some time.The performance of the path, reflecting the improved competitive interest-sensitive sectors, most notably position of U.S. producers. At the same homebuilding and business investment, time, the growth of real imports is likely will be influenced considerably by the to be restrained, owing to the lagged extent to which the federal government is effects of the depreciation of the dollar competing for available supplies of credit. through the end of last year. This contin- Accordingly, continued fiscal restraint is ued shrinkage of the real trade deficit is essential if we are to free up resources to expected to be sufficient to generate some support private investment. In this rereduction in the nation's deficit on current gard, the budget summit agreement account during 1988 and a further decline reached last December was a favorable in 1989.In contrast to the boost provided first step, and the Federal Open Market by the external sector, domestic demand Committee members and other Reserve is projected to remain relatively subdued. Bank presidents have assumed that the Consumer spending, in particular, has necessary legislative action will be taken been on a sluggish growth trend since late to implement the agreement. There is a 1986, and that pattern seems likely to clear need for further initiatives to deal persist. Moreover, in an environment of with the out-year deficits, which remain Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 45 distressingly large; financial events later pace anticipated over the final three this year and in 1989 could be substan- quarters of 1988 reflects the expectation tially affected by the developments in the that business and labor—recognizing the fiscal arena. Although little change is realities of a highly competitive internaexpected in the overall pace of inflation tional marketplace—will continue to this year, as compared with 1987, the exercise restraint in setting prices and sources of actual and potential price wages. pressure appear to have changed. In 1987, a rebound in oil prices was a major The Performance of the Economy factor boosting the general price level; During the First Half of 1988 assuming that world oil prices remain fairly stable, domestic energy prices The economy continued to expand briskly should not be a significant inflationary in the first part of 1988. Activity was force in 1988-89. Labor markets have boosted by strength in capital spending tightened considerably since last year, and growth in foreign demand for U.S. however, and most measures of wage goods. The rise in overall output during and compensation rates have firmed. the first six months of this year supported Although the overall rate of industrial the addition of about 1 % million jobs to capacity utilization is not high by histor- nonfarm payrolls, and the civilian unemical standards, plants are being used very ployment rate, which had trended down intensively in some materials-producing throughout 1987, dropped somewhat sectors; sharply rising materials prices further since the beginning of the year to have raised costs for manufacturers an average level of 5 Vi percent in the generally. Food prices also have been a second quarter. less favorable element in the inflation Despite the greater tightness in labor picture recently, and are likely to experi- markets and the higher rates of capacity ence some further acceleration as a utilization now prevailing in some indusconsequence of drought conditions; how- tries, tendencies toward additional inflaever, it is important to recognize the tion have been limited. Prices of materials temporary nature of this phenomenon, and components have risen sharply, but which should have no lasting effect on for finished goods there are only hints of overall inflation so long as it does not price acceleration outside the food sector. become embedded in wage trends. Wages, on the whole, have continued to For 1989, the FOMC central-tendency be fairly well behaved, suggesting a range for the GNP deflator widens on the recognition on the parts of labor and upper end, suggesting the possibility of a management of the need to maintain pickup in inflation from the pace this competitive cost structures. year. However, this apparent accelera- The continued resurgence of manufaction of prices largely reflects the arith- turing has been one of the most notable metic implication of an eccentric move- economic developments this year. Durment in the deflator for GNP in the first ing the first five months of 1988, indusquarter of this year. Shifts in the compo- trial production expanded at nearly a 4 sition of output caused the deflator to rise percent annual rate, and the rate of at an annual rate of less than 1 Vi percent capacity utilization for total manufacturduring that quarter; these shifts are not ing rose Vi percentage point between expected to be so noticeable in coming December and May to just over 83 quarters. The view that inflation next percent, the highest level during the year will not differ significantly from the 1980s. Owing to these advances in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

46 Monetary Policy Reports production, manufacturers have em- have been particularly strong for indusbarked on substantial programs to invest trial machinery and for computing equipin plant and equipment, pacing an ment. On the import side, the volume of economy-wide pickup in the rate of purchases rose less than 1 percent in the capital spending. The better balance of first quarter and apparently declined in expansion also has been visible in agri- April. Imports of consumer goods excludculture, although the upturn in that sector ing autos were essentially unchanged in has been jeopardized by recent drought the first quarter, continuing the pattern of conditions. 1987, while auto imports fell somewhat. The improvements in manufacturing In contrast, imports of capital goods rose and agriculture are, in part, reflections of considerably, stimulated by the surge in a broader adjustment of the U. S. external equipment outlays by domestic firms. position. The combination of a lower Economic expansion abroad has condollar and domestic cost containment has tinued at a moderate pace, on balance, so translated into a marked turnaround in far this year, providing some support for real net exports. That process also has an improved U.S. trade position. Activity been aided by stronger economic growth increased sharply in the major foreign in other large industrial countries. industrial countries in early 1988, while growth in the smaller industrial nations The External Sector remained subdued. In the newly industri- After having trended downward for alized countries of Asia, economic activnearly three years, the dollar appreciated ity continued to expand rapidly. In consubstantially over the first half of 1988 trast, growth slowed in Latin America, against most major foreign currencies. primarily due to a sharp deceleration of The dollar rose sharply at the beginning activity in Brazil. In the OPEC countries, of the year, responding in part to coor- activity appears to have stabilized in dinated central bank intervention. In 1988, after a decline in 1987, as higher recent months, sentiment toward the volumes of oil exports have offset the dollar appears to have improved, owing effects on government revenues of a slight largely to the release of better-than- softening in prices. expected trade reports and to firming actions by the Federal Reserve. The Household Sector The U.S. merchandise trade deficit for Consumer spending showed some vigor the first quarter was $144 billion at a in early 1988, after declining in the fourth seasonally adjusted annual rate, substan- quarter of last year. Real outlays intially below the figures for the fourth creased at a 3 % percent annual rate in the quarter and for 1987 as a whole. In April, first quarter, as purchases of motor the trade deficit narrowed further. Ex- vehicles bounced back with the expansion ports have continued to expand rapidly, of manufacturers' incentive programs, while import growth has slowed consid- outlays for other durable goods were erably. The strong growth of exports can strong, and expenditures on services be attributed primarily to the increased continued to post appreciable gains. Data price competitiveness of U.S. goods, for April and May suggest, however, that which reflects the decline of the dollar in the growth of consumer spending slowed recent years and the tight control over from the rapid first-quarter rate. production costs exercised by domestic The buoyancy of consumer spending firms. This growth of exports continues early this year can be traced to robust to be broadly based, and foreign sales income growth. Real disposable personal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 47 income rose at a 5 percent annual rate, on to a large increase in purchases of equipaverage, during the fourth quarter of ment. In recent months, spending appears 1987 and the first quarter of 1988, to have remained near the high firstsubstantially above the 2 percent rate quarter level. Surveys of capital spending posted for 1987 as a whole. However, plans, taken this spring, point to appredisposable income growth appears to ciable growth in investment outlays over have slowed considerably in the second the second half of 1988. quarter, as a result of a spurt in nonwith- Real outlays for computing equipment held tax payments and a slower pace of jumped at more than a 90 percent annual employment gains. rate in the first quarter, but fell back Although the pace of consumer spend- considerably in subsequent months. ing thus far this year has been stronger Smoothing through this volatility, it than many expected, the stock market appears that demand for such equipment break probably did exert some restraining has emerged from the lull that prevailed effect. This is evident in the personal during 1986 and the first half of 1987, saving rate, which has averaged 4Vi when excess computing capacity—as percent for the seven months after Octo- well as concerns about the usefulness of ber- 1 percentage point above the aver- available software—limited purchases. age level during the first three quarters of Outlays for other types of equipment also 1987. While most households experi- have been strong, on balance, since the enced little direct loss of wealth from the turn of the year, largely reflecting the stock market decline, the startling dimen- buoyancy of overall economic activity. sions of the event obviously affected In particular, with utilization rates now at consumer sentiment last fall. With each elevated levels in many manufacturing passing month, however, confidence has industries, equipment investments have grown and helped to sustain the growth been an attractive way of removing of spending. bottlenecks and achieving a relatively Residential construction was weak rapid improvement in effective capacity. during the first half of 1988. Total Although the data for May showed a housing starts averaged about 1 Vi million surprising jump in nonresidential conunits at an annual rate through May, struction activity, real outlays in this almost 9 percent below the 1987 total. In sector were sluggish overall during the the multifamily sector, building declined first five months of the year. Commercial from the already depressed 1987 level. construction, the largest part of this Starts in this sector have been falling aggregate, continues to be restrained by since the end of 1985, as near-record an overhang of vacant space. In addition, vacancy rates and changes in the tax laws oil and gas drilling, which was up more have reduced the incentive to build new than 20 percent in 1987, has changed units. In the single-family sector, build- little since last fall, owing in large part to ing has fluctuated from month to month, the general weakness of petroleum prices influenced by movements in interest rates over this period. Industrial construction, and perhaps by weather; on balance, the in contrast, has risen briskly in recent average level of starts through May was months. Nonetheless, even here, the roughly 6 percent below the 1987 pace. picture is cloudy. Although capacity utilization is high in a number of sectors, The Business Sector manufacturers apparently remain cau- Business fixed investment advanced tious about making the large, long-range sharply in the firstq uarter of 1988, owing commitments involved in building new Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

48 Monetary Policy Reports plants, and new contracts for industrial fell during the firstq uarter and appear to construction actually have trended down have remained relatively weak in recent since the beginning of the year, after months. This dropoff reflects the winding rising in 1987. down of some major defense procure- The pace of business inventory invest- ment programs, restraint on domestic ment moderated somewhat during the discretionary spending, and net reducfirst four months of 1988, reducing the tions in farm inventories held by the concern about excessive stocks that had Commodity Credit Corporation. Howarisen earlier this year. This concern had ever, on a budget basis, total outlays have focused on the retail sector, where inven- been growing rapidly, owing to contintories at auto dealers and at certain outlets ued increases in entitlements, greater for nondurable goods (primarily general demands on deposit insurance agencies, merchandise and apparel stores) ap- and increasing net interest payments. peared high relative to sales at year-end. Meanwhile, growth of federal govern- By cutting production early in the year ment revenue has slowed compared with and offering a variety of sales incentives, the sharp increase in FY1987. Although automakers have been able to bring their tax receipts have been pushed up by the inventories into better alignment with robust gains in income and by an increase sales. In contrast, inventory-to-sales in the payroll tax rate, this upward ratios for nondurable retail goods con- impetus to revenue has been tempered by tinue to hover at levels that are high by the final reductions in income tax rates historical standards. At the manufactur- from the reforms enacted in 1986. In ing level, inventory positions through contrast to its effects this year, tax reform May appeared fairly lean in general, had provided a substantial boost to revegiven the pace of shipments. Much of the nues in FY1987. On balance, it is quite recent building of factory stocks has been possible that the budget deficit this year in industries where market demand has will exceed the $150 billion shortfall been robust, such as aircraft, machinery, recorded last year. chemicals, and paper. The state and local sector continues to Before-tax economic profits of nonfi- operate under budgetary pressure, as nancial corporations continued to be operating and capital accounts (which strong in the first quarter, with manufac- exclude social insurance funds) have been turing firms posting substantial gains. in deficit for the past year and a half. In After-tax profits also rose noticeably, as the first quarter of 1988, this combined the maximum tax rate on corporate deficit stood at $9 billion, similar to the profits was reduced from 40 to 34 percent, shortfall recorded during 1987. Many a change mandated by the Tax Reform states have acted to curb this fiscal Act of 1986. Owing to the strong growth erosion, using a combination of tax of profits, the internal cash flow of hikes—primarily sales and excise taxes— nonfinancial corporations has increased and budget cuts. As a result, the growth considerably since mid-1987, reversing of real spending slowed considerably in the slide of the previous year. the first quarter, reflecting a sharp decrease in construction outlays. This was The Government Sector the third such decline in the past four In real terms, federal government pur- quarters, and this downtrend in construcchases of goods and services—which add tion activity has occurred despite continudirectly to GNP and account for about ing needs to expand and upgrade the one-third of total federal expenditures— basic infrastructure. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 49 Labor Markets there were some signs of an acceleration Early in the year, incoming data seemed in labor costs. Hourly compensation, as to signal some weakening of labor de- measured by the employment cost index, mand. Initial claims for unemployment advanced nearly 4 percent between the insurance, which had trended up during first quarter of 1987 and the first quarter the final months of 1987, rose even of this year, about 34 percentage point further just after the turn of the year. more than in the previous 12-month Moreover, the first report on nonfarm period. Although this pickup was related payroll employment for January showed in large part to the strength of labor the smallest monthly increase since mid- demand, it was exacerbated by the rise in 1986. Taken together, these indicators the payroll tax rate that took effect on conveyed a picture of deterioration in the January 1. By sector, the sharpest uptick labor market. However, as subsequent in compensation rates occurred in manudata were released, it became clear that facturing, where increases in production the underlying pattern of labor demand have led to a firming in labor demand. had, in fact, remained healthy. Claims This pattern stands in contrast to trends in for unemployment insurance dropped the early 1980s, when pay gains in back to relatively low levels and the manufacturing lagged far behind those in anemic employment gains for January the service-producing sector. were revised up substantially. Moreover, Since 1980, output per hour in the since January, nonfarm payroll employ- nonfarm business sector has risen at an ment has advanced more than 300,000 at average l!/2 percent annual rate. Ala monthly rate, somewhat above the though this rate is somewhat above the average increase in 1987. Although the sluggish pace of the 1970s, it remains far gains have been concentrated in the below the advances registered earlier in service-producing sector, manufacturing the postwar period. In contrast, produchas posted an average monthly increase tivity gains in manufacturing have been of about 30,000 jobs thus far this year, quite rapid in recent years. The firstwith the largest advances in the machin- quarter rise in factory output per hour ery and metals industries. was nearly 3 percent at an annual rate, in The combination of strong gains in line with the average increase registered employment and slower growth of the during 1986 and 1987; these productivity labor force over the first half of 1988 advances have continued to hold down lowered the civilian jobless rate to 5.3 unit labor costs, which fell Vi percent percent in June from 5.8 percent at the over the year ended in the first quarter of end of last year. Jobless rates fell for a 1988. broad spectrum of demographic groups over the first half of the year, and the June Price Developments rate of unemployment represents the Upward pressures on prices appear to lowest monthly figure since mid-1974. have grown stronger this year, reflecting The June level, however, may be artifi- the lagged effects of the earlier cially low, owing to the difficulty of depreciation of the dollar, as well as adjusting for seasonal swings in employ- tighter markets for labor, industrial ment at the end of the school year. materials, and farm output. Energy As the unemployment rate dropped prices, in contrast, have been restrained last year, compensation increases, which this year, on balance, and have provided had been moderating for several years, some offset to these pressures. For the leveled out. In the early part of this year, most part, signs of higher inflation have Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

50 Monetary Policy Reports been confined to price indicators for a jump in clothing prices, which have commodities and intermediate goods, been affected not only by the dollar's which have posted sharp increases. The movement, but by quotas on apparel consumer price index-a measure of imports. In the service area, medical inflation for finished goods and ser- care costs have continued to rise rapidly. vices—showed no acceleration during At earlier stages of processing, inflathe first five months of 1988, rising at tion appears to have picked up for a wide the 4!/2 percent annual rate registered for range of items. On commodity markets, 1987 as a whole. prices of crude industrial materials have In the energy sector, spot prices for remained on an upward course this year, crude oil plummeted after OPEC failed although the price hikes have been less last December to reach a credible agree- pervasive than in 1987. Reflecting, in ment to limit production. The contract part, these developments, the producer price for West Texas Intermediate (the price index for intermediate materials benchmark crude oil in the United States) other than food and energy rose at an fell from about $18 per barrel in Decem- annual rate of nearly 8 percent over the ber to about $16 per barrel in March. first five months of this year, up from the Reflecting these developments, retail 5 percent pace registered last year. Price prices for gasoline fell considerably in increases have been especially large for the first quarter. During March and April, materials used by producers of metals, prices for crude oil drifted up and, in chemicals, paper, and plastic, where response, consumer energy prices re- output has been strong or capacity utilibounded in April and May. More re- zation rates high. cently, however, crude oil prices have The upward movement of intermediate receded again, as OPEC's June meeting goods prices relative to finished goods adjourned without an agreement on pro- prices at the producer level has been quite duction cuts. substantial. Although divergences in the In the agricultural sector, tighter crop two series, such as the one that has arisen inventories and stronger grain exports over the past year, are not unprecedented, pushed up farm-level prices early in disparities typically have not persisted 1988. In addition, prices for grains and for long. Historical evidence indicates soybeans recently have surged in that higher materials costs, on average, commodity markets, owing to the pass through rather quickly into finished drought in major growing regions. It goods prices. In the recent period, the now appears likely that retail food prices effect of the sharp rise in materials prices will accelerate in coming months and may have been cushioned by restraint on exert some upward pressure on aggre- unit labor costs, by the spreading of gate consumer price inflation. overhead costs over larger sales volumes, Excluding food and energy, prices at and, perhaps, by efforts to save on or the consumer level rose at about an substitute away from higher cost materiannual rate of about 4% percent during als. Nonetheless, past experience sugthe first five months of this year. gests that, even if there may not be a Consumer price inflation has remained significant delayed pass-through in comat this relatively high rate partly because ing months, the risks of an acceleration in of continued increases in import prices finished goods prices would be considerspurred by the earlier depreciation of the able if the pressures on materials prices dollar. Particularly noteworthy has been do not ease soon. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 51 Monetary Policy and Financial broad aggregates, thus making it even Developments during the First more difficult to interpret; consequently, Half of 1988 the Committee decided against establishing a target range for this aggregate. The Federal Open Market Committee In setting a monitoring range for has sought monetary and financial condi- domestic nonfinancial sector debt, the tions that promote price stability over Committee anticipated that debt growth time, support sustainable economic would slow in 1988, owing to less growth, and contribute to an improved government borrowing. Nonetheless, the pattern of international transactions. To rate of expansion of domestic debt was this end, the Committee at its February expected to exceed that of income. As meeting established target ranges, mea- was the case for the monetary aggregates, sured as growth rates from the fourth considerable uncertainty surrounded the quarter of 1987 to the fourth quarter of prospects for debt growth, leading the 1988, of 4 to 8 percent for both M2 and Committee to widen the monitoring range M3. It also set a monitoring range of 7 to by dropping the lower limit 1 percentage 11 percent for the growth of domestic point from the previous year's rate. nonfinancial debt and chose, once again, During the first partof 1988, monetary not to stipulate a range for Ml growth. policy was conducted against a backdrop The 1988 target ranges for M2 and M3 of data suggesting some weakness in the represented reductions from last year's economic expansion. Reflecting concern ranges of 5Vi to SV2 percent for both about the outlook for economic growth, aggregates and resulted in a lowering of the Committee moved in January to ease the midpoint of the target ranges by 1 full slightly the degree of pressure on reserve percentage point. positions. On balance, interest rates fell In widening the target ranges for M2 during January and February, which, in and M3, the Committee cited the high conjunction with rate declines that foldegree of variability in the relationship lowed the stock market drop in Octobetween money and aggregate demand ber, contributed to a pickup in M2 and that had appeared in recent years. As a M3 growth over the first quarter of the result of this development, which year. stemmed largely from an increased sen- As information suggesting greater ecositivity of money growth to interest rate nomic strength and an increased potential changes, it was believed that a wider for a buildup of inflationary pressures range of monetary growth rates could be became available in March and in subsecompatible with satisfactory outcomes quent months, and with M2 and M3 for the economy. At the time of the running near the upper ends of their February FOMC meeting, broader growth ranges, the Committee moved, in ranges seemed particularly appropriate several steps, to tighten reserve presin light of the uncertain outlook for sures. Owing to the force of credit spending. More specifically, the eventual demands and the Federal Reserve's less effects on domestic demand of the Octo- accommodative posture, interest rates ber stock market plunge and the subse- rose on balance over those months. Late quent drop in interest rates remained in the second quarter, growth in the unclear. Ml had become even more aggregates moderated, leaving both well interest sensitive, and it had varied more within their target ranges as the first half widely relative to GNP than had the of 1988 ended. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

52 Monetary Policy Reports Growth of Money and Debt 1987 when market interest rates and the Percent change at annual rate opportunity cost of M2 were generally increasing. Debt of domestic A number of the components of M2 Period Ml M2 M3 non- contributed to its strengthening in the financial sectors first half of the year. After declining steadily over the last half of 1987, liquid Fourth quarter to fourth quarter retail deposits—the sum of other check- 1979 . 7.7 8.2 10.4 12.3 able deposits, savings deposits, and 1980 7.5 8.9 9.5 9.6 1981 5.2 9.3 12.3 10.0 money market deposit accounts—regis- (2.5)» 1982 8.7 9.1 9.9 8.9 tered a solid gain over the first half of 1983 10.2 12.1 9.8 11.3 1988, as reductions in market interest 1984 5.3 7.6 10.4 14.2 1985 12.0 8.9 7.7 13.3 rates during the winter combined with 1986 15.6 9.4 9.1 13.3 the slow adjustment of rates on these 1987 6.2 4.0 5.4 9.6 deposits to increase their relative attrac- 1987:4 to 1988:2e... 5.0 7.4 7.1 8.5 tiveness. Growth in small time deposits 1987:4 to June 1988e 5.1 7.1 7.0 8.5 also was particularly strong, as was that in M2-type money market mutual fund Quarterly average 1987: 1 13.2 6.5 6.5 10.5 assets early in the year. Falling market 2 6.6 2.7 4.6 8.6 3 .8 2.8 4.5 7.9 interest rates, coupled with slow adjust- 4 3.9 3.9 5.4 10.1 ment of returns on fund assets, provided 1988: 1 3.8 6.7 7.0 8.4 2e 6.1 7.9 7.1 8.3 money funds with a rate advantage in the first quarter, thereby leading to higher 1. Ml figure in parentheses is adjusted for shifts to NOW accounts in 1981. asset growth. Rising market rates of e estimated interest and the apparent use of money funds to pay taxes, however, significantly Behavior of Money and Credit slowed their growth in the second quarter. From the fourth quarter of 1987 through M3 growth increased in the first half of June 1988, M2 increased at about a 7 1988 to a 7 percent rate, following a 5Vi percent annual rate, a noticeable increase percent increase in 1987. Credit expanover its 1987 rate of 4 percent (table 3). sion at banks and thrift institutions, which The faster growth can be attributed heavily influences the overall behavior of primarily to the lagged reaction of the M3, remained at roughly the same pace public's demand for M2 balances to as last year, but it was financed to a decreases in market interest rates relative greater extent over the first half of the to deposit rates that occurred in late 1987 year by liabilities included in M3. In parand early 1988. In the second quarter of ticular, inflows to banks from their for- 1988, however, the "opportunity cost" of eign branches and borrowings by savings holding M2 reversed its downward trend, and loans from Federal Home Loan and growth in M2 moderated toward the Banks, which are not included in M3, end of the period. Also contributing to dropped off sharply compared with 1987. the May-June slowdown was the runoff Ml grew at a 5 percent rate during the of an unusually large, tax-related buildup first half of the year, which although of transactions balances that inflated both below the 6 lA percent rate for all of 1987, Ml and M2 in April. On balance, M2 was higher than its growth in the second velocity is estimated to have declined half of last year. The sluggish growth of slightly over the first half of the year, Ml, especially in comparison to that of in contrast to its upward movement in M2 and M3, owed entirely to weakness Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 53 in demand deposits, which have been quarter of 1987 and some softening in declining over the past year and a half. In labor market data. At the same time, contrast, growth in currency and other inflationary pressures and expectations checkable deposits was robust. appeared to have diminished somewhat, Domestic nonfinancial debt grew at a and after coming under pressure in late rate of SV2 percent rate from the fourth December, the dollar first rebounded quarter of 1987 to June, according to and then stabilized against most major estimates based on partial data. Debt currencies. growth in the first half represented a In these circumstances, the Committee slowdown from last year's rate of 9*/2 moved in late January to ease slightly the percent and a substantial decline from the pressure on bank reserve positions. The rate of expansion of 13 lA percent in 1985 provision of nonborrowed reserves and 1986. Nonetheless, debt continued to through open market operations was grow faster than nominal GNP. Reflect- increased, the level of discount window ing the effects of smaller federal deficits borrowing declined, and the federal funds during the calendar year, growth in fed- rate edged downward. Other market eral debt slowed from last year's pace and interest rates declined as well; in spite remained at a rate well below that re- of lower interest rates, the dollar was corded over most of the 1980s. Nonfed- relatively stable against most major eral debt also expanded at a somewhat currencies. slower rate, as the growth of the debt of The downward trend for most market households and state and local govern- interest rates came to an end in late ments declined modestly. In the house- February and early March, when incomhold sector, a falloff in mortgage borrow- ing information indicated that the econing associated with weaker housing omy was considerably stronger than it expenditures offset a pickup in consumer was earlier thought to be, and in light of credit. Business borrowing expanded at emerging pressures on industrial capacity roughly the same pace as in 1987, with and labor markets, the risks of a pickup in rising interest rates in the second quarter inflation appeared to have risen. In this causing firms to shift more of their environment, monetary policy began in borrowing to short-term instruments. late March to become less accommodative. The restraint in policy was aimed at Implementation of Monetary Policy moderating potential inflationary pres- In conducting monetary policy, the Fed- sures by damping domestic demand in eral Reserve directed its operations dur- order to facilitate a shift of resources to ing the first three months of 1988 at either the external sector. As information pointmaintaining or easing slightly the degree ing to substantial economic strength of reserve pressure that had prevailed became available in April and May, and since the October stock market collapse. with the monetary aggregates growing at Thereafter, the System moved in several rates near the upper end of their target steps to firm reserve positions. ranges, the Committee moved again to The early months of 1988 were marked apply slightly greater pressure on reserve by widespread concern that the economic positions. Reflecting both the System's expansion might be faltering. Data avail- actions and market concerns about inflaable in January and February pointed tion, market interest rates moved higher. toward a weakening in domestic final Since late May, however, long-term demand, as evidenced by a substantial interest rates have fallen on balance, buildup of inventories in the fourth despite further increases in short-term Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

54 Monetary Policy Reports interest rates. The resulting narrowing of of financial institutions and markets. the spread between long- and short-term These concerns became the subject of rates apparently reflects some lessening studies by a presidential commission, of concerns about inflation, brought governmental agencies, and the securiabout in part by the firmer monetary ties industry. Recommendations from policy. Long-term yields also have bene- these groups and from a follow-up presifited recently from the upward movement dential working group focused on ways of the dollar against most major cur- to avoid excessive stock price volatility rencies, as the trade balance has contin- and to strengthen the ability of markets ued to improve. The change in attitude and related systems to deal with large toward the dollar apparently has encour- price movements. Progress has been aged investments in relatively high yield- made in this regard, with steps having ing dollar assets. been taken by market participants to In the aftermath of the stock market address some of the problems revealed crash last October, the Committee modi- by the market break in clearing and fied the System's procedures by placing settlement systems. Additional steps have greater emphasis on money market con- been taken to coordinate trading halts ditions and less on bank reserve positions triggered by extreme price moves and to in carrying out day-to-day open market strengthen capital positions of specialists operations. In doing so, it was neither the and other market makers. Committee's intention to alter its operat- In considering the possibility of future ing procedures permanently nor to ignore regulatory action in this sphere, it is bank reserve positions completely. noteworthy that the stock market break Rather, the thrust of the modification was has not been followed by any major to permit greater flexibility in System aftershocks. In part, this reflects the basic operations in light of the volatility and resilience in this period of the economy fragility characterizing financial markets and financial markets. In addition, it at that time. During this period, it was attests to the general adequacy of the considered important to assure the mar- current regulatory framework and monkets of the System's intention to provide etary policy institutions in cushioning adequate liquidity, and it was feared that financial disturbances, so that they do not significant variation in money market spread to the economy as a whole. Thus, conditions could add to the unusual while the additional steps initiated by uncertainties already in the markets. private entities to strengthen market As markets exhibited signs of in- mechanisms certainly are desirable, a creased stability this year, the Committee major extension of the governmental responded by gradually placing greater regulatory apparatus does not seem necemphasis on reserve positions in conduct- essary. ing System operations, allowing money The banking industry also has been the markets to respond more sensitively to subject of considerable concern, arising changing economic circumstances. The from its well-publicized difficulties with transition back to the pre-October ap- energy, agricultural, real estate, and proach was completed in the spring. developing country loans. These problems have been highlighted by the many Other Financial Developments bank closings and the rescue by bank The collapse of equity prices last October regulators of several large banks. As a heightened public concerns about the result of large banks choosing to make volatility of stock prices and the fragility sizable increases in loan-loss reserves, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 55 profits reported by the banking industry of households and businesses - especially as a whole in 1987 were down nearly 80 about the ability of these sectors to service percent from 1986. Despite these diffi- their debts if interest rates were to rise culties, some bright spots emerged last sharply or business conditions were to year, especially the improved perfor- weaken significantly. mance of agricultural banks. It is impor- With regard to households, the rapid tant to note, however, that throughout growth of their debt during the current this period of stress in the industry, the economic expansion has outstripped that commercial banking system has contin- of disposable income. The ratio of houseued to play its crucial role as a provider of hold sector indebtedness to income is at credit to the economy. an all-time high. Recent information also The savings and loan industry contin- shows a rising level of personal bankruptues to be under financial stress. Although cies and a relatively high level of delinthe majority of savings and loans are quencies on certain types of consumer healthy and reasonably profitable, the loans. industry as a whole reported enormous Although these developments suggest losses in 1987 and in the first quarter of that debt burdens may be difficult for 1988. Roughly one-sixth of the institu- some households to manage, other evitions are insolvent when evaluated in dence indicates that most households are accordance with generally accepted ac- able to meet their debt obligations reasoncounting principles, and their aggregate ably well. The trend toward longer losses increased in 1987 and in the first repayment schedules has held down debtquarter of 1988. The prospects for the service payments. The increased use of recovery of the insolvent institutions are adjustable-rate mortgages has made the not bright, implying that the Federal financial positions of many households Savings and Loan Insurance Corporation more vulnerable to increases in interest (FSLIC) will be required either to liqui- rates; however, at the same time, deposit date them or to assist in their absorption deregulation has meant that household by stronger institutions. interest income is more responsive to The deterioration of the savings and changes in rates. Furthermore, for the loan industry has affected the financial sector as a whole, assets have risen more condition of FSLIC, whose net worth rapidly than debt, implying increases in became more deeply negative in 1987. household net worth. Indeed, survey Congress approved a plan last year information indicates that many families providing nearly $11 billion to recapital- with consumer debt have substantial ize FSLIC. This action has helped FSLIC amounts of financial assets that could be liquidate several large and especially tapped to meet debt-service obligations troubled savings and loans, but concerns in the event that incomes proved to be persist in the market that the total avail- inadequate. able new capital may fall short of that Like households, businesses have needed for FSLIC to deal fully with the added greatly to their indebtedness in problem institutions. recent years. Many companies have The difficulties of many individual dramatically increased their leverage depository institutions have been associ- through debt-financed merger, buyout, ated, in most cases, with specific types of and share retirement activity. Reflecting loans or certain regions and countries. heavier debt loads, the bite that interest However, concerns have been expressed payments take out of corporate cash flow more generally about the financial health is near historically high levels for the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

56 Monetary Policy Reports nonfinancial corporate sector as a whole. perceived as being more directly under A downturn in earnings would place the control of the Federal Reserve than serious debt-servicing strains on many are the broader aggregates. This appenindividual firms. In addition, heavy dix reviews the historical and analytical reliance on floating-rate loans and short- characteristics of the monetary base. It term debt obligations has rendered many discusses its definition, its relation to firms vulnerable to a significant rise in income and other economic variables, borrowing costs. In reflection of this and its control by the Federal Reserve. situation, downgradings of corporate debt have continued to exceed upgradings Concepts, Definitions, and Measurement by a large margin. The monetary base consists of currency Firms would not have been able to in the hands of the nonbank public and assume these greater financial exposures reserves held by depository institutions— were it not for receptive attitudes among both reserves required to be held against lenders and equity investors. Companies deposits and the additional, "excess" engaging in restructurings that have reserves that depository institutions involved the addition of massive amounts choose to hold. Because reserve requireof debt to their balance sheets have been ments are substantially higher for transrewarded with sizable runups in their actions deposits (that is, checkable deshare prices; this is reflected in the posits) than for nontransactions deposits, absence of an uptrend during the 1980s in the bulk of required reserves—about the market-value based "debt/equity" three-quarters—is related to transactions measure. Moreover, lenders are exacting deposits. In turn, transactions deposits relatively small risk premiums on debt consist primarily of demand deposits and obligations incurred by firms, as re- other checkable deposits, which are the flected, for example, in the spreads principal components of the narrow between yields on high-grade corporate monetary aggregate Ml. Thus, both bonds and Treasury securities or even through its currency component and its those for below-investment-grade "junk" reserves component, the monetary base bonds. Nonetheless, our financial history is closely related to Ml. The links provides numerous reminders of the between the monetary base and broader fragility of this type of situation: last fall, measures of money, such as M2 and M3, for example, when confidence was jolted are much looser because most savingsby the stock market break, yield spreads type instruments in these measures either widened dramatically, and the availabil- are not reservable or have a much lower ity of new credit to riskier borrowers was reserve requirement applied to them. sharply curtailed. Moreover, currency accounts for an even smaller share—on the order of 5 percent—of these aggregates. Appendix: The Monetary Base Looking at the base as currency and In recent years, the monetary base has reserves focuses on the monetary liabilireceived increased attention as the behav- ties of the Federal Reserve—frequently ior of other monetary aggregates-espe- referred to as the "uses" of the base.2 cially Ml -has diverged from historical Alternatively, the base can be measured patterns. In part, the appeal of the base from its "sources" in the Federal Reserve has resulted from the notion that it may have a reasonably stable relationship with 2. Technically, the base also encompasses a nominal spending. In addition, it is relatively small amount of U. S. Treasury liabilities. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 57 balance sheet, the assets held by the Sys- Treasury holdings of coin and curtem less its nonmonetary liabilities. The rency, and certain miscellaneous items. two concepts are identical if all compo- Implicitly, all vault cash is treated nents are measured contemporaneously. contemporaneously.4 There are two publicly available mea- The St. Louis and Board measures of sures of the monetary base. One, corre- the monetary base have moved together sponding to the uses concept, is con- over time, though the St. Louis measure structed by the Board and the other, a generally lies above the Board measure, sources concept, is produced by the Fed- reflecting differences in techniques for eral Reserve Bank of St. Louis. Besides adjustment of breaks caused by changes the difference in accounting approach, in reserve requirements. In terms of which affects the treatment of vault cash growth rates, the two series track each used to meet reserve requirements, the other closely. two measures differ in the method of Growth of the monetary base has been adjustment for changes in reserve require- much smoother on average than that of ments and in the method of seasonal the other monetary aggregates.5 In large adjustment. measure, the smooth growth of the base The Board measure constructs the base can be attributed to its large currency from the currency component of the component, which over long periods of money stock (currency held by the non- time has expanded in a relatively stable bank public) (76 percent), total reserves fashion. Between 1959 and 1987, the (lagged vault cash, up to required re- average quarter-to-quarter fluctuation of serves, plus reserve deposits at the Fed- growth in currency in circulation was eral Reserve banks) (23 percent), and a less than one-fifth of the quarterly fluctuthird component that includes current ation in growth of total reserve balances. surplus vault cash held at depository While growth in the base has been institutions plus service-related balances relatively smooth, its longer-run pattern (1 percent).3 has not differed markedly from that of The St. Louis measure, consistent with other narrow aggregates. Specifically, its sources concept, comprises Federal Reserve credit—holdings of U. S. government securities, discounts and advances, 4. There are two other differences between the Board base and the St. Louis base concerning Federal Reserve float, and other Federal seasonal adjustment and adjustments for changes in Reserve assets—plus other sources, in- reserve requirements. St. Louis seasonally adjusts cluding the gold stock, special drawing the whole base directly after adding a reserve rights and Treasury currency outstand- adjustment magnitude (RAM) to account for regulatory changes in reserve requirements as well as ing. It subtracts several categories of changes in composition of deposits. For the Board liabilities, namely, Treasury and formeasure, currency, total reserves, and the residual eign deposits at the Federal Reserve, component are seasonally adjusted separately, after applying to the reserves and residual components certain break adjustment factors, and finally the 3. "Vault cash" included in total reserves is components are summed. The Board's break adjustlagged four weeks, which reflects its use to meet ment method is intended to adjust only for regulareserve requirements."Surplus vault cash" is bank tory changes in reserve requirements. holdings of currency in excess of required reserves. 5. This and subsequent mentions of the monetary "Service-related balances" comprise other balances base refer specifically to the Board measure of the held by depository institutions at the Federal base but, in view of the close relationship between Reserve, including required clearing balances and the two measures, should apply nearly as well to the adjustments to compensate for Federal Reserve series produced by the Federal Reserve Bank of St. float. Louis. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

58 Monetary Policy Reports the velocity of the monetary base has Analysis by the Board's staff has found behaved similarly to Mi's velocity, with that the demand for the base has substana pronounced break in the 1980s from its tial interest sensitivity, mainly reflecting earlier behavior. Between 1960 and the interest sensitivity of demand de- 1980, the velocities of the base, Ml-A posits and other checkable deposits.6 This (currency plus demand deposits), and interest responsiveness, together with the Ml all rose, in part reflecting the effects drop in interest rates during the 1980s, on money demand of the generally rising helps to explain the turnaround in base trend of interest rates. Fluctuations of velocity, much as it explains the movebase velocity around its trend during the ments in the velocities of other monetary 1960s and 1970s were comparable with aggregates—especially Ml—in recent those of the other aggregates. And, in the years. However, the base probably is less 1980s, velocity of the base and Ml interest sensitive than are the other monedeclined both absolutely and relative to tary aggregates, because of the importhe earlier trend as deregulation and tance of the currency component, which falling market interest rates encouraged a does not respond very much to changes in large volume of funds to move into interest rates. This implies that efforts to transaction deposits. control the base to predetermined target Statistical methods of relating growth ranges could involve very wide swings in in income to past growth rates in the base interest rates. Whether those fluctuations produce results that echo this pattern of would be beneficial to the economy depends in part on the stability of the velocity behavior. When these relationdemand relationship. If the demand for ships are estimated using data through the base is relatively stable, the interest 1980, they make substantial errors in rate movements would tend to stabilize predicting nominal GNP in subsequent GNP in the face of disturbances to years, much as do equations involving spending. But if base demand tends to other aggregates—especially the narrow move unpredictably, the interest rate aggregates. Techniques that allow for a movements associated with controlling break in behavior in the early 1980s make the base would tend to destabilize GNP. somewhat smaller but still large errors in the 1980s and leave unanswered ques- Over long periods of time, the demand tions about the potential for additional for the base appears to be fairly predictshifts in the relationships. able, especially compared with Ml-A An examination of the demand proper- and Ml. Movements in transactions deties of the base can shed light on the posits, especially demand deposits, often determinants of the behavior of its veloc- have been somewhat erratic, tending to ity and the errors made in predicting loosen the relationships of Ml-A and Ml GNP. The demand for the base is derived with GNP, but their effects on base from demands for its components, cur- demand are muted by the fractional rency and reserves. The demand for nature of reserve requirements. Another reserves, in turn, depends on demands for excess reserves and for reservable 6. An estimated demand equation for the base deposits—primarily the transactions de- was derived from the Board staffs standard models posits that are included in Ml but also of demand for currency and demand for required some that are not in that aggregate, reserves on transactions accounts in Ml only. Demands for other components of reserves were such as interbank and U.S. government not explicitly modeled, as the effects of these deposits and certain time and savings components on required reserves are relatively deposits. small. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 59 factor contributing to the relative stability base to accommodate its demand. This of the demand for the base is that has been a consistent policy with regard unpredictable movements in transaction to demands for currency. With respect to deposits at times have tended to offset reserves, the interactions have been more unexplained changes in currency, per- complex. Except in the early 1980s, haps owing to substitution between cur- reactions to deviations of reserves from rency and demand deposits. However, expectations have been quite indirect. there is considerable variability in the Any increases or decreases in the demand relationship of the base to income and for reserves have been completely accomother variables over periods of a year or modated in the short-run. However, over less—and evidence suggests that at least time persistent deviations in money (and over these shorter periods it is no more implicitly reserves) from objectives have stable than M2. prompted adjustments in monetary policy In considering the past and prospective when those deviations were judged likely degree of stability of demand for the to be associated with unwelcome develbase, attention must be directed to its opments in the economy. largest component, currency. Analysts Even in the period from late 1979 have noted the extraordinarily large through late 1982, when the Federal volume of dollar currency outstanding Reserve used nonborrowed reserves as relative to measured U.S. economic an operating target to achieve goals for activity or the number of households. money growth over time, total reserves Although available data are inadequate to were not closely controlled because determine even approximate magnitudes, borrowed reserves adjusted in response it seems likely that a substantial part of to deviations in money growth from U.S. currency is being employed in objectives. support of activity that is not reflected in Because of the remaining two-day lag U.S. GNP—in particular, activity outside between the ends of the reserve computaour borders. Especially to the extent this tion and reserve maintenance periods, activity and the currency to support it control of total reserves or the monetary move independently of U.S. GNP, this base would need to be indirect, working would tend to reduce the usefulness of the through the effects of changes in interest base as an indicator or target. rates on the demand for the components Not only is it difficult to account fully of the base in the short run. In this for the level of currency outstanding, but respect, control of the base is achieved in growth occasionally has been at variance the same way as for the broader aggrewith expectations, despite the relatively gates. It is likely that the base, or for that stable long-run relationship with mea- matter any of the broader aggregates, sured income. For example, in the past could be controlled reasonably well over year and a half, growth of currency has a span of several quarters—a period that been roughly twice as rapid as would be would be meaningful in terms of the expected on the basis of historical expe- effects of monetary policy. However, the rience, judging by the Board staffs degree of interest rate volatility under quarterly econometric model, with no base targeting could be quite substantial, obvious explanation for the strength. especially in the short to intermediate run. Changes in the quantity of the base Controllability of the Monetary Base demanded that caused the base to deviate For the most part, the Federal Reserve from its target would need to be offset in historically has supplied the monetary the short run mainly by changes in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

60 Monetary Policy Reports reserves (given the low interest sensitivity of currency demand), which would have multiple effects on the quantity of money. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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

63 Record of Policy Actions of the Board of Governors Regulation C and home purchase will include loans (Home Mortgage Disclosure) related to mobile and manufactured homes. August 3, 1988—Revision and Adoption of New Reporting Forms Regulation D The Board revised Regulation C to imple- (Reserve Requirements ment recent amendments to the Home of Depository Institutions) Mortgage Disclosure Act and to clarify the regulatory language. November 29, 1988 - Amendments The Board amended Regulation D to Votes for this action: Messrs. Greenspan and Johnson, Ms. Seger, and Messrs. increase the amount of transaction Angell, Heller, and Kelley.1 balances to which the lower reserve requirement applies and to increase the Early this year, the Congress amended amount of reservable liabilities subject the Home Mortgage Disclosure Act of to a zero percent reserve requirement. 1975, expanded its coverage, and made it permanent. The act requires institutions Votes for these actions: Messrs. Greenspan and Johnson, Ms. Seger, and Messrs. that have more than $10 million in assets Angell, Heller, Kelley, and LaWare. and that operate in a metropolitan statistical area to disclose annually certain Under the Monetary Control Act of detailed information about their home 1980, depository institutions, Edge and mortgage lending. The recent amendagreement corporations, and U.S. ments expanded the coverage of the act to agencies and branches of foreign banks include savings and loan service corporaare subject to reserve requirements set tions and mortgage banking subsidiaries by the Board. Initially, the Board set of bank and savings and loan holding reserve requirements at 3 percent of an companies. Accordingly, the Board reinstitution's first $25 million in transvised the implementing regulation and action balances, and 12 percent on the related reporting forms and instrucbalances above that level. The act directs tions and clarified the language of the the Board to adjust the amount subject to regulation. the lower reserve requirement annually The revisions were effective Septemto reflect changes in transaction balances ber 19,1988, except that after January 1, nationwide. By the beginning of 1988, 1989, the provisions governing the defithis amount was $40.5 million. Recent nition of loans for home improvement growth in such balances warranted an increase of $1 million. The Board, therefore, amended Regulation D to increase to $41.5 million the amount of 1. On this and subsequent pages, footnote 1 transaction account balances to which indicates there was a vacancy on the Board when the lower reserve requirement applies. this action was taken. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

64 Board Policy Actions The Garn-St Germain Depository the swap must be held by the holding Institutions Act of 1982 established a company or a subsidiary and not by the zero percent reserve requirement on the bank; and (4) the shares must be divested first $2 million of an institution's reserv- within five years after the acquisition, able liabilities. It also provided for annual unless the Board grants an extension for adjustments to that exemption based on up to five additional years. deposit growth nationwide. Recent The Board decided to amend the regugrowth in deposits warranted an increase lation further to provide additional flexifrom $3.2 million to $3.4 million in the bility in making debt-equity investments. amount subject to a zero percent reserve Under the new rules, the investment must requirement, and the Board amended be made by the holding company or its Regulation D accordingly. subsidiary, and not by the bank. The The amendments are effective begin- other conditions are as follows: (1) A ning December 20, 1988. U.S. holding company may acquire up to 40 percent of the equity, including voting shares, of a privately owned company. If Regulation K (International the organization acquires more than 25 Banking Operations) percent, there must be another investor holding a larger block of shares. (2) A February 3, 1988—Amendment holding company that holds more than 20 The Board amended Regulation K, effec- percent of a company's equity may not tive February 24, 1988, to liberalize the finance more than one-half of the comconditions under which bank holding pany's borrowing needs. (3) The organicompanies may make debt-for-equity zation may hold the investment for the swaps. lesser of 15 years or up to 2 years after the country cancels restrictions on the repa- Votes for this action: Messrs. Greenspan triation of investments. This divestiture and Johnson, Ms. Seger, and Messrs. period also applies to investments made Angell, Heller, and Kelley. (Governor under the earlier amendment. Angell abstained from voting on the review of general consent limits.)l The Board also revised its general consent procedures for foreign invest- In August 1987 the Board amended ments made under debt-equity swaps. Regulation K to permit U.S. banking Under the regulation's general consent organizations to make certain invest- rules, a bank holding company may ments abroad using debt-for-equity invest up to $15 million in a company, or swaps. (Swaps are useful primarily in a 5 percent of the capital and surplus of the country that has restricted or prohibited company, whichever is smaller, without foreign creditors from expatriating its first seeking Board approval. For larger currency.) That amendment allowed a investments, a bank must notify the Board U.S. bank holding company to acquire of its intentions and may proceed with the up to 100 percent of the shares of a acquisition if the Board has not indicated nonfinancial company in a swap, pro- its disapproval within 45 days. A majority vided the following conditions were met: of Board members believed that a more (1) the company must be in the process of liberal general consent provision was being transferred from public to private appropriate, and they agreed, Governor ownership; (2) the company must be Angell abstaining, to establish the cutoff located in a country that is heavily for making investments under this amendindebted; (3) the shares acquired through ment without Board approval at $15 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 65 million or 1 percent of the investing The Competitive Equality Banking organization's equity capital, whichever Act, which revised the definition of is greater. "bank" in the Bank Holding Company Act to include any institution whose deposits are insured by the Federal Deposit Regulation T Insurance Corporation, precludes the (Credit by Brokers and Dealers) formation of new FDIC-insured nonbank banks. The act permits a nonbanking August 10, 1988—Amendments company that controlled a nonbank bank on March 5, 1987, to retain it, without The Board amended Regulation T, effecbeing treated as a bank holding company, tive September 15,1988, to make certain provided certain conditions are met. foreign debt securities eligible for margin Those conditions generally restrict the credit. ability of nonbank banks: to commence new activities or engage in new cross- Votes for this action: Messrs. Greenspan marketing activities with affiliates after and Johnson, Ms. Seger, and Messrs. Angell, Heller, and Kelley.'l March 5, 1987; to permit overdrafts by or incur overdrafts for affiliates at a The Board revised the definition in Reserve Bank; or to expand their assets Regulation T of over-the-counter margin by more than 7 percent during any 12bonds to include long-term nonconvert- month period after August 10,1988. The ible debt securities issued by foreign act also prohibits the parent company governments or supranational entities. from acquiring more than 5 percent of an The amendment allows brokers and additional bank after the 1987 cutoff date. dealers to extend margin credit on longterm debt securities issued or guaranteed as a general obligation by a foreign Regulation CC (Availability of sovereign, its entities, or a supranational Funds and Collection of Checks) organization, if there is available for the obligation an explicit or implicit rating, May 11, 1988-Adoption in one of the two highest categories, by a nationally recognized statistical rating The Board adopted Regulation CC, effecservice. tive September 1, 1988, to carry out the requirements of the Expedited Funds Availability Act of 1987. Regulation Y Votes for this action: Messrs. Greenspan, (Bank Holding Companies and Johnson, Angell, and Kelley. Votes against Change in Bank Control) this action: Ms. Seger and Mr. Heller.1 September 6, 1988—Amendments The act and the regulation impose new requirements for more prompt process- The Board amended Regulation Y to ing of checks. Banks and other depository implement the Competitive Equality institutions now must make funds depos- Banking Act of 1987. ited in transaction accounts available on a specified schedule; disclose their avail- Votes for this action: Messrs. Greenspan ability schedules to customers; and and Johnson, Ms. Seger, and Messrs. Angell, Heller, and Kelley. Absent and not promptly pay interest on funds deposited voting: Mr. La Ware. in accounts. In general, banks must make Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

66 Board Policy Actions funds available for withdrawal within some consumers might even be adversely three business days of deposit, if the affected by the new rules. check is deposited in a local bank. (A depository bank is determined to be local if it is located in the same Federal Reserve August 10, 1988-Interim rules check processing region as the paying October 19, 1988-Final rules bank.) Proceeds from nonlocal checks must be made available within seven The Board adopted interim rules for business days of deposit. In addition, Regulation CC to implement a recent certain types of checks, such as Treasury court ruling relating to payable-through checks, state and local government checks. checks, and cashier's checks, must be Votes for this action: Messrs. Greenspan available for withdrawal the next busiand Johnson, Ms. Seger, and Messrs. ness day after deposit. Under certain Angell and Kelley. Vote against this action: exceptions specified in the regulation, a Mr. Heller.1 bank is permitted to place longer holds on a check. The Board amended Regulation CC to The regulation also includes rules to adopt the rules in final form. expedite the collection and return of Votes for this action: Mr. Greenspan, Ms. checks by requiring paying banks to Seger, and Messrs. Angell, Heller, Kelley, return checks promptly, by authorizing and LaWare. Votes against: None. Absent direct returns, and by expanding the and not voting: Mr. Johnson. requirements governing notices of nonpayment of checks written for In May the Board adopted Regulation amounts above $2,500. The rules CC, effective September 1, 1988, to requiring the prompt collection of implement the Expedited Funds Availchecks will help reduce the risk that ability Act. One provision of the regulabanks might incur when making funds tion had held that a bank check or credit available within the schedules mandated union share draft written on an account at by the regulation. one institution but payable through an- In addition to rules regarding the other institution would be considered availability of funds and the return of local or nonlocal depending on the locachecks, the regulation also includes tion of the institution through which the endorsement standards that allow banks check would be paid. A court decision in to identify more easily the depository July, however, found that that provision banks to which returned checks or notices was inconsistent with the definition of of nonpayment should be sent. originating depository institution in the Governors Seger and Heller opposed act. The court ruled that the location of adoption of the regulation because they the institution on which the check was believed it was too burdensome relative written—and not the bank through which to the benefit that consumers would the check would be paid-should deterderive from it. Governor Seger was mine whether an item was local or concerned about the regulatory burden nonlocal. on smaller institutions. Governor Heller Because the regulation would become believed that the burden of the rulemak- effective shortly after the court's ruling, ing was excessive relative to the benefits the Board adopted interim amendments that consumers would derive. He thought in August to comply with the ruling and that the benefits would be small and that at the same time sought public comment Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 67 on the amendments. The interim amend- erations in selecting a securities dealer ments revised several definitions, and and indicates that management should also required certain banks and credit evaluate the condition of securities firms unions to amend their disclosure state- with which they do business. The statements. Governor Heller dissented from ment also describes several types of this action, for the same reason he had securities with volatile prices and highdissented when the Board adopted Regu- risk characteristics that might be unsuitlation CC, because he believed the regu- able for an institution's investment portlatory burden imposed was excessive folio, especially if those securities are relative to the benefit consumers would held in significant amounts. derive. In October, the Board amended the regulation to adopt the rules in final form, December 16, 1988-Risk-Based with certain technical revisions. In addi- Capital Standards and tion, based on comments received on the Implementation Guidelines for U.S. interim rules, the Board sought comment Banks and Bank Holding Companies on further refinements to the regulation that would ease possible operational The Board adopted a new framework for difficulties and reduce the risks resulting the assessment of capital adequacy and from the revised rule. issued guidelines for the application of its standards to U.S. banking organizations. Votes for this action: Messrs. Greenspan, Policy Statements Johnson, Angell, Heller, Kelley, and La Ware. Votes against this action: None. April 20, 1988-The Selection of Absent and not voting: Ms. Seger. Securities Dealers and Unsuitable Investment Practices In late 1987, U.S. bank regulators began working with bank supervisors The Board issued a supervisory policy abroad to develop a new framework for statement, effective immediately, re- assessing bank capital. U.S. regulators garding a bank's selection of securities and supervisors in eleven other industridealers and the investment practices alized countries were seeking a uniform considered inappropriate for its invest- capital standard that not only would ment portfolio. permit comparisons among banking organizations from different countries but Votes for this action: Mr. Greenspan, Ms. also would be more sensitive to risk Seger, and Messrs. Angell, Heller, and Kelley. Absent and not voting: Mr. factors, including off-balance-sheet risk Johnson.1 exposures. After many months of deliberations, the supervisors developed a The Federal Financial Institutions Ex- framework that will permit greater comamination Council had recommended parability in the measurement and assessthat the member agencies issue a joint ment of capital internationally. Also, it policy statement to advise depository will reduce competitive inequities that institutions of trading practices that are arise from differences in supervisory considered inappropriate when used for treatment among nations. the purchase and sale of securities held in The new capital framework provides a an institution's investment portfolio. The common definition of the core capital statement advises institutions of consid- elements that constitute tier I capital, as Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

68 Board Policy Actions well as certain other supplementary During the year the Board also voted at capital elements that constitute tier II. In four meetings to disapprove requests for addition, the risks associated with partic- increases or decreases submitted by ular types of assets and off-balance-sheet individual Federal Reserve Banks. In items (which are converted into balance April, the Board decided not to renew its sheet equivalents) are factored into the temporary, simplified seasonal credit capital framework by assigning such program. claims to one of five broad risk categories The reasons for the Board's decisions that have weights ranging from zero to are reviewed below. Those decisions 100 percent. The new standards encour- were made in the context of the policy age banking organizations that do busi- actions of the Federal Open Market ness internationally to strengthen their Committee and the related economic and capital positions. financial developments that are covered Banking organizations having capital in more detail elsewhere in this REPORT. ratios below the minimum established by A listing of the Board's actions on the the new framework are encouraged to discount rate during 1988, including the strengthen their capital positions as soon votes on those actions, follows this as possible. The three U.S. bank regula- review. tors expect to begin applying the capital framework in mid-March 1989. The Actions on the Basic Discount Rate transitional minimum standards for all U.S. banks and bank holding companies During the first three months of the year, will become effective at the end of 1990, the Board discussed but took no action on and final standards will take effect at the a request, renewed biweekly, from one end of 1992. Federal Reserve Bank to reduce the basic Governor Seger, who was absent when discount rate by Vi percentage point; the the standards were adopted, had indicated proposed reduction was lowered to lA her opposition to the framework during percentage point late in the first quarter. an earlier discussion of risk-based capi- Some easing of reserve conditions had tal. Governor Seger opposed the stan- been sought through open market operadards primarily because of the credit tions in late January and early February, allocation aspects of the risk weights but the Board felt that business and assigned to the various categories of financial developments did not warrant assets and the capital requirements for an accompanying reduction in the discertain activities. Also, because of the count rate. Later in the quarter indicaexpediency of developing an interna- tions of a stronger economic expansion tional standard, she feared that the conse- than was anticipated earlier in conjuncquences of assigning those assets to tion with faster growth of the monetary particular risk categories might not have aggregates reinforced the Board's view been assessed sufficiently. In addition, that the discount rate should not be she did not think the standards should be reduced. applied to bank holding companies. On April 4 the Board turned down the still pending request to reduce the discount rate by lA percentage point. This 1988 Discount Rates action followed a decision in late March The Board approved one change in the by the Federal Open Market Committee basic discount rate during 1988, an to increase slightly the degree of pressure increase in August from 6 to 6V2 percent. on reserve positions because of growing Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 69 concerns that the expansion might gather rates that had occurred over the course of excessive and inflationary momentum. recent months and the resulting increase During the latter part of April, the Board in the spread between such rates and the discussed but took no action on requests discount rate. An increase in the discount from two Federal Reserve Banks calling rate was expected to result in firmer respectively for an increase and for a conditions in money markets without decrease of lA percentage point in the widening the spread further. basic discount rate. Subsequently, on September 6 and In May and June a growing number of October 17, the Board disapproved re- Federal Reserve Banks submitted re- quests from one Federal Reserve Bank to quests for increases of W or Vi percentage raise the discount rate by a further Vi point in the basic rate. The proposed percentage point. In the Board's view, increases were seen by the Banks as a the increasing degree of monetary redesirable complement to the gradual straint that had been implemented since tightening of monetary policy that had early spring and some recent indications been implemented through open market that the rate of economic growth might be operations since late March. On July 5 slowing argued against approval of the the Board disapproved pending requests proposed increase, pending an evaluation from seven Banks to raise the basic rate of farther economic developments. by Vi percentage point. In the Board's Toward the end of the year, incoming judgment, current economic and finan- information suggested that the economic cial developments, including upward expansion retained considerable momenpressures on the dollar in foreign ex- tum and that inflationary pressures rechange markets, argued on balance mained substantial. Indeed, the risks against a near-term increase in the dis- appeared to have increased that such count rate. The Board recognized that pressures would intensify in the absence prospective developments might call for of farther monetary tightening. Against a higher rate subsequently, but felt that this background, the Federal Open Mardenying rather than taking no action on ket Committee adjusted its operations the pending increases would serve the toward a greater degree of reserve presusefal purpose of communicating the sure in late fall and a growing number of Board's current thinking to the Federal Federal Reserve Banks, totaling seven by Reserve Banks. the second half of December, proposed On August 9 the Board approved an increases of Vi percentage point—or in increase of Vi percentage point in the one case a fall percentage point—in the basic discount rate to a level of 6V2 basic discount rate. percent. Recent economic statistics, no- The Board reviewed but took no action tably on the employment situation in on the proposed increases. In the Board's July, suggested a stronger economy than view, economic and financial developpreviously appeared to be evolving. In ments might warrant a higher discount these circumstances the Board concluded rate later, but an immediate increase that an increase in the discount rate would could have unintended repercussions usefully complement earlier moves to under prevailing conditions in domestic tighten monetary policy through open and international financial markets. In market operations in order to reduce particular, it might convey a misleading inflationary pressures. In reaching its impression of the extent of the System's decision the Board also took into account policy tightening intentions and generate the substantial rise in short-term interest an undesired degree of upward pressure Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

70 Board Policy Actions on domestic interest rates and on the liquidity pressure and that are not able to value of the dollar in foreign exchange secure similar credit on reasonable terms markets. from other sources. The flexible rate is related to market rates and is adjusted periodically, subject to Board approval. Termination of Temporary Seasonal At the discretion of the lending Federal Credit Program Reserve Bank, the first 30 days of bor- On April 4, 1988, the Board decided to rowing on extended credit may be at the discontinue its temporary seasonal credit basic rate, but any further borrowings program. This program was originally are charged the higher flexible rate. The approved and implemented in 1985, highest rate applicable to any credit when financial conditions in the agricul- extended to a depository institution will tural sector were deteriorating substan- be charged on exceptionally large tially, and renewed for each of the adjustment-credit loans that arise from following two years. Its purpose was to computer breakdowns or other operating make funds available at the discount problems, unless the operating problem window to agricultural banks that were clearly is beyond the reasonable control experiencing exceptionally strong loan of the borrowing institution; under the demands in those unusual circumstances. current rate structure that rate is the The program was designed to comple- flexible rate. ment the longstanding regular seasonal As of December 31, 1988, the struccredit program and thereby to help ensure ture of discount rates was as follows: a that small- and medium-size banks did basic rate of 6Vi percent for short-term not face liquidity constraints in their adjustment credit and for credit under the efforts to accommodate their farm bor- seasonal program, and a flexible rate of rowers over the planting and production 9.55 percent. During 1988 the flexible cycle. The Board agreed not to renew the rate ranged from a low of 7.10 percent program in light of the improved outlook early in the year to a high of 9.55 percent for the agricultural sector and the rela- at year-end. tively small use of the program. Board Votes Structure of Discount Rates The basic discount rate is the rate charged Under the provisions of the Federal on loans to depository institutions for Reserve Act, the boards of directors of short-term adjustment credit. The basic Federal Reserve Banks are required to rate also applies to the seasonal credit establish rates on loans to depository program; under that program, credit may institutions at least every 14 days and to be provided for periods longer than those submit such rates to the Board of Goverpermitted under adjustment credit to nors for review and determination. Reassist smaller institutions in meeting serve Bank actions on the discount rate regular needs arising from certain sea- include requests to renew the formula for sonal movements in their deposits and calculating the flexible rate on extended loans. credit. The Board votes listed below are A higher, flexible rate may be charged those that involved changes in the basic on loans made over extended periods for discount rate and termination of the other than seasonal purposes to deposi- temporary simplified seasonal credit tory institutions that are under sustained program. Votes relating to the reestab- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 71 lishment of existing rates or the updating September 6 1988. The Board disapy of market-related rates under the ex- proved an action taken by the directors of tended credit program are not shown. All the Federal Reserve Bank of Cleveland votes during 1988 were unanimous. on August 25 to increase the basic discount rate from 6x/2 to 7 percent. Votes on the Basic Discount Rate Votes for this action: Messrs. Greenspan April 4,1988. The Board disapproved and Johnson, Ms. Seger, and Messrs. an action taken by the directors of the Angell, Heller, and Kelley. Absent and not Federal Reserve Bank of Dallas on March voting: Mr. La Ware. 24 to reduce the basic discount rate from 6 to 5% percent. October 17, 1988. The Board disapproved an action taken by the directors of Votes for this action: Messrs. Greenspan the Federal Reserve Bank of Cleveland and Johnson, Ms. Seger, and Messrs. on October 13 to increase the basic Angell, Heller, and Kelley.1 discount rate from 6Vi to 7 percent. July 5, 1988. The Board disapproved Votes for this action: Messrs. Greenspan actions taken on the following dates by and Johnson, Ms. Seger, and Messrs. the directors of the following Federal Angell, Heller, Kelley, and LaWare. Reserve Banks to increase the basic Vote on the Temporary Seasonal discount rate from 6 to 6*/2 percent: Credit Program Philadelphia, Cleveland, Richmond, Chi- On April 4, 1988, the Board voted to cago, and St. Louis on June 23; Atlanta terminate the temporary, simplified seaon June 24; and New York on June 30. sonal credit program for small and medium-size banks that lend to agricul- Votes for this action: Mr. Greenspan, Ms. Seger, and Messrs. Angell and Heller. tural borrowers. Absent and not voting: Messrs. Johnson and Kelley.1 Votes for this action: Messrs. Greenspan and Johnson, Ms. Seger, and Messrs. Angell, Heller, and Kelley.l August 9, 1988. Effective August 9, 1988, the Board approved actions taken by the directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, St. Louis, Minneapolis, Kansas City, and San Francisco to increase the basic discount rate from 6 to 6^2 percent. Votes for this action: Messrs. Greenspan and Johnson, Ms. Seger, and Messrs. Angell, Heller, and Kelley.l The Board subsequently approved similar actions taken by the directors of the Federal Reserve Bank of Chicago, effective August 10, and by the directors of the Federal Reserve Bank of Dallas, effective August 11, 1988. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

73 Record of Policy Actions of the Federal Open Market Committee The record of policy actions of the Fed- operations in the open market that were eral Open Market Committee is presented called for to implement the general in the ANNUAL REPORT of the Board of policy. Governors pursuant to the requirements During 1988 the policy record for each of section 10 of the Federal Reserve Act. meeting was released a few days after the That section provides that the Board shall next regularly scheduled meeting and keep a complete record of the actions was subsequently published in the Fedtaken by the Board and by the Federal eral Reserve Bulletin. Open Market Committee on all questions Policy directives of the Federal Open of policy relating to open market opera- Market Committee are issued to the Fedtions, that it shall record therein the votes eral Reserve Bank of New York as the taken in connection with the determina- Bank selected by the Committee to exetion of open market policies and the cute transactions for the System Open reasons underlying each such action, and Market Account. In the area of domestic that it shall include in its ANNUAL REPORT open market activities, the Federal Reto the Congress a full account of such serve Bank of New York operates under 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 Domestic Open Market Operations and a meetings of the Federal Open Market Domestic Policy Directive. (A new Do- Committee held during the calendar year mestic Policy Directive is adopted at 1988, including the votes on the policy each regularly scheduled meeting.) In the decisions made at those meetings as well foreign currency area, the Committee as a resume of the basis for the decisions. operates under an Authorization for For- The summary descriptions of economic eign Currency Operations and a Foreign and financial conditions are based on the Currency Directive. These four instruinformation that was available to the ments are shown below in the form in Committee at the time of the meetings, which they were in effect at the beginning rather than on data as they may have been of 1988. Changes in the instruments revised later. during the year are reported in the records It will be noted from the record of for the individual meetings. policy actions that in some cases the decisions were made by unanimous vote and that in other cases dissents were Authorization for Domestic recorded. The fact that a decision in Open Market Operations favor of a general policy was by a large majority, or even that it was by unani- In Effect January 1, 1988 mous vote, does not necessarily mean that all members of the Committee were 1. The Federal Open Market Committee equally agreed as to the reasons for the authorizes and directs the Federal Reserve particular decision or as to the precise Bank of New York, to the extent necessary to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

74 FOMC Policy Actions carry out the most recent domestic policy underlying goods; provided that the aggregate directive adopted at a meeting of the amount of bankers acceptances held at any Committee: one time shall not exceed $100 million; (a) To buy or sell U.S. Government (c) To buy U.S. Government securities, securities, including securities of the Federal obligations that are direct obligations of, or Financing Bank, and securities that are direct fully guaranteed as to principal and interest obligations of, or fully guaranteed as to by, any agency of the United States, and principal and interest by, any agency of the prime bankers acceptances of the types autho- United States in the open market, from or to rized for purchase under l(b) above, from securities dealers and foreign and interna- dealers for the account of the Federal Reserve tional accounts maintained at the Federal Bank of New York under agreements for Reserve Bank of New York, on a cash, repurchase of such securities, obligations, or regular, or deferred delivery basis, for the acceptances in 15 calendar days or less, at System Open Market Account at market rates that, unless otherwise expressly authoprices, and, for such Account, to exchange rized by the Committee, shall be determined maturing U.S. Government and Federal by competitive bidding, after applying reasonagency securities with the Treasury or the able limitations on the volume of agreements individual agencies or to allow them to mature with individual dealers; provided that in the without replacement; provided that the aggre- event Government securities or agency issues gate amount of U. S. Government and Federal covered by any such agreement are not agency securities held in such Account (in- repurchased by the dealer pursuant to the cluding forward commitments) at the close of agreement or a renewal thereof, they shall be business on the day of a meeting of the sold in the market or transferred to the System Committee at which action is taken with Open Market Account; and provided further respect to a domestic policy directive shall not that in the event bankers acceptances covered be increased or decreased by more than $6.0 by any such agreement are not repurchased by billion during the period commencing with the seller, they shall continue to be held by the the opening of business on the day following Federal Reserve Bank or shall be sold in the such meeting and ending with the close of open market. business on the day of the next such meeting;l 2. In order to ensure the effective conduct (b) When appropriate, to buy or sell in of open market operations, the Federal Open the open market, from or to acceptance Market Committee authorizes and directs the dealers and foreign accounts maintained at Federal Reserve Banks to lend U.S. Governthe Federal Reserve Bank of New York, on a ment securities held in the System Open cash, regular, or deferred delivery basis, for Market Account to Government securities the account of the Federal Reserve Bank of dealers and to banks participating in Govern- New York at market discount rates, prime ment securities clearing arrangements conbankers acceptances with maturities of up to ducted through a Federal Reserve Bank, under nine months at the time of acceptance that (1) such instructions as the Committee may arise out of the current shipment of goods specify from time to time. between countries or within the United States, 3. In order to ensure the effective conduct or (2) arise out of the storage within the of open market operations, while assisting in United States of goods under contract of sale the provision of short-term investments for or expected to move into the channels of trade foreign and international accounts maintained within a reasonable time and that are secured at the Federal Reserve Bank of New York, the throughout their life by a warehouse receipt Federal Open Market Committee authorizes or similar document conveying title to the and directs the Federal Reserve Bank of New York (a) for System Open Market Account, to sell U.S. Government securities to such for- 1. Pursuant to an action taken by the Committee eign and international accounts on the bases at its meeting on Dec. 15-16, 1987, the limit on set forth in paragraph l(a) under agreements changes between Committee meetings in System providing for the resale by such accounts of Account holdings of U.S. government and federal those securities within 15 calendar days on agency securities was set at $9.0 billion for the terms comparable to those available on such period through the close of business on Feb. 10, transactions in the market; and (b) for New 1988, at which time the limit reverted to $6.0 York Bank account, when appropriate, to billion. undertake with dealers, subject to the condi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 75 tions imposed on purchases and sales of the period since the previous Committee securities in paragraph l(c), repurchase meeting on November 3. On balance, share agreements in U.S. Government and agency prices fell somewhat further in this period. securities, and to arrange corresponding sale Changes in long-term yields were mixed while and repurchase agreements between its own short-term interest rates rose, especially on account and foreign and international ac- short-maturity private market instruments. counts maintained at the Bank. Transactions The trade-weighted foreign exchange value undertaken with such accounts under the of the dollar in terms of the other G-10 provisions of this paragraph may provide for currencies declined considerably further. a service fee when appropriate. The monetary aggregates weakened in November after strengthening in October in conjunction with a temporary surge in de- Domestic Policy Directive mands for transaction balances and other liquid assets in the latter part of that month. In Effect January 1, 19882 For 1987 through November, expansion of M2 fell somewhat further below the lower The economic information reviewed at this end of the range established by the Committee meeting largely reflected the influence of for the year, while growth of M3 remained developments that were under way before the around the lower end of its range. Growth of financial disturbances of mid-October. The Ml was close to that of nominal GNP for the extent to which those disturbances would year to date and expansion in total domestic affect the economy remained uncertain. nonfinancial debt remained well within the Information available for the current quarter Committee's monitoring range for the year. suggested that the expansion in economic The Federal Open Market Committee seeks activity was moderating from a brisk pace in monetary and financial conditions that will the third quarter. Total nonfarm payroll foster reasonable price stability over time, employment rose strongly further over promote growth in output on a sustainable October and November, with the manu- basis, and contribute to an improved pattern facturing sector recording relatively large of international transactions. In furtherance gains. The civilian unemployment rate, at of these objectives, the Committee agreed at 5.9 percent in November, remained close to its meeting in July to reaffirm the ranges its level since mid-year. Industrial established in February for growth of 5 Vi to production also increased considerably 8V2 percent for both M2 and M3 measured further over October and November, from the fourth quarter of 1986 to the fourth following sizable advances since late spring. quarter of 1987. The Committee agreed that Retail sales edged up in November after two growth in these aggregates around the lower months of substantial declines. Recent ends of their ranges might be appropriate in indicators of business capital spending light of developments with respect to velocity suggested modest further growth after a and signs of the potential for some strengthensurge in the third quarter. Housing starts rose ing in underlying inflationary pressures, somewhat in November, after slowing in provided that economic activity was expand- October, but were little changed from the ing at an acceptable pace. The monitoring average pace in the second and third range for growth in total domestic nonfinanquarters. The nominal U.S. merchandise cial debt set in February for the year was left trade deficit in October appeared to have unchanged at 8 to 11 percent. deteriorated substantially from the average For 1988, the Committee agreed in July on rate in the third quarter. The rise in broad tentative ranges of monetary growth, meameasures of prices and wages in recent sured from the fourth quarter of 1987 to the months generally has been close to that fourth quarter of 1988, of 5 to 8 percent for experienced earlier in the year. both M2 and M3. The Committee provision- Financial markets remained somewhat ally set the associated range for growth in total unsettled. Stock and bond prices continued to domestic nonfinancial debt at IVi to lO fluctuate over a relatively wide range during percent. With respect to Ml, the Committee recognized that, based on experience, the 2. Adopted by the Committee at its meeting on behavior of that aggregate must be judged Dec. 15-16, 1987. in the light of other evidence relating to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76 FOMC Policy Actions economic activity and prices; fluctuations in At the conclusion of a telephone meet- Ml have become much more sensitive in ing on January 5, 1988, the Committee recent years to changes in interest rates, voted to change the operational paraamong other factors. Because of this graph of its directive to read as follows: sensitivity, which had been reflected in a sharp slowing of the decline in Ml velocity over the first half of the year, the Committee In the implementation of policy for the again decided at the July meeting not to immediate future, the Committee seeks to establish a specific target for growth in Ml maintain the existing degree of pressure on over the remainder of 1987 and no tentative reserve positions. The Committee agrees that range was set for 1988. The appropriateness the passing of time and the year-end should of changes in Ml this year would continue to permit further progress toward restoring a be evaluated in the light of the behavior of its normal approach to open market operations, velocity, developments in the economy and although still sensitive conditions in financial financial markets, and the nature of emerging markets and uncertainties in the economic price pressures. The Committee welcomed outlook may continue to call for some substantially slower growth of Ml in 1987 flexibility in operations. Taking account of than in 1986 in the context of continuing conditions in financial markets, somewhat economic expansion and some evidence of lesser reserve restraint or somewhat greater greater inflationary pressures. The Com- reserve restraint would be acceptable mittee indicated in July that in reaching depending on the strength of the business operational decisions over the balance of the expansion, indications of inflationary year it would take account of growth in Ml pressures, developments in foreign exchange in the light of circumstances then prevailing. markets, as well as the behavior of the The issues involved with establishing a target monetary aggregates. The contemplated for Ml will be carefully reappraised at the reserve conditions are expected to be beginning of 1988. consistent with growth in M2 and M3 over the period from November through March at In the implementation of policy for the annual rates of about 5 percent and 6 percent, immediate future, the Committee seeks to respectively. Over the same period, growth maintain the existing degree of pressure on in Ml is expected to remain relatively reserve positions. The Committee recognizes limited. The Chairman may call for that still sensitive conditions in financial Committee consultation if it appears to the markets and uncertainties in the economic Manager for Domestic Operations that outlook may continue to call for a special reserve conditions during the period before degree of flexibility in open market the next meeting are likely to be associated operations. Taking account of conditions in with a federal funds rate persistently outside financial markets, somewhat lesser reserve a range of 4 to 8 percent. restraint or somewhat greater reserve restraint would be acceptable depending on the strength of the business expansion, indications of inflationary pressures, Authorization for Foreign developments in foreign exchange markets, as well as the behavior of the monetary Currency Operations aggregates. The contemplated reserve conditions are expected to be consistent with In Effect January 1, 1988 growth in M2 and M3 over the period from November through March at annual rates of 1. The Federal Open Market Committee about 5 percent and 6 percent, respectively. authorizes and directs the Federal Reserve Over the same period, growth in Ml is Bank of New York, for System Open Market expected to remain relatively limited. The Account, to the extent necessary to carry out Chairman may call for Committee con- the Committee's foreign currency directive sultation if it appears to the Manager for and express authorizations by the Committee Domestic Operations that reserve conditions pursuant thereto, and in conformity with such during the period before the next meeting are procedural instructions as the Committee may likely to be associated with a federal funds issue from time to time: rate persistently outside a range of 4 to 8 A. To purchase and sell the following percent. foreign currencies in the form of cable Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 77 transfers through spot or forward transactions Amount on the open market at home and abroad, Foreign bank (millions of including transactions with the U. S. Treasury, dollars equivalent) with the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve Austrian National Bank 250 National Bank of Belgium 1,000 Act of 1934, with foreign monetary authori- Bank of Canada 2,000 ties, with the Bank for International Settle- National Bank of Denmark 250 ments, and with other international financial Bank of England 3,000 Bank of France 2,000 institutions: German Federal Bank 6,000 Bank of Italy 3,000 Bank of Japan 5,000 Austrian schillings Italian lire Bank of Mexico 700 Belgian francs Japanese yen Netherlands Bank 500 Canadian dollars Mexican pesos Bank of Norway 250 Danish kroner Netherlands guilders Bank of Sweden 300 Pounds sterling Norwegian kroner Swiss National Bank 4,000 French francs Swedish kronor Bank for International Settlements German marks Swiss francs Dollars against Swiss francs 600 Dollars against authorized European currencies other than Swiss francs 1,250 B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, the foreign currencies listed in para- Any changes in the terms of existing swap graph A above. arrangements, and the proposed terms of any C. To draw foreign currencies and to new arrangements that may be authorized, permit foreign banks to draw dollars under shall be referred for review and approval to the reciprocal currency arrangements listed the Committee. in paragraph 2 below, provided that drawings 3. All transactions in foreign currencies by either party to any such arrangement shall undertaken under paragraph 1(A) above be fully liquidated within 12 months after any shall, unless otherwise expressly authorized amount outstanding at that time was first by the Committee, be at prevailing market drawn, unless the Committee, because of rates. For the purpose of providing an investexceptional circumstances, specifically autho- ment return on System holdings of foreign rizes a delay. currencies, or for the purpose of adjusting D. To maintain an overall open position interest rates paid or received in connection with swap drawings, transactions with forin all foreign currencies not exceeding $12.0 eign central banks may be undertaken at billion. For this purpose, the overall open non-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 coordination in individual currencies. The net position in a of foreign currency transactions. In making single foreign currency is defined as holdings operating arrangements with foreign central of balances in that currency, plus outstanding banks on System holdings of foreign curcontracts for future receipt, minus outstandrencies, the Federal Reserve Bank of New ing contracts for future delivery of that cur- York shall not commit itself to maintain any rency, i.e., as the sum of these elements with specific balance, unless authorized by the due regard to sign. Federal Open Market Committee. Any agree- 2. The Federal Open Market Committee ments or understandings concerning the directs the Federal Reserve Bank of New administration of the accounts maintained by York to maintain reciprocal currency arrange- the Federal Reserve Bank of New York with ments ("swap" arrangements) for the System the foreign banks designated by the Board of Open Market Account for periods up to a Governors under Section 214.5 of Regulation maximum of 12 months with the following N shall be referred for review and approval to foreign banks, which are among those desig- the Committee. nated by the Board of Governors of the Fed- 5. Foreign currency holdings shall be eral Reserve System under Section 214.5 of invested insofar as practicable, considering Regulation N, Relations with Foreign Banks needs for minimum working balances. Such and Bankers, and with the approval of the investments shall be in liquid form, and Committee to renew such arrangements on generally have no more than 12 months maturity: remaining to maturity. When appropriate in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78 FOMC Policy Actions connection with arrangements to provide Foreign Currency Directive investment facilities for foreign currency holdings, U.S. Government securities may be In Effect January 1, 1988 purchased from foreign central banks under agreements for repurchase of such securities 1. System operations in foreign currencies within 30 calendar days. shall generally be directed at countering 6. All operations undertaken pursuant to disorderly market conditions, provided that the preceding paragraphs shall be reported market exchange rates for the U.S. dollar promptly to the Foreign Currency Subcomreflect actions and behavior consistent with mittee and the Committee. The Foreign Curthe IMF Article IV, Section 1. rency Subcommittee consists of the Chairman 2. To achieve this end the System shall: and Vice Chairman of the Committee, the A. Undertake spot and forward pur- Vice Chairman of the Board of Governors, chases and sales of foreign exchange. and such other member of the Board as the B. Maintain reciprocal currency Chairman may designate (or in the absence of ("swap") arrangements with selected foreign members of the Board serving on the Subcomcentral banks and with the Bank for Internamittee, other Board Members designated by tional Settlements. the Chairman as alternates, and in the absence C. Cooperate in other respects with of the Vice Chairman of the Committee, his central banks of other countries and with alternate). Meetings of the Subcommittee international monetary institutions. shall be called at the request of any member, 3. Transactions may also be undertaken: or at the request of the Manager for Foreign A. To adjust System balances in light of Operations, for the purposes of reviewing probable future needs for currencies. recent or contemplated operations and of B. To provide means for meeting Sysconsulting with the Manager on other matters tem and Treasury commitments in particular relating to his responsibilities. At the request currencies, and to facilitate operations of the of any member of the Subcommittee, ques- Exchange Stabilization Fund. tions arising from such reviews and consulta- C. For such other purposes as may be tions shall be referred for determination to the expressly authorized by the Committee. Federal Open Market 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 consultation to enter into any needed agreement or under- and cooperation with the United States Treastanding with the Secretary of the Treasury sury; about the division of responsibility for foreign B. In cooperation, as appropriate, with currency operations between the System and foreign monetary authorities; and the Treasury; C. In a manner consistent with the B. To keep the Secretary of the Treasury obligations of the United States in the Internafully advised concerning System foreign cur- tional Monetary Fund regarding exchange rency operations, and to consult with the arrangements under the IMF Article IV. Secretary on policy matters relating to foreign currency operations; Meeting Held on C. From time to time, to transmit appro- February 9-10,1988 priate reports and information to the National Advisory Council on International Monetary and Financial Policies. Domestic Policy Directive 8. Staff officers of the Committee are authorized to transmit pertinent information The information reviewed at this meeting on System foreign currency operations to indicated that economic activity continappropriate officials of the Treasury Departued to expand rapidly in the fourth ment. 9. All Federal Reserve Banks shall partic- quarter, although gains in output apipate in the foreign currency operations for peared to have moderated around year- System Account in accordance with para- end. Over the quarter as a whole, manugraph 3 G(l) of the Board of Governors' facturing output recorded a sizable further Statement of Procedure with Respect to Forincrease, supported by continued strong eign Relationships of Federal Reserve Banks dated January 1, 1944. demands for exports. Domestic final sales Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 79 weakened, however, with consumption after a surge in November and some outlays and business fixed investment decline in the single-family area. Sales of declining, and much of the rise in produc- new and existing homes also decreased in tion apparently went into inventories. late 1987. For the fourth quarter as a The rate of inflation was held down late in whole, total starts were down appreciably the year by declines in energy prices, from their averages in the previous two while wage trends showed little change. quarters. Industrial production rose consider- Business fixed investment fell someably over the fourth quarter, but the what in the fourth quarter, after an increase slowed in November and mod- exceptionally large rise in the previous erated further in December. Output of quarter. Spending on informationconsumer goods, which changed little in processing equipment, which earlier had both months, was held down by reduc- grown rapidly, appeared to slow, and tions in automobile assemblies. Also, business purchases of motor vehicles output of business equipment edged declined. At the same time, expenditures lower after substantial growth over the for industrial equipment continued to summer and early autumn. Nonfarm expand as did spending for nonresidential payroll employment grew at a brisk pace construction, including sizable increases in the fourth quarter, but slowed substan- in outlays for office structures and other tially in January. In manufacturing, commercial buildings. New orders for employment gains moderated in January nondefense capital goods, excluding as sizable increases in a few industries aircraft, were little changed in the fourth were partly offset by layoffs elsewhere. quarter, after appreciable gains earlier in In contrast to the payroll survey, total the year, while new building commitemployment as measured by the house- ments continued to increase. hold survey was up sharply in January, Inventory investment rose strongly in bringing the rise over the past four October and November. The increase months into line with the advance in was concentrated in the trade sector, payroll employment. The growth in the particularly at automobile dealers and labor force about matched the rise in merchant wholesalers. Stocks at nonhousehold employment in January, and auto retailers also continued to expand at the civilian unemployment rate was un- a faster rate than sales, especially at changed at 5.8 percent. general merchandise, apparel, and furni- Consumer spending remained sluggish ture stores. In contrast, manufacturers' in recent months. Excluding motor vehi- inventories remained low relative to cles, real outlays on goods and services shipments. were essentially unchanged during the Increases in consumer prices moderlast three months of 1987. Sales of new ated in late 1987, reflecting £ decline in automobiles improved after incentives retail energy prices in response to earlier were reintroduced in mid-November, but decreases in crude oil prices. The condealer inventories remained high. With sumer price index was up only slightly in consumer spending weak and growth in December, when prices of consumer disposable income stronger in the fourth goods also were held down by extensive quarter, the saving rate rose considerably markdowns on holiday merchandise and to 4.9 percent. by the latest round of incentives for Housing starts fell to an annual rate of automobile sales. At the producer level, 1.37 million units in December, reflect- prices of finished goods fell somewhat in ing a sharp drop in the multifamily sector late 1987. Hourly compensation in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80 FOMC Policy Actions private nonfarm sector increased at a economic policy commitments of the moderate pace over recent months, little Louvre accord, and the dollar retraced its changed from earlier trends. decline in early January when heavy The nominal deficit in U.S. merchan- intervention by central banks associated dise trade was estimated to have increased with the G-7 statement became particuslightly over October and November larly visible. The dollar strengthened from the average rate in the third quarter, further in mid-January following the but in real terms the trade deficit as release of better-than-expected data for measured in the GNP accounts appeared the U.S. trade balance in November. to have narrowed further. Nonagricul- At its meeting on December 15-16, tural exports rose somewhat over the first 1987, and its meeting via telephone two months of the quarter, but agricul- conference on January 5, 1988, the tural exports fell slightly. Non-oil im- Committee adopted directives that called ports rose considerably in the October- for maintaining the existing degree of November period from the third-quarter pressure on reserve positions. In Decempace, with the increases widespread. Oil ber, the Committee recognized that still imports, however, fell somewhat as both sensitive conditions in financial markets price and volume declined. The increases and uncertainties in the economic outlook in prices of exports and of non-oil imports might continue to require a special degree accelerated in the fourth quarter to rates of flexibility in the conduct of open experienced in the first two quarters of market operations. In early January, the 1987, reversing the slower increases in Committee agreed that the passing of the third quarter. Recent indicators of time and of year-end pressures in the economic performance in major foreign money market should permit further industrial nations were mixed, after progress toward restoring a normal apstrong growth of real GNP in most of proach to open market operations. At the those countries in the third quarter of same time the members recognized that 1987. Data continued to suggest rela- some flexibility might continue to be tively vigorous growth in Japan, the needed in the conduct of operations. At United Kingdom, and Canada. In con- both meetings, the Committee decided trast, expansion appeared to have slowed that, taking account of conditions in during the fourth quarter in Germany, financial markets, somewhat lesser or France, and Italy. somewhat greater reserve restraint would The weighted-average foreign ex- be acceptable depending on the strength change value of the dollar in terms of the of the business expansion, indications of other G-10 currencies increased about 3 inflationary pressures, developments in percent over the period since the Decem- the foreign exchange markets, as well as ber meeting. The dollar rose about IV2 the behavior of the monetary aggregates. percent in terms of the yen and about 4 The intermeeting range for the federal funds rate was left unchanged at 4 to 8 percent in terms of the mark during the percent. intermeeting period. Early in the period, the dollar fell sharply owing to height- Over the course of the intermeeting ened concerns about prospects for adjust- period and especially after early January, ment of U.S. external imbalances and the conduct of open market operations reports that G-7 authorities no longer involved placing more emphasis on resupported the Louvre accord. The G-7 serve positions and correspondingly less authorities released a statement in late on influencing money market condi- December reaffirming the objectives and tions on a day-to-day basis. Even so, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 81 adjustments in the provision of reserves stabilize and economic data were viewed were made on a number of occasions as pointing to a softer economy, more during the intermeeting period in light of subdued inflation, and easier monetary unusual developments affecting reserve policy. Early in February, banks lowand money market conditions. Those ered their prime rate. Broad indexes of developments included heavy borrowing stock prices increased somewhat on over the four-day New Year's weekend balance since mid-December, though and sizable borrowing subsequently price fluctuations were relatively large stemming from a data processing prob- on occasion. lem at a large bank. In the ensuing reserve Preliminary data showed that money maintenance period, demands for dis- growth rebounded strongly in January count credit were very limited. In late after the marked weakening in November January and early February, with incom- and December. For 1987 as a whole, M2 ing data suggesting some weakening in expanded at a rate well below the 5Vi the economic expansion and in the con- percent lower boundary of the target text of a more stable dollar in foreign range that the Committee had established exchange markets, some easing was for the year. M3 growth was at the lower sought in the degree of pressure on end of its range. Ml grew sharply in reserve positions. Thus far in the current January, after declining in late 1987. maintenance period, borrowing had re- Demand deposits were particularly weak mained relatively low. Total reserves in late 1987, possibly reflecting in part contracted in December, reflecting con- incentives to adjust compensating baltinued weakness in transactions deposits, ances downward before year-end, but but rebounded strongly in January as other checkable deposits also fell in most categories of reservable deposits November and December without a grew rapidly and excess reserves also corresponding increase in other M2 deincreased. posits. The strengthening of money The federal funds rate averaged 6.82 growth in January was spread widely percent over the three complete reserve over various components of the monetary maintenance periods since the December aggregates and appeared to be related in meeting; in recent days, the rate moved part to the general decline in interest rates down toward 6!/2 percent. Year-end since mid-October.l pressures in the money market were much milder than most market participants had expected, partly because of a 1. These growth rates and all subsequent data on greatly reduced need for ftinds compared the monetary aggregates reflect annual benchmarks and seasonal factors as published on February 11, with that a year earlier, more planning in 1988. advance by banks and others, and a The monetary aggregates are defined as follows: relatively generous provision of reserves. Ml comprises demand deposits at commercial With the easing of concerns about year- banks and thrift institutions, currency in circulation, end pressures, rates on private money travelers checks of nonbank issuers, negotiable order of withdrawal (NOW) and automatic transfer market instruments fell sharply in late service (ATS) accounts at banks and thrift institu- December. Yields on Treasury securities tions, and credit union share draft accounts. M2 of all maturities and on longer-term debt contains Ml and savings and small-denomination of private borrowers changed little on time deposits (including money market deposit balance over the first several weeks of the accounts (MMDAs) at all depository institutions, overnight repurchase agreements (RPs) at commerintermeeting period. More recently, such cial banks, overnight Eurodollars held at foreign rates declined as the dollar tended to branches of U. S. banks by U. S. residents other than Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

82 FOMC Policy Actions The staff projection for economic difficult to evaluate the outlook for an activity continued to suggest relatively economy that appeared to be in transition sluggish growth in output in the first half from a consumer-driven to an exportof 1988 and a pickup later in the year. driven expansion. Another area of uncer- This pattern primarily reflected varia- tainty related to the decline in equity tions in the growth of inventories. A prices. The latter did not appear to have sharp slowing in the pace of investment had a substantial impact on consumer or in nonfarm inventories, notably automo- business spending to date, judging from bile inventories, was expected early in currently available data, but more reperthe year following the buildup in the cussions might be felt later. In addition, fourth quarter. Final domestic demand financial markets, including the foreign was projected to expand sluggishly in exchanges, were still relatively sensitive, 1988, given an erosion in the growth of and many financial institutions had been real income associated in part with higher weakened by serious debt repayment import prices and a moderately restrain- difficulties among their domestic and foring fiscal policy. Over 1988 as a whole, eign borrowers. Several members comthe primary impetus to growth was mented that the staff projection remained anticipated to come from further strong a reasonable expectation but that the risks demand for U.S. exports. Prices were of a different outcome were substantial. projected to rise at a moderate rate during Others saw somewhat greater or somethe year. Prices of nonpetroleum imports what lesser economic growth as more were believed likely to increase substan- likely for the year ahead. The members tially, but the price of imported petroleum generally agreed, however, that the major was assumed to rise only slowly. Nominal risks to the economy over the longer run gains in compensation were expected to appeared to be in the direction of more pick up, as wage demands responded to inflation. increases in consumer prices. With un- In conformance with the usual practice employment rates remaining near at meetings when the Committee considcurrent levels, however, labor market ers its long-run objectives for monetary conditions were not expected to put growth, the members of the Committee much additional pressure on wage rates, and the Federal Reserve Bank presidents especially in light of uncertainties about not currently serving as members had the economic outlook and continuing prepared specific projections of ecoefforts by businesses to improve nomic activity, the rate of unemploycompetitiveness. ment, and the overall level of prices. For In the Committee's discussion, mem- the period from the fourth quarter of bers emphasized that the economic out- 1987 to the fourth quarter of 1988, the look was subject to a great deal of forecasts for growth of real GNP had a uncertainty under prevailing circum- central tendency of 2 to 2 Vi percent and a stances. They noted that it was especially full range of Vi to 3 percent. Forecasts of nominal GNP centered on growth rates of 5 VA to 6 percent and ranged from 4 to than those restricted to institutions). M3 is M2 plus 6 Vi percent. Estimates of the civilian rate large-denomination time deposits at all depository institutions, large-denomination term RPs at com- of unemployment in the fourth quarter of mercial banks and savings and loan associations, 1988 were concentrated in a range of 5 % institution-only money market mutual funds, and to 6 percent with a full range of 5 xh to 6 3A term Eurodollars held by U.S. residents in Canada percent. With regard to the rate of and the United Kingdom and at foreign branches of U.S. banks elsewhere. inflation, as indexed by the GNP Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 83 deflator, the projections centered on rates quarters would depend to a substantial of 3 V4 to 3 3/4 percent and had an overallextent on the rate of improvement in the range of 2x/i to 4 percent for the year. In nation's balance of trade. making these forecasts, the members In the discussion of the outlook for took account of the Committee's objec- trade, a number of members observed tives for monetary growth in 1988. They that sizable further gains in exports were also assumed that future fluctuations in a reasonable expectation, but the rate of the foreign exchange value of the dollar increase would probably diminish from would not be of sufficient magnitude to the very rapid pace in recent quarters. have any significant effect on the Among the factors tending to inhibit projections. export growth, they cited the possibility In their assessment of specific develop- that expansion in major industrial naments bearing on the economic outlook, tions, as a group, might be relatively members gave considerable attention to limited. On balance, while the extent of the recent buildup of inventories and the the improvement in trade was uncertain related possibility of some correction and might well prove to be relatively that would tend to depress overall growth slow and uneven, most members saw in business activity during the first half of favorable prospects for continuing gains the year. Several believed that the adjust- of appreciable magnitude over the year ment in inventories might be relatively ahead. limited and economic growth in the first Turning to the outlook for inflation, half somewhat stronger than projected by the members generally agreed that the the staff, especially in light of the strength risks over time were in the direction of of orders for capital goods on the books greater inflation. They emphasized that of manufacturing firms. Others antici- relatively rapid growth in overall depated a sharper inventory correction but mands, including that for exports, could one that would probably be over by mid- trigger inflationary pressures in a period year. The outlook for the second half was when the utilization of productive reparticularly uncertain, and views differed sources was already relatively high and regarding the likelihood and potential comparatively little leeway appeared to strength of a rebound. Conditions in exist for growth in excess of the moderate financial markets would have an impor- pace projected by most members. The tant influence on business conditions and recent behavior of broad price indexes any major new disturbances in those did not suggest any acceleration in the markets could have a negative effect on overall rate of inflation, but several both consumer and business spending. members saw evidence in local econo- Some members could see few signs in the mies that price pressures might be intendomestic economy that pointed to a sifying. Business contacts were reporting resurgence in business activity later in that some firms were successful in selecthe year. Other members viewed the tive efforts to pass through rising costs by prospects as more promising, and some raising product prices. And, in one view, did not rule out the possibility that the the behavior of key commodity prices expansion might in fact tend to be more raised concern about more inflation. vigorous than was desirable in a period Some members also indicated that rising when increasing domestic production import prices were tending to put upward needed to be diverted to export markets. pressure on competing products that were All of the members agreed that the rate of manufactured domestically. In general, economic expansion over the next several increases in wages remained moderate, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

84 FOMC Policy Actions but members expressed concern that, regard to how much the ranges should be given the reduced level of unemploy- reduced. Several indicated a preference ment, rising prices would tend to be for confirming the ranges for 1988 that translated into higher wages at some the Committee had established on a point. It was noted that the key to tentative basis in July. Those ranges avoiding both more inflation or a reces- involved reductions of Vi percentage sion in a period of major adjustments in point from 1987. Others favored lower the trade balance would be the difficult ranges with midpoints that were reduced task of maintaining restrained growth in by a full percentage point. The latter domestic demands over an extended included a proposal, which received period. considerable support, for wider ranges of Against that background the Commit- 4 to 8 percent for both M2 and M3. The tee at this meeting completed the review, members noted that monetary expansion begun at the meeting in December, of the in 1988 at rates around the midpoints of ranges for growth in the monetary and the ranges under consideration, which debt aggregates in 1988; those ranges they generally viewed as a reasonable had been established on a tentative basis expectation, would represent some accelin July 1987 in keeping with the require- eration from the relatively modest expanments of the Full Employment and Bal- sion in 1987, especially in the case of anced Growth Act of 1978 (the M2. Humphrey-Hawkins Act). The tentative Further discussion focused on the ranges included growth of 5 to 8 percent desirability of widening the ranges for for both M2 and M3 for the period from growth of the broader aggregates to 4 to 8 the fourth quarter of 1987 to the fourth percent. Such a range was deemed to be quarter of 1988. A monitoring range of 8 warranted by the experience of recent to 11 percent had been set on a provisional years when more marked variability had basis for growth of total domestic non- emerged in the relationship between financial debt in 1988. With regard to monetary expansion and ultimate policy Ml, the Committee had decided in July objectives such as prices and output. not to set a tentative range for 1988 but to That variability stemmed from a number reappraise at this meeting the issues of sources, but prominent among them relating to the establishment and use of was the course of interest rates; a level of such a target. rates consistent with satisfactory eco- All of the members favored some nomic performance would depend on the reduction in the ranges for growth of M2 underlying strength of demands in the and M3 in 1988. Such a reduction would economy and on emerging price preshelp to focus attention on the need for sures. In that context, an uncertain relatively restrained expansion in domes- outlook for the economy and inflation tic demand to accommodate the adjust- suggested to several members the need ment in the nation's external accounts and for somewhat wider ranges than had been would underscore the Committee's com- used in the past. A range of 4 percentage mitment to achieving reasonable price points would provide more room for stability over time. However, given their appropriate policy responses to unanticidiffering assessments of the risks to the pated economic and financial developbusiness expansion and of the prospective ments and would encompass more fully relationship of monetary growth to satis- the possible outcomes for monetary factory economic performance, members growth that might prove consistent with expressed some divergence of views with acceptable economic performance in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 85 1988. Some members expressed reserva- relationship between growth in Ml and tions about the desirability of wider the performance of the economy. In light ranges. They acknowledged that ranges of its unpredictable behavior, a narrow of 4 percentage points might reflect more range for Ml could easily trigger an adequately the various uncertainties that inappropriate response of monetary polwere involved, but they were concerned icy to unexpected developments in the that widening the ranges could be viewed economy. On the other hand, a range as a further retreat from effective mone- wide enough to reasonably encompass tary targeting. Moreover, the narrower possible acceptable growth in Ml over ranges imposed a desirable discipline by the year would be of little use in guiding requiring a more prompt reappraisal of the conduct of monetary policy or in policy as their limits were approached or communicating the Committee's policy exceeded. intentions to the public. The members also considered propos- The members anticipated some further als for using a different base than the slowing in the growth of nonfinancial actual fourth quarter level of the aggre- debt in 1988, following a marked slowgates as the starting point for the 1988 down in 1987, but the rate of growth this ranges. In support of this view, some year appeared likely to remain well above members argued that the depressed levels that of nominal GNP. A key factor of the aggregates in late 1987, which may bearing on the outlook for debt expansion have reflected in part some special fac- was the expectation of some reduction in tors, together with the reduced ranges government borrowing. However, as in under consideration implied a quite sub- the case of the monetary aggregates, stantial lowering of the Committee's considerable uncertainty surrounded the objectives for monetary growth. Several prospects for debt growth in 1988 and members were opposed to a change in the Committee members endorsed a proposal Committee's procedures, especially on to widen the monitoring range for total an ad hoc basis. A number expressed domestic nonfinancial debt to 7 to 11 their willingness to consider at a later percent, a reduction of 1 percentage point time proposals for a regularized proce- from the lower limit of the 1987 range. dure that would take account of over- At the conclusion of the Committee's shoots or of shortfalls in the previous consideration of the ranges for 1988, all year. Others believed that it would be of the members indicated that they could preferable to adjust the new ranges support ranges of 4 to 8 percent for themselves each year, rather than the growth in both M2 and M3 for the year. base, if the Committee concluded that it No range was established for Ml for the was desirable to compensate for exces- year, while the monitoring range for sive or inadequate monetary growth in growth in total domestic nonfinancial the previous year. debt was set at 7 to 11 percent. In keeping No member supported the reestablish- with the Committee's usual procedures mentof a target range for Ml in 1988, but under the Humphrey-Hawkins Act, the a few favored the use of a monitoring ranges would be reviewed at midyear, or range for this aggregate. The behavior of sooner if deemed necessary. It was Ml had become highly sensitive to understood that in carrying out policy the changes in interest rates, among other Committee would continue to judge the factors, in recent years, as reflected in behavior of the monetary aggregates sharp swings in its velocity. It remained against the background of developments particularly difficult to interpret the in the economy and financial markets, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

86 FOMC Policy Actions including attention to the sources and mentation faced the special challenge of extent of price pressures in the economy, balancing the risks of a potentially softer the performance of the dollar in foreign economy over the nearer term while also exchange markets, and other indicators remaining positioned to achieve the of the impact of monetary policy. Committee's anti-inflationary objectives The following paragraphs relating to over the longer run. Accordingly, despite the 1988 ranges were approved for the shadings of opinion, the members were domestic policy directive: in broad agreement that any substantial change in policy, in either direction, was The Federal Open Market Committee seeks not warranted under prevailing ecomonetary and financial conditions that will nomic and financial conditions. A tightfoster reasonable price stability over time, ening move would not be appropriate at a promote growth in output on a sustainable basis, and contribute to an improved pattern time when the expansion was showing of international transactions. In furtherance some signs of slackening, and against of these objectives, the Committee at this this background such a policy course meeting established growth ranges of 4 to 8 might well have a disruptive impact on percent for both M2 and M3, measured from the fourth quarter of 1987 to the fourth quarter financial markets, which remained someof 1988. The monitoring range for growth in what fragile. On the other side, policy total domestic nonfinancial debt was set at 7 to should not overreact to recent indications 11 percent for the year. of a more sluggish business expansion With respect to Ml, the Committee again because any policy easing now would decided not to establish a specific target for 1988. The behavior of this aggregate in tend to have its major impact later in the relation to economic activity and prices has year when, in the view of many members, become very sensitive to changes in interest a stronger economic expansion was likely rates, among other factors, as evidenced by to emerge. Moreover, while the dollar sharp swings in its velocity in recent years. had tended to stabilize recently in the Consequentiy, the appropriateness of changes in Ml this year will continue to be evaluated foreign exchange markets, members in the light of the behavior of its velocity, were concerned that appreciable further developments in the economy and financial easing, especially if it was seen as leading markets, and the nature of emerging price to a lower discount rate, could have pressures. highly adverse repercussions on the Votes for this action: Messrs. Greenspan, dollar. It might also have unsettling Corrigan, Angell, Boehne, Boykin, Heller, effects on financial markets more gener- Johnson, Keehn, and Kelley, Ms. Seger, ally if it was not viewed by market and Mr. Stern. Votes against this action: None. participants as warranted by substantial new evidence of a weaker economy. The In the Committee's discussion of policy slight easing that had already been underimplementation for the period immedi- taken did not appear to put significant ately ahead, all of the members indicated downward pressure on the dollar and it that they favored or could accept a provided greater assurance that the exdirective that called for maintaining the pected strengthening of the business slightly reduced degree of pressure on expansion would in fact materialize later reserve positions that had been sought in the year. recently. While some members ex- In the course of the Committee's dispressed reservations about that easing, a cussion, members referred to the rebound few indicated a preference for easing in the growth of M2 and M3 in January, marginally further. Members commented but they noted that the stronger growth during the discussion that policy imple- needed to be viewed in relation to the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 87 weakness in late 1987. According to a developments might well continue to staff analysis prepared for this meeting, warrant occasional departures from the expansion in M2 and M3 could be focus on reserve objectives for the purexpected to strengthen a little over the pose of moderating temporary fluctuabalance of the first quarter from the tions in money market conditions. A average pace in December and January, number of these members also comassuming unchanged conditions of re- mented on the need for flexibilityb ecause serve availability. More generally, some- a relatively normal or predictable relawhat faster growth was projected in the tionship between the provision of recurrent quarter than had occurred in the serves and money market conditions had second half of 1987, as increased de- not yet emerged. mands for money balances in response to The members expressed some shadthe decline in interest rates since mid- ings of opinion with regard to possible October more than offset the expected adjustments in policy during the intereffects of slower income growth. The meeting period. A majority felt that there growth in Ml might also strengthen over should be no presumptions about the the first quarter, but the near-term behav- likely direction of any such adjustments, ior of this aggregate remained subject to a especially in light of the consensus at this high degree of uncertainty. meeting for maintaining reserve condi- During this meeting further consider- tions that were consistent with the slight ation was given to the Committee's easing that had been sought since late operating procedures. In keeping with January. Some members believed, howthe Committee's decision in early Janu- ever, that policy implementation should ary, continuing progress had been made be especially alert to developments that toward restoring the Committee's previ- might point to somewhat easier reserve ous focus on reserve positions in the conditions, particularly because of the day-to-day implementation of policy. At risks that they saw of a weaker economy this meeting the members expressed than was currently projected. In the view differing views about whether that pro- of some members, further easing might cess should now be completed. Several also be appropriate if monetary growth felt that the approach originally adopted fell appreciably short of current expectaat a time of crisis in financial markets was tions. Several members cautioned that no longer warranted, even in attenuated any decision to ease should take careful form, and that the previous approach to account of the potential impact on the reserve management provided a better dollar in foreign exchange markets. basis for guiding the conduct of monetary While the dollar had tended to stabilize policy because it allowed greater scope recently, it could be vulnerable to a for changes in supply and demand forces further decline. to be reflected in the money market. On At the conclusion of the Committee's the other hand, a majority of the members discussion, all of the members indicated preferred to retain for now a directive their acceptance of a directive that called that called for some flexibility in the for maintaining the slightly easier degree approach to open market operations. of reserve pressure that had been sought These members emphasized that finan- recently. With regard to the Committee's cial market conditions still exhibited operating procedures, a majority ensome degree of fragility and, against the dorsed the view that some flexibility background of substantial uncertainty in might continue to be needed in the the economic outlook, unanticipated conduct of open market operations in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

88 FOMC Policy Actions light of the still somewhat unsettled January, was unchanged from December. conditions in financial markets, the un- Growth in industrial production moderated further in December. Retail sales picked up in certainties in the relationship between December, buoyed by improved auto sales, reserve and money market conditions, but remained below levels reached during the and the substantial risks of unanticipated summer. Indicators of business capital spendeconomic and financial developments. ing were mixed late in the year. Housing Taking account of conditions in financial starts fell markedly in December, and were markets, the members indicated that down somewhat on balance in the fourth quarter from the average pace in the second somewhat less or somewhat more reserve and third quarters. The nominal U.S. merrestraint would be acceptable, depending chandise trade deficit declined substantially in on the strength of the business expansion, November. For October and November comindications of inflation, the performance bined, the deficit rose slightly from the of the dollar in foreign exchange markets, average rate in the third quarter, but in real terms the deficit was estimated to have with consideration also given to the narrowed further. The rise in consumer prices behavior of the monetary aggregates. slowed and producer prices fell in late 1987, The reserve conditions contemplated by reflecting declines in energy prices; wage the Committee were expected to be trends have shown little change in recent consistent with growth in both M2 and months. M3 over the four-month period from Most interest rates were down substantially on balance since the Committee's meeting in November through March at annual rates mid-December. In the Treasury securities of about 6 to 7 percent. Because of the market, long-term yields fell considerably unusual uncertainty relating to the behav- more than short-term rates. Broad indexes of ior of M1 and in keeping with the decision stock prices rose somewhat on balance over not to set a longer-run target for this the intermeeting period in still relatively aggregate, the Committee decided not to volatile trading. The trade-weighted foreign exchange value of the dollar in terms of the indicate any expectation regarding its other G-10 currencies declined further in the growth over the months ahead. The second half of December but recovered after members agreed that the intermeeting the turn of the year and has increased moderrange for the federal funds rate, which ately on balance since the December meeting. provides one mechanism for initiating Growth of M2 and M3 strengthened subconsultation of the Committee when its stantially in January after slowing over November and December. For 1987 as a whole, boundaries are persistently exceeded, expansion of M2 fell considerably below the should be left unchanged at 4 to 8 percent. lower end of the range established by the At the conclusion of the meeting the Committee for the year, while growth of M3 following domestic policy directive was was at the lower end of its range. Growth of issued to the Federal Reserve Bank of Ml surged in January following two months of declines. For the year 1987, Ml growth New York: was marginally below that of nominal GNP, and expansion in total domestic nonfinancial The information reviewed at this meeting debt was at the midpoint of the Committee's indicated that economic activity continued to monitoring range for the year. expand rapidly in the fourth quarter but that The Federal Open Market Committee seeks the advance reflected a build-up in inventories monetary and financial conditions that will as domestic final demands weakened. The foster reasonable price stability over time, growth in output appeared to have slowed promote growth in output on a sustainable around year-end. Total nonfarm payroll basis, and contribute to an improved pattern employment rose much less in January than of international transactions. In furtherance on average over the previous three months; of these objectives, the Committee at this the manufacturing sector also recorded re- meeting established growth ranges of 4 to 8 duced employment growth in January. The percent for both M2 and M3, measured from civilian unemployment rate, at 5.8 percent in the fourth quarter of 1987 to the fourth quarter Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 89 of 1988. The monitoring range for growth in continuing to expand in the current total domestic nonfinancial debt was set at 7 to quarter, although the rate of growth was 11 percent for the year. down somewhat from the rapid pace in With respect to Ml, the Committee again the fourth quarter. The moderation decided not to establish a specific target for 1988. The behavior of this aggregate in reflected a considerable slowing in the relation to economic activity and prices has pace of inventory investment. However, become very sensitive to changes in interest domestic final sales seemed to have rates, among other factors, as evidenced by picked up sharply in the first quarter; sharp swings in its velocity in recent years. business capital expenditures apparently Consequently, the appropriateness of changes in Ml this year will continue to be evaluated increased substantially and consumer in the light of the behavior of its velocity, spending also strengthened, buoyed by developments in the economy and financial higher sales of motor vehicles. The rate markets, and the nature of emerging price of inflation had remained relatively pressures. restrained over the course of recent In the implementation of policy for the immediate future, the Committee seeks to months and wage trends had shown little maintain the slightly reduced degree of pres- change. sure on reserve positions sought in recent Growth in industrial production moddays. The Committee agrees that the current more normal approach to open market opera- erated in January and February from a tions remains appropriate; still sensitive rapid pace in late 1987. After a surge in conditions in financial markets and uncertain- the second half of 1987, the output of ties in the economic outlook may continue to materials edged down. Also, auto assemcall for some flexibility in operations. Taking blies and the production of consumer account of conditions in financial markets, somewhat lesser reserve restraint or some- home goods dropped below their late what greater reserve restraint would be 1987 levels, apparently reflecting in part acceptable depending on the strength of the an effort to trim or to moderate the growth business expansion, indications of inflationin inventories. In contrast, the production ary pressures, developments in foreign exchange markets, as well as the behavior of the of business equipment remained quite monetary aggregates. The contemplated re- strong, with gains in nearly all cateserve conditions are expected to be consistent gories. Capacity utilization rates were at with growth in both M2 and M3 over the relatively high levels in a number of period from November through March at industries. Gains in total nonfarm payroll annual rates of about 6 to 7 percent. The Chairman may call for Committee consulta- employment continued strong over the tion if it appears to the Manager for Domestic January-February period, led by the Operations that reserve conditions during the service and retail trade sectors. In manuperiod before the next meeting are likely to be facturing, employment gains were associated with a federal funds rate persistently outside a range of 4 to 8 percent. smaller in January and February than during the second half of 1987. The Votes for this action: Messrs. Greenspan, unemployment rate edged down to 5.7 Corrigan, Angell, Boehne, Boykin, Heller, percent in February, its lowest level since Johnson, Keehn, and Kelley, Ms. Seger, mid-1979. and Mr. Stern. Votes against this action: None. Increased demand for motor vehicles produced a rebound in consumer spend- Meeting Held on ing early in the year. That demand March 29,1988 appeared to be bolstered by sales incentives programs, strong income growth, 1. Domestic Policy Directive and rising consumer confidence. Exclud- The information reviewed at this meeting ing motor vehicles, nominal retail sales suggested that economic activity was were essentially flat since November, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

90 FOMC Policy Actions and the saving rate was well above its ing the impact of declining energy prices average for the year preceding the break and a relatively small rise in food prices. in the stock market. At the producer level, prices of finished Housing activity picked up in February goods fell slightly in February after but still was slightly below its fourth- fluctuating irregularly in other recent quarter pace. While sales of new and months, largely because of swings in existing homes continued to decline in food prices. Commodity prices regis- January, housing starts rose to an annual tered mixed changes during the first rate of 1.49 million units in February, quarter. The index of hourly earnings with growth stronger in the single-family was unchanged in February after increassector than in the multifamily area. ing in January, and on balance it rose Available information suggested that roughly in line with the pace in 1987. business fixed investment was increasing At its meeting on February 9-10, rapidly since late last year, led by large 1988, the Committee had adopted a gains in equipment spending. Data on directive that called for maintaining the shipments indicated a surge in spending slightly reduced degree of pressure on on information-processing equipment. reserve positions that had been sought Increases in other equipment categories since late January. These reserve condiwere smaller but were widespread. tions were expected to be consistent with Spending on nonresidential structures growth in both M2 and M3 at annual rates was relatively weak in early 1988. Inven- of about 6 to 7 percent over the period tory investment apparently slowed in the from November through March. With first quarter, reflecting the strength in regard to operating procedures, the Comsales of motor vehicles combined with mittee had agreed that the more normal cutbacks in their production. approach to operations implemented The nominal U.S. merchandise trade especially since the year-end, which emdeficit in January was significantly below phasized the provision of reserves rather the fourth-quarter average, although than money market conditions, remained essentially unchanged from December. generally appropriate. Nonetheless, it Non-oil imports and nonagricultural was understood that some flexibility exports both fell noticeably from their might continue to be needed in the con- December levels. The current account duct of operations in light of the still deficit had narrowed in the fourth quarter, somewhat unsettled conditions in finanbut the improvement was more than cial markets, the uncertainties in the accounted for by a sharp increase in relationship between reserve and money capital gains stemming from the depreci- market conditions, and the substantial ation of the dollar and the related revalua- risks of unanticipated economic and tion in the book value of direct U.S. financial developments. Taking account investments abroad denominated in for- of conditions in financial markets, the eign currencies. On average, economic members had decided that somewhat growth in major foreign industrial coun- less or somewhat more reserve retries continued strong in the fourth quar- straint would be acceptable, depending ter and early this year, though it slowed on the strength of the business expansomewhat from the rapid third-quarter sion, indications of inflationary prespace. Growth was particularly robust in sures, developments in foreign ex- Canada and Japan. change markets, and the behavior of the monetary aggregates. The intermeeting Increases in consumer prices remained range for the federal funds rate had relatively moderate in early 1988, reflect- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 91 been left unchanged at 4 to 8 percent. a weighted-average basis in relation to As contemplated at the February meet- the other G-10 currencies. The net deing, primary emphasis was placed on cline was largely accounted for by a 4 achieving reserve objectives during the percent depreciation in terms of the intermeeting period, although slightly pound and 2 percent in terms of the greater than normal attention continued Canadian dollar and the yen, while the to be given to developments in the money mark and other EMS currencies remained market. In the three reserve maintenance little changed in relation to the dollar. periods ending March 23, adjustment The staff projection prepared for toplus seasonal borrowing averaged $238 day's meeting suggested more strength in million. Growth in M2 and M3 remained business activity this year than had been relatively robust in February and appar- forecast earlier. The faster growth was ently also in March following a rebound expected to be associated with little in January. Since November both aggre- change in the unemployment rate from gates had expanded at an annual rate of current levels. And while the projection about 7 percent. Growth in Ml slowed for 1989 now indicated a somewhat considerably over the intermeeting pe- reduced rate of growth, higher levels of riod from a very rapid pace in January. capacity utilization over the projection With transaction deposits expanding at a period as a whole were associated with relatively sluggish pace on balance and marginally higher rates of inflation by excess reserves declining, total reserves late 1988 and for the year 1989. A key advanced at a modest rate during the adjustment in the forecast was stronger intermeeting period. investment spending. The staff continued The federal funds rate averaged 6.59 to anticipate that the external sector percent for the three full reserve mainte- would make a substantial positive contrinance periods since the February meet- bution to business activity in 1988 and ing, close to the rate prevailing around 1989. the time of that meeting but below the In the Committee's discussion of the average in January. Most other interest economic situation and outlook, the rates rose somewhat on balance during members generally agreed that the inforthe intermeeting period. The largest mation available since the February increases were in bond markets and they meeting pointed to a stronger expansion appeared to have been prompted by in business activity than they had anticievidence of more strength in the econ- pated earlier. Unfortunately, recent deomy than had been anticipated. Broad velopments in the view of several memindexes of stock prices rose somewhat bers also increased the risks of more over the period, but price swings re- pressures on productive resources and mained sizable on occasion. more inflation. A number of members Through most of the period since the noted that the revised staff forecast was in February meeting the dollar fluctuated in line with their own projections, and some a relatively narrow range. However, it also indicated that any deviations were came under downward pressure late in likely to be in the direction of somewhat the period following reports suggesting faster expansion and even higher rates of stronger than anticipated growth in U.S. inflation. A number of other members domestic demand that raised questions did not disagree that the risks had shifted about the pace of adjustment in the U.S. and that concerns about a recession had trade balance. Over the intermeeting receded, but they also referred to areas of period the dollar declined 2 lA percent on weakness in the economy that implied the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

92 FOMC Policy Actions potential for relatively moderate growth ing number of business contacts were without adding to price pressures. expressing concern about the prospects In the course of the Committee's dis- for prices and wages. On the positive cussion, members referred to high or side, while some deterioration seemed to improving levels of business activity in have occurred recently, inflationary exmany parts of the country, albeit from pectations appeared to have diminished depressed levels in some areas or sectors on balance since the stock market crash of the economy. Manufacturing was in October. Moreover, aggregate meaexhibiting particular strength across the sures of prices and wages had not yet nation. Despite some increasing pres- shown any sustained tendency to accelersures on manufacturing capacity, busi- ate. This could indicate that some leeway ness executives generally appeared to remained in the economy before a more remain cautious in their plans for new serious inflation problem emerged. Inflaproduction facilities, apparently reflect- tion developments did not depend solely ing their uncertainties about the outlook on rates of capacity use but on the overall for sales growth in both domestic and inflationary and financial climate and on export markets. However, some busi- expectations about policy responses to nesses were reported to be in the process inflation. In particular, responses to of reappraising their capacity needs, and rising capacity constraints might be with demands for business equipment reduced or delayed in light of the downrelatively strong, a number of members trend in inflation since the early 1980s. concluded that appreciable further growth Nonetheless, most members agreed that was likely in overall business-fixed invest- the risks of more inflation stemming from ment. The members differed to some increased pressures on capacity had extent in their views on the outlook for increased and represented a key chalconsumer spending and business inven- lenge for policymakers. In a still limited tory accumulation, but they generally number of manufacturing industries, expected at least moderate growth in total relatively high capacity utilization rates domestic final demands. were being reflected in sizable price In the view of some members any increases for some metals and other strengthening in domestic demand could business products, increasing lead times well give rise to pressures on resources in filling certain orders, and some preas net exports continued to expand. The cautionary ordering in anticipation of outlook for trade remained subject to future needs. While there was little considerable uncertainty, but further evidence thus far that the added price improvement in the trade balance was pressures extended to finished products nonetheless a reasonable prospect. That or that overall business buying and prospect was supported by reports from inventory patterns were being signifibusinesses of their increased ability to cantly affected, the economy might well compete internationally. A number of be near the point where faster growth in members again commented that long-run business activity would induce a higher adjustment in the trade balance would rate of inflation, and in the view of several require a period of relatively moderate members, there was a potential for a growth in domestic purchases as more sharp escalation in prices. Members were production was directed to export mar- particularly concerned that any tendency kets. for greater price pressures to become imbedded in more rapid wage increases Turning to the outlook for inflation, would make achievement of the ultimate some members reported that an increas- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 93 objective of price stability considerably cial markets, and the nature of emerging more difficult. price pressures. In further comments some members In the Committee's discussion of policy noted that an assessment of the economic implementation for the intermeeting outlook was complicated by the continu- period ahead, nearly all the members ing risks associated with the troubled favored some increase in the degree of status of a number of financiali nstitutions pressure on reserve positions. Most and the still somewhat unsettled condi- indicated a preference for only a slight tions in financial markets, as evidenced move toward restraint, at least at this in part by occasionally sharp movements time, but a few urged somewhat greater in stock prices. Some members believed tightening. Several commented that a that speculative attitudes had intensified stronger economic outlook in the context recently as reflected for example in of already high capacity utilization rates increases in corporate merger, acquisi- in a number of industries required timely tion, and commercial construction activ- action to help prevent the business expanities that typically involved heavy use of sion from gathering excessive and undebt financing. Such a development was sustainable momentum that would lead to surprising so soon after the October 1987 higher inflation. A policy response under disturbances in financial markets, and emerging circumstances would also serve still growing debt burdens served to to confirm the System's commitment to increase the vulnerability of the economy achieving price stability over time and to adverse developments. Some members might help to avert an aggravation of also expressed considerable concern inflationary expectations. Moreover, acabout the outlook for the dollar, which tion at this time might preclude the need had been under downward pressure in the for more substantial tightening later. foreign exchange markets. A sizable While they favored a slight increase in further decline in the dollar, while it reserve pressures, a number of members might have favorable implications for the stressed that monetary policy should not U.S. trade balance, would tend to raise overreact to recent developments. The domestic prices and could adversely firming should proceed with caution in affect the nation's ability to continue to light of the prevailing uncertainties in the finance a massive trade deficit, with economic outlook and the current abdisruptive effects on domestic financial sence of evidence in broad measures of markets and the domestic economy. prices and wages that rates of inflation At its meeting in February the Commit- were already rising. Other factors cited tee had agreed on policy objectives that in favor of a cautious approach included called for monetary growth ranges of 4 to the persisting problems or incomplete 8 percent for both M2 and M3 for the recovery in some sectors of the economy period from the fourth quarter of 1987 to and areas of the country, the still sensitive the fourth quarter of 1988. The associated conditions in financial markets, and the range for growth in total domestic nonfi- troubled status of many financial institunancial debt was set at 7 to 11 percent. tions. In the view of one member, under- The Committee decided not to establish a lying demands in the economy were not numerical target for Ml growth; instead, likely to be sufficiently robust to pose a the appropriateness of changes in Ml threat of greater inflation, and so prospecwould be evaluated during the year in the tive economic and financial conditions light of the behavior of Ml velocity, did not warrant any tightening of reserve developments in the economy and finan- conditions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

94 FOMC Policy Actions In the course of the Committee's dis- ations had continued to be conducted cussion, somemembers noted that growth with some degree of flexibility that of the broader monetary aggregates had involved occasional departures from a remained fairly rapid in February and normal focus on targeting reserve posi- March. According to a staff analysis, the tions and slightly greater than usual reserve conditions favored by most mem- attention to money market conditions. In bers were likely to be associated with today's discussion a few members indisome slowing in the expansion of those cated that they favored paying greater aggregates, assuming a typically sluggish attention to money market conditions in adjustment of offering rates on retail de- the normal course of conducting open posits to changes in short-term market market operations. It was noted in suprates. Even so, the analysis suggested port of this view that money market that for the year through June growth of interest rates were a key variable for both M2 and M3 would still be apprecia- transmitting monetary policy to financial bly above the midpoints of the Commit- markets and the economy, and that the tee's ranges for 1988. Some members variability in those rates that sometimes observed that the near-term outlook for accompanied the pursuit of a given monetary growth was subject to more degree of pressure on reserve positions uncertainty than usual because the impact injected an unneeded element of uncerof new tax laws on mid-April tax pay- tainty in the decisions of market particiments and related deposit balances could pants. However, most members were in not be fully anticipated. Some concern favor of either retaining the existing was expressed regarding the inflationary emphasis on reserve pressures or compotential of the recent rates of growth in pleting the process of reinstating the the broader monetary aggregates, and previous approach to reserve manageone member commented that under ment. Short-run variability in money prevailing circumstances significantly market interest rates was not seen as stronger than expected expansion in those detracting from the functioning of the aggregates should be resisted, especially market or the implementation of policy expansion that brought the cumulative since market participants were well aware growth of M2 and M3 to levels above the of the System's procedures, and such Committee's ranges by midyear. fluctuations could reflect important shifts During this meeting the Committee in market expectations or underlying reviewed its operating procedures at conditions of supply and demand for some length, including the relative merits reserves and credit. The shifts would be of focusing primarily on money market masked if the Federal Reserve were to conditions or on a specified degree of focus more closely on money market reserve pressure in the day-to-day con- conditions in its day-to-day conduct of duct of monetary policy. The consider- open market operations. Even so, a able emphasis on stabilizing money mar- majority of the members felt that the ket conditions in the period after the uncertain economic outlook and still October collapse of the stock market had sensitive conditions in financial markets given way increasingly to the earlier warranted some continuing flexibility in concentration on achieving reserve posi- the conduct of open market operations. tion objectives, especially since the year- In the Committee's consideration of end. Nonetheless, in keeping with the possible adjustments in policy implemen- Committee's instructions as reaffirmed at tation during the intermeeting period, the February meeting, open market oper- some members felt that the risks of more Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 95 inflation argued for giving particular conditions in financial markets and the attention to developments that might call uncertainties surrounding the economic for somewhat tighter reserve conditions. outlook. Taking account of conditions in A majority of the members believed, financial markets, the members indicated however, that there should be no pre- that somewhat greater or somewhat lesser sumption about the likely direction of reserve restraint would be acceptable intermeeting adjustments, if any, in the depending on the strength of the business implementation of policy. While these expansion, indications of inflation, the members generally agreed that the eco- performance of the dollar in foreign nomic risks were in the direction of more exchange markets, and the behavior of inflation, they preferred not to weight the the monetary aggregates. The reserve directive toward possible further tighten- conditions contemplated by the Commiting in light of the firming that was already tee were expected to be consistent with contemplated at this meeting and the growth in both M2 and M3 over the considerable uncertainties that they saw period from March through June at in the economic and financial outlook. annual rates of about 6 to 7 percent. As at One member proposed placing more previous meetings, the Committee deemphasis on the behavior of the monetary cided not to indicate any expectation aggregates as a factor that might trigger regarding the growth of Ml over the some firming during the intermeeting months ahead. The members agreed that period, but other members preferred the the intermeeting range for the federal current emphasis, partly because any funds rate, which provides one mechasurge in money growth over the weeks nism for initiating consultation of the ahead might reflect temporary develop- Committee when its boundaries are perments related to mid-April tax payments. sistently exceeded, should be left un- Some consideration was given during the changed at 4 to 8 percent. discussion to an upward adjustment in the At the conclusion of the meeting the intermeeting range for the federal funds following domestic policy directive was rate, especially since federal funds could issued to the Federal Reserve Bank of trade well into the upper half of the New York: Committee's range following the decision made at today's meeting. However, the The information reviewed at this meeting members concluded that increasing the suggests some moderation in the expansion of range under current circumstances could economic activity in the current quarter from be misread as implying a greater move the rapid pace in the fourth quarter; the toward restraint than the Committee continuing expansion has been supported by a sharp pickup in domestic final sales while the intended. accumulation of inventories appears to have At the conclusion of the Committee's slowed. Total nonfarm payroll employment discussion, all but one of the members rose substantially over the first two months of indicated their acceptance of a directive the year, although employment growth slowed somewhat in the manufacturing sector. The that called for a slight increase in the civilian unemployment rate fell slightly to 5.7 degree of pressure on reserve positions. percent in February. Growth in industrial With regard to the Committee's operating production moderated in early 1988 from a procedures, a majority continued to brisk pace during the second half of 1987. endorse the view that some flexibility Consumer spending strengthened in January and February, buoyed by higher sales of might be desirable in the day-to-day motor vehicles. Indicators of business capital conduct of open market operations in spending pointed to substantial gains in the light of the still somewhat unsettled first quarter. Housing starts rebounded in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

96 FOMC Policy Actions February but were still somewhat below the reserve positions. The Committee agrees that reduced fourth-quarter average. The nominal the current more normal approach to open U.S. merchandise trade deficit changed little market operations remains appropriate; still in January and was significantly below the sensitive conditions in financial markets and fourth-quarter average. In recent months the uncertainties in the economic outlook may rise in consumer and producer prices has been continue to call for some flexibility in operarelatively modest on balance, reflecting devel- tions. Taking account of conditions in finanopments in food and energy prices, and wage cial markets, somewhat greater reserve retrends have shown little change. straint or somewhat lesser reserve restraint Most interest rates were up somewhat on would be acceptable depending on the strength balance since the Committee's meeting in of the business expansion, indications of February, with the largest increases concen- inflationary pressures, developments in fortrated in bond markets. The trade-weighted eign exchange markets, as well as the behavior foreign exchange value of the dollar in terms of the monetary aggregates. The contemof the other G-10 currencies fluctuated in a plated reserve conditions are expected to be relatively narrow range over most of the consistent with growth in M2 and M3 over the intermeeting period, but declined somewhat period from March through June at annual in recent days. rates of about 6 to 7 percent. The Chairman After strengthening in January, growth of may call for Committee consultation if it M2 and M3 remained relatively robust in appears to the Manager for Domestic Opera- February and in the first part of March. Thus tions that reserve conditions during the period far this year expansion of these two aggregates before the next meeting are likely to be appears to have been in the upper portion of associated with a federal funds rate persisthe ranges established by the Committee for tently outside a range of 4 to 8 percent. 1988. Ml has grown moderately on balance since the fourth quarter. Expansion in total Votes for this action: Messrs. Greenspan, domestic nonfinancial debt appears to be Corrigan, Angell, Black, Forrestal, Heller, continuing at a pace close to that in 1987. Hoskins, Johnson, Kelley, and Parry. Vote The Federal Open Market Committee seeks against this action: Ms. Seger. monetary and financial conditions that will foster price stability over time, promote Ms. Seger dissented because she did not growth in output on a sustainable basis, and believe that economic and financial develcontribute to an improved pattern of internaopments warranted any tightening of tional transactions. In furtherance of these reserve conditions. She did not see a objectives, the Committee at its meeting in February established growth ranges of 4 to 8 significant risk of more inflationary prespercent for both M2 and M3, measured from sures on productive resources stemming the fourth quarter of 1987 to the fourth quarter from prospective demands in domestic of 1988. The monitoring range for growth in and export markets. She remained contotal domestic nonfinancial debt was set at 7 to cerned about the downside risks in the 11 percent for the year. With respect to M1, the Committee decided economy, the fragility in financial marin February not to establish a specific target kets, especially the stock market, and the for 1988. The behavior of this aggregate in weakened condition of many depository relation to economic activity and prices has institutions. become very sensitive to changes in interest rates, among other factors, as evidenced by sharp swings in its velocity in recent years. Consequently, the appropriateness of changes 2. Authorization for Domestic in Ml this year will continue to be evaluated Open Market Operations in the light of the behavior of its velocity, developments in the economy and financial The Committee approved a temporary markets, and the nature of emerging price increase of $4 billion, to a level of $10 pressures. billion, in the limit between Committee In the implementation of policy for the meetings on changes in System Account immediate future, the Committee seeks to increase slightly the degree of pressure on holdings of U. S. government and federal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 97 agency securities specified in paragraph sured by the household survey was up l(a) of the Authorization for Domestic very sharply in April, and the civilian Open Market Operations. The increase unemployment rate declined 0.2 percentwas effective for the intermeeting period age point to a level of 5.4 percent; that starting March 30,1988, and ending with level was down appreciably since the the close of business on May 17,1988. start of the year and was the lowest since 1974. Votes for this action: Messrs. Greenspan, Growth in industrial production picked Corrigan, Angell, Black, Forrestal, Heller, up considerably in April from a reduced Hoskins, Johnson, Kelley, and Parry and pace earlier in the year. Auto assemblies Ms. Seger. Votes against this action: None. posted large gains, and the output of This action was taken on the recommen- business equipment remained exceptiondation of the Manager for Domestic ally strong. Capacity utilization rates in Operations. The Manager advised that manufacturing and mining and in the the normal leeway of $6 billion probably production of industrial materials increased appreciably in April and on would not be sufficient to accommodate balance have risen substantially over the desirable increases in System Account past several quarters to relatively high holdings of securities during the interlevels. meeting period. Those increases would supply reserves to help offset very large Consumer spending for durables and reserve drains stemming mainly form a services was strong in the first quarter. short-term rise in Treasury balances at Retail sales, as revised, showed substanthe Federal Reserve Banks associated tial gains in February and March but fell with mid-April tax payments. in April. Auto sales declined somewhat in April, apparently reflecting reduced sales incentives, but household spending on other durables and on services re- Meeting Held on mained strong. Outlays on nondurable May 17,1988 goods continued sluggish. A surge in business fixed investment Domestic Policy Directive during the first quarter reflected large The information reviewed at this meeting gains in spending on informationsuggested continuing strength in the eco- processing and other equipment. New nomic expansion, supported by strong orders for nondefense capital goods sales in both domestic and export mar- softened recently, but order backlogs kets, and relatively high utilization levels were still high and suggested that output of labor and capital resources. In this would remain at an advanced level in the setting, consumer and producer prices current quarter. Spending on structures have risen more rapidly recently. In declined in the first quarter, and forward addition, labor costs increased substan- commitments for nonresidential building tially in the first quarter. were essentially flat in nominal terms. Nonfarm payroll employment contin- While inventories of motor vehicles ued to increase in April, though at a more declined during the first quarter, nonmoderate pace than in other recent auto inventory investment remained close months. The rise included sizable growth to the high rate of the fourth quarter. in the manufacturing sector and was Sales of new and existing homes inaccompanied by a sharp increase in the creased late in the first quarter. After average workweek. Employment as mea- showing weakness early in the year, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

98 FOMC Policy Actions housing starts picked up to a 1.55 million appreciated about 1 percent on the mornannual rate in March, a level margin- ing of the May 17 meeting in response to ally above that in the fourth quarter but news of the improved U.S. trade deficit still appreciably below that in earlier in March. quarters. At its meeting in February the Commit- The U.S. merchandise trade deficit tee agreed on policy objectives that called declined substantially in both nominal for monetary growth ranges of 4 to 8 and real terms in the first quarter. Exports percent for both M2 and M3 for the reached a record level; oil imports fell, period from the fourth quarter of 1987 to but non-oil imports continued to expand. the fourth quarter of 1988. The associated Indicators of economic activity in the range for growth in total domestic nonfimajor foreign industrial countries during nancial debt was set at 7 to 11 percent. the first months of 1988 showed contin- The Committee decided not to establish a ued strength in Japan and, on balance, in numerical target for Ml growth; instead, Europe as well. the appropriateness of changes in Ml The consumer price index increased would be evaluated during the year in the substantially in March, despite a limited light of the behavior of Ml velocity, rise in retail food prices and flat retail developments in the economy and finanenergy prices. At the producer level, cial markets, and the nature of emerging prices of finished goods rose rapidly in price pressures. March and April, largely reflecting in- At its previous meeting on March 29, creases in the food and energy sectors. the Committee adopted a directive calling Prices of intermediate goods advanced for a slight increase in the degree of considerably further in both months, pressure on reserve positions. These continuing their uptrend of the past year reserve conditions were expected to be and a half that has coincided with in- consistent with growth in both M2 and creased capacity utilization rates. Com- M3 at annual rates of about 6 to 7 percent modity prices strengthened recently after over the period from March through registering mixed changes in the first June. Taking account of conditions in quarter. Broad measures of labor costs financial markets, the members agreed indicated a substantial advance in the first that somewhat greater or somewhat lesser quarter, in part because of a rise in payroll reserve restraint would be acceptable, taxes. depending on the strength of the business Dollar exchange rates moved within a expansion, indications of inflationary narrow range during most of the inter- pressures, developments in foreign exmeeting period, with uncertainties re- change markets, and the behavior of the garding U.S. trade and price perfor- monetary aggregates. The intermeeting mance apparently offset by indications of range for the federal funds rate was left U.S. monetary tightening; also, weak- unchanged at 4 to 8 percent. ness at the time of the release of the Some slight firming of reserve condi- February trade data was met by concerted tions was implemented immediately after central bank intervention. On a weighted- the March meeting. In the two reserve average basis, the dollar appreciated maintenance periods ending April 20, slightly on balance in relation to the other adjustment plus seasonal borrowing rose G-10 currencies until late in the period; it to an average of about $330 million; in strengthened with respect to the mark the subsequent period ending May 4, and weakened slightly with respect to the borrowing averaged about $440 million, pound and the yen. The dollar then reflecting the impact of a tax-related Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 99 bulge in Treasury deposits at the Federal little higher, than had been anticipated, Reserve Banks that affected reserve the risks of higher rates of price and wage market conditions and complicated the inflation had increased. The actual course management of reserves. More recently, of the economy would depend in part on open market operations were adjusted how these developments affected finantoward the implementation of further cial markets. Pressures in those markets slight firming in reserve conditions in could restrain domestic final demands. relation to what had been sought earlier Relatively sluggish growth in such dein the period. This action was taken in mands, along with indications of overlight of information that indicated consid- stocking in the retail sector, would erable strength in the economy and a encourage a reduced rate of inventory related increase in concerns about the investment. Growth in business fixed potential for greater inflation. Growth of investment was projected to slow substan- M2 and M3 for the year to date was at tially, and federal purchases, in constant rates in the upper portions of the Commit- dollar terms, were expected to be weak. tee's ranges for 1988. Monetary growth Under such circumstances, while prices was boosted in April by a temporary and wages might rise somewhat more buildup in transaction balances associ- rapidly in the quarters ahead, reflecting ated with very large tax payments by the effects of the lower dollar on market individuals. Although preliminary data prices and reduced margins of unutilized for early May indicated substantial weak- production resources, the extent and ness of money growth, the cumulative duration of any pickup of inflation might expansion of the broad aggregates re- be limited. mained relatively high in their annual In the Committee's discussion of the ranges. Total and nonborrowed reserves outlook for economic activity and rose at rapid rates in April in conjunction prices, the members focused on the with the increase in required reserves strong performance of the economy in against transaction deposits. recent months, and, in the context of The firming of reserve conditions was diminishing margins of unused labor reflected in a rise in the federal funds rate and other production resources, they from around 6 Vi percent at the time of the expressed considerable concern about March meeting to around 7 percent most the potential for higher rates of inflation recently. Other short-term rates also rose in the year ahead. Members referred to about Vi percentage point over the inter- widespread evidence of strength in the meeting period, while yields on Treasury manufacturing sector and to indications and corporate bonds increased somewhat that many firms were producing at very less. Banks raised their prime lending high levels of capacity use. Manrate from 8 xh to 9 percent during the first ufacturing was continuing to benefit half of May. Broad indexes of stock from the nation's improved ability to prices changed little on balance over the compete internationally as a result of the period. depreciated dollar, and strength in The staff projection reviewed at this manufacturing was feeding through to meeting suggested that the economy had other related sectors of the economy. On considerable underlying strength, reflect- the negative side, members referred to ing both an improving trade balance and indications that inventories were higher continuing momentum in domestic de- than desired in some industries, notably mands. With unemployment already a at the retail level, and some saw a little lower, and capacity utilization a relatively weak outlook for construe- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

100 FOMC Policy Actions tion, both residential and nonresidential. an inflationary surge might be imminent, Weaknesses in the financial sectors of but they believed that the situation needed the economy and relatively heavy debt careful watching. burdens also increased the downside In the Committee's discussion of policy risks in the economy. But, on balance, for the intermeeting period ahead, the while some slowing from the current members generally agreed that some rate of expansion was a reasonable further tightening of reserve conditions expectation, the risks were on the side of was needed to counter the risks of rising faster-than-desired growth and more inflationary pressures in the economy. A inflationary pressures. Some members failure to act in timely fashion not only observed that in these circumstances would be inconsistent with the Commitfiscal restraint, especially if supple- tee's commitment to achieving price mented by measures to reduce the stability over time but would in fact inflationary consequences of many compound the difficulties of accomplishgovernment programs, could greatly ing that objective. Views differed, howfacilitate the effort to control inflation ever, regarding the desirable extent of while encouraging sustained economic such firming and the appropriate timing expansion. for its implementation. A majority fa- Turning to the outlook for inflation, vored only a slight move toward more members reported rising costs of materi- restraint, at least pending an evaluation als and other manufacturing inputs. With of further developments, and most of profit margins under more pressure, these members preferred to delay the numerous firms were looking for oppor- tightening action for a short period. Other tunities to pass on rising costs, and there members felt that current and potential were reports of some increase in success- pressures on prices and wages argued ful efforts by businesses to raise prices, more urgently for a prompt move to especially on crude and intermediate somewhat greater restraint. producer goods. However, while many The members who favored only slight specific instances of sizable price in- further firming, whether immediately or creases could be cited, broad measures of after a short delay, saw a considerable prices, including commodity prices as a risk that an appreciable further tightening group, did not indicate at this point that a would be unexpected so soon after the significant worsening had occurred in the most recent firming and might well have overall rate of inflation. Likewise, while an exaggerated impact on financial marreports of shortages of qualified labor kets. Among other effects, it might give were multiplying and business resistance rise to anticipations of an increase in the to higher wages seemed to be diminishing discount rate, and foster unwarranted in some areas, the members did not expectations about the System's intencurrently detect any appreciable acceler- tions. Some members also stressed the ation in wage rate increases. Nonethe- adverse impact that any marked weakenless, several expressed concern that, ing of financial markets could have on unless the expansion in overall demands troubled depository institutions. In these were to slow markedly from the recent circumstances, marginal further tightenpace, which exceeded the trend growth ing in the near term would provide an of potential output, a substantially higher appropriate balance between the need to rate of price and wage inflation could not curb the emergence of excessive demand be avoided in the relatively near future. pressures in the economy and the risks of Others were less ready to conclude that further restraint for financial markets and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 101 depository institutions. A few members opportunity costs of holding money balalso expressed the view that the two ances in response to the rise in market firming actions since late March, taken interest rates. While M2 and M3 curtogether, already represented a signifi- rently appeared to be growing at rates cant move to greater restraint and more that were consistent with the Committee's time was needed to appraise their impact expectations for the second quarter, their on the economy before any substantial cumulative growth thus far this year was further tightening was implemented. at rates in the upper part of the Commit- Members who favored moving tee's ranges. One member stressed that promptly to a somewhat greater degree any tendency for monetary growth to of restraint gave more emphasis to the exceed the ranges should be firmly rerisks of more inflation as demand pres- sisted under prevailing circumstances. sures encountered labor and capacity Another commented that reduced growth, constraints in many industries. In this which brought the expansion for the year view the System's recent firming actions to around the middle of the Committee's were helpful, but they did not go far ranges, would be a desirable outcome. enough toward restraining the growth in With regard to adjustments in the total demands to a noninflationary pace. degree of reserve pressure during the These members recognized that apprecia- intermeeting period, the slight firming ble further firming could have some after a short interval following today's adverse impact on financial markets in meeting that was favored by a majority of the short run and on the condition of the members would be implemented many already weakened depository insti- unless economic and financial conditions tutions. However, a prompt and some- in the period ahead were to differ markwhat stronger response to inflationary edly from current expectations. Should developments at this point would have a unanticipated developments of that sort favorable effect on inflationary expecta- occur, the Chairman would call for a tions, and over time also on long-term special consultation of the Committee. debt markets, and would reduce the need On the question of any subsequent adjustfor greater and more disruptive tighten- ment in policy, a majority believed that ing actions later. Some of these members policy implementation should remain indicated that a relatively modest move especially alert to incoming information now, or in the very near future, and a that might call for further firming. Given readiness to tighten further later during the recent tightening of reserve condithe intermeeting period would constitute tions and the presumption that at least an acceptable compromise, given con- marginally firmer reserve conditions cerns about the risks of unwarranted would be implemented in the intermeetreactions in the financial markets. ing period, the members decided to raise During the discussion members re- the intermeeting range for the federal ferred to a staff analysis prepared for this funds rate by 1 percentage point to 5 to 9 meeting that concluded that expansion of percent. With such an increase the averthe monetary aggregates, especially Ml age trading level expected for the federal and M2, was likely to moderate substan- funds rate in the period ahead would be tially from the pace in April. The pro- aligned somewhat more symmetrically jected slowing reflected in part a reversal around the middle of the range. of the tax-related buildup in transaction In further discussion most of the memaccounts during April, which was already bers indicated that they now favored occurring, and the impact of increased dropping from the directive the special Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

102 FOMC Policy Actions reference to sensitive conditions in finan- firming would be implemented after a cial markets and the related reference to short interval following today's meeting, the need for flexibility in the conduct of assuming that economic and financial open market operations. Members noted conditions remained reasonably consisthat these references, while helpful in tent with current expectations. In particdescribing the Committee's approach to ular, and in keeping with the Committee's operations for an extended period follow- usual approach to policy, the conduct of ing the October disturbances in financial open market operations would take acmarkets, no longer served a clarifying count of conditions in financial markets, purpose in communicating the Commit- the strength of the business expansion, tee's intentions. While still somewhat indications of inflation, the performance volatile, market conditions were now of the dollar in foreign exchange markets, closer to those prevailing prior to the and the behavior of the monetary aggre- October break in the stock market, and gates. Later in the intermeeting period, the Committee anticipated that the earlier some added reserve restraint would be approach to open market operations acceptable, or some slight lessening of generally would be followed. A few reserve pressure might be acceptable, members felt, however, that still quite depending on ongoing economic and sensitive conditions in financial markets financial developments. The contemcontinued to warrant more than the usual plated reserve conditions were likely to amount of flexibility in the conduct of be associated with slower monetary open market operations. growth, but given their relatively rapid In advance of the discussion of long- expansion in April, M2 and M3 were still term monetary growth ranges at its next expected to grow at the rates of 6 to 7 meeting, the Committee considered the percent established in late March for the role that the monetary base might play in period from March to June. The members monetary policy. One proposal was to set agreed that the intermeeting range for the fairly wide limits on quarterly fluctua- federal funds rate, which provides one tions in the monetary base, but to adjust mechanism for initiating consultation of policy promptly if the limits were the Committee when its boundaries are breached. The Committee also discussed persistently exceeded, should be raised whether a range for the base comparable by 1 percentage point to 5 to 9 percent. to the existing ranges for M2 and M3 and At the conclusion of the meeting the nonfinancial debt might usefully supple- following domestic policy directive was ment the current ranges. Most members issued to the Federal Reserve Bank of expressed reservations about the relia- New York: bility of the base as a guide to or restraint on policy, given their questions about the The information reviewed at this meeting behavior of currency and reserves rela- suggests continuing strong expansion in economic activity and rising levels of resource tive to income. However, there was sentiutilization. In April, total nonfarm payroll ment for a continuing review of possible employment rose further; the increase inmonetary indicators of future pricetrends. cluded sizable growth in the manufacturing At the conclusion of the Committee's sector. The civilian unemployment rate fell to discussion, all but two of the members 5.4 percent, down appreciably from its level at the start of the year. Growth in industrial indicated that they favored or could production picked up considerably in April accept a directive that called initially for from a reduced pace earlier in the year. Retail maintaining the current degree of pres- sales fell appreciably last month but estimates sure on reserve positions. Some slight of sales in February and March were revised Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 103 substantially higher. Indicators of business degree of pressure on reserve positions. capital spending point to substantial gains Taking account of conditions in financial thus far this year, notably for equipment. The markets, the strength of the business expannominal U.S. merchandise trade deficit in the sion, indications of inflationary pressures, first quarter was substantially smaller than developments in foreign exchange markets, that for the fourth quarter. Consumer and and the behavior of the monetary aggregates, producer prices have risen more rapidly the Committee expects that a slight increase in recently following a period of relatively the degree of pressure on reserve positions modest increases. Broad measures of labor would be appropriate in the weeks ahead. costs indicate a substantial advance in the first Depending on further developments in these quarter, in part because of a rise in payroll factors, somewhat greater reserve restraint taxes. would, or slightly lesser reserve restraint Interest rates have risen somewhat since might, also be acceptable later in the intermeetthe Committee's meeting on March 29. The ing period. The contemplated reserve conditrade-weighted foreign exchange value of the tions are expected to be consistent with growth dollar in terms of other G-10 currencies had in M2 and M3 over the period from March increased slightly on balance over the inter- through June at annual rates of about 6 to 7 meeting period prior to May 17 and jumped percent. The Chairman may call for Commitfollowing release of the March trade data. tee consultation if it appears to the Manager M1 and M2 grew rapidly in April, owing in for Domestic Operations that reserve condipart to a buildup in transaction balances tions during the period before the next meeting associated with tax payments, while M3 are likely to be associated with a federal funds expanded at a slower pace than in previous rate persistently outside a range of 5 to 9 months. Through April, expansion of M2 and percent. M3 was in the upper portion of the ranges established by the Committee for 1988. Votes for this action: Messrs. Greenspan, Expansion in total domestic nonflnancial debt Corrigan, Angell, Black, Forrestal, Heller, appears to be continuing at a pace close to that Johnson, and Kelley and Ms. Seger. Votes in 1987. against this action: Messrs. Hoskins and The Federal Open Market Committee seeks Parry. monetary and financial conditions that will foster price stability over time, promote growth in output on a sustainable basis, and Messrs. Hoskins and Parry dissented contribute to an improved pattern of internabecause they favored a prompt move to a tional transactions. In furtherance of these greater degree of reserve restraint. In objectives, the Committee at its meeting in February established growth ranges of 4 to 8 their view the risks were considerable percent for both M2 and M3, measured from that price and wage inflation would the fourth quarter of 1987 to the fourth quarter accelerate from rates that were already of 1988. The monitoring range for growth in too high. A more substantial firming was total domestic nonflnancial debt was set at 7 to needed to moderate underlying pressures 11 percent for the year. and to foster reasonable progress toward With respect to M1, the Committee decided in February not to establish a specific target price stability. In the absence of such a for 1988. The behavior of this aggregate in move at this time, even greater tightening relation to economic activity and prices has might well be required later, with attenbecome very sensitive to changes in interest dant costs to financial markets and the rates, among other factors, as evidenced by economy. Mr. Hoskins noted that the M2 sharp swings in its velocity in recent years. Consequently, the appropriateness of changes and M3 aggregates were near the upper in Ml this year will continue to be evaluated bound of their target ranges. He also in the light of the behavior of its velocity, referred to the strengthening of business developments in the economy and financial activity abroad, which had implications, markets, and the nature of emerging price potentially, for more widespread price pressures. pressures, and to the desirability of In the initial implementation of policy, the Committee seeks to maintain the existing increasing the credibility, and thus the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

104 FOMC Policy Actions effectiveness, of monetary policy through months. The output of materials also timely, anti-inflationary measures. He strengthened over the two months, but emphasized that monetary policy should that of non-auto consumer goods edged be directed toward a steady reduction of down. There were widespread increases inflation and not toward meeting shorter- in capacity utilization rates in April and term business cycle goals. Mr. Parry May. Those rates have risen to high noted that the two tightening actions in levels in primary processing industries. recent weeks were of insufficient magni- After increasing appreciably in the tude to have much effect on the economy first quarter, retail sales were little in the context of strengthened prospects changed on balance over April and May. for growth and already tight labor Sales of durable goods edged down from markets. recent advanced levels, while spending on nondurable goods extended the sluggish pattern in evidence over the previous Meeting Held on two quarters. Housing starts fell to an June 29-30,1988 annual rate of 1.38 million units in May, down from a rate of approximately 1 Vi Domestic Policy Directive million units over the preceding three The information reviewed at this meeting months. Despite the decline, data on suggested that economic activity was building permits and home sales sugcontinuing to expand at a relatively gested that the pace of housing activity vigorous pace, though apparently not was little changed. quite as rapidly as earlier this year. Business fixed investment also ap- Growth in output was being sustained by peared to have leveled off at a high rate considerable strength in manufacturing; recently. Outlays for structures increased the latter appeared to reflect in part a in April, particularly in the industrial continuing improvement in the nation's sector, but new commitments for nonrestrade balance as well as ongoing expan- idential construction were trending down. sion in domestic demands. Various mea- While new orders for nondefense capital sures of prices and wages suggested some goods showed little change in April and intensification of inflation in recent May, the latest survey data implied months. further gains in capital spending over the Growth in nonfarm payroll employ- second half of 1988. Nonfarm inventory ment moderated somewhat in April and investment in April remained close to its May, particularly in construction, trade, first-quarter pace. The buildup in stocks and services. However, manufacturing continued to be sizable in manufacturing employment and the average workweek and wholesale trade and was concentrated showed continued strength. In May, in industries experiencing strong domeshousehold employment fell sharply and tic and foreign demand. At the retail reversed a large gain in April. The level, non-auto inventory investment civilian unemployment rate rose from slowed sharply in April, while invento- 5.4 percent in April to 5.6 percent in ries of automotive products rose some- May, but it remained slightly below the what after declining substantially in the first-quarter average. first quarter. Industrial production increased consid- The U.S. merchandise trade deficit erably in April and May. Assemblies of narrowed in April on a seasonally admotor vehicles and the production of justed basis, essentially reflecting a decapital goods rose substantially in both cline in imports across a wide range of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 105 commodity categories. Exports fell tions in financial markets, the strength of slightly in April after a large increase in the business expansion, indications of March. Real economic activity expanded inflation, the performance of the dollar in strongly during the first quarter in most foreign exchange markets, and the behavof the major foreign industrial countries, ior of the monetary aggregates. Later in but available indicators pointed to some the intermeeting period, some added slowing in the second quarter, while reserve restraint would be acceptable, or inflation remained subdued. some slight lessening of reserve pressure Over April and May, the consumer might be acceptable, depending on ongoprice index rose at about the average pace ing economic and financial developof the first quarter, despite a sizable ments. The contemplated reserve condiadvance in retail food and energy prices. tions were expected to be associated with At the producer level, prices of finished growth in M2 and M3 at annual rates of 6 goods continued to increase in May at the to 7 percent over the period from March quickened pace of the previous two to June. The members agreed that the months. Prices of a broad range of intermeeting range for the federal funds commodities, particularly agricultural rate should be raised by 1 percentage goods, increased sharply in the past few point to a range of 5 to 9 percent. weeks, in part because of the effects of In accordance with the Committee's the drought. The rise in average hourly instructions, open market operations earnings of private nonfarm workers were directed toward a slight increase in picked up significantly in April and May. the degree of reserve pressure starting in The dollar firmed considerably in for- the latter part of May. In the two reserve eign exchange markets from late May maintenance periods ending June 15, through mid-June, and it subsequently adjustment plus seasonal borrowing rose appreciated further in the days leading up to an average of $530 million. That to the Committee meeting. In relation to average included a bulge over the Memoother G-10 currencies, the dollar finished rial Day holiday in late May. The implethe period on average about 6 percent mentation of firmer reserve conditions, above its level at the time of the previous interacting with market expectations of a Committee meeting on May 17. Continu- tighter monetary policy and some seaing improvement in the U.S. trade bal- sonal pressures in the money market, ance and perceptions that inflationary contributed to an increase in the federal pressures would be resisted with tighter funds rate from about 7 percent at the monetary policy helped to strengthen the time of the May meeting to around 73/s to dollar. IVi percent by mid-June. Subsequently, At its previous meeting in May, the a marginal further increase was sought in Committee adopted a directive that called the degree of reserve restraint. This initially for maintaining the existing further adjustment in open market operdegree of pressure on reserve positions. ations was made in the context of a flow The Committee agreed that some slight of economic information that suggested a firming would be implemented after a continuing risk of greater inflation and a short interval following this meeting, directive that called for evaluating new assuming that economic and financial economic data with a greater readiness to conditions did not diverge significantly tighten than to ease. Adjustment plus from the members' expectations. In par- seasonal borrowing averaged about $520 ticular, the conduct of open market million in the reserve maintenance period operations would take account of condi- ending June 29. Federal funds traded Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

106 FOMC Policy Actions mostly around IVi percent during this demands were strong, in a context of an period but rose to around 8 percent late in anti-inflation monetary policy, this would the month with the approach of the show through in pressures in those marquarterly statement date. kets tending to restrain domestic spend- Most other short-term interest rates ing. The staff projection continued to rose by 14 to % percentage point during anticipate a sluggish pace of consumer the intermeeting period. In contrast, bond spending, substantially slower growth in yields declined by about the same amount business fixed investment, and subdued over the interval. Demands for long-term housing activity; it also assumed a mildly debt instruments appeared to be buoyed restrictive fiscal policy. As in earlier by improved prospects for the dollar and projections, improvement in the trade by signs that the economic expansion balance was expected to contribute submight be moderating toward a more stantially to continuing growth in overall sustainable pace in the context of percep- economic activity. Prices and wages were tions that monetary policy was being expected to rise somewhat more rapidly tightened in a timely manner. Broad in the quarters ahead because of the indexes of stock prices increased appre- continuing effects of the dollar's depreciciably on balance over the period since ation on prices of non-oil imports and of mid-May. reduced margins of unutilized production Growth of M2 and M3 slowed substan- resources. Increases in food prices as a tially in May, and Ml was about un- consequence of drought conditions were also expected to contribute to inflationary changed. This weaker performance repressures over the quarters immediately flected mainly a runoff of tax-related ahead. balances. Based on partial data through midmonth, growth of the monetary ag- In the Committee's discussion of the gregates appeared to have rebounded in economic situation and outlook, the June, though it remained below that members generally agreed that some registered earlier in the year as increases moderation in the rate of economic in market interest rates in recent months expansion was a reasonable expectation apparently began to damp demands for for the next several quarters. Indeed, money. Expansion in total domestic although the specific rate of economic nonfinancial debt thus far this year was growth that would foster achievement of estimated to have moderated somewhat the Committee's price stability goal could from the pace in 1987. not be anticipated with any degree of The staff projection prepared for this precision, the members generally agreed meeting suggested that the economy that a considerably slower rate of expanwould expand at a more moderate pace in sion than appeared to have occurred in the quarters immediately ahead. Growth the first half of 1988 would probably be in output would be held down by the needed, given already high utilization effects of the drought on agricultural rates of labor and capital resources. output, a decline in automobile produc- Views differed, however, with regard to tion, and a more restrained pace of the likely extent of the slowing that nonfarm inventory accumulation than might already be under way. Many was thought to have occurred in recent members expressed concern that, in the months. Over the longer run, the course absence of tighter fiscal and monetary of the economy would depend to an policies, the momentum of the economy important extent on developments in pointed to faster growth than would be financial markets. To the degree that consistent with the Committee's objective Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 107 of containing inflationary pressures over the anticipated pickup in inflation for time. Some other members gave more technical reasons, including a shift in the emphasis to recent data that seemed to composition of output that had produced point to more moderate economic growth. an unusually low increase in the deflator They noted that the higher interest and for the first quarter of 1988. In making exchange rates and the slower monetary these projections the members took acgrowth that had accompanied the tighten- count of the Committee's objectives for ing of monetary policy over the spring monetary growth established at this would be restraining demands over com- meeting and assumed that the fiscalp olicy ing quarters, and they saw a lesser risk of understandings reached by the Congress a significant pickup in inflation. In the and the administration in late 1987 would view of these members, inflation re- be fully implemented. The members also mained a major concern, but additional assumed that fluctuations in the exchange information was needed to assess whether value of the dollar would not be of the economy was on a course that would sufficient magnitude to affect economic lead to an intensification of price growth and inflation materially in the pressures. period through the end of 1989. In keeping with the usual practice at In their review of developments bearmeetings when the Committee considers ing on the prospects for the economy, the its long-run objectives for monetary members generally agreed that the outgrowth, the members of the Committee look for consumer and business spending and the Federal Reserve Bank presidents pointed to slower growth in domestic not currently serving as members pre- final demands over the next several pared specific projections of growth in quarters, but they continued to anticipate real and nominal GNP, the rate of unem- that further improvement in the nation's ployment, and changes in the overall trade balance would provide a major price level. With regard to rates of impetus to sustained moderate expansion expansion in real GNP, the projections in overall economic activity. There was had a central tendency of 2 3A to 3 percent uncertainty about strength of demands in for 1988 as a whole, implying a consid- the economy from both domestic and erable slowing over the second half of the foreign sources. Some recent data on year; for the year 1989 the central consumption and investment seemed to tendency of the projections was 2 to 2*/2 suggest that demands were moderating a percent or close to that implied for the bit in the second quarter; moreover, the second half of this year. Projections of rise in interest rates would be damping growth in nominal GNP centered on rates domestic demands over coming quarters, of 53A to 6% percent for 1988 and 5 to 7 and the higher dollar, if it persisted, percent for 1989. The projected rates of could restrain the pace of external adjustcivilian unemployment had a central ment. In addition, money stock growth, tendency of 5lA to 5% percent for the taking 1987 and the first half of 1988 fourth quarter of 1988 and 5V4 to 6 together, had been much less rapid than percent for the fourth quarter of 1989. in previous years, and this suggested With respect to the rate of inflation, as some restraint in the economy. On the indexed by the GNP deflator, the projec- other hand, the economy seemed to have tions centered on rates of 3 to 3 % percent a good deal of momentum and it was far for 1988 and 3 to 4Vi percent for 1989. from clear whether the slowing, if any, The somewhat higher midpoint of the would be sufficient to relieve growing central tendency for 1989 overstated pressures on resources. Consumption Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 FOMC Policy Actions seemed sluggish, but restrained con- omy might prove excessive in relation to sumer spending was needed to allow available labor and capital resources, production resources to be shifted to especially given the high levels of resectors that competed in international source utilization already prevailing. By markets. Reports from the Federal Re- some measures, prices had risen someserve Districts suggested that the im- what more rapidly in recent months, proved international competitiveness of although any associated worsening of domestic producers continued to boost inflationary expectations, at least as manufacturing activity and that capital reflected in certain key financial markets, spending to expand and modernize indus- appeared to have been muted, perhaps by try would likely continue fairly robust, if favorable reactions to the System's tightbelow the extraordinary pace of the first ening moves. With regard to wages, quarter. Economic activity abroad had some members commented that recent been somewhat stronger than expected, wage data, on the whole, had an upward and if that pattern continued it would tend tilt. Reports from different parts of the to boost demands on U.S. exporters. country suggested that labor market An important uncertainty in the eco- conditions were relatively taut in many, nomic outlook, at least in the view of but not all, areas, but there were few some members, was the prospective reports of substantial acceleration in rates performance of inventories. A somewhat of wage increases. Many business execreduced rate of inventory accumulation utives were expressing concern, howwas desirable to prevent an excess buildup ever, about their continuing ability to in relation to sales, but a surge in restrain demands for higher wages. For inventory investment could not be ruled the moment, priority in labor negotiaout. Such a development would contrib- tions continued to be placed on job ute to demand pressures and would security issues, and many business execthreaten the sustainability of the expan- utives, facing domestic and foreign comsion . Members also noted that the drought petition, continued to emphasize meawas having an adverse impact on agricul- sures to increase productivity and hold ture in several parts of the country, but its down unit labor costs. ultimate effects on the economy were Against the background of the Comdifficult to predict. A timely improve- mittee's views regarding the economic ment in moisture conditions might yet outlook and in keeping with the requirelimit that impact for many producers. ments of the Full Employment and Bal- In areas unaffected by the drought, anced Growth Act of 1978 (the Humphagricultural producers were benefiting rey-Hawkins Act), the Committee at this from higher prices of agricultural meeting reviewed the ranges for growth commodities. in the monetary and debt aggregates that During the Committee's discussion, it had established in February for 1988 the members focused a great deal of and decided on tentative ranges for attention on the outlook for prices and growth in those measures in 1989. The wages. Specific developments, such as 1988 ranges included growth of 4 to 8 rising import prices and the impact of the percent for both M2 and M3 for the drought on agricultural prices, were period from the fourth quarter of 1987 to contributing to inflationary pressures. the fourth quarter of 1988. A monitoring However, of more fundamental concern range of 7 to 11 percent had been set for to members was the possibility that growth in total domestic nonfinancial aggregate demand pressures in the econ- debt in 1988. For the year to date, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 109 cumulative expansion of M2 and M3 had and concurrent progress toward price been in the upper portion of the ranges stability would require that the ranges established by the Committee, while continue to be ratcheted down over time. expansion in nonfinancial debt had been However, views differed as to how much, around the middle of its range. With if any, of this reduction should be schedregard to M1, the Committee had decided uled at this time for 1989—especially in in February not to set a numerical target light of the uncertainty at mid-1988 as to for 1988 but to appraise the behavior of what economic and financial conditions this monetary measure in terms of its would prevail in 1989. With deposit rate velocity and against the background of deregulation, the aggregates had become developments in the economy and finan- more interest sensitive, and it had become cial markets and the nature of emerging increasingly difficult to anticipate very price pressures. far in advance what rates of monetary In the Committee's review of the growth would be appropriate. Many ranges that had been set for 1988, all of members favored a reduction of a full the members found acceptable a proposal percentage point in the M2 range. They to retain the current ranges. The Commit- viewed such a reduction as necessary to tee took account of a staff analysis that constrain income growth in a period when indicated that a moderation in the growth underlying inflation pressures could reof M2 over the second half of 1988, main strong and velocity could be increasbringing M2 expansion to around the ing. Most other members favored a middle of the Committee's range for the smaller reduction, or no reduction, in the year, was consistent with the slower money growth ranges. Some anticipated growth of income that was both expected that the expansion in business activity as and desirable. The slower M2 growth 1989 began might well be slower than also would reflect the impact of the rise in most members currently anticipated. market interest rates in recent months in Interest rates might also be lower, thereby association with an expectation that tending to damp velocity. Because of depository institutions characteristically uncertainty about the outlook, there was would not adjust offering rates fully on a risk that a part, or all, of any current their interest-bearing deposits or would reductions might have to be reversed do so only after a considerable delay. when the ranges were reexamined in Growth of M3 was projected to exceed February, with adverse effects in terms that of M2 during the remainder of 1988, of the public's perception of the System's reflecting needs to finance fairly robust anti-inflation resolve. In the view of these credit growth at depository institutions. members, the ranges could be adjusted Nonetheless, the growth of M3 was downward in February, when the outlook projected to remain well within the for 1989 would be in clearer focus. On Committee's range for the year. Growth the other hand, one member felt that a in total domestic nonfinancial debt was reduction of more than 1 percentage point expected to remain near the middle of its in the M2 range probably would be range and thus still appreciably above the needed if progress was to be made in projected expansion in nominal GNP, in lowering the rate of inflation in 1989. part because of a widened corporate Despite their differing preferences and in financing gap. recognition of the possibility of revisions With regard to the ranges in 1989, the next February in these tentative ranges, members generally agreed that achieve- all but one member indicated they could ment of sustained economic expansion accept a reduction of a full percentage Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 FOMC Policy Actions point in the M2 range. This would most members preferred not to make use communicate the System's intention to of another narrow monetary measure, restrain any tendency for inflation to the monetary base, in guiding monetary accelerate next year and, indeed, to move policy. In recent years, the base had over time toward price stability. In light varied less in relation to economic activof the uncertainties, the Committee de- ity and prices than had Ml, but its cided to retain the 4-point width for all velocity had nonetheless fluctuated subthe aggregates in 1989. Consideration stantially, and sometimes unpredictably, would be given to narrowing the ranges from year to year. to 3 percentage points when they were At the conclusion of this discussion, reviewed in February. the Committee approved for inclusion in The tentative range for M3 was re- the domestic policy directive the followduced by Vi percentage point and left ing paragraphs relating to its objectives somewhat higher than that for M2. for the broader aggregates and nonfinan- Growth in M3 had shown a tendency to cial debt in 1988 and the role of Ml: exceed M2 growth over time and that pattern was expected to continue. The The Federal Open Market Committee seeks range for M3 had been set above that for monetary and financial conditions that will foster price stability over time, promote M2 in a number of earlier years. The growth in output on a sustainable basis, and monitoring range for expansion in total contribute to an improved pattern of internadomestic nonfinancial debt also was tional transactions. In furtherance of these lowered on a tentative basis by Vi per- objectives, the Committee reaffirmed at this centage point from the range for 1988. In meeting the ranges it had established in February for growth of 4 to 8 percent for both the economic environment projected for M2 and M3, measured from the fourth quarter 1989, growth in nonfinancial debt was of 1987 to the fourth quarter of 1988. The believed likely to slow a bit from the monitoring range for growth in total domestic already reduced pace now expected for nonfinancial debt was also maintained at 7 to all of 1988. Even so, with business loan 11 percent for the year. demands expected to remain relatively With respect to Ml, the Committee reaffirmed its decision in February not to strong, growth in nonfinancial debt would establish a specific target for 1988 and also probably continue to exceed that of decided not to set a tentative range for 1989. nominal GNP by a considerable margin. The behavior of this aggregate will continue The Committee again decided not to to be evaluated in the light of movements in its set a specific range for Ml for 1988 or velocity, developments in the economy and financial markets, and the nature of emerging 1989. The velocity of Ml had exhibited price pressures. sharp swings in recent years. The latter were in part the result of the increased Votes for this action: Messrs. Greenspan, sensitivity of M1 to fluctuations in market Corrigan, Angell, Black, Forrestal, Heller, interest rates since the deregulation of Hoskins, Johnson, Kelley, and Parry and Ms. Seger. Votes against this action: None. deposit rate ceilings. The Committee concluded that the prospective relation- The following paragraph relating to ships between Ml and aggregate meathe ranges for 1989 was approved for sures of economic performance remained inclusion in the domestic policy directive: too uncertain to justify reliance on this monetary aggregate as a guide for mone- For 1989, the Committee agreed on tentatary policy, at least insofar as could be tive ranges for monetary growth, measured judged at this point for next year. Simi- from the fourth quarter of 1988 to the fourth larly, after Committee consideration quarter of 1989, of 3 to 7 percent for M2 and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 111 3 Vi to 7 Vi percent for M3. The Committee setsure sought recently might well be interthe associated monitoring range for growth in preted as a move to an easier policy once total domestic nonfinancial debt at 6 Vi to 101/2 the effects of seasonal pressures on percent. It was understood that all these ranges were provisional and that they would be money market interest rates subsided. In reviewed in early 1989 in the light of interven- present circumstances such a developing developments. ment could have an exaggerated effect on inflationary attitudes and thus on the Votes for this action: Messrs. Greenspan, effectiveness of monetary policy. A slight Corrigan, Angell, Black, Forrestal, Heller, Hoskins, Johnson, Kelley, and Parry. Vote increase in reserve pressure would help against this action: Ms. Seger. to maintain the general thrust of policy and its perception by the markets; some Ms. Seger dissented because she pre- further tightening could be assessed as ferred to retain—at least for now—this new data, especially pertaining to inflayear's ranges of 4 to 8 percent for growth tion pressures, became available. Other in both M2 and M3 for 1989. The eco- members preferred a somewhat greater nomic outlook for next year remained degree of firming immediately. They highly uncertain at this point, and she were concerned that there were substanwas concerned about reducing the ranges tial risks that the tightening actions to so far in advance and incurring the risk of date might not be sufficient to limit the having to reverse that decision next expansion to a noninflationary pace, and February. Such a reversal would create some felt that an increase in the discount unnecessary uncertainty about the con- rate might helpfully complement open duct of monetary policy. She recognized market operations at this juncture. that further reductions in the M2 and M3 Some members favored steady reserve ranges might well be needed over time to conditions. They gave more emphasis to bring inflation under control, and she the anticipated lagged effects of earlier would be prepared to lower those ranges policy tightening actions, and most of early next year if economic conditions these members also interpreted recent and prospects appeared to warrant such information as indicative of some slowing an action at that time. in the business expansion. They also In the course of the Committee's dis- were concerned that any firming, howcussion of policy implementation for the ever slight, would add to existing upward period immediately ahead, considerable pressures on the dollar. The rise in the emphasis was given by some members to dollar already suggested monetary rethe desirability of avoiding any impres- straint in the United States, and further sion of a reversal in what was widely upward movements might work against perceived as the thrust of policy in recent needed adjustment of external imbalmonths toward a gradual increase in the ances . Some firming might well be needed degree of restraint. Several observed that at some point and should be reflected in a the tightening actions of recent months directive that indicated a greater willinghad had a salutary effect on financial ness to tighten than to ease in response to markets, and, as evidenced in part by the new data. However, economic and monperformance of the bond markets, on etary indicators in this view did not point inflation expectations. The Committee to the need for any tightening at this time. did not contemplate any easing of policy According to a staff analysis prepared in the current economic environment, for this meeting, the implementation of and some members were concerned that unchanged or slightly firmer reserve maintaining the degree of reserve pres- conditions was likely to be associated Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

112 FOMC Policy Actions with some slowing in the growth of Ml the growth of the monetary aggregates. and M2 during the months ahead, largely At the conclusion of the Committee's reflecting the impact on deposit growth discussion, a majority of the members of more attractive yields on short-term indicated that they preferred or could market instruments stemming from the accept a directive that called for a slight recent rise in market rates. Growth in M3 increase in the degree of pressure on might be better maintained as banks and reserve positions. The members indithrift institutions continued to finance cated that somewhat greater reserve still sizable expansion in credit demands restraint would be acceptable, or slightly through issuance of managed liabilities. lesser reserve restraint might be accept- In these circumstances, cumulative able, depending on indications of inflagrowth in both M2 and M3 through tionary pressures, the strength of the September would be expected to remain business expansion, developments in forin the upper halves of the Committee's eign exchange and domestic financial 1988 ranges, albeit with M2 declining markets, and the behavior of the monetoward the midpoint of its range. tary aggregates. The reserve conditions With regard to possible changes in the contemplated by the Committee were degree of reserve pressure during the expected to be consistent with growth in intermeeting period, all of the members M2 and M3 at annual rates of about 5Vi agreed that operations should be adjusted and 7 percent respectively over the threemore readily toward further tightening month period from June through Septemthan toward some easing. However, ber. In keeping with its decision on the those who preferred no change in the longer-run ranges, the Committee dedegree of reserve restraint, at least for cided not to indicate any expectations now, also thought that the directive regarding the growth of Ml over the should incorporate such a presumption months immediately ahead. The memonly if there were no immediate tighten- bers agreed that the intermeeting range ing. The relatively long span between for the federal funds rate, which provides meetings and the importance of the one mechanism for initiating consultation forthcoming data to an assessment of the of the Committee when its boundaries are evolving economic and price outlook, persistently exceeded, should be left might well require consideration of inter- unchanged at 5 to 9 percent. meeting adjustments in the stance of open At the conclusion of the meeting the market operations in coming weeks. In following domestic policy directive was addition, developments in financial mar- issued to the Federal Reserve Bank of kets, especially the foreign exchange New York: market, could have an important effect on the timing of policy actions in the near The information reviewed at this meeting term, and such developments would need suggests that economic activity has continued to be reviewed carefully. The members to expand at a fairly vigorous pace. Growth in total nonfarm payroll employment moderated generally endorsed a suggestion to give somewhat in April and May. The civilian particular weight to incoming informaunemployment rate rose to 5.6 percent in tion bearing on the outlook for inflation May, a level just below its average in the first during the intermeeting period, though quarter. Industrial production advanced conthe usual attention should also continue siderably in April and May. Retail sales were little changed on balance over the two months to be given to the strength of the ecoafter rising appreciably in the first quarter. nomic expansion, conditions in domes- Available data indicate that business capital tic and foreign exchange markets, and spending has remained at the high level Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 113 reached in the first quarter. Housing starts fell decided not to set a tentative range for 1989. sharply in May, but other indicators suggested The behavior of this aggregate will continue little change in the pace of recent housing to be evaluated in the light of movements in its activity. The nominal U.S. merchandise trade velocity, developments in the economy and deficit declined substantially in April, as financial markets, and the nature of emerging imports dropped sharply and exports were price pressures. essentially unchanged. Most measures indi- In the implementation of policy for the cate that prices and wages have risen some- immediate future, the Committee seeks to what more rapidly in recent months. Prices of increase slightly the existing degree of a broad range of commodities, particularly pressure on reserve positions. Taking agricultural goods, have increased sharply in account of indications of inflationary the past few weeks. pressures, the strength of the business Short-term interest rates have risen since expansion, developments in foreign exthe Committee's meeting on May 17, while change and domestic financial markets, and bond yields have moved lower. The trade- the behavior of the monetary aggregates, weighted foreign exchange value of the dollar somewhat greater reserve restraint would, or in terms of the other G-10 currencies appre- slightly lesser reserve restraint might, be ciated considerably over the intermeeting acceptable in the intermeeting period. The period. contemplated reserve conditions are Expansion of M2 and M3 slowed consider- expected to be consistent with growth in M2 ably in May and Ml was about unchanged, and M3 over the period from June through but data available for June suggested some September at annual rates of about 5 V2 and 7 pickup in monetary growth. From a fourth- percent, respectively. The Chairman may quarter base, M2 and M3 have grown at rates call for Committee consultation if it appears in the upper portion of the ranges established to the Manager for Domestic Operations that by the Committee for 1988. Expansion in reserve conditions during the period before total domestic nonfinancial debt for the year the next meeting are likely to be associated thus far appears to be at a pace somewhat with a federal funds rate persistently outside below that in 1987. a range of 5 to 9 percent. The Federal Open Market Committee seeks monetary and financial conditions that will Votes for the paragraph on short-term foster price stability over time, promote policy implementation: Messrs. growth in output on a sustainable basis, and Greenspan, Corrigan, Black, Forrestal, contribute to an improved pattern of interna- Heller, Hoskins, Johnson, and Parry. tional transactions. In furtherance of these Votes against: Messrs. Angell and Kelley objectives, the Committee reaffirmed at this and Ms. Seger. meeting the ranges it had established in February for growth of 4 to 8 percent for both M2 and M3, measured from the fourth quarter of 1987 to the fourth quarter of 1988. The Messrs. Angell and Kelley and Ms. Seger monitoring range for growth in total domestic dissented because they preferred to direct nonfinancial debt was also maintained at 7 to policy toward maintaining unchanged 11 percent for the year. For 1989, the Committee agreed on tenta- conditions of reserve availability. They tive ranges for monetary growth, measured did not rule out the possible need for from the fourth quarter of 1988 to the fourth some firming later during the intermeetquarter of 1989, of 3 to 7 percent for M2 and ing period, subject to a review of devel- 3 Vi to 7 Vi percent for M3. The Committee set opments by the Committee. the associated monitoring range for growth in total domestic nonfinancial £ebt at 6Vi to lOVi Mr. Angell indicated that he percent. It was understood that all these ranges supported a continued slowing in the were provisional and that they would be growth of the monetary aggregates that reviewed in early 1989 in the light of interven- was directed toward price level stability ing developments. over time. In his view, while longer- With respect to Ml, the Committee rerun developments in prices remained affirmed its decision in February not to establish a specific target for 1988 and also somewhat uncertain, recent information Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

114 FOMC Policy Actions from exchange rate and commodity Meeting Held on markets, as well as the monetary August 16,1988 aggregates, called for a pause in the process of continuous tightening in order Domestic Policy Directive to gain additional insight regarding the effects of previous actions. In addition, The information reviewed at this meeting the dollar had been under substantial suggested that the economy was continuupward pressure, which had prompted ing to expand at a vigorous pace, with central bank intervention. He felt that manufacturing activity exhibiting particthe exchange rate objectives implied in ular strength. Some measures of price dollar sales would be frustrated by the inflation pointed to a pickup from recent double sterilization of reserves implied trends, and data on wages and total by monetary tightening. He wanted to compensation indicated that labor costs call attention to the cross purposes of were rising more rapidly. these actions. Total nonfarm payroll employment Mr. Kelley noted that he had increased sharply further in June and supported firming actions over the past July. The rise included continuing rapid several months, but he could not concur expansion in the manufacturing sector, with a decision to increase reserve and it was accompanied by an appreciable pressure further at this time. The econ- increase in the workweek of production omy, for the most part, was behaving workers. After declining considerably in satisfactorily, with evidence that the rate June, the civilian unemployment rate of growth in real activity might be edged up to 5.4 percent in July but decelerating. He recognized and shared remained slightly below its average level the concern that inflation had the for the second quarter. potential to accelerate. However, there Industrial production rose strongly in was insufficient evidence at this time to July after a sizable advance during the justify further tightening that might second quarter. Production gains were foster undue slowing in economic widespread but were especially progrowth. He would be prepared to nounced for business equipment. Capital support appropriate firming action later utilization rates in manufacturing rose should adequate evidence of increased further in June and July and were at inflationary pressures emerge, taking relatively high levels in primary processinto account overall economic activity. ing industries. Ms. Seger emphasized that some Retail sales increased moderately furcurrent business indicators already ther in July, and revised data indicated pointed to a slower economic expansion. somewhat higher retail sales in the second Moreover, the full impact of the firming quarter than had been estimated earlier. of policy in recent months had not yet Overall consumer spending in constant materialized. In the circumstances and dollar terms increased at about the same also taking into account the strength of moderate pace in the second quarter as it the dollar and the absence of broad had on average in the previous three indications of significant acceleration in quarters; outlays for services and durable the rate of inflation, she believed that a goods posted strong gains in the quarter, further increase in the degree of reserve while spending for nondurable goods restraint represented an unwarranted declined. risk at this time to satisfactory economic Business fixed investment was now performance. indicated to have increased substantially Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 115 further in the second quarter. Spending period since the Committee meeting on for business equipment registered an- June 29-30. In relation to other G-10 other sharp rise, paced by continued large currencies, the dollar was up about 2Vi gains in outlays for computing equipment percent on average over the intermeeting An upturn in expenditures for nonresiden- period. Indications of continuing imtial construction offset about half of the provement in the U.S. trade balance and drop in the previous quarter. With outlays of some tightening in U.S. monetary for consumer durables and business conditions contributed to the strength of equipment relatively robust, the accumu- the dollar, but the rise in its exchange lation of nonfarm business inventories value may have been tempered by percepslowed markedly in the second quarter. tions that it would be resisted by official Housing starts were unchanged in the actions. quarter from their pace in the first quarter. At its meeting in late June, the The U.S. merchandise trade deficit Committee adopted a directive calling declined considerably in the second for a slight increase in the degree of quarter to its lowest level in three years. pressure on reserve positions. These Exports of both agricultural and nonagri- reserve conditions were expected to be cultural goods rose substantially while consistent with growth of M2 and M3 at non-oil imports fell after increasing annual rates of about 5Vi percent and 7 steadily since early 1985. Economic percent respectively over the period activity appeared to have slowed in most from June to September. The members of the major foreign industrial countries agreed that somewhat greater reserve in the second quarter. The rate of inflation restraint would, or slightly lesser had increased in some of those countries reserve restraint might, be acceptable in recent months, but it was still relatively depending on indications of inflationary low. pressures, the strength of the business Producer prices of finished goods, expansion, developments in foreign which had increased at an accelerated exchange and domestic financial marpace in the second quarter, rose apprecia- kets, and the behavior of the monetary bly further in July. The advance in July aggregates. The intermeeting range for included a substantial rise in prices of the federal funds rate was left unchanged consumer goods excluding food and at 5 to 9 percent. energy. The consumer price index, avail- Some slight firming of reserve condiable for June, continued to suggest little tions was implemented immediately after change in the rate of consumer price the June meeting. In the reserve mainteinflation as declines in energy prices nance period ending in mid-July, adjusttended to offset some acceleration in food ment plus seasonal borrowings jumped to and other prices. The prices of some an average of $1.3 billion, reflecting a basic commodities had softened recently, surge in borrowings over the extended in part because of the appreciation of the July 4 weekend and another bulge associdollar in foreign exchange markets. ated with an unanticipated large upward Increases in most measures of labor costs revision in required reserves late in that had picked up over the past several maintenance period. In the two reserve months, with the acceleration occurring maintenance periods that followed, borin most broad industry and occupational rowings averaged close to $600 million, groupings. somewhat above the level prior to the In the foreign exchange markets, the June meeting. Over much of the interdollar rose somewhat further over the meeting period, federal funds traded Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

116 FOMC Policy Actions primarily in a range of 7 3A percent to 7 % for this meeting was revised to incorpopercent. In addition to the firming of rate notably faster real growth in the reserve conditions, market expectations current quarter than had been anticipated of further near-term monetary restraint earlier. Nevertheless, the rate of expanin response to the strength of incoming sion was still projected to moderate economic data seemed to contribute to considerably on balance over the next the rise in the federal funds rate from its several quarters. The effects of the average level in June. On August 9, the drought were expected to depress meadiscount rate was increased from 6 per- sured GNP growth in the second half of cent to 6 Vi percent and at the time of this the year, but those effects would be meeting federal funds were trading reversed in the first part of 1989. Growth around 8V& percent. of final demand was projected to moder- Against the background of continuing ate somewhat over the year ahead. To the strength in the economy, related concerns extent that the current momentum in final about inflation, and the firming of mone- demand tended to be sustained but was tary policy, most other interest rates rose not accommodated by monetary policy, Vz to % percentage point over the inter-pressures would be generated in financial meeting period; however, increases in markets that would restrain domestic yields on corporate and municipal bonds spending. The staff projection continued were more limited, reflecting reduced to anticipate relatively sluggish growth supplies of new issues. Mortgage rates of consumer spending, much slower rose marginally during the period. Banks expansion of business fixed investment, raised their prime lending rate from 9 to and subdued housing activity. The 9 Vi percent in mid-July and subsequently strengthening of the dollar since late to 10 percent in the first part of August. spring might inhibit the improvement in Broad indexes of stock prices were down the nation's trade balance to some extent around 5 percent over the intermeeting in 1989, but continuing progress in period. reducing the trade deficit was still ex- Growth of the broader monetary aggre- pected to provide a key impetus to gates, especially M2, slowed in July to sustained economic expansion. The rate rates somewhat below the Committee's of inflation was projected by the staff to expectations for the third quarter as a increase somewhat over the next several whole. The weakness in M2 was concen- quarters, to an important extent because trated in its volatile overnight RP and of the effects of reduced margins of Eurodollar components. Growth of retail unutilized labor and other production deposits in M2 remained considerably resources. less than in the first few months of the In the Committee's discussion of the year and apparently was damped by the economic situation and outlook, a numrise since early spring of market interest ber of members gave considerable emrates and related opportunity costs of phasis to indications of ongoing strength holding such deposits. Ml continued to in the economic expansion and to the expand rapidly in July, with strength implications of such growth for inflation especially evident in other checkable de- in the context of relatively full utilization posits. Reflecting a surge in total re- of labor and capital resources. Some serves, the growth of the monetary base commented that the surprises in the accelerated in July. incoming economic information over the In the light of recent economic devel- course of recent weeks—indeed for the opments, the staff projection prepared year 1988 to date—had tended to be on Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 117 the side of greater than projected strength. Views with respect to the outlook for Other members gave more weight to the consumer spending differed to some possibility that monetary tightening over extent, but the members generally anticprevious months—reflected in reduced ipated relatively limited growth over the growth of the monetary aggregates, next several quarters. One factor cited higher interest and exchange rates, and was the impact of higher interest rates, flat commodity prices—might already whose restraining effects on consumer have fostered a significant slowing of the spending might be reflected more quickly expansion and restraint on inflation. The than earlier because of the increased use members generally anticipated at least of variable rates on consumer and mortsome moderation in the expansion from gage loans. Some members commented the recent pace and viewed slower growth that relatively slow growth of consumer as a desirable development in terms of expenditures would be desirable not only accommodating long-run anti-inflation to curb potentially inflationary expansion objectives, but they differed as to what of overall final demand but to facilitate degree of policy restraint might be needed the allocation of more production reto achieve a sustainable and noninflation- sources to export markets. The rise in ary rate of economic expansion. mortgage interest rates was expected to In their assessment of prospective damp housing activity, and one member developments in key sectors of the econ- emphasized that this effect might be quite omy, a number of members focused on substantial. business fixed investment and business With regard to the prospects for forinventory accumulation as areas of par- eign trade, the members still expected net ticular uncertainty. Growth in business exports to continue to improve, but the capital spending was expected to slow extent of that improvement might be less substantially from its rapid pace earlier than previously anticipated, given the this year, but a number of members appreciation of the dollar in recent believed that the risks of a different months. Indeed, some business contacts outcome were in the direction of unantic- competing in international markets or ipated strength, particularly in light of preparing to enter such markets were exceptionally high rates of capacity utili- already expressing concern about the zation in many industries. Tending to potentially negative impact that the rise support that view were a growing number in the dollar would have on their sales. of reports from business contacts of plans Turning to the outlook for inflation, to expand or modernize production facil- members noted with particular concern ities. Business inventories currently ap- that labor compensation costs were rising peared to be at generally acceptable at a faster rate this year. Several comlevels, as evidenced by inventory-to- mented on increasing shortages of worksales ratios, lead times on deliveries, and ers in their local and regional markets reports from many business firms around and on more numerous reports of higher the country. Nonetheless, a surge in wages to attract or retain workers. Howinventory accumulation could not be ever, wage inflation did not appear to be ruled out at this stage of the cyclical worsening in many areas, including some expansion. Under prevailing economic where available workers were reported conditions, such a development might to be in increasingly short supply. With well add to inflationary demand pressures regard to price developments, recent and could threaten the sustainability of statistical indicators presented a mixed the business expansion itself. picture. Producer prices of finished goods Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 FOMC Policy Actions were rising more rapidly, and there were During the Committee's discussion of reports from some parts of the country policy for the intermeeting period ahead, that business firms were succeeding to a nearly all the members indicated that greater extent than earlier in their efforts they preferred or could support a directo pass on rising costs or to raise profit tive to maintain unchanged conditions of margins. On the other hand, sensitive reserve availability. In assessing the commodity prices, particularly for indus- desirability of such a policy, members trial materials, had been fairly steady and noted that the discount rate had been a firmer dollar should relieve some of the raised only recently and, to date, financial pressure on import prices. On balance, markets did not appear to have adjusted however, most of the members thought fully to the increase. In the circumthat the risks were on the side of greater stances, several members expressed coninflation over the quarters ahead. cern that further tightening at this time At its meeting in late June, the Com- through open market operations might mittee reviewed the basic policy objec- have unintended and unsettling effects on tives that it had set for growth of the financial markets. Moreover, under premonetary and debt aggregates in 1988 vailing circumstances, further firming and established tentative objectives for might well foster some added strengthenexpansion of those aggregates in 1989. ing of the dollar in foreign exchange For the period from the fourth quarter of markets with undesirable repercussions 1987 to the fourth quarter of 1988, the over time on progress in improving the Committee reaffirmed the ranges of 4 to 8 nation's foreign trade position. One mempercent established in February for ber also noted that further tightening so growth of both M2 and M3. The monitor- soon after the increase in the discount ing range for expansion of total domestic rate would add to pressures for firmer nonfinancial debt was left unchanged at 7 monetary policies abroad and thereby to 11 percent for 1988. On a cumulative heighten the risks of an upward ratcheting basis through July, M2 and M3 grew at of interest rates in financial markets annual rates a little above the midpoints around the world. of their annual ranges. Expansion of total While the members generally agreed domestic nonfinancial debt appeared to on the desirability of a steady policy for have moderated to a pace marginally the near term, many thought that some below the midpoint of its range. For 1989 further firming was likely to be needed, the Committee agreed on tentative reduc- perhaps relatively soon. These members tions to ranges of 3 to 7 percent for M2 saw substantial risks that inflationary and 3x/2 to IVi percent for M3. The pressures would intensify in the absence monitoring range for growth of total of further fiscal and monetary restraint. domestic nonfinancial debt was reduced The economy had considerable momento 6V2 to 10% percent for 1989. It was tum, and there already were indications understood that all the ranges for next that cost pressures and some prices were year were provisional and that they would increasing more rapidly. In light of their be reviewed in February 1989 in the light concerns, these members favored a direcof intervening developments. With re- tive that would permit operations during spect to M1, the Committee reaffirmed in the intermeeting period to be adjusted June its earlier decision not to set a more readily toward further tightening if specific target for growth in 1988 and incoming information tended to confirm also decided not to establish a tentative the potential that they saw for increasing range for 1989. inflationary pressures. While most of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 119 these members did not rule out the M2 and M3 was likely to be appreciably possibility of some easing, one proposed slower in the current quarter than had a directive that did not envisage any been anticipated at the time of the previmove in that direction during the inter- ous meeting, given the rise in interest meeting period. rates that had occurred over the intermeet- Other members, while they could ing period. Assuming no further increase accept a directive that indicated a greater in interest rates, the cumulative expanwillingness to tighten than to ease reserve sion of M2 through September might be conditions, were less certain of the around the midpoint of the Committee's potential need for further monetary re- range for the year while that of M3 might straint, especially in the near term. These be only marginally above the midpoint of members emphasized that, when taken its range. Growth of Ml also was extogether, the tightening actions over the pected to slow substantially from its past several months represented, in their relatively rapid rates of expansion in judgment, a major policy move whose June and July. Members who wanted to restraining impact was not yet fully give the monetary aggregates greater reflected in the economy. In this view, attention expressed satisfaction that montime was needed to observe the effects of etary growth appeared to have slowed to the earlier policy actions and thus to a pace deemed more consistent with reduce the risk that monetary policy progress in reducing inflationary presinadvertently might become too restric- sures and a sustainable expansion in ecotive. Also, a cautious approach to further nomic activity over time. They also tightening might be appropriate in light observed that the behavior of M2 had of the fragilities that had developed in the resumed a more predictable pattern over economy, including the vulnerability of the past several quarters in relation to many financial intermediaries and the aggregate measures of economic perforexposure of many business and house- mance. However, several members exhold borrowers and of some foreign pressed the reservation that more time debtor countries to rising interest rates. was needed to assess the ongoing relia- Other members, while not disagreeing bility of M2 as a guide for the conduct of that debtor problems were a matter of monetary policy. A number commented serious concern, nevertheless felt that that the major focus in policy implemenprimary emphasis needed to be placed on tation should continue to be on incoming curbing any tendency for inflation to indications of inflationary pressures in gather momentum; such a development, the economy. if allowed to proceed, would lead to even In light of the increase that had ochigher interest rates and more severe curred in the federal funds rate, including damage to exposed, interest-sensitive the recent rise following the advance in borrowers, both in the United States and the discount rate, the members accepted abroad. a proposal to raise the intermeeting range In the discussion of factors that might for the federal funds rate by 1 percentage trigger future monetary policy actions, a point to a range of 6 to 10 percent. The number of members felt that the behavior upward adjustment in the range was of the monetary aggregates should be intended to align its midpoint more given more weight, although only a few closely with the current average level of favored giving primary emphasis to these the federal funds rate. The range for the measures. According to a staff analysis federal funds rate provides one mechaprepared for this meeting, growth of both nism for initiating consultation of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 FOMC Policy Actions Committee when its boundaries are per- to rise and non-oil imports declined. Over the sistently exceeded. intermeeting period, the trade-weighted foreign exchange value of the dollar appreciated At the conclusion of the Committee's somewhat further in terms of the other G-10 discussion, all but one member indicated currencies. that they favored or could accept a Expansion of M2 and to a lesser extent M3 directive that called for maintaining the slowed in July but growth of Ml remained current degree of pressure on reserve relatively strong. From a fourth-quarter base positions. The members decided that through July, M2 and M3 have grown at rates somewhat above the midpoints of the ranges somewhat greater reserve restraint would established by the Committee for 1988. be acceptable, or slightly lesser reserve Expansion in total domestic nonfinancial debt restraint might be acceptable, over the for the year thus far appears to be at a pace intermeeting period depending on indica- somewhat below that in 1987. tions of inflationary pressures, the The Federal Open Market Committee seeks monetary and financial conditions that strength of the business expansion, the will foster price stability over time, promote behavior of the monetary aggregates, growth in output on a sustainable basis, and and developments in foreign exchange contribute to an improved pattern of and domestic financial markets. The international transactions. In furtherance of reserve conditions contemplated by the these objectives, the Committee at its Committee were expected to be consis- meeting in late June reaffirmed the ranges it had established in February for growth of 4 tent with growth of M2 and M3 at annual to 8 percent for both M2 and M3, measured rates of around V/i percent and 5Vi from the fourth quarter of 1987 to the fourth percent respectively over the three- quarter of 1988. The monitoring range for month period from June to September. growth in total domestic nonfinancial debt The intermeeting range for the federal was also maintained at 7 to 11 percent for the funds rate was raised by 1 percentage year. For 1989, the Committee agreed on tentapoint to a range of 6 to 10 percent. tive ranges for monetary growth, measured At the conclusion of the meeting, the from the fourth quarter of 1988 to the fourth following domestic policy directive was quarter of 1989, of 3 to 7 percent for M2 and issued to the Federal Reserve Bank of 3 Vi to 7 Vi percent for M3. The Committee set the associated monitoring range for growth in New York: total domestic nonfinancial debt at 6 Vi to 10 Vi The information reviewed at this meeting percent. It was understood that all these ranges suggests that economic activity has continued were provisional and that they would be to expand at a vigorous pace. Total nonfarm reviewed in early 1989 in the light of intervenpayroll employment grew sharply further in ing developments. June and July. The civilian unemployment With respect to Ml, the Committee reafrate in July, at 5.4 percent, was slightly below firmed its decision in February not to establish its average level in the second quarter. a specific target for 1988 and also decided not Industrial production advanced considerably to set a tentative range for 1989. The behavior further in July. Growth in retail sales remained of this aggregate will continue to be evaluated moderate last month. Business capital spend- in the light of movements in its velocity, ing has continued to grow rapidly. Some developments in the economy and financial measures of prices indicate a pickup from markets, and the nature of emerging price recent trends and labor costs have risen more pressures. rapidly in recent months.. In the implementation of policy for the Most interest rates have increased apprecia- immediate future, the Committee seeks to bly since the Committee's meeting on June maintain the existing degree of pressure on 29-30. On August 9 the Federal Reserve reserve positions. Taking account of indica- Board approved an increase in the discount tions of inflationary pressures, the strength of rate from 6 to 6V2 percent. the business expansion, the behavior of the The nominal U.S. merchandise trade deficit monetary aggregates, and developments in fell in the second quarter as exports continued foreign exchange and domestic financial Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 121 markets, somewhat greater reserve restraint but recent statistics, including data on would, or slightly lesser reserve restraint labor market activity, pointed on balance might, be acceptable in the intermeeting to some slowing in the rate of economic period. The contemplated reserve conditions growth. Measures of price and wage are expected to be consistent with growth in M2 and M3 over the period from June through inflation showed little change from recent September at annual rates of about Vh and trends, apart from the continuing upward 5!/2 percent, respectively. The Chairman may impetus to food prices stemming from call for Committee consultation if it appears the drought. to the Manager for Domestic Operations that Total nonfarm payroll employment reserve conditions during the period before the next meeting are likely to be associated rose more slowly in July and August, but with a federal funds rate persistently outside a gains in overall employment remained range of 6 to 10 percent. sizable. After four months of strong increases, manufacturing employment Votes for this action: Messrs. Greenspan, fell slightly although some industries with Corrigan, Angell, Black, Forrestal, Heller, strong domestic and export sales re- Johnson, La Ware, and Parry and Ms. corded further increases. The civilian Seger. Vote against this action: Mr. Hoskins. Absent and not voting: Mr. Kelley. unemployment rate edged up in July and rose somewhat further to 5.6 percent in August, returning to its average level of President Hoskins dissented because the first half of the year. he preferred a policy that would give less emphasis to near-term business condi- Industrial production advanced sometions and exchange rate considerations what further in August after a sharp and greater emphasis to the longer-term increase in July. Production gains were objective of price stability. He viewed recorded for most categories although the current rate of inflation as too high they generally were smaller than those in relative to that objective and believed that July. Total industrial capacity utilization the strength of final demand and associ- was little changed in August. Utilization ated pressures on costs in the economy rates remained at relatively high levels in suggested that inflation may be heading primary processing industries but slipped higher. In the circumstances, he thought in manufacturing as a whole after four further monetary restraint would be more months of increases. consistent with the Committee's long-run Total retail sales were little changed on price stability objective and would in- balance in July and August. Outlays for crease market confidence in the eventual durable goods declined in both months, achievement of that objective. partly because of some slowing in unit sales of new automobiles. Sales of nondurable goods increased at a sluggish pace. Meeting Held on Recent information on business capital September 20,1988 spending suggested some moderation from the very rapid growth in earlier Domestic Policy Directive months of the year. Real outlays for The information reviewed at this meeting equipment continued to expand in July suggested that the expansion of economic but at a pace well below that of the first activity might be moderating from the half of the year as shipments of office and vigorous pace experienced earlier in the computing equipment fell. Nonresidenyear. Information on output and spending tial construction activity apparently edged in the third quarter was still fragmentary, higher in July despite farther contraction Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 FOMC Policy Actions in oil drilling and in spending on indus- since the Committee meeting on August trial and commercial structures other than 16. Following that meeting, the dollar office buildings. Inventory investment in remained under upward pressure until the manufacturing and wholesale sectors late in the month when increases in in July evidently remained at about the European official lending rates arrested moderate second-quarter pace. Housing its climb. Following the softer U.S. starts rose in July, as multifamily con- employment report for August, the dollar struction rebounded from a reduced June moved lower in early September, but it level, but single-family starts remained subsequently firmed in response to the close to the average pace of the first half publication of the July merchandise trade of the year. Sales of new and existing figures. homes retreated from their June pace, At its meeting in mid-August, the which had been the highest in more than a Committee adopted a directive calling year. for no change in the degree of pressure on The nominal U.S. merchandise trade reserve positions. These reserve condideficit fell appreciably further in July tions were expected to be consistent with from a considerably reduced second- growth of M2 and M3 at annual rates of quarter rate and was the lowest monthly about 3V4 and 5V6 percent respectively deficit since March 1985. Virtually all of over the period from June through Septhe improvement in July was due to a tember. The members agreed that somereduction in imports. The total value of what greater reserve restraint would, or exports was little changed from the June slightly lesser reserve restraint might, be level as a sharp reduction in exports of acceptable, depending on indications of automotive products about offset small inflationary pressures, the strength of the increases in most other major categories. business expansion, the behavior of the Economic activity in major foreign indus- monetary aggregates, and developments trial countries slackened in the second in foreign exchange and domestic finanquarter, but expansion appeared to have cial markets. resumed in the current quarter. Reserve conditions remained essen- Producer prices of finished goods, tially unchanged over the period since the propelled by farther substantial increases August meeting. Adjustment plus seain refinery prices for gasoline, registered sonal borrowing averaged just below another large advance in August. At the $600 million for the two reserve maintelevel of crude materials, producer food nance periods completed since the meetprices were up sharply for the fourth ing, and federal funds primarily traded straight month, reflecting the continuing near the SVs percent level prevailing at effects of the drought. Consumer prices, the time of the meeting. In light of some available for July, advanced at about the indications of more moderate economic second-quarter pace. Consumer food expansion, most other market interest prices surged again; and energy prices rates declined lA to 3/s percentage point rose further, mainly because of higher over the intermeeting period. Broad gasoline prices. Excluding food and indexes of stock prices were up 1 to 3 energy items, consumer prices increased percent. at about the average pace of the preceding Growth of the broader monetary aggre- 12 months. gates slowed again in August. The slower In the foreign exchange markets, the expansion of M2 was concentrated in its trade-weighted value of the dollar liquid deposit components and probably changed little on balance over the period continued to reflect the rise since early Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 123 spring of market interest rates and related of higher inflation. A number were opportunity costs of holding such de- concerned that the apparent slowing posits. Growth of Ml fell sharply in might prove to be only a temporary pause August, as total transaction deposits in a generally strong expansion or to be declined slightly. Reflecting a contraction inadequate to avert an intensification of in total reserves, growth of the monetary inflationary pressures without further base slowed markedly in August. monetary restraint. Others, while noting The staff projection prepared for this the still tentative nature of the incoming meeting incorporated somewhat slower data, interpreted recent developments in growth of economic activity in the current financial markets as well as the real econquarter than had been projected earlier, omy as suggesting a greater likelihood largely reflecting the recent softening in that policy had tightened sufficiently to the data on employment. The rate of put the economy on a desirable course expansion through the end of 1989 was toward moderate growth that would expected to remain on balance below the prove compatible over time with the pace in recent quarters, with the drought achievement of the Committee's antilikely to contribute to an uneven quarterly inflationary objectives. pattern of growth. To the extent that In the Committee's discussion of facmonetary policy did not accommodate tors bearing on the economic outlook, a any tendency for growth in final demand number of members emphasized that, on to be sustained at a pace that threatened the whole, indicators of economic activmore inflation, pressures would be gen- ity continued to suggest appreciable erated in financial markets that would momentum in the expansion. Recent restrain domestic spending. The staff growth of payroll employment, while continued to project relatively limited below the average pace of the first half of growth of consumer spending, consider- the year, was still substantial. Capital ably reduced expansion of business fixed spending exhibited few signs of weakeninvestment, and sluggish housing activ- ing following a period of rapid expansion, ity. The foreign sector was still expected and sizable profits augured for continuing to make a major contribution to domestic growth. Likewise, new orders, notably economic growth, even though progress for exports, were holding up well, and in reducing the trade deficit was thought some greater inventory investment was likely to be slower than in recent quarters. seen as a reasonable prospect, given The staff also anticipated some continucurrent low inventory-to-sales ratios. A ing cost pressures over the next several number of members also referred to quarters, reflecting the effects of rising continuing evidence of a high level of import prices and especially of reduced business activity in many parts of the margins of unutilized labor and other country. Indeed, in some areas and production resources. industries, growth was being constrained In the Committee's discussion of the by a limited availability of labor and economic situation and outlook, mem- other production resources. At the same bers noted that the recent indications of time, members noted that economic some moderation in the rate of economic performance remained uneven across the growth tended to reinforce their expecta- country, depending on the mix of local tions of a reduced rate of economic industries, and a few signs of moderation expansion through next year. The mem- could be observed even in areas that were bers welcomed the signs of somewhat characterized by strong local economies. slower economic growth, given the risks Retail sales were lackluster in a number Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 FOMC Policy Actions of areas, and the drought was having a foreign exchange markets. Moreover, mixed impact on agriculture. The industrial commodity prices had been drought's adverse effects in some parts of relatively stable for an extended period. the country contrasted with income gains Reports from contacts around the nation in other areas where producers experienc- did not suggest much change recently in ing more normal crop yields were bene- local price and wage developments. fitting from higher prices. On balance, Capacity constraints and labor shortages local conditions appeared consistent with in some industries and areas continued to expectations of somewhat slower growth be a source of inflationary pressures, but in domestic demand. there were few reports of outsized in- Members continued to anticipate fur- creases in prices or wages. Indeed, some ther improvement in the nation's trade members noted that prices had tended to balance over the next several quarters. level out or to rise more slowly in a That view was bolstered by local reports number of industries and indications of of strength in export demands for a wide faster increases in wages were limited. variety of products and indications of At its meeting in late June the Commitgains in domestic market shares by firms tee reviewed the basic policy objectives in the United States. The prospective that it had set for growth of the monetary improvement in net exports was not likely and debt aggregates in 1988, and it to be as strong as in recent quarters, established tentative objectives for expanhowever, reflecting the lagged effects of sion of those aggregates in 1989. For the the rise in the exchange value of the period from the fourth quarter of 1987 to dollar over the course of recent months. the fourth quarterof 1988, the Committee With regard to the outlook for infla- reaffirmed the ranges of 4 to 8 percent set tion, members generally emphasized that in February for growth of both M2 and the risks remained on the side of an M3. The monitoring range for expansion intensification of inflationary demand of total domestic nonfinancial debt in pressures. Some favorable developments 1988 was left unchanged from its Februthat had tended to dampen inflation, such ary specification of 7 to 11 percent. On a as declining oil prices and a rising dollar, cumulative basis through August, M2 might well be reversed. More fundamen- had grown at an annual rate slightly tally, given current utilization rates of above, and M3 at a rate more noticeably labor and other production resources, the above, the midpoints of their annual economy was probably near the point ranges. Expansion of total domestic where expansion at a rate somewhat nonfinancial debt appeared to have modabove the economy's trend growth poten- erated to a pace marginally below the tial could result in greater pressures on midpoint of its range. For 1989 the wages and prices. Other members saw Committee agreed on tentative reducless risk of more inflation, particularly in tions to ranges of 3 to 7 percent for M2 the context of what they viewed as the and 3V4 to IVi percent for M3. The moderating growth of the economy and monitoring range for growth of total the appreciable tightening of monetary domestic nonfinancial debt was lowered policy over the past several months. to 6Vi to \0Vi percent for 1989. It was Consistent with this view, some noted understood that all the ranges for next that inflationary expectations appeared to year were provisional and that they would have eased as evidenced, for example, by be reviewed in February 1989 in the light the performance of long-term debt mar- of intervening developments. With rekets and the behavior of the dollar in spect to M1, the Committee reaffirmed in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 125 June its earlier decision not to set a firming than an adjustment toward easing specific target for growth in 1988 and it in the weeks ahead. Some commented also decided not to establish a tentative that near-term developments were not range for 1989. likely to call for a policy change in this In the Committee's discussion of policy period, while others saw a greater likeliimplementation for the weeks immedi- hood that intermeeting developments ately ahead, all of the members agreed on would point to the desirability of some a proposal calling for an unchanged firming. The potential need for some policy stance pending an evaluation of easing was viewed as remote. further economic developments. Those At the conclusion of the Committee's who perceived the risks in the economic discussion, all of the members approved outlook as still decidedly on the side of a directive that called for maintaining the continued strong demand and greater current degree of pressure on reserve inflationary pressures saw enough uncer- positions. The members decided that tainties in the current economic situation somewhat greater reserve restraint would to warrant a pause in the policy firming be acceptable, or slightly lesser reserve process. Others were less persuaded that restraint might be acceptable, over the inflationary pressures would intensify, intermeeting period, depending on indiespecially given the degree of policy cations of inflationary pressures, the restraint that already had been imple- strength of the business expansion, the mented over the past several months. It behavior of the monetary aggregates, was noted that additional firming at this and developments in foreign exchange time could have undesirable repercus- and domestic financial markets. The sions on the dollar in foreign exchange reserve conditions contemplated by the markets and on the financial condition of Committee were expected to be consismany already troubled depository institu- tent with growth of M2 and M3 at annual tions. Some members expressed concern rates of about 3 percent and 5 percent that a marked weakening in the economy, respectively over the four-month period which would become a greater risk if from August to December. The members policy were tightened further, would agreed that the intermeeting range for the disrupt the urgent task of reducing the federal funds rate, which provides one federal budget deficit. mechanism for initiating consultation of In their consideration of a desirable the Committee when its boundaries are policy for the near term, the members persistently exceeded, should be left took account of a staff analysis, which unchanged at 6 to 10 percent. suggested that monetary expansion was At the conclusion of the meeting, the likely to remain relatively damped in following domestic policy directive was coming months. This outlook assumed a issued to the Federal Reserve Bank of continuing lagged adjustment of offering New York: rates on retail deposits to earlier increases in market interest rates. The information reviewed at this meeting With regard to possible adjustments in suggests that the expansion in economic the degree of reserve pressure during the activity may be moderating from the vigorous intermeeting period, all of the members pace earlier in the year. Total nonfarm payroll employment grew more slowly in July and indicated that the balance of risks in the August, though the increases in the two economy was such that they favored or months were still sizable. The civilian unemcould accept a directive that would more ployment rate rose to 5.6 percent in August. readily accommodate a move toward Industrial production advanced slightly fur- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 FOMC Policy Actions ther in August after a sharp increase in July. in the light of movements in its velocity, Retail sales were flat in July and August. developments in the economy and financial Recent indicators of business capital spending markets, and the nature of emerging price suggest some moderation ftom the especially pressures. rapid growth in earlier months of the year. In the implementation of policy for the Preliminary data for the nominal U.S. mer- immediate future, the Committee seeks to chandise trade deficit in July showed some maintain the existing degree of pressure on further reduction from the improved second- reserve positions. Taking account of indicaquarter rate. The latest information on prices tions of inflationary pressures, the strength of suggests little if any change from recent the business expansion, the behavior of the trends. monetary aggregates, and developments in Most interest rates have declined somewhat foreign exchange and domestic financial since the Committee meeting on August 16. markets, somewhat greater reserve restraint Over the intermeeting period, the trade- would, or slightly lesser reserve restraint weighted foreign exchange value of the dollar might, be acceptable in the intermeeting in terms of the other G-10 currencies was period. The contemplated reserve conditions about unchanged on balance. are expected to be consistent with growth of Expansion of M2 and M3 moderated fur- M2 and M3 over the period from August ther in August. For the year through August, through December at annual rates of about 3 M2 has grown at a rate slightly above, and M3 and 5 percent, respectively. The Chairman at a rate more noticeably above, the midpoints may call for Committee consultation if it of the ranges established by the Committee appears to the Manager for Domestic Operafor 1988. Ml was unchanged in August after tions that reserve conditions during the period registering relatively strong growth in June before the next meeting are likely to be and July. Expansion of total domestic nonfi- associated with a federal funds rate persisnancial debt for the year thus far appears to be tently outside a range of 6 to 10 percent. at a pace somewhat below that in 1987. The Federal Open Market Committee seeks Votes for this action: Messrs. Greenspan, monetary and financial conditions that will Corrigan, Angell, Black, Forrestal, Heller, foster price stability over time, promote Hoskins, Johnson, Kelley, LaWare, and growth in output on a sustainable basis, and Parry and Ms. Seger. Votes against this contribute to an improved pattern of interna- action: None. tional transactions. In furtherance of these objectives, the Committee at its meeting in late June reaffirmed the ranges it had established in February for growth of 4 to 8 percent Meeting Held on for both M2 and M3, measured from the November 1,1988 fourth quarter of 1987 to the fourth quarter of 1988. The monitoring range for growth of 1. Domestic Policy Directive total domestic nonfinancial debt was also maintained at 7 to 11 percent for the year. The information reviewed at this meeting For 1989, the Committee agreed on tentaindicated that the expansion in economic tive ranges for monetary growth, measured from the fourth quarter of 1988 to the fourth activity had moderated from the vigorous quarter of 1989, of 3 to 7 percent for M2 and pace evident earlier in the year. Private 3 Vi to 7 Vi percent for M3. The Committee set domestic final demand grew at an apprethe associated monitoring range for growth of ciably slower pace in the third quarter total domestic nonfinancial debt at 6 Vi to 10 Vi than in the first half of the year; and other percent. It was understood that all these ranges were provisional and that they would be recent statistics, including data on labor reviewed in early 1989 in the light of interven- market activity, also suggested some ing developments. slowing in the rate of economic expan- With respect to Ml, the Committee reaf- sion. Information on wage and price firmed its decision in February not to establish developments gave no clear evidence on a specific target for 1988 and also decided not balance of any change in underlying to set a tentative range for 1989. The behavior of this aggregate will continue to be evaluated inflation trends. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 127 Total nonfarm payroll employment of sales. Retail inventories, reflecting increased considerably in the third quar- little further change in stocks at auto ter, but the gains were less than those dealers after a sharp rise in the second registered in the first half. In August and quarter, increased much less rapidly. September, hiring in all major sectors Housing construction had been flat in except government moderated, and em- recent months; the third-quarter pace of ployment in manufacturing declined. starts of single-family homes was un- Despite this broad-based slowing in the changed from that of the previous quarter growth of private payrolls, the civilian while multifamily starts edged down. unemployment rate fell to 5.4 percent in Preliminary data for the nominal U.S. September and has remained in a narrow merchandise trade deficit in August range around 5Vi percent since early showed a larger deficit than in July. Howspring. ever, the average for July and August was Industrial production increased only slightly lower than the second-quarter slightly on balance in August and Septem- rate as exports increased more than ber after a strong surge earlier in the imports. Most of the rise in exports was summer. Output of business equipment in nonagricultural goods, particularly continued to advance fairly rapidly while capital goods and consumer durables; production of consumer goods was slug- increased imports of consumer goods gish. Total industrial capacity utilization and food outweighed a slight reduction in declined slightly in September but was the value of purchases of imported oil. still more than xh percent above the Economic activity in the major foreign relatively high second-quarter level. industrial economies appeared to have Overall consumer spending in constant rebounded somewhat in the third quarter, dollar terms increased substantially on following a pronounced slackening in the average in the third quarter, as outlays second quarter. for services and nondurable goods Reflecting a decline in gasoline prices strengthened while purchases of durables at the refinery level, producer prices of were little changed. However, retail sales finished goods registered a smaller adweakened in August and September, vance in September than in August; howowing partly to reduced sales of motor ever, for the third quarter as a whole, vehicles. these prices rose more rapidly than during Indicators of business capital spending the first half of the year. At the crude in the third quarter suggested a consider- materials level, producer food prices ably reduced rate of expansion compared continued to rise sharply. Consumer with the first half of the year. Growth of prices increased at a somewhat slower real outlays for business equipment rate in September as declines in energy slowed sharply, as investment in prices outweighed the passthrough to the information-processing equipment decel- retail level of higher wholesale food erated. Nonresidential construction activ- prices. Excluding food and energy items, ity was weak in the first two months of the consumer prices on a year-over-year quarter, with oil drilling and expenditures basis continued to rise at about the AVi on commercial and industrial structures percent annual rate evident since late other than office buildings contracting 1987. Most measures of labor costs further. Inventory investment in the indicated some slowing in the rate of manufacturing and wholesale sectors increase over the summer months, after a picked up in July and August, but stocks sharp upward movement in the second accumulated about in line with the growth half of 1987 and early 1988. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 FOMC Policy Actions In the foreign exchange markets, the money market conditions would not be trade-weighted value of the dollar in tightened substantially further. Lower terms of the other G-10 currencies had bond yields apparently contributed to declined from its high level of last higher equity prices; some broad indexes summer by the time of the previous of stock prices had risen about 3 percent Committee meeting on September 20. since the September meeting. Following the meeting, the dollar initially Expansion of M2 slowed further in fluctuated in a narrow range but later September, and preliminary data sugdeclined appreciably in response to indi- gested that growth remained quite weak cations of more moderate U.S. economic in October as earlier increases in market growth and to information suggesting a interest rates and opportunity costs conslower U.S. external adjustment than the tinued to damp demands for liquid demarkets had anticipated earlier. posit components. By contrast, after slow At its meeting on September 20, the growth in August and September, M3 Committee adopted a directive calling appeared to have strengthened somewhat for no change in the degree of pressure on in October, in association with a resumpreserve positions. These reserve condi- tion in growth of bank credit. After tions were expected to be consistent with registering relatively strong expansion in growth of M2 and M3 at annual rates of June and July, Ml had increased only about 3 and 5 percent respectively over slightly on balance in recent months, the period from August to December. with total transactions deposits falling The members agreed that somewhat marginally. greater reserve restraint would, or The staff projection prepared for this slightly lesser reserve restraint might, be meeting suggested that growth of the acceptable depending on indications of nonfarm sector of the economy in the inflationary pressures, the strength of the current quarter might be near the reduced business expansion, the behavior of the pace of the third quarter and that expanmonetary aggregates, and developments sion in 1989 was likely to remain, on in foreign exchange and domestic finan- balance, well below the pace of the first cial markets. half of 1988. The effects of the drought Adjustment plus seasonal borrowing would continue to be reflected in an fluctuated over a sizable range during theuneven quarterly pattern of growth of intermeeting period, averaging about GNP, notably through the first half of $630 million in the two complete reserve next year. To the extent that expansion of maintenance periods since the September final demand at a pace that could foster meeting. The federal funds rate rose higher inflation was not accommodated somewhat, with funds trading around 8 lA by monetary policy, pressures would be percent and sometimes higher over most generated in financial markets that would of the intermeeting period. Most other restrain domestic spending. The staff short-term interest rates edged higher, projection, which assumed a slightly perhaps reflecting the firmer federal restrictive fiscal policy, continued to funds rate as well as increased supplies of indicate relatively sluggish growth of Treasury bills and CDs. Interest rates in consumer spending, sharply reduced long-term debt markets declined a little expansion of business fixed investment further as indications of more moderate from the pace in the first half of 1988, and economic expansion and weak energy restrained housing activity. As in earlier prices apparently reduced concerns about projections, the external sector was inflation and buoyed expectations that expected to contribute importantly to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 129 domestic economic growth. The staff strength in business capital spending, now anticipated some marginal easing in and noteworthy improvement in the aggregate price increases in 1989, in agricultural sector. Further improvement large part because recent declines in in the nation's trade balance also appeared crude oil prices portended lower energy likely, and while the gains might be more prices more generally. However, any limited than in recent quarters, they decline in inflation would be limited, would help to sustain domestic manufaclargely because of continuing pressures turing activity. Consumer spending might stemming from still strong demands be supported to some extent by gains in pressing against reduced margins of real incomes stemming from reduced unutilized labor and other production energy prices. By most measures, busiresources. ness inventories appeared to be relatively In the Committee's discussion of the lean and, assuming continued moderate economic situation and outlook, mem- growth in overall final demand, further bers welcomed the apparent moderation inventory accumulation might provide a in the expansion of economic activity modest fillip to the expansion over the toward a pace that might prove to be year ahead. On the other hand, members more sustainable and consistent with also took note of the relatively sluggish progress over time toward price stability. performance of retail sales recently, Continuing expansion, but at a more notably of durable goods, and the continumoderate pace than that experienced in ing weakness of construction activity, the first half of 1988, was viewed as a including housing. A review of local reasonable expectation, partly in light of business conditions continued to indicate the monetary policy tightening that al- an uneven pattern of regional activity, ready had been implemented this year. but on balance local developments tended There was no evidence of emerging to confirm broader indications of further, imbalances in key sectors of the economy though reduced, growth in overall busithat might bring the expansion to an end, ness activity. although the outlook remained clouded With regard to the outlook for inflaby the nation's outsized trade and federal tion, a critical issue in the view of many budget deficits and the financial problems members was whether overall demand or debt exposure of a number of deposi- conditions in the economy would be tory institutions and business firms. In consistent with containing or reducing the view of many of the members, the inflation. A number of members exrisks of deviations from current expecta- pressed concern that underlying prestions continued to be in the direction of sures on resources remained strong and greater inflationary pressures. Other that the possibility of greater inflation members, while concerned about the constituted the major current threat to potential for inflation, felt that the econ- sustained economic expansion. One obomy already appeared to be on a track served that the uncertainties in the outconsistent with no pickup in inflation and look for inflation were compounded by perhaps some improvement next year. the prospect that, with production re- In the course of the Committee's dis- sources at or close to full capacity, even cussion, members noted that despite signs small differences in demand pressures of some slowing in recent months, the could have a disproportionate effect on expansion in business activity retained the actual rate of inflation next year. appreciable momentum as evidenced, for However, some members commented example, by order backlogs, ongoing that, on the whole, price and wage Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 FOMC Policy Actions developments were more favorable than With respect to Ml, the Committee might have been anticipated at current reaffirmed in June its earlier decision not rates of capacity utilization. Recent to set a specific target for growth in 1988 reports from around the nation suggested and it also decided not to establish a that inflation was not worsening in re- tentative range for 1989. gional markets, including parts of the In the Committee's discussion of policy country where business activity remained implementation for the period immedirelatively robust. Indeed, there were ately ahead, the members generally indications that prices of some business agreed that the current relatively balproducts previously in short supply now anced performance of the economy and were showing some tendency to level off, the uncertainties surrounding the outlook and there was little or no evidence of argued for an unchanged policy at this faster increases in wages. Moreover, point. Some commented that the apparent recent developments in financial markets strength of underlying inflationary pressuggested some lessening of inflationary sures might require further monetary expectations, although the latter re- restraint later, but for now they favored mained volatile. or could accept a steady policy course. At its meeting in late June, the Com- Other members were more persuaded mittee reviewed the basic policy objec- that, in the context of the recent evidence tives that it had set for growth of the of slower economic growth, monetary monetary and debt aggregates in 1988, policy already appeared to be on a course and it established tentative objectives for that would promote progress in reducing expansion of those aggregates in 1989. inflation. From the perspective of the For the period from the fourth quarter of growth of the monetary aggregates and 1987 to the fourth quarter of 1988, the reserve as well as interest rate develop- Committee reaffirmed the ranges of 4 to 8 ments, monetary policy had been fairly percent set in February for growth of restrictive for some months and further both M2 and M3. The monitoring range restraint needed to be approached with for expansion of total domestic nonfinan- some caution. At the same time, memcial debt in 1988 was left unchanged from bers stressed the continuing need to its February specification of 7 to 11 sustain the System's commitment to its percent. For the year to date, M2 had long-run objective of controlling inflagrown at an annual rate somewhat below, tion, including the desirability of making and M3 at a rate somewhat above, the clear that the current rate of inflation was midpoints of their annual ranges. Expan- unacceptable. sion of total domestic nonfinancial debt In the course of the Committee's disappeared to have moderated to a pace cussion, the members took account of a marginally below the midpoint of its staff analysis that concluded that the range. For 1989 the Committee agreed maintenance of unchanged reserve conon tentative reductions to ranges of 3 to 7 ditions was likely to be associated with percent for M2 and 3 Vi to 7 Vi percent forrelatively slow monetary growth over the M3. The monitoring range for growth of balance of the year. Some pickup in the total domestic nonfinancial debt was growth of M2 and M3 was anticipated lowered to 6Vi to lOVi percent for 1989. from the very sluggish performance of It was understood that all the ranges for September and October, but further next year were provisional and that they adjustments of asset portfolios to previwould be reviewed in February 1989 in ous increases in interest rates and opporthe light of intervening developments. tunity costs were likely to limit the rise. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 131 In addition, reductions in compensating that they favored or could accept a balances in response to earlier increases directive that called for maintaining the in market interest rates were expected to current degree of pressure on reserve be more pronounced late in the year, conditions and that provided for remainthough such adjustments would have their ing especially alert to potential developmajor impact on Ml growth. Concur- ments that might require some firming rently, expansion of M3 and, to a lesser during the intermeeting period. Accorddegree, M2 might be buttressed to some ingly, somewhat greater reserve restraint extent as banks undertook to secure funds would be acceptable, or slightly lesser to underwrite a perhaps substantial por- reserve restraint might be acceptable, tion of the initial cash needed to finance over the intermeeting period depending the recent surge in merger and buyout on indications of inflationary pressures, activities. Although members observed the strength of the business expansion, that any easing of reserve conditions to the behavior of the monetary aggregates, stimulate monetary growth would not be and developments in foreign exchange desirable at this point, some indicated and domestic financial markets. The that they would become increasingly reserve conditions contemplated by the concerned if very weak monetary growth Committee were expected to be consiswere to persist in the context of sluggish tent with growth of M2 and M3 at annual expansion in economic activity. rates of around 2 Vi percent and 6 percent With regard to possible adjustments in respectively over the three-month period the degree of reserve pressure in the from September to December. The interintermeeting period, a majority of the meeting range for the federal funds rate, members believed that operations should which provides one mechanism for initibe adjusted more readily toward further ating consultation of the Committee when tightening than toward any easing. Some its boundaries are persistently exceeded, indicated that they viewed the incor- was left unchanged at 6 to 10 percent. poration of such an understanding as a At the conclusion of the meeting, the key element of an acceptable directive, following domestic policy directive was given their assessment of the inflationary issued to the Federal Reserve Bank of risks in the economic outlook. Most of New York: the other members indicated that they could accept such a directive, although The information reviewed at this meeting they were less inclined than they had indicates that the expansion in economic activity has moderated from the vigorous been previously to bias it toward further pace earlier in the year. Total nonfarm payroll restraint; in this view, the direction of employment grew considerably in the third any potential adjustment in policy im- quarter but the gains were less than those plementation was less certain than earlier, registered in the first half of the year and given the recent performance of the employment in manufacturing declined in economy and behavior of the monetary August and September. The civilian unemployment rate fell to 5.4 percent in September, aggregates. One member felt that the remaining in the narrow range that has risks of some further weakness in the prevailed since early spring. Industrial proeconomy were sufficiently strong that a duction advanced only slightly on balance in continued bias toward possible tightening August and September after a sharp increase during the intermeeting period was not in July, while housing construction has been flat in recent months. Consumer spending acceptable. increased substantially on average in the third At the conclusion of the Committee's quarter but apparently slowed in recent discussion, all but one member indicated months. Indicators of business capital spend- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 FOMC Policy Actions ing suggest considerably slower expansion in establish a specific target for 1988 and also the third quarter, following very rapid growth decided not to set a tentative range for 1989. in the first half of the year. Preliminary data The behavior of this aggregate will continue for the nominal U.S. merchandise trade deficit to be evaluated in the light of movements in its in August showed a greater deficit than in velocity, developments in the economy and July, but the average for July-August was financial markets, and the nature of emerging slightly less than the second-quarter rate. The price pressures. latest information on prices and wages sug- In the implementation of policy for the gests little if any change from recent trends. immediate future, the Committee seeks to Interest rates in long-term debt markets maintain the existing degree of pressure on have declined a little further since the Com- reserve positions. Taking account of indicamittee meeting on September 20, while rates tions of inflationary pressures, the strength of in short-term markets have edged higher. The the business expansion, the behavior of the trade-weighted foreign exchange value of the monetary aggregates, and developments in dollar in terms of the other G-10 currencies foreign exchange and domestic financial declined appreciably over the intermeeting markets, somewhat greater reserve restraint period from the high level of last summer. would, or slightly lesser reserve restraint Expansion of M2 has slowed considerably might, be acceptable in the intermeeting in recent months; growth of M3 moderated in period. The contemplated reserve conditions August and September but appears to have are expected to be consistent with growth of strengthened somewhat in October. Thus far M2 and M3 over the period from September this year, M2 has grown at a rate somewhat through December at annual rates of about below, and M3 at a rate somewhat above, the 2Vi and 6 percent, respectively. The Chairmidpoint of the ranges established by the man may call for Committee consultation if it Committee for 1988. Ml has increased only appears to the Manager for Domestic Operaslightly on balance in recent months after tions that reserve conditions during the period registering relatively strong growth in June before the next meeting are likely to be and July. Expansion of total domestic nonfi- associated with a federal funds rate persisnancial debt for the year thus far appears to be tently outside a range of 6 to 10 percent. at a pace somewhat below that in 1987. The Federal Open Market Committee seeks Votes for this action: Messrs. Greenspan, monetary and financial conditions that will Corrigan, Angell, Black, Forrestal, Heller, foster price stability over time, promote Hoskins, Johnson, Kelley, LaWare, and growth in output on a sustainable basis, and Parry. Vote against this action: Ms. Seger. contribute to an improved pattern of international transactions. In furtherance of these Ms. Seger indicated that while an objectives, the Committee at its meeting in late June reaffirmed the ranges it had estab- unchanged policy was acceptable to her lished in February for growth of 4 to 8 percent at this point, she did not want to bias the for both M2 and M3, measured from the directive toward potential tightening. In fourth quarter of 1987 to the fourth quarter of her view current indications of slower 1988. The monitoring range for growth of economic growth and the lagged effects total domestic nonfinancial debt was also maintained at 7 to 11 percent for the year. of earlier policy tightening actions pointed For 1989, the Committee agreed on tenta- to relatively slow expansion and reduced tive ranges for monetary growth, measured inflationary pressures over the year from the fourth quarter of 1988 to the fourth ahead. In these circumstances, she would quarter of 1989, of 3 to 7 percent for M2 and not want to react more promptly or 3 Vi to 7 Vi percent for M3. The Committee set vigorously to indications of greater the associated monitoring range for growth of total domestic nonfinancial debt at 6 Vi to 10 Vi strength or price pressures in the econpercent. It was understood that all these ranges omy, which might well prove to be were provisional and that they would be temporary, than to evidence of a weakenreviewed in early 1989 in the light of intervening economy. ing developments. In the period following the Committee With respect to Ml, the Committee reaffirmed its decision in February not to meeting on November 1, it became Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 133 increasingly evident in the implementa- Hoskins, Johnson, Kelley, LaWare, and tion of policy that depository institutions Parry and Ms. Seger. Votes against this action: None. had reduced their demands on the discount window; in this period, a significantly lower level of adjustment plus This action was taken on the recomseasonal borrowing was being associated mendation of the Manager for Domestic with a slightly higher federal funds rate Operations. The Manager had advised than had been anticipated at the time of that the usual leeway of $6 billion for the meeting. To take account of this changes in System Account holdings change in behavior, but also in light of would probably not be sufficient over the recent information suggesting that the intermeeting period because of seasonal economic expansion retained consider- increases in currency in circulation and able strength, the Manager for Domestic in required reserves. Operations adjusted the reserve paths to incorporate a lower level of borrowing, with the expectation that federal funds 3. Change in Terms of Certain would continue to trade in the slightly Members to Calendar-Year Basis higher range that had prevailed recently. The Committee amended its "Rules of This adjustment in open market opera- Organization" to advance from March 1 tions was discussed with the Committee to January 1 of each year the start of the on November 22, 1988. The members terms of office of the Federal Reserve agreed that the factors relating to the Bank presidents who serve one-year apparent change in the relationship beterms as Committee members or alternate tween borrowing and the federal funds members. The change will be effective rate, and the broader implications for the starting with the calendar year 1990. conduct of open market operations, would Because the Committee's objectives for be reviewed further at the December monetary growth are established on a meeting. calendar-year basis, the Committee believed that it would be appropriate to have all the members responsible for 2. Authorization for Domestic carrying out those objectives during the Open Market Operations year participate in the vote to establish them at the start of the year. The Commit- Effective November 2, 1988, the Comtee emphasized that this change was mittee approved a temporary increase of essentially procedural in nature, given $4 billion, to $10 billion, in the limit the continuity of its decisionmaking between Committee meetings on changes process. The Full Employment and Balin System Account holdings of U.S. anced Growth Act of 1978 requires that government and federal agency securities the Committee's monetary growth objecthat is specified in paragraph l(a) of the tives for the calendar year be transmitted Authorization for Domestic Open Market to the Congress by February 20 of each Operations. The increase was effective year. for the intermeeting period ending with the close of business on December 14, Votes for this action: Messrs. Greenspan, 1988. Corrigan, Angell, Black, Forrestal, Heller, Hoskins, Johnson, Kelley, LaWare, and Votes for this action: Messrs. Greenspan, Parry and Ms. Seger. Votes against this Corrigan, Angell, Black, Forrestal, Heller, action: None. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 FOMC Policy Actions Meeting Held on Growth of overall consumer spending December 13-14,1988 had moderated somewhat in recent months. Spending for nondurables had been sluggish in September and October, Domestic Policy Directive while outlays for durable goods had Information on employment and produc- declined, mainly because of reduced tion reviewed at this meeting suggested purchases of cars. On the other hand, that, apart from the direct effects of the preliminary data for total retail sales in drought, economic activity had continued November indicated a strong advance to expand at a vigorous pace although following a large, upward-revised insome measures of demand, available on a crease in October. less current basis, still indicated more Indicators of business capital spending moderate growth. Recent price data suggested a substantially slower rate of showed a fairly stable inflation rate, expansion in October than earlier in the partly because of the favorable effects of year. Shipments of nondefense capital earlier oil price declines, while labor cost goods were little changed, reflecting a measures continued to indicate some fairly broad-based deceleration. Nonresacceleration from a year earlier. idential construction edged down a little Total nonfarm payroll employment further, as petroleum drilling fell again rose sharply in October and November. and expenditures on commercial struc- Following declines in late summer, gains tures other than office buildings declined. in manufacturing employment were large Inventory investment in the manufacturin both months, with particularly sizable ing and wholesale sectors in the third increases recorded in the machinery, quarter remained about in line with the electrical equipment, and lumber indus- growth of sales. In the retail sector, a tries. Employment in service industries buildup in inventories in the third quarter picked up significantly in November from largely reflected additions to stocks by the reduced pace of expansion in previous auto dealers; the expansion of nonauto months. The civilian unemployment rate stocks remained broadly in line with edged up to 5.4 percent in November but sales. Housing starts strengthened in remained in the lower part of the narrow October after changing little on balance range that had prevailed since early over the previous several months. spring. Excluding food and energy, producer Industrial production advanced consid- prices of finished goods were unchanged erably further in October and November in October after a sizable increase in after a strong third quarter. Output of September. At the consumer level, retail consumer goods continued to increase, food prices eased in October and energy on balance, at a fairly vigorous pace, and prices were little changed, but prices of production of materials posted another other goods and services increased faster solid gain in November. Output of busi- on balance than in preceding months. ness equipment also increased in Novem- On a year-over-year basis, consumer ber, but revised data indicated that such prices continued to rise at about the 4x/2 growth had moderated appreciably in percent annual rate evident since late recent months. Total industrial capacity 1987. The limited data available for utilization edged up further in Novem- labor costs in the fourth quarter ber, and the operating rate in manufac- suggested that increases in these costs turing reached its highest level since July continued to exceed those of a year 1979. earlier. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 135 Preliminary data for the nominal U.S. In the course of implementing policy merchandise trade deficit in October following the November meeting, it showed a slightly smaller deficit than in became increasingly evident that a September. The value of total imports slightly higher federal funds rate than fell, with declines recorded in capital that anticipated at the time of the meeting goods, consumer goods, and oil. Exports was associated with a substantially lower also declined in October owing to lower volume of adjustment plus seasonal boragricultural sales abroad. Boosted by rowing; for reasons that remained unhigher aircraft shipments, nonagricul- clear, depository institutions exhibited a tural exports were unchanged from their reduced willingness to come to the dis- September level. Economic activity ac- count window. To take account of this celerated or remained strong in most of change in borrowing behavior, and the major foreign industrial countries in against a backdrop of recent information the third quarter but appeared to have suggesting that the economic expansion slowed somewhat in the fourth quarter. retained considerable vigor and potential In the foreign exchange markets, the for price pressures, the Manager for trade-weighted value of the dollar in Domestic Operations adjusted the reserve terms of the other G-10 currencies had paths on November 22 to incorporate a declined about 2lh percent on balance lower level of borrowings, with the over the period since the Committee expectation that federal funds would meeting on November 1, bringing it to a continue trading in the slightly higher level 8 percent below its peak of last range that had prevailed recently. Over August. Following a brief respite in the the intermeeting period, the federal funds week before the U. S. elections, the dollar rate rose nearly lA percentage point to was under downward pressure over most around 8J/2 percent. Other short-term of the intermeeting period. However, the market interest rates generally advanced dollar firmed somewhat near the end of by more than the federal funds rate over the period, as prospects were seen to be the intermeeting period, as expectations increasing for further reductions in the of a tighter monetary policy were stimufederal deficit and a tightening of mone- lated by higher world oil prices, renewed tary policy. weakness of the dollar, and the release of strong domestic economic data. The At its meeting on November 1, the prime rate was increased 50 basis points. Committee adopted a directive calling Rates in long-term debt markets also rose for no immediate change in the degree of on balance, although by appreciably less pressure on reserve positions. These than short-term rates. Stock prices fell reserve conditions were expected to be over the first half of the intermeeting consistent with growth of M2 and M3 at period, but most indexes rebounded annual rates of about 2Vi and 6 percent subsequently to nearly their values at the respectively over the period from Septemtime of the November 1 meeting. ber to December. The members agreed that somewhat greater reserve restraint Growth of the broader monetary aggrewould, or slightly lesser reserve restraint gates strengthened in November from the might, be acceptable depending on indi- relatively sluggish rates of expansion cations of inflationary pressures, the recorded in previous months, especially strength of the business expansion, the for M2. The acceleration in M2 reflected behavior of the monetary aggregates, strong expansion in its liquid retail and developments in foreign exchange components. M3 growth picked up someand domestic financial markets. what less, as bank credit growth and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

136 FOMC Policy Actions associated funding needs remained mod- business activity had remained more erate . On average in October and Novem- robust than had seemed likely earlier, ber, growth of M2 had been somewhat and many expressed concern that continfaster, and that of M3 slightly faster, than ued expansion at a relatively rapid pace the Committee expected at the time of the raised the risk that inflation would intenprevious meeting. With demand deposits sify, given already high rates of capacity running off again, Ml, which had in- utilization in many industries and tight creased only slightly on balance since labor markets in many parts of the midsummer, was virtually unchanged in country. On balance, while somewhat November. more moderate growth continued to be The staff projection prepared for this viewed as a reasonable expectation for meeting suggested that, after adjustment 1989, most members interpreted recent for the effects of the drought, economic developments as suggesting that, in the growth in the current quarter might be absence of some added policy restraint, near the vigorous pace of the third quarter any moderation in the expansion might but that expansion in 1989 was likely to well prove to be insufficient to forestall a moderate on balance. However, to the pickup in inflation, much less to permit extent that expansion of final demand at a progress to be made in reducing inflation pace that could foster higher inflation over time. At the same time, some was not accommodated by monetary members cautioned that the risk of a policy, pressures would be generated in recession stemming from a substantial financial markets that would tend to tightening of policy should not be overrestrain domestic spending. The staff looked; in addition to job and output continued to project some slowing in the losses, a recession could impede progress growth of consumer spending, sharply in bringing the federal budget into balreduced expansion of business fixed ance and could have severe repercussions investment, and sluggish housing activ- on the viability of highly leveraged bority. Foreign trade was expected to make rowers and many depository institutions. an important contribution to growth in In their review of developments beardomestic output, despite some damping ing on the economic outlook, members effects from the dollar appreciation that took account of indications that overall had occurred earlier in 1988 and some- domestic demands were being well mainwhat slower growth abroad. The staff tained, including some recent strength in also anticipated some continuing cost retail sales, and that exports remained on pressures over the next several quarters, a clear uptrend. High levels of activity especially owing to reduced margins of continued to characterize business condiunutilized labor and other production tions in many areas. Manufacturing was resources. benefiting from growing export markets and the substitution of domestic products In the Committee's discussion- of the for higher-priced imports; moreover, economic situation and outlook, the many domestic producers had not yet members focused on indications of conexploited potential markets abroad. There tinuing strength in the economic expanwere indications of some softening in sion. While some signs of prospective business fixed investment, including a slowing in the expansion remained in moderation of growth in outlays for evidence, recent data on employment equipment and reduced construction and production suggested that the econactivity in a number of areas, notably omy retained considerable momentum. those most affected by weak energy A number of members commented that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 137 markets and previous overbuilding. yet have been passed through fully to Nonetheless, business contacts suggested consumer prices. Of particular concern that overall investment spending would was the prospect that, in the absence of a continue to benefit from ongoing efforts timely move to restraint, greater inflation in many industries to modernize or would become embedded in the econexpand production facilities. With regard omy, especially in the labor-cost structo housing construction, members re- ture. A new wage-price spiral would then ported somewhat depressed conditions in be very difficult to avoid and the critical a number of areas, but the latest statistics task of bringing inflation under control for the nation as a whole were on the firm would be prolonged and much more side of recent trends. disruptive. A worsening of inflationary In the course of the Committee's dis- pressures and inflation expectations, if cussion, members gave a good deal of unchecked, eventually would foster attention to the outlook for inflation. On higher interest rates and would lead to the positive side, inflationary expecta- growing imbalances and distortions in tions did not appear to be worsening, as the economy and almost certainly to a evidenced for example by the stability of downturn at some point in overall ecolong-term bond markets, and strong nomic activity. competitive pressures were encouraging At its meeting in late June, the Combusiness firms to persist in their efforts to mittee reviewed its basic policy objechold down costs. Such competition con- tives for growth of the monetary and debt tinued to make it difficult for many aggregates in 1988 and established tentabusinesses to pass on increasing costs tive objectives for expansion of those through higher prices and tended to aggregates in 1989. For the period from harden business resistance to demands the fourth quarter of 1987 to the fourth for higher wages. With regard to labor quarter of 1988, the Committee reafcosts, reports from local areas suggested firmed the ranges of 4 to 8 percent that it that non wage components were rising at had set in February for growth of both a faster rate than wages but that large M2 and M3. The monitoring range for increases in the latter still were infrequent expansion of total domestic nonfinancial despite some shortages of labor. debt in 1988 was left unchanged from its While the members saw no clear February specification of 7 to 11 percent. evidence in current aggregate measures For the year through November, M2 of prices that the overall rate of inflation grew at an annual rate a little below, and was worsening, key indicators of labor M3 at a rate a little above, the midpoint of compensation suggested some uptrend their annual ranges. Expansion of total and many members commented that the domestic nonfinancial debt appeared to risks were in the direction of greater have moderated to a pace somewhat inflation, given the apparent growth of below the midpoint of its range. For 1989 the economy at a pace above its long-run the Committee agreed in June on tentative potential together with the relatively full reductions to ranges of 3 to 7 percent for employment of production resources. M2 and 3% to IVi percent for M3. The These risks would be heightened if the monitoring range for growth of total dollar were to decline significantly from domestic nonfinancial debt was lowered current levels. Commodity prices ap- to 6V2 to 10V4 percent for 1989. It was peared to have leveled off, but they understood that all the ranges for next showed little sign of reversing earlier year were provisional and that they would increases, which themselves might not be reviewed in February 1989 in the light Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

138 FOMC Policy Actions of intervening developments. With re- approach to further restraint in order to spect to Ml, the Committee reaffirmed in minimize potential market disturbances, June its earlier decision not to set a especially around the year-end, and to specific target for growth in 1988, and it facilitate adjustments to rising interest also decided not to establish a tentative rates. It also was suggested that more range for 1989. marked tightening at this time could have In the Committee's discussion of policy the unintended effect of fostering an for the near term, nearly all the members escalation of interest rates in world supported a proposal mat called for an markets, with especially undesirable immediate increase in the degree of effects on many less developed debtor reserve pressure to be followed by some nations. further tightening at the start of 1989 In the discussion of adjustments in the unless incoming evidence on the behavior provision of reserves through open marof prices, the performance of the econ- ket operations, many members comomy, or conditions in financial markets mented on how a possible increase in the differed greatly from current expecta- discount rate might interact with such tions. The appropriate degree of reserve operations. Several favored the implerestraint also would be reevaluated in the mentation of a tighter policy through the event of an increase in the discount rate. discount rate in order to signal more While the members recognized that the clearly than through a gradual tightening degree of monetary restraint could be of reserve conditions the System's ongooverdone, they generally felt that the ing commitment to an anti-inflationary risks of a downturn stemming from the policy. Other members expressed conlimited tightening under consideration cern that, under immediately prevailing were extremely small and needed to be circumstances, an increase in the disaccepted in light of what they perceived count rate might have exaggerated reperas the much greater threat of a recession cussions on domestic and international if inflation were allowed to intensify. financial markets. The Committee con- Expressing a differing view, one member cluded that in the event of an increase in commented that further restraint was the discount rate during the intermeeting undesirable in light of that member's period the members would need to conexpectation that economic growth over sult regarding the implications for the the next several quarters was likely to be conduct of open market operations. at a pace consistent with progress against In the course of the Committee's disinflation. cussion, the members took account of a While all but one member agreed on staff analysis, which suggested that monthe need for some further monetary etary growth was likely to remain relarestraint, views differed to some extent tively restrained in the months immediwith regard to the appropriate degree and ately ahead, especially if reserve timing of such restraint. A number of conditions were tightened. An increase members indicated a preference for a in the degree of reserve restraint in line stronger immediate move to greater with that contemplated by the Committee restraint, given their perception of the would reduce growth of M2 somewhat urgency of countering inflation expecta- from its recent pace, assuming a typically tions and inflationary pressures in the delayed adjustment in deposit rates to economy. Other members did not dis- rising short-term market interest rates, agree that inflation was a serious prob- while growth of M3 would continue at a lem, but they preferred a more gradual somewhat higher rate than that of M2. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 139 Several members observed that re- At the conclusion of the Committee's strained monetary growth would con- discussion, all but one of the members tinue to be desirable, and some expressed indicated that they favored or could concern that in the absence of some accept a directive that called for some tightening of reserve conditions such immediate firming of reserve conditions, growth might accelerate, with inflation- with some further tightening to be impleary implications under foreseeable eco- mented at the start of 1989, assuming that nomic conditions. On the other hand, in economic and financial conditions relight of the limited growth in the monetary mained reasonably consistent with curbase and reserves in the past several rent expectations. In keeping with the months, some other members cautioned Committee's usual approach to policy, that sharp additional restraint on reserve the conduct of open market operations provision could have an undesirably would be subject to further adjustment restraining effect on monetary growth during the intermeeting period based on and the economy. indications of inflationary pressures, the With regard to the proposed move strength of the business expansion, the toward further monetary restraint shortly behavior of the monetary aggregates, after the year-end, it was understood that and developments in foreign exchange such firming would be implemented and domestic financial markets. Dependunless emerging economic and financial ing on such developments, some added conditions were to differ markedly from reserve restraint would be acceptable, or current expectations. Should unantici- some slight lessening of reserve pressure pated developments of that kind occur or might be acceptable. The reserve condishould the Board of Governors approve tions contemplated at this meeting were an increase in the discount rate during the expected to be consistent with growth of intermeeting period, the Chairman would M2 and M3 at annual rates of around 3 call for a special consultation of the percent and 6 Vi percent respectively over Committee. On the question of any the four-month period from November additional adjustment in policy, the mem- 1988 to March 1989. bers generally agreed that policy imple- At the conclusion of the meeting, the mentation should remain especially alert following domestic policy directive was to incoming information that might call issued to the Federal Reserve Bank of for further firming beyond that already New York: contemplated. In light of the tightening of reserve conditions after today's meet- The information reviewed at this meeting ing and the presumption that some further suggests that, apart from the direct effects of monetary restraint would be imple- the drought, economic activity has continued mented later during the intermeeting to expand at a vigorous pace. Total nonfarm period, the members decided to raise the payroll employment rose sharply in October intermeeting range for the federal funds and November, with sizable increases indicated in manufacturing after declines in late rate by 1 percentage point to 7 to 11 summer. The civilian unemployment rate, at percent. With such an increase, federal 5.4 percent in November, remained in the funds would be expected to trade at rates lower part of the range that has prevailed averaging closer to the middle of the since early spring. Industrial production range. That range provides one mecha- advanced considerably in October and November. Housing starts turned up in October nism for initiating consultation of the after changing little on balance over the Committee when its boundaries are perprevious several months. Growth in consumer sistently exceeded. spending has been somewhat more moderate Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

140 FOMC Policy Actions in recent months, and indicators of business establish a specific target for 1988 and also capital spending suggest a substantially slower decided not to set a tentative range for 1989. rate of expansion than earlier in the year. The The behavior of this aggregate will continue nominal U.S. merchandise trade deficit nar- to be evaluated in the light of movements in its rowed further in the third quarter. Preliminary velocity, developments in the economy and data for October indicate a small decline from financial markets, and the nature of emerging the revised deficit for September. The latest price pressures. information on prices and wages suggests In the implementation of policy for the little if any change from recent trends. immediate future, the Committee seeks to Interest rates have risen since the Commit- increase somewhat the existing degree of tee meeting on November 1, with appreciable pressure on reserve positions. Taking account increases occurring in short-term markets. In of indications of inflationary pressures, the foreign exchange markets, the trade-weighted strength of the business expansion, the behavvalue of the dollar in terms of the other G-10 ior of the monetary aggregates, and developcurrencies declined significantly further on ments in foreign exchange and domestic balance over the intermeeting period. financial markets, somewhat greater reserve Expansion of M2 and M3 strengthened in restraint would, or slightly lesser reserve November from relatively slow rates of restraint might, be acceptable in the intermeetgrowth in previous months, especially in the ing period. The contemplated reserve condicase of M2. Thus far this year, M2 has grown tions are expected to be consistent with growth at a rate a little below, and M3 at a rate a little of M2 and M3 over the period from November above, the midpoint of the ranges established through March at annual rates of about 3 and by the Committee for 1988. Ml has increased 6lh percent, respectively. The Chairman may only slightly on balance over the past several call for Committee consultation if it appears months, bringing growth so far this year to 4 to the Manager for Domestic Operations that percent. Expansion of total domestic nonfi- reserve conditions during the period before nancial debt for the year thus far appears to be the next meeting are likely to be associated at a pace somewhat below that in 1987 and with a federal funds rate persistently outside a around the midpoint of the Committee's range of 7 to 11 percent. monitoring range for 1988. The Federal Open Market Committee seeks Votes for this action: Messrs. Greenspan, monetary and financial conditions that will Corrigan, Angell, Black, Forrestal, foster price stability over time, promote Heller, Hoskins, Johnson, Kelley, growth in output on a sustainable basis, and LaWare, and Parry. Vote against this contribute to an improved pattern of interna- action: Ms. Seger. tional transactions. In furtherance of these objectives, the Committee at its meeting in late June reaffirmed the ranges it had estab- Ms. Seger dissented because she lished in February for growth of 4 to 8 percent viewed current business indicators as for both M2 and M3, measured from the already pointing on balance to slower fourth quarter of 1987 to the fourth quarter of economic expansion, and in the circum- 1988. The monitoring range for growth of stances she did not feel that any added total domestic nonfinancial debt was also maintained at 7 to 11 percent for the year. monetary restraint was needed to foster For 1989, the Committee agreed on tenta- economic conditions consistent with tive ranges for monetary growth, measured progress in reducing inflationary presfrom the fourth quarter of 1988 to the fourth sures. In the context of already restrained quarter of 1989, of 3 to 7 percent for M2 and monetary growth, she was concerned 3 Vi to 7 Vi percent for M3. The Committee set that a further increase in the degree of the associated monitoring range for growth of total domestic nonfinancial debt at 6 Vi to 10 Vi reserve pressure would pose unnecessary percent. It was understood that all these ranges risks to interest-sensitive sectors of the were provisional and that they would be economy and ultimately to the sustainareviewed in early 1989 in the light of intervenbility of the expansion itself. She exing developments. pressed particular concern that the higher With respect to Ml, the Committee reaffirmed its decision in February not to interest rates implied by greater monetary Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 141 restraint would aggravate the condition of financially troubled thrift institutions. At this meeting the Committee reviewed its current procedure for implementing open market operations against the background of a marked change over recent months in the relationship between the level of adjustment plus seasonal borrowing and the federal funds rate. The current procedure of focusing on the degree of reserve restraint, as indexed by borrowed reserves, had been implemented with some flexibility in recent weeks in light of the substantial shortfall of borrowing in relation to expectations. The policy results had been satisfactory, but some members proposed that consideration be given to focusing more directly on the federal funds rate in carrying out open market operations, particularly if uncertainty about the borrowing-federal funds relationship were to persist. Others felt that despite its drawbacks, the current procedure had a number of advantages, including that of allowing greater scope for market forces to determine shortterm interest rates. The Committee concluded that no changes in the current procedure were needed at this time, but that flexibility would remain important in accomplishing Committee objectives under changing circumstances. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

143 Consumer and Community Affairs In 1988 the Federal Reserve Board used delayed access to deposits and require, its rulewriting and enforcement authority among other things, that depository to maintain statutory protections for institutions make funds deposited into consumers while easing regulatory bur- accounts available within specified time dens. This chapter examines the activities periods. Banks and other depository of the Federal Reserve System in support institutions must give next-day availabilof those goals. ity, subject to certain conditions, for electronic payments, Treasury checks, postal money orders, state and local Regulatory Matters government checks, and checks written The Board issued Regulation CC to carry on the same institution where the check is out the Expedited Funds Availability Act being deposited. For next-day availabiland revised Regulation C to implement ity, deposits may have to be made in statutory amendments that expanded the person to a teller or the depositor may coverage of the Home Mortgage Disclo- have to use a special deposit slip made sure Act and made the law permanent. available by the institution. The Board also proposed amendments to The period within which institutions Regulation Z to implement the Fair must make other check deposits available Credit and Charge Card Disclosure Act for withdrawal depends on whether a of 1988, which provides that credit and check is considered local or nonlocal in charge card issuers must give consumers relation to the institution where it was information about their plans earlier than deposited. A local check is one deposited currently required. In addition, the Board in an institution located in the same Fedprepared regulations concerning home eral Reserve check processing region as equity lines of credit to implement the the institution on which the check was Home Equity Loan Consumer Protection written. In the case of a nonlocal check, Act of 1988. In other matters, the Board the two institutions are located in differreviewed the paperwork burden associ- ent processing regions. ated with several regulations in keeping Funds must be made available by the with the Paperwork Reduction Act and third business day after deposit for local issued four new publications for consum- checks and by the seventh day after deers: one to explain the provisions of the posit for nonlocal checks. After Septem- Expedited Funds Availability Act and a ber 1,1990, these deposits must be made set of three pamphlets to clarify the available sooner: by the second business mortgage-application process. day for local checks and by the fifth business day for nonlocal checks. Institutions may invoke exceptions to Regulation CC the time periods in the law when handling (Expedited Funds Availability) new accounts, redeposited checks, emer- In May the Board issued Regulation CC, gency conditions, deposits exceeding effective September 1, 1988, to imple- $5,000 in any one day, accounts that have ment the Expedited Funds Availability been repeatedly overdrawn, and checks Act. The act and regulation address that the institution has reasonable cause Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 Consumer and Community Affairs to believe will not be paid. In such cases To qualify for an exemption, the state the institution must notify the customer must have a law that protects consumers of the longer delay and indicate when the at least as well as the corresponding funds will be available. federal provision. In the case of Califor- Regulation CC requires depository nia, the Board granted the exemption institutions to disclose their specific after determining that the law with repolicies on funds availability and to notify spect to a special notice given to cosigners customers of a change in policy. An is substantially equivalent to the federal institution must give disclosures to new law and that the state administers and customers before opening an account and enforces its laws effectively. to anyone who asks for the information. A brief notice is required at all locations Regulation C where an institution's employees accept (Home Mortgage Disclosure) deposits, at automated teller machines, and on all deposit slips printed with the In August the Board revised Regulation customer's name and account number. C to incorporate amendments to the Regulation CC includes model forms and Home Mortgage Disclosure Act. The act clauses to help institutions make the applies to institutions with more than $10 required disclosures. To facilitate com- million in assets and offices in metropolpliance, the Board in June released a itan areas; it requires disclosure, and a Special Notice summarizing the require- geographic listing, of originations and ments of the regulation. purchases of home mortgage and home In September the Board issued a pam- improvement loans. phlet for consumers that explains the The amendments, enacted by the Conprovisions of the act, "Making Deposits: gress in February 1988, expand the When Will Your Money Be Available?" coverage of the act to mortgage-banking It outlines the availability schedule by subsidiaries of bank and thrift-institution type of deposit, lists the circumstances holding companies and to savings and under which an institution may delay loan service corporations that originate customers' funds beyond the normal or purchase mortgage loans. The act limits, states the disclosure requirements, previously applied only to depository demonstrates endorsement procedures, institutions and their majority-owned and provides information on how to subsidiaries. The newly covered instituresolve errors. tions will report data for loan originations and purchases made after August 19, 1988, in keeping with an amendment Regulation AA adopted by the Congress in November (Credit Practices Rule) 1988. Without that amendment, institutions would have been required to report In July the Board granted a request from data for the entire calendar year. the State of California for an exemption Following an in-depth review through from the cosigner provisions of Regula- the Board's Regulatory Review Section, tion AA (Credit Practices Rule) for state- the Board revised the text of Regulation chartered institutions. That rule prohibits C to improve its clarity and expanded banks from using certain remedies to the instructions for the reporting form. enforce consumer credit obligations and These changes should make it easier for from "pyramiding" late charges; it also financial institutions to comply with the affords special protections to cosigners. regulation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 145 The Board also amended the regulation quire creditors to keep records of a to require that institutions disclose loan business application for at least one year data related to the purchase or improve- and to notify business credit applicants, ment of mobile and manufactured homes. in writing, that they are entitled to a Until now, such loans were reported only statement of reasons when they are turned if these dwellings were treated as real down for credit. The Board will issue estate under state law. This change proposed amendments to Regulation B in became effective January 1, 1989. early 1989. The changed requirements will take effect when the revisions to Regulation B are published in final form. Regulation B (Equal Credit Opportunity) In November the Board determined that Regulation Z the Equal Credit Opportunity Act (Truth in Lending): (ECOA) and Regulation B preempt a Adjustable-Rate Mortgages portion of New York law because of the latter's inconsistency with the federal A revision to Regulation Z regarding law. ECOA and Regulation B prohibit disclosures for adjustable-rate mortdiscrimination in any credit transaction gages (ARMs) became effective in on the basis of race, color, national October. The amendment, adopted in origin, and other specified characteristics December 1987, requires creditors to of the applicant. But to allow creditors to give consumers more detailed infortarget a segment of the population that mation about the variable-rate feature of finds it difficult to obtain credit, such as closed-end mortgages with maturities an ethnic minority, the act and regulation longer than one year. The amendment, allow creditors to offer special-purpose which applies to mortgages secured by credit and to consider one or more the consumer's principal dwelling, characteristics of applicants for such requires creditors to give a description credit (such as race or national origin). of the terms of the mortgage. The Because creditors under New York law amendment also requires creditors to could in no circumstance take any of the give borrowers historical data on specified characteristics into account, changes in the index to show the they were in effect barred from offering potential effect on monthly payments. special-purpose credit programs. As of ARM disclosures must be given when November 11, 1988, the state of New the consumer gets an application form York may not prohibit special-purpose or before the consumer pays a noncredit programs or related inquiries that refundable fee, whichever is earlier. are permissible under federal law. An educational booklet describing The Women's Business Ownership Act the characteristics and risks related of 1988, signed into law in October, to ARMs must accompany these amends ECOA requirements applicable disclosures. to business credit transactions. Although To provide guidance to creditors about business credit has always been covered the required ARM disclosures, the Board by ECOA and Regulation B, the regula- in September published a special update tory requirements for retaining records to the staff commentary. This official and for notice of adverse action have commentary applies to, and interprets, differed from those applicable to con- the requirements of Regulaption Z and is sumer credit. The amendments will re- a substitute for individual interpretations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 Consumer and Community Affairs Regulation Z: for disclosures to be given at the time Credit Card Disclosures consumers receive an application form for home equity lines of credit and revises In December the Board proposed to the rules for advertising such credit. The amend Regulation Z to require that law further mandates certain consumer consumers be given earlier disclosures protections applicable to these programs. about credit and charge card plans. For example, it limits a creditor's ability Under the proposed amendments, which to terminate the line of credit and accelimplement the Fair Credit and Charge erate any outstanding balance or to Card Disclosure Act, issuers that offer change the terms once a plan has been cards to consumers by direct-mail opened. The Board will issue proposed solicitation must disclose the annual amendments to the regulation in early percentage rate, annual fees, transaction 1989. charges, grace periods, and the method The Board is also preparing a pamphlet used to calculate the balance on which for consumers that describes the features the finance charge is computed. of home equity lines of credit, how they Previously, these disclosures could be work, and how they compare with other made later, when the card was issued. types of credit programs. This pamphlet, Special rules will apply to disclosures in or one substantially similar, must be telephone solicitations and to application given to consumers along with creditors' forms placed in retail establishments and disclosures. in magazines. Card issuers that charge fees for renewing an account must notify the consumer Regulation Z: at least 30 days before the renewal Determination of Preemption payment is due. The notice must include the date when the card will expire if not In February the Board determined that renewed by the consumer; the cost (infederal law preempts a provision of cluding membership fees) for continued an Indiana statute that is inconsistent use of the card; and information on how with the disclosure requirements of the consumer may close the account and Regulation Z. Indiana law requires loan avoid paying any fees. brokers to give disclosures to potential The proposed changes also address borrowers and mandates that their fees credit insurance. A card issuer that and charges be included in calculatchanges insurance providers must give ing the finance charge and annual cardholders advance notice and the oppercentage rate. Under Regulation Z, portunity to cancel the insurance. The charges for services provided by third card issuer also must inform consumers parties, such as loan brokers, are not of any increase in rate or substantial finance charges if the creditor does not decrease in coverage that may result from require the services or does not retain the change. the fees. The Board preempted the Indiana provision because it uses the same wording as that used in the federal Regulation Z: law to refer to the disclosure of an Home Equity Lines of Credit amount that is different from the amount The Home Equity Loan Consumer Pro- to be disclosed under federal law. The tection Act of 1988, signed into law in preemption took effect on October 1, November, adds extensive requirements 1988. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 147 Interpretations The bulk of the disclosures imposed by the Board's regulations are mandated by, In 1988 the Board continued to offer legal or are needed to carry out the intent of, interpretations and guidance through the underlying legislation. The requireupdates to the official staff commentaries ments were already reduced significantly on Regulation B (Equal Credit Opportu- in recent years through the Board's own nity), Regulation E (Electronic Fund regulatory review program and through Transfers), and Regulation Z (Truth in previous reviews for paperwork reduc- Lending). These commentaries, pub- tion. Following the latest review, the lished by April 1 each year, help financial Board concluded that few opportunities institutions and others apply the regula- exist for further reducing the paperwork tions to specific situations. burden in the absence of congressional The Board published an update, effec- action. tive August 1, to its staff guidelines on the Credit Practices Rule. The guidelines answer questions from banks about the Community Affairs rule and are updated periodically. The Community Affairs Program of the Federal Reserve System took a major step in 1988 when the presidents of the 12 Mortgage Brochures Reserve Banks formally established a Community Affairs subcommittee within In response to a congressional request, their Conference of Presidents. The the Federal Reserve Board and the Fedsubcommittee will keep the presidents eral Home Loan Bank Board in June informed of current issues relating to published three brochures to improve community development and the Comconsumer understanding of the mortgage munity Reinvestment Act. application process. These brochures— on refinancings, lock-ins, and closing A major focus of the Community costs—were prepared in consultation Affairs Program, described by the Board with trade and consumer groups and with at hearings in March before the Senate other government agencies. Committee on Banking, Housing and Urban Affairs, is to develop expertise in safe, sound, and thoughtful community Reduction of Paperwork Burden development lending and then to share that expertise with member banks and In May the Board reviewed the paper- others. During the year, staff members of work burden associated with five regula- the Community Affairs Program kept tions —Regulation BB (Community Rein- themselves up to date on the latest vestment), Regulation Z (Truth in strategies and programs (such as tax Lending), Regulation E (Electronic Fund credits for low-income housing and the Transfers), Regulation B (Equal Credit use of new secondary market entities and Opportunity), and Regulation M (Con- techniques) by attending more than 125 sumer Leasing)—and one statute, the seminars and workshops. The Commu- Right to Financial Privacy Act. As re- nity Affairs Officers from the Reserve quired by the Office of Management and Banks and staff members from the Board Budget under the Paperwork Reduction also took part in week-long training Act, the Board conducts these reviews sessions on methods that can help lenders periodically for the possible reduction of and community members form producregulatory requirements. tive partnerships. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

148 Consumer and Community Affairs The Reserve Banks conducted 78 of conference sponsors as diverse as the educational programs, many of them in National League of Cities, the American conjunction with the Federal Home Loan Bankers Association, and National Peo- Banks, the Department of Housing and ple's Action. Through these speeches as Urban Development, and the Small Busi- well as through seminars, conferences, ness Administration. Partnerships be- and other meetings, Community Affairs tween banks and their communities, of staff members reached an estimated the types explored at these conferences, 13,000 people on the subject of commuare needed to address adequately the nity development. country's economic development. Many banks—from small and rural communi- Examination Procedures ties as well as from more metropolitan areas—have responded in a positive way Amendments to Regulation Z that took to the information provided by the Re- effect in October 1988 require creditors serve Banks' Community Affairs Officers. to give consumers more detailed informa- Participation by financial institutions tion about closed-end mortgages with in community development takes a vari- variable rates. To ensure compliance by ety of forms. A number of California state member banks, the Board developed banks formed a consortium to address objectives, procedures, and a checklist low-income housing needs. To coordi- for the compliance examination dealing nate their involvement in community with such mortgages. The other federal development, lenders formed councils in agencies that supervise financial institu- Camden, New Jersey; in Harrisburg, tions expect to adopt similar procedures. Pennsylvania; and in Wilmington, Dela- Member agencies of the Federal Finanware. In Boston, financial institutions cial Institutions Examination Council began an assessment of housing needs. In (FFIEC)-the Board, the Federal Decooperation with Board staff members, posit Insurance Corporation, the Federal the Economic Development Administra- Home Loan Bank Board, the Office of the tion is encouraging banks and bank Comptroller of the Currency, and the holding companies throughout the coun- National Credit Union Administration— try to form community development developed interagency examination procorporations. cedures for Regulation CC (Expedited In 1988 the Reserve Banks also used Funds Availability). The FFIEC also community profiles, educational pam- conducted and videotaped a training phlets, and newsletters to help banks, session for examiners, providing an holding companies, and others address overview that focuses on the schedules the economic development of their com- for availability of funds, disclosure remunities. The Federal Reserve Bank of quirements, and examination proce- Chicago inaugurated a community affairs dures. The videotape and a written newsletter, bringing to five the number "Course for Financial Institution Examnow published by the System. These iners" is available to compliance examinpublications highlight emerging issues in ers of the five financial regulators. community development and present The Federal Reserve continues to case studies of successful programs that conduct separate examinations to monitor involve cooperation between banks and compliance with consumer protection their communities. laws and regulations and to monitor In 1988, staff members of the Federal performance under the Community Rein- Reserve made 135 speeches at the request vestment Act. State member banks are Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 149 examined at intervals determined by their rizes data gathered from the agencies for own performance records. The longest the reporting period July 1,1987, to June interval between examinations, for banks 30,1988. i with the best records of performance, is 24 months. Banks with poor performance Truth in Lending Act records are examined as frequently as (Regulation Z) every 6 months. The Federal Deposit Insurance Corpo- Taken together, the five financial regularation reports that it changed the fre- tory agencies report that 46 percent of all quency of its compliance examinations in examined institutions were in full compli- July 1988. The agency will examine ance with Regulation Z, down from 54 banks with a poor record of performance percent in 1987. Of the five agencies, the every 12 months and banks with better Office of the Comptroller of the Currecords every 24 months. It has increased rency (OCC), the Federal Deposit Insurits staff of examiners, and as a result ance Corporation (FDIC), and the Board expects the number of compliance exam- noted declines in compliance, while the inations completed in 1989 to increase by Federal Home Loan Bank Board 30 percent. During 1988 the agency (FHLBB) and the National Credit Union reorganized its compliance function in Administration (NCUA) reported levels Washington, centralizing the responsibil- of compliance similar to those for the ity for consumer compliance in the Office 1987 reporting period. Data from the of Consumer Affairs. Board, the OCC, and the NCUA (the The Federal Home Loan Bank Board agencies that provide frequency ranges) has created a Division of Compliance indicate that among the institutions not in Programs within the Office of Reg- full compliance, 78 percent had no more ulatory Activities to be responsible for than five violations, an improvement over consumer compliance examinations. the 51 percent reported in that range for The board adopted a Compliance Policy 1987. Statement in June 1988, urging savings The most frequent violations involved and loan associations that are system the failure to give accurate disclosures of members to develop sound internal the annual percentage rate; the number, compliance programs; the agency also amounts, and timing of payments scheddistributed a manual, "Compliance: A uled to repay the obligation; the finance Self-Assessment Guide," to all member charge; the itemization of the amount institutions. financed; and the amount financed. The FDIC issued one cease-and-desist order and the Board entered into one Compliance with Consumer formal written agreement involving vio- Regulations lations of Regulation Z. Under the Inter- Data from the five federal agencies that agency Enforcement Policy on Regulasupervise financial institutions and from tion Z, a total of 279 institutions other federal supervisory agencies indi- supervised by the Board, the FDIC, the cate that compliance with the Truth in Lending Act and the Equal Credit Opportunity Act declined somewhat from 1987 1. The federal agencies that regulate financial levels, while compliance with the Elecinstitutions do not use the same method to compile tronic Fund Transfer Act remained subinformation on compliance; however, the data stantially the same. This section summa- support the general conclusions presented here. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 Consumer and Community Affairs FHLBB, and the OCC reimbursed ap- compliance among the entities they proximately $2 million to 23,419 ac- supervise. counts, compared with $1.2 million reimbursed to 10,507 accounts during Equal Credit Opportunity Act the 1987 reporting period. (Regulation B) The Federal Trade Commission (FTC) continued its compliance program to Among the institutions they examine, the enforce the credit-advertising require- five financial regulatory agencies rements of Regulation Z, with an emphasis ported a decline in the overall level of on advertisers of credit for the purchase compliance with Regulation B. The numof real estate and automobiles. Most com- ber of institutions that had no violations panies contacted by the FTC promptly declined from 74 percent in 1987 to 67 brought their advertising programs into percent for the 1988 reporting period. compliance. The Board, the OCC, and the NCUA (the In conjunction with the National Asso- three agencies that collect data on the ciation of Attorneys General, the FTC frequency of violations) report that 78 has also continued its enforcement pro- percent of the institutions not in full gram against fraud in telemarketing and compliance had fewer than five violaother fraud involving charges to credit tions. The most frequent violations incards. Two actions were brought in fed- volved the failure to meet the following eral district court, alleging violations of requirements: the Truth in Lending requirements for • Notify the applicant of the action prompt notification of returns and credit- taken within 30 days after the creditor ing of refunds on credit card accounts. receives a complete application. The FTC issued a new pamphlet, • Provide a written notice of adverse "Home Equity Credit Lines." A checklist action that contains the information reassists consumers in comparing different quired by the regulation. home equity loan programs. The FTC • Request information for monitoring also published "Choosing and Using purposes about race or national origin Credit Cards," which offers guidance on and sex on applications involving the how to shop for a credit card and explains purchase or refinancing of a primary the consumer protections provided under residence. federal law. • Note the race or national origin and The Department of Transportation sex, based on the lender's visual observareported a satisfactory level of compli- tion, if an applicant chooses not to ance with the Truth in Lending Act by provide that information. foreign and domestic carriers under its • Provide the specific reasons for jurisdiction. As the result of consumer credit denials and other adverse action. inquiries investigated by its Consumer The FTC continued an investigative Affairs Division, the department entered program in which testers pose as credit into a consent order with an air carrier applicants to monitor compliance with that included provisions relating to the ECO A. Four finance companies were act. found to have practices that violate The other agencies that enforce the ECOA, leading FTC staff to recommend act—the Packers and Stockyards Admin- enforcement actions. istration of the Department of Agricul- The other agencies that enforce the ture and the Farm Credit Administra- act—the Department of Transportation, tion-reported satisfactory levels of the Farm Credit Administration, the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 151 Interstate Commerce Commission, the of the depository institutions in the United Small Business Administration, the Secu- States provide EFT services that are rities and Exchange Commission, and covered by the requirements of the act the Packers and Stockyards Administra- and Regulation E. tion—report substantial compliance Demand for EFT services has continamong the entities they supervise. ued to grow. Consumers gained greater access to EFT services through the expansion of shared ATM systems. More Electronic Funds Transfer Act than 86 percent of ATMs in the United (Regulation E) States now participate in shared systems. The five financial regulatory agencies Excluding balance inquiries, about 5 report that 88 percent of examined insti- billion transactions were conducted at the tutions were in full compliance with 82,000 installed machines in the country. Regulation E, a decline from last year's The number of point-of-sale (POS) 90 percent. The four most frequent systems has also grown rapidly, though violations involved the failure to give the these machines still handle a relatively following disclosures: small share of total EFT transactions. • A periodic notice of the procedures The number of merchant terminals capafor resolving alleged errors. ble of supporting direct-debit POS trans- • A written statement outlining the actions grew about 12 percent in 1988, terms and conditions of the EFT service. from 38,800 to 43,400 terminals. POS • A periodic statement for each terminals handled about 55 million transmonthly cycle in which an EFT occurred. actions during 1988. • A summary of the consumer's liabil- Each year, more consumers are electity for unauthorized transfers. ing to receive pay or government trans- The fifth most frequent violation in- fers by electronic direct deposit, and volved the failure promptly to investigate more corporations are offering direct deerrors alleged by consumers and to posit. In the public sector, about half of inform them of the results of the investi- social security recipients receive monthly gation in a timely manner. benefits electronically; and the number The other agencies that enforce the of military personnel who receive payroll act—the Federal Trade Commission and and other benefits by automated direct the Securities and Exchange Commis- deposit continues to grow. The Internal sion—report a satisfactory level of com- Revenue Service offers electronic depliance among the entities they supervise. posit of income tax refunds to individuals who file their returns electronically. The benefits to consumers from the Economic Effect of the Electronic Electronic Fund Transfer Act are diffi- Funds Transfer Act cult to measure because they cannot be In accordance with statutory require- isolated from protections that would have ments, the Board monitors the effects of been provided in the absence of regulathe Electronic Funds Transfer Act on the tion. Statistics from examination reports costs and benefits of EFT services to do not suggest widespread violation of financial institutions and consumers. the consumer rights established by the During 1988, the economic effect of the act. act broadened as more financial institu- Data from the Board's Consumer Comtions offered EFT services and as more plaint Control System show no serious consumers used them. About two-thirds consumers problems with electronic Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

152 Consumer and Community Affairs transactions. In 1988, 51 of the 2,196 Reserve investigated and resolved the complaints processed involved electronic 796 that were against state member banks transactions; of the 51, the Federal (see accompanying table). The Board Reserve System forwarded the 23 com- also received 184 written inquiries conplaints that did not pertain to state mem- cerning consumer credit laws and bankber banks to other agencies for resolution. ing practices. In responding to these None of the remaining 28 involved a complaints and inquiries, staff members violation of the regulation. of the Board and the Reserve Banks gave Because the costs of industry practices specific explanations of laws, regulathat would have evolved in the absence of tions , and banking practices and provided statutory requirements are unknown, the printed materials on the general issues. incremental costs associated with the act, To evaluate compliance with System like the benefits, are difficult to quantify. policies, the Board's Division of Con- But the compliance cost of an electronic sumer and Community Affairs regularly transaction is probably not high enough reviews a sample of the complaints to compromise its cost advantage over a handled by the Reserve Banks. The Board check-based transaction. uses follow-up questionnaires to gauge, As EFT systems mature, as transaction through the perceptions of complainants, volume builds, and as start-up costs for how well the System handles cases. compliance are amortized, compliance Consumers returned 44 percent of these costs imposed by the act, per transfer and questionnaires. Approximately 80 perper dollar of transferred funds, will likely cent of the respondents found the expladecline. nations clear and understandable; 75 percent were satisfied with the promptness of handling; 95 percent said they Complaints against were treated courteously by Federal State Member Banks Reserve staff; 90 percent reported that In 1988 the Federal Reserve received they would contact the Federal Reserve 2,196 complaints: 1,832 by mail, 356 by again if they had other problems with telephone, and 8 in person. The Federal banks; and 75 percent found the resolu- Consumer Complaints Received by the Federal Reserve System, by Subject, 1988 Subject State b a m nk em s ber le O n t d h e e r r s1 lotai Regulation B (Equal Credit Opportunity) 86 52 138 Regulation E (Electronic Fund Transfers) 28 23 51 Regulation M (Consumer Leasing) 3 3 6 Regulation Q (Interest on Deposits) 41 47 88 Regulation Z (Truth in Lending) 157 316 473 Regulation BB (Community Reinvestment) 0 1 1 Regulation CC (Expedited Funds Availability). 1 30 31 Fair Credit Reporting Act 12 83 95 Fair Debt Collection Practices Act 10 24 34 Fair Housing Act 1 3 4 Municipal Securities Dealer Regulation 0 3 3 Transfer agents 2 1 3 Unregulated bank practices 455 706 1,161 Other2 0 108 108 Total. 796 1,400 2,196 1. Referred by the Federal Reserve to the appropriate 2. Primarily miscellaneous complaints against business agencies. entities. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 153 tion of their complaint acceptable. Many (such as length of residency) and other complaints involved practices that, al- unregulated lending practices (such as though of concern to consumers, are release or use of credit information). permissible practices. Thus, a greater About 26 percent involved disputes conpercentage of the respondents were satis- cerning interest on deposits and general fied with the System's handling of their practices concerning deposit accounts. complaint than with its resolution. A second table summarizes the nature Unregulated Practices and resolution of the 796 complaints against state member banks. About 52 In 1988 the Board continued to monitor, percent involved loan functions: 11 per- under section 18(f) of the Federal Trade cent alleged discrimination on a prohib- Commission Act, complaints about bankited basis, and 41 percent concerned ing practices that are not subject to credit denial on nonprohibited bases existing regulations to focus on those that Consumer Complaints Received by the Federal Reserve System, by Function and Resolution, 1988 Type of complaint Type of resolution Total Loan function Electronic Deposit Trust fund Other Discrimi- Other function transfers services nation Complaints about state member banks Number 796 87 329 205 28 9 138 Percent 100 11 41 26 4 1 17 Complaints about state member banks, by type Insufficient informationl 27 3 6 7 1 1 9 Information furnished to complainant2 89 9 46 21 0 0 13 Bank legally correct No accommodation 277 43 107 73 14 4 36 Accommodation made3 66 10 31 12 0 0 13 Clerical error, corrected 153 5 70 47 5 0 26 Factual dispute4 41 2 15 12 2 1 9 Bank violation, resolved5 18 4 10 2 2 0 0 Possible bank violation, unresolved6 2 0 10 0 0 1 Customer error 21 1 3 7 0 0 10 Pending, December 31 102 10 40 24 4 3 21 Complaints referred to other agencies7 1,400 56 644 294 23 16 367 Total, all complaints 2,196 143 973 499 51 25 505 1. The staff has been unable, after follow-up correspon- that can be resolved only by the courts. Consumers wishing dence with the consumer, to obtain sufficient information to pursue the matter may be advised to seek legal counsel or to process the complaint. legal aid or to use small claims court. 2. When it appears that the complainant does not 5. In these cases a bank appears to have violated a law or understand the law and that there has been no violation on regulation and has taken corrective measures voluntarily the part of the bank, the Federal Reserve System explains or as indicated by the Federal Reserve System. the law in question and provides the complainant with other 6. When a bank appears to have violated a law or 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 enforcement 4. These cases involve factual disputes not resolvable agency. by the Federal Reserve System and contractual disputes 7. Complaints about nonmember institutions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 Consumer and Community Affairs may be unfair or deceptive. Three cate- applications of banks and bank holding gories each accounted for 5 percent of the companies. 1,161 complaints: improper crediting of Examiners trained in consumer regudeposits to accounts (59), credit denial lation and CRA issues carry out the based on credit history (58), and miscel- compliance program; they conduct exlaneous other practices (57). Complaints aminations and produce reports dealing about improper crediting of deposits exclusively with these issues. During the usually involved cases in which a cus- 1988 reporting period (July 1, 1987, tomer held more than one account and the through June 30,1988), Federal Reserve teller inadvertently credited funds to the personnel examined 569 state member wrong account. Many of the complaints banks for compliance with the CRA. about credit denials based on credit During these examinations, banks are history indicated that the applicant under- counseled on ways to improve CRA estimated the importance lenders give to performance, including techniques for a poor credit history or a lack of borrow- more active involvement in community ing experience when considering the economic development. applicant's creditworthiness. The third The number of CRA protests and the category covered a wide range of prac- increased complexity of protests involvtices, such as merchants' minimum- ing interstate acquisitions have resulted charge requirements on credit cards, the in a greater emphasis on the applications number of points charged on a mortgage process in recent years. To achieve a fair loan, or a lender's failure to close on a and equitable settlement of CRA issues mortgage loan by the agreed settlement arising during the application process, date. the Board carefully considers all relevant facts from the parties involved. The Board scrutinizes the CRA records, Community Reinvestment Act which may reflect problems for an The Community Reinvestment Act applicant, whether or not a protest has (CRA) requires the Board to encourage been filed. In this process the Board often institutions under its jurisdiction to help has obtained commitments for future meet the credit needs of their communi- improvement. When CRA issues arise, ties, including the needs of low- and the Federal Reserve also provides a moderate-income neighborhoods, in a forum for protestants and applicants that manner consistent with safe and sound wish to discuss their concerns privately practices. The Board assesses the CRA and narrow differences caused by record of state member banks during misunderstandings. regular examinations, and takes CRA The number of applications of state performance into account when acting on member banks or bank holding comapplications filed by state member banks panies protested because of CRA perforand bank holding companies. The Board mance declined from the record high of may withhold approval of certain appli- 1987. In calendar year 1988, 31 applicacations if the CRA record of the institu- tions were protested, compared with 36 tion is not satisfactory. in 1987. But the Board also handled 20 The CRA program of the Federal other applications in which adverse CRA Reserve consists of a compliance exami- ratings were at issue, compared with 15 nation program, a community affairs such cases during 1987. In the protested program, and a program for analysis of cases, 6 protests were withdrawn follow- CRA performance in connection with ing resolution of differences between Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 155 applicants and protestants. In 9 other removes from mandated schedules cerinstances, applications were approved tain items such as large-dollar deposits or after the applicant made commitments to checks the institution has reason to the Board to improve its CRA perfor- believe will not be paid; a majority of mance. By year-end the Board had council members wanted the Board to approved 27 of the 31 applications; the seek statutory authority to extend the other 4 applications were still pending. exceptions to all checks, including government and cashier's checks. Consumer and community representatives, noting Consumer Advisory Council that many low-income individuals desper- The Consumer Advisory Council (C AC) ately need next-day availability, opposed met in March, July, and October to advise applying the exceptions to government the Board on its responsibilities under the checks. consumer credit protection laws and Also in March the CAC recommended discuss other issues relating to financial that the Board support legislation allowservices to consumers. The CAC has 30 ing banks, thrift institutions, and credit members from consumer groups, finan- unions to sell insurance if they met cial institutions, academia, and govern- certain conditions designed to protect ment. Its meetings are open to the public. consumers. These conditions would in- At the March meeting, the CAC con- clude legal protections against linking sidered proposed legislation for im- insurance sales to credit extensions, proved disclosures to consumers and for clear and understandable product disclorestrictions on credit features of home sures, access to insurance and banking equity lines of credit. The CAC reviewed products that are affordable to low- and a December 1987 Board proposal that moderate-income persons, "at-cost" would have required earlier and addi- government-check-cashing services for tional Truth in Lending disclosures for noncustomers, and public disclosure of these plans. The council urged the Board the CRA rating of an institution that to move expeditiously in developing a applies for insurance powers. Six CAC final rule, though CAC members also members, representing both industry and recognized the need for protections for consumer perspectives, opposed the consumers (such as rate indexes that can recommendation. be verified by the consumer through an At the July meeting the CAC considoutside source) that could be provided ered the potential effects of a legislative only by legislative action. The CAC proposal requiring banks to cash governrecommended amending Regulation Z to ment checks for nondepositors for a small provide a 90-day notice period (instead fee. Members were agreed that recipients of the current 15 days) for a change in of public-assistance and social-security terms affecting an outstanding balance in checks should be able to cash those a home equity line. checks at a reasonable cost, but the In March the CAC considered the members differed over the best way to Board's proposed rules implementing the accomplish this objective. Industry rep- Expedited Funds Availability Act. Sev- resentatives, concerned about the poteneral bankers expressed concern about a tial for fraud and about the new direct and provision that mandates next-day avail- indirect costs for institutions under the ability without exception for government proposed legislation, thought reliance on and cashier's checks, citing the risk of electronic fund transfer systems would fraud on large-dollar items. The act be a better solution: direct deposit of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 Consumer and Community Affairs funds would minimize the potential for the interest received matches the rate fraud, and the use of automated teller advertised. The CAC generally endorsed machines would provide convenience for the concept that depositors should have recipients. Consumer representatives the information necessary to verify interpointed out that only a small percentage est, though some members expressed of families with incomes under $10,000 concern about costs if institutions had to currently use automated teller machines. give a great deal of complicated data to In July the CAC considered alterna- consumers. tives to accommodate communities de- In 1988 the CAC also considered the prived of local banking services when a following issues: bank branch shuts down. The alternatives • Legislative proposals to amend the included community development credit CRA. unions (chartered around a geographic • The Federal Reserve's implementabond) and community development banks tion of CRA recommendations that were (designed to provide financial services made by the CAC in 1983. and economic development in low- and • Newspaper articles describing wide moderate-income communities). The disparities in the practices of banks CAC also reviewed programs undertaken with respect to lending in predomiby banks and by the banking trade groups nantly white and predominantly minority to develop alternative banking services. neighborhoods. The CAC supported the concept that • Regulatory issues that affect small banks should give advance notice to the financial institutions. community when they decide to close a • The trend toward restructuring branch and urged the Board to publicize within the financial services industry. alternatives for communities lacking • The exportation, by national banks, regular banking services. of interest rates and other charges across In October the CAC considered disclo- state lines. sure rules on traditional second-mortgage transactions in the context of the new Testimony and Legislative rules for early disclosure of terms on Recommendations home equity lines of credit. Members suggested earlier disclosure of the credit In 1988 the Board testified before the costs, repayment terms, and risks associ- Congress and made recommendations ated in the more traditional closed-end concerning the Community Reinvesttransactions that involve second mort- ment Act, government check cashing gages; the disclosures for these transac- and basic banking, and expedited funds tions are now given at settlement. Legal- availability. aid attorneys and state government officials believe that with earlier disclo- Community Reinvestment Act sures, consumers would be more likely to avoid the less advantageous programs. The Board testified twice before the Members from small banks were against Senate Committee on Banking, Housing, the idea of having to provide additional and Urban Development concerning the disclosures because their institutions are Community Reinvestment Act. At overnot part of the problem being described. sight hearings in March the Board re- Also in October, the CAC considered ported on the Federal Reserve's CRA whether the information given on savings program, which integrates compliance accounts enables depositors to check that examinations, a strong community affairs Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 157 program, and a program for analysis of effective communication among banks, banks' CRA performance in deciding communities, and regulators about the applications by banks and bank holding community's needs and an institution's companies (see the section above on the record of accomplishment in meeting its CRA). CRA responsibilities. The Board's testimony in September provided comment on proposed amend- Government Check Cashing and ments to the CRA in a comprehensive Basic Banking banking bill. While the Board recognizes that improvements in the implementation The Board's testimony in September of the CRA can be made, it believes the before the Senate banking committee also current CRA requirements are fundamen- covered legislative proposals to impose tally sound and workable, and it opposed new requirements for government-check major revisions. Any modification must cashing and basic banking services. The be tailored carefully to preserve the Board opposes the requirement that finanbalance between the needs of local com- cial institutions cash government checks munities and the safe and sound operation for nondepositors at a specified price. of banks and should not raise administra- Electronic alternatives present a better tive obstacles that may tend to erase gains long-term solution to problems in this already achieved by the CRA. The Board area than focusing exclusively on check believes that changes to the CRA should cashing; the processing cost would be focus on two major criticisms: the lack of much lower and the fee charged an opportunity for individuals and commu- individual to make cash available would nity groups to contribute to the evaluation probably be smaller than for cashing a of the CRA performance of institutions, check. Federal, state, and local agencies and that high CRA ratings may be given could arrange to transfer benefit paytoo readily. ments electronically to depository insti- The Board suggested some ways that tutions that agree to participate in a would enable the public to participate in voluntary program, for example. CRA assessments. Institutions could The Board does not support requiring provide, in their annual public statement that institutions offer basic transaction on the CRA, a discussion of the efforts accounts at a regulated price. Any manthey have made to meet their CRA datory arrangement would be inflexible, responsibilities. Members of the public the Board believes, and fee requirements could then comment to the institution and would be extremely difficult to implement to regulators on the institution's perfor- in regulations. In light of these problems, mance. In addition, federal regulators and the fact that as many as 50 percent of could publish every two years or so an all financial institutions already offer evaluation of the CRA record of each basic banking services, the Board favors financial institution. This evaluation encouraging voluntary efforts by finanwould give the basis for the regulatory cial institutions to offer basic low-cost agency's analysis of an institution's CRA accounts—without mandating a specific performance. The public could be invited program of services and fees. to comment on this evaluation as well; and the agency would take these com- Expedited Funds Availability ments into account in reviewing applications by the institution. This approach The Expedited Funds Availability Act would facilitate regular, meaningful, and generally authorizes financial institutions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 Consumer and Community Affairs to impose holds for longer than the and statistically sound." The FDIC renormal times under specific, limited ports that the largest volume of ECOAcircumstances. But these exceptions are related complaints involve credit card not authorized for some checks on which applications where "age" or "age group" the act requires next-day availability— has been cited as a reason for denial of Treasury and cashier's checks, for exam- credit. To eliminate the confusion inherple. The Board supports amending the ent in the act's provisions, the FDIC act to make the special exceptions appli- recommends that the reference to "age" cable to all checks to reduce the risk of be replaced by the term "elderly age," fraud. and suggests defining elderly to mean 62 The Board opposes the legislative years or older, as in Regulation B. • codification of a recent court decision requiring that credit union share drafts payable through a bank be treated as local or nonlocal based on the location of the credit union (rather than the location of the bank). The Board believes this approach increases the risk associated with accepting these drafts for deposit and also makes it difficult for consumers to understand when the proceeds of credit union drafts are available for withdrawal. The Board recommended that the Congress amend the act to treat a draft as local or nonlocal based on the location of the payable-through bank. Recommendations of Other Agencies Each year the Board asks those agencies that have enforcement responsibilities under Regulations B, E, and Z for recommended changes to the regulations or the underlying statutes. The FDIC has recommended amending ECOA to prohibit discrimination on the basis of handicap, a change that would bring it into conformity with recent amendments to the Fair Housing Act. The FDIC also recommends amending ECOA to clarify congressional intent with respect to age discrimination. ECOA bars creditors from discriminating on the basis of age regardless of whether an applicant is young or old. But it allows creditors to take age into account in credit scoring systems that are "demonstrably Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

159 Litigation During 1988 the Board of Governors was annual reports for bank holding comnamed in 44 pending lawsuits, compared panies with assets of $150 million or with 47 in 1987. Of the 13 new lawsuits more (50 Fed. Reg. 50,950, December filed in 1988,6 raised questions under the 13, 1985. The Board's order was upheld Bank Holding Company Act, compared by the Court of Appeals (855 F.2d 688). with 12 in 1987. As of December 31, A petition for certiorari in the Supreme 1988,23 cases were pending, 15 of which Court is pending (No. 88-1109). involved questions under the Bank Hold- In Independent Community Bankers ing Company Act. Association of South Dakota v. Board of Governors, No. 86-5373 (8th Circuit, filed October 3, 1986), the Court of Bank Holding Companies— Appeals (838 F.2d 969) overturned the Antitrust Action Board order dated September 15, 1986, In 1988 no bank holding company acqui- approving the application of Michigan sitions or mergers that had been approved National Corporation to acquire a nationby the Board were challenged by the ally chartered credit card bank in South Department of Justice under antitrust Dakota (Federal Reserve Bulletin, vol. laws, and no such cases were pending 72, November 1986, p. 792). On Februfrom previous years. ary 17, 1988, however, the provisions in the South Dakota statute that were challenged in this case were repealed. Bank Holding Company Act— In Lewis v. Board of Governors, Nos. Review of Board Actions 87-3455 and 87-3545 (1 lth Circuit, filed In Independent Community Bankers As- June 25, 1987), petitioner seeks review sociation of South Dakota v. Board of of Board orders dated May 29,1987, and Governors, No. 85-1496 (D.C. Circuit, July 1, 1987, approving applications of filed August 7, 1985), petitioners sought Chemical New York Corporation and of review of a Board order dated July 12, Manufacturers National Corporation to 1985, which approved the application of expand activities of trust company sub- First City Bancorporation of Texas to sidiaries in Florida (Federal Reserve acquire a nationally chartered credit card Bulletin, vol. 73, July 1987, p. 609, and bank in South Dakota (Federal Reserve September, p. 735). The cases have been Bulletin, vol. 71, September 1985, p. stayed pending the resolution of proceed- 716). In an opinion dated June 5, 1987, ings in a related case in the same judicial the Court of Appeals affirmed the Board's circuit. order (820 F.2d 428). On January 11, In Chase Manhattan Corporation v. 1988, the Supreme Court denied a peti- Board of Governors, No. 87-1333 (D.C. tion for certiorari (108 S. Ct. 695). Circuit, filed July 20, 1987), petitioner In CBC, Inc. v. Board of Governors, seeks review of a Board order dated July No 86-1001 (10th Circuit, filed January 17, 1987, conditionally approving the 2, 1986) petitioner seeks review of the application of Chase Manhattan Corpo- Board's amendment to Regulation Y ration to underwrite and deal in mortgagerequiring certified financial statements in related securities to a limited extent (Fed- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

160 Litigation eral Reserve Bulletin, vol. 73, September ber 9, 1987), petitioner sought review of 1987, p. 729). The case is pending. a Board order dated August 10, 1987, In National Association of Casualty denying petitioner relief from certain and Surety Agents et al. v. Board of conditions on prior approvals of acquisi- Governors, Nos. 87-1354 and 87-1355 tions of thrift institutions. The case was (D.C. Circuit, filed July 29, 1987) the dismissed on January 29, 1988. Court of Appeals (856 F.2d 282) upheld In Independent Insurance Agents of Board orders dated June 29, 1987, and America, Inc. v. Board of Governors, July 2,1987, permitting Sovran Financial No. 87-4118 (2nd Circuit, filed Septem- Corporation and MNC Financial, Inc., ber 17, 1987), petitioner sought review to retain insurance agency activities (Fed- of a Board order dated September 10, eral Reserve Bulletin, vol. 73, September 1987, granted at the request of Merchants 1987, p. 744 and p. 740, respectively). National Corporation, determining that On December 2, 1988, a petition for nonbanking prohibitions of the Bank rehearing and rehearing en bane was Holding Company Act do not apply to denied. Several other cases involved activities of banks (Federal Reserve petitions for review of similar Board Bulletin, vol. 73, November 1987, p. orders. The petitions for review in these 876). The Board order was vacated on cases were denied by court orders dated January 26, 1988, on the basis of a January 19, 1989. These cases are as congressional moratorium (838 F.2d follows: National Association of Casu- 627), and thus, no further judicial proalty and Surety Agents et al. v. Board of ceedings have been taken. Governors, No. 88-1001 (D.C. Circuit, In Irving Bank Corporation v. Board filed January 4, 1988), No. 88-1270 of Governors, No. 88-1176 (D.C. Cir- (D.C. Circuit, filed April 7, 1988), No. cuit, filed March 1, 1988), the Court of 87-1644 (D.C. Circuit, filed November Appeals (845 F.2d 1035) upheld a Board 14, 1987), No. 87-1801 (D.C. Circuit order approving the application of the filed December 21, 1987), No. 88-1206 Bank of New York Company, Inc., to (D.C. Circuit, filed March 18,1988) and acquire Irving Bank Corporation (Fed- No. 88-1245 (D.C. Circuit, filed March eral Reserve Bulletin, vol. 74, April 30, 1988); and Independent Insurance 1988, p. 257). Agents of America, Inc., et al. v. Board In American Land Title Association v. of Governors, No. 87-1686 (D.C. Cir- Board of Governors, No. 88-1872 (D.C. cuit, filed November 19,1987). Circuit, filed December 16, 1988) peti- In Board of Trade of Chicago et al. v. tioner seeks review of a Board order Board of Governors, No. 87-2389 (7th dated November 17,1988, approving the Circuit, filed September 1,1987) petition- application by First Wisconsin Corpoers sought review of a Board order dated ration to acquire a company engaged in August 5, 1987, approving the applica- title insurance agency activities (Federal tion of Security Pacific Corporation to Reserve Bulletin, vol. 75, January 1989, engage in brokerage clearing and other p. 31). The case is pending. services through wholly owned subsidiaries (Federal Reserve Bulletin, vol. Other Litigation Involving 73, October 1987, p. 815). On January Challenges to Board Procedures 20,1988, the case was dismissed as moot and Regulations by joint stipulation. In Citicorp v. Board of Governors, In 1988, 15 actions were taken, were No. 87-1475 (D.C. Circuit, filedSeptem- pending, or were dismissed under the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 161 Financial Institutions Supervisory Act 1988) plaintiff seeks to enjoin an enforceand the Glass-Steagall Act. ment proceeding. The case is pending. Financial Institutions Glass-Steagall Act Supervisory Act In Securities Industry Association v. In Adams et al. v. Board of Governors, Board of Governors, No. 86-1412 (D.C. No. 87-5311MN (8th Circuit, filed July Circuit, filed July 14, 1986) petitioner 13, 1987), the Court of Appeals (855 sought review of a Board order dated F.2d 1336) on August 31,1988, affirmed June 13,1986, approving National Westthe decision of a district court (659 minster Bank's acquisition of a company F.Supp. 948) holding that the Board did offering investment advice and securities not violate the Right To Financial Privacy brokerage (FederalReserve Bulletin, vol. Act when it reviewed and copied plain- 72, August 1986, p. 584). On July 7, tiffs' records at a national bank. 1987, the Court of Appeals upheld the In Northeast Bancorp, Inc. v. Board of Board'sorder (821 F.2d810). OnJanuary Governors, No. 87-1365 (D.C. Circuit, 11, 1988, the Supreme Court denied a filedJuly31,1987), the Court of Appeals petition for certiorari (108 S. Ct. 697). (849 F.2d 1499) denied a petition for In Securities Industry Association v. review of the Board determination that Board of Governors, No. 87-1169 (D.C. an officer and director who consents to be Circuit, filed April 17, 1987), the Court removed from a national bank is also of Appeals (847 F.2d 890) upheld a Board barred from serving in a holding order dated March 18, 1987, approving company. the application by Chase Manhattan In Anonymous Bank v. Board of Corporation to underwrite and deal in Governors, No. 87-1661 (S.D. Fla., commercial paper to a limited extent filed September 4, 1987), a case placed (Federal Reserve Bulletin, vol. 73, May under seal by court order, plaintiffs 1987, p. 367). sought to set aside a Board order suspend- In Securities Industry Association v. ing a bank director and officer from a Board of Governors etal, No. 87-4041, state member bank. A motion to dismiss (2nd Circuit, filed May 1, 1987), petithe case as moot is pending. tioner sought review of Board orders In Stoddard v. Board of Governors, dated April 30 and May 18, 1987, No. 88-1148 (D.C. Circuit, filed Febru- authorizing various bank holding comary 25,1988) petitioner seeks review of a panies to underwrite and deal in certain Board order removing petitioner from securities to a limited extent through a the positions of director and officer of the securities subsidiary (Federal Reserve Michigan National Bank of Detroit. The Bulletin, vol. 73, June 1987, p. 473, and case is pending. July 1987, p. 607). On February 8,1988, In Bonilla v. Board of Governors, No. the Court of Appeals upheld the Board's 88-1464 (7th Circuit, filed March 11, order in substantial part (839 F.2d 47). A 1988) petitioner seeks review of a Board petition for certiorari was denied by the order prohibiting petitioner from partici- Supreme Court on June 13,1988 (108 S. pation in the conduct of the affairs of any Ct. 2830). Several other cases that ininsured bank or bank holding company. volve similar petitions for review were The case is pending. withdrawn after final disposition of this In MCorp v. Board of Governors, No. case by the Supreme Court. These cases 88-2693 (N.D. Texas, filed October 28, are as follows: Securities Industry Asso- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

162 Litigation elation v. Board of Governors, Nos. In Cohen v. Board of Governors, No. 87-4091 and 87-4093 (2nd Circuit, filed 88-1061 (D. New Jersey, filed March 7, July 1,1987), No. 87-4095 (2nd Circuit, 1988) plaintiff seeks to require disclosure filed July 15, 1987), No. 87-4115 (2nd of documents under the Freedom of Circuit, filed September 9, 1987), No. Information Act. 87-4135 (2nd Circuit, filed October 8, In Fidata Trust Company New York v. 1987), and No. 87-4161 (2nd Circuit, Board of Governors, No. 88-4846 (D. filed December 24, 1987). New Jersey, filed November 9, 1988) plaintiff seeks to enjoin the Board from disclosing certain documents involved in Other Actions the Cohen case. Both actions are pending. In Melcher v. Federal Open Market In Credit Union National Association, Committee, No. 84-1335 (D. D.C., filed Inc., etal. v. Board of Governors, No. April 30, 1984), plaintiff challenged the 88-1295 (D. D.C, filed May 13,1988)a constitutionality of the methods used to district court invalidated certain chalselect certain members of the Federal lenged provisions of the Board's Regula- Open Market Committee. On December tion CC relating to the treatment of credit 18, 1987, the Court of Appeals held the union share drafts under the Expedited complaint should be dismissed on grounds Funds Availability Act (53 Fed. Reg. of equitable discretion (836 F.2d 561). A 19,372, May 27, 1988) by order dated petition for certiorari in the Supreme July 28, 1988. Court was denied on June 6,1988 (108 S. In White v. Board of Governors, No. Ct. 2034). 88-623 (D. Nevada, filed July 29, 1988) In Jenkins etal. v. Board of Governors, plaintiff alleges discriminatory practices No. 87-1336 (D.C. Circuit, filed July under the Age Discrimination In Employ- 18,1986) the Court of Appeals dismissed ment Act. The case is pending. • the petition for review of the Board order granting application for membership in the Federal Reserve System on June 2, 1988. In Brown v. United States Congress et al., No. 87-5586 (9th Circuit, filed March 2, 1987), plaintiff appealed the dismissal of his complaint seeking damages for alleged discrimination in home financing and mandatory injunction regarding the Board's monetary policy. The appeal was dismissed on March 8,1988. In Barrett v. Greenspan, No. 87-2280 (D. D.C, filed August 17, 1987), an action to enjoin an alleged discriminatory practice, was dismissed on July 8, 1988. In Teichgraeber v. Board of Governors, 87-2505-0 (D. Kans., filed October 16,1987), plaintiff seeks to require disclosure of certain documents under the Freedom of Information Act. The case is pending. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

163 Legislation Enacted In 1988 the Congress passed the follow- these federal agencies require depository ing legislation directly affecting the institutions with substantial loans to Federal Reserve or the institutions it heavily indebted sovereign borrowers to regulates. recapitalize as appropriate to maintain adequate ratios of capital to assets; and (3) that the federal agencies ensure that Omnibus Trade and depository institutions establish appro- Competitiveness Act of 1988 priate levels of reserves against loan Public Law 100-418, the Omnibus Trade losses. and Competitiveness Act of 1988, was Subtitle B further requires the federal enacted on August 23, 1988. Title III of banking agencies to submit data to the the act addresses international financial Congress annually concerning loan-loss policy and is summarized here. exposure, reduction of risks associated Subtitle A of title III, the Exchange with such exposure, the relationship Rate and International Economic Policy between bank lending activity in heavily Coordination Act of 1988, states policy indebted foreign countries and U.S. goals for negotiations by the President exports to these countries and ways to and imposes new reporting requirements encourage such lending, responses of on the Secretary of the Treasury concern- regulatory authorities in other countries ing the international coordination of eco- to international debt problems, and steps nomic and exchange rate policies. Sub- taken by heavily indebted countries to title A also amends the Federal Reserve alleviate debt-servicing problems. The Act to require that the Board include an Board, together with the Comptroller of analysis of the impact of the dollar the Currency and the Federal Deposit exchange rate on the economy in the Insurance Corporation are also required Board's yearly report to the Congress on to submit a report analyzing regulatory economic development. and accounting obstacles to various forms Subtitle B of title III, the International of debt restructuring. Debt Management Act of 1988, contains Subtitle E of title III, the Export congressional findings and provisions Trading Company Act Amendments of concerning the debt of developing coun- 1988, amends the Bank Holding Comtries. It also expesses the sense of the pany Act of 1956. The amendments Congress that federal regulators give establish standards for determining banks wide latitude in negotiating reduc- whether a company may be considered to tions of principal and interest with sover- be operated principally for the purposes eign debtors. Subtitle B also declares that of exporting goods and services produced it is the intent of the Congress (1) that in the United States. The amendments federal agencies regulating depository also prohibit the Board from proscribing institutions allow maximum flexibility in a proposed investment in an export applying generally accepted accounting trading company solely on the basis of principles in determining the asset value the leverage ratios of the company unless and effects of restructured loans to heavily the asset-to-equity ratio is projected to be indebted sovereign borrowers; (2) that greater than 20 to 1. The amendments Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

164 Legislation Enacted limit the circumstances under which the Management Interlocks Revision Board may limit the maximum dollar Act of 1988 value of the inventory of an export trading P.L. 100-650, the Management Intercompany. locks Revision Act of 1988, enacted on Subtitle F of title III, the Primary November 10,1988, amends the Depos- Dealers Act of 1988, provides that itory Institution Management Interlocks neither the Board nor the Federal Act. The 1988 act amends the definition Reserve Bank of New York may of "affiliate" to allow companies to be designate or continue a prior designation considered affiliates if 25 percent or more of a foreign person as a primary dealer of the voting stock in each company is in government debt securities unless that beneficially owned by common shareperson's country affords U.S. companies holders. Previously, at least 50 percent the same opportunities in the underof the voting stock had to be commonly writing and distribution of government owned for companies to be considered debt securities as are afforded domestic affiliates. Because affiliated companies companies in that country. Designations are allowed to have management intermade before July 31, 1987, are locks, the amendment will allow comexcepted; also excepted are previously panies that are more loosely related to designated primary dealers acquired by have directors and managers in common. a foreign person prior to that date if the The new law makes the following Federal Reserve Bank was notified additional provisions: before the acquisition. Exceptions are also made for citizens of countries that • Creates an exception for failed or were negotiating or had in force as of failing depository institutions acquired January 1, 1987, a bilateral free trade by another depository institution or by agreement with the United States. the holding company of a depository institution. Subtitle G of title III, the Financial • Creates a limited exception for Reports Act of 1988, requires the directors in diversified savings and loan Treasury, in conjunction with the Board holding companies. and a number of other federal agencies, • Excludes advisory or honorary dito report to the Congress on the home rectors in depository institutions with countries of foreign financial-service assets of less than $100 million from institutions doing business in the United coverage by the act. States and on the types of financial ser- • Extends for an additional five years, vices offered by persons from these to November 10, 1993, the grandfathercountries. The report must also include ing clause for interlocks that existed in information concerning the extent to 1978. which such countries deny national treatment to U.S. financial-service institutions, on efforts to eliminate Anti-Drug Abuse Act of 1988 discrimination, and on discussions authorized by subtitle G to reduce P.L. 100-690, the Anti-Drug Abuse Act barriers to trade in financial services. of 1988, enacted on November 18,1988, The subtitle also requires the Board to includes amendments to the Right to report on issues concerning the Financial Privacy Act of 1978. Among treatment of loan loss reserves as part of other provisions, the amendments exbanks' primary capital for regulatory empt agencies or departments of the purposes. United States from the procedures estab- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 165 lished for the transfer of financial records act amends the Truth in Lending Act to under the Right to Financial Privacy Act, establish additional requirements for enabling such organizations to more disclosures, advertising, and other aseasily transfer financial records to the pects aspects of home equity lines of attorney general. credit. The amendments require that To be transferred, records must have applications for such credit disclose been obtained in the exercise of supervi- certain information including payment sory or regulatory functions and be terms, the annual percentage rate of believed to be relevant to a violation of interest charged, the calculation of varifederal criminal law. A similar exemp- able interest rates, maximum interest tion will allow financial institutions or rates, and the timing of changes in rates. supervisory agencies to provide law The amendments address the timing enforcement officials more easily with and form of the disclosures with regard to the records of directors, officers, employ- solicitations or applications and require ees, controlling shareholders, and certain the information to be provided again at borrowers when the records are relevant the time the home equity account is to suspected crimes against financial opened. The amendments also require institutions by such insiders. certain disclosures in any advertisements related to home equity lines of credit and prohibits the use of misleading terms in Fair Credit and Charge Card such advertising. Disclosure Act of 1988 Under the new provisions, the creditor P.L. 100-583, the FairCreditand Charge must not be able to control the index to Card Disclosure Act of 1988, enacted on which a variable interest rate is linked. November 3, 1988, amends the Truth in The act prohibits creditors from unilater- Lending Act to require that applications ally terminating a credit line and requiror solicitations for credit or charge cards ing immediate payment except in the disclose annual percentage rates, fees event of fraud, default by the debtor, or and charges, grace periods for payments, other action by the debtor that adversely and methods used to calculate balances, affects the creditor's security interest. as well as additional disclosures when The amendments also limit the cirrenewal fees are due and when the credit cumstances under which the creditor insurer is changed. may unilaterally change the terms of the The amendments require the Board to credit agreement. Impositions of nonreadopt implementing regulations, to col- fundable fees are also limited, and the lect information on the price and avail- amendments provide that consumers may ability of credit cards, and to report to obtain a refund of fees under certain the Congress within one year on the circumstances. profitability of credit card operations and The amendments require the Board to on the effect of the amendments on develop educational materials for conprofitability. sumers of home equity lines of credit and to report to the Congress on whether the use of terms such as "annual percentage Home Equity Loan Consumer rate" for different types of credit lines Protection Act of 1988 mislead consumers attempting to com- The Congress enacted P.L. 100-709, the pare credit plans. The act requires the Home Equity Loan Consumer Protection Board to develop regulations to imple- Act of 1988, on November 23,1988. The ment the amendments. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

166 Legislation Enacted Women's Business Ownership Act of 1988 P.L. 100-533, the Women's Business Ownership Act of 1988, enacted on October 25,1988, establishes a National Women's Business Council and amends the Small Business Act to provide for demonstration projects to provide services and assistance to small businesses owned by women. The act also amends the Equal Credit Opportunity Act to require the Board to prescribe regulations to improve access to capital for small businesses owned by women. The amendments require creditors to maintain records of business loan applications by women and to give such applicants notice of their right to information concerning credit denials. Housing and Community Development Act of 1987 P.L. 100-242, the Housing and Community Development Act of 1987, enacted February 5,1988, makes the Home Mortgage Disclosure Act of 1975 permanent and extends its coverage to the mortgagebanking subsidiaries of holding companies of depository institutions and to certain savings and loan service corporations. The new law also amends several existing statutes in order to improve the availability of low- and moderate-income housing in the United States. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

167 Banking Supervision and Regulation During 1988 the international supervi- nonbanks, the effects of which will sion of banking organizations reached an continue the restructuring of the geoimportant milestone. Under the auspices graphic and product environment that of the Basle Committee on Banking has evolved in recent years. The propos- Regulations and Supervisory Practices, als included large interstate combinations the Federal Reserve and the other U.S. as well as reorganizations and acquisibank regulators reached an agreement tions for certain Texas-based institutions with the central banks and banking super- in financial difficulty. Under provisions visors of 11 industrialized nations on granted by the Congress to cover emerinternational guidelines for risk-based gencies, the Board expedited its processcapital standards.1 The agreement aims ing of applications involving failing for more consistent capital standards banks and distressed thrift institutions. throughout the world, thereby reducing a In addition, Division staff members source of competitive inequity among provided technical assistance to other international banking organizations. The agencies in selecting an appropriate agreement, which the Board adopted in owner for failing institutions. Through December 1988, will be phased in over this process, the agencies attempt to the next four years.2 The risk-based select a bidder that will provide optimum framework will introduce more sensitiv- financial and managerial resources to the ity to risk factors, including off-balance- successor institution at the lowest possisheet exposures, than the current lever- ble cost. age ratios provide. The standards should The Board also took significant steps also encourage banking organizations, on the issue of securities underwriting particularly those engaged in interna- and dealing by banking organizations. tional activities, to strengthen their capi- By way of background, the Board in 1987 tal positions. approved proposals by banking organiza- The guidelines constitute a major step tions to underwrite and deal on a limited in fulfilling the capital mandate set forth basis in investment-quality commercial by the Congress in the International paper, certain municipal revenue bonds, Lending Supervisory Act of 1983. When conventional residential mortgage-refully in place throughout the world, the lated securities, and securitized conrisk-based capital standard promises sumer loans in a manner consistent with support of a more stable international the Glass-Steagall Act and the Bank banking environment. Holding Company Act. The Board lim- The Board also considered numerous ited revenues from these approved activproposals for expansions of banks and ities to no more than 5 percent of total revenues for each organization. The 1. The other U.S. regulators in the agreement Board also required that the organizations are the Federal Deposit Insurance Corporation and undertake these activities in separate the Office of the Comptroller of the Currency. securities subsidiaries under limitations 2. For a discussion of the Board's action, see the that would insulate bank subsidiaries with section on policy statements in the chapter of this federally insured deposits from related REPORT on "Record of Policy Actions of the Board of Governors." risks and to avoid possible conflicts of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 Banking Supervision and Regulation interests, unfair competition, and other industrial countries. The principle objecpotential adverse effects. tives of the framework were greater In accordance with the provisions of convergence in the measurement and the Competitive Equality Banking Act of assessment of capital adequacy interna- 1987, the Congress placed a moratorium, tionally and strengthened capital posiuntil March 1, 1988, on bank holding tions of major international banking companies engaging in these securities organizations. activities. Court rulings upheld the After reviewing and incorporating Board's action in large part. Subsequent public comments, the Board of Goverto the expiration of the moratorium, nors approved the final risk-based capital several bank holding companies applied guidelines on December 14, 1988, for to the Board to underwrite and deal in a state member banks and bank holding broad range of corporate debt and equity companies. The Federal Deposit Insursecurities under the terms set by the ance Corporation and the Office of the Board in 1987. After extensive delibera- Comptroller of the Currency issued tions, the Board approved the applica- similar guidelines early in 1989. tions in January 1989 subject to additional The domestic guidelines adopted by conditions. In particular, approval of the Board establish a systematic analytiactivity in equities carries a one-year cal framework that (1) makes regulatory waiting period, after which the Board capital requirements more sensitive to will determine whether the applicants differences in risk profiles among bankhave the managerial and operational ing organizations, (2) takes off-balancestructure required by the Board to com- sheet exposures into explicit account in mence the new activity. assessing capital adequacy, and (3) minimizes disincentives to holding liquid, low-risk assets. Risk-Based Capital These guidelines consist of a definition On March 1, 1988, the Federal Reserve of capital, a system for assigning assets issued for public comment its proposed and off-balance-sheet items to risk categuidelines for risk-based capital based on gories, a schedule for achieving a minithe December 1987 Basle Accord. These mum risk-based capital ratio, and a proposed guidelines superseded the pro- phase-in period that provides for transiposal on risk-based capital issued for tional arrangements. The minimum supublic comment in February 1987. pervisory ratios reflected in the frame- The Basle Accord was developed by work's transitional provisions will not the Basle Committee on Banking Regula- become effective until December 31, tions and Supervisory Practices, which 1990. The supervisory ratios in their consists of representatives of the central final form will take effect December 31, banks and supervisory authorities from 1992. 12 industrial countries.3 The accord aimed to develop a broad-based capital framework applicable to international Supervision for Safety banking organizations from the major and Soundness The Federal Reserve conducts the follow- 3. The 11 "Group of 10" countries (Belgium, ing activities to ensure the safety and Canada, France, Germany, Italy, Japan, the Nethsoundness of financial institutions: onerlands, Sweden, Switzerland, the United Kingdom, and the United States) plus Luxembourg. site examinations and inspections, sur- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 169 veillance and monitoring, and enforce- and bank holding companies. The guidement and other supervisory actions. lines call for state member banks to be examined at least annually. Except for large or troubled banks, examination by Examinations and Inspections either a Reserve Bank or state banking The on-site review of operations is an agency will meet that requirement. In integral part of ensuring the safety and 1988, either the Federal Reserve or a soundness of financial institutions. Exam- state banking agency examined 1,083 inations of state member banks and Edge state member banks at least once. Altocorporations and inspections of bank gether, the state agencies conducted 344 holding companies and their subsidiaries examinations of state member banks, and entail (1) an appraisal of the quality of the the Federal Reserve conducted 875 examinstitution's assets; (2) an evaluation of inations, some of them jointly with the management, including internal policies, state agencies. Under policy guidelines, operations, and procedures; (3) an assess- Reserve Bank officials also held 348 ment of the key financial factors of meetings with directors of the largest capital, earnings, asset and liability state member banks in each state and with management, and liquidity; and (4) a directors of those banks that displayed review for compliance with applicable significant weaknesses. laws and regulations.4 Bank Holding Companies State Member Banks In 1988 the number of bank holding The Federal Reserve is the primary fedcompanies increased by 31, to 6,474. eral supervisor and regulator of state- These organizations control 9,025 comchartered commercial banks that are mercial banks, which hold approximately members of the Federal Reserve System, 91 percent of the assets of all insured of which there were 1,063 at the end of commercial banks in the United States. 1988. These banks accounted for about 8 Most large bank holding companies percent of all insured commercial banks and smaller companies with significant and about 18 percent of the assets of all nonbank assets are inspected annually such banks. under the 1986 guidelines. Others are The Federal Reserve in 1986 increased inspected at least every three years or, in the frequency of scheduled examinations the case of the smallest companies withand inspections of state member banks out any nonbank assets, on a sample basis. The inspection focuses on the operations of the parent and the nonbanking companies. The subsidiary banks are 4. The Board's Division of Consumer and Community Affairs is responsible for reviewing examined by the appropriate banking compliance with consumer and civil rights laws. regulators. In 1988, System examiners This responsibility is accomplished mainly through made 2,726 on-site inspections and 97 examinations by specially trained Reserve Bank off-site inspections. State examiners made examiners. These regulatory responsibilities are described in the section of this REPORT covering 49 inspections of bank holding comconsumer and community affairs. Compliance with panies. During 1988, Reserve Bank other statutes and regulations, which is treated in officials held 591 meetings with directors this section, is the responsibility of the Board's of the largest bank holding companies Division of Banking Supervision and Regulation and with those of companies displaying and the Reserve Banks, whose examiners check for safety and soundness. significant weakness. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 Banking Supervision and Regulation Enforcement Actions to provide all segments of the U.S. econand Civil Money Penalties omy with a means of financing international trade, especially exports. Anagree- Under the Financial Institutions Superviment corporation is a company that enters sory Act of 1966, the Board of Governors into an agreement with the Board not to has the authority to enter into written exercise any power that is impermissible agreements with, or issue cease and desist for an Edge corporation. In 1988 the orders against, state member banks and Federal Reserve examined 112 Edge and bank holding companies, and persons agreement corporations. associated with such organizations, that engage in unsafe or unsound practices or that violate applicable laws or regula- Foreign-Office Operations tions. The Board may also assess civil of U.S. Banking Organizations money penalties for violations of a cease- The Federal Reserve examines the interand-desist order, of the Bank Holding national operations of state member Company Act, or of certain provisions of banks, Edge corporations, and bank the Federal Reserve Act. holding companies principally at the U. S. In 1988 the Reserve Banks recom- head offices of these organizations, where mended, and the Board's staff initiated the ultimate responsibility for their forand worked on, 144 enforcement cases eign offices lies. In addition, the Federal that involved 287 separate actions such as Reserve conducts on-site reviews of cease and desist orders, removals, and important foreign offices at least every civil money penalties, most dealing with three years to supplement the results of unsafe or unsound banking practices; of the head-office examinations. In 1988 the these, 54 cases involving 93 actions, Federal Reserve examined 12 foreign were completed by year-end. The Board branches of state member banks and 34 completed 6 civil money penalty actions foreign subsidiaries of Edge corporations and assessed a total of $55,000. By and bank holding companies. In 1988 the year-end 1988, the Board collected Federal Reserve, in coordination with $40,000, with the remainder of the the Office of the Comptroller of the Curassessments to be paid in accordance rency, conducted extensive on-site examwith agreed-upon schedules. A descrip- inations of merchant banking activities of tion of all formal supervisory actions U.S. banking organizations in the United during the year and the reasons for them Kingdom and Spain. All the examinations are available to the public in the Board's abroad were conducted with the coopertwice-yearly "Report on Formal En- ation of the supervisory authorities of the forcement Actions." countries in which the examinations took place. International Activities U.S. Activities of Foreign Banks Foreign banks continue to be significant The Federal Reserve is responsible for participants in the U.S. banking system. supervising several international ac- As of year-end 1988, 264 foreign banks tivities. operated 457 state-licensed branches and agencies, of which 31 are insured by the Edge and Agreement Corporations Federal Deposit Insurance Corporation. Edge corporations are international bank- At year-end these foreign banks also ing organizations chartered by the Board operated 81 branches and agencies li- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 171 censed by the Office of the Comptroller agencies on organizations that provide of the Currency, of which 4 have FDIC data-processing services to state member insurance. Foreign banks also directly banks. owned 18 Edge corporations and 9 commercial lending companies. In addition, Trust Activities foreign banks held a 25 percent or greater During 1988 the Federal Reserve coninterest in 88 U.S. commercial banks. ducted 215 examinations of the trust Together, these foreign banks at yearfunctions of state member banks, trust end controlled approximately 20 percent companies that are members of the Fedof U.S. banking assets. eral Reserve System, and certain foreign The Federal Reserve has broad authorand domestic trust companies that are ity to supervise and regulate foreign subsidiaries of bank holding companies. banks that engage in banking in the At the end of 1988, 432 of these institu- United States through branches, agencies, tions exercised trust powers, approxicommercial lending companies, Edge mately 10 percent of the total number of corporations, or banks. In exercising this institutions in the industry. These 432 authority, the Federal Reserve relies on institutions held about 50 percent of the examinations conducted by the appropritotal assets administered by all such ate federal or state regulatory agency. banks, trust companies and subsidiaries. Although states have primary authority for examining state-licensed uninsured branches and agencies, the Federal Re- Government Securities Dealers serve participated in the examination of and Brokers 125 such offices during the past year. Under the Government Securities Act of 1986, the Board is responsible for examining government securities dealer and Specialized Examinations brokerage activities of state member banks and of some foreign banks for The Federal Reserve conducts special- compliance with the act and with the ized examinations in the following areas regulations of the Treasury Department. of bank activity: data processing, trust Forty-three state member banks, one activities, dealing and brokering govern- branch of a foreign bank, and one ment securities, dealing and clearing agency of a foreign bank currently have municipal securities, and transferring on file with the Board notices that they securities. are government securities dealers or brokers not otherwise exempt by Treasury Department regulations. Electronic Data Processing Specialized examination procedures Under the Interagency EDP Examination relating to government securities Program, the Federal Reserve examines activities were revised by the Federal the electronic data processing (EDP) Reserve in September 1988 in light of activities of state member banks, Edge regulatory amendments adopted by the and agreement corporations, and inde- Treasury Department. pendent centers that provide EDP services to these institutions. In 1988, System examiners conducted 296 on-site Municipal Securities Dealers EDP reviews. In addition, the Federal and Clearing Agents Reserve reviews reports of EDP exami- The Securities Act Amendments of 1975 nations issued by other bank regulatory made the Board responsible for supervis- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

172 Banking Supervision and Regulation ing state member banks and bank holding have recently encountered financialp robcompanies that act as municipal securities lems. These organizations may then be dealers or as clearing agencies. In 1988 subject to accelerated examinations or the Board examined 26 state member may warrant closer supervision or other banks that deal in municipal securities. supervisory actions. Currently 50 such banks are registered with the Board. A clearing agency acts as Supervisory Policy a custodian of securities involved in transactions settled by bookkeeping en- In addition to its enactment of risk-based tries. The four agencies registered with capital guidelines, the Board in 1988 the Board were examined in 1988. initiated or modified several other supervisory guidelines. The following sections Transfer Agents summarize the principal aspects of these System examiners conducted separate additional initiatives or changes and reviews of state member banks and bank review other activities carried out during holding companies that act as transfer the year to enhance the supervisory agents. Transfer agents countersign and program. monitor the issuance of securities, register the transfer of securities, and ex- Problem Loans in Agriculture change or convert securities. During 1988, System examiners conducted ex- In 1987 the Congress passed the Competaminations of 79 of the 165 banks and itive Equality Banking Act, which in part bank holding companies registered as required the three federal bank regulatory transfer agents with the Board. agencies to issue regulations permitting agricultural banks with assets of less than $100 million to amortize losses on agri- Surveillance and Monitoring cultural loans and related real or personal property over a period not to exceed The Federal Reserve monitors the finan- seven years. Banks seeking to amortize cial condition of state member banks and losses on qualified agricultural loans are bank holding companies. The surveil- required to apply to their Federal Reserve lance program supplements the Federal Bank for acceptance into the program, Reserve's on-site examination program must have capital in need of restoration, with automated screening systems that and must haye reasonable procedures for identify organizations with poor or dete- restoring capital to acceptable levels. At riorating financial profiles. These auto- year-end 1988, eight state member banks mated systems use quarterly financial were amortizing their loan losses under statements submitted by the banking the program. organizations and compute numerous In a related action, effective December financial ratios, which are then analyzed 31, 1987, the Federal Financial Instituby the staff members of the Division and tions Examination Council (FFIEC) of the Reserve Banks in order to deter- amended the regulatory reports for the mine whether banking organizations are banks amortizing their losses. These potential emergency problems. The sur- revised reports permit losses eligible for veillance program also aids in the alloca- deferral to be reinstated as new items in tion of the System's examination re- the asset and equity sections of the sources by focusing early attention on balance sheet. The resulting increases in those banking institutions that appear to the capital account are treated as primary Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 173 capital for determining the adequacy of of interest rate swaps occurring after the bank's capital. inception be recognized in the current In 1988 the FFIEC revised the instruc- period. tions for Call Reports so that transfers of Progress was made toward the adopsecuritized agricultural mortgages, under tion of regulatory reporting standards for the Farmer Mac Program, could be push down accounting and futures that reported as sales. Otherwise these assets are consistent with GAAP. The Board would be reported as borrowings under also adopted Financial Accounting Stanthe general rule governing the sale of dards Board (FASB) Statement 95, which assets with recourse. replaced the statement of changes in financial position in the FR Y-6 annual reports filed by bank holding companies with a statement of cash flows. Relations with the States Board staff members have served on The Board has provided a total of various advisory committees of FASB $300,000 to the Education Foundation of and advisors to that group's project on State Bank Supervisors over the past financial instruments. Staff members also three years. Established by the Confer- provide commentary on proposals issued ence of State Bank Supervisors, the by FASB and by the American Institute Foundation offers technical courses to of Certified Public Accountants that state bank examiners. The Board also affect banking organizations. authorized the Federal Reserve Banks to provide scholarships to examiners em- Staff Training ployed by state banking agencies to help them cover expenses in attending training System staff training emphasizes analyticourses offered by the Federal Reserve cal and supervisory themes common to and by the FFIEC. the four areas of supervision and regulation—examinations, inspections, applications, and surveillance—and stresses the Accounting Standards interdependence among these areas. and Regulatory Reporting During 1988 the Federal Reserve conducted fifty sessions of various The Board and its staff are continuing to courses. The core banking program work on eliminating, to the extent possi- comprised four sessions of an introducble, differences between regulatory re- tory course, eight sessions of an intermeporting requirements and generally ac- diate course, and five sessions of an cepted accounting principles (GAAP). In advanced course; each course lasted three 1988 the Board incorporated GAAP in its weeks. A new course presented this year, regulatory requirements for reporting Senior Forum for Current Regulatory nonrefundable loan fees. Under the aus- Issues, is a continuing-education seminar pices of the FFIEC, the Board in Novem- for senior examiners. The other offerings ber 1988 issued for public comment a covered sixteen sessions of a course on proposal to require that the income from effective writing for banking supervision interest rate swaps be recognized over staff, five sessions of a credit analysis the life of the transaction for Call Report course, two sessions of a bank holding purposes, in a manner analogous to that company applications course, six sesunder GAAP. This proposal would also sions on bank holding company inspecrequire that changes in the market value tions, one session on cash flow and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

174 Banking Supervision and Regulation liquidity analysis, and two courses of one selection of securities dealers and unsuitsession each on consumer compliance. able investment practices. The Federal Also, System staff attended two courses Reserve also endorsed a FFIEC proposal conducted jointly by a financial institu- to inform financial institutions of the tions regulator and the Federal Bureau of risks associated with large-scale inte- Investigation on white-collar crime and grated systems of financial software. bank failures. In March 1988 the Federal Reserve In 1988 the System participated in and other FFIEC agencies implemented 111 sessions of courses offered by the a program for the electronic transfer of FFIEC in specialized areas of income- reports of condition and income by property lending, trust department activ- banks. CompuServe, Inc., has been ities, off-balance-sheet risk, international designated collection agent for the banking, electronic data processing, agencies. activities of municipal securities dealers, The FFIEC and other agencies also payments system risks, white-collar revised reporting requirements to accomcrime, management training, conducting modate special lending programs and to meetings with management, and instruc- disclose certain off-balance-sheet actor training. tivities. In addition, provision has been During 1988 the Federal Reserve made to collect information on the type cosponsored with the World Bank two of audits performed on financiali nstitutraining sessions for senior supervisors tions by independent certified public from developing nations. Sixty-eight accountants. representatives from twenty-nine countries attended these programs. In 1988 the Federal Reserve trained Regulation of 1,194 System employees in System the U.S. Banking Structure schools and 866 System employees in schools conducted by the FFIEC and The Board administers the Bank Holding other agencies, for a total of 2,060, in Company Act, the Bank Merger Act, and addition to 269 students from state agen- the Change in Bank Control Act for bank cies and 117 from foreign central banks. holding companies and state member banks. In doing so, the Federal Reserve acts on a variety of proposals that directly Federal Financial Institutions or indirectly affect the structure of U.S. Examination Council banking at the local, regional, and national levels. The Board also has primary During 1988 the Federal Reserve adopted responsibility for regulating the internaseveral policies recommended by the tional operations of domestic banking FFIEC.5 The Board joined the other organizations and the overall U.S. bankconstituent agencies of the FFIEC in ing operations of foreign banks, whether approving a policy statement concerning conducted directly through a branch or agency or indirectly through a subsidiary commercial lending company. In addi- 5. The FFIEC consists of representatives from tion, the Board has established regulathe Board of Governors of the Federal Reserve tions for the interstate banking activities System, the Federal Deposit Insurance Corpora- of these foreign banks and for foreign tion, the Federal Home Loan Bank Board, the banks that control a U.S. subsidiary National Credit Union Administration, and the commercial bank. Office of the Comptroller of the Currency. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 175 Public Notice of Board Decisions Bank Holding Company Act Each decision by the Board that involves By law, a company must obtain the a bank holding company, bank merger, Board's approval if it is to form a bank change in control, or international bank- holding company by acquiring control of ing proposal is effected by an order or one or more banks. Moreover, once announcement. Orders state the decision formed, a bank holding company must along with the essential facts of the receive the Board's approval before application and the basis for the decision; acquiring additional banks or nonbanking announcements state only the decision. companies. All orders and announcements are re- In reviewing an application filed by a leased immediately to the public; they are bank holding company, the Board also reported in the Board's weekly H.2 considers factors relating to the statistical release and in the monthly Fed- convenience and needs of the comeral Reserve Bulletin. Announcement of munity to be served, the applicant's applications and notices received by the financial and managerial resources, the System but not yet acted on is made in the prospects of both the applicant and the H.2 release. firm to be acquired, and die competitive effects of the proposal. In 1988 the Federal Reserve acted on Timely Processing of Applications 1,337 bank holding company and related applications. The Federal Reserve Sys- The Federal Reserve maintains target tem approved 400 new bank holding dates and procedures for the processing companies plus 372 bank acquisitions by of applications. These target dates pro- existing bank holding companies and 489 mote efficiency at the Board and the requests by existing companies to acquire Reserve Banks and reduce the burden on nonbank firms engaged in activities applicants. The time allowed for a deci- closely related to banking. Data on these sion is 60 days; during 1988, about 91 and related bank holding company decipercent of the decisions met this standard. sions are shown in the accompanying table. Delegation of Applications Bank Merger Act The Board has delegated certain regulatory functions—including the authority The Bank Merger Act requires that all to approve, but not to deny, certain types proposed bank mergers be acted upon of applications—to the Reserve Banks, to by the appropriate federal bank the Staff Director of the Board's Division regulatory agency. If the bank survivof Banking Supervision and Regulation, ing the merger is a state member bank, and to the Secretary of the Board. the Federal Reserve has primary juris- The delegation of responsibility for diction. Before acting on a proposed applications permits staff members to bank merger, the Federal Reserve work more efficiently at both the Board considers factors relating to the comand the Reserve Banks by removing munity's convenience and needs, the routine cases from the Board's agenda. financial and managerial resources and During 1988, 89 percent of the applica- prospects of the existing and proposed tions were acted on under delegated institutions, and the competitive effects authority. of the proposal. The Board must also Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

176 Banking Supervision and Regulation Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1988 Action under authority delegated by the Board of Governors Direct action by the Staff Director of Office Proposal Board of Governors Division of Banking of the Federal Total Supervision and Reserve Banks Secretary Regulation Approved Denied Approvedl Denied Approved Approved Permitted Formation of holding company 30 0 10 2 367 0 400 Merger of holding company 5 0 0 0 1 55 0 61 Retention of bank 0 0 0 0 0 10 1 Acquisition Bank 38 0 1 0 22 311 0 372 Nonbank 142 0 0 0 25 149 173 489 Bank service corporation 0 0 0 0 0 1 12 Other 0 0 12 0 0 0 0 12 Total 215 0 14 0 50 884 174 1,337 1. Two of the fourteen cases—the formation of a holding delegated by the Board for joint action by the office shown company and the acquisition of a bank—were specifically and the General Counsel of the Board. consider the views of certain other Change in Bank Control Act agencies on the competitive factors involved in the transaction. The Change in Bank Control Act requires During 1988 the Federal Reserve persons seeking control of a bank or bank approved 75 merger applications: the holding company to obtain approval from Secretary of the Board approved 4 under the appropriate federal banking agency authority delegated by the Board, and the before the transaction occurs. Under the Reserve Banks approved 71. As required act, the Board is responsible for reviewby law, each merger is described in this ing changes in the control of state member REPORT (in table 16 of the Statistical banks and of bank holding companies. In Tables section). so doing, it must review the financial When the Office of the Comptroller of condition, competence, experience, and the Currency or the Federal Deposit integrity of the acquiring person; it must Insurance Corporation has jurisdiction consider the effect on the financial condiover a merger, the Board is asked to tion of the bank or bank holding company comment on the competitive factors to to be acquired; and it must determine the assure comparable enforcement of the effect on competition in any relevant antitrust provisions of the act. The Board market. and those agencies have adopted standard The federal banking agencies are reterminology for assessing competitive quired to publish notice of each proposed factors in bank merger cases to assure change in control and to invite public consistency in administering the act. On comment, particularly from persons lobehalf of the Board, the Reserve Banks cated in the markets served by the institusubmitted 698 reports on competitive tion to be acquired. The federal banking factors to the OCC and the FDIC in agencies are also required to assess the 1988. qualifications of each person seeking Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 177 control; the Board routinely makes such writing and dealing in securities; (4) a determination and verifies information providing management consulting sercontained in the proposal. In 1988 the vices to failed savings and loan associa- Federal Reserve System acted on 198 tions under the Management Consignproposed changes in control of state ment Program of the Federal Home Loan member banks and bank holding com- Bank Board, and assisting in the disposipanies. The Reserve Banks consented to tion of assets of such failed institutions; 192 proposals, the Secretary of the Board and (5) issuing and selling drafts and wire consented to 5 under authority delegated transfers that are payable in foreign curby the Board, and the Board consented rencies without limitation as to their face tol. amount, but subject to certain limitations. Proposals to Engage Board Policy Decisions in New Nonbanking Activities and Developments At year-end 1988 the Board was considin Bank-Related Activities ering a proposal for bank holding companies to engage in leasing transactions In 1988 the Board approved several new in a manner consistent with expanded nonbanking activities for individual bank national bank leasing powers authorized holding companies. It also had under by the Competitive Equality Banking Act consideration other nonbanking proposof 1987. At year-end the Board also was als, including one to engage in modified considering a proposal for a bank holding leasing activities. A proposed rulemakcompany to ftmction as a foreign curing procedure would require Board aprency options specialist on a securities proval for state bank affiliates of bank exchange. holding companies to establish or acquire operations subsidiaries. (In early 1989 Also pending was a proposal to rescind the Board approved pending applications an existing rule that permits bank holding to engage in expanded securities under- companies, through their state-chartered writing and dealing activities.) bank subsidiaries, to establish or acquire nonbank operations subsidiaries engaged in activities that may be conducted by the Approval of Permissible parent bank. If adopted, this proposal Nonbank Activities would require bank holding companies to In 1988 the Board for the first time obtain approval to acquire or retain approved the following activities for control of such nonbank operations subindividual bank holding companies: (1) sidiaries. The Board also requested comproviding investment advisory and re- ment on a proposal to permit retention of search services to retail customers in all or most existing operations subcombination with securities brokerage sidiaries without further approval. activities; (2) providing financial advice Other rulemaking proposals were to the Canadian federal and provincial under continuing review at year-end. governments, such as with respect to the These proposals, if adopted, would perissuance of their securities in the United mit bank holding companies to acquire States; (3) engaging in private placement healthy thrift institutions and to engage of ineligible securities (for underwriting in real estate investment and develand dealing by banks) to a limited extent opment activities subject to appropriate as an incidental activity related to under- limitations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 Banking Supervision and Regulation Applications International Activities by State Member Banks of U.S. Banking Organizations State member banks must obtain the The Board has several statutory responpermission of the Board to open new sibilities in supervising the international domestic branches, to make investments operations of U.S. banking organizain bank premises that exceed 100 percent tions . The Board must provide authorizaof capital stock, and to add to the capital tion and regulation of foreign branches of base from sales of subordinated debt. member banks; of overseas investments State member banks must also give six by member banks, Edge corporations, months' notice of their intention to with- and bank holding companies; and of draw from membership in the Federal investments by bank holding companies Reserve, although the Board may shorten in export trading companies. In addition or eliminate the notice period in specific the Board is required to charter and cases. These matters are normally han- regulate Edge corporations and their dled by the Federal Reserve Banks under investments. delegated authority or, in the case of certain investments in bank premises or Foreign Branches of Member Banks proposed sales of subordinated debt, by the Staff Director of the Board's Division Under provisions of the Federal Reserve of Banking Supervision and Regulation. Act and of Regulation K, member banks in most cases must seek Board approval to establish branches in foreign countries. In reviewing proposed foreign branches, Stock Repurchases the Board considers the requirements of by Bank Holding Companies the law, the condition of the bank, and the A bank holding company sometimes bank's experience in international busipurchases its own shares from its share- ness. In 1988 the Board approved the holders. When the company borrows the opening of seven foreign branches. money to buy the shares, the transaction By the end of 1988,147 member banks increases the debt of the bank holding were operating 854 branches in foreign company and simultaneously decreases countries and overseas areas of the United its equity. Relatively large repurchases States; 113 national banks were operating may undermine the financialc ondition of 715 of these branches, and 34 state a bank holding company and its bank member banks were operating the remainsubsidiaries. The Board's regulations ing 139 branches. require holding companies to give advance notice of repurchases that retire 10 International Banking Facilities percent or more of their consolidated equity capital. The Board may object to The Board amended its Regulations D stock repurchases by holding companies and Q to permit the establishment of that fail to meet certain standards, includ- international banking facilities (IBFs) in ing the Board's capital guidelines. During the United States as of December 3, 1988 the Federal Reserve reviewed 110 1981. An IBF is essentially a set of asset proposed stock repurchases by bank and liability accounts that is segregated holding companies, 107 of which were from the accounts of the office establishacted on by the Reserve Banks on behalf ing the IBF. Deposits from, and credit of the Board. extended to, foreign residents or other Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 179 IBFs generally can be booked at these member banks, Edge and agreement facilities free from domestic reserve corporations, and bank holding comrequirements and interest rate limita- panies. In most cases, the applicant tions. Subject to conditions specified by requested permission to increase an the Board, IBFs may be established by existing investment. The Board also U.S. depository institutions, by Edge amended Regulation K to facilitate the and agreement corporations, and by U. S. ability of bank holding companies to branches and agencies of foreign banks. engage in debt-for-equity swap transac- By the end of 1988, 532 IBFs had been tions in certain developing countries. established. Export Trading Companies Edge and Agreement Corporations In 1982 the Bank Export Services Act Under sections 25 and 25(a) of the Fed- amended Section 4 of the Bank Holding eral Reserve Act, Edge and agreement Company Act to permit bank holding corporations may engage in international companies, their subsidiary Edge or banking and foreign financial transac- agreement corporations, and bankers' tions. These corporations, which are banks to invest in export trading comusually subsidiaries of member banks, panies, subject to certain limitations and provide their owner organizations with after Board review. The purpose was to the following powers: (1) they may allow effective participation by bank conduct a deposit and loan business in holding companies in the financing and states other than that of the parent, development of export trading comprovided that the business is strictly panies. The Export Trading Company related to international transactions; and Act Amendments of 1988 provide addi- (2) their powers to make foreign invest- tional flexibility for bank holding comments are broader than those of member panies engaging in export trading combanks because they can invest in foreign pany activities. Since 1982 the Board has financial organizations, such as finance acted affirmatively on notifications by 45 companies and leasing companies, as bank holding companies to establish well as in foreign banks. By the end of export trading companies. 1988, there were 112 Edge corporations, which had 49 branches. The Board Enforcement of other requires each Edge corporation that is Laws and Regulations engaged in banking to maintain a ratio of equity to risk-assets of at least 7 percent. This section describes the Board's responsibilities for the enforcement of laws, rules, and regulations other than those Foreign Investments specifically related to bank safety and Under authority of the Federal Reserve soundness and the integrity of the banking Act and the Bank Holding Company Act, structure. U.S. banking organizations may engage in activities overseas with the autho- Bank Secrecy Act rization of the Board. To a significant extent, the Board's Regulation K permits Through the examination process, the such investments without prior Board Federal Reserve determines whether the review. In 1988 the Board reviewed and institutions it supervises are complying permitted 71 foreign investments bv with the recordkeeoine and reoortine Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

180 Banking Supervision and Regulation requirements of the Currency and For- obtained from foreign lenders by U.S. eign Transactions Reporting Act (the citizens. Bank Secrecy Act). Among the stipula- Brokers and dealers are examined for tions in the act designed to combat compliance with Regulation T by the unlawful currency transactions is the Securities and Exchange Commission, requirement that financial institutions the National Association of Securities (and selected other businesses) report to Dealers, and the national securities exthe Internal Revenue Service certain cash changes. The three federal bank supervitransactions of more than $10,000. sory agencies examine banks under their During 1988 the Federal Reserve, respective jurisdictions for compliance working in concert with the other federal with Regulation U. banking agencies and the federal law Other lenders are examined for enforcement community, focused its compliance with Regulation G by the compliance efforts toward criminal oper- Board, the National Credit Union ations that conduct cash transactions Administration, the Farm Credit under the $10,000 threshold and also use Administration, or the Federal Home the banking system's wire transfer oper- Loan Bank Board according to the ations to launder money. The Federal jurisdiction involved. At the end of 1988 Reserve has encouraged the institutions it there were 560 "G-lenders," of which supervises to report such suspicious 310 were subject to the Board's activities to the federal enforcement supervision. Of these 310, 171 were authorities. subject to regular inspection by the Fed- The Federal Reserve also supported eral Reserve System. During the year, the Omnibus Drug Initiative Act of 1988 Federal Reserve examiners inspected 53 which, among other provisions, intensi- G-lenders for compliance with the Fedfied the recordkeeping requirements of eral Reserve's margin requirements banks that sell monetary instruments to (these lenders are inspected on either a nondeposit customers and provided the biennial or triennial basis, according to Secretary of the Treasury with the author- the type of credit extended). ity to conduct regional investigations of Regulations G and U in general impose money laundering. credit limits on loans whose purpose is the purchasing or carrying of publicly held equity securities and that are secured by such securities. Securities Regulation Regulation T limits the amount of Under the Securities Exchange Act of credit that brokers and dealers may 1934, the Board is responsible for regu- extend when securities serve as collatlating credit in certain transactions involv- eral for credit that is used to purchase or ing the purchase or carrying of securities. carry securities. This collateral must In fulfilling its responsibility under the consist of stocks and bonds traded on act, the Board limits the amount of credit national securities exchanges, of certain that may be provided by securities bro- over-the-counter stocks that the Board kers and dealers (Regulation T), by banks designates as having characteristics (Regulation U), and by other lenders similar to those of stocks listed on (Regulation G). Regulation X extends national exchanges, or of bonds meeting these credit limitations, or margin re- certain requirements. quirements, to certain borrowers and to The Division of Banking Supervision certain credit extensions, such as credit and Regulation monitors the market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 181 activity of all over-the-counter (OTC) tant or novel issues were published in the stocks to determine what stocks are "Securities Credit Transactions Handsubject to the Board's margin require- book," which is part of the Federal ments. In 1988 the Board published the Reserve Regulatory Service. These interresulting "List of Marginable OTC pretations serve as a guide to the margin Stocks" in February, May, August, and regulations. November. The November list consisted of 3,111 stocks. Financial Disclosure In August 1988 the Board amended by State Member Banks Regulation T, revising the definition of "OTC margin bond" to include certain State member banks must disclose certain foreign sovereign debt securities. The information of interest to investors, amendment permits broker-dealers to including financial reports and proxy extend good faith loan value on long- statements, if they issue securities registerm debt securities issued or guaranteed tered under the Securities Exchange Act as a general obligation by a foreign of 1934. The Board's financial disclosure sovereign, its provinces, states, or cities, rules are required by statute to be substanor a supranational entity if there is tially similar to those issued by the available an explicit or implicit rating of Securities and Exchange Commission. the entity in one of the two highest rating In 1988 the Board implemented a categories by a nationally recognized comprehensive revision of its reporting statistical rating organization. requirements that rescinded Regulation Under Section 8 of the Securities F in its entirety and added a new disclo- Exchange Act, a nonmember domestic sure rule as part of Regulation H. To ease or foreign bank may lend to brokers or compliance, the new rule requires banks dealers posting registered securities as subject to Regulation H to use the forms collateral only if the bank has filed an prescribed by the Securities and Exagreement with the Board that it will change Commission and receive annual comply with all the statutes, rules, and audits of their financial statements. Small regulations applicable to member banks banks have the option of filing simplified regarding credit of securities. During the quarterly reports. year, the Board processed three such At the end of 1988, 37 state member agreements. banks, most of which are of small or In 1988 the Securities Regulation medium size, were registered with the Section of the Division of Banking Super- Board under the Securities Exchange vision and Regulation issued 65 inter- Act. Members of the Board's staff review pretations of the margin regulations. the bank disclosures for compliance with Those that presented sufficiently impor- the regulation. Loans by State Member Banks to their Executive Officers, 1987-88 Range of interest Period Number Amount (dollars) rates charged (percent) October 1-December 31, 1987 1,132 21,817,715 6.0-20.5 January 1-March 31,1988 1,039 19,447,137 6.0-20.0 April 1-June 30,1988 1,078 20,166,780 6.5-21.0 July 1-September 30, 1988 1,019 21,199,836 6.6-21.0 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 Banking Supervision and Regulation Loans to Executive Officers Under section 22(g) of the Federal Reserve Act, each state member bank must include with each quarterly report of condition a report of all extensions of credit made by the bank to its executive officers since the date of the bank's previous report of condition. The accompanying table summarizes these data for the last quarter of 1987 and the first three quarters of 1988. Federal Reserve Membership At the end of 1988, 5,450 banks were members of the Federal Reserve System, a decrease of 299 from the previous year. Member banks operated 30,391 branches on December 31,1988, a net increase of 1,131 for the year. Member banks accounted for 41 percent of all commercial banks in the United States and for 65 percent of all commercial banking offices. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

183 Regulatory Simplification In 1978 the Board of Governors estab- Home Mortgage Disclosure lished the Regulatory Improvement The Board revised its Regulation C to Project, in the Office of the Secretary, to incorporate the 1988 amendments to the minimize the burdens imposed by regu- Home Mortgage Disclosure Act of 1975, lation, to ensure that consideration is which permanently extended the act and given to minimizing the economic impact expanded its coverage to include mortof regulation on small business, to afford gage banking subsidiaries of holding interested parties the opportunity to companies of depository institutions and participate in designing regulations and savings and loan service corporations to comment on them, and to ensure that that originate or purchase mortgage regulations are written in simple and loans. In adopting the final regulation, clear language. Under the program, the Board made some changes in its Board staff members periodically review proposed definitions to ensure that instiall existing regulations for adherence to tutions already reporting under the act these objectives. In 1986 the Board would not be subject to additional reportreaffirmed its commitment to regulatory ing burdens. improvement, renaming the project the Regulatory Review Section and creat- In the process of this revision, obsolete ing a subcommittee of the Board called provisions were deleted, footnotes were the Regulatory Policy and Planning either incorporated or eliminated, and Committee. the instructions to the report forms were significantly reworked to make them easier to follow. Availability of Information Debt-Equity Swaps In the spring of 1987 the Board adopted a revised version of its "Rules Regarding In August 1987 the Board liberalized Availability of Information." These rules provisions to Regulation K to permit cover three broad areas: requests under certain investments abroad by U. S. bankthe Freedom of Information Act, handled ing organizations through swaps of debt by the Secretary of the Board; subpoenas, for equity. In February 1988 the Board inquiries regarding law enforcement, and further liberalized the regulation as it similar matters, handled by the Board's applies to debt-for-equity investments in General Counsel; and the routine disclo- heavily indebted developing countries. sure of supervisory activities, tradition- The new provisions permit investors ally handled by the Staff Director of the to acquire up to 40 percent of the equity Board's Division of Banking Supervision of foreign companies engaged in nonfiand Regulation and staff members at the nancial activities in the context of ex- Federal Reserve Banks. This revision, changing sovereign debt obligations for the first since the Board promulgated the ownership interests in the companies. rules in 1967, incorporates many proce- The revisions extend to 15 years the time dures developed by the staff or suggested period that companies acquired through by the courts in the intervening years. the debt-for-equity conversions could be Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

184 Regulatory Simplification held; the revisions also increased the Efforts to Assist Regulatory amount that organizations may invest Compliance without giving prior notice to the Board, The Board created a special form of to the greater of $15 million or 1 percent information release called a Special of the tangible equity of the bank holding Notice to assist depository institutions in company. complying with the Expedited Funds Availability Act and the rule, Regulation Issuance of Foreign Currency CC, that implements it. The Board took Deposits this unusual step because the law and regulation is extremely lengthy, the time In light of the globalization of financial for compliance was short, and many market transactions and the continuation financial institutions thought they were of financial innovations, the Board deexempt because they provided next-day cided that the Federal Reserve would no availability of funds. longer discourage the issuance of foreign One Special Notice, entitled "You Are currency deposits in the United States. Affected by the Expedited Funds Avail- The decision will become effective on ability Law" and issued in June 1988, January 1, 1990, to permit time for provided a one-page checklist of policies financial institutions to develop the proand notices that institutions had to have in cedures for handling the reporting of place by September 1, the implementasuch accounts. The Board does not antiction date of the regulation. The notice ipate a significant demand for foreign also gave step-by-step instructions on currency deposits, in part because of the compliance and provided sample forms availability of competing instruments and that institutions could use in complying also because foreign currency deposits with the requirements for informing cuswill be subject to reserve requirements. tomers. The other Special Notice, issued in August, addressed the new endorse- OTC Margin Bond ment standards to be used on the back of checks. The Board amended the definition of The Federal Reserve Banks sent the "OTC margin bond" in Regulation T Special Notices to all depository institu- (Credit by Brokers and Dealers) to make tions in the United States, and the Board certain foreign sovereign debt securities provided ready-to-print copy to relevant marginable. The amendment permits trade associations to facilitate their distribrokers and dealers to extend "good faith" bution of the information. • loan value on long-term debt securities issued as a general obligation by a foreign sovereign or supernational entity if these securities are given one of the two highest rating categories by a nationally recognized statistical rating organization. The amendment gives parity to U.S. broker-dealers with regard to banks and foreign dealers, who already could extend such credit. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

185 Federal Reserve Banks The Expedited Funds Availability Act, to determine whether to put the idea into a which requires the Federal Reserve to formal regulatory proposal to be issued ensure the prompt availability of depos- for public comment. ited funds according to mandated Also in April the Board approved schedules and to expedite the return of standards to be used by depository instichecks, was a major focus of the Sys- tutions when endorsing checks during the tem's activities in 1988. The legislation, collection and return process (appendix title VI of Public Law 100-86, the D of Regulation CC). The standard is Competitive Equality Banking Act of designed to promote clear and uniform 1987, was enacted in August 1987 and endorsements and to make it easier for became effective on September 1, 1988 paying banks to return unpaid checks. In (see also "Record of Policy Actions of the August the Board issued a Special Notice Board of Governors" in this REPORT). that clarified the endorsement requirements and discussed the consequences of not endorsing checks in accordance with Regulation CC the standard. In December 1987 the Board proposed In June the Board requested comment for public comment Regulation CC, on a proposed amendment to Regulation which implements the Expedited Funds CC to address the delayed disbursement Availability Act. To better prepare the of teller's checks. In comments received public to comment on the Board's propos- on the original proposal for Regulation als, the Reserve Banks during January CC, some banks said that the requirement 1988 conducted more than 220 seminars to provide next-day availability for tellattended by about 17,000 participants er's checks might be particularly unfair from nearly 9,000 depository institutions because some banks issue teller's checks to explain the provisions of the act and drawn on remote banks. In these cases, the proposed regulation. The Board the bank of first deposit may be required received more than 1,000 comments on to make funds available for withdrawal the proposals. After the Board approved before it could reasonably be expected to the final Regulation CC in May, the receive funds through the collection Reserve Banks conducted an additional process. The rule proposed in June would 290 seminars attended by approximately permit a bank to issue an official check 37,000 participants from more than drawn on another bank only if a bank of 16,000 depository institutions to explain first deposit located in the same commuthe provisions of the regulation and the nity as the issuing bank could receive actions banks must take to comply. credit for the check as early as a check In April the Board requested comment drawn on the issuing bank. on a proposed concept under which banks In October the Board requested compresented with checks before 2:00 p.m. ment on proposed clarifying amendwould be required to pay those checks ments to Regulation CC designed to aid with same-day funds without imposing compliance. presentment fees. The Board will analyze Under Regulation CC, the Board dethe more than 1,100 comments it received termines, upon the request of a state, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

186 Federal Reserve Banks bank, or other interested party, whether a by the Reserve Banks was 17.6 billion, state law related to funds availability is an increase of 3.6 percent from 1987. preempted by federal law. The Board has The Board approved the implementaissued such determinations for the laws tion of new Federal Reserve services of California, Connecticut, Illinois, designed to accelerate the processing of Maine, Massachusetts, New Jersey, New returned checks by the Federal Reserve Mexico, New York, and Rhode Island, Banks and thus facilitate compliance by as well as for the provision in the Uniform banks with the check return rules of Commercial Code governing the avail- Regulation CC. The new return services, ability of cash deposits. which are explicitly priced, became effective September 1, 1988. Returned check fees are assessed on the paying or Other Developments in the Pricing returning bank depositing returned of Federal Reserve Services checks with the Federal Reserve Bank. and in the Payments Mechanism Also on September 1, Federal Reserve In 1988 the Federal Reserve System as a forward collection fees were reduced whole recovered 100.6 percent of its because of the elimination of the return operating expenses and imputed costs, cost component in those fees. In June the compared with 104.6 percent in 1987. Board approved the prices and deadlines The reduced rate of recovery is attribut- for the new Federal Reserve returned able primarily to the costs of providing check services as well as the revised new services on returned checks in prices and deadlines for Federal Reserve accordance with Regulation CC. forward collection services. Revenue at the Reserve Banks from all In May the Board converted into priced services totaled $801.7 million, permanent services the System's pilot and costs were $796.6 million, for net programs for truncation and for the revenue of $5.2 million (see the section electronic delivery of information capon Federal Reserve Bank financial state- tured through Magnetic Ink Character ments for priced services, at the end of Recognition (MICR). Reserve Banks will this chapter). These figures include the initially provide truncation services only income and expenses related to clearing to paying banks that request this service balances, the value of priced float, and locally; eventually the System intends to the PSAF (the private sector adjustment offer a national service by truncating a factor-the taxes and costs of capital that check (holding the physical check and the System would have incurred if it were transmitting payment information eleca private firm). tronically) at the first Federal Reserve Bank to receive the check. Under the extended MICR service, Reserve Banks Check Collection would deliver payment information by The operating and imputed costs of check electronic transmission or magnetic tape, collection by the Federal Reserve in 1988 provide returned check and retrieval were $499.0 million (see the pro forma service, and deliver the checks to the income statement for priced services, by paying bank several days later. service, and note 9, at the end of this On September 1 the Reserve Banks chapter). Check operations for the year implemented the provisions of Regulagenerated $513.8 million in revenue and tion CC (Expedited Funds Availability a net of $10.2 million in other income and Act). The Reserve Banks also impleexpenses. The number of checks handled mented new services designed to reduce Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 187 the risk to depository banks from making business requirements for its electronic funds available for withdrawal more payment services. promptly. The Reserve Banks began serving as returning banks, as defined by Automated Clearinghouse Regulation CC, and accepting returned checks from any paying bank or returning Operating and imputed costs of providing bank. automated clearinghouse (ACH) ser- In order to expedite the return process, vices in 1988 were $38.9 million; reve- Reserve Banks began to send returned nues were $42.7 million. The Reserve checks directly to the bank of first de- Banks processed 602.4 million commerposit, thus bypassing intermediary en- cial transactions in 1988, an increase of dorsers. The Reserve Banks began over- 26.8 percent over 1987. night processing of local returned checks In July 1988, operational measures for dispatch with the forward collection designed to reduce risk in the ACH checks the next morning. Nonlocal re- mechanism became effective. The meaturned checks are prepared for high- sures include uniform procedures for speed processing ("qualified") by the first Reserve Banks to monitor ACH pay- Federal Reserve office and dispatched to ments originated by financially weak the second Federal Reserve office the depository institutions; earlier deposit following night. Federal Reserve offices deadlines for returns of ACH debit also accept returned checks that have transactions of $2,500 or more; and been qualified by the paying bank or prior uniform procedures for depository instireturning bank and dispatch them as tutions to account for credit transactions quickly as forward collection checks. that settle on holidays or other days when Because of the requirement in Regula- the institutions are closed. tion CC for expanded notification of Board staff members continued their return, the Reserve Banks also began analysis of the proposal, offered in Deprocessing notifications at the request of cember 1986, to modify the procedures the paying bank for delivery to the bank for measuring daylight overdrafts and to of first deposit of any returned check for redefine the finality of ACH transactions. an amount greater than $2,500. The Board took no final action on the proposal in 1988. Finally, the Reserve Banks continued Electronic Payments to make progress in increasing the num- The Federal Reserve System is conduct- ber of electronic connections to deposiing a strategic study of its electronic tory institutions for the delivery of ACH payments services in the 1990s. One transactions. The Reserve Banks dephase of the study is an evaluation of ployed a new software product by which alternative delivery systems for elec- depository institutions can gain access to tronic payments. In 1988 the Federal Federal Reserve services, including Reserve issued a request for proposals to ACH, through personal computers. The test new technology. Concurrently, the product should expand the electronic Reserve Banks are improving the relia- delivery of ACH transactions. bility of their current operating systems. In addition, the Federal Reserve con- Wire Transfer of Funds tacted representatives of depository institutions and other users of payment ser- The number of wire transfers originated vices to define more precisely the future during 1988 increased 5.7 percent over Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 Federal Reserve Banks 1987, to 56.3 million. Service costs Federal Reserve also initiated a major totaled $64.3 million, while revenue automation effort that will enable the amounted to $69.6 million. In 1988 the Board, the Reserve Banks, the Bureau of basic fee for funds transfers was reduced Engraving and Printing, and the U.S. from $0.50 to $0.47. Mint to better manage the supply of cash By year-end 1988, almost all electronic through the exchange of data. The Fedconnections between Reserve Banks and eral Reserve also continued to work with depository institutions for funds transfers the Department of the Treasury to deter via low-volume computer terminals were the counterfeiting of U.S. currency. converted to standard protocols and encrypted. The System also converted more than one-third of its high-volume Definitive Securities connections by year-end. and Noncash Collection To reduce the risk of service disrup- The System received $17.9 million in tions, the Reserve Banks completed a test revenue for definitive safekeeping and to evaluate ways to process work for each noncash collection services in 1988; the other during a serious interruption in cost of these services was $16.7 million. operations. The results led to improve- The average number of definitivements in the reliability of Federal Reserve securities issues and deposits maintained electronic payment services. In Novemin safekeeping accounts at the Reserve ber 1988 the Board approved the creation Banks decreased 15.6 percent in 1988, to of a contingency processing center at the 138,000. The number of noncash collec- Los Angeles Branch to handle funds tion items processed decreased 12.2 transfers, securities transfers, and ACH percent, to 3.3 million. Reserve Banks and accounting operations in the event of continue tosearch for ways to reduce a severe interruption of service at the costs as the volume of work decreases in Federal Reserve Bank of San Francisco. both the definitive safekeeping and noncash collection services. Coin and Currency In its coin and currency operations, the Securities and Fiscal Federal Reserve continued to focus on Agency Services the effectiveness of controls, the efficiency in processing, and the mainte- The Federal Reserve provides booknance of high quality for currency in entry (computerized) securities services circulation. for the Department of the Treasury and Priced cash services received $14.9 for certain federally sponsored agencies, million in revenue in 1988; the cost of such as the Federal National Mortgage these services was $14.2 million. In Association and the Federal Home Loan 1988, four Federal Reserve Districts Mortgage Corporation. Book-entry serprovided transportation of cash by vices for federal agency securities are armored carrier and four Districts pro- treated as a Federal Reserve priced vided wrapped coin to depository service; these services incurred costs of institutions. $8.4 million and earned revenue of $8.7 Major undertakings in 1988 included a million in 1988. The Federal Reserve determination of the optimal level of processed 2.2 million such transfers quality for the currency distributed to the during the year, an increase of 8.5 percent public by Federal Reserve Banks. The from 1987. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 189 The Federal Reserve sells savings Federal Reserve Act. The results of the bonds in its role as fiscal agent. Under a audits are given to the managepilot program begun in 1987 and contin- ment and directors of the respective ued in 1988, the Ohio Over-the-Counter Banks and to the Board of Governors. Savings Bonds project, all savings bonds Also, to assess conformance with the sold over-the-counter in Ohio are being policies issued by the Federal Open issued at the Pittsburgh Branch of the Market Committee, the division an- Federal Reserve Bank of Cleveland rather nually audits the accounts and holdings than at the financiali nstitutions receiving of the Federal Reserve System Open the applications for purchase. The data Market Account at the Federal Reserve from the pilot program indicate that Bank of New York and the foreign curcentralized issuance saves money for the rency operations conducted by that government and is acceptable to Bank. The division furnishes copies investors. of these reports to the Committee. The examination procedures used by the division are reviewed each year Float by a private firm of certified public Federal Reserve float increased to a daily accountants. average of $606 million in 1988, compared with $454 million in 1987. The costs of all Federal Reserve float associ- Income and Expenses ated with priced services are recovered each year. The accompanying table summarizes the income, expenses, and distribution of net earnings of the Federal Reserve Banks Examinations for 1988 and 1987. The Board's Division of Federal Reserve Income, at $19,526 million, was 10.7 Bank Operations examines the 12 Re- percent higher than in 1987, primarily serve Banks and their 25 Branches each because of an increase of $1,808 million year, as required by section 21 of the in earnings on the System's holdings of Income, Expenses, and Distribution of Net Earnings of Federal Reserve Banks, 1988 and 1987l Thousands of dollars Item 1988 1987 Current income 19,526,431 17,633,012 Current expenses 1,205,960 1,146,911 Operating expenses2 1,081,685 1,033,288 Earnings credits granted 124,276 113,623 Current net income 18,320,471 16,486,101 Net addition to (deduction from) current net income -489,058 1,843,552 Cost of unreimbursed services to Treasury 27,852 46,958 Assessments by the Board of Governors 248,655 252,545 For expenditures of Board 84,411 81,870 For cost of currency 164,245 170,675 Net income before payments to Treasury 17,554,906 18,030,150 Dividends paid 125,616 117,499 Payments to Treasury (interest on Federal Reserve notes) . 17,364,319 17,738,880 Transferred to surplus 64,971 173,771 1. Details may not add to totals because of rounding. pension costs of $70 million in 1988 and $49 million in 2. Operating expenses include a net periodic credit for 1987. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 Federal Reserve Banks U.S. government securities. Total ex- In the Statistical Tables section of this penses were $1,290 million ($1,082 REPORT, table 6 details income and million in Reserve Bank operating ex- expenses of each Federal Reserve Bank penses, $124 million in earnings credits for 1988, and table 7 shows a condensed granted to depository institutions, and statement for each Bank for 1914-88. A $84 million in assessments for expendi- detailed account of the assessments and tures by the Board of Governors). The expenditures of the Board of Governors cost of currency was $164 million. appears in the next chapter, "Board of Income from financial services was $657 Governors Financial Statements." million. The profit and loss account showed a Federal Reserve Bank Premises net deduction of $489 million, resulting primarily from losses on assets During 1988 the Board of Governors denominated in foreign currencies. authorized purchases of property for Statutory dividends to member banks future expansion at the Atlanta Bank and totaled $126 million, $8 million more at the Houston Branch of the Dallas Bank. than in 1987. The rise reflected an The New York Bank initiated the design increase in the capital and surplus of of its new operations center and the member banks and a consequent Minneapolis Bank completed the design increase in the paid-in capital stock of of a new building for the Helena Branch. the Reserve Banks. Construction of the new building for the Payments to the U.S. Treasury, Charlotte Branch of the Richmond Bank termed interest on Federal Reserve and the expansion of the main building of notes, totaled $17,364 million, com- the Chicago Bank continued. Table 8, in pared with $17,739 million in 1987. The the Statistical Tables section of this payments consist of all income after the REPORT, shows the cost and book value deduction of dividends and after the of premises owned by the Federal Rededuction of the amount necessary to serve Banks and Branches and of real bring the surplus of the Banks to the estate acquired for future banking-house level of capital paid in. purposes. Securities and Loans of Federal Reserve Banks, 1986-88 Millions of dollars, except as noted U.S. Item and year Total government Loans securitiesl Average daily holdings2 1986 193,354 192,514 840 1987 217,392 216,722 670 1988 233,796 231,442 2,354 Earnings 1986 16,199 16,142 57 1987 16,418 16,371 47 1988 18,358 18,180 179 Average interest rate (percent) 1986 8.38 8.38 6.84 1987 7.55 7.55 6.99 1988 7.85 7.85 7.59 1. Includes federal agency obligations. 2. Based on holdings at opening of business. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 191 Holdings of Securities and Loans Volume of Operations As shown in the preceding table, average Table 9, in the Statistical Tables section daily holdings of securities and loans of this REPORT, shows the volume of during 1988 amounted to $233,796 mil- operations in the principal departments lion, an increase of $16,404 million over of the Federal Reserve Banks for the 1987. Holdings of U.S. government years 1985-88. securities increased $14,720 million and loans increased $1,684 million. Financial Statements From 1987 to 1988 the average rate of for Priced Services interest on holdings of U.S. government securities increased, from 7.55 percent The following tables show pro forma to 7.85 percent; and the average rate of statements for priced services for 1988, interest on loans increased, from 6.99 including a balance sheet, income statepercent to 7.59 percent. ments, and a breakdown of volumes. PRO FORMA BALANCE SHEET FOR PRICED SERVICES As of December 31 (millions) 1988 1987 SHORT-TERM ASSETS (Note 1) Imputed reserve requirements on clearing balances $ 222.0 $ 219.6 Investment in marketable securities 1,628.0 1,610.4 Receivables 57.7 58.3 Materials and supplies 6.4 4.9 Prepaid expenses 10.9 6.7 Net items in process of collection (float) 967.0 67'5.7 Total short-term assets $2,892.0 $2,575.5 LONG-TERM ASSETS (Note 2) Premises 271.8 224.5 Furniture and equipment 126.1 110.9 Leases and leasehold improvements 6.1 3.0 Prepaid pension costs 37.4 18.7 Total long-term assets 441.4 357.1 TOTAL ASSETS $3,333.4 $2,932.7 SHORT-TERM LIABILITIES Clearing balances and balances arising from early credit ofuncollected items $2,817.0 $2,505.7 Short-term debt 75.0 69.9 Total short-term liabilities $2,892.0 $2,575.5 LONG-TERM LIABILITIES Obligations under capital leases 1.2 1.2 Longtermdebt 128.1 107.2 108.4 Total long-term liabilities 129.3 2,684.0 TOTAL LIABILITIES 3,021.3 248.7 EQUITY 312.1 $2,932.7 TOTAL LIABILITIES AND EQUITY (Note 3) $3,333.4 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

192 Federal Reserve Banks PRO FORMA INCOME STATEMENT FOR PRICED SERVICES For the years ending December 31 (millions) 1988 1987 INCOME (Note 4) Services provided to depository institutions $667.7 $649.7 EXPENSES (Note 5) Production expenses 552.9 506.8 INCOME FROM OPERATIONS 114.8 142.9 IMPUTED COSTS (Note 6 Interest on float $ 43.4 $ 27.4 Interest on debt 16.2 16.1 Sales taxes 8.4 7.4 FDIC insurance L8 69.9 L8 52.7 INCOME FROM OPERATIONS AFTER IMPUTED COSTS 44.9 90.2 OTHER ICOME AND EPENSES (Note 7) Investment income 134.0 119.1 Earnings credits 123.0 11.0 114.1 5J) INCOME BEFORE INCOME TAXES 55.9 95.2 IMPUTED INCOME TAXES (Note 8) 18.1 32.3 NET INCOME $ 37.9 $ 62.9 MEMO Targeted return on equity (Note 8) $ 32.7 $ 29.3 Details may not add to totals because of rounding. The accompanying notes are an integral part of these financial statements. PRO FORMA INCOME STATEMENT FOR PRICED SERVICES, BY SERVICE (Note 9) For the year ending December 31, 1988 (millions) Definitive Com- Wire safekeeping mercial transfer Com- and Bookcheck and net mercial noncash entry Cash Total collection settlement ACH collection securities services INCOME FROM SERVICES $667.7 $513.8 $69.6 $42.7 $17.9 $8.7 $14.9 OPERATING EXPENSES 552.9 436.6 61.2 36.2 15.8 7.7 14.1 INCOME FROM OPERATIONS ... 114.8 77.2 8.4 6.6 2.1 1.0 .8 IMPUTED COSTS 69.9 62.4 3.1 2.7 .9 _/7 A INCOME FROM OPERATIONS AFTER IMPUTED COSTS .. 44.9 14.7 5.4 3.9 1.2 .3 .7 OTHER INCOME AND EXPENSES, NET 11.0 10.2 J .3 A J^_ A INCOME BEFORE INCOME TAXES $55.9 $24.9 $5.7 $4.2 $1.3 $.3 $ .8 *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 193 REVENUE AND EXPENSES OF LOCALLY PRICED SERVICES (Note 10) For the year ending December 31,1988 (millions) Total Operating Float Total Net revenue cost cost cost revenue Commercial check collection Boston $ 36.6 $ 31.6 $ 4.4 $ 36.0 $ .6 NewYork 66.4 59.6 6.9 66.4 * Philadelphia 24.7 18.7 1.1 19.8 4.8 Cleveland 30.1 25.4 1.7 27.0 3.0 Richmond 48.2 38.7 2.9 41.6 6.6 Atlanta 59.3 53.3 .6 53.9 5.4 Chicago 71.3 56.8 4.2 61.0 10.2 St. Louis 22.8 19.4 2.3 21.7 1.1 Minneapolis 29.4 24.9 .4 25.3 4.1 KansasCity 32.6 29.1 1.5 30.6 2.0 Dallas 37.7 30.5 2.6 33.1 4.6 San Francisco 54.6 44.5 5.6 50.1 4.5 System total $513.8 $435.3 $34.2 $469.6 $44.2 Definitive safekeeping and noncash collection Boston $ .8 $ .7 * $ .7 $.1 NewYork 2.9 2.5 * 2.4 .4 Philadelphia 1.3 1.2 • 1.2 .1 Cleveland 2.1 1.8 .1 1.9 .2 Richmond .9 .9 * .9 * Atlanta 2.6 2.4 * 2.3 .3 Chicago 2.7 2.0 * 2.0 .6 St. Louis 1.2 1.1 * 1.1 .1 Minneapolis .9 1.0 * .9 -.1 KansasCity 1.5 1.3 * 1.3 .2 Dallas 1.3 1.0 * 1.0 .2 San Francisco * * * * * System total $17.9 $15.8 * $15.8 $2.2 Cash services Boston $ .7 ... ... $ .7 * NewYork * ... ... * * Philadelphia 1.6 ... ... 1.5 * Cleveland 1.9 ... ... 1.8 .2 Richmond .1 ... ... .1 * Atlanta * ... ... * * Chicago .5 ... ... .4 * St. Louis .3 ... ... .3 * Minneapolis 2.8 ... ... 2.5 .3 KansasCity .5 ... ... .5 * Dallas * ... ... * * San Francisco 6.5 . . . . . . 6.3 .2 System total $14.9 ... ... $14.1 $.8 *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

194 Federal Reserve Banks PRICED SERVICES VOLUMES (Note 11) Thousands of items, except as noted Percent change 1988 1987 1986 1987-88 1986-87 Fund transfers 56,334 53,278 49,900 5.7 7.1 Commercial ACH 602,406 475,114 362,557 26.8 31.0 Commercial checks 17,617,744 17,007,924 16,225,812 3.6 4.8 Securities transfers 2,236 2,061 1,719 8.5 19.9 Definitive safekeeping 138 163 165 -15.6 -1.0 Noncash collection 3,337 3,803 4,312 -12.2 -11.8 Cash transportation 341 357 363 -4.6 -1.4 The accompanying notes are an integral part of these financial statements. NOTES TO FEDERAL RESERVE BANK The cost base for providing services that must be recovered FINANCIAL STATEMENTS under the Monetary Control Act includes the cost of float FOR PRICED SERVICES incurred by the Federal Reserve during the period, valued at the federal funds rate. Conventional accounting proce- PRO FORMA BALANCE SHEET dures would call for the gross amount of items in the process of collection and deferred availability items to be included on a balance sheet. However, the gross amounts (1) SHORT-TERM ASSETS have no implications for income or actual or imputed costs, The imputed reserve requirement on clearing balances and and inclusion of the gross amounts could lead to misinterinvestment in marketable securities reflect the Federal pretations of the assets employed in the provision of priced Reserve's treatment of clearing balances maintained on services that must be financed. Therefore, only the net deposit with Reserve Banks by depository institutions. For amount is shown. The net amount represents the assets that presentation of the balance sheet and the income statement, involve a financing cost. clearing balances are reported in a manner comparable to the way correspondent banks report compensating balances (2) LONG-TERM ASSETS held with them by respondent institutions. That is, Long-term assets on the balance sheet have been respondent balances held with a correspondent are subject allocated to priced services with the direct determination to a reserve requirement established by the Federal method, which uses the Federal Reserve's Planning and Reserve. This reserve requirement must be satisfied with Control System to ascertain directly the value of assets either vault cash or with nonearning balances maintained at used solely in priced services operations and to apportion a Reserve Bank. Following this model, clearing balances the value of jointly used assets between priced services and maintained with Reserve Banks for priced service purnonpriced services. Also, long-term assets include an poses are subjected to imputed reserve requirements. estimate of the assets of the Board of Governors directly Therefore, a portion of the clearing balances held with the involved in the development of priced services. Federal Reserve is classified on the asset side of the balance Long-term assets include amounts for capital leases and sheet as required reserves and is reflected in a manner leasehold improvements and for prepaid pension costs similar to vault cash and due from bank balances normally associated with priced services. Effective January 1,1987, shown on a correspondent bank's balance sheet. The the Federal Reserve Banks implemented Financial Accountremainder of clearing balances is assumed to be available ing Standards Board Statement No. 87, Employers' for investment. For these purposes, the Federal Reserve Accounting for Pensions. Accordingly, the Reserve Banks assumes that all such balances are invested in three-month recognized a credit to expenses of $18.7 million and a Treasury bills. corresponding increase in this long-term asset account in Receivables represent (1) amounts due the Reserve 1988. Banks for priced services that have been provided to institutions for which payment has not yet been received and (2) that share of suspense-account and difference- (3) LIABILITIES AND EQUITY account balances related to priced services. A matched-book capital structure has been used for those The amount shown for materials and supplies represents assets that are not "self-financing" in determining liability the inventory value of such short-term assets necessary for and equity amounts. Short-term assets are financed with the ongoing operations of priced service areas. Prepaid short-term debt. Long-term assets are financed with longexpenses represent items such as salary advances and term debt and equity in a proportion equal to the ratio of travel advances for priced service personnel. long-term debt to equity for the bank holding companies The account "Net items in the process of collection" used in the model for the private sector adjustment factor represents the amount of float as of the balance-sheet date (PS AF). The PS AF model uses the 25 largest bank holding and is the difference between the value of items in the companies as a basis to impute the taxes that would have process of collection-including checks, coupons, securi- been paid and the return on capital that would have been ties, wire transfers, and automated clearinghouse (ACH) provided had Federal Reserve priced services been transactions—and the value of deferred-availability items. furnished by a private-sector firm. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 195 Other short-term liabilities include clearing balances Also included in imputed costs is the interest on debt maintained at Reserve Banks and deposit balances arising assumed necessary to finance priced service assets and the from float. Other long-term liabilities consist of obligations sales taxes and FDIC insurance assessment that the Federal on capital leases. Reserve would have paid had it been a private-sector firm. These imputed costs are among the components of the PRO FORMA INCOME STATEMENT PSAF(seenote3). The income statement reflects income and expenses for (7) OTHER INCOME AND EXPENSES priced services. Included in these amounts are the imputed costs of float, imputed financing costs, and the income Other income and expenses consist of income on clearing related to clearing balances. balances and the cost of earnings credits granted to depository institutions on their clearing balances. Income (4) INCOME on clearing balances represents the average couponequivalent yield on three-month Treasury bills applied to Income represents charges to depository institutions for the total clearing balance maintained, adjusted for the priced services. This income is realized through one of two effect of reserve requirements on clearing balances. methods: direct charges to an institution's account or Expenses for earnings credits are derived by applying the charges against accumulated earnings credits. average federal funds rate to the required portion of the (5) PRODUCTION EXPENSES clearing balances, adjusted for the net effect of reserve requirements on clearing balances. Production expenses include direct, indirect, and other general administrative expenses of the Federal Reserve (8) INCOME TAXES AND RETURN ON EQUITY Banks for providing priced services. Also included are the expenses of staff members of the Board of Governors Imputed income taxes are calculated at the effective tax working directly on the development of priced services, rate derived from the PSAF model (see note 3). The which were $1.7 million in 1988 and in 1987. The credit to targeted return on equity represents the after-tax rate of expenses resulting from implementation of FASB 87 (see return on equity that the Federal Reserve would have note 2) is reflected in production expenses. earned had it been a private business firm, based on the bank holding company model. These items are among the (6) IMPUTED COSTS components of the PSAF (see note 3). Imputed float costs represent the value of float to be PRO FORMA INCOME STATEMENT, BY SERVICE recovered, either explicitly or through per-item fees, during the period. Float costs include those for checks, (9) The income statement by service reflects revenue, book-entry securities, noncash collection. ACH, and wire operating expenses, and imputed costs except for income transfers. taxes. The effect of implementing FASB 87 (see note 2) is The following table depicts the daily average recovery of reported only in the "total" column in this table and has not float by the Federal Reserve Banks for 1988. In the table, been allocated to individual priced services. unrecovered float includes that generated by services to Imputed costs include float and interest on debt, sales government agencies or by other central bank services. taxes, and the FDIC assessment. Float costs are based on Float recovered through income on clearing balances the actual float incurred in each priced service. Other represents increased investable clearing balances as a imputed costs are allocated among priced services accordresult of reducing imputed reserve requirements through ing to the ratio of operating costs less shipping costs in each the use of a cash-items-in-process-of-collection deduction priced service to the total cost of all priced services less the for float when calculating the reserve requirement. This total shipping costs of all priced services. income then reduces the float required to be recovered Other income and expenses consist of income on clearing through other means. balances and the cost of earnings credits for the Federal As-of adjustments and direct charges refer to midweek Reserve. Because clearing balances relate directly to the closing float and interterritory check float, which may be Federal Reserve's offering of priced services, the income recovered from depositing institutions through adjustments and cost associated with these balances are spread to each to the institution's reserve or clearing balance or by valuing service based on the ratio of income from each service to the float at the federal funds rate and billing the institution total income. directly. Taxes and the after-tax targeted rate of return on equity, Float recovered through per-item fees is valued at the as shown on the pro forma income statement, have not been federal funds rate and has been added to the cost base spread by service because these elements relate to the subject to recovery in 1988. organization as a whole. Daily average REVENUE AND EXPENSES (millions) OF LOCALLY PRICED SERVICES Total float $931.2 Unrecovered float 55.8 (10) This table depicts the financial results for each Float subject to recovery 875.4 Reserve Bank in providing locally priced services. Sources of recovery of float Expenses related to research and development projects are Income on clearing balances 105.4 reported at the System level; the sum of expenses for the As of adjustments 325.3 12 Districts may not, therefore, equal the System total. The Direct charges 121.2 financial results for each Reserve Bank shown here do not Per-item fees 323.6 include the dollars to be recovered through the PSAF and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

196 Federal Reserve Banks the net income on clearing balances. Therefore, to reconcile net revenue by priced service shown in this table with that shown in the preceding table, adjustments must be made for imputed interest on debt, sales taxes, FDIC assessment, Board expenses for priced services, and net income on clearing balances. PRICED SERVICES VOLUMES (11) This table shows the number of items handled by the Federal Reserve in its priced services operations and the percentage changes in these numbers in recent years. Volume for the wire transfer of funds is the number of basic transactions originated; ACH volume is the total number of commercial items processed; commercial check volume reflects the total commercial checks collected, including both processed and fine-sort items; volume for securities transfers is the number of basic transfers originated online; volume for definitive safekeeping is the average number of issues or receipts maintained; noncash collection volume is the number of items assessed fees; and cash transportation volume is the number of armored-carrier stops. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

197 Board of Governors Financial Statements The financial statements of the Board for ined by Price Waterhouse, independent the years 1988 and 1987 were exam- public accountants. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Governors of the Federal Reserve System In our opinion, the accompanying balance sheets and the related statements of revenues and expenses and fund balance and of cash flows present fairly, in all material respects, the financial position of the Board of Governors of the Federal Reserve System at December 31,1988 and 1987, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Board's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards and the financial audit standards in Government Auditing Standards issued by the Comptroller General. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Washington, D.C. February 24, 1989 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

198 Board Financial Statements BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BALANCE SHEETS As of December 31, 1988 1987 ASSETS CURRENT ASSETS Cash $ 7,312,846 $ 7,705,996 Accounts receivable 602,478 908,883 Stockroom and cafeteria inventories, at cost 333,601 244,963 Prepaid expenses and other assets 654,077 760,903 Total current assets 8,903,002 9,620,745 PROPERTY, BUILDINGS AND EQUIPMENT, Net (Note 3) 58,487,676 63,356,924 OTHER ASSETS - 429,357 Totalassets $67,390,678 $73,407,026 LIABILITIES AND FUND BALANCE CURRENT LIABILITIES Accounts payable $ 4,020,776 $ 4,593,746 Accrued payroll and related taxes 2,915,138 2,547,172 Accrued annual leave 4,288,264 4,185,226 Other liabilities (Note 4) 833,578 237,951 Total current liabilities 12,057,756 11,564,095 FUNDBALANCE 55,332,922 61,842,931 Total liabilities and fund balance $67,390,678 $73,407,026 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 199 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF REVENUES AND EXPENSES AND FUND BALANCE For the years ended December 31, 1988 1987 BOARD OPERATING REVENUES Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $ 84,410,500 $ 81,869,800 Other revenues (Note 4) 3,460,332 3,645,891 Total operating revenues 87,870,832 85,515,691 BOARD OPERATING EXPENSES Salaries 56,229,044 53,811,021 Retirement and insurance contributions 7,095,176 6,245,296 Depreciation and losses (gains) on disposals 7,601,609 7,530,325 Travel 3,171,355 2,834,715 Utilities 3,169,953 3,195,502 Repairs and maintenance 3,099,672 2,731,026 Contractual services and professional fees 3,062,980 2,235,129 Postage and supplies 3,035,304 3,218,518 Software 2,461,366 2,764,635 Printing and binding 2,305,362 1,867,291 Equipment and facility rentals 876,944 1,398,787 Other expenses (Note 4) 2,272,076 2,089,415 Total operating expenses 94,380,841 89,921,660 BOARD OPERATING REVENUES (UNDER) EXPENSES (6,510,009) (4,405,969) ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES Assessments levied on Federal Reserve Banks for currency costs 164,975,182 170,700,082 Expenses for currency printing, issuance, retirement, shipping, and research costs 164,975,182 170,700,082 CURRENCY ASSESSMENTS (UNDER) OVER EXPENSES — — TOTAL REVENUES (UNDER) EXPENSES (6,510,009) (4,405,969) FUND BALANCE, Beginning of year 61,842,931 66,248,900 FUND BALANCE, End of year $ 55,332,922 $ 61,842,931 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 Board Financial Statements BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF CASH FLOWS For the years ended December 31, 1988 1987 CASH FLOWS FROM OPERATING ACTIVITIES Net income $(6,510,009) $(4,405,969) Adjustments to reconcile net income to net cash Depreciation and losses (gains) on disposals 7,601,609 7,530,325 Decrease in accounts receivable, inventories and prepaid expenses, and other assets 324,593 1,044,021 Decrease in other non-current assets 429,357 1,279,149 Increase in accrued annual leave 103,038 288,828 Increase (decrease) in accounts payable, accrued payroll and related taxes, and other liabilities 390,623 (616,694) Net cash provided by operating activities 2,339,211 5,119,660 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposals of furniture and equipment 42,608 33,334 Capital expenditures (2,774,969) (6,093,208) Net cash used in investing activities (2,732,361) (6,059,874) NET DECREASE IN CASH (393,150) (940,214) CASH BALANCE, Beginning of year 7,705,996 8,646,210 CASH BALANCE, End of year $ 7,312,846 $ 7,705,996 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 201 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM NOTES TO FINANCIAL STATEMENTS the participating employers and net pension cost for the period is the required contribution for the period. As of DECEMBER 31, 1988 AND 1987 January 1,1988, actuarial calculations showed that the fair value of the assets of the System's Plan exceeded the (1) SIGNIFICANT ACCOUNTING POLICIES projected benefit obligations by 61 percent. Based on these calculations and similar calculations performed for 1987, Board Operating Revenues and Expenses—Assessments it was determined that employer funding contributions made on the Federal Reserve Banks for Board operating were not required for the years 1988 and 1987 and the expenses and capital expenditures are calculated based on Board was not assessed a contribution for these years. expected cash needs. These assessments, other operating Excess Plan assets will continue to fund future years' revenues, and operating expenses are recorded on the contributions. accrual basis of accounting. Issuance and Redemption of Federal Reserve Notes— Board contributions to the Civil Service Plan directly The Board incurs expenses and assesses the Federal match employee contributions. The Board's contributions Reserve Banks for the cost of printing, issuing, shipping to the Civil Service Plan totaled $555,700 in 1988 and and retiring Federal Reserve Notes. These assessments $547,000 in 1987. and expenses are separately reported in the statements of Employees of the Board may also participate in the revenues and expenses because they are not Board Federal Reserve System's Thrift Plan. Under the Thrift operating transactions. Plan, members may contribute up to a fixed percentage of their salary. Board contributions are based upon a fixed Property, Buildings, and Equipment—The Board's proppercentage of each member's basic contribution and were erty, buildings and equipment are stated at cost less $1,594,000 in 1988 and $1,491,000 in 1987. accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the The Board also provides certain health benefits for assets, which range from 3 to 10 years for furniture and retired employees. The cost of providing the benefits is equipment and from 10 to 50 years for building equipment recognized by expensing the insurance premiums which and structures. were $245,400 in 1988 and $166,800 in 1987. Other Assets -The Board made prepayments for computer equipment to be received in future years. In addition, (3) PROPERTY, BUILDINGS, AND EQUIPMENT maintenance on this and other computer equipment The following is a summary of the components of the received during 1987 and 1988 has been prepaid through Board's fixed assets, at cost, net of accumulated January 1989. For 1987 OTHER ASSETS includes the depreciation. equipment prepayments and the portion of the prepaid maintenance services which will be received in 1989. As As of December 31, the equipment is received and maintenance service 1988 1987 provided, the furniture and equipment account and the Land and appropriate expense account will be charged accordingly. improvements . $ 1,301,314 $ 1,301,314 Contingency Processing Center—The Board operates on Buildings 63,290,586 62,903,355 Furniture and behalf of the Federal Reserve System a contingency equipment 38,865,250 37,005,912 processing center to handle data processing requirements 103,457,150 101,210,581 during emergency situations. The Board recovers from the Less accumulated Federal Reserve Banks a proportionate amount of the depreciation .. 44,969,474 37,853,657 operating expenses of the center in the form of fees. Total property, buildings and (2) RETIREMENT BENEFITS equipment $ 58,487,676 $ 63,356,924 Substantially all of the Board's employees participate in either the Retirement Plan for Employees of the Federal (4) OTHER REVENUES AND OTHER EXPENSES Reserve System or the Civil Service Plan. The System's 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 Other Revenues and Other Expenses. Administrative Office. Employees of the Board who entered on duty prior to 1984 are covered by a contributory For the years ended December 31, defined benefits program under the plan. Employees of the 1988 1987 Board who entered on duty after 1983 are covered by a Other Revenues non-contributory defined benefits program under the plan. Contingency The Civil Service Plan is a defined contribution plan. Processing Contributions to the System's Plan are actuarially Center fees $1,672,667 $1,593,050 determined and funded by participating employers at Subscription amounts prescribed by the Plan's administrator. No revenues 924,783 1,418,513 separate accounting is maintained of assets contributed by Miscellaneous 862,882 634,328 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 Board Financial Statements (4) OTHER REVENUES AND OTHER EXPENSES—Cont. Total other revenues $3,460,332 $3,645,891 Other Expenses Subsidies and contributions... $ 697,237 $ 649,919 Tuition, registrations and membership fees 571,271 517,097 Cafeteria operations, net 598,004 560,282 Miscellaneous 405,564 362,117 Total other expenses $2,272,076 $2,089,415 Beginning in 1988, the Board began recognizing income from sale of publication subscriptions as revenue over the period the publications and statistical releases are supplied to the subscriber rather than the cash basis previously followed. Of $1,574,783 received in 1988, $650,000 represents unearned subscription revenue which is included in other liabilities. (5) FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL The Board is one of the five member agencies of the Federal Financial Institutions Examination Council (the "Council"). During 1988 and 1987, the Board paid $187,200 and $162,000, respectively, in assessments for operating expenses of the Council. These amounts are included in subsidies and contributions for 1988 and 1987. The Board serves as custodian for the Council's cash account. This cash is not reflected in the accompanying financial statements. It also processes accounting transactions, including payroll for most of the Council employees, and performs other administrative services for which the Board was reimbursed $31,700 in each of the years 1988 and 1987. The Board is not reimbursed for the costs of personnel who serve on the Council and on the various task forces and committees of the Council. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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

204 Tables 1. Detailed Statement of Condition of All Federal Reserve Banks Combined, December 31, 1988 * ASSETS Gold certificate account 11,059,988 Special drawing rights certificate account 5,018,000 Coin 397,593 Loans and securities Loans to depository institutions 2,171,233 Federal agency obligations Bought outright 6,966,477 Held under repurchase agreement 2,100,735 U.S. Treasury securities Bought outright Bills 112,781,960 Notes 90,950,477 Bonds 29,929,395 Total bought outright 233,661,832 Held under repurchase agreement 4,760,465 Total securities 238,422,297 Total loans and securities 249,660,742 Items in process of collection Transit items 6,943,601 Other items in process of collection 1,795,238 Total items in process of collection 8,738,839 Bankpremises Land 108,905 Buildings (including vaults) 564,838 Building machinery and equipment 171,938 Construction account 95,876 Total bankpremises 832,652 Less depreciation allowance 192,971 639,681 Bank premises, net 748,586 Other assets Furniture and equipment 621,499 Less depreciation 348,341 Total furniture and equipment, net 273,158 Denominated in foreign currencies2 9,128,949 Interest accrued 3,182,481 Premium on securities 1,691,882 Due from Federal Deposit Insurance Corporation 3,316,178 Overdrafts 56,259 Prepaid expenses 158,108 Suspense account 66,269 Real estate acquired for banking-house purposes 7,038 Other 172,120 Total other assets 18,052,442 Totalassets 293,675,190 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 205 1.—Continued LIABILITIES Federal Reserve Notes Outstanding (issued to Federal Reserve Banks) 271,492,172 Less held by Federal Reserve Banks 41,852,740 Total Federal Reserve notes, net 229,639,432 Deposits Depository institutions 39,346,294 U.S. Treasury, general account 8,656,496 Foreign, official accounts 346,951 Other deposits Officers'and certified checks 21,096 International organizations 87,001 Other3 442,027 Total other deposits 550,124 Deferred credit items 7,451,424 Other liabilities Discount on securities 3,335,154 Sundry items payable 50,656 Suspense account 44,948 All other 28,579 Total other liabilities 3,459,337 Total liabilities 289,450,058 CAPITAL ACCOUNTS Capital paid in 2,112,566 Surplus 2,112,566 Other capital accounts4 0 Total liabilities and capital accounts 293,675,190 1. Amounts in boldface type indicate items in the Board's 3. In closing out the other capital accounts at year-end, weekly statement of condition of the Federal Reserve the Reserve Bank earnings that are payable to the Treasury Banks. are included in this account pending payment. 2. Of this amount $1,478.8 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

206 Tables 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1988 and 1987 Millions of Dollars Total Boston Item 1988 1987 1988 1987 ASSETS Gold certificate account 11,060 11,078 680 706 Special drawing rights certificate account 5,018 5,018 314 314 Coin 395 408 20 27 Loans To depository institutions 2,170 3,815 42 47 Other 0 0 0 0 Acceptances held under repurchase agreements.... Federal agency obligations Bought outright 6,966 7,553 423 466 Held under repurchase agreements 2,101 1,316 0 0 U.S. Treasury securities Bought outrightl 233,662 218,906 14,181 13,502 Held under repurchase agreements 4,760 3,645 0 0 Total loans and securities 249,659 235,235 14,646 14,015 Items in process of collection 8,739 7,990 480 501 Bank premises 750 705 92 93 Other assets Denominated in foreign currencies2 0 7,773 0 257 All other 18,053 7,359 613 275 Interdistrict Settlement Account 0 0 605 -1,124 Total assets 293,674 275,566 17,450 15,064 LIABILITIES Federal Reserve notes 229,640 212,890 14,322 12,503 Deposits Depository institutions 39,347 41,784 2,386 1,863 U.S. Treasury, general account 8,656 5,313 0 0 Foreign, official accounts 347 244 5 5 Other 548 1,027 20 34 Total deposits 48,898 48,368 2,411 1,902 Deferred credit items 7,453 7,179 373 355 3,457 3,035 194 168 Other liabilities and accrued dividends3 89,448 271,472 17,300 14,928 Total liabilities CAPITAL ACCOUNTS 2,113 2,047 75 68 Capital paid in 2,113 2,047 75 68 Surplus 0 0 0 0 Other capital accounts Total liabilities and capital accounts 293,674 275,566 17,450 15,064 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes outstanding (issued to Bank) 271,492 253,313 16,862 15,123 Less: Held by Bank 41,852 40,423 2,540 2,620 Federal Reserve notes, net 229,640 212,890 14,322 12,503 Collateral for Federal Reserve notes Gold certificate account 11,060 11,078 Special drawing right certificate account 5,018 5,018 Other eligible assets U.S. Treasury and federal agency securities 213^(52 196J94 Digitized Tfootra Fl cRolAlaSteEraRl 229,640 212,890 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 207 2.-Continued New York Philadelphia Cleveland Richmond 1988 1987 1988 1987 1988 1987 1988 1987 3,310 3,177 389 385 655 664 917 933 1,489 1,489 162 162 314 314 461 461 14 16 29 24 25 28 62 63 34 2,787 168 131 890 63 122 181 0 0 0 0 0 0 0 0 2,381 2,430 197 229 402 453 541 638 2,101 1,316 0 0 0 0 0 0 79,855 70,430 6,624 6,624 13,498 13,130 18,142 18,497 4,760 3,645 0 0 0 0 0 0 89,131 80,608 6,989 6,984 14,790 13,646 18,805 19,316 1,235 934 421 478 244 294 459 422 32 33 46 46 32 32 124 111 0 1,874 0 365 0 466 0 420 4,460 1,571 610 190 793 284 901 368 114 1,449 470 -599 -559 136 3,132 -1,736 99,785 91,151 9,116 8,035 16,294 15,864 24,861 20,358 78,077 70,471 6,655 5,706 13,704 12,987 20,096 16,550 9,199 11,653 1,777 1,648 1,894 2,124 3,836 2,902 8,656 5,313 0 0 0 0 0 0 237 130 7 7 8 9 9 8 310 438 6 28 14 42 45 61 18,402 17,534 1,790 1,683 1,916 2,175 3,890 2,971 795 875 375 369 266 317 387 383 1,379 1,189 90 83 178 159 242 226 98,653 90,069 8,910 7,841 16,064 15,638 24,615 20,130 566 541 103 97 115 113 123 114 566 541 103 97 115 113 123 114 0 0 0 0 0 0 0 0 99,785 91,151 9,116 8,035 16,294 15,864 24,861 20,358 84,057 75,709 10,019 9,048 16,071 15,192 23,687 21,052 5,980 5,238 3,364 3,342 2,367 2,205 3,591 4,502 75,077 70,471 6,655 5,706 13,704 12,987 20,096 16,550 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

208 Tables 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1988 and 1987-Continued Millions of Dollars Atlanta Chicago Item 1988 1987 1988 1987 ASSETS Gold certificate account 584 596 1,394 1,383 Special drawing rights certificate account 203 203 656 656 Coin 36 37 44 31 Loans To depository institutions 35 39 44 19 Other 0 0 0 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 325 335 846 876 Held under repurchase agreements 0 0 0 0 U.S. Treasury securities Bought outright l 10,895 9,722 28,367 25,385 Held under repurchase agreements 0 0 0 0 Total loans and securities 11,255 10,096 29,257 26,280 Items in process of collection 721 615 774 620 Bank premises 59 57 100 70 Other assets Denominated in foreign currencies2 0 707 0 1,057 All other 1,076 228 4,185 3,185 Interdistrict Settlement Account 360 1,742 -1,715 2,605 Total assets 14,294 14,281 34,695 35,887 LIABILITIES Federal Reserve notes 8,889 9,206 29,658 30,029 Deposits Depository institutions 4,189 3,922 3,413 4,325 U.S. Treasury, general account 0 0 0 0 Foreign, official accounts 13 14 19 20 Other 5 52 107 145 Total deposits 4,207 3,988 3,539 4,490 Deferred credit items 657 604 565 522 149 121 387 324 Other liabilities and accrued dividends3 3,902 13,919 34,149 35,365 Total liabilities CAPITAL ACCOUNTS 196 181 273 261 Capital paid in 196 181 273 261 Surplus ; 0 0 0 0 Other capital accounts 14,294 14,281 34,695 35,887 Total liabilities and capital accounts FEDERAL RESERVE NOTE STATEMENT 12,528 13,288 32,902 31,890 Federal Reserve notes outstanding (issued to Bank) 3,639 4,082 3,244 1,861 Less: Held by Bank Federal Reserve notes, net 8,889 9,206 29,658 30,029 1. Includes securities loaned-fully guaranteed by U.S. 3. Includes exchange-translation account reflecting the Treasury securities pledged with Federal Reserve Banks— monthly revaluation at market exchange rates of foreignand excludes securities sold and scheduled to be bought exchange commitments. 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 Digitized for FRASER 90 days. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 209 2.—Continued St. Louis Minneapolis Kansas City Dallas San Francisco 1988 1987 1988 1987 1988 1987 1988 1987 1988 1987 368 351 168 169 490 562 676 669 1,429 1,483 160 160 66 66 216 216 307 307 670 670 29 28 11 13 30 31 28 29 67 81 95 38 12 10 30 68 688 416 10 16 0 0 0 0 0 0 0 0 0 0 205 218 99 114 262 300 391 448 894 1,046 0 0 0 0 0 0 0 0 0 0 6,875 6,322 3,329 3,290 8,789 8,693 13,105 12,986 30,002 30,325 0 0 0 0 0 0 0 0 0 0 7,175 6,578 3,440 3,414 9,081 9,061 14,184 13,850 30,906 31,387 422 502 383 435 1,542 1,454 696 572 1,362 1,163 21 20 24 23 47 47 22 20 151 153 0 241 0 256 0 334 0 661 0 1,135 412 130 371 81 572 181 2,085 257 1,975 609 742 723 1,010 -3 712 -100 -2,813 6 -2,058 -3,099 9,329 8,733 5,473 4,454 12,690 11,786 15,185 16,371 34,502 33,582 847 6,942 4,124 3,043 9,758 8,380 11,664 12,312 24,846 24,761 874 1,165 807 848 1,122 1,689 2,401 2,985 7,449 6,660 0 0 0 0 0 0 0 0 0 0 4 5 5 5 6 6 13 13 21 22 8 21 2 16 4 31 0 56 27 103 886 1,191 814 869 1,132 1,726 2,414 3,054 7,497 6,785 389 407 353 371 1,507 1,402 616 498 1,170 1,076 91 77 48 45 119 108 173 157 407 378 9,213 8,617 5,339 4,328 12,516 11,616 14,867 16,021 33,920 33,000 58 58 67 63 87 85 159 175 291 291 58 58 67 63 87 85 159 175 291 291 0 0 0 0 0 0 0 0 0 0 9,329 8,733 5,473 4,454 12,690 11,786 15,185 16,371 34,502 33,582 9,425 8,804 4,928 4,035 12,204 10,963 14,640 15,582 34,169 32,357 1,578 1,862 804 992 2,446 2,583 2,976 3,540 9,323 7,596 7,847 6,942 4,124 3,043 9,758 8,380 11,664 12,312 28,846 24,761 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

210 Tables 3. Federal Reserve Open Market Transactions, 1988! Millions of dollars Type of transaction Jan. Feb. Mar. Apr. U.S. TREASURY SECURITIES Outright transactions (excluding matched transactions) Treasury bills Gross purchases 0 Gross sales 49 Exchanges 0 Redemptions 600 Others within 1 year Gross purchases 0 Gross sales 0 Maturity shift 950 Exchanges -754 Redemptions 0 1 to 5 years Gross purchases 0 Gross sales 0 Maturity shift -840 Exchanges 749 5 to 10 years Gross purchases 0 Gross sales 0 Maturity shift -110 Exchanges 5 More than 10 years Gross purchases Gross sales Maturity shift Exchanges 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 oooo 346 560 538 0 0 0 1,600 0 0 0 0 0 1,939 2,051 -2,868 -2,089 0 0 0 0 800 0 -952 -2,051 2,643 2,089 0 175 -987 150 0 0 0 75 0 346 49 1,513 600 1,600 78,358 97,892 78,513 99,139 10,591 0 14,237 0 oooo oooo 423 0 0 0 1,092 0 868 -1,688 0 3,661 0 -823 1,434 1,017 0 -45 254 966 0 0 0 560 7,160 0 0 0 0 104,527 86,900 104,572 85,608 0 18,696 0 11,088 -4,140 -1,520 605 13,476 0 0 0 0 0 0 0 0 131 21 3 120 Repurchase agreements2 Gross purchases 4,042 0 0 4,243 Gross sales 5,357 0 0 1,447 Net change in agency obligations -1,446 -21 -3 2,676 Total net change in System Open Market Account . -5,586 -1,541 602 16,151 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 211 3.-Continued May June July Aug. Sept. Oct. Nov. Dec. Total oooo 0 0 1,646 -4,324 0 0 0 -1,102 3,724 0 0 -387 400 0 0 -157 200 ooo 115,287 115,115 15,871 23,478 oooo 515 0 0 0 0 0 0 0 1,384 1,033 -1,826 -87 0 0 0 0 0 0 -1,384 -997 1,826 0 0 0 0 0 0 -36 0 87 0 0 0 0 0 0 0 0 0 515 0 0 0 0 73,708 81,979 72,966 83,464 10,520 22,978 5,334 28,164 oooo 1,280 375 3,599 1,125 8,222 0 0 0 0 588 0 0 0 0 0 0 0 0 0 2,200 0 0 0 0 1,084 2,177 0 0 0 0 0 0 3,932 1,368 1,669 5,264 1,750 23,853 -4,296 -1,646 -916 -2,391 -1,703 -24,587 0 0 0 0 0 0 0 0 0 0 1,824 5,486 0 0 0 0 0 800 -1,821 -1,368 -1,544 -3,088 -1,750 -17,719 3,971 1,646 639 2,091 1,703 22,515 0 0 0 0 562 1,579 0 0 0 0 0 175 -2,111 0 -125 -2,145 0 -5,946 325 0 276 300 0 1,797 0 0 0 0 432 1,398 0 0 0 0 0 0 0 0 0 -31 0 -188 0 0 0 0 0 275 0 1,280 375 3,599 5,028 18,863 0 0 0 0 0 1,563 0 0 0 0 0 2,200 124,875 113,886 98,804 98,618 93,650 1,168,486 123,220 113,384 97,897 100,680 93,584 1,168,143 0 35,800 4,715 17,867 15,575 152,614 0 30,191 7,727 16,463 14,815 151,498 -7,779 4,444 -3,186 -1,655 6,386 -3,544 7,064 5,721 15,871 0 0 11 4,771 7,566 -2,807 -10,585 ooo 0 0 0 0 67 10 5,083 12,355 0 2,843 14,594 0 2,239 -2,306 -10 6,683 -5,492 -1,665 ooo 0 0 0 0 0 0 0 0 75 14 135 587 12,107 2,223 4,763 7,672 57,258 8,225 4,454 5,132 6,853 56,473 3,882 -2,306 -383 683 198 10,268 -5,850 6,681 6,404 16,070 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

212 Tables 4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities, December 31, 1986-881 Millions of dollars Increase or December 31 decrease (-) Description 1988 1987 1986 1988 1987 U.S. Treasury securities, total 238,422 222,551 211,316 15,871 11,235 By term l-15days2 9,935 11,364 20,480 -1,429 -9,117 16-90days 58,448 46,112 53,611 12,336 -7,499 91 days to 1 year 75,236 76,827 62,239 -1,591 14,588 1-5 years 55,326 47,512 36,469 7,814 11,043 5-10 years 12,568 15,313 15,451 -2,745 -138 More than 10 years 26,909 25,424 23,066 1,485 2,358 By type of holding Held outright Treasury bills3 112,782 107,691 103,775 5,091 3,916 Treasury notes 90,950 82,973 68,126 7,977 14,848 Treasury bonds 29,929 28,242 25,724 1,687 2,518 Held under RPs 4,760 3,645 13,691 1,115 -10,046 Federal agency obligations, total 9,067 8,869 10,143 198 -1,274 By term 1-15 days2 2,271 1,561 2,704 710 -1,143 16-90 days 697 691 808 6 -118 91 days to 1 year 1,492 1,653 1,224 -161 428 1-5 years 3,419 3,416 3,854 3 -437 5-10 years 1,000 1,358 1,178 -358 180 More than 10 years 189 189 374 0 -185 By type of holding Held outright Federal Farm Credit Banks 1,997 2,294 2,486 -297 -192 Federal Home Loan Banks 2,251 2,251 2,252 0 -1 Federal Home Loan Financing Corporation 0 0 0 0 0 Federal Home Loan Mortgage Corporation 0 0 0 0 0 Federal Intermediate Credit Banks4 0 0 30 0 -30 Federal Land Banks 130 200 236 -70 -36 Federal Home Administration 35 99 101 -64 -3 Federal National Mortgage Association 2,387 2,490 2,490 -103 0 Federal National Sinking Fund 0 0 0 0 0 Government National Mortgage Association participation certificates4 0 51 67 -51 -16 U.S. Postal Service 37 37 37 0 0 Washington Metropolitan Area Transit Authority 117 117 117 0 0 General Services Administration 14 14 14 0 0 Held under RPs 2,101 1,315 2,314 786 -998 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 (repur- agreements. chase agreements and matched sale-purchase agreements). 4. There were no outstanding issues as of December 31, 1988. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 213 5. Number and Salaries of Officers and Employees of Federal Reserve Banks, December 31, 1988 President Other officers Employees Total Federal Reserve Bank (including) Annual Annual Number Annual Annual Branches salary Num- salaries salaries Num- salaries (dollars) ber (dollars) Full- Part- (dollars) ber (dollars) time time Boston 171,200 51 3,768,326 1,315 306 38,444,344 1,673 42,383,870 New York 198,500 158 13,326,575 3,715 53 109,593,220 3,927 123,118,295 Philadelphia 147,600 55 4,039,300 1,126 87 29,148,656 1,269 33,335,556 Cleveland 137,800 56 3,828,300 1,332 68 32,013,430 1,457 35,979,530 Richmond 150,000 81 5,487,900 1,801 142 42,365,154 2,025 48,003,054 Atlanta 163,000 72 4,907,660 2,194 91 52,162,030 2,358 57,232,690 Chicago 177,500 88 5,939,360 2,454 28 64,159,321 2,571 70,276,181 St. Louis 149,000 60 3,769,600 1,185 67 27,954,455 1,313 31,873,055 Minneapolis 133,000 44 2,978,700 979 142 25,311,846 1,166 28,423,546 Kansas City 146,500 63 4,201,800 1,605 57 38,686,861 1,726 43,035,161 Dallas 142,000 59 3,988,800 1,522 45 38,296,827 1,627 42,427,627 San Francisco 171,000 102 7,089,218 2,376 69 64,714,185 2,548 71,974,403 Total 1,887,100 889 63,325,539 21,604 1,155 562,850,329 23,660 628,062,968 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

214 Tables 6. Income and Expenses of Federal Reserve Banks, 1988 Dollars Item1 Total Boston New York Philadelphia Cleveland CURRENT INCOME Loans 355,503,582 1,917,148 4,067,423 2,486,347 555,846 U.S. Treasury and federal agency securities 18,179,534,091 1,099,303,526 6,178,080,704 522,231,597 1,055,774,529 Foreign currencies 299,843,275 9,892,553 78,629,814 14,368,529 16,607,328 Priced services 656,805,293 44,833,234 91,692,476 32,017,493 40,109,734 Other 34,745,057 651,088 24,766,126 567,153 571,323 Total 19,526,431,297 1,156,217,539 6,380,785,220 571,611,487 1,114,447,833 CURRENT EXPENSES Salaries and other personnel expenses 661,695,075 44,546,626 132,470,011 35,178,572 37,868,080 Retirement and other benefits 63,785,742 8,638,103 23,675,231 7,649,904 8,001,485 Fees 14,926,898 5,006,138 1,941,067 518,633 1,609,136 Travel 25,358,327 1,113,434 3,358,905 1,099,409 1,933,977 Postage and other shipping costs 81,971,317 4,296,876 10,242,315 4,470,305 5,917,766 Communications 11,906,871 1,028,083 2,240,628 570,355 660,981 Materials and supplies 51,059,279 3,160,857 9,191,926 2,721,446 3,198,311 Building expenses Taxes on real estate 23,983,391 3,761,037 3,462,858 1,508,751 1,024,188 Property depreciation 28,407,981 2,361,790 3,246,647 1,626,416 1,499,255 Utilities 22,981,317 1,847,963 3,395,973 2,208,917 1,526,079 Rent 21,681,855 561,072 14,150,347 42,557 339,554 Other 18,822,842 899,469 3,371,365 1,336,957 759,240 Equipment Purchases 3,981,307 83,094 0 281,347 138,936 Rentals 26,577,783 385,069 5,372,028 900,332 2,309,366 Depreciation 77,321,209 5,471,218 15,107,959 4,156,659 4,755,947 Repairs and maintenance 45,940,759 3,322,267 7,229,142 2,214,105 3,093,988 Earnings-credit costs 124,275,559 7,837,385 13,064,312 8,872,596 11,043,526 Other 53,752,137 3,310,383 11,771,372 2,107,058 3,583,786 Shared costs, net3 0 (993,205) 438,940 2,371,756 169,828 Recoveries (34,276,302) (8,257,005) (3,624,696) (2,531,196) (3,238,503) Expenses capitalized4 (2,452,557) (113,297) (6,370) (15,058) (138,544) Total 1,321,700,790 88,267,357 260,099,960 77,289,822 86,056,383 Reimbursements (115,740,657) (4,697,003) (24,096,216) (15,204,424) (9,775,070) Net expenses 1,205,960,134 83,570,354 236,003,744 62,085,398 76,281,313 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 215 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 1,438,247,017 832,367,957 2,168,845,209 529,481,697 261,532,503 690,709,256 1,030,435,746 2,372,524,350 16,742,570 26,448,953 38,564,698 8,464,422 9,341,521 12,341,470 25,761,815 42,679,602 55,920,615 72,271,032 89,093,953 28,725,332 37,361,790 42,891,487 48,081,040 73,807,107 644,235 1,094,276 2,405,835 460,646 446,235 497,849 930,878 1,709,413 1,512,542,017 934,103,037 2,468,884,122 574,233,014 312,293,467 750,274,112 1,258,076,204 2,492,963,246 50,218,223 59,030,489 75,263,091 33,683,814 29,323,391 45,026,296 44,019,774 75,066,708 10,255,976 12,906,111 14,715,747 7,259,567 5,912,042 8,983,008 9,061,857 16,271,479 475,285 1,136,977 879,735 512,826 1,088,382 577,200 299,735 881,784 2,057,121 2,387,612 3,530,130 1,288,897 1,113,084 1,945,614 2,150,255 3,379,889 6,540,349 9,327,550 8,861,961 4,080,392 5,566,164 6,218,229 4,181,974 12,267,436 740,628 1,386,139 1,289,396 571,773 458,283 843,871 892,258 1,224,476 4,602,451 5,326,078 5,400,041 3,215,190 2,129,316 3,643,109 3,389,437 5,081,117 2,025,292 1,708,533 4,414,939 457,217 1,770,005 949,755 569,426 2,331,390 3,796,639 2,121,161 2,639,282 980,745 1,077,565 2,214,242 1,312,901 5,531,338 2,024,345 2,033,072 2,276,876 1,491,369 811,887 1,506,838 1,077,387 2,780,611 540,859 582,182 3,319,666 423,015 149,273 183,654 1,202,996 186,680 1,660,171 1,214,616 4,420,665 638,266 1,117,928 786,571 645,487 1,972,107 433,733 358,809 382,065 376,972 711,241 116,090 325,577 773,443 1,328,107 1,803,144 6,166,948 523,400 613,391 942,265 2,757,238 3,476,495 6,594,970 8,420,872 9,186,710 3,241,437 4,056,916 4,389,333 4,874,818 7,064,370 4,192,839 5,430,413 7,155,647 1,926,292 2,300,103 2,122,666 2,101,235 4,852,062 10,150,326 12,188,134 24,497,230 4,598,019 6,930,482 8,954,497 6,331,882 9,807,170 4,713,550 4,758,370 6,617,714 2,248,085 2,781,148 2,804,744 3,594,805 5,461,122 187,439 147,883 (6,408,496) 743,473 1,712,865 847,919 685,090 96,507 (4,534,181) (1,922,976) (2,338,276) (1,176,488) (695,407) (756,083) (1,485,502) (3,715,989) (185,148) (257,126) (609,606) (94,417) (52,158) (403,391) (497,970) (79,472) 107,818,974 130,088,043 171,661,465 66,989,844 68,875,901 91,896,427 87,490,659 154,710,723 (7,414,075) (8,588,131) (12,412,611) (7,269,273) (3,654,226) (5,498,505) (5,070,307) (12,060,816) 100,404,899 121,499,912 159,248,854 59,720,571 65,221,675 86,397,922 82,420,353 142,649,907 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

216 Tables 6. Income and Expenses of Federal Reserve Banks, 1988—Continued Item1 Total Boston New York Philadelphia Cleveland PROFIT AND LOSS Current net income 18,320,471,163 1,072,647,185 6,214,326,244 509,526,088 1,038,166,519 Additions to and deductions from current net income Profits on sales of U.S. Treasury and federal agency securities 22,741,685 1,405,315 7,264,559 693,204 1,369,006 Other additions 87,590,510 20,824 990,764 9,075 6,765 Total additions 110,332,194 1,426,139 8,255,323 702,280 1,375,771 Loss on foreign exchange transactions (510,875,399) (16,858,888) (134,871,105) (24,522,019) (28,098,147) Other deductions (88,514,766) (34,534) (1,020,938) (15,248) (108,533) Total deductions (599,390,166) (16,893,423) (135,892,044) (24,537,267) (28,206,680) Net additions to or deductions(-) from current net income (489,057,971) (15,467,283) (127,636,721) (23,834,987) (26,830,909) Cost of unreimbursed Treasury services 27,852,349 1,499,201 5,038,020 2,691,151 1,924,431 Assessments by Board Board expenditures5 84,410,500 2,848,500 22,217,800 4,014,300 4,620,100 Cost of currency 164,244,653 9,688,687 53,879,756 4,421,601 10,064,330 Net income before payment to U.S. Treasury 17,554,905,689 1,043,143,514 6,005,553,947 474,564,049 994,726,749 Dividends paid 125,616,018 4,385,524 33,109,144 6,039,635 6,811,391 Payments to U.S. Treasury (interest on Federal Reserve notes) 17,364,318,571 1,032,070,290 5,698,704,285 462,991,264 985,705,508 Transferred to surplus 64,971,100 6,687,700 24,741,350 5,533,150 2,209,850 Surplus, January 1 2,047,086,700 68,267,400 541,045,900 97,245,800 112,693,400 Surplus, December 31 2,112,057,800 74,955,100 565,787,250 102,778,950 114,903,250 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 temporarily ployers' Accounting for Pensions—is recorded in the Total capitalized and charged to activities when the products are column only and has not been distributed to each District. consumed. Accordingly, the sum of the Districts will not equal the 5. For additional details, see the last four pages of the Total column for this category or for Total net expenses, preceding section: Board of Governors, Financial and New York will not add to current net income. The Statements. effect of FASB 87 on the Reserve Banks was a reduction in expenses. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 217 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 1,412,137,113 812,603,125 2,309,635,267 514,512,443 247,071,793 663,876,190 1,175,655,855 2,350,313,340 1,939,690 1,004,209 2,623,055 655,362 343,892 908,663 1,357,682 3,177,049 52 2,570 12,040 720 60,396 241 86,449,276 37,785 1,939,742 1,006,779 2,635,095 656,082 404,288 908,904 87,806,957 3,214,834 (28,609,022) (44,957,035) (65,392,051) (14,304,511) (15,837,137) (20,945,891) (43,935,284) (72,544,307) (21,440) (110,768) (35,413) (7,363) (58,501) (557,718) (86,461,293) (83,017) (28,630,462) (45,067,803) (65,427,465) (14,311,874) (15,895,639) (21,503,609) (130,396,578) (72,627,324) (26,690,720) (44,061,024) (62,792,370) (13,655,793) (15,491,350) (20,594,705) (42,589,620) (69,412,490) 2,443,149 2,347,652 3,696,045 1,217,001 1,219,849 1,634,799 1,888,319 2,252,731 4,724,500 7,452,600 10,758,000 2,375,900 2,596,100 3,476,700 7,387,300 11,938,700 12,825,070 7,134,247 23,270,501 5,379,479 2,368,162 6,483,890 9,540,917 19,188,013 1,365,453,674 751,607,603 2,209,118,351491,884,270 225,396,332 631,686,095 1,114,249,699 2,247,521,406 7,163,926 11,283,631 16,088,003 3,495,521 4,004,145 5,127,698 10,515,965 17,591,436 1,348,753,798 725,345,821 2,181,326,998 487,948,950 217,151,037 624,448,198 1,121,027,434 2,229,845,820 9,535,950 14,978,150 11,703,350 439,800 4,241,150 2,110,200 (17,293,700) 84,150 113,919,900 180,789,500 261,303,050 58,019,850 62,604,650 84,801,500 175,324,750 291,071,000 123,455,850 195,767,650 273,006,400 58,459,650 66,845,800 86,911,700 158,031,050 291,155,150 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

218 Tables 7. Income and Expenses of Federal Reserve Banks, 1914-88J Dollars Assessments by Net additions Board of Governors Period, or Federal Current Net or Reserve Bank income expenses deductions (-) Board Costs expenditures of currency All Banks 1914-15. 2,173,252 2,018,282 5,875 302,304 1916 .... 5,217,998 2,081,722 -193,001 192,277 1917 .... 16,128,339 4,921,932 -1,386,545 237,795 1918 .... 67,584,417 10,576,892 -3,908,574 382,641 1919.... 102,380,583 18,744,815 -4,673,446 594,818 1920.... 181,296,711 27,548,505 -3,743,907 709,525 1921 .... 122,865,866 33,722,409 -6,314,796 741,436 1922 50,498,699 28,836,504 -4,441,914 722,545 1923 .... 50,708,566 29,061,539 -8,233,107 702,634 1924 38,340,449 27,767,886 -6,191,143 663,240 1925 41,800,706 26,818,664 -4,823,477 709,499 1926 47,599,595 24,914,037 -3,637,668 721,724 1,714,421 1927 43,024,484 24,894,487 -2,456,792 779,116 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 219 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 I,i34,234 '. '. '. 1,134,234 5,540,684 48,334,341 5,011,832 2,703,894 '. '. '. 70,651,778 5.654,018 60,724,742 82,916,014 6,119,673 59,974,466 15,993,086 6,307,035 10,850,605 -659,904 6.552.717 3.613.056 2,545,513 6,682,496 113,646 -3,077,962 6,915,958 59,300 2,473,808 7,329,169 818,150 8,464,426 7,754,539 249,591 5,044,119 8,458,463 2,584,659 21,078,899 9,583,911 4,283,231 22,535,597 10,268,598 17,308 -2,297,724 10,029,760 -7,057,694 9,282,244 2,011,418 '. '. '. 11,020,582 8,874,262 -916,855 8,781,661 -60^323 6,510,071 8,504,974 '. '. '. 291,661 27,695 607,422 7,829,581 227,448 102,880 352,524 7,940,966 176,625 67,304 2,616,352 8,019,137 119,524 -419,140 1,862,433 8,110,462 24,579 -425,653 4,533,977 8,214,971 82,152 -54,456 17,617,358 8,429,936 141,465 -4,333 570,513 8,669,076 197,672 49,602 3,554,101 8,911,342 244,726 135,003 40,327,237 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 75,283,818 86,772 8,366,350 11,919,809 166,690,356 18,522,518 12,329,373 193,145,837 21,461,770 13,082,992 196,628,858 21,849,490 13,864,750 254,873,588 28,320,759 14,681,788 291,934,634 46,333,735 15,558,377 342,567,985 40,336,862 16,442,236 276,289,457 35,887,775 17,711,937 251,740,721 32,709,794 18,904,897 401,555,581 53,982,682 20,080,527 542,708,405 61,603,682 21,197,452 524,058,650 59,214,569 22,721,687 910,649,768 -93,600,791 23,948,225 896,816,359 42,613,100 25.569,541 687,393,382 70,892,300 27,412,241 799,365,981 45,538,200 28,912,019 879,685,219 55,864,300 30,781,548 1,582,118,614 -465,822,800 32,351,602 1,296,810,053 27,053,800 33,696,336 1,649,455,164 18,943,500 35,027,312 1,907,498,270 29,851,200 36,959,336 2,463,628,983 30,027,250 39,236,599 3,019,160,638 39,432,450 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 Tables 7. Income and Expenses of Federal Reserve Banks, 1914-88—Continued Dollars Assessments by Net additions Board of Governors Period, or Federal Current Net or Reserve Bank income expenses deductions (—) Board Costs expenditures of currency 1970. 3,877,218,444 276,571,876 11,441,829 21,227,800 23,573,710 1971 . 3,723,369,921 319,608,270 94,266,075 32,634,002 24,942,528 1972. 3,792,334,523 347,917,112 (49,615,790) 35,234,499 31,454,740 1973 . 5,016,769,328 416,879,377 (80,653,488) 44,411,700 33,826,299 1974 . 6,280,090,965 476,234,586 (78,487,237) 41,116,600 30,190,288 1975 . 6,257,936,784 514,358,633 (202,369,615) 33,577,201 37,130,081 1976. 6,623,220,383 558,128,811 7,310,500 41,827,700 48,819,453 1977. 6,891,317,498 568,851,419 (177,033,463) 47,366,100 55,008,163 1978 . 8,455,309,401 592,557,841 (633,123,486) 53,321,700 60,059,365 1979. 10,310,148,406 625,168,261 (151,148,220) 50,529,700 68,391,270 1980. 12,802,319,335 718,032,836 (115,385,855) 62,230,800 73,124,423 1981 . 15,508,349,653 814,190,392 (372,879,185) 63,162,700 82,924,013 1982. 16,517,385,129 926,033,957 (68,833,150) 61,813,400 98,441,027 1983 . 16,068,362,117 1,023,678,474 (400,365,922) 71,551,000 152,135,488 1984. 18,068,820,742 1,102,444,454 (412,943,156) 82,115,700 162,606,410 1985 . 18,131,982,786 1,127,744,490 1,301,624,294 77,377,700 173,738,745 1986 . 17,464,528,361 1,156,867,714 1,975,893,356 97,337,500 180,779,673 1987 . 17,633,011,623 1,146,910,699 1,796,593,9172 81,869,800 170,674,979 1988 . 19,526,431,297 1,205,960,134 (516,910,320) 84,410,500 164,244,653 Total, 1914-88 . 238,510,484,581 17,741,836,222 1,999,244,205 1,271,014,708 1,967,511,010 Aggregate/or each Bank, 1914-88 Boston 12,005,096,843 1,174,105,749 55,134,542 45,779,286 114,917,920 New York 69,376,122,412 3,525,480,072 534,167,103 328,683,786 492,365,339 Philadelphia .... 9,836,833,130 935,307,310 86,170,618 62,160,518 90,575,610 Cleveland 16,280,828,013 1,198,233,303 67,205,461 98,122,690 124,358,035 Richmond 18,788,385,425 1,393,781,737 92,183,673 66,169,276 185,156,576 Atlanta 9,898,281,276 1,524,845,146 182,174,022 94,744,360 120,997,307 Chicago 34,738,042,867 2,334,955,874 226,221,946 180,357,672 275,191,342 St. Louis 8,187,287,027 948,898,211 45,150,118 39,683,972 75,231,451 Minneapolis 4,313,264,726 816,101,971 66,677,954 37,826,415 34,325,191 Kansas City 10,348,387,248 1,126,493,481 86,680,029 54,354,709 94,968,427 Dallas 13,763,880,880 1,012,280,569 209,610,258 82,922,773 116,662,362 San Francisco... 30,974,074,736 1,800,655,287 347,868,477 180,179,251 242,761,450 Total 238,510,484,582 17,741,836,2224 1,999,244,205 1,271,014,708 1,967,511,010 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 surplus services provided to the Treasury by Federal Reserve (1958); and was increased by transfer of $11,131,013 from Banks for which reimbursement was not received. reserves for contingencies (1945), leaving a balance of 3. The $2,240,750,999 transferred to surplus was $2,112,057,800 on Dec. 31,1987. reduced by direct changes 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 221 7.—Continued Payments to U.S. Treasury Transferred Transferred Dividends paid Franchise Under Fed In er te a r l e R st e o se n rve (s t e o c t s i u o r n p l 1 u 3 s b) ( t s o e s c u ti r o p n l u 7 s ) tax section 13b notes 41,136,551 3,493,570,636 32,579,700 43,488,074 3,356,559,873 40,403,250 46,183,719 3,231,267,663 50,661,000 49,139,682 4,340,680,482 51,178,300 52,579,643 5,549,999,411 51,483,200 54,609,555 5,382,064,098 33,827,600 57,351,487 5,870,463,382 53,940,050 60,182,278 5,937,148,425 45,727,650 63,280,312 7,005,779,497 47,268,200 67,193,615 9,278,576,140 69,141,200 70,354,516 11,706,369,955 56,820,950 74,573,806 14,023,722,907 76,896,650 79,352,304 15,204,590,947 78,320,350 85,151,835 14,228,816,297 106,663,100 92,620,451 16,054,094,674 161,995,900 103,028,905 17,796,464,292 155,252,950 109,587,968 17,803,894,710 91,954,150 117,499,115 17,738,879,542 173,771,400 125,616,018 17,364,318,571 64,971,100 2,160,030,490 149,138,300 2,188,893 214,977,261,822 (3,657) 2,240,750,9993 89,004,996 7,111,395 280,843 10,543,845,860 135,411 84,049,925 586,093,192 68,006,262 369,116 64,355,883,827 (433,412) 603,043,821 116,936,323 5,558,901 722,406 8,594,442,847 290,661 117,109,172 175,777,068 4,842,447 82,930 14,618,489,864 (9,906) 128,137,043 108,956,701 6,200,189 172,493 16,990,867,850 (71,517) 129,335,658 147,368,065 8,950,561 79,264 7,982,401,044 5,491 201,034,190 298,326,916 25,313,526 151,045 31,561,621,600 11,682 288,335,154 68,733,059 2,755,629 7,464 7,033,553,602 (26,515) 63,600,278 60,824,362 5,202,900 55,615 3,354,818,340 64,874 70,723,013 90,002,435 6,939,100 64,213 8,971,201,935 (8,674) 91,051,650 131,996,042 560,049 102,083 12,466,603,395 55,337 162,308,528 286,011,331 7,697,341 101,421 28,503,531,658 (17,089) 301,022,567 2,160,030,491 149,138,300 2,188,893 214,977,261,822 (3,657) 2,240,750,999 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

222 Tables 8. Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks and Branches, December 31,1988l Dollars Acquisition costs Federal Reserve Net Other Bank or Buildings Building ma- book real Branch Land (including chinery and Total3 value estate4 vaults)2 equipment BOSTON. 22,036,681 79,910,316 5,360,169 107,307,166 91,396,908 Annex.. 27,840 89,202 44,538 161,580 125,754 NEW YORK . 3,436,277 18,207,333 21,735,584 43,379,194 28,050,650 Annex 477,863 1,136,219 745,855 2,359,936 783,785 Buffalo 887,844 2,693,268 2,265,777 5,846,889 3,077,117 PHILADELPHIA. 1,876,601 52,360,437 5,903,704 60,140,742 45,902,623 CLEVELAND. 1,074,281 6,478,201 6,475,744 14,028,226 8,659,744 1,224,363 Cincinnati 2,246,599 13,537,723 7,528,477 23,312,798 13,080,684 Pittsburgh 1,658,376 7,235,660 3,309,063 12,203,099 9,619,998 RICHMOND. 3,912,575 55,853,002 14,314,313 74,079,889 55,450,587 Annex 522,733 3,725,466 3,924,584 8,172,784 3,716,505 Baltimore 6,476,114 26,826,903 3,842,189 37,145,206 32,591,159 Charlotte 1,902,406 15,484,515 946,943 18,333,865 16,950,727 ATLANTA.. 1,202,255 14,035,875 3,558,580 18,796,710 13,342,878 Birmingham . 3,026,988 1,905,770 1,117,797 6,050,555 4,233,201 Jacksonville . 880,258 17,486,169 0 18,366,427 18,366,427 909,313 Miami 3,717,791 11,965,974 2,111,664 17,795,429 14,935,299 Nashville.... 592,342 1,474,678 1,274,593 3,341,613 1,415,890 New Orleans. 3,087,693 2,956,411 1,476,257 7,520,362 4,893,900 283,753 CHICAGO . 4,511,942 92,922,805 14,265,111 111,699,858 92,508,787 Annex 53,066 904,562 426,419 1,384,047 1,252,166 Detroit 797,734 4,454,918 2,899,301 8,151,953 6,068,827 ST. LOUIS . 700,378 11,162,871 5,283,870 17,147,118 10,924,792 Little Rock . 1,148,492 2,082,669 1,003,022 4,234,183 2,551,767 Louisville .. 700,075 2,871,372 1,131,238 4,702,685 2,690,444 Memphis ... 1,135,623 4,216,382 2,126,755 7,478,760 4,750,245 MINNEAPOLIS. 1,394,384 26,664,805 7,692,189 35,751,378 21,966,834 Helena 289,619 104,184 68,689 462,491 314,549 1,376,047 KANSAS CITY. 1,798,804 9,987,268 8,802,665 20,588,737 16,837,800 149,948 Denver 3,187,962 3,422,762 3,505,761 10,116,484 7,570,687 Oklahoma City.. 646,386 2,381,207 2,153,371 5,180,963 4,404,446 Omaha 6,534,583 10,989,009 1,401,083 18,924,675 18,194,160 2,220,765 DALLAS.... 3,772,588 7,019,293 3,737,706 14,529,587 11,624,235 El Paso 262,477 1,398,307 393,301 2,054,085 1,652,768 Houston 2,049,064 3,535,591 983,006 6,567,661 5,876,471 San Antonio . 482,284 2,857,743 658,346 3,998,373 3,326,538 SAN FRANCISCO. 15,541,937 66,620,971 17,345,628 99,508,536 85,282,801 Los Angeles 3,891,887 48,580,244 8,334,890 60,807,022 57,992,081 3,094,592 Portland 207,381 2,010,290 649,432 2,867,103 2,492,808 Salt Lake City 480,222 2,032,415 1,293,985 3,806,622 2,848,852 Seattle 274,772 1,890,966 1,836,988 4,002,725 2,410,208 Total 108,905,176 641,473,754 171,928,587 922,307,517 730,154,100 9,258,780 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 bank premises formerly occupied and being held pending offices, 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 223 9. Operations in Principal Departments of Federal Reserve Banks, 1985-8 Operation 1988 1987 1986 1985 Millions of pieces (except as noted) Loans (thousands) 22 25 19 24 Currency received and counted 17,580 16,881 15,408 14,655 Currency verified and destroyed 5,910 5,217 5,584 5,744 Coin received and counted 17,137 19,871 20,461 19,691 Checks handled U.S. government checks 547 568 585 592 Postal money orders 144 146 140 130 Mother 17,623 17,006 16,226 15,965 Issues, redemptions, and exchanges of U.S. Treasury and federal agency securities1. 186 191 204 171 Transfer of funds 56 52r 50 45 Food stamps redeemed 2,327 2,210 2,216 2,322 Millions of dollars Loans 537,952 151,323 193,424 307,856 Currency received and counted 195,647 216,151 197,516 182,095 Currency verified and destroyed 47,184 44,907 47,842 51,081 Coin received and counted 3,684 3,517 3,088 3,226 Checks handled U.S. government checks 608,307 610,678 606,029 538,261 Postal money orders 13,189 12,511 11,103 9,486 Mother 11,789,787 11,453,158 10,546,900 9,557,753 Issues, redemptions, and exchanges of U.S. Treasury and federal agency securities1. 89,516,419 90,056,338 75,447,899 65,866,333 Transfer of funds 160,730,050 152,453,528 2-r 125,028,070 109,126,369 Food stamps redeemed 10,748 10,322 10,475 10,915 1. Before 1988, data included book-entry securities 2. Before 1987, data were compiled using a different transfers both sent and received. To eliminate double methodology, counting, the 1988 data include only the transfers sent. r = Revised. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

224 Tables 10. Federal Reserve Bank Interest Rates, December 31, 1988 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.. 6.5 6.5 9.55 1. Adjustment credit is available on a short-term basis to if similar assistance is not reasonably available from other help depository institutions meet temporary needs for sources, when exceptional circumstances or practices funds that cannot be met through reasonable alternative involve only a particular institution or when an institution sources. After May 19,1986, the highest rate established is experiencing difficulties adjusting to changing market for loans to depository institutions may be charged on conditions over a longer period of time. adjustment credit loans of unusual size that result from a 3. For extended-credit loans outstanding more than 30 major operating problem at the borrower's facility. days, a flexible rate somewhat above rates on market Seasonal credit is available to help smaller depository sources of funds ordinarily will be charged, but in no case institutions meet regular, seasonal needs for funds that will the rate charged be less than the basic discount rate cannot be met through special industry lenders and that plus 50 basis points. The flexible rate is reestablished on arise from a combination of expected patterns of movement the first business day of each two-week reserve maintein their deposits andloans. Atemporary simplified seasonal nance period. At the discretion of the Federal Reserve program established on March 8,1985, and reestablished Bank, the time period for which the basic discount rate is for 1986 and 1987 was not renewed for 1988. See sections applied may be shortened. See section 201.3(b)(2) of 201.3(a) and 201.3(b)(l) of Regulation A. Regulation A. 2. Extended credit is available to depository institutions, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 225 11. Reserve Requirements of Depository Institutions' Depository institution requirements after implementation of the Type of deposit, and Monetary Control Act deposit interval2 Percent of deposits Effective date Net transaction accounts3A $0 million-$41.5 million 3 12/20/88 More than $41.5 million 12 12/20/88 Nonpersonal time deposits5 By original maturity Less than 1 xh years 3 10/6/83 1 Vz years or more 0 10/6/83 Eurocurrency liabilities All types 3 11/13/80 1. Reserve requirements in effect on Dec. 31, 1988. With respect to NOW accounts and other transaction Required reserves must be held in the form of deposits with accounts, the exemption applies only to such accounts that Federal Reserve Banks or vault cash. Nonmembers may would be subject to a 3 percent reserve requirement. maintain reserve balances with a Federal Reserve Bank 3. Transaction accounts include all deposits on which indirectly on a pass-through basis with certain approved the account holder is permitted to make withdrawals by institutions. negotiable or transferable instruments, payment orders of For previous reserve requirements, see earlier editions withdrawal, and telephone and preauthorized transfers in of the ANNUAL REPORT and of the Federal Reserve Bulletin. excess of three per month for the purpose of making Under provisions of the Monetary Control Act, depository payments to third persons or others. However, MMDAs institutions include commercial banks, mutual savings and similar accounts subject to the rules that permit no banks, savings and loan associations, credit unions, more than six preauthorized, automatic, or other transfers agencies and branches of foreign banks, and Edge per month, of which no more than three can be checks, are corporations. not transaction accounts (such accounts are savings de- 2. The Garn-St Germain Depository Institutions Act of posits subject to time deposit reserve requirements). 1982 (Public Law 97-320) requires that $2 million of 4. The Monetary Control Act of 1980 requires that the reservable liabilities (transaction accounts, nonpersonal amount of transaction accounts against which the 3 percent time deposits, and Eurocurrency liabilities) of each reserve requirement applies be modified annually by 80 depository institution be subject to a zero percent reserve percent of die percentage increase in transaction accounts requirement. The Board is to adjust the amount of held by all depository institutions, determined as of June 30 reservable liabilities subject to this zero percent reserve each year. Effective Dec. 20, 1988, for institutions requirement each year for the succeeding calendar year by reporting quarterly and Dec. 27, 1988, for institutions 80 percent of the percentage increase in the total reservable reporting weekly, the amount was increased from $40.5 liabilities of all depository institutions, measured on an million to $41.5 million. annual basis as of June 30. No corresponding adjustment is 5. In general, nonpersonal time deposits are time deto be made in the event of a decrease. On Dec. 20,1988, the posits, including savings deposits, that are not transaction exemption was raised from $3.2 million to $3.4 million. In accounts and in which a beneficial interest is held by a determining the reserve requirements of depository depositor that is not a natural person. Also included are institutions, the exemption shall apply in the following certain transferable time deposits held by natural person order: (1) net NOW accounts (NOW accounts less and certain obligations issued to depository institution allowable deductions); (2) net other transaction accounts; offices located outside the United States. For details, see and (3) nonpersonal time deposits or Eurocurrency section 204.2 of Regulation D. liabilities starting with those with the highest reserve ratio. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

226 Tables 12. Initial Margin Requirements under Regulations T, U, G, and X1 Percent of market value Margin Convertible Short sales, Effective date stocks bonds Tonly2 1934, Oct. 1.. 25-45 1936, Feb. 1.. 25-55 Apr. 1.. 55 1937, Nov. 1 . 40 50 1945, Feb. 5.. 50 50 July5.. 75 75 1946, Jan. 21. 100 100 1947, Feb. 21. 75 75 1949, Mar. 3 . 50 50 1951, Jan. 17. 75 75 1953, Feb. 20. 50 50 1955,Jan. 4 .. 60 60 Apr. 23. 70 70 1958,Jan.16. 50 50 Aug. 5 . 70 70 Oct. 16. 90 90 1960, July 28. 70 70 1962, July 10. 50 50 1963, Nov. 6 . 70 70 1968, Mar. 11 70 50 70 June 8.. 80 60 80 1970, May 6.. 65 50 65 1971, Dec. 6.. 55 50 55 1972, Nov. 24 65 50 65 1974, Jan. 3 .. 50 50 50 1. These regulations, adopted by the Board of Gover- the current market value of the stock underlying the option. nors pursuant to the Securities Exchange Act of 1934, limit On Sept. 30,1985, the Board changed the required initial the amount of credit to purchase and carry "margin margin, allowing it to be the same as the option maintenance securities" (as defined in the regulations) when such credit margin required by the appropriate exchange or selfis collateralized by securities. Margin requirements on regulatory organization; such maintenance margin rules securities other than options are the difference between the must be approved by the Securities and Exchange Commismarket value (100 percent) and the maximum loan value of sion. Effective Jan. 31, 1986, the SEC approved new collateral as prescribed by the Board. Regulation T was maintenance margin rules, permitting margins to be the adopted effective Oct. 15, 1934; Regulation U, effective price of the option plus 15 percent of the market value of the May 1,1936; Regulation G, effective Mar. 11, 1968; and stock underlying the option. Regulation X, effective Nov. 1,1971. 2. From Oct. 1,1934, to Oct. 31,1937, the requirement On Jan. 1,1977, the Board of Governors for the first time was the margin "customarily required" by the brokers and established in Regulation T the initial margin required dealers. for writing options on securities, setting it at 30 percent of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 227 13. Principal Assets and Liabilities and Number of Insured Commercial Banks, by Class of Bank, June 30, 1988 and 1987l Asset and liability items shown in millions of dollars Member banks Nonmember Item Total banks Total National State June 30,1988 Loans and investments 2,127,678 1,578,619 1,272,273 306,346 549,059 Gross loans 1,647,363 1,251,938 1,015,857 236,080 395,425 Net loans 1,634,411 1,242,772 1,008,696 234,076 391,639 Investments 480,315 326,682 256,415 70,266 153,634 U.S. Treasury and federal agency securities 312,005 208,140 166,243 41,897 103,865 Other 168,310 118,542 90,172 28,369 49,769 Cash assets, total 209,506 160,869 128,296 32,573 48,637 Deposits, total 1,987,493 1,442,062 1,158,539 283,523 545,431 Interbank 59,880 52,186 36,723 15,463 7,694 Other transaction 583,727 434,515 343,650 90,865 149,212 Other nontransaction 1,532,856 1,084,780 886,457 198,322 448,076 Equity capital 184,226 132,593 102,708 29,885 51,634 Number of banks 13,274 5,530 4,459 1,071 7,744 June 30,1987 Loans and investments 1,997,678 1,472,286 1,178,461 293,825 525,392 Gross loans 1,536,916 1,163,780 935,008 228,772 373,136 Net loans 1,524,022 1,154,868 928,140 226,728 369,154 Investments 460,762 308,506 243,453 65,053 152,256 U.S. Treasury and federal agency securities 292,559 191,268 154,372 36,896 101,291 Other 168,203 117,239 89,081 28,157 50,964 Cash assets, total 217,237 168,383 132,045 36,338 48,854 Deposits, total 1,900,405 1,368,728 1,100,274 268,454 531,676 Interbank 65,613 57,655 42,405 15,250 7,957 Other demand 572,720 423,597 334,177 89,421 149,123 Other time and savings 1,436,543 1,005,562 822,651 182,911 430,981 Equity capital 172,546 123,456 97,100 26,356 49,090 Number of banks 13,829 5,818 4,724 1,094 8,011 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

228 Tables 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items — Year-End 1918-88, and Month-End 1988l Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- US. Treasury and cial Treafederal agency securities draw- sury Period ing cur- Other Gold u H n e d l e d r Loans Float2 ot A he ll r3 R Fe e d se e r r v a e l Total stock5 c r e ig rt h if t - s r o en u c t- y Total o B u o tr u i g g h h t t r c e h p a u s r e - assets4 ic a a c t - e s i t n an g d 6 agree- count ment 1918.... 239 239 0 1,766 199 294 0 2,498 2,873 1,795 1919.... 300 300 0 2,215 201 575 0 3,292 2,707 1,707 1920 .... 287 287 0 2,687 119 262 0 3,355 2,639 1,709 1921 .... 234 234 0 1,144 40 146 0 1,563 3,373 1,842 1922 .... 436 436 0 618 78 273 0 1,405 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 1,302 4,212 2,025 1925 .... 375 367 8 643 63 378 0 1,459 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 2T486 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://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 229 14.-Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with Federal Reserve Banks Other Cur- Re- Trea- Other Federal rency quired sury Federal Reserve in clearcash Reserve liacir- ing With Curhold- ac- bilities c t u io la n - ings7 T su re r a y - F ei o g r n - Other counts 4 bal- ca a p n it d al4 R F B e e a d s n e e r k r v a s e l r c e a o n n in c d y 9 qu R ir e e - d 1( ce E s x s - 10 4,951 288 51 96 25 118 0 0 1,636 0 1,585 51 5,091 385 51 73 28 208 0 0 1,890 0 1,822 68 5,325 218 57 5 18 298 0 0 1,781 0 0 0 4,403 214 96 12 15 285 0 0 1,753 0 1,654 99 4,530 225 11 3 26 276 0 0 1,934 0 0 0 4,757 213 38 4 19 275 0 0 1,898 0 1,884 14 4,760 211 51 19 20 258 0 0 2^220 0 2,161 59 4,817 203 16 8 21 272 0 0 2,212 0 2,256 -44 4,808 201 17 46 19 293 0 0 2,194 0 2.250 -56 4,716 208 18 5 21 301 0 0 2,487 0 2,424 63 4,686 202 23 6 21 348 0 0 2,389 0 2,430 -41 4,578 216 29 6 24 393 0 0 2,355 0 2,428 -73 4,603 211 19 6 22 375 0 0 2,471 0 2,375 96 5,360 222 54 79 31 354 0 0 1,961 0 1,994 -33 5,388 272 8 19 24 355 0 0 2,509 0 1,933 576 5,519 284 3 4 128 360 0 0 2,729 0 1,870 859 5,536 3,029 121 20 169 241 0 0 4,096 0 2,282 1,814 5,882 2,566 544 29 226 253 0 0 5,587 0 2,743 2,844 6,543 2,376 244 99 160 261 0 0 6,606 0 4,622 1,984 6,550 3,619 142 172 235 263 0 0 7,027 0 5,815 1,212 6,856 2,706 923 199 242 260 0 0 8,724 0 5,519 3,205 7,598 2,409 634 397 256 251 0 0 11,653 0 6,444 5,209 8,732 2,213 368 1,133 599 284 0 0 4,026 0 7,411 6,615 11,160 2,215 867 774 586 291 0 0 12,450 0 9,365 3,085 15,410 2,193 799 793 485 256 0 0 13,117 0 11,129 1,988 20,499 2,303 579 1,360 356 339 0 0 12,886 0 11,650 1,236 25,307 2,375 440 1,204 394 402 0 0 14,373 0 12,748 1,625 28,515 2,287 977 862 446 495 0 0 15,915 0 14,457 1,458 28,952 2,272 393 508 314 607 0 0 16,139 0 15,577 562 28,868 1,336 870 392 569 563 0 0 17,899 0 16,400 1,499 28,224 1,325 1,123 642 547 590 0 0 20,479 0 19,277 1,202 27,600 1,312 821 767 750 106 0 0 16,568 0 15,550 1.018 27,741 1,293 668 895 565 714 0 0 17,681 0 16,509 1,172 29,206 1,270 247 526 363 746 0 0 20,056 0 19,667 389 30,433 1,270 389 550 455 111 0 0 19,950 0 20,520 -570 30,781 761 346 423 493 839 0 0 20,160 0 19,397 763 30,509 796 563 490 441 907 0 0 18,876 0 18,618 258 31,158 767 394 402 554 925 0 0 19,005 0 18,903 102 31,790 775 441 322 426 901 0 0 19,059 0 19,089 -30 31,834 761 481 356 246 998 0 0 19,034 0 19,091 -57 32,193 683 358 272 391 1,122 0 0 18,504 0 18,574 -70 32,591 391 504 345 694 841 0 0 18,174 310 18,619 -135 32,869 377 485 217 533 941 0 0 17,081 2,544 18,988 637 33,918 422 465 279 320 1,044 0 0 17,387 2,544 18,988 96 35,338 380 597 247 393 1,007 0 0 17,454 3,262 20,071 645 37,692 361 880 171 291 1.065 0 0 17.049 4.099 20.677 471 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

230 Tables 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items - Year-End 1918-88, and Month-End 1988 ^Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasury and cial Treafederal agency securities draw- sury Period Other Gold ing curu H n e d l e d 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 r e ig rt h if t - s r o en u c t- y Total ou B t o ri u g g h h t t 12 r c e h p a u s r e - assets4 ic a a c t - e s i ta n n g d 6 agree- countment 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 7,1543 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 1988 .... 247,489 240,628 6,861 2,170 1,286 0 18,803 269,748 11,060 5,018 18,799 1988 Jan.... 225,834 225,834 0 333 396 0 15,954 242,517 11,068 5,018 18,197 Feb ... 224,293 224,293 0 336 897 0 14,269 239,795 11,063 5,018 18,248 Mar... 224,895 224,895 0 2,311 298 0 15,038 242,542 11,063 5,018 18,313 Apr... 241,045 230,642 10,403 2,590 371 0 16,236 260,242 11,063 5,018 18,369 May... 230,460 230,460 0 3,304 122 0 14,388 248,274 11,063 5,018 18,425 June... 237,144 229,718 7,426 2,464 259 0 14,780 254,647 11,063 5,018 18,501 July... 231,651 231,651 0 3,650 774 0 16,365 252,440 11,063 5,018 18,531 Aug... 229,986 229,986 0 3,237 659 0 17,638 251,520 11,061 5,018 18,581 Sept... 240,524 230,764 9,490 2,154 1,199 0 18,248 261,855 11,062 5,018 18,637 Oct.... 234,405 230,157 4,248 2,275 1,690 0 19,352 257,722 11,062 5,018 18,693 Nov... 241,086 235,803 5,283 2,328 389 0 18,168 261,971 11,059 5,018 18,743 Dec... 247,489 240,628 6,861 2,170 1,286 0 18,803 269,748 11,060 5,018 18,799 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 (February well as any gold in excess of the gold certificates issued to 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 dates Digitized Rfoesre FrvRe AliaSbiEliRtie s and capital" are shown separately. were Dec. 29). Beginning on Sept. 12,1968, the amount is 5. For the period before Jan. 30, 1934, includes gold based on close-of-business figures for the reserve period http://fraser.stlouisfed.org/ held in Federal Reserve Banks and in circulation. two weeks before the report date. Federal Reserve Bank of St. Louis

Tables 231 14.-Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with reserves8 Federal Reserve Banks Other Cur- Re- Trea- Other Federal rency quired sury Federal Reserve in clearcash Reserve liacir- ing With Curhold- ac- bilities c t u io la n - ings7 T s r u e r a y - e F i o g r n - Other counts4 a b n a c l e - s ca a p n it d al4 R Fe e d se e r r v al e re a n n c d y qu R i e r - ed10 Ex- Banks 42,056 760 668 150 355 211 0 0 18,447 4,163 22,848 -238 44,663 1,176 416 174 588 -147 0 0 19,779 4,310 24,321 -232 47,226 1,344 1,123 135 563 -773 0 0 21,092 4,631 25,905 -182 50,961 695 703 216 747 -1,353 0 0 21,818 4,921 27,439 -700 53,950 596 1,312 134 807 0 0 0 22,085 5,187 28,173 -901 57,903 431 1,156 148 1,233 0 0 1,986 24,150 5,423 30,033 -460 61,068 460 2,020 294 999 0 0 2,131 27,788 5,743 32,496 1,035 66,516 345 1,855 325 840 0 0 2,143 25,647 6,216 32,044 9812 72,497 317 2,542 251 1,41914 0 0 2,669 27,060 6,781 35,268 -1,360 79,743 185 2,113 418 1,27514 0 0 2,935 25,843 7,370 37,011 -3,798 86,547 483 7,285 353 1,090 0 0 2,968 26,052 8,036 35,197 -1,103!- 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,^51 480 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. 247,649 395 8,656 347 548 0 1,605 7,683 37,742 n.a. n.a. n.a. 223,152 438 10,276 355 315 0 1,674 6,926 33,664 n.a. n.a. n.a. 223,574 457 2,472 343 438 0 1,658 7,139 38,043 n.a. n.a. n.a. 227,073 479 2,403 534 436 0 1,671 7,047 37,106 n.a. n.a. n.a. 228,282 479 16,186 215 360 0 1,660 7,450 40,060 n.a. n.a. n.a. 232,732 459 3,030 288 491 0 1,660 7,235 37,098 n.a. n.a. n.a. 235,513 432 9,762 382 351 0 1,658 7,109 34,023 n.a. n.a. n.a. 234,990 397 3,910 269 291 0 1,642 7,200 38,352 n.a. n.a. n.a. 235,881 398 4,390 231 392 0 1,634 7,020 36,234 n.a. n.a. n.a. 235,527 389 13,023 338 358 0 1,605 7,899 37,433 n.a. n.a. n.a. 237,094 397 6,151 301 348 0 1,662 8,463 38,079 n.a. n.a. n.a. 242,472 402 5,198 251 398 0 1,613 8,058 38,399 n.a. n.a. n.a. 247,649 395 8,656 347 548 0 1,605 7,683 37,742 n.a. n.a. n.a. 11. Beginning on Dec. 1,1966, includes federal agency 14. For the period before July 1973, includes certain obligations held under repurchase agreements and begin- deposits of domestic nonmember banks and foreign-owned ning on Sept. 29, 1971, federal agency issues bought banking institutions held with member banks and redeoutright. posited in full with Federal Reserve Banks in connection 12. Includes, beginning in 1969, securities loaned— with voluntary participation by nonmember institutions in fully guaranteed by U.S. government securities pledged the Federal Reserve System program of credit restraint. with Federal Reserve Banks-and excludes securities sold As of Dec. 12, 1974, the amount of voluntary nonand scheduled to be bought back under matched sale- member bank and foreign-agency and branch deposits at purchase transactions. Federal Reserve Banks that are associated with marginal 13. Beginning with week ending Nov. 15, 1972, reserves are no longer reported. However, two amounts includes $450 million of reserve deficiencies on which are reported: (1) deposits voluntarily held as reserves by Federal Reserve Banks are allowed to waive penalties for a agencies and branches of foreign banks operating in the transition period in connection with bank adaptation to United States and (2) Eurodollar liabilities. Regulation J as amended, effective Nov. 9, 1972. Allow- 15. Adjusted to include waivers of penalties for reserve able deficiencies are as follows (beginning with first state- deficiencies, in accordance with change in Board policy Digitized mfoenr tF wReeAkS oEf qRu arter, in millions): 1973-Q1, $279; Q2, effective Nov. 19, 1975. http://fras$e17r2.s; tQlo3u, i$s1fe12d;. oQr4g, /$ 84; 1974-Q1, $67; Q2, $58. The transition period ended with the second quarter of 1974. Federal Reserve Bank of St. Louis

232 Tables 15. Changes in Number of Banking Offices in the United States, 1988' Commercial banks2 Mutual savings Type of office Total Member Nonmember banks and change Total Non- Non- Total National State Insured insured3 Insured insured Banks, Dec. 31,1987... 14,375 14,004 5,749 4,640 1,109 7,994 261 370 1 Changes during 1988 New banks 231 228 99 69 30 129 0 3 0 Ceased banking operation -201 -201 -103 -81 -22 -95 -3 -9 0 Banks converted into branches -598 -586 -403 -344 -59 -183 0 -12 0 Other4 -13 -27 108 91 17 -131 -4 23 0 Net change -581 -586 -299 -265 -34 -280 -7 5 0 Banks, Dec. 31,1988.. 13,794 13,418 5,450 4,375 1,075 7,714 254 375 1 Branches and additional offices, Dec. 31,1987 47,981 45,411 29,260 23,924 5,336 16,019 132 2,565 5 Changes during 1988 De novo 1,459 1,320 775 628 147 538 7 139 0 Banks converted into branches 598 586 403 344 59 183 0 12 0 Discontinued -942 -910 -604 -469 -135 -306 0 -32 0 Sale of branch 0 -21 -20 -12 -8 -1 0 21 0 Other4 371 281 577 525 52 -272 -24 90 0 Net change4 1,486 1,256 1,131 1,016 115 142 -17 230 0 Branches and additional offices, Dec. 31,1988 49,467 46,667 30,391 24,940 5,451 16,161 115 2,795 5 1. Preliminary. Final data will be available in the Annual 3. As of Dec. 31, 1988, includes noninsured national Statistical Digest, 1988, forthcoming. trust companies. 2. Includes stock savings banks and nondeposit trust 4. Includes interclass changes, companies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 233 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1988 Columbia Bank, Avondale, Arizona, to acquire pro forma basis, Applicant's market share will be assets and liabilities of The North American within Department of Justice and Board guidelines. Bank, Phoenix, Arizona The banking factors and considerations relating to the convenience and needs of the community are SUMMARY REPORT BY THE ATTORNEY GENERAL consistent with approval. No report received. Request for report on the competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Citizens Bank and Trust Company, Baytown, Reserve System to act immediately to safeguard the Texas, to merge the assets and liabilities of First depositors of The North American Bank. American Bank & Trust of Baytown, Baytown, Texas BASIS FOR APPROVAL BY THE FEDERAL RESERVE (1/8/88) SUMMARY REPORT BY THE ATTORNEY GENERAL Columbia Bank (Applicant) has assets of $9.4 No report received. Request for report on the million and The North American Bank (Bank) has competitive factors was dispensed with, as authoassets of $30.5 million. rized by the Bank Merger Act, to permit the Federal The Federal Deposit Insurance Corporation Reserve System to act immediately to safeguard the (FDIC) has recommended immediate action by the depositors of First American Bank & Trust of Federal Reserve System to prevent the probable Baytown. failure of Bank. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/11/88) Farmers & Merchants Bank and Trust Com- Citizens Bank and Trust Company (Applicant) has pany, Aberdeen, South Dakota, to merge with assets of $ 149.2 million and First American Bank & Bank of Cresbard, Cresbard, South Dakota Trust of Baytown (Bank) has assets of $35.7 SUMMARY REPORT BY THE ATTORNEY GENERAL million. No report received. Request for report on the The FDIC has recommended immediate action competitive factors was dispensed with, as autho- by the Federal Reserve System to prevent the rized by the Bank Merger Act, to permit the Federal probable failure of Bank. Reserve System to act immediately to safeguard depositors of Bank of Cresbard. Central Bank, Hollidaysburg, Pennsylvania, to BASIS FOR APPROVAL BY THE FEDERAL RESERVE merge the assets and liabilities of the Broad Top (2/3/88) City office of Mellon Bank (Central), N. A., State Farmers & Merchants Bank and Trust Company College, Pennsylvania (Applicant) has assets of $94.2 million and Bank of SUMMARY REPORT BY THE ATTORNEY GENERAL Cresbard (Bank) has assets of $8.9 million. (3/4/88) The Office of the Comptroller of the Currency The proposed transaction would not be significantly (OCC) has recommended immediate action by the adverse to competition. Federal Reserve System to prevent the probable failure of Bank. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/28/88) Central Bank (Applicant) has assets of $159.8 Farmers State Bank of Western Illinois, New million and the branch of Mellon Bank (Branch) has Windsor, Illinois, to merge the assets and liabilities assets of $4.1 million. Applicant and Branch 0/Bank of Viola, Viola, Illinois operate in the same banking market. On a pro forma SUMMARY REPORT BY THE ATTORNEY GENERAL basis, Applicant's market share is within Depart- (12/18/87) ment of Justice and Board guidelines. The proposed transaction would not be significantly The banking factors and considerations relating adverse to competition. to the convenience and needs of the community are consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (2/18/88) Farmers State Bank of Western Illinois (Applicant) State Bank and Trust of Colorado Springs, has assets of $28.4 million and Bank of Viola Colorado Springs, Colorado, to merge the assets (Bank) has assets of $10.9 million. Applicant and and liabilities of Citizens National Bank, Colo- Bank are located in the same banking market. On a rado Springs, Colorado Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

234 Tables 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1988 — Continued SUMMARY REPORT BY THE ATTORNEY GENERAL Citizens Bank, Smithville, Tennessee, to merge No report received. Request for report on the with Bank of Ardmore, Ardmore, Tennessee competitive factors was dispensed with, as autho- SUMMARY REPORT BY THE ATTORNEY GENERAL rized by the Bank Merger Act, to permit the Federal (2/26/88) Reserve System to act immediately to safeguard the The proposed transaction would not be significantly depositors. adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (4/21/88) (6/6/88) State Bank and Trust (Applicant) has assets of Citizens Bank (Applicant) has assets of $204 million $12.7 million and Citizens National Bank (Bank) and Bank of Ardmore (Bank) has assets of $54 has assets of $17.6 million. million. Applicant and Bank operate in the same The FDIC has recommended immediate action banking market. On a pro forma basis, Applicant's by the Federal Reserve System to prevent the market share will be within the Department of probable failure of Bank. Justice and Board guidelines. The banking factors and considerations relating to the convenience and needs of the community are Interstate Bank North, Houston, Texas, to consistent with approval. acquire the assets and liabilities o/First National Bank of Kingwood, Kingwood, Texas First Interstate Bank of California, Los Angeles, SUMMARY REPORT BY THE ATTORNEY GENERAL California, to merge with Bank of Contra Costa, No report received. Request for report on the Walnut Creek, California competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal SUMMARY REPORT BY THE ATTORNEY GENERAL Reserve System to act immediately to safeguard the (4/29/88) depositors. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (5/26/88) BASIS FOR APPROVAL BY THE FEDERAL RESERVE Interstate Bank North (Applicant) has assets of (6/16/88) $37.7 million and First National Bank of Kingwood First Interstate Bank of California (Applicant) has (Bank) has assets of $16.1 million. The OCC has assets of $19.6 billion and Bank of Contra Costa recommended immediate action by the Federal (Bank) has assets of $175.9 million. Applicant and Reserve System to prevent the probable failure of Bank are not located in the same banking market. Bank. The banking factors and considerations relating to the convenience and needs of the community are consistent with approval. Citizens Bank and Trust Company, Baytown, Texas, to merge certain assets and liabilities of Irving Trust Company, New York, New York, to Lone Star Bank, Baytown, Texas acquire certain assets and liabilities of the Seoul, South Korea, branch of Continental Illinois SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the National Bank and Trust Company of Chicago, Chicago, Illinois competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal SUMMARY REPORT BY THE ATTORNEY GENERAL Reserve System to act immediately to safeguard the (5/6/88) depositors. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (5/26/88) BASIS FOR APPROVAL BY THE FEDERAL RESERVE Citizens Bank and Trust Company (Applicant) has (6/27/88) assets of $19.0 million and Lone Star Bank (Bank) Irving Trust Company (Applicant) has assets of has assets of $12.1 million. $20.5 billion and the Seoul, South Korea, branch The FDIC has recommended immediate action (Branch) has assets of $129 million. Applicant and by the Federal Reserve System to prevent the Bank are not located in the same banking market. probable failure of Bank. The banking factors and considerations relating Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 235 16.-Continued to the convenience and needs of the community are BASIS FOR APPROVAL BY THE FEDERAL RESERVE consistent with approval. (9/7/88) First Community Bank, Inc. (Applicant), has assets of $250.6 millionand First National Bank of Grafton Beaver Trust Company, Beaver, Pennsylvania, (Bank) has assets of $34.0 million. Applicant and to acquire the assets and liabilities of branch Bank do not operate in the same banking market. offices of First Seneca Bank, Butler, Pennsyl- The banking factors and considerations relating vania and of Union National Bank, Pittsburgh, to the convenience and needs of the community are Pennsylvania consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (8/5/88) Merchants State Bank, Freeman, South Dakota, The proposed transaction would not be significantly to acquire certain assets and liabilities of Hurley adverse to competition. State Bank, Hurley, South Dakota BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (8/11/88) (7/15/88) Beaver Trust Company (Applicant) has assets of The proposed transaction would not be significantly $ 187 million and the branches of First Seneca Bank adverse to competition. and of Union National Bank (Branches) have BASIS FOR APPROVAL BY THE FEDERAL RESERVE acquired assets of $46.8 million. Applicant and (9/9/88) Branches do not operate in the same banking Merchants State Bank (Applicant) has assets of $22 market. million and Hurley State Bank (Branch) has assets The banking factors and considerations relating of $ 10 million. Applicant and Branch do not operate to the convenience and needs of the community are in the same banking market. consistent with approval. The banking factors and considerations relating to the convenience and needs of the community are Norstar Bank, Hempstead, New York, to acquire consistent with approval. certain assets and liabilities of three branches of Chemical Bank, New York, New York First Virginia Bank-South Central, Amherst, Virginia, to merge certain assets and liabilities of SUMMARY REPORT BY THE ATTORNEY GENERAL two branches of Colonial American National (7/22/88) Bank, Roanoke, Virginia The proposed transaction would not be significantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (9/9/88) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be significantly (8/30/88) adverse to competition. Norstar Bank (Applicant) has assets of $2.3 billion and the branches of Chemical Bank (Branches) BASIS FOR APPROVAL BY THE FEDERAL RESERVE have assets of $108 million. Applicant and Bank (10/4/88) operate in the same banking market. On a pro forma First Virginia Bank-South Central (Applicant) has basis, Applicant's market share is within Depart- assets of $43.6 million and the branches of Colonial ment of Justice and Board guidelines. American National Bank (Branches) have assets of The banking factors and considerations relating $2.5 million. Applicant and Branches operate in the to the convenience and needs of the community are same banking market. On a pro forma basis, consistent with approval. Applicant's market share is within Department of Justice and Board guidelines. The banking factors and considerations relating First Community Bank, Inc., Princeton, West to the convenience and needs of the community are Virginia, to merge with First National Bank of consistent with approval. Grafton, Grafton, West Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL Isabella Bank and Trust, Mount Pleasant, (8/12/88) Michigan, to merge the assets and liabilities of the The proposed transaction would not be significantly Shepherd branch of Commercial National Bank adverse to competition. of Alma, Alma, Michigan Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

236 Tables 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1988-Continued SUMMARY REPORT BY THE ATTORNEY GENERAL First Community Bank, Inc., Princeton, West (10/21/88) Virginia, to merge with Valley Bank & Trust The proposed transaction would not be significantly Company, Bluefield, West Virginia adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11/4/88) (10/24/88) The proposed transaction would not be significantly Isabella Bank and Trust (Applicant) has assets of adverse to competition. $154.3 million and Commercial National Bank BASIS FOR APPROVAL BY THE FEDERAL RESERVE (Branch) has assets of $4.2 million. Applicant and (11/29/88) Branch do not operate in the same banking market. First Community Bank, Inc. (Applicant), has assets The banking factors and considerations relating of $283.4 million and Valley Bank & Trust Comto the convenience and needs of the community are pany (Bank) has assets of $15.4 million. Applicant consistent with approval. and Bank operate in the same banking market. On a pro forma basis, Applicant's market share is within Department of Justice and Board guidelines. Bank of Woodward, Woodward, Oklahoma, to The banking factors and considerations relating assume the assets and liabilities of Bank of the to the convenience and needs of the community are Northwest, Woodward, Oklahoma consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the State Bank of Caledonia, Caledonia, Michigan, competitive factors was dispensed with, as authoto acquire certain assets and deposit liabilities of rized by the Bank Merger Act, to permit the Federal the Middleville Branch of PrimeBank, Middle- Reserve System to act immediately to safeguard ville, Michigan depositors of Bank of the Northwest. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11/4/88) (11/15/88) The proposed transaction would not be significantly Bank of Woodward (Applicant) has assets of $103 adverse to competition. million and Bank of the Northwest (Bank) has assets of $22 million. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11/30/88) The FDIC has recommended immediate action State Bank of Caledonia (Applicant) has assets of by the Federal Reserve System to prevent the $56.9 million and the Middleville Branch (Branch) probable failure of Bank. has deposit liabilities of $8.9 million. Applicant and Bank do not operate in the same banking market. First Interstate Bank of California, Los Angeles, The banking factors and considerations relating California, to merge with Point West Bancorp to the convenience and needs of the community are and its banking subsidiary, Point West Bank, consistent with approval. both of Sacramento, California First Community Bank, Forest, Virginia, to SUMMARY REPORT BY THE ATTORNEY GENERAL (10/12/88) assume deposit liabilities from three branches of The proposed transaction would not be significantly Signet Bank/Virginia, Richmond, Virginia adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (10/28/88) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be significantly (11/23/88) adverse to competition. First Interstate Bank of California (Applicant) has assets of $19.7 billion and Point West Bancorp BASIS FOR APPROVAL BY THE FEDERAL RESERVE (Bank) has banking assets of $168.3 million. (12/9/88) Applicant and Bank are not in the same banking First Community Bank (Applicant) has assets of market. $27 million and the branches of Signet Bank/Vir- The banking factors and considerations relating ginia (Branches) have assumed deposits of $48 to the convenience and needs of the community are million. Applicant and Branches do not operate in consistent with approval. the same banking market. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

237 16.-Continued The banking factors and considerations relating The FDIC has recommended immediate action to the convenience and needs of the community are by the Federal Reserve System to prevent the consistent with approval. probable failure of Bank. Continental Bank and Trust Company, Salt Mergers Approved Involving Wholly Owned Lake City, Utah, to merge with Tracy-Collins Subsidiaries of the Same Bank Holding Bank and Trust Company, Salt Lake City, Utah Company SUMMARY REPORT BY THE ATTORNEY GENERAL In each of the following cases, the Summary Report No report received. Request for report on the by the Attorney General indicates that the transaccompetitive factors was dispensed with, as autho- tion would not have a significantly adverse effect on rized by the Bank Merger Act, to permit the Federal competition because the proposed merger is essen- Reserve System to act immediately to safeguard tially a corporate reorganization. The Board of depositors of Tracy-Collins Bank and Trust Governors, the Federal Reserve Bank, or the Company. Secretary of the Board of Governors, whichever BASIS FOR APPROVAL BY THE FEDERAL RESERVE approved the application, determined that the (12/23/88) competitive effects of the proposed transaction, the Continental Bank and Trust Company (Applicant) financial and managerial resources and prospects of has assets of $410.9 million and Tracy-Collins the banks concerned, as well as the convenience Bank and Trust Company (Bank) has assets of and needs of the community to be served were $213.3 million. consistent with approval. Assets Date of Institutionl (millions approval of dollars) First of America-Straits Area, Cheboygan, Michigan 85 1/20/88 Merger First of American Bank, N. A., Sault Ste. Marie, Michigan 52 Trustcorp Bank, Toledo, Ohio 2,898 1/26/88 Merger Trustcorp Co. Dayton, Dayton, Ohio Trustcorp Company, N. A., Columbus, Ohio 40 Marine Bank of Champaign, Champaign, Illinois 100 3/18/88 Merger Marine American National Bank of Champaign, Champaign, Illinois 89 Chemical Bank and Trust Company, Midland, Michigan 452 3/18/88 Merger Chemical Bank Bay Area, Bay City, Michigan 9 Trustcorp Bank, Lenawee, Adrian Michigan 147 4/15/88 Merger Jipson-Carter State Bank, Blissfield, Michigan 31 Old Kent Bank of Kalamazoo, Kalamazoo, Michigan 521 4/22/88 Merger Old Kent Bank of Allegan, Allegan, Michigan 42 Old Kent Bank of Battle Creek, Battle Creek, Michigan 41 Old Kent Bank of South Haven, South Haven, Michigan 41 Old Kent Bank of Three Rivers, Three Rivers, Michigan 32 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

238 Tables 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1988 —Continued Institutionl (millions Date of approval of dollars) Sovran Bank/Central South, Nashville, Tennessee 2,700 7/1/88 Merger Sovran Bank/Williamson County, Franklin, Tennessee 349 Bank One, Mansfield, Mansfield, Ohio. 349 7/13/88 Merger Bank One, Ashland, Ashland, Ohio 70 United Jersey Bank, Hackensack, New Jersey 4,025 8/1/88 Merger United Jersey Bank Edgewater N. A., Englewood, New Jersey. 155 United Jersey Bank, Hackensack, New Jersey 4,183 9/7/88 Merger United Jersey Bank/Wood Ridge, N. A., Wood Ridge, New Jersey. 102 Landmark Bank, Fairview Heights, Illinois 62 9/29/88 Merger Landmark Bank Edgemont, East St. Louis, Illinois . 93 Landmark Bank St. Clair County, OTallon, Illinois. 29 Landmark Bank, Mascoutah, Illinois 25 First City Bank of Dallas, Dallas, Texas 1,600 9/29/88 Merger First City Bank-East Dallas, Dallas, Texas 105 First City Bank-Market Center, N. A., Dallas, Texas 70 First City Bank Valley View, Dallas, Texas 135 First City Bank-Farmers Branch, Farmers Branch, Texas. 155 First City Bank of Garland, N. A., Garland, Texas 134 First City National in Grand Prairie, Grand Prairie, Texas. 80 First City Bank of Lancaster, Lancaster, Texas 83 First City Bank of Richardson, Richardson, Texas 240 State Savings Bank of South Lyon, South Lyon, Michigan. 46 10/20/88 Merger First of America Bank-Ann Arbor, Ann Arbor, Michigan . 495 Scottsdom Bank, Scottsdom, Arizona. 52 11/16/88 Merger Thunderbird Bank, Phoenix, Arizona. 315 First City Bank of Dallas, Dallas, Texas 1,500 11/22/88 Merger First City Bank of Lewisville, Lewisville, Texas 131 First City Bank of Piano, N. A., Piano, Texas 62 First Interstate Bank of California, Los Angeles, California . 19,700 11/23/88 Merger Point West Bank, Sacramento, California 168 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 239 16.-Continued Assets Institutionl (millions Date of approval of dollars) Cole Taylor Bank/Drovers, Chicago, Illinois 340 11/29/88 Merger Cole Taylor Bank/Main, Chicago, Illinois 287 Cole Taylor Bank/Skokie, Skokie, Illinois 182 Cole Taylor Bank/Ford City, Chicago, Illinois 291 First City Bank of Dallas, Dallas, Texas 1,500 11/29/88 Merger First City Bank-Central Arlington, Arlington, Texas 87 First City National Bank of Arlington, Arlington, Texas 245 First City National Bank of Colley, Colleyville, Texas 55 First City Bank-Forest Hill, Forest Hill, Texas 46 First City National Bank of Fort Worth, Fort Worth, Texas 75 Sovran Bank/Central South, Nashville, Tennessee 3,000 12/13/88 Merger Sovran Bank/Clarksville, Clarksville, Tennessee 135 First Bank of Johnson City, Johnson City, Illinois 29 12/22/88 Merger First Bank of Carbondale, Carbondale, Illinois 26 1. Each proposed transaction was to be effected under chronological order of approval. the charter of the first-named bank. The entries are in Mergers Approved Involving a Nonoperating bank by the holding company, the merger would Institution with an Existing Bank have no effect on competition. The Board of Governors, the Federal Reserve Bank, or the The following transactions have no significant effect Secretary of the Board of Governors, whichever on competition; they merely facilitate the acquisiapproved the application, determined that the tion of the voting shares of a bank or banks by a proposal would, in itself, have no adverse holding company. In such cases the summary report competitive effects, and that the financial factors by the attorney general indicates that the transaction and considerations relating to the convenience and will merely combine an existing bank with a needs of the community were consistent with nonoperating institution; in consequence, and approval. without regard to the acquisition of the surviving Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

240 Tables 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1988—Continued Assets Institutionl (millions Date of approval of dollars)2 The ACB Bank, Apple Creek, Ohio 1/27/88 Merger Apple Creek Banking Company, Apple Creek, Ohio. 21 Orrstown Interim Bank, Orrstown, Pennsylvania . 2/5/88 Merger Orrstown Bank, Orrstown, Pennsylvania 74 Commonwealth Bank, Arlington, Texas 4/1/88 Merger Commonwealth Bank-Lamar, N.A., Arlington, Texas . 113 Norstar Bank of Callicoon, Callicoon, New York . 4/26/88 Merger Norstar Bank of Upstate NY, Albany, New York.. 94 F&M Bank-Martinsburg, Martinsburg, West Virginia 5/23/88 Merger Merchants and Farmers Bank 53 *St. Elmo Bank, St. Elmo, Illinois 6/20/88 Merger Fayette County Bank, St. Elmo, Illinois . 16 New Bank, Madisonville, Tennessee 7/29/88 Merger Bank of Madisonville, Madisonville, Tennessee 86 Richwood Interim Bank, Richwood, Ohio 8/18/88 Merger Richwood Banking Company, Richwood, Ohio . 46 Ripley Bank Merger Subsidiary, Inc., Ripley, West Virginia . 8/29/88 Merger Bank of Ripley, Ripley, West Virginia , 38 Ranson Interim Bank, Ranson, West Virginia 9/26/88 Merger Blakeley Bank and Trust Company, Ranson, West Virginia. 64 Central Florida Bancshares, Inc., Maitland, Florida 11/4/88 Merger First American Bank of Orange County, Maitland, Florida . 41 1. Each proposed transaction was to be effected under 2. Where no assets are listed, the bank is newly the charter of the first-named bank. The entries are in organized and not in operation, chronological order of approval. 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

242 Directories and Meetings Board of Governors of the Federal Reserve System December 31,1988 Term expires ALAN GREENSPAN of New York, Chairmanl January 31,1992 MANUEL H. JOHNSON of Virginia, Vice Chairman1 January 31,2000 MARTHA R. SEGER of Michigan January 31,1998 WAYNE D. ANGELL of Kansas January 31,1994 H. ROBERT HELLER of California January 31,1996 EDWARD W. KELLEY, JR., of Texas January 31,1990 JOHN P. LAWARE of Massachusetts January 31,2002 OFFICE OF BOARD MEMERS 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 BOB STAHLY MOORE, Special Assistant JAMES MCAFEE, Associate Secretary to the Board LEGAL DIVISION DIVISION OF MONETARY AFFAIRS MICHAEL BRADFIELD, General Counsel DONALD L. KOHN, Director J. VIRGILMATTINGLY, JR., Deputy DAVID E. LINDSEY, Deputy Director General Counsel BRIAN F. MADIGAN, Assistant Director RICHARD M. ASHTON, Associate RICHARD D. PORTER, Assistant Director General Counsel NORMAND R.V. BERNARD, Special Assistant OLIVER IRELAND, Associate General Counsel to the Board RICKI R. TIGERT, Assistant General Counsel MARYELLEN A. BROWN, Assistant to the General Counsel OFFICE OF STAFF DIRECTOR FOR MANAGEMENT S. DAVID FROST, Staff Director DIVISION OF RESEARCH EDWARD T. MULRENIN, Assistant AND STATISTICS StaffDirector MICHAEL J. PRELL, Director PORTIA W. THOMPSON, Equal Employment EDWARD C. ETTIN, Deputy Director Opportunity Programs Officer THOMAS D. SIMPSON, Associate Director LAWRENCE SLIFMAN, Associate Director MARTHA BETHEA, Deputy OFFICE OF STAFF DIRECTOR FOR Associate Director FEDERAL RESERVE BANK ACTIVITIES PETER A. TINSLEY, Deputy THEODORE E. ALLISON, StaffDirector Associate Director MYRON L. KWAST, Assistant Director OFFICE OF THE EXECUTIVE SUSAN J. LEPPER, Assistant Director DIRECTOR FOR INFORMATION MARTHA S. SCANLON, Assistant Director RESOURCES MANAGEMENT DAVID J. STOCKTON, Assistant Director ALLEN E. BEUTEL, Executive Director JOYCE K. ZICKLER, Assistant Director STEPHEN R. MALPHRUS, Deputy Executive LEVON H. GARABEDIAN, Assistant Director 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 243 DIVISION OF INTERNATIONAL DIVISION OF CONSUMER FINANCE AND COMMUNITY AFFAIRS EDWIN M. TRUMAN, Staff Director GRIFFITH L. GARWOOD, Director LARRY J. PROMISEL, Senior GLENN E. LONEY, Assistant Director Associate Director ELLEN MALAND, Assistant Director CHARLES J. SIEGMAN, Senior DOLORES S. SMITH, Assistant Director Associate Director DAVID H. HOWARD, Deputy Associate Director DIVISION OF HUMAN ROBERT F. GEMMILL, Staff Adviser RESOURCES MANAGEMENT DONALD B. ADAMS, Assistant Director DAVID L. SHANNON, Director PETER HOOPER, IE, Assistant Director JOHN R. WEIS, Associate Director KAREN H. JOHNSON, Assistant Director ANTHONY V. DIGIOIA, Assistant Director RALPH W. SMITH, JR. , Assistant Director JOSEPH H. HAYES, JR., Assistant Director FRED HOROWITZ, Assistant Director DIVISION OF FEDERAL RESERVE BANK OPERATIONS DIVISION OF SUPPORT SERVICES CLYDE H. FARNSWORTH, JR. , Director ROBERT E. FRAZIER, Director DAVID L. ROBINSON, Associate Director GEORGE M. LOPEZ, Assistant Director C. WILLIAM SCHLEICHER, JR., Associate DAVID L. WILLIAMS, Assistant Director Director CHARLES W. BENNETT, Assistant Director JACK DENNIS, JR. , Assistant Director OFFICE OF THE CONTROLLER EARL G. HAMILTON, Assistant Director GEORGE E. LIVINGSTON, Controller JOHN H. PARRISH, Assistant Director STEPHEN J. CLARK, Assistant Controller LOUISE L. ROSEMAN, Assistant Director (Programs and Budgets) FLORENCE M. YOUNG, Adviser DARRELL R. PAULEY, Assistant Controller (Finance) DIVISION OF BANKING SUPERVISION AND REGULATION DIVISION OF HARDWARE AND WILLIAM TAYLOR, Staff Director SOFTWARE SYSTEMS DON E. KLINE, Associate Director BRUCE M. BEARDSLEY, Director FREDERICK M. STRUBLE, Associate Director THOMAS C. JUDD, Assistant Director WILLIAM A. RYBACK, Deputy Associate ELIZABETH B. RIGGS, Assistant Director Director ROBERT J. ZEMEL, Assistant Director STEPHEN C. SCHEMERING, Deputy Associate Director RICHARD SPILLENKOTHEN, Deputy DIVISION OF Associate Director APPLICATIONS DEVELOPMENT HERBERT A. BIERN, Assistant Director AND STATISTICAL SERVICES JOE M. CLEAVER, Assistant Director WILLIAM R. JONES, Director ROGER T. COLE, Assistant Director DAY RADEBAUGH, Assistant Director JAMES I. GARNER, Assistant Director RICHARD C. STEVENS, Assistant Director JAMES D. GOETZINGER, Assistant Director PATRICIA A. WELCH, Assistant Director MICHAEL G. MARTINSON, Assistant Director ROBERT S. PLOTKIN, Assistant Director SIDNEY M. SUSS AN, Assistant Director OFFICE OF THE INSPECTOR GENERAL LAURA M. HOMER, Securities Credit Officer BRENT L. BOWEN, Inspector General Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

244 Directories and Meetings Federal Open Market Committee December 31,1988 Members ALAN GREENSPAN, Chairman, Board of Governors E. GERALD CORRIGAN, Vice Chairman, President, Federal Reserve Bank of New York WAYNE D. ANGELL, Board of Governors ROBERT P. BLACK, President, Federal Reserve Bank of Richmond ROBERT P. FORRESTAL, President, Federal Reserve Bank of Atlanta H. ROBERT HELLER, Board of Governors W. LEE HOSKINS, President, Federal Reserve Bank of Cleveland MANUEL H. JOHNSON, Board of Governors EDWARD W. KELLEY, JR. , Board of Governors JOHN P. LAWARE, Board of Governors ROBERT T. PARRY, President, Federal Reserve Bank of San Francisco MARTHA R. SEGER, Board of Governors Alternate Members ROGER GUFFEY, President, Federal Reserve Bank of Kansas City SILAS KEEHN, President, Federal Reserve Bank of Chicago THOMAS C. MELZER, President, Federal Reserve Bank of St. Louis FRANK E. MORRIS, President, Federal Reserve Bank of Boston JAMES H. OLTMAN, First Vice President, Federal Reserve Bank of New York Officers DONALD L. KOHN, JOHN M. DAVIS, Secretary and Economist Associate Economist NORMAND R.V. BERNARD, RICHARD G. DAVIS, Assistant Secretary Associate Economist MICHAEL BRADFIELD, DAVID E. LINDSEY, General Counsel Associate Economist ERNEST T. PATRIKIS, CHARLES J. SIEGMAN, Deputy General Counsel Associate Economist MICHAEL J. PRELL, THOMAS D. SIMPSON, Economist Associate Economist EDWIN M. TRUMAN, LAWRENCE SLIFMAN, Economist Associate Economist JOHN H. BEEBE, SHEILA L. TSCHINKEL, Associate Economist Associate Economist J. ALFRED BROADDUS, JR., 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 1988, the Federal Open Market Federal Open Market Committee in this Committee held eight regularly scheduled REPORT.) meetings (see Record of Policy Actions of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 245 Federal Advisory Council December 31,1988 Members District 1 - J. TERRENCE MURRAY, President, Fleet/Norstar Financial Group, Inc., Chairman and Chief Executive Officer, Fleet National Bank, Providence, Rhode Island District 2-WILLARD C. BUTCHER, Chairman and Chief Executive Officer, The Chase Manhattan Bank, N. A., New York, New York District 3-SAMUEL A. MCCULLOUGH, President and Chief Executive Officer, Meridian Bancorp, Inc., Reading, Pennsylvania District 4-THOMAS H. O'BRIEN, President and Chief Executive Officer, PNC Financial Corp, Pittsburgh, Pennsylvania District 5 - FREDERICK DEANE, JR. , Chairman of the Board and Chief Executive Officer, Signet Banking Corporation, Richmond, Virginia 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'sBancshares, 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 of Omaha, Omaha, Nebraska District 11 — T. C. FROST, Chairman of the Board, Frost National Bank, San Antonio, Texas District 12-PAUL HAZEN, President and Chief Operating Officer, Wells Fargo and Co., San Francisco, California Officers CHARLES T. FISHER, HI, President BENNETT A. BROWN, Vice President HERBERT V. PROCHNOW, Secretary WILLIAM J. KORSVIK, Associate Secretary Directors SAMUEL A. MCCULLOUGH DONALD N. BRANDIN The Federal Advisory Council met on Feb- the twelve Federal Reserve Districts, is ruary 4-5, May 5-6, September 8-9, and required by law to meet in Washington at least November 3-4, 1988. The Board of Gover- four times each year and is authorized by the nors met with the council on February 5, May Federal Reserve Act to consult with, and 6, September 9, and November 4, 1988. The advise, the Board on all matters within the council, which is composed of one represen- jurisdiction of the Board, tative of the banking industry from each of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

246 Directories and Meetings Consumer Advisory Council December 31,1988 Members NAOMI G. ALBANESE, Former Professor of Home Economics, Greensboro, North Carolina STEPHEN BROBECK, Executive Director, Consumer Federation of America, Washington, D.C. EDWIN B. BROOKS, President, Security Federal Savings and Loan Association, Richmond, Virginia JUDITH N. BROWN, Treasurer, American Association of Retired Persons, Edina, Minnesota MICHAEL S. CASSIDY, Senior Vice President, Chase Manhattan Bank, New York, New York BETTY TOM CHU, Chairman, Trust Savings Bank, Arcadia, California JERRY D. CRAFT, Senior Vice President, First National Bank of Atlanta, Atlanta, Georgia DONALD C. DAY, President, New England Securities Corporation, Boston, Massachusetts RICHARD B. DOBY, Financial Services Consultant, Doby and Associates, 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 ELENA HANGGI, Director, Institute for Social Justice, Little Rock, Arkansas ROBERT A. HESS, President and General Manager, Wright Patman Congressional Federal Credit Union, Washington, D.C. ROBERT J. HOBBS, Deputy Director, National Consumer Law Center, Boston, Massachusetts RAMON E. JOHNSON, Professor of Finance, University of Utah, Salt Lake City, Utah ROBERT W. JOHNSON, Professor of Management andDirector, Credit Research Center, Purdue University, West Lafayette, Indiana A. J. KING, Chairman and Chief Executive Officer, Valley Bank of Kalispell, Kalispell, Montana JOHN M. KOLESAR, President, Ameritrust Development Bank, Cleveland, Ohio ALAN B. LERNER, Senior Executive Vice President, Associates Corporation, Dallas, Texas RICHARD L. D. MORSE, Professor of Family Economics, Kansas State University, Manhattan, Kansas WILLIAM E. ODOM, Chairman of the Board, Ford Motor Credit Company, Dearborn, Michigan SANDRA R. PARKER, Chairman, Banking Committee, Richmond United Neighborhoods, Richmond, Virginia SANDRA PHILLIPS, Executive Director, Pittsburgh Partnership for Neighborhood Development, Pittsburgh, Pennsylvania JANE SHULL, Director, Institute for the Study of Civic Values, Philadelphia, Pennsylvania RALPH E. SPURGIN, President and Chief Executive Officer, Limited Credit Services, Inc., Columbus, Ohio LAWRENCE WINTHROP, President, Consumer Credit Counseling Service of Oregon, Inc., Portland Oregon Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 247 Consumer Advisory Council—Continued Officers STEVEN W. HAMM, Chairman EDWARD J. WILLIAMS, Vice Chairman The Consumer Advisory Council met with financial industry, and representatives of members of the Board of Governors on March consumer and community interests. It was 17-18, July 14-15, and October27-28,1988. established pursuant to the 1976 amendments The council is composed of academics, state to the Equal Credit Opportunity Act to advise government officials, representatives of the the Board on consumer financial services. Thrift Institutions Advisory Council December 31,1988 Members GERALD M. CZARNECKI, Chairman of the Board and Chief Executive Officer, HONFED, Honolulu, Hawaii ROBERT S. DUNCAN, Chairman, President, and Chief Executive Officer, Magnolia Federal Bank for Savings, Hattiesburg, Mississippi BETTY GREGG, Immediate Past President and Chief Executive Officer, Desert Schools Federal Credit Union, Scottsdale, Arizona JAMIE J. JACKSON, President, Landmark Capital, Inc., 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 JOE C. MORRIS, Chairman of the Board, Columbia Savings Association, Overland Park, Kansas JOSEPH W. MOSMILLER, Chairman and Chief Executive Officer, Loyola Federal Savings and Loan Association, Baltimore, Maryland JANET M. PAVLISKA, President and Chief Executive Officer, BankFive for Savings, Arlington, Massachusetts Louis H. PEPPER, Chairman and Chief Executive Officer, Washington Mutual Savings Bank, Seattle, Washington WILLIAM G. SCHUETT, President and Chief Executive Officer, Security Savings and Loan Association, Milwaukee, Wisconsin DONALD B. SHACKELFORD, Chairman of the Board, State Savings Bank, Columbus, Ohio Officers JAMIE J. JACKSON, President GERALD M. CZARNECKI, Vice President The members of the Thrift Institutions Advi- unions, savings and loan associations, and sory Council met with the Board of Governors savings banks, consults with and advises the on February 25, May 24, September 13, and Board on issues pertaining to the thrift November 15, 1988. The council, which industry 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

248 Directories and Meetings Officers of Federal Reserve Banks, Branches, and Offices December 31,1988! BANK, Chairman2 President Vice President Branch, ox facility Deputy Chairman First Vice President in charge of Branch BOSTON3 George N. Frank E. Morris Hatsopoulos Robert W. Richard N. Cooper Eisenmenger NEW YORK3.... John R. Opel E. Gerald Corrigan Ellen V. Futter James H. Oltman Buffalo Mary Ann Lambertsen John T. Keane PHILADELPHIA Nevius M. Curtis Edward G. Boehne Peter A. Benoliel William H. Stone, Jr. CLEVELAND3.. Charles W. Parry W. Lee Hoskins John R. Miller William H. Hendricks Cincinnati Owen B.Butler Charles A. Cerino4 Pittsburgh James E. Haas Harold J. Swart4 RICHMOND3... Robert A. Georgine Robert P. Black Hanne M. Merriman Jimmie R. Monhollon Baltimore Thomas R. Shelton Robert D. McTeer, Jr.4 G. Alex Bernhardt Albert D. Charlotte Tinkelenberg4 JohnG. Stoides4 Culpeper Bradley Currey, Jr. Robert P. Forrestal ATLANTA Larry L. Prince Jack Guynn Delmar Harrison 4 Roy D. Terry FredR.Herr4 Birmingham E.William Nash, Jr. James D. Hawkins4 Jacksonville Sue McCourt Cobb James T. Curry, III Miami Condon S. Bush Donald E. Nelson Nashville Sharon A. Perlis Robert J. Musso New Orleans Robert J. Day Silas Keehn CHICAGO3 Marcus Alexis Daniel M. Doyle Richard T. Lindgren Roby L.Sloan4 Detroit Robert L. Virgil, Jr. Thomas C. Melzer ST. LOUIS H. Edwin Trusheim James R. Bowen James R. Rodgers John F. Breen Little Rock Lois H. Gray Howard Wells Louisville Sandra B. Sanderson Paul I. Black, Jr. Memphis Michael W.Wright Gary H. Stern John A. Rollwagen Thomas E. Gainor MINNEAPOLIS . Marcia S. Anderson Robert F.McNellis Helena Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 249 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 Fred W. Lyons, Jr. Henry R. Czerwinski Denver James C. Wilson Kent M. Scott Oklahoma City Patience S. Latting David J. France Omaha Kenneth L. Morrison Harold L. Shewmaker DALLAS Bobby R. Inman Robert H. Boykin Tony J. Salvaggio4 Hugh G. Robinson William H. Wallace El Paso Peyton Yates Sammie C. Clay Houston Walter M. Mischer, Jr. Robert Smith in 4 San Antonio Robert F. McDermott Thomas H. Robertson SAN FRANCISCO Robert F. Erburu Robert T. Parry John F. Hoover4 Carolyn S. Carl E. Powell Chambers Los Angeles Richard C. Seaver Thomas C. Warren5 Portland Paul E. Bragdon Angelo S. Carella 4 Salt Lake City Don M. Wheeler E. Ronald Liggett4 Seattle Carol A. Nygren Gerald R. Kelly 4 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 statute, Charleston, West Virginia; Des Moines, Iowa; Indianaposerves 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 On November 3, 1987, the Conference elected Gary H. Stern, President of the Fed- The Chairmen of the Federal Reserve Banks eral Reserve Bank of Minneapolis, as its are organized into the Conference of Chair- Chairman for 1988, and Robert P. Forrestal, men, which meets to consider matters of President of the Federal Reserve Bank of common interest and to consult with, and Atlanta, as its Vice Chairman. The Conferadvise, the Board of Governors. Such meet- ence appointed Carolyn A. Verret, of the ings, attended also by the deputy chairmen, Federal Reserve Bank of Minneapolis, as its were held in Washington on June 1 and 2 and Secretary, and Christopher G. Brown, of the November 30 and December 1, 1988. Federal Reserve Bank of Atlanta, as its The Executive Committee of the Confer- Assistant Secretary. ence of Chairmen during 1988 comprised Robert J. Day, Chairman; Robert F. Erburu, Vice Chairman; and John R. Opel, member. Conference of First On December 1, 1988, the Conference Vice Presidents elected its Executive Committee for 1989, naming Robert F. Erburu as Chairman, The Conference of First Vice Presidents of Bradley Currey, Jr. as Vice Chairman, and the Federal Reserve Banks was organized in Peter A. Benoliel as the other member. 1969 to meet periodically for the consideration of operations and other matters. On November 20, 1987, the Conference Conference of Presidents elected Thomas E. Gainor, First Vice President of the Federal Reserve Bank of Minne- The presidents of the Federal Reserve Banks apolis, as its Chairman for 1988, and Jack are organized into the Conference of Presi- Guynn, First Vice President of the Federal dents, which meets periodically to consider Reserve Bank of Atlanta, as its Vice Chairmatters of common interest and to consult man. The Conference appointed Carolyn A. with, and advise, the Board of Governors. Verret, of the Federal Reserve Bank of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

250 Directories and Meetings Minneapolis, as its Secretary, and Christo- For the name of the chairman and deputy pher G. Brown, of the Federal Reserve Bank chairman of the board of directors of each of Atlanta, as its Assistant Secretary. Reserve Bank and of the chairman of each Branch, see the preceding table, "Officers of Federal Reserve Banks, Branches, and Directors Offices." The following list of directors of Federal Reserve Banks and Branches shows for each director the class of directorship, the principal business affiliation, and the date the term expires. Each Federal Reserve Bank has nine members on its board of directors: three Class A and three Class B directors, who are elected by the stockholding member banks, and three Class C directors, who are appointed by the Board of Governors of the Federal Reserve System. Directors are chosen without discrimination as to race, creed, color, sex, or national origin. Class A directors represent the stockholding member banks in each Federal Reserve District. Class B and Class C directors represent the public and are chosen with due, but not exclusive, consideration to the interests of agriculture, commerce, industry, services, labor, and consumers; they may not be officers, directors, or employees of any bank or bank holding company. In addition, Class C directors may not be stockholders of any bank or bank holding company. For the election of Class A and Class B directors, the Board of Governors classifies the member banks of each Federal Reserve District into three groups. Each group, which comprises banks with similar capitalization, elects one Class A director and one Class B director. The Board of Governors designates one Class C director as chairman of the board of directors and Federal Reserve Agent of each District Bank and appoints another Class C director as deputy chairman. Federal Reserve Branches have either five or seven directors, a majority of whom are appointed by the parent Federal Reserve Bank; the others are appointed by the Board of Governors. One of the directors appointed by the Board is designated annually as chairman of the board of that Branch in a manner prescribed by the parent Federal Reserve Bank. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 251 Term expires Dec. 31 District 1-BOSTON Class A William C. Bullock, Jr Former Chairman, Merrill/Northstar, Bangor, 1988 Maine Joel B. Alvord Chairman and Chief Executive Officer, Shawmut 1989 National Corporation, Hartford, Connecticut Richard D. Wardell President and Chief Executive Officer, National 1990 Iron Bank of Salisbury, Salisbury, Connecticut Class B Matina S. Horner President, Radcliffe College, Cambridge, 1988 Massachusetts Richard M. Oster President and Chief Executive Officer, Cookson 1989 America, Inc., Providence, Rhode Island Stephen R. Levy Chairman and Chief Executive Officer, Bolt 1990 Beranek and Newman, Inc., Cambridge, Massachusetts Class C George N. Hatsopoulos Chairman of the Board and President, Thermo 1988 Electron Corporation, Waltham, Massachusetts Richard N. Cooper Maurits C. Boas Professor of International 1989 Economics, Harvard University, Cambridge, Massachusetts Richard L. Taylor President, Taylor Properties, Inc., Boston, 1990 Massachusetts District 2-NEW YORK Class A John F. McGillicuddy Chairman of the Board and Chief Executive 1988 Officer, Manufacturers Hanover Trust Company, New York, New York Alberto M. Paracchini Chairman of the Board and President, Banco de 1989 Ponce, Ponce, Puerto Rico J. Kirby Fowler President and Chief Executive Officer, The 1990 Flemington National Bank and Trust Company, Flemington, New Jersey Class B Richard L. Gelb Chairman and Chief Executive Officer, Bristol- 1988 Myers Company, New York, New York John A. Georges Chairman and Chief Executive Officer, 1989 International Paper Company, New York, New York Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

252 Directories and Meetings Term expires Dec. 31 John F. Welch, Jr Chairman and Chief Executive Officer, GE, 1990 Fairfield, Connecticut Class C Maurice R. Greenberg President and Chief Executive Officer, American 1988 International Group, Inc., New York, New York John R. Opel Chairman of the Executive Committee, 1989 International Business Machines Corporation, Armonk, New York Ellen V. Futter President, Barnard College, Columbia 1990 University, New York, New York BUFFALO BRANCH Appointed by the Federal Reserve Bank R. Carlos Carballada President and Chief Executive Officer, Central 1988 Trust Company, Rochester, New York Donald I. Wickham President, Tri-Way Farms, Inc., Stanley, 1988 New York Harry J. Sullivan President, Salamanca Trust Company, 1989 Salamanca, New York Norman W. Sinclair President and Chief Executive Officer, Lockport 1990 Savings Bank, Lockport, New York Appointed by the Board of Governors Mary Ann Lambertsen Vice President, Human Resources, The Quaker 1988 Oats Company, Fisher-Price Division, East Aurora, New York Matthew Augustine President and Chief Executive Officer, Eltrex 1989 Industries, Inc., Rochester, New York Paul E. McSweeney Executive Vice President, United Food and 1990 Commercial Workers, District Union Local One, AFL-CIO, Amherst, New York District 3 - PHILADELPHIA Class A Clarence D. McCormick President, Farmers and Merchants National 1988 Bank, Bridgeton, New Jersey George A. Butler Chairman and Chief Executive Officer, First 1989 Pennsylvania Bank, N.A., Philadelphia, Pennsylvania Constantinos I. Costalas Chief Executive Officer, Glendale National Bank 1990 of New Jersey, Voorhees, New Jersey Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 253 Term expires Dec. 31 Class B Nicholas Riso Executive Vice President, AHOLD, U.S.A., 1988 Harrisburg, Pennsylvania Carl E. Singley Partner, White, McClelland, and Singley, 1989 Philadelphia, Pennsylvania Charles F. Seymour Chairman, Jackson-Cross Company, 1990 Philadelphia, Pennsylvania Class C NeviusM. Curtis Chairman and Chief Executive Officer, 1988 Delmarva Power, Wilmington, Delaware Peter A. Benoliel Chairman of the Board, Quaker Chemical 1989 Corporation, Conshohocken, Pennsylvania Jane G. Pepper President, The Pennsylvania Horticultural 1990 Society, Philadelphia, Pennsylvania District 4-CLEVELAND Class A William A. Stroud Chairman and Chief Executive Officer, 1988 First-Knox Bane Corporation, Mount Vernon, Ohio Frank Wobst Chairman and Chief Executive Officer, 1989 Huntington Bancshares Incorporated, Columbus, Ohio William H. May Chairman and President, First National Bank of 1990 Nelsonville, Nelsonville, Ohio Class B Daniel M. Galbreath President, John W. Galbreath and Company, 1988 Columbus, Ohio Laban P. Jackson, Jr Chairman of the Board, International Spike, 1989 Inc., Lexington, Kentucky Verna K. Gibson President, The Limited Stores, Inc., Columbus, 1990 Ohio Class C John R. Miller Former President and Chief Operating Officer, 1988 The Standard Oil Company (Ohio), Cleveland, Ohio Charles W. Parry Director and Retired Chairman and Chief 1989 Executive Officer, Aluminum Company of America, Pittsburgh, Pennsylvania Robert D. Storey Partner, Burke, Haber, and Berick, Cleveland, 1990 Ohio Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

254 Directories and Meetings Term expires Dec. 31 CINCINNATI BRANCH Appointed by the Federal Reserve Bank Robert A. Hodson President and Chief Executive Officer, 1st 1988 Security Bank, Hillsboro, Ohio Robert M. Duncan President, First National Bank of Louisa, 1989 Louisa, Kentucky Jack W. Buchanan President, Sphar and Company, Inc., 1990 Winchester, Kentucky Jerry L.Kirby Chairman of the Board, President, and Chief 1990 Executive Officer, Citizens Federal Savings and Loan Association, Dayton, Ohio Appointed by the Board of Governors Kate Ireland National Chairman, Frontier Nursing Service, 1988 Wendover, Kentucky Owen B. Butler Chairman of the Board (Retired), The Procter 1989 and Gamble Company, Cincinnati, Ohio Marvin Rosenberg Partner, Towne Properties, Ltd., Cincinnati, 1990 Ohio PITTSBURGH BRANCH Appointed by the Federal Reserve Bank Lawrence F. Klima President, The First National Bank of 1988 Pennsylvania, Erie, Pennsylvania Thomas G. Dove Chairman of the Executive Committee and Chief 1989 Executive Officer, Wheeling Dollar Bank, Wheeling, West Virginia George A. Davidson, Jr Chairman and Chief Executive Officer, 1990 Consolidated Natural Gas Company, Pittsburgh, Pennsylvania Stephen C. Hansen President and Chief Executive Officer, Dollar 1990 Bank, F.S.B., Pittsburgh, Pennsylvania Appointed by the Board of Governors James E. Haas President and Chief Operating Officer, National 1988 Intergroup, Inc., Pittsburgh, Pennsylvania Karl M. von der Hey den Senior Vice President-Finance, and Chief 1989 Financial Officer, H. J. Heinz Company, Pittsburgh, Pennsylvania Milton A. Washington President and Chief Executive Officer, 1990 Allegheny Housing Rehabilitation Corporation, Pittsburgh, Pennsylvania Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 255 Term expires Dec. 31 District 5-RICHMOND Class A K. Donald Menefee Chairman of the Board and Chief Executive 1988 Officer, Madison National Bank, and Chairman of the Board and President, James Madison Limited, Washington, D.C. Chester A. Duke President and Chief Executive Officer, Marion 1989 National Bank, Marion, South Carolina John F. McNair III President and Chief Executive Officer, 1990 Wachovia Bank and Trust Company, N. A. and The Wachovia Corporation, Winston-Salem, North Carolina Class B Edward H. Covell President, The Covell Company, Easton, 1988 Maryland Thomas B. Cookerly President, Broadcast Division, Allbritton 1989 Communications, Washington, D.C. JackC. Smith Chairman ofthe Board and Chief Executive 1990 Officer, K-VA-T Food Stores, Inc., Grundy, Virginia Class C Robert A. Georgine President, Building and Construction Trades 1988 Department, AFL-CIO, Washington, D.C. Leroy T. Canoles, Jr President, Kaufman and Canoles, Norfolk, 1989 Virginia Hanne M. Merriman President and Chief Executive Officer, 1990 Honeybee, Inc., New York, New York BALTIMORE BRANCH Appointed by the Federal Reserve Bank H. Grant Hathaway Chairman ofthe Board, Equitable Bank, N. A., 1988 Baltimore, Maryland Joseph W. Mosmiller Chairman of the Board, Loyola Federal Savings 1988 and Loan Association, Baltimore, Maryland Charles W. Hoff III President and Chief Executive Officer, Farmers 1989 and Mechanics National Bank, Frederick, Maryland Raymond V. Haysbert, Sr. ... President and Chief Executive Officer, Parks 1990 Sausage Company, Baltimore, Maryland Appointed by the Board of Governors Thomas R. Shelton President, Case Foods, Inc., Salisbury, 1988 Maryland Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

256 Directories and Meetings Term expires Dec. 31 John R. Hardesty, Jr President, Preston Energy, Inc., Kingwood, 1989 West Virginia Gloria L. Johnson Deputy Director of Administration, The 1990 Baltimore Museum of Art, Baltimore, Maryland CHARLOTTE BRANCH Appointed by the Federal Reserve Bank J. Donald Collier President and Chief Executive Officer, 1988 Orangeburg National Bank, Orangeburg, South Carolina James G. Lindley Chairman and Chief Executive Officer, South 1988 Carolina National Corporation, and Chairman, President and Chief Executive Officer, The South Carolina National Bank, Columbia, South Carolina John A. Hardin Chairman of the Board and President, First 1989 Federal Savings Bank, Rock Hill, South Carolina James M. Culberson, Jr Chairman and President, The First National 1990 Bank of Randolph County, Asheboro, North Carolina Appointed by the Board of Governors G. Alex Bernhardt President, Bernhardt Industries, Inc., Lenoir, 1988 North Carolina Anne M. Allen Vice President, Allen Construction Company, 1989 Greensboro, North Carolina William E. Masters President, Perception, Inc., Easley, South 1990 Carolina District 6 -ATLANTA Class A Virgil H. Moore, Jr Chairman and Chief Executive Officer, First 1988 Farmers and Merchants National Bank, Columbia, Tennessee Mary W. Walker Vice Chairman, The National Bank of Walton 1989 County, Monroe, Georgia E. B. Robinson, Jr Chairman and Chief Executive Officer, Deposit 1990 Guaranty National Bank and Deposit Guaranty Corporation, Jackson, Mississippi Class B Bernard F. Sliger President, Florida State University, Tallahassee, 1988 Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 257 Term expires Dec. 31 Paul W. Green President and Chief Executive Officer, American 1989 Cast Iron Pipe Company, Birmingham, Alabama Gary J. Chouest President, Edison Chouest Offshore, Inc., 1990 Galliano, Louisiana Class C Larry L. Prince President and Chief Operating Officer, Genuine 1988 Parts Company, Atlanta, Georgia Bradley Currey, Jr President, Rock-Tenn Company, Norcross, 1989 Georgia Edwin A. Huston Senior Executive Vice President-Finance, Ryder 1990 System, Inc., Miami, Florida BIRMINGHAM BRANCH Appointed by the Federal Reserve Bank William F. Childress President, First American Federal Savings and 1988 Loan Association, Huntsville, Alabama Milton A. Wendland Owner-Operator, Autauga Farming Company, 1988 Autaugaville, Alabama John H. Newman, Jr President and Chief Executive Officer, First 1989 National Bank of Scottsboro, Scottsboro, Alabama Harry B. Brock, Jr Chairman and Chief Executive Officer, Central 1990 Bank of the South, Birmingham, Alabama Appointed by the Board of Governors Roy D. Terry President and Chief Executive Officer, Terry 1988 Manufacturing Company, Inc., Roanoke, Alabama Nelda P. Stephenson President, Nelda Stephenson Chevrolet, Inc., 1989 Florence, Alabama A. G. Trammell President, Alabama Labor Council, AFL-CIO, 1990 Birmingham, Alabama JACKSONVILLE BRANCH Appointed by the Federal Reserve Bank Robert R. Deison Chairman of the Board and President, Andrew 1988 Jackson State Savings and Loan Association, Tallahassee, Florida George W. Gibbs III President, Atlantic Dry Dock Corporation, 1988 Jacksonville, Florida A. Bronson Thayer Chairman and Chief Executive Officer, First 1989 Florida Banks, Inc., Tampa, Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

258 Directories and Meetings Term expires Dec. 31 Buell G. Duncan, Jr Chairman, President, and Chief Executive 1990 Officer, Sun Bank, N.A., Orlando, Florida Appointed by the Board of Governors E. William Nash, Jr President, South-Central Operations, The 1988 Prudential Insurance Company of America, Jacksonville, Florida Saundra H. Gray Co-Owner, Gemini Springs Farm, DeBary, 1989 Florida Winnie F. Taylor Professor of Law, University of Florida, 1990 Gainesville, Florida MIAMI BRANCH Appointed by the Federal Reserve Bank WilliamH. Losner President and Chief Executive Officer, The First 1988 National Bank of Homestead, Homestead, Florida James H. Robinson President, Sun Bank/South Florida, N. A., Fort 1989 Lauderdale, Florida Robert M. Taylor Chairman and Chief Executive Officer, 1990 The Mariner Group, Inc., Fort Myers, Florida Frederick A. Teed President and Chief Executive Officer, 1990 Community Savings, F.A., Riviera Beach, Florida Appointed by the Board of Governors Sue McCourt Cobb Attorney, Greenberg, Traurig, Askew, 1988 Hoffman, Lipoff, Rosen, and Quentel, PA., Miami, Florida Jose L. Saumat Chairman, Kaufman and Roberts, Inc., Miami, 1989 Florida Robert D. Apelgren President, Apelgren Corporation, Pahokee, 1990 Florida NASHVILLE BRANCH Appointed by the Federal Reserve Bank W. L. Calloway, Jr Chairman, Quality Lawn Systems, Inc., 1988 Nashville, Tennessee Shirley A. Zeitlin President, Shirley Zeitlin and Company 1981 Realtors, Nashville, Tennessee James A. Rainey Chairman, Sovran Financial Corporation/ 198 Central South, Nashville, Tennessee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 259 Term expires Dec. 31 Lawrence A. Roseberry Chairman, First National Bank and Trust 1990 Company, Chairman and Chief Executive Officer, First Franklin Bancshares, Inc., Athens, Tennessee Appointed by the Board of Governors Condon S. Bush President, Bush Brothers and Company, 1988 Dandridge, Tennessee Patsy R. Williams Partner, Rhyne Lumber Company, Newport, 1989 Tennessee Victoria B. Jackson President and Chief Executive Officer, Diesel 1990 Sales and Service, Inc. and Prodiesel, Inc., Nashville, Tennessee NEW ORLEANS BRANCH Appointed by the Federal Reserve Bank Robert M. Shofstahl President and Chief Executive Officer, Pelican 1988 Homestead and Savings Association, Metairie, Louisiana Alan R. Barton President and Chief Executive Officer, 1988 Mississippi Power Company, Gulfport, Mississippi Robert S. Gaddis President and Chief Executive Officer, 1989 Trustmark National Bank, Laurel, Mississippi Ronald M. Boudreaux President and Chief Executive Officer, First 1990 National Bank of St. Landry Parish, Opelousas, Louisiana Appointed by the Board of Governors Sharon A. Perlis President, Sharon A. Perlis, (APLC), Metairie, 1988 Louisiana James A. Hefner President, Jackson State University, Jackson, 1989 Mississippi Caroline G. Theus President, Ingle wood Land and Development 1990 Company, Alexandria, Louisiana District 7-CHICAGO Class A John W. Gabbert President and Chief Executive Officer, First of 1988 America Bank-LaPorte, N.A., LaPorte, Indiana B. F. Backlund Chairman and Chief Executive Officer, 1989 Bartonville Bank, Bartonville, Illinois Barry F. Sullivan Chairman of the Board, First Chicago 1990 Corporation, Chicago, Illinois Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

260 Directories and Meetings Term expires Dec. 31 Class B Max J. Naylor Farmer, Jefferson, Iowa 1988 PaulJ. Schierl Chairman of the Board and Chief Executive 1989 Officer, Fort Howard Corporation, Green Bay, Wisconsin Edward D. Powers Chairman of the Board and Chief Executive 1990 Officer, Mueller Company, Decatur, Illinois Class C Charles S. McNeer Chairman of the Board and Chief Executive 1988 Officer, Wisconsin Energy Corporation, Milwaukee, Wisconsin Robert J. Day Chairman and Chief Executive Officer, 1989 USG Corporation, Chicago, Illinois Marcus Alexis Dean, College of Business Administration, 1990 University of Illinois at Chicago, Chicago, Illinois DETROIT BRANCH Appointed by the Federal Reserve Bank Donald R. Mandich Chairman and Chief Executive Officer, 1988 Comerica Bank-Detroit, Detroit, Michigan Ronald D. Story Chairman and President, The Ionia County 1989 National Bank of Ionia, Ionia, Michigan James A. Aliber Chairman of the Board and Chief Executive 1990 Officer, First Federal of Michigan, Detroit, Michigan Frederik G. H. Meijer Chairman of the Board, Meijer, Incorporated, 1990 Grand Rapids, Michigan Appointed by the Board of Governors Phyllis E. Peters Director, Professional Standards Review, 1988 Touche Ross and Company, Detroit, Michigan Richard T. Lindgren Former President and Chief Executive Officer, 1989 Cross and Trecker Corporation, Bloomfield Hills, Michigan Beverly Beltaire President, P R Associates, Inc., Detroit, 199( Michigan District 8-ST. LOUIS Class A Vacancy 19' Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 261 Term expires Dec. 31 David W. Kemper II Chairman and Chief Executive Officer, 1989 Commerce Bank of St. Louis, N.A., Clayton, Missouri, and President and Chief Executive Officer, CommerceBancshares, Inc., Kansas City, Missouri H. L. Hembree III Chairman of the Executive Committee, 1990 Merchants National Bank, Fort Smith, Arkansas Class B Robert J. Sweeney Consultant, Murphy Oil Corporation, El 1988 Dorado, Arkansas Frank M. Mitchener, Jr President, Mitchener Farms, Inc., Sumner, 1989 Mississippi Roger W. Schipke Senior Vice President, GE Appliances, GE, 1990 Louisville, Kentucky Class C Robert L. Virgil, Jr Dean, John M. Olin School of Business, 1988 Washington University in St. Louis, St. Louis, Missouri H. Edwin Trusheim Chairman and Chief Executive Officer, General 1989 American Life Insurance Company, St. Louis, Missouri Janet McAfee Weakley President, Janet McAfee, Inc., Clayton, 1990 Missouri LITTLE ROCK BRANCH Appointed by the Federal Reserve Bank Robert C. Connor, Jr President, Union National Bank of Little Rock, 1988 Little Rock, Arkansas Patricia M. Townsend President, Townsend Company, Stuttgart, 1989 Arkansas David Armbruster President, First America Federal Savings Bank, 1990 Fort Smith, Arkansas W. Wayne Hartsfield President and Chief Executive Officer, First 1990 National Bank, Searcy, Arkansas Appointed by the Board of Governors James R. Rodgers Airport Manager, Little Rock Regional Airport, 1988 Little Rock, Arkansas L. Dickson Flake President, Barnes, Quinn, Flake, and Anderson, 1989 Inc., Little Rock, Arkansas William E. Love President, Sound-Craft Systems, Inc., 1990 Morrilton, Arkansas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

262 Directories and Meetings Term expires Dec. 31 LOUISVILLE BRANCH Appointed by the Federal Reserve Bank Allan S. Hanks Director, The Anderson National Bank, 1988 Lawrenceburg, Kentucky Morton Boyd President, First Kentucky National Corporation, 1989 Louisville, Kentucky Irving W. Bailey II President and Chief Operating Officer, 1990 Capital Holding Corporation, Louisville, Kentucky Wayne G. Overall, Jr President, First Federal Savings Bank, 1990 Elizabethtown, Kentucky Appointed by the Board of Governors Lois H. Gray Chairman of the Board, James N. Gray 1988 Construction Company, Inc., Glasgow, Kentucky Thomas A. Alvey Delegate, Owensboro Council of Labor, 1989 Owensboro, Kentucky Raymond M. Burse President, Kentucky State University, Frankfort, 1990 Kentucky MEMPHIS BRANCH Appointed by the Federal Reserve Bank William H. Brandon, Jr President, First National Bank of Phillips 1988 County, Helena, Arkansas Michael J. Hennessey President, Munro and Company, Inc., Wynne, 1989 Arkansas Thomas M. Garrott President and Chief Operating Officer, 1990 National Bank of Commerce and National Commerce Bancorporation, Memphis, Tennessee Larry A. Watson Chairman of the Board and President, Liberty 1990 Federal Savings Bank, Paris, Tennessee Appointed by the Board of Governors Katherine Hinds Smythe President, Memorial Park, Inc., Memphis, 1988 Tennessee Sandra B. Sanderson President and Chief Executive Officer, 1989 Sanderson Plumbing Products, Inc., Columbus, Mississippi Seymour B. Johnson Owner, Kay Planting Company, Indianola, 1990 Mississippi Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 263 Term expires Dec. 31 District 9 - MINNEAPOLIS Class A Duane W. Ring President, Norwest Bank La Crosse, N. A., La 1988 Crosse, Wisconsin Charles W. Ekstrum President and Chief Executive Officer, First 1989 National Bank, Philip, South Dakota Joel S. Harris President, Yellowstone Holding Company, 1990 Columbus, Montana Class B Richard L. Falconer District Manager-Finance, U.S. West 1988 Communications, Minneapolis, Minnesota Bruce C. Adams Partner, Triple Adams Farms, Lansford, North 1989 Dakota Earl R. St. John, Jr President and Owner, St. John Forest Products, 1990 Inc., Spalding, Michigan Class C John A. Rollwagen Chairman and Chief Executive Officer, 1988 Cray Research Inc., Minneapolis, Minnesota Michael W. Wright Chairman, President, and Chief Executive 1989 Officer, Super Valu Stores, Inc., Minneapolis, Minnesota Delbert W. Johnson President and Chief Executive Officer, 1990 Pioneer/Norelkote, Minneapolis, Minnesota HELENA BRANCH Appointed by the Federal Reserve Bank Noble E. Vosburg President and Chief Executive Officer, Pacific 1988 Hide and Fur Corporation, Great Falls, Montana Robert H. Waller President and Chief Executive Officer, First 1988 Interstate Bank of Billings, N.A., Billings, Montana F. Charles Mercord President and Managing Officer, First Federal 1989 Savings Bank of Montana, Kalispell, Montana Appointed by the Board of Governors Marcia S. Anderson President, Bridger Canyon Stallion Station, Inc., 1988 Bozeman, Montana Warren H. Ross President, Ross 8-7 Ranch, Inc., Chinook, 1989 Montana Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

264 Directories and Meetings Term expires Dec. 31 District 10-KANSAS CITY Class A Robert L. Hollis Chairman ofthe Board and Chief Executive 1988 Officer, First National Bank and Trust Company, Okmulgee, Oklahoma Harold L. Gerhart, Jr President and Chief Executive Officer, First 1989 National Bank, Newman Grove, Nebraska Roger L. Reisher Co-Chairman, FirstBank Holding Company of 1990 Colorado, Lake wood, Colorado Class B Jerry D. Geist Chairman and President, Public Service 1988 Company of New Mexico, Albuquerque, New Mexico Richard D. Harrison Chairman and Chief Executive Officer, Fleming 1989 Companies, Inc., Oklahoma City, Oklahoma S. Dean Evans, Sr Partner, Evans Grain Company, Salina, Kansas 1990 Class C Irvine O. Hockaday, Jr President and Chief Executive Officer, Hallmark 1988 Cards, Inc., Kansas City, Missouri Fred W. Lyons, Jr President and Chief Executive Officer, Marion 1989 Laboratories, Inc., Kansas City, Missouri Thomas E. Rodriguez President and General Manager, Thomas E. 1990 Rodriguez and Associates, P.C., Aurora, Colorado DENVERBRANCH Appointed by the Federal Reserve Bank George S. Jenks President and Chief Executive Officer, Sunwest 1988 Financial Services, Inc., Albuquerque, New Mexico W. Richard Scarlett III President, Jackson State Bank, Jackson Hole, 1988 Wyoming Henry A. True III Partner, True Companies, Casper, Wyoming 1989 Junius F. Baxter Chairman of the Board and Chief Executive 1990 Officer, Bank Western, a Federal Savings Bank, Denver, Colorado Appointed by the Board of Governors Anthony W. Williams Attorney, Williams, Turner, & Holmes, PC., 1988 Grand Junction, Colorado James C. Wilson Management Consultant, Longmont, Colorado 1989 Gilbert Sanchez President, New Mexico Highlands University, 199C Las Vegas, New Mexico Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 265 Term expires Dec. 31 OKLAHOMA CITY BRANCH Appointed by the Federal Reserve Bank William O. Alexander Chairman, Continental Federal Savings and 1988 Loan Association, Oklahoma City, Oklahoma W. Dean Hidy Chairman of the Board, Triad Bank, N. A., 1988 Tulsa, Oklahoma WilliamH. Crawford Chairman and Chief Executive Officer, First 1989 National Bank and Trust Company, Frederick, Oklahoma Appointed by the Board of Governors John F. Snodgrass President and Trustee, The Samuel Roberts 1988 Noble Foundation, Inc., Ardmore, Oklahoma PatienceS. Latting Oklahoma City, Oklahoma 1989 OMAHA BRANCH Appointed by the Federal Reserve Bank John R. Cochran President and Chief Executive Officer, Norwest 1988 Bank Nebraska, N.A., Omaha, Nebraska John T. Selzer President, Scottsbluff National Bank and Trust 1989 Company, Scottsbluff, Nebraska Charles H. Thorne Chairman of the Board, First Federal Savings 1989 and Loan Association of Lincoln, Lincoln, Nebraska Appointed by the Board of Governors Janice D. Stoney President and Chief Executive Officer, 1988 Northwestern Bell Telephone Company, Omaha, Nebraska Kenneth L. Morrison President, Morrison Enterprises, Hastings, 1989 Nebraska District 11-DALLAS Class A Charles T. Doyle Chairman and Chief Executive Officer, Gulf 1988 National Bank, Texas City, Texas Robert G. Greer Chairman of the Board, Tanglewood Bank, 1989 N.A., Houston, Texas T. C. Frost Chairman of the Board, The Frost National 1990 Bank, San Antonio, Texas Class B Robert Ted Enloe III President, Lomas and Nettleton Financial 1988 Corporation, Dallas, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

266 Directories and Meetings Term expires Dec. 31 Gary E. Wood President, Texas Research League, Austin, 1989 Texas Robert L. Pfluger Rancher, San Angelo, Texas 1990 Class C Hugh G. Robinson President, Cityplace Development Corporation, 1988 Dallas, Texas Leo E. Linbeck, Jr Chairman and Chief Executive Officer, Linbeck 1989 Construction Corporation, Houston, Texas Bobby R. Inman Chairman of the Board and Chief Executive 1990 Officer, Westmark Systems Inc., Austin, Texas ELPASO BRANCH Appointed by the Federal Reserve Bank Humberto F. Sambrano Partner, Urban General Contractors, Inc., 1988 El Paso, Texas David L. Stone President, The Portales National Bank, Portales, 1989 New Mexico Henry B. Ellis President and Chief Credit Officer, MBank 1990 El Paso, N.A., El Paso, Texas Ethel Ortega Olson Owner, NAMBE of Ruidoso, Ruidoso, 1990 New Mexico Appointed by the Board of Governors Peyton Yates President, Yates Drilling Company, Artesia, 1988 New Mexico Vacancy 1989 DianaS. Natalicio President, The University of Texas at El Paso, 1990 El Paso, Texas HOUSTON BRANCH Appointed by the Federal Reserve Bank Jeff Austin, Jr President, First National Bank of Jacksonville, 1988 Jacksonville, Texas Jenard M. Gross President, Gross Builders, Inc., Houston, Texas 1989 Clive Runnells President and Director, Runnells Cattle 1990 Company, Bay City, Texas David E. Sheffield Vice Chairman, Texas National Bank of 1990 Victoria, Victoria, Texas Appointed by the Board of Governors Gilbert D. Gaedcke, Jr Chairman of the Board and Chief Executive 1988 Officer, Gaedcke Equipment Company, Houston, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 267 Term expires Dec. 31 Walter M. Mischer, Jr President and Chief Operating Officer, The 1989 Mischer Corporation, Houston, Texas Andrew L. Jefferson, Jr Attorney, Jefferson and Mims, Houston, 1990 Texas SAN ANTONIO BRANCH Appointed by the Federal Reserve Bank Jane Flato Smith Investor and Rancher, San Antonio, Texas 1988 C. Ivan Wilson Chairman of the Board and Chief Executive 1989 Officer, First City Bank of Corpus Christi, Corpus Christi, Texas Robert T. Rork Regional Chairman, NCNB Texas, Dallas, 1990 Texas Sam R. Sparks President, Sam R. Sparks, Inc., Progreso, Texas 1990 Appointed by the Board of Governors Robert F. McDermott Chairman of the Board and President, United 1988 Services Automobile Association, San Antonio, Texas Lawrence E. Jenkins Vice President (Retired), Austin Division, 1989 Lockheed Missiles & Space Co., Inc., Austin, Texas Ruben M. Garcia Chief Executive Officer, Modern Machine Shop, 1990 Inc., Laredo, Texas District 12-SAN FRANCISCO Class A Spencer F. Eccles Chairman and Chief Executive Officer, 1988 First Security Corporation, Salt Lake City, Utah Rayburn S. Dezember Chairman of the Board and Chief Executive 1989 Officer, Central Pacific Corporation, and Chairman, American National Bank, Bakersfield, California R. Blair Hawkes President and Chief Executive Officer, Ireland 1990 Bank, Malad City, Idaho Class B Togo W. Tanaka Chairman, Gramercy Enterprises, Inc., 1988 Los Angeles, California John C. Hampton President and Chief Executive Officer, 1989 Willamina Lumber Company, Portland, Oregon John N. Nordstrom Co-Chairman of the Board, Nordstrom, Inc., 1990 Seattle, Washington Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

268 Directories and Meetings Term expires Dec. 31 Class C Carolyn S. Chambers President and Chief Executive Officer, 1988 Chambers Communications Corp., Eugene, Oregon Robert F. Erburu Chairman of the Board and Chief Executive 1989 Officer, The Times Mirror Company, Los Angeles, California Cordell W. Hull Executive Vice President and Director, Bechtel 1990 Group, Inc., San Francisco, California LOS ANGELES BRANCH Appointed by the Federal Reserve Bank Howard C. McCrady Vice Chairman, Valley National Corporation, 1988 Phoenix, Arizona William L. Tooley Chairman, Tooley and Company, Investment 1988 Builders, Los Angeles, California Fred D. Jensen Chairman of the Board, President, and Chief 1989 Executive Officer, National Bank of Long Beach, Long Beach, California Ross M. Blakely Chairman of the Executive Committee of the 1990 Board, Coast Savings and Loan, Los Angeles, California Appointed by the Board of Governors Thomas R. Brown, Jr Chairman of the Board, Burr-Brown 1988 Corporation, Tucson, Arizona Yvonne Brathwaite Burke .... Partner, Jones, Day, Reavis and Pogue, Los 1989 Angeles, California Richard C. Seaver Chairman, Hydril Company, Los Angeles, 1990 California PORTLAND BRANCH Appointed by the Federal Reserve Bank Stuart H. Compton Chairman and Chief Executive Officer, Pioneer 1988 Trust Bank, N.A., Salem, Oregon Wayne E. Phillips, Jr Vice President, Phillips Ranch, Inc., Baker, 1989 Oregon Stephen G. Kimball President and Chief Executive Officer, 1990 Baker Boyer Bancorp, Walla Walla, Washington G. Dale Weight Chairman of the Board and Chief Executive 1990 Officer, Benjamin Franklin Savings and Loan Association, Portland, Oregon Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 269 Term expires Dec. 31 Appointed by the Board of Governors G. Johnny Parks Former Northwest Regional Director, 1988 International Longshoremen's and Warehousemen's Union, Portland, Oregon Paul E. Bragdon Assistant to the Governor for Education, Office 1989 of the Governor, Salem, Oregon Sandra A. Suran Small Business Advocate, State of Oregon, 1990 Salem, Oregon SALT LAKE CITY BRANCH Appointed by the Federal Reserve Bank Gerald R. Christensen Chairman and President, First Federal Savings 1988 and Loan Association, Salt Lake City, Utah Ronald S. Hanson President, Zions First National Bank, Salt Lake 1989 City, Utah Curtis H. Eaton President and Vice Chairman of the Board, Twin 1990 Falls Bank and Trust Company, Twin Falls, Idaho Virginia P. Kelson Management Consultant in Organization 1990 Development, Salt Lake City, Utah Appointed by the Board of Governors D. N. Rose President and Chief Executive Officer, Mountain 1988 Fuel Supply Company, Salt Lake City, Utah RobertN. Pratt President and Chief Operating Officer, 1989 Bonneville Pacific Corporation, Salt Lake City, Utah Don M. Wheeler President, Wheeler Machinery Company, Salt 1990 Lake City, Utah SEATTLE BRANCH Appointed by the Federal Reserve Bank W. W. Philip Chairman and Chief Executive Officer, Puget 1988 Sound Bancorp, Tacoma, Washington H. H. Larison President, Columbia Paint and Coatings, 1989 Spokane, Washington B. R. Beeksma Chairman of the Board, InterWest Savings Bank, 1990 Oak Harbor, Washington WilliamS. Randall Chairman, President and Chief Executive 1990 Officer, First Interstate Bank of Washington, N.A., Seattle, Washington Appointed by the Board of Governors Byron I. Mallott Chief Executive Officer, Sealaska Corporation, 1988 Juneau, Alaska Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

270 Directories and Meetings Term expires Dec. 31 Carol A. Nygren Partner, Laventhol and Horwath, Seattle, 1989 Washington Irma Goertzen Hospital Administrator, University Hospital, 1990 University of Washington, Seattle, Washington 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

273 Index Acceptances, bankers {See Bankers Bank holding companies — acceptances) Continued Accounting standards, 173 Policy statement, 67-68 Adjustable-rate mortgages Stock repurchases by, 178 {See Regulations: Z) Surveillance and monitoring, 172 Agriculture Transfer agents, 172 Loans, 172-73 Unregulated practices ,153 Seasonal credit program, 68, 70, 71 Bank Holding Company Act of 1956 U.S. Department of, Packers and {See also Regulations: Y) Stockyards Administration, 150,151 Foreign investments, 179 American Bankers Association, 148 Legislative recommendations and American Institute of Certified Public litigation, 159, 163, 175 Accountants, 173 Regulation and compliance, 174-78 Anti-Drug Abuse Act of 1988, 164 Bank Holding Companies and Change in Assets and liabilities Bank Control {See Regulations: Y) Banks, by class, 227 Bank Merger Act, 175 Board of Governors, 197-202 Banking offices, changes in number, 232 Federal Reserve Banks, 206-09 Banking supervision and regulation by Audits {See Examinations, inspections, Federal Reserve System, 167-82 regulations, and audits) Bank mergers and consolidations, 233-40 Availability of funds and collection of Bank Secrecy Act, 179 checks {See Regulations: CC) Basic banking, 157 Basle Accord, 168 Basle Committee on Banking Regulations Balance of payments {See International developments, review of 1988) and Supervisory Practices, 167-68 Bank Control Act, 176 Board of Governors Bankers acceptances {See also Federal Reserve System) Authority to purchase and to enter into Cash, sources, uses, and balance repurchase agreements, 73-75 at end of 1988,197-202 Federal Reserve Banks Consumer Advisory Council Holdings, 206-09 {See Consumer Advisory Council) Bank holding companies Financial statements, 197-202 {See also Regulations: Y) Interpretations {See Interpretations) Antitrust Action, 179 Litigation, 159-62 Applications by, processing and notice of Members and officers, 242-43 Board decisions, 174-78 Policy actions {See Policy actions) Bank Merger Act, 175 Pricing of Federal Reserve services Board decisions, 175, 176, 177 {See Fees) Change in Bank Control Act, 176 Publications {See Publications) Delegation of applications, 175 Regulations {See Regulations) Enforcement, 170 Regulatory simplification, 183-84 Examination, inspection, Salaries, 213 and regulation, 169, 184 Branch banks International activities, 170, 178 Federal Reserve {See Federal Reserve Legislative recommendations, 156-57 Banks, Branches) Litigation, 159-62 Foreign branches of U. S. banking Number and assets, 169 organizations, 170, 178-179 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

274 Index California, state exemption, 144 Definitive securities, 188 Call reports (See Condition statements) Debt-equity swaps (See also Capital accounts Regulations: K), 183 Banks, by class, 222 Depository institutions Federal Reserve Banks, 205, 206, 208 Checks (See Check clearing and Check clearing and collection collection) Fees for Federal Reserve services, 66, Interest on deposits (See Interest rates) 185-96 Reserve requirements (See Regulations: D) Float (See Float) Reserves and related items, 228-31 Volume of operations, 191, 223 Services to (See Fees) Commercial banks (See also Insured Deposits commercial banks) Banks, by class, 227 Banking offices, changes in number, 232 Checks (See Check clearing and Supervision and regulation by Federal collection) Reserve System, 167-82 Federal Reserve Banks, 206-09, 228-31 Transfers of funds (See Transfers Interest rates (See Interest rates) of funds) Reserve requirements (See Reserve Commodity Credit Corporation, 8 requirements of depository Community Affairs Program, 147 institutions) Community Reinvestment Act Directors, Federal Reserve Banks and Examination under, 148, 154 Branches, list, 250-70 Testimony, 156 Discount rates at Federal Reserve Banks Competitive Equality Banking Act of 1987 (See Interest rates) (See also Expedited Funds Availability Dividends Act), 65, 168, 172, 177, 185 Federal Reserve Banks, 189, 216-17, Comptroller of the Currency, 148, 149, 163, 218-21 168, 171, 176 CompuServe, Inc., 174 Earnings of Federal Reserve Banks Condition statements of Federal Reserve (See also Federal Reserve Banks, Banks, 204-09 income and expenses), 189,214-21 Conference of State Bank Supervisors, 173 Economy in 1988, 5-11 Consumer Advisory Council, 155, 246 Business, 7, 32, 47 Consumer and community affairs, 143-58 Foreign, 20-22, 30, 46 Consumer Complaint Control System, 151 Government, 8, 33, 49 Course for Financial Institution Households, 5, 31,46 Examiners, 148 Labor markets, 9, 33, 49 Credit (See also Loans) Price developments, 10, 34, 49 Card disclosures, 146 Economic Development Equal Credit Opportunity (See Truth in Administration, 148 Lending Act) Edge and agreement corporations Mortgages, 17, 63, 144-45,146,147, Examinations, 170 165,166, 183 International activities, 170, 178, 179 Seasonal program, 68, 70, 71 Educational activities (See Training) Special purpose credit programs, 145 Education Foundation of State Bank Credit by Brokers and Dealers Supervisors, 173 (See Regulations: T) Electronic data processing, 171 Credit Practices Rule (See Regulations: A A) Electronic Funds Transfer Act Currency and coin services, 188 Compliance, 151 Currency and Foreign Transactions Economic effects, 151 Reporting Act (See Bank Secrecy Electronic funds transfer (See Transfers Act) of funds and Regulations: E) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 275 Equal Credit Opportunity Act Federal Reserve Act Compliance, 145 Examinations, 189 Regulation B (See Regulations: B) Legislative recommendations and Examinations, inspections, regulation, litigation, 163-66 and audits Provisions, 170 Bank holding companies, 169 Federal Reserve Banks Compliance, 148, 149 Assessments for expenses of Board Federal Reserve Banks, 185-96 of Governors, 199, 216-17, 218-21 International banking activities, 170, 178 Bank premises, 190, 204, 206-09, 222 Specialized, 171 Branches State member banks, 169 Bank premises, 190, 199, 222 Surveillance and Monitoring Chicago, 148 program, 169, 172 Directors, list, 250-70 Exchange Stabilization Fund, 20 St. Louis, 57 Expedited Funds Availability Act, 65-67, Vice presidents in charge, 248 143-44,157-58, 162, 184 Capital accounts, 205, 206-09 Expenses (See Income and expenses) Chairmen and deputy chairmen, 248-49 Export Trading Companies, 179 Check collection, 186-87 Coin and currency service, 188 Condition statement, 204-09 Fair Credit and Charge Card Disclosure Delegated authority, 175, 176 Act of 1988,146,165 Deposits, 205, 206-09, 231 Fair Housing Act, 158 Directors, list, 250-70 Farm Credit Administration, 150, 180 Dividends paid, 189, 216-17, 219, 221 Farmer Mac Program, 173 Examination or audit, 189 Federal Advisory Council, 245 Income and expenses, 189, 191, 192 Federal agency securities Interest rates, 68, 70, 224 Authority to purchase and to enter into Loans and securities, 190, 204, 206-09, repurchase agreements, 73-75, 96-97,133 212, 214, 228, 230 Federal Reserve Bank holdings and Officers and employees, number and earnings, 190, 206-12, 228-29 salaries, 213 Federal Reserve open market Operations, volume, 191, 194, 223 transactions, 1988, 210-11 Premises, 190 Repurchase agreements, 73-75, 205, Presidents and first vice presidents, 213, 206-09,210-11,212 248-49 Federal Bureau of Investigation, 174 Pricing of services, 186-89, 191-96, Federal Deposit Insurance Corporation, 228-29 148, 149, 163, 168, 170, 176 Priced services, pro forma balance Federal Financial Institutions Examination sheet, 191 Council, 67, 148, 172, 174 Profit and loss, 230-31 Federal Home Loan Bank Board, 147, 148, Training, 148, 173 149, 177,180 Federal Reserve Board (See Board Federal National Mortgage Association, 188 of Governors) Federal Open Market Committee Federal Reserve notes Examinations, 189 Condition statement data, 206-09 Meetings, 78, 89, 97, 104, 114, 121, 126, Cost of issuance and redemption, 188, 134 199,201,216-17 Members and officers Interest paid to U.S. Treasury on, 189, Calendar-year membership 192 change, 133 Litigation, 159 List, 244 Federal Reserve's Reciprocal Currency Policy actions, 73-151 (Swap) Network, 24 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

276 Index Federal Reserve System (See also Board Home equity lines of credit, 146, 150,165 of Governors) Home Equity Loan Consumer Protection Banking supervision and Act of 1988, 146, 165 regulation by, 167-82 Home Mortgage Disclosure Act of 1975 Consumer affairs (See Consumer and (See Regulations: C) community affairs) Housing and Community Development Act Foreign currency operations (See Foreign of 1987, 166 currencies) Housing and Urban Development, U.S. Maps, 280-81 Department of, 148 Membership, 182 Training, 148, 173 Income and expenses Federal Savings and Loan Insurance Board of Governors, 197-202 Corporation, 17,55 Federal Reserve Banks, 189-90, 192-93, Federal Trade Commission 214-21 Act, 153 Indiana, state preemption, 146 Pamphlets, 150 Insured commercial banks (See also Fees Commercial banks) Federal Reserve services to depository Assets and liabilities, by class institutions ofbank, 227 Automated clearinghouse service, 187 Banking offices, changes in number, 232 Check clearing and collection, 186 Number, by class of bank, 227 Coin and currency, 188 Interagency Enforcement Policy, 149 Electronic payments, 187 Interest on deposits (See Interest rates) Pricing of, 186-89,214-15 Interest rates Securities, 188 Federal Reserve Banks Wire transfers of funds, 187 Discount rates, 1988, 68, 70 Financial Accounting Standards Board, 173 Votes, 71 Financial Institutions Supervisory Act, 161, Table, 224 170 Internal Revenue Service, 151, 180 Financial markets and monetary policy, International banking activities, 170, 178 12-18 International banking facilities, 178 Float (See also Check clearing and International banking operations collection), 187, 188, 189 (See Regulations: K) Foreign banking and financing International developments, review of 1988, (See Regulations: K) 19,24 Foreign branches of U.S. banking International Lending Supervisory Act organizations, 179 of 1983,167 Foreign currencies International Monetary Fund, 22 Authorization and directive for operations International transactions, 22-24 in, and review of documents, 24, 76, Interpretations of regulations, 147 78 Interstate Commerce Commission, 151 Deposit issuance, 184 Investments Federal Reserve income on, 214-17 Banks, by class, 227 Freedom of Information Act, 183 Federal Reserve Banks, 204, 206-09 Foreign, by U.S. banking organizations, Garn-St Germain Depository Institutions 179 Act of 1982,64 State member banks, 227 Glass-Steagall Act, 161,167 Gold certificate accounts of Reserve Banks Justice, U.S. Department of, 159 and gold stock, 206-09, 228, 230 Government check cashing, 157 Government Securities Act of 1986, 171 Labor market developments, 9-10 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 277 Legislation enacted (See also specific act), Monetary policy—Continued 163-66 Financial markets relative to, 12-18, Legislative recommendations 35-40 Board of Governors, 156 Reports to the Congress, 25-60 Other agencies with enforcement Review of 1988, 3-11 responsibilities, 158 Mortgages Litigation Brochures by Federal Trade Bank holding companies, 159-62 Commission, 147 Board procedures and regulations, Home Equity Loan Consumer Protection challenges to, 160-62 Act of 1988, 165 Loans (See also Credit) Home mortgage disclosure, 17, 63, Agricultural (See Agriculture) 144-45, 146,183 Banks, by class, 227 Housing and Community Development Executive officers of state member Act of 1987, 166 banks, 182 Mutual savings banks, 232 Federal Reserve Banks Depository institutions, 204, 206-09, National Association of Attorneys 214-17,230 General, 150 Holdings and income, 190-91, 204, National Association of Securities 206-09, 214, 228,230 Dealers, 180 Interest rates, 68, 70, 224 National banks (See also Member banks) Mortgage, brochures, 146,147 Assets, liabilities, and capital Volume of operations, 223 accounts, 227 Banking offices, changes in number, 232 Management and Budget, Office of, 147 National Credit Union Administration, 148, Management Consignment Program, 149, 180 FHLBB, 177 National League of Cities, 148 Management Interlocks Revision Act National People's Action, 148 of 1988, 164 National Women's Business Council, 166 Margin credit regulation (See Regulations: T) New York, state preemption, 145 Margin requirements, 226 Nonmember depository institutions Member banks (See also Depository Assets and liabilities, 227 institutions and National banks) Banking offices, changes in number, 232 Assets, liabilities, and capital Number, 227 accounts, 227 Banking offices, changes in number, 232 Omnibus Trade and Competitiveness Act Borrowings and loans (See Loans) of 1988, 163, 180 Foreign branches, 178 Organization for Economic Cooperation and Membership in Federal Reserve Development, 21 System, 182 OTC margin bond (See also Number, 227 Regulations: T), 184 Reserve requirements, 225 Over-the-counter marginable stocks, 180 Reserves and related items, 228-31 State member banks (See State member banks) Paperwork Reduction Act, 147 Surveillance and monitoring program, Payments mechanism (See Fees) 169,172 Policy actions Transfers of funds Board of Governors (See Transfers of funds) Discount rates at Federal Reserve Monetary Control Act of 1980, 63 Banks, 68-71 Monetary policy Regulations, 68-71 es. 15-18 Statements and other artions fO f\l Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

278 Index Policy actions—Continued Regulations—Continued Federal Open Market Committee Z, Truth in Lending—Continued (See also System Open Market Home equity lines of credit, 146 Account), 73-141 Indiana, state preemption, 146 Presidents and vice presidents of Federal Revision, adjustable-rate Reserve Banks mortgages, 145 Conferences, 249 AA, Credit Practices Rule List, 248-49 California, state exemption, 144,147 Salaries of presidents, 213 CC, Expedited Funds Availability Pricing of Federal Reserve services, Adoption, Expedited Funds 185-89,191-96,214-15 Availability Act, 65, 143, 148 Profit and loss, Federal Reserve Banks, Interim rules regarding 216-17 payable-through checks, 66 Publications Regulatory review program, 144, 147, "Compliance: A Self Assessment 183-84 Guide," 149 Regulatory Policy and Planning Mortgage brochures, 146, 147 Committee, 183 Regulatory simplification, 183-84 Report on Formal Enforcement Actions, 170 Real estate loans (See Mortgages) Repurchase agreements Regulation of banking organizations Authority to purchase and (See Banking supervision and to enter into, 73-75 regulation by Federal Reserve System) Bankers acceptances (See Bankers Regulations (See also Regulatory review acceptances) program) Federal agency securities (See Federal B, Equal Credit Opportunity agency securities) Compliance, 150 U.S. Treasury securities (See U.S. New York, state preemption, 145 Treasury securities) C, Home Mortgage Disclosure Reserve requirements of depository Revision and adoption of new reporting institutions forms, 63 Regulation D (See Regulations: D) Revision to incorporate amendments Securities, 180 to Home Mortgage Disclosure Table, 225 Act, 144, 166, 183 Reserves and related items, 228-31 D, Reserve Requirements of Depository Right to Financial Privacy Act, 147, 164 Institutions Risk-based capital standards, 67, 168 Amendment to increase transaction Rules Regarding Availability balances, 63 of Information, 183 E, Electronic Funds Transfer Compliance, 151 Salaries K, International Banking Operations Board of Governors, 199 Amendment to liberalize conditions Federal Reserve Banks, 213 on debt-for-equity swaps, 64 Schools (See Training) T, Credit by Brokers and Dealers Seasonal credit program, 68, 70, 71 Amendment, foreign debt securities Securities (See also specific types) for margin credit, 65 Credit, 226 Y, Bank Holding Companies and Change Dealers, policy statement, 67 in Bank Control Definitive, 188 Amendment to implement Competitive Over-the-counter, 180 Equality Banking Act of 1987, 65 Regulation, 180 Z, Truth in Lending Securities Act Amendments of 1975,171 Compliance, 149 Securities and Exchange Commission, 151, Credit card disclosures, 146 180,181 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 279 Securities Exchange Act of 1934, 180, 181 Transfer Agents, 172 Senior Forum for Current Regulatory Transfers of funds (See also Fees Issues, 173 and Regulations: E) Small Business Act, 166 Check clearing and collection (See Check Small Business Administration, 148, 151 clearing and collection) Special drawing rights, 204, 206-09, 228, Federal Reserve operations, volume, 191, 230 194, 223 State member banks Pricing of Federal Reserve services, (See also Member banks) 186-89,191-96,214 Applications by, 175,178 Transportation, U.S. Department of, 150 Assets and liabilities, 227 Treasury, U.S. Department of, 171 Bank Control Act, 176 Treasury securities Bank Holding Company Act, 175 Authority to buy, to enter into repurchase Bank Merger Act, 175 agreements, and to lend, 73, 96, 133 Banking offices, changes in number, 232 Bank holdings, by class of bank, 227 Board decisions, 175, 177 Federal Reserve Banks Calendar-year membership change, 133 Holdings, 191, 204, 206-09, 212, 228, Complaints against, 152 230 Examinations and inspections, 169, 184 Income, 189,214-21 Financial disclosure by, 181 Transfers by, 189 Fees (See Fees) Open market transactions, 210-11 Interest on deposits (See Interest rates) Repurchase agreements Loans to executive officers, 182 Authorization for, 73 Membership in Federal Reserve Board policy statement, 62, 67 System, 182 Tables, 204, 206-09, 210-11, 212, Mergers and consolidations (See Bank 228,230 mergers and consolidations) Truth in Lending Act (See Regulations: Z) Number, by class of bank, 169, 227 Reserve requirements (See Reserve World Bank, 22, 174 requirements of depository Women's Business Ownership Act institutions) of 1988, 145 Surveillance and monitoring, 172 Transfer agents, 172 Stock market credit (See Securities credit) Supervision of banking organizations (See Banking supervision and regulation by Federal Reserve System) System Open Market Account Authority to effect transactions in domestic operations Domestic Open Market Operations Authorization for, 73-75, 96-97, 133 Domestic Policy Directive, 75, 78, 89, 97,104,114,121,126,134 Foreign Currency Directive, 78 Foreign currency operations Authorization for, 76 Thrift Institutions Advisory Council, 247 Training, 148, 173 FRB 1-10,000-0589 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

280 Maps of the Federal Reserve System MINNEAPOLIS 2 BOSTON / 12 CHICAGO • • a • NEW YORK I SAN FRANCISCO 10 CLEVELAND ° ^PHILADELPHIA A D WASHINGTON KANSAS CITY ST. LOUIS RICHMOND 8 5 6. ATLANTA DALLAS LEGEND Both pages Facing page • Federal Reserve Bank city • Federal Reserve Branch city Q Board of Governors of the Federal — Branch boundary Reserve System NOTE The Federal Reserve officially identifies Rico and the U.S. Virgin Islands; the San Districts by number and Reserve Bank Francisco Bank serves American Samoa, city (shown on both pages) and by letter Guam, and the Commonwealth of the (shown on the facing page). Northern Mariana Islands. The Board of In the 12th District, the Seattle Branch Governors revised the boundaries of the serves Alaska, and the San Francisco System most recently in August 1986. Bank serves Hawaii. The System serves commonwealths and territories as follows: the New York Bank serves the Commonwealth of Puerto Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

281 4 D 5 Baltimore Pittsburgh Charlotte •Cincinnati Buffalo BOSTON NEW YORK PHILADELPHIA CLEVELAND RICHMOND G H • Nashville Birmingham Louisville Detroit • '^v—^—^ Jacksonville • Memphis Littl? ) m Rock ( ATLANTA CHICAGO ST. LOUIS 10 12 SAN FRANCISCO ^^ Omaha • • j __, Denver I I ^ jj^^^K/Km- Jf ihoma City KANSAS CITY Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis