Annual Report of the Federal Reserve Board, 1989

€/fnnual TZeport \ L» 1989 Board of Governors of the Federal Reserve System Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

This publication is available from Publications Services, Board of Governors of the Federal Reserve System, Washington, DC 20551. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Letter of Transmittal BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Washington, D.C., May 7, 1990 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-Sixth Annual Report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 1989. Sincerely, 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 1989 3 INTRODUCTION 5 THE ECONOMY IN 1989 5 The household sector 7 The business sector 9 The government sector 9 The labor markets 11 Price developments 13 MONETARY POLICY AND FINANCIAL MARKETS IN 1989 13 The implementation of monetary policy in 1989 16 The monetary aggregates 17 Credit markets in 1989 19 INTERNATIONAL DEVELOPMENTS 20 Foreign economies 22 U.S. international transactions 25 Foreign currency operations 27 MONETARY POLICY REPORTS TO THE CONGRESS 27 Report on February 21,1989 41 Report on July 20,1989 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Part 2 Records, Operations, and Organization 59 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS 59 Regulation B (Equal Credit Opportunity) 59 Regulation C (Home Mortgage Disclosure) 60 Regulation D (Reserve Requirements of Depository Institutions) 60 Regulation H (Membership of State Banking Institutions in the Federal Reserve System) 61 Regulation Y (Bank Holding Companies and Change in Bank Control) and Rules Regarding Delegation of Authority 62 Regulation Z (Truth in Lending) 63 Regulation CC (Availability of Funds and Collection of Checks) 64 Rules Regarding Delegation of Authority 65 Policy statements 66 1989 discount rates 71 RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE 71 Authorization for domestic open market operations 73 Domestic policy directive 74 Authorization for foreign currency operations 75 Foreign currency directive 76 Meeting held on February 7-8,1989 85 Meeting held on March 28, 1989 92 Meeting held on May 16, 1989 99 Meeting held on July 5-6, 1989 109 Meeting held on August 22, 1989 118 Meeting held on October 3, 1989 124 Meeting held on November 14, 1989 131 Meeting held on December 18-19,1989 141 CONSUMER AND COMMUNITY AFFAIRS 141 Regulatory matters 145 Community affairs 145 Examination procedures 146 Compliance with consumer regulations 148 Economic effect of the Electronic Fund Transfer Act 149 Complaints about state member banks Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

CONSUMER AND COMMUNITY AFFAIRS-Continued 150 Unregulated practices 151 Consumer Advisory Council 153 Testimony and legislative recommendations 156 Recommendations of other agencies 157 LITIGATION 157 Bank holding companies—antitrust action 157 Bank Holding Company Act - review of Board actions 158 Other litigation involving challenges to Board procedures and regulations 159 Other actions 161 LEGISLATION ENACTED 161 Financial Institutions Reform, Recovery, and Enforcement Act of 1989 162 Title II 164 Title III 164 Title VI 164 Title IX 167 BANKING SUPERVISION AND REGULATION 169 Scope of supervisory and regulatory responsibilities 170 Supervision for safety and soundness 174 Supervisory policy 177 Regulation of the U.S. banking structure 181 International activities of U. S. banking organizations 182 Enforcement of other laws and regulations 185 Federal Reserve membership 187 REGULATORY SIMPLIFICATION 187 Community reinvestment 187 Elimination of tandem restrictions 187 Home mortgage disclosure 188 Equal credit opportunity 188 Security devices and procedures 189 FEDERAL RESERVE BANKS 189 Developments in Federal Reserve services 191 Examinations 192 Income and expenses 192 Federal Reserve Bank premises 193 Holdings of securities and loans 193 Volume of operations 193 Financial statements for priced services Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

199 BOARD OP GOVERNORS FINANCIAL STATEMENTS 205 STATISTICAL TABLES 206 1. Detailed statement of condition of all Federal Reserve Banks combined, December 31,1989 208 2. Statement of condition of each Federal Reserve Bank, December 31,1989 and 1988 212 3. Federal Reserve open market transactions, 1989 214 4. Federal Reserve Bank holdings of U. S. Treasury and federal agency securities, December 31,1987-89 215 5. Number and salaries of officers and employees of Federal Reserve Banks, December 31, 1989 216 6. Income and expenses of Federal Reserve Banks, 1989 220 7. Income and expenses of Federal Reserve Banks, 1914-89 224 8. Acquisition costs and net book value of premises of Federal Reserve Banks and Branches, December 31,1989 225 9. Operations in principal departments of Federal Reserve Banks, 1986-89 226 10. Federal Reserve Bank interest rates, December 31,1989 227 11. Reserve requirements of depository institutions 228 12. Initial margin requirements under Regulations T, U, G, and X 229 13. Principal assets and liabilities and number of insured commercial banks, by class of bank, June 30,1989 and 1988 230 14. Reserves of depository institutions, Federal Reserve Bank credit, and related items—year-end 1918-89, and month-end 1989 234 15. Changes in number of banking offices in the United States ,1989 235 16. Mergers, consolidations, and acquisitions of assets or assumptions of liabilities approved by the Board of Governors, 1989 245 FEDERAL RESERVE DIRECTORIES AND MEETINGS 246 Board of Governors of the Federal Reserve System 248 Federal Open Market Committee 249 Federal Advisory Council 250 Consumer Advisory Council 251 Thrift Institutions Advisory Council 252 Officers of Federal Reserve Banks, Branches, and Offices 275 INDEX 284 MAPS OF I HE FEDERAL RESERVE SYSTEM Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Parti Monetary Policy and the US. Economy in 1989 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction The U.S. economy in 1989 recorded its trial capacity began to moderate slightly seventh consecutive year of expansion. during this period, commodity prices Although growth was slower than in leveled off, and the dollar strengthened either of the preceding two years, it was on exchange markets, all of which reinsufficient to support the creation of 2lA forced signals conveyed by the weakness million jobs and to hold the unemploy- in the monetary aggregates. In June the ment rate steady at 5 lA percent, the lowest FOMC began a series of steps—underreading since the early 1970s. Inflation taken with care to avoid excessive inflaremained undesirably high, but the pace tionary stimulus—that trimmed IVi perwas less than many analysts had pre- centage points from short-term interest dicted, with softness in the prices of rates by year-end. Longer-term interest imported goods helping to offset persis- rates moved down by a like amount, tent domestic cost pressures. On the influenced both by the System's easing external front, the trade and current and a moderate reduction in inflation account deficits shrank further in 1989. expectations. In 1989, monetary policy was tailored Growth of M2 rebounded in the second to the changing contours of the economic half of 1989 to end the year at about the expansion and to shifting perceptions of midpoint of the 1989 target range. Growth the potential for inflation. Early in the of M3, however, remained around the year, the economy still was strong, and lower end of its range; a contraction of inflation appeared to be on the rise; to the thrift industry, which was prompted prevent the pressures on wages and prices by the Financial Institutions Reform, from building, the Federal Reserve ex- Recovery, and Enforcement Act of 1989, tended the tightening of money market reduced the needs of thrifts to tap M3 conditions that had begun in early 1988. sources of funds. The shrinkage of the A rise in market rates of interest relative thrift industry's assets led to a rechanto those on deposit accounts restrained neling of funds in mortgage markets but the growth of the monetary aggregates; appeared to have little effect on overall additional restraint came in April and credit availability. In total, growth in the May, when unexpectedly large tax pay- outstanding debt of the nonfinancial ments drained liquid balances. By May, sector was only a bit slower in the second M2 and M3 lay below the lower bounds half of the year than in the first half, and of the annual target ranges established by the level of debt ended the year close to the Federal Open Market Committee. the midpoint of the 1989 monitoring Through the spring, risks of an immi- range established by the FOMC. nent acceleration in inflation seemed to On the whole, the adjustments that the diminish somewhat. Pressures on indus- Federal Reserve undertook in 1989 were more in the nature of a midcourse correction than of a fundamental shift in policy. NOTE . This discussion of economic and financial The basic goals and strategies of the developments in 1989 is adapted from the Monetary System remained unchanged from those Policy Report to the Congress Pursuant to the Full of previous years. The ultimate goal of Employment and Balanced Growth Act of 1978 (Board of Governors, February 1990). monetary policy continued to be that of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76th Annual Report, 1989 ensuring price stability so as to promote deficits —and perhaps even surpluses — the maximum sustainable rate of eco- becomes even more compelling when nomic growth. Similarly, the strategy for viewed in the context of current demomoving toward that goal still was that of graphic trends: saving and investment restraining growth in money and aggre- are needed now to ensure a productive gate demand by enough to establish a economy that can support a rapidly clear downward tilt to the trend of growing population of retirees two or inflation and inflation expectations while three decades down the road. Internaavoiding a recession. tional developments also seem to rein- Viewed in the context of those longer- force the case for deficit reduction, as the run goals and strategies, the performance rebuilding of Eastern European econoof the economy in 1989 seemed satisfac- mies is likely to put still greater demands tory in many broad respects. At the same on the limited flow of world saving in the time, however, the year's events under- coming decade. • scored the formidable challenges that still lay ahead if the ultimate goals of price stability and sustained economic growth are to be realized. While inflation in 1989 was no higher than in the previous year, neither was there any progress made toward the goal of reduced inflation over time. Indeed, the underlying rate of inflation held stubbornly around the 4 to 4lA percent mark, about the same range in which it had been in previous years of the expansion. Clearly, seeking gains against inflation while maintaining the expansion would remain a central part of economic strategy into the 1990s. Another essential part of economic policy as a new decade begins is to move further toward a lowering of federal budget deficits. In that regard, the federal budget deficit in 1989, while smaller than those of the mid-1980s, remained far too large for an economy in the neighborhood of full employment. Such deficits seem almost certain to affect long-run economic performance adversely. In particular, the deficits likely have cut into national saving and investment in recent years and have limited the expansion and upgrading of the stock of productive capital. It is that stock, together with the skills and innovativeness of the labor force, that ultimately will determine the standard of living of the population over the long run. The need for lowered Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1989 Real gross national product grew 2Vi and 4Vi percent in 1988. Employment in percent over the four quarters of 1989; manufacturing, after increasing a total of the rise was 2 percent if adjustment is 90,000 over the first three months of made for the recovery in farm output 1989, declined 190,000 over the remainfrom the drought losses of 1988. By der of the year. either measure, growth was significantly The rate of inflation was about the slower than in 1987 and 1988; in those same in 1989 as it had been in the two years, however, the pace of expan- preceding two years. While the apprecision had been unsustainably rapid and ation of the U.S. dollar through the first had pushed activity to a point at which half of the year helped to hold down the inflationary strains were beginning to prices of imported goods, the high level emerge. As growth slowed over the of resource utilization continued to exert course of 1989, the pressures on resource pressure on wages and prices. In that utilization eased somewhat, particularly regard, the moderation in the expansion in the industrial sector. Nonetheless, the of real activity during 1989 was a necesoverall unemployment rate remained at sary development in establishing an eco- 5.3 percent, the lowest reading since nomic environment more conducive to 1973; and inflation, as measured by the progress over time toward price stability. consumer price index, remained at 4V& percent despite the restraining influence The Household Sector of a dollar that was strong for much of the year. Household spending softened signifi- The deceleration in business activity in cantly in 1989 as the demand for motor 1989 reflected, to some degree, a tighten- vehicles and housing weakened marking of monetary conditions; this tighten- edly. Real consumer spending on goods ing, which had begun in early 1988 and and services increased 2V& percent over extended into early 1989, was undertaken the four quarters of 1989, VA percentage with a view toward damping the inflation points less than in 1988. Growth in real forces. Partly as a consequence of the disposable income also slowed last year tightening, the U.S. dollar appreciated in but, for a second year, outstripped growth the foreign exchange markets from early in spending; as a result, the personal 1988 through mid-1989 and contributed saving rate increased to 5 Vi percent in the to a slackening of the growth of foreign fourth quarter of 1989. demand for U.S. products. At the same The slackening in consumer demand time, domestic demand also slowed, was concentrated in goods rather than more for goods than for services. services. Real spending on durables, Producers of goods, facing slower which had jumped 8 percent in 1988, was growth of demand in both the domestic about unchanged over the four quarters and foreign markets, shifted to a lower of 1989; the sharp slowing mainly rerate of growth in activity than that of the flected a slump in purchases of motor two previous years. The rise in industrial vehicles. Spending on nondurable goods production was a bit more than 1 percent also decelerated, increasing only 1 perin 1989; it had been 6V4 percent in 1987 cent in 1989 after a 2 percent advance in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

6 76th Annual Report, 1989 Indicators of Economic Performance Percent change, Q4 to Q4 Percent change, Q4 to Q4 Real GNP Real personal income and consumption Drought-adjusted 6 6 Millions of units, annual rate Percent of disposable income Private housing starts Personal saving rate Multifamily Percent change, Q4 to Q4 Billions of 1982 dollars, annual rate Real business fixed investment Changes in real business inventories 30 Total nonfarm 90 20 60 10 -j- l 30 0 + 0 10 Percent Percent change, Q4 to Q4 Civilian unemployment rate GNP fixed-weight price index II 1985 1987 1989 1985 1987 1989 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 1989 1988. By contrast, real consumer spend- occurred in some locales earlier in the ing for services continued to rise rapidly. decade. Vacancy rates remained espe- Among the service categories, outlays cially high for multifamily rental and for medical care increased 7 lA percent in condominium units, and the starts of real terms last year; the sustained rapid multifamily units fell for the fourth year growth in these outlays in recent years in a row. In addition, high prices for has raised their share of total consump- houses appeared to be restraining demand tion expenditures to 11 percent—a larger in some regions in which price increases share than is spent on any major category had been especially large over the course except food and shelter. Outlays for of several years. other services rose V/i percent in 1989, Mortgage interest rates declined more with sizable increases in a number of than a percentage point, on net, between categories. the spring of 1989 and the end of the year, Sluggishness of autombile sales was helping to arrest the contraction in housevident when 1989 began, and it persisted ing activity; however, the response to the through much of the year. In total, the easing in rates appears to have been sales of cars and light trucks fell more muted somewhat by a reduction in the than 34 million units in 1989, to 14 Vi availability of construction credit, likely million. The weakness of sales was most reflecting, in part, the tightening of pronounced during the fourth quarter. regulatory standards in the thrift industry Third-quarter clearance sales on 1989- and the closing of a number of insolvent model cars had led buyers to advance the institutions. Exceptionally cold weather timing of their purchases but apparently also hampered building late in the year. did not raise overall demand appreciably. Sales thus fell back in the fourth quarter. The Business Sector This decline was exacerbated by a relatively large increase in sticker prices on Business fixed investment, adjusted for 1990-model cars; although part of the inflation, changed little on net during the price increase reflected the inclusion of second half of 1989 after surging at an additional equipment—notably the addi- annual rate of 734 percent during the first tion of passive restraint systems to many half. Although competitive pressures models—consumers nevertheless reacted forced many firms to continue seeking adversely. Beyond these influences, efficiency gains through capital investlonger-run factors appear to have damped ment, the deceleration in overall ecothe demand for autos and light trucks nomic growth made the need for capacity during 1989; in particular, the robust expansion less urgent, and shrinking pace of sales earlier in the expansion profits reduced the availability of internal seems to have satisfied demand that had finance. been pent up during the recessionary Spending on equipment moved up period of the early 1980s. The rebuilding briskly during the first half of 1989; gains of the motor vehicle stock suggests that in outlays were particularly notable for future sales may be aligned more closely information processing equipment— with pure replacement needs than was the computers, photocopiers, telecommunicase through much of the 1980s. cations devices, and the like. However, Real spending on residential construc- in the second half of the year equipment tion fell 7 percent over the four quarters outlays leveled off; growth in the inforof 1989. Construction was pressured mation processing category slowed throughout 1989 by the overbuilding that sharply, and spending in most other cate- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 76th Annual Report, 1989 gories was either flat or down. Business notable exception to the overall pattern of purchases of motor vehicles, in particu- weakness in heavy construction: Real lar, dropped sharply in the fourth quarter. outlays for new industrial facilities in- Spending on aircraft, which had been creased 10 percent in 1989, largely very strong over the first three quarters of because of construction that had been 1989, also was down in the final quarter planned in 1987 and 1988, when capacity as the strike at Boeing curbed production in many basic industries tightened suband shipments. In an exception to the stantially and profitability was improving pattern of second-half softness, outlays sharply. for agricultural machinery moved up The slowdown in investment spending smartly through year-end, buoyed by the during the second half of 1989 likely was substantial improvement in the financial exacerbated by the deterioration in corhealth of the farm sector over the past few porate cash flow. Before-tax operating years. Overall, business spending on profits of nonfinancial corporations equipment increased 5 lA percent in real dropped 17 V2 percent from the fourth terms over the four quarters of 1989 — quarter of 1988 to the fourth quarter of about 2 percentage points below the pace 1989; measured as a share of the value of of 1988. gross domestic output, the pre-tax profits Business spending for new construc- of nonfinancial corporations averaged tion, which had dropped 3Vi percent in 13A percent in 1989, the lowest reading real terms in 1988, edged down further in since 1982. Fundamentally, this squeeze 1989. Commercial construction, which on profits arose from increased pressures includes office buildings, remained espe- from labor and materials costs at a time cially weak; vacancy rates for office space when domestic and international markets persisted at high levels in many areas, had become highly competitive and aglowering prospective returns on new gregate demand was being restrained. investment. Outlays for drilling and Inventory investment in the nonfarm mining, which had dropped 20 percent business sector totaled $18 billion in real over the four quarters of 1988, moved terms in 1989, a slower pace of accumudown further in the first quarter of 1989; lation than in 1988. Some of the buildup later in the year, drilling activity revived in stocks took place in industries where in response to a higher level of crude oil orders and shipments were generally prices. The industrial sector was the most strong—aircraft, for example. Inventories in some other sectors became uncomfortably heavy at times and precip- Corporate Profits after Taxes itated adjustments in orders and produc- Percent of gross domestic product tion. The clearest area of inventory imbalance at the end of 1989 was at auto dealers, where stocks of domestically produced automobiles were at 1.7 million units in December—almost three months' supply at the sluggish sales pace of the fourth quarter. In response, the domestic automakers implemented a new round of sales incentives and cut sharply the 1985 1987 1989 planned assembly rate for the first quarter Profits of nonfinancial corporations from domestic of 1990. Elsewhere in the retail sector, operations, with adjustments for inventory valuation and capital consumption. inventories moved up substantially rela- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1989 9 tive to sales at general merchandise in effect-accounted for about one-third outlets. Overall, though, most sectors of of the decline. Lower defense purchases the economy adjusted fairly promptly to made up most of the remainder. Nondethe deceleration in sales in 1989 and fense purchases excluding those of the appeared to have avoided being caught CCC were down slightly in real terms with large holdings of unwanted stocks. from the fourth quarter of 1988 to the fourth quarter of 1989; increases in such areas as the space program and drug The Government Sector interdiction were more than offset by Federal purchases of goods and ser- general budgetary restraint that imposed vices —the part of federal spending that is real declines on most other discretionary counted in GNP—fell 3 percent in real programs. terms over the four quarters of 1989. In terms of the unified budget, the Reductions in the stock of farm products federal deficit in fiscal year 1989 was owned or financed by the Commodity $152 billion, slightly smaller than in Credit Corporation—negative purchases, 1988. Growth in total federal outlays, which includes transfer payments and Government Surpluses and Deficits interest costs as well as purchases of Billions of dollars goods and services, picked up a bit in fiscal year 1989. Outlays were boosted at Federal government the end of the fiscal year by the initial $9 r~ o billion of spending by the Resolution Trust Corporation. On the revenue side, growth in federal receipts increased in fiscal 1989. Income tax payments by 100 individuals jumped, and corporate and social security tax payments also rose strongly. 200 Purchases of goods and services at the state and local level rose 3 percent in real terms over the four quarters of 1989, a State and local government rise similar to the increases in each of the ll 20 two preceding years. Spending for educational buildings increased, and employ- 10 ment in the state and local sector rose 350,000 over the year, a change driven partly by a rise in hiring by schools. The budgetary position of the state and local 20 sector deteriorated further over the four quarters of 1989, as the annualized deficit 30 of operating and capital accounts, which excludes social insurance funds, in- 1985 1989 creased $18 billion. The data on the federal government are for fiscal years. They are on a unified budget basis and come from the Department of the Treasury. Labor Markets The data on state and local governments are for operating and capital accounts. They are on a national income Employment growth slowed in the secaccounts basis and come from the Department of Commerce. ond half of 1989; nonetheless, nonfarm Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

10 76th Annual Report, 1989 payrolls increased nearly 2Vi million thought they could find a job—declined during the year. The bulk of this expan- in 1989, as did the number of workers sion was in the service-producing sector. who accepted part-time employment By contrast, the manufacturing sector when they would have preferred fulllost 100,000 jobs. These cutbacks were time. The proportion of the civilian more than accounted for by declines in population with jobs reached an historic the durable goods industries, which were high. affected by the slump in auto sales, the The tightness of labor markets and the second-half sluggishness in capital spend- persistence—according to surveys —of ing, and the effects of a stronger dollar on inflation expectations in the 4 to 5 percent exports and imports. range kept pressure on labor costs. The Despite the slowdown in the creation employment cost index for wages and of new jobs, the overall balance of supply salaries in nonfarm private industry and demand in the labor market changed increased 4VA percent over the twelve little over the year and, on the whole, months of 1989, about the same as the gave a sense of continued tightness. The rise during 1988. Benefit costs in 1989 civilian unemployment rate, which had continued to rise more rapidly than wages dropped sharply in 1987 and 1988, closed and salaries, with health insurance costs out 1989 at 5.3 percent—unchanged from remaining a major factor; nonetheless, the level of a year earlier. Other indicators the rate of growth in overall benefit costs gave a similar picture: The number of slowed, in part because of a smaller "discouraged" workers—those who say increase in social security taxes than in they would re-enter the labor force if they 1988. Total compensation, which includes both benefits and wages and salaries, rose 43A percent during 1989. Labor Market Conditions Growth of compensation in the service Net change, millions of persons, Q4 to Q4 producing sector—at 5 percent—contin- Nonfarm payroll employment ued to outpace the gain in the goodsproducing sector by about 3A percentage point. Productivity gains were lackluster in 1989, a phenomenon typical of a slowing economy. Output per hour in the private Manufactu nonfarm business sector increased only Vi percent over the four quarters of the Percent change, Dec. to Dec. year— 1 percentage point below the rate Employment cost index of increase in 1988. In the manufacturing Total compensation sector, productivity gains during the first half of 1989 kept pace with the 1988 average of 3 percent; in the second half, 111 however, productivity growth slowed a little, to an annual rate of 2 percent. Reflecting both the sharp increase in hourly compensation and the slowing in productivity, unit labor costs in private 1985 1987 1989 nonfarm industry rose 4% percent over The data are from the Department of Labor. The the four quarters of 1989—the largest employment cost index is for private industry, excluding increase since 1982. farm and household workers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1989 11 Price Developments third of the earlier run-up. The effect of import prices in holding down inflation Inflation in consumer prices remained in also was more apparent in the second half the neighborhood of 4V2 percent for the of the year than in the first half. third year in a row. Although some relief Food prices increased 5Vi percent at came in the form of stable import prices, the retail level over the year, slightly the continued pressures on domestic more than in 1988, when a number of resources, particularly in the labor marcrops were severely damaged by drought. kets, precluded any easing of overall A poor wheat crop in 1989 and a shortfall price increases. During the first half of in dairy production were among the the year, inflation was boosted tempofactors that prevented food prices from rarily by a sharp runup in energy prices decelerating. In addition, increases in and a carry-over from 1988 of droughtdemand, including sharp increases in related increases in food prices. Howexports of some foods, also appear to ever, inflation in food prices slowed have played a role, as did continued during the summer, and a drop in energy increases in the costs of food processing prices in the second half retraced about a and marketing. In December, a hard freeze hurt fruit and vegetable crops in Florida and Texas and sent prices soaring as a new year began. Pric Consumer energy prices surged 16 Percent change, Q4 to Q4 percent at an annual rate during the first Producer finished goods six months of 1989, but fell at a 5 percent rate in the second half. During the first half, increases in the cost of crude oil drove up retail energy prices. In addition, the introduction of tighter standards # 0 governing the composition of gasoline during summer months boosted summer gasoline prices. Later on in the year, gasoline prices eased considerably, re- Consumer flecting the passthrough of lower prices for crude oil and the expiration of the summertime standards. Taking the twelve months of 1989 as a whole, the increase in retail energy prices came to a bit more than 5 percent. At year-end, heating oil Consumer excluding food and energy prices were surging in response to increased demands and supply disruptions caused by December's unusually cold weather. Crude oil prices at the end of 1989 had moved up to around their highest levels since the big price collapse of 1986. 1 • » 1 1 The rise in the consumer price index for items other than food and energy was 1985 1987 1989 almost Al/i percent in 1989, about the Consumer prices are for all urban consumers. The data are from the Department of Labor. same as in 1988. Developments in this Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

12 76th Annual Report, 1989 category likely would have been less rates through the first half of 1989. These favorable had the dollar not been appre- same factors also caused the prices of ciating in foreign exchange markets industrial commodities to weaken as the through the first half of 1989. The prices year progressed; price declines were of consumer commodities excluding food especially sharp for some primary metand energy decelerated sharply, and this als, such as copper, aluminum, and steel slowdown was particularly marked for scrap. At year-end, however, prices of some categories where import penetra- industrial commodities appeared to be tion is high, including apparel and recre- stabilizing. • ational equipment. In contrast to goods prices, the prices of nonenergy services - which make up half of the overall consumer price index—increased 5lA percent in 1989, slightly more than in 1988. The pickup in this category was led by rents, medical services, and entertainment services. At the producer level, prices of finished goods increased IVi percent at an annual rate during the first half of 1989 almost twice the pace of 1988-but slowed to an annual rate of 2 Vi percent in the second half. Sectoral developments that affected the prices of finished goods at the producer level were similar to those that affected consumer prices. At earlier stages of processing, the index for intermediate materials excluding food and energy, abroad indicator of trends in materials prices, decelerated sharply during the first half of the year, and then edged down in the second half. Over the four quarters of 1989, this index registered a net increase of only 1 percent, compared with a rise of more than 7 percent in 1988; the deceleration appears to have reflected a relaxation of earlier pressures on capacity in the primary processing industries, along with the influence of the rise in dollar exchange Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

13 Monetary Policy and Financial Markets in 1989 In 1989, the Federal Reserve continued a In the spring, the incoming data on policy aimed at containing and ultimately activity, along with the strength of the eliminating inflation while providing dollar, suggested that the risk of accelersupport for economic expansion. In ating inflation was beginning to lessen a implementing that policy, the Federal bit. Consequently, the Committee re- Open Market Committee maintained a frained from further tightening, and in flexible approach to monetary targeting, June it began to ease the pressures on responding to emerging conditions in reserve markets. Interest rates fell sharply the economy and financial markets as during the second quarter, at both the well as to the growth of the monetary short and long ends of the maturity aggregates relative to their established spectrum. By mid-year, most long-term target ranges. nominal interest rates were down as much as 1 percentage point from their March peaks; the yield on the bellwether thirty- The Implementation year Treasury bond fell to about 8 percent of Monetary Policy in 1989 by the end of June. The decline in interest In the opening months of 1989, the Fed- rates outstripped the reduction in most eral Open Market Committee extended measures of investors' inflation expectathe move toward restraint that it had tions, so that estimated real interest rates begun almost a year earlier. Policy also fell from their levels of earlier in the actions in January and February re- year. These declines in nominal and real strained the availability of reserves, interest rates, however, were not accomraised the discount rate, and prompted a panied by declines in the foreign exfurther increase of 34 percentage point change value of the dollar. Rather, bein short-term market interest rates. cause of better-than-expected trade Longer- term rates, however, moved up reports in late spring, and political turonly moderately; the tightening appar- moil abroad, the dollar strengthened ently had been widely anticipated and further. was viewed as a welcome step toward In July, when the FOMC met for its helping to avoid an escalation in underly- semiannual review of the growth ranges ing inflation. Real short-term interest for money and credit, M2 and M3 lay at, rates—nominal rates adjusted for ex- or a bit beneath, the lower bounds of pected price inflation—likely moved their target cones. This weakness, higher in early 1989 but remained below together with the information on prices peak levels earlier in the expansion. The and real activity, led the Committee to tightening of policy and the related ease reserve positions further. While increases in interest rates contributed to a taking such action, the Committee also strengthening of the foreign exchange reaffirmed the existing 1989 target value of the dollar in early 1989. Growth ranges for the monetary and debt of the monetary aggregates slowed dur- aggregates and tentatively established ing this period as the additional policy those same ranges for 1990; it was restraint reinforced the effects of actions thought that such ranges likely would taken in 1988. encompass money growth at a pace Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 76th Annual Report, 1989 needed to foster further economic pending clearer signals of the economy expansion and moderation of price and of prices. pressures in 1990. In early autumn, evidence of a further Longer-term interest rates moved slowing in the pace of economic activity down a bit further shortly after mid- began to accumulate. Beginning in Octoyear, but then turned up later in the ber the FOMC reduced pressures on summer. During this period, incoming reserve markets in three separate steps; information hinted at the possibility the moves nudged the federal funds rate of renewed inflation pressures; with down to around 8 XA percent by year-end, growth in the monetary aggregates about Wi percentage points below its rebounding, the Committee therefore level when the tightening of policy had kept reserve conditions about unchanged ceased in February. Over those ten Interest Rates Percent per year Short-term Long-term 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 thirty-year investment-grade bonds The rate for three-month Treasury bills is the market rate adjusted 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 thirty-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 thirty-year fixed-rate mortgages with level Buyer index based on twenty-five issues of thirty-year payments at savings and loan associations and is from the revenue bonds of mixed quality. Federal Home Loan Mortage Corporation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 15 months, other short- and long-term nom- probably about Vi to 3A percentage point. inal interest rates fell about 1 to VA Still, most measures of short- and longpercentage points. Reflecting some re- term real interest rates remained well duction in inflation anticipations over the above their trough levels of 1986 and same period, estimated short- and 1987—levels that had preceded rapid long-term real interest rates fell some- growth in the economy and a buildup of what less than nominal rates, dropping inflationary pressures. Reserves, Money Stock, and Debt Aggregates Annual rate of change based on seasonally adjusted data unless otherwise noted, in percentx 1989 Item 1986 1987 1988 1989 Ql Q2 Q3 Q4 Depository institution reserves2 Total 18.2 4.7 2.8 -1.5 -3.1 -8.7 .6 5.1 Nonborrowed 20.0 4.8 .2 1.7 1.2 -10.2 8.7 7.2 Required 18.3 4.8 2.7 -1.4 -3.2 -7.7 .5 5.0 Monetary base3 9.5 7.6 6.9 3.4 4.4 1.7 3.2 4.0 Concepts of money 4 Ml 15.5 6.3 4.3 .6 -.1 -4.4 1.8 5.1 Currency and travelers checks . 7.4 8.7 8.1 4.8 6.6 4.3 3.8 4.0 Demand deposits 11.6 -.9 -1.3 -2.8 -4.5 -7.5 -.5 1.1 Other checkable deposits 29.2 13.7 7.6 1.0 -.6 -7.7 2.5 9.8 M2 9.3 4.3 5.2 4.6 2.3 1.6 6.9 7.1 Non-Mi component 7.3 3.6 5.5 5.9 3.2 3.7 8.7 7.7 MMDAs, savings, and smalldemonimation time deposits 5.9 3.2 5.7 3.7 2.4 5.6 5.2 General-purpose and broker/dealer money market mutual fund assets 17.4 5.9 7.7 29.8 18.0 23.0 37.6 29.5 Overnight RPs and Eurodollars (n.s.a.).... 16.3 7.0 -5.0 -9.2 3.4 -25.4 -2.9 -12.5 M3 9.1 5.8 6.3 3.2 3.9 3.2 3.9 1.8 Non-M2 components 8.1 12.0 10.6 -1.5 9.6 9.1 -6.8 -17.3 Large-denomination time deposits 1.8 9.3 11.6 4.2 11.4 13.5 -1.3 -6.7 Institution-only money market mutual fund assets 32.3 3.0 -.6 17.1 .3 25.2 36.6 3.3 Term RPs (n.s.a.) 32.0 36.7 14.7 -16.1 9.6 3.8 -29.9 -49.0 Term Eurodollars (n.s.a.) 4.3 14.1 11.1 -22.5 -2.2 -20.2 -33.3 -41.8 Domestic nonfinancial sector debt . 13.2 9.9 9.1 8.0 8.2 7.7 7.2 7.9 Federal 14.6 9.0 8.0 7.4 7.7 6.9 4.7 9.5 Nonfederal 12.7 10.2 9.4 8.1 8.3 7.9 7.9 7.4 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 thrift 4. Ml consists of currency; travelers checks of nonbank institutions; and overnight Eurodollars issued to U.S. issuers; demand deposits at all commercial banks other residents by foreign branches of U.S. banks worldwide. than those due to depository institutions, the U.S. govern- M3 is M2 plus large-denomination time deposits at all ment, and foreign banks and official institutions, less cash depository institutions; assets of institution-only money items in the process of collection and Federal Reserve market mutual funds; wholesale term RPs issued by float; and other checkable deposits, which consist of commercial banks and thrift institutions; and term Euronegotiable orders of withdrawal and automatic transfer dollars held by U.S. residents in Canada and the United service accounts at depository institutions, credit union Kingdom and at foreign branches of U. S. banks elsewhere. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

16 76th Annual Report, 1989 The Monetary Aggregates thereafter. All told, the rise in M2 over the year amounted to 4Vi percent, down Growth in M2 was uneven over 1989, from growth of 5 XA percent in 1988; the with marked weakness in the first part of 1989 figure was about at the midpoint of the year giving way to robust growth the annual target range of 3 to 7 percent. The slowing from 1988 reflected some Monetary Aggregates, Nonfinancial moderation in nominal income growth as Sector Debt, and Reserves well as the pattern of interest rates and Trillions of dollars associated opportunity costs of holding money; with regard to the latter, the lagged effects of increased interest rates and rising opportunity costs in 1988 and early 1989 outweighted the effects of the subsequent, smaller reversal. Compositional shifts within M2 in 1989 reflected the pattern of interest rate movements over the year, an unexpectedly large volume of tax payments in the 4.1 spring, and a flow of funds out of thrift institution deposits and into other instru- 3.9 ments. Early in the year, rising market interest rates buoyed the growth of smalldenomination time deposits at the ex- Total domestic nonfinancial debt pense of more liquid deposits, the rates on which adjusted only sluggishly to the market's upward movements. The jump in tax payments, which came in April and May, added to the weakness in liquid 9.1 instruments in those months. However, as market interest rates fell, liquid instru- Billions of dollars ments gained in favor, and their rate of Ml growth rebounded; replenishment of the . 800 accounts that had been drawn down to pay taxes added to the stronger growth of 770 liquid deposits. The swings in interest rates and opportunity costs in 1989 had an especially Reserves 62 strong effect on the Ml component of Total M2. From the fourth quarter of 1988 to 60 May of 1989, Ml declined at an annual 58 rate of about 2lh percent. Then, from May to December, M1 growth rebounded 1988 1989 to a 4 percent rate, boosted by the The ranges were adopted by the FOMC for the period cumulating effects of falling interest rates from 1988:4 to 1989:4. and the tax-related replenishment of Reserves have been adjusted to remove discontinuities associated with changes in reserve requirements. Nonbor- liquid balances. The rise in Ml over the rowed reserves include extended credit; the difference four quarters of the year was only Vi between total and nonborrowed reserves is used to meet percent; it had grown AlA percent in seasonal and adjustment needs. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 17 1988. Ml velocity continued the upward managed liabilities, as evidenced by the trend that resumed in 1987, increasing in 16 percent decline over the year in the the first three quarters before edging sum of large time deposits and RPs at down in the fourth quarter of 1989. thrifts. Money market mutual funds that The composition of M2 also was are open only to institutions were bolaffected in 1989 by developments in the stered by a yield advantage, as fund thrift industry, which led to a shift of returns lagged behind declining market deposits from those institutions to com- interest rates; these funds provided the mercial banks and money fund shares. major source of growth for the non-M2 The shift stemmed, in part, from regula- component of M3. On balance, the tory pressures that brought down the effects of the thrift restructuring domiinterest rates paid by some excessively nated the movements in M3, and the aggressive thrifts. In addition, beginning rebound in M2 in the second half of 1989 in August, the newly created Resolution did not show through to this broader Trust Corporation (RTC) directed some aggregate. Thus, M3 continued to hug of its funds toward paying down high- the lower bound of its 3 lh to 7 Vi percent cost deposits at some thrifts; it also began target cone; it closed the year 3 lA percent a program of closing insolvent thrifts and above its level in the fourth quarter of selling their deposits to other institu- 1988. The velocity of M3 increased 3 tions—for the most part, banks. On percent in 1989, VA percentage points balance, the weak growth of retail de- faster than the growth in M2 velocity and posits at thrifts appears to have been its largest annual rise in twenty years. about offset by the shift into commercial banks and money market mutual funds, Credit Markets in 1989 leaving M2 little affected overall. M3 growth in 1989 was driven largely, Aggregate debt of the domestic nonfinanas usual, by the funding needs of banks cial sectors grew at a fairly steady pace and thrifts; however, the special circum- over 1989, averaging 8 percent, a rate stances of the restructuring of the thrift near the midpoint of the FOMC monitorindustry lessened the reliability of M3 as ing range of 6 V4 to \Wi percent. This rise a barometer of monetary policy pres- in debt was about 1 percentage point less sures. Banks' funding needs exhibited than the increase recorded in 1988 and continued expansion in 1989 as growth of was several percentage points below the bank credit was only slightly below the exceptionally rapid increases of the mid- 1988 rise of 7% percent. By contrast, 1980s. Nonetheless, debt growth once credit at thrift institutions, which rose again exceeded the growth of nominal 6*4 percent in 1988, declined on balance GNP, which was 6V2 percent in 1989. in 1989. This weakness in thrift credit Federal sector debt grew IVi percent, stemmed directly from the shrinkage of about xh percentage point less than in assets at SAIF-insured savings and loan 1988. Debt growth outside the federal institutions; the other thrifts—credit sector amounted to 8 percent, 1 XA percentunions and mutual savings banks—ex- age points less than in 1988. Households panded their balance sheets in 1989. In accounted for the bulk of this easing in addition, the funds paid out by the RTC the growth of nonfederal debt: Mortgage to thrift institutions and to banks that credit slowed in line with the reduced acquired thrift deposits were a direct pace of housing activity, and consumer substitute for other sources of funds. As a credit growth, though volatile from month result, thrifts lessened their reliance on to month, was less than in 1988. The Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

18 76th Annual Report, 1989 growth of nonfinancial business debt the profitability of banks in Texas, Oklaslipped further below the extremely rapid homa, and Louisiana; and in the second rates of the mid-1980s. Corporate restruc- half, such loans emerged as a serious turing continued to be a major factor problem for banks in New England. By buoying business borrowing, although contrast, smaller, agriculturally oriented such activity showed distinct signs of banks continued to recover from the slowing late in the year as lenders became distressed conditions of the mid-1980s. more cautious, and the use of debt to As in 1988, agricultural banks charged retire equity ebbed. off loans at well below the national rate, In the mortgage markets, the down- and their nonperforming assets represizing of the thrift industry apparently sented a smaller portion of their loans had little effect on either the cost or than that for the country as a whole. availability of home mortgages in 1989. The upswing in the profitability of The spread between the rate on primary insured commercial banks that began in fixed-rate mortgages and the rate on ten- 1988 only extended through the first half year Treasury notes rose somewhat early of 1989. A slowing in the buildup of in the year but thereafter remained rela- loan-loss provisions, along with improvetively stable. And the gap in mortgage ments in interest-rate margins, contriblending associated with the shrinking of uted to the first-halfg ains. In the second thrift assets was largely filled by in- half, profits eroded. Several money cencreased activity on the part of other ter banks sharply boosted their loss institutions, notably diversified lenders, provisions on loans to developing counwho acted in part through other interme- tries, while evidence of rising delindiaries such as federally sponsored agen- quency rates on real estate and consumer cies. Nonetheless, some shrinkage of loans gave evidence of a somewhat more credit available for acquisition, develop- extensive weakening in loan quality. ment, and construction appeared to fol- Although these developments might low from FIRREA-imposed limits on foster a more cautious attitude toward loans by thrifts to single borrowers, granting credit to riskier borrowers, it though the reduction in funds available seemed unlikely at the end of 1989 that for these purposes probably also reflected the availability of credit had been reduced problems in some residential real estate in a more general way that could materimarkets. ally impede the ongoing economic The second half of 1989 was marked expansion. • by indications of increased financial stress among certain classes of borrowers, with implications for the profitability of lenders, including commercial banks. During this period, delinquency rates on closed-end consumer loans at commercial banks and auto loans at "captive" auto finance companies were close to historically high levels. The delinquency and charge-off rates for real estate loans at commercial banks as a whole were only slightly higher in 1989 than in the previous year. Still, problem real estate loans continued to be a drag on Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

19 International Developments Economic growth in foreign industrial Japan and China also contributed to the countries was again quite robust in 1989, dollar's strength. In the summer, howwith real GNP in ten major countries ever, the Federal Reserve's easing of increasing by about V/i percent on a monetary policy contrasted sharply with weighted average basis. In non-OPEC a further tightening of monetary policy developing countries, real GNP grew 3 abroad, particularly in Germany, and the percent on average, though economic dollar moved off its highs. Nevertheless, performance among this group of coun- by the time of the September meeting of tries was mixed. Progress on adjustment the Group of 7 (G-7), the dollar was still of major external imbalances was uneven relatively firm. The G-7 statement indiin 1989. The deficit in the U.S. current cated that officials "considered the rise in account narrowed by about $21 billion, recent months of the dollar inconsistent to $106 billion for the year as a whole. with longer run economic fundamentals." Japan's current account surplus declined The dollar moved somewhat lower in the about $20 billion, and the surplus of the wake of the subsequent coordinated newly industrialized Asian economies intervention and of increases in official declined substantially further. But Ger- interest rates in Europe and Japan. many's huge surplus increased signifi- Through the rest of the year, especially cantly, and the already large deficits of Canada and the United Kingdom also grew. Exchange Value of the Dollar The dollar appreciated sharply against and Interest Rate Differential nearly all major foreign currencies during Percentage points Ratio scale, March 1973 = 100 the first half of 1989, propelled by monetary policy restraint in the United States and favorable trade figures that suggested further progress in narrowing U.S. external deficits. Political events in Exchange Value of the Dollar Long-term against Selected Currencies real interest December 1988 = 100 rate differential1 2 - U.S. minus foreign 120 1975 1980 1985 1989 110 The exhange value of the U.S. dollar is its weighted average exchange value against currencies of other Group of 10 (G-10) industrial countries using 1972-76 total trade weights adjusted by relative consumer prices. 100 Canadian dollar The differential is the rate on long-term U.S. government bonds minus the rate on comparable foreign securities, both adjusted for expected inflation estimated by a thirtysix-month centered moving average of actual consumer 1989 price inflation or by staff forecasts where needed. Foreign currency units per dollar. The data are monthly. All the data are quarterly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

20 76th Annual Report, 1989 November and December, the dollar United Kingdom, where inflationary declined sharply against the mark and pressures have been severe and where related European currencies as political monetary tightening was undertaken developments in Eastern Europe acceler- earlier than in other foreign industrial ated, with their favorable implications countries. Growth slipped noticeably in for the economy of West Germany. The both countries as the contribution from dollar remained firm against the yen, interest-sensitive demand components in however, despite further monetary easing the United Kingdom softened and the in the United States and higher interest Canadian external sector weakened in rates in Japan. The yen's generalized response to a stronger Canadian dollar. weakness appeared to be importantly Unemployment rates continued to influenced by uncertainties over the move down during 1989 in most foreign political outlook in Japan. industrial countries, with some signs of Over the year as a whole, the dollar levelling off near year-end. The unemappreciated 3V4 percent (December to December) against a weighted average of GNP, Demand, and Prices the other G-10 currencies; it appreciated Percent change from previous year 16 percent against the yen and 14 percent Gross national product against sterling while depreciating 1 Constant prices percent against the mark and 3 percent against the Canadian dollar. When adjusted for relative consumer price levels, United States the dollar appreciated somewhat more than in nominal terms, on average, as the U.S. inflation rate again exceeded that of a weighted average of other major industrial countries. Total domestic demand Constant prices Official intervention in the exchange markets by fourteen major countries, frequently pursuant to G-7 understandings, amounted to net sales of $77 billion, of which a little more than $22 billion was by U.S. authorities. Consumer price index Foreign Economies Economic growth continued strong on average in the foreign industrial countries in 1989, but significant differences emerged among countries during the year. Demand in Japan was again supported by robust private investment that offset weaker real net exports. Investment 1985 1987 1989 demand also remained buoyant in Ger- Foreign data are multilaterally weighted averages for the G-10 countries, using 1972-76 total trade weights, and are many, where net exports continued to be from foreign official sources. an important source of strength. Signs of Data for the United States are from the Departments of adjustment to slower rates of growth Commerce and Labor. The data for GNP and domestic demand are quarterly: were more apparent in Canada and the the data for consumer prices are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 21 ployment rate in the United Kingdom fell Larger deficits in the United Kingdom, more than \lh percentage points to below Canada, and Italy also contributed to the 6 percent, and the German unemploy- smaller overall surplus. Strong demand ment rate fell more than lA percentage for German exports, however, caused point to less than 8 percent. Smaller the German current account surplus to declines were recorded in Canada and widen by about $4 billion, to nearly $53 France, while the unemployment rate billion. was about unchanged in Japan and Italy. The combined current account deficit Signs of increasing labor-market tight- of developing countries in 1989 declined ness in some countries, especially Japan about $4 billion, to $12 billion. The and Germany, raised concerns about volume of trade grew briskly for these possible upward pressure on wages as countries in 1989, with imports expandkey labor-market negotiations ap- ing strongly for the third year in a row. proached in early 1990. Among subgroups of developing coun- Monetary conditions were tightened in tries, the newly industrialized economies most foreign industrial countries during (NIEs) of Asia showed a large reduction the year, as inflation was more persistent in their combined current account surthan had been expected and demand plus. The surplus of the four Asian continued to press on capacity. Several NIEs—Taiwan, Korea, Hong Kong, and factors, including tax changes and weak- Singapore—fell from about $29 billion ness in some currencies, added to upward in 1988 to $22 billion in 1989, with most pressures on prices in the first half. U.K. of the adjustment taking place in Korea. authorities continued to tighten last year The reduction in the combined surplus of following significant increases in interest the NIEs in 1989 is attributable to the rates in 1988; the 1989 year-over-year lagged effects of currency appreciation, rate of inflation moved up to 7 Vi percent. large wage increases, slower growth in As inflation in Japan and Germany moved major export markets, strike-related up in the first half to more than 3 percent, production shortfalls in Korea, and the those two countries (and others in the liberalization of import restrictions in European Monetary System) raised offi- Taiwan and Korea. cial rates several times. Although the The current account deficit of a group growth of monetary aggregates in some of fourteen heavily indebted developing countries accelerated slightly in 1989, it countries increased about $3 billion in was steady in most cases and key aggre- 1989. An increase in the trade surplus of gates stayed within target ranges. The this group was more than offset by an stance of fiscal policy, as measured by increase in interest payments. cyclically adjusted budget deficits calcu- Economic performance in the larger lated by the Organisation for Economic heavily indebted countries continued to Co-operation and Development, was be mixed in 1989. Growth in Mexico more restrictive—notably so in Germany accelerated to about 3 percent despite and Japan, where new indirect taxes continued progress in reducing inflation. were introduced. Inflation accelerated to extremely high The combined current account sur- levels in Argentina and Brazil; gross plus of the foreign G-10 industrial coun- domestic product fell sharply in Argentries contracted by more than $40 billion tina and increased only slightly in Brazil. in 1989, with half that change pro- Argentina's stabilization effort was intenduced by a narrowing of the Japanese sified when President Menem took office external surplus to about $57 billion. in July, but by year-end the program was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

22 76th Annual Report, 1989 in the midst of substantial alteration. Exports rose 10 percent during the Venezuela began implementing an adj ust- four quarters of 1989, a bit more than ment program early in the year. The half the pace of the preceding four short-term effect of the program was a quarters. All of the increase was in recession combined with a spurt in the quantity; the average price of exports general price level that was due to was little changed, held down by the rise changes in administered prices and de- in the dollar and relatively small increases valuation. However, by the end of the in the domestic prices of goods that are year, inflation was on a downward trend exported. The growth in exports reflected and the external current account had been the strong growth in income abroad and significantly adjusted. the continuing positive effects of the In March 1989, Treasury Secretary decline in the dollar through the end of Brady called for a revitalization of the 1987. Most of the advance in exports was debt strategy toward heavily indebted in the first half of the year; growth slowed developing countries. He stressed the substantially in the second half, as the crucial role of policy reforms to achieve rise in the dollar through mid-year began growth, and he recognized the need for to depress U.S. price competitiveness. In voluntary reductions in debt and debt service, with the International Monetary Fund and the World Bank providing U.S. International Trade financial support for such operations. Billions of dollars During 1989, financing packages based Balances on the Brady framework were agreed upon for Mexico, the Philippines, and Costa Rica. The packages for Mexico and the Philippines were completed in 100 early 1990. Merchandise trade U.S. International Transactions Ratio Scale, billions of 1982 dollars The U.S. merchandise trade and current Merchandise trade _^_ account deficits narrowed further in 1989. A $43 billion increase in merchandise exports and a $29 billion increase in merchandise imports yielded a trade deficit of $113 billion for the year, compared with $127 billion in 1988. The current account balance moved about in Ratio scale, 1982 = 100 line with the trade balance, as net trans- GNP fixed-weight price index actions in services and other transfers 120 remained in rough overall balance. A substantial increase in net payments of 110 portfolio income to foreigners, associated with the growing U.S. net interna- 100 Total exports tional indebtedness, was about offset by the continued advance in receipts of U. S. 1985 1987 1989 net direct investment income, excluding The data are quarterly, seasonally adjusted at annual capital gains and losses. rates, and are from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 23 addition, a strike at Boeing caused a in the Soviet Union and China. Agriculsharp drop in aircraft shipments during tural shipments expanded only half as the fourth quarter. fast in value terms, however, as prices The expansion of exports during 1989 fell from their drought-induced highs of was broadly based both across commod- 1988. ity categories and across regions of the Merchandise imports rose 4V6 percent world. Shipments of capital goods and in value and slightly more in quantity industrial supplies, which together ac- during 1989, as the average price of count for about two-thirds of total export imports fell slightly. A sharp increase in volume, scored healthy gains in 1989. In the price of oil imports largely offset addition, the quantity of agricultural moderate declines in the prices of other exports rose 10 percent between the imports. Prices of non-oil imports fell fourth quarter of 1988 and the fourth 1 percent over the first three quartersquarter of 1989, reflecting strong demand largely because of the rise in the dollar U.S. International Transactions ] Billions of dollars, seasonally adjusted Quarter Year Transaction 1988 1989 1988 1989 Q4 Ql Q2 Q3 Q4 Current account Published -127 -106 -29 -30 -32 -23 -21 Excluding capital gains and losses -126 -104 -33 -27 -27 -26 -25 Merchandise trade balance -127 -113 -32 -28 -28 -29 -29 Exports 319 362 84 88 91 91 92 Imports 446 475 116 116 119 119 121 Investment income Published 2 1 4 -2 -6 3 7 Excluding capital gains and losses 3 3 1 1 -1 0 3 Direct investment Published, net 32 36 13 6 3 12 15 Capital gains and losses, net -2 4 -3 -5 3 4 Excluding capital gains and losses 33 38 9 9 8 9 11 Portfolio investment, net -29 -35 -8 -8 -9 -9 -9 Other services (including military transactions) 13 21 4 4 4 6 6 Unilateral transfers, private and government -15 -14 -5 -3 -3 -3 -4 Private capital flows, net 99 32 24 17 19 27 Bank-related capital, net (outflows, -) 14 11 1 -9 6 5 9 U.S. net purchases (-) of foreign securities -8 -23 -3 -3 -6 -10 -4 Foreign net purchases (+) of U.S. Treasury securities .. 20 29 5 9 2 13 6 Foreign net purchases of U.S. corporate bonds 27 33 9 9 6 6 12 Foreign net purchases of U.S. corporate stock -1 7 -2 * 4 5 -1 U.S. direct investment abroad -18 -32 -9 -5 -5 -10 -12 Foreign direct investment in United States 58 61 23 19 13 12 16 Other corporate capital flows, net 5 7 5 -3 -1 0 1 Foreign official assets in United States (increase, +).. 39 11 8 -5 12 -7 7 U.S. official reserve assets, net (increase, -) -4 2 -4 -12 -6 -3 -25 U.S. government foreign credits and other claims, net 3 3 1 1 1 Total discrepancy -11 -19 1 33 -3 4 Seasonal adjustment discrepancy * 35 4 4 -3 -5 5 Statistical discrepancy -11 * -23 — 3 36 2 -1 35 1. Details may not sum 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 76th Annual Report, 1989 during 1989 and substantial declines in of $71 billion and a statistical discrepancy world prices of several basic commodi- of $35 billion. Adding the recorded net ties-and recovered moderately in the capital inflows to the previously pubfourth quarter under the influence of the lished U.S. net investment position sugdeclining dollar. gests that the position at the end of 1989 The growth in the volume of non-oil reached around negative $600 billion. imports was not as broadly based across However, because of serious valuation commodity categories. Capital goods problems with direct investment assets, it grew particularly strongly, largely re- is likely that U.S. net indebtedness is flecting the relative strength of domestic overstated in the published data. Despite spending for computers and other infor- the large recorded negative position, mation processing equipment. Imports U.S. investors earned about as much on of consumer goods also increased over their investments abroad as foreigners the four quarters of the year, but imports earned on their investments in the United of industrial supplies were damped by the States in 1989. slowing of industrial production in the The large statistical discrepancy in United States. Part of the overall increase 1989 casts doubt on the accuracy of the in non-oil imports was likely in response data in both the current and capital to the substantial decline in the relative accounts. The wide swings in the discrepprice of such imports earlier in the ancy from quarter to quarter suggest that year. part of the problem may be in the timing The value of oil imports increased of the recording of transactions. For sharply in 1989. Prices rebounded from example, the fiscal year used in reports their sharp decline the year before, and by direct investors may not coincide the quantity imported advanced as well. exactly with the calendar year, or the The price of imported oil rose $5 per counterpart to end-of-period "window barrel during 1989, to a level of just dressing" by banks may not be recorded above $ 17 per barrel in the fourth quarter. in the same quarter. In any case, the large The rebound in oil prices followed size of the statistical discrepancy in 1989 OPECs agreement at the end of 1988 to is troublesome. limit supplies; it was helped along by a Holders of foreign official reserves downtrend in U. S. output and disruptions added to their investments in the United to supply caused by accidents in the States in 1989: Holdings by the G-10 North Sea and Alaska. Some unusually countries were reduced by intervention cold weather and further disruptions to sales of dollars to counter downward supply during December 1989 and Janu- pressure on the foreign exchange value ary 1990 moved spot prices another $1 to of their currencies, but that movement $2 per barrel above their 1988 fourth- was more than balanced by the increase quarter average. The volume of U.S. oil in holdings of other countries. The United imports (seasonally adjusted) rose from States significantly increased its holdings an average of about IVi million barrels of foreign currencies as it tried to limit per day (mbd) in during 1988 to nearly the appreciation of the dollar. 8*4 mbd in the second half of 1989, Recorded net private capital inflows partly reflecting reduced U.S. produc- were almost as large in 1989 as they were tion. Imports supplied nearly half of total in 1988. Securities transactions ac- U.S. oil consumption during 1989. counted for the largest part of the inflow. The U.S. current account deficit was Net purchases of U.S. government secubalanced by recorded net capital inflows rities by private foreigners reached record Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 25 levels, as did net purchases of U.S. $31,333 million equivalent, predomigovernment agency securities (included nantly marks and yen. with corporate bonds). Net purchases of The only activity in the Federal Reser- U.S. corporate bonds (largely Euro- ve's Reciprocal Currency (Swap) netbonds) were also substantial. Foreigners work involved a drawing on September added to their holdings of U. S. corporate 25 by the Bank of Mexico of $784.1 stocks, and U.S. residents added to their million, including $84.1 million on a holdings of foreign stocks and bonds. new special swap arrangement, The Direct investment by foreigners in the drawing was part of a multilateral bridge United States continued at near-record loan pending completion of Mexico's new levels in 1989, spurred by large mergers refinancing package and was fully repaid and acquisitions involving foreign enti- by February 1990. ties. U.S. directinvestmentabroadpicked up from the depressed 1988 level, probably reflecting in part the increase in capital expenditures by affiliates abroad. Foreign Currency Operations U.S. monetary authorities intervened in the exchange markets on 97 of the year's 260 business days. All of the interventions involved selling U.S. dollars against foreign currencies. Total purchases of foreign currencies amounted to $22,056 million equivalent, of which $10,926 million equivalent was Japanese yen and $11,131 million equivalent was German marks. Of the total intervention, $11,078 million was for the account of the Federal Reserve System. In addition, the System warehoused $7,000 million equivalent of foreign currencies for the Treasury's Exchange Stabilization Fund (ESF). Under this warehousing arrangement, the System purchased the foreign currency at the spot price and simultaneously sold it forward with the ESF. The System realized no profits or losses on intervention in 1989, but recorded a net translation gain of $1,272 million on its foreign currency position as the gain on marks far exceeded a small loss on yen. At year-end, the value of the System's gross foreign currency balances, including those warehoused for the ESF, was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

27 Monetary Policy Reports to the Congress Given below are reports submitted to the repercussions from the plunge in stock Congress on February 21 and July 20, prices and, in particular, to guard against 1989, pursuant to the Full Employment the possibility of a significant contraction and Balanced Growth Act of 1978. in business activity. Pressures on the reserve positions of depository institutions were eased a bit further in early Report on February 21,1989 1988, and interest rates edged down for a time, extending the declines that had Monetary Policy and the Economic begun in October 1987. Growth of M2 Outlook for 1989 and M3 was fairly rapid during this Overall, 1988 was another year of period, nearly reaching the upper bounds progress for the U.S. economy, marked of the annual target ranges established by by further substantial increases in output the Federal Open Market Committee and employment and by a significant (FOMC). improvement in the balance of trade. The As it became clear in the spring that the dramatic stock-market break of October economy still was strong, the focus of 1987 did seem to affect real activity for a Federal Reserve policy shifted. For much time, but the underlying strength of the of the year, there was heightened concern economy soon showed through, and, about the potential for increased inflaapart from losses of farm output caused tion, largely reflecting rapid growth of by the drought, growth proceeded at a spending and a continued tightening of relatively strong pace throughout 1988. labor and product markets. A sharp Moreover, the sizable employment gains upswing in real net exports of goods and in January of this year suggest that the services that had begun in 1987 continued economy entered 1989 with considerable into 1988; while this upturn was a welforward momentum. come and necessary part of the adjust- Inflation has remained in check into ment of the U.S. economy toward a the seventh year of the expansion. Even better balance in its external accounts, it so, developments during 1988 were a also intensified the demands on U.S. little worrying, as, for a second year, producers at a time when the utilization increases in prices were somewhat larger of domestic labor and capital already was than they were in earlier years of the quite high. Accommodating the improveexpansion. Part of the pressure on prices ment in our external position while in 1988 came in the food area and limiting the risk of heightened inflation reflected the influence of the drought. required restraint on the growth of However, with labor markets tightening, domestic demand. there also was a quickening in the rise of The shift by the Federal Reserve wages and total hourly compensation, toward restraint was reflected in a tightwhich affected prices more generally. ening of reserve market conditions that Federal Reserve policy mirrored the began in late March and continued, in changing economic circumstances of several steps, into 1989. Short-term 1988. Early in the year, as in late 1987, market interest rates moved up during the Federal Reserve sought to limit this period, influenced both by the Sys- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

28 76th Annual Report, 1989 tern's tightening and by the strength of the M3 — signalling the Committee's determieconomy, and the discount rate was nation to resist any upward tendencies in raised in August, to its current level of inflation in the coming year and to 6V2 percent. Growth of M2 moderated promote progress toward price stability after the spring and ended the year just over the long run. The monitoring range below the middle of the 1988 target for the growth of domestic nonfinancial range. The growth of M3 also ebbed over debt for 1989 was set at 6V4 to \0Vi the last two quarters, as the needs of percent, which also is lower than that of banks and thrift institutions to fund credit last year. expansion slackened. In recognition of the degree to which At present, short-term interest rates the relationship between the monetary are about 2V2 percentage points higher aggregates and economic performance than they were early last spring. Long- has varied in this decade, the Committee term interest rates, by contrast, have retained the spread of 4 percentage points changed little, on net, over that same between the upper and lower ends of the period; although these rates turned up in growth ranges that it adopted in 1988. the spring of 1988, they leveled off over Despite the deregulation of deposit interthe summer and edged down in the fall, est rates, M2 velocity has remained very even as short-term rates were continuing sensitive to changes in market interest to rise. This behavior of bond yields rates over periods as long as a year or seems to have reflected a lowering of more. Depository institutions have been market expectations of long-run inflation. slow to adjust some of their offering rates, causing substantial changes over the short and intermediate term in the Monetary Policy for 1989 relative attractiveness to savers of de- The commitment by the Federal Reserve posits versus market instruments. In these to contain inflationary pressures is circumstances, it is difficult to specify in reflected in the FOMC's decisions to advance a narrow range for the approprilower the ranges for monetary and credit ate growth of M2 and the other aggregates expansion this year. The Committee has in the coming year; such growth will set a range of 3 to 7 percent for M2 depend on the forces affecting the econgrowth during 1989 and a range of 3 Vi to omy and prices and on the response of 7 Vi percent for M3, reaffirming the target depository institutions to any changes in ranges established tentatively in June market interest rates, both of which are 1988. These ranges were reduced from subject to a substantial degree of uncerthose for 1988—a full percentage point tainty. Moreover, in 1989, the behavior for M2 and one-half percentage point for of M2 and M3 also could be influenced by the resolution of problems in the thrift industry, depending, in part, on how Ranges of Growth for Monetary pricing practices of these institutions and Credit Aggregates change, on the reactions of retail and Percentage change1 wholesale depositors in these institutions, and on the extent of any restraints on the Aggregate 1987 1988 1989 growth of assets of savings and loan M2 SViXoVh 4to8 3to7 associations. M3 5% to 8% 4to8 3% to 7% Debt ... 8toll 7toll 6Vi to 10% M2 and M3 are now around the lower ends of their 1989 ranges. This slow 1. From average of the fourth quarter of the preceding growth and the accompanying rise in year to average of the fourth quarter of the year indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 29 velocity reflect the continuing effects of Economic Projections recent increases in market interest rates. In general, the Committee members, In light of the slow adjustment of deposit including the nonvoting Reserve Bank rates, velocity could continue to increase, presidents, anticipate that real gross with growth in these monetary aggregates national product will grow moderately in in the lower halves of their ranges. Given 1989, that prices will rise at a pace similar the uncertainties about the relation of to, or perhaps slightly above, that of movements in the aggregates to prices 1988, and that the unemployment rate and output, the Committee agreed that in will remain near its recent level-the implementing policy, they would need to lowest in a decade and a half. On balance, assess, in addition to the behavior of the FOMC members anticipate a little money, indicators of inflationary pres- less real growth and a somewhat higher sures and economic growth, as well as rate of inflation than does the administradevelopments in financial and foreign tion, but the differences are not large. exchange markets. Members of the Committee believe The Committee will continue to moni- that the progress of the economy in 1989 tor the growth of domestic debt in 1989. will be determined in large measure by The expansion of the debt of nonfinancial developments on the inflation front. sectors may slow a little from the 8% Although special factors, such as the percent pace of 1988, although it is drought, contributed to price increases expected once again to exceed the pace of last year, there also have been troubling growth in nominal income. The growth indications—most notably in recent wage of debt could be importantly affected by trends—that inflationary pressures have corporate financial behavior. The expan- become more widespread and, potension of private debt has been boosted in tially, more deeply rooted. recent years by the substitution of debt Given the tightening actions taken by for equity in connection with leveraged the Federal Reserve over the past year buyouts and other corporate restructur- and the policy of continued restraint on ings, and business borrowing is likely to aggregate demand expressed in the monbe especially sizable in the early part of etary targets for 1989, the members of this year, owing to the recent heavy the Committee anticipate that, if there is volume of such activity. The federal any further acceleration of prices from government, once again, will be placing the 1988 pace, it will be quite limited. heavy demands on credit markets, financ- The majority of the Committee members ing its continuing deficit. expect that the consumer price index will Economic Projections for 1989 Percent FOMC members and other FRB presidents Item 1988 actual Range Central tendency Change, fourth quarter to fourth quarter Nominal GNP 7.0 5teto8% 6V4to7V4 C R o e n al s G um N e P r price index] 2 4 . . 7 3 V V h h t i o o 5 V V A i 4 2 1 V /2 2t t o o 3 5 Average level in the fourth quarter Civilian unemployment rate 5.3 5 to 6 5Hto5Vi 1. All urban consumers (CPI-U). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

30 76th Annual Report, 1989 rise about 4V2 to 5 percent this year. This a percentage point to the growth of GNP, would be a slightly larger increase than in similar to the amount that the drought 1988, and thus would represent some- pared from growth in 1988. Excluding thing of a setback relative to the Commit- this swing in farm output, the centraltee's disinflationary objective. However, tendency forecast is for considerably in light of the tautness of markets and the slower growth of real output than last current momentum of wages and prices, year's gain, excluding drought losses, of these members viewed such a projection more than 3 percent. as realistic in the context of a prudent Although the economy clearly has effort to restore price stability over time. entered 1989 on a strong note—even It should be noted, however, that some discounting the transitory influence of members expect a rise in prices that is unusually mild weather in many parts of significantly below the central-tendency the country—the members feel that range; in their view this far more desir- growth soon will move to a lower trajecable outcome could flow from the dollar's tory, owing both to the general influence recent firmness, which will damp the of monetary restraint and to a number of pressures from rising import prices, and sector-specific trends. In the business from the recognition by business and sector, the boom in capital outlays that labor that restraint is needed to preserve was evident in the first half of 1988 has gains in international competitiveness. since abated, and surveys of plans for A particular uncertainty in the inflation 1989 point to moderate gains in overall outlook for 1989 centers on the prospects plant and equipment spending. Governfor food prices. FOMC members gener- ment purchases are expected to be held ally assume that a return to more normal down by budgetary constraints; defense weather conditions this year, together purchases, in particular, have been trendwith an increase in acres planted, will ing lower under the influence of cutbacks lead to a sharp rebound in crop produc- in real spending authority. Recent intion, in which case food prices might help creases in mortgage rates likely portend to temper overall inflation. However, some slackening in the pace of homebuildbecause stocks of some key agricultural ing, and the growth of consumption commodities have been reduced to low expenditures also should begin to taper levels, there also is risk that another year off from the rapid pace of 1988, as a of drought could generate strong upward slowing of expansion elsewhere in the pressures on prices. In the energy area, economy damps the growth of real disconsumer prices could rise sharply early posable income. this year, responding to the runup in oil With regard to the external sector, real prices around the end of 1988; nonethe- net exports of goods and services declined less, world oil supplies still look ample, over the second half of 1988, but most and members of the Committee are members of the Committee expect some assuming that energy prices will increase improvement in the months ahead. Howonly moderately over 1989 as a whole. ever, substantial further progress in With respect to real GNP, the central- external adjustment will require a contendency forecast of the Committee tinuing commitment on the part of U.S. members is for a rise of about 2Vi to 3 firms to capitalize on the enhanced compercent in 1989, about the same as in petitiveness resulting from the deprecia- 1988. However, this forecast incorpo- tion of the dollar since 1985. That rates a working assumption that increased commitment must take the form not only farm output will add around two-thirds of of continued cost control and price re- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 31 straint, but also of more intense efforts at boom in capital spending. Households, marketing abroad and investment in new meanwhile, adjusted fairly readily to the capacity where constraints are visible. loss of stock market wealth, and con- Failure on these counts would almost sumer spending rose at a strong pace certainly leave the U. S. economy consid- throughout the year. Toward the end of erably less well off over the long haul. the year, net exports and capital spending Government policy can do much to softened, but there was enough impetus encourage businesses to make the longer- from other sectors to keep real GNP on a range commitments needed to bring firm upward course. about better balance in the economy and The rate of inflation, which had picked to foster longer-run growth. A monetary up in 1987, remained somewhat higher in policy directed steadfastly at movement 1988 than in earlier years. The step-up in toward price stability is one critical inflation in 1987 had resulted mainly ingredient. But also crucial is action to from a rebound in the price of oil and the bring about further progress toward pass-through of higher prices for imbalance in the federal budget. The Com- ports. This past year, by contrast, extra mittee has assumed that Gramm-Rud- price pressures reflected the impact of man-Hollings targets will be adhered to drought on the price of food and, more in the fiscal 1990 budget process; but the generally, a widespread pickup in labor creation of an environment favorable for costs in the domestic economy. economic growth with stable prices re- The rise in real GNP last year would quires that fiscal policies be put in place have exceeded 3 percent but for a severe to produce the prescribed budget results drought, one of the worst of this century, in the out-years as well. that caused huge losses of farm output. These losses accounted for most of the slowdown in GNP growth that occurred The Performance of the Economy after the first quarter of 1988. Fortuin 1988 nately, inventories of farm products had The U.S. economy completed a sixth been sizable coming into 1988, and a year of expansion in 1988. Real gross drawdown of stocks helped to buffer national product rose about 234 percent households and others from the disrupover the course of the year, the number of tion to output. Within the farm sector, the jobs increased more than 3Vi million, drought strained the finances of some and the unemployment rate remained on producers, but the financial condition of a downward course, closing the year at many others was not seriously affected, 5.3 percent, its lowest level in 14 years. and the sector as a whole remains stronger Progress also was made toward restoring fundamentally than in the first half of the external balance, as the merchandise 1980s, when the boom of the previous trade deficit fell sharply. decade was unwinding. The year began on a note of uncer- In most of the nonfarm economy, the tainty. The sharp break in the stock growth of activity was robust in 1988. market in the fall of 1987 had raised Production in the manufacturing sector concern that the economy might falter, increased 5 percent, nearly matching the and some signs of weakness did emerge previous year's gain, and factory employaround the start of 1988. By early spring, ment rose sharply. Employment also however, it became clear that the expan- continued to grow rapidly in retail and sion still had considerable vigor, coming wholesale trade and among the providers in particular from rising exports and a of business and health services. How- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

32 76th Annual Report, 1989 ever, oil drilling, which had turned up in imported industrial supplies (excluding 1987, when oil prices were rising, expe- oil) rose significantly in 1988; smaller rienced renewed weakness in 1988, increases were recorded for consumer intensifying economic stresses in some goods, automotive products, and various parts of the country. machinery categories. However, price declines for oil and computers held the The External Sector overall increase in import prices below The U.S. external accounts showed con- that of 1987; on a fixed-weight basis, the siderable improvement during 1988. On rise in non-oil import prices during 1988 a balance of payments basis, the deficit was 7 XA percent. The value of oil imports on merchandise trade fell from an annual declined last year, as an increase in rate of $165 billion in the fourth quarter physical volume was more than offset by of 1987 to around $120 billion in the the decline in price. second quarter of 1988 and, on average, For the first three quarters of 1988, the remained at that lower level in the second current account showed a cumulative half of the year. Over the four quarters of deficit of $102 billion, which was ballast year, the value of exports rose more anced by recorded net capital inflows of than 20 percent; adjusted for inflation, $88 billion and a statistical discrepancy the increase was around 15 percent. of $14 billion. Foreign official assets in Much of the strength in exports, which the United States increased $28 billion on was concentrated in the first half of the net (this rise included about $30 billion, year, appeared to be associated with an on net, of official purchases of U.S. improvement in the price competitive- government securities). Net inflows ness of U.S. products resulting from an through banks were $21 billion. Excludearlier depreciation of the dollar, as well ing banking flows, assets held in the as with efforts at cost control and in- United States by private foreigners increases in productivity among domestic creased $68 billion on net; purchases of producers. Demand for exports also was U.S. government securities were sizable supported by surprisingly strong eco- (in contrast to net sales in 1987), and nomic growth in other industrial coun- direct investment by foreigners in the tries. The growth in real export volume United States remained near record levwas spread over most categories of trade; els . Excluding bank flows, the assets held gains were particularly large for capital abroad by private U.S. residents ingoods (especially computers and com- creased $26 billion. These recorded puter parts), automotive products, and capital flows during the first three quarconsumer goods. The volume of agricul- ters of 1988, plus the likely net inflows in tural exports for 1988 was up 9 percent the fourth quarter, brought the recorded from that for 1987, despite declines in the U.S. net indebtedness to foreigners to second half of the year; the value of these almost $500 billion at the end of 1988. exports was boosted further by the The foreign exchange value of the drought-induced rise in crop prices. U.S. dollar, which had fallen sharply The value of merchandise imports, from early 1985 through the end of other than oil, rose about 7 percent during 1987, has shown wide fluctuations in the 1988. The volume of non-oil imports subsequent period. Measured against the increased about 2 percent. This rise was other G-10 currencies, the dollar curconcentrated mainly in the capital goods rently is up somewhat, on net, from its area; volume was down for other major end-of-1987 low. However, it has decategories of imports. The prices of clined in real (price-adjusted) terms Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 33 against the currencies of our major In the event, the loss of wealth may trading partners among the developing indeed have left an imprint on consumer countries, especially South Korea, Mex- demand. The personal saving rate did ico, and Brazil. rise after the crash and, over the next From mid-April to late August of last year, averaged about a percentage point year, the dollar rose sharply, on average, higher than in the year preceding the against the currencies of the other indus- crash. But, with exports and capital trial countries, reflecting the influences investment booming, the growth of jobs of Federal Reserve monetary tightening and real incomes remained strong in and monthly trade reports that brightened 1988, and the uncertainties spawned by the market's assessment of the outlook the crash soon gave way to renewed for U.S. external adjustment. When optimism among households. Thus, after measured against a weighted average of the initial, one-time jump in the saving the other G-10 currencies, the apprecia- rate, real consumption expenditures grew tion during that period was more than 15 at about the same pace as the trend in percent. After holding steady through after-tax income; the rise over the year September, the dollar then declined was about 3 Vi percent. sharply in October and November; mar- Consumer spending for big-ticket ket perceptions appeared to shift during items was brisk in 1988. The unit sales of that period toward a view that monetary domestically produced automobiles restraint in other countries had increased moved up a bit from the 1987 pace, and relative to that in the United States, and the sales of light trucks and vans, which incoming trade data suggested a stalling have more than doubled since the expanof the adjustment process. Since Novem- sion began in 1983, reached another new ber, the dollar has again risen, partly in high. Adjusted for inflation, total conresponse to further tightening actions by sumer spending for motor vehicles inthe Federal Reserve. creased 6 Vi percent over the four quarters Measured against the G-10 cur- of the year. Among the household durrencies, the dollar currently is about 7 ables, real outlays for furniture and percent above its December 1987 level. appliances, which had slowed in 1987, If adjustment is made for changes in moved up IVi percent during 1988, relative prices, the resulting real renewing the strength that had been appreciation is somewhat greater, as evident over the 1983-86 period. inflation in the United States has Real residential investment fell slightly exceeded the weighted average of the in the first half of 1988, but it turned up in inflation rates of the other major the second half and, by the fourth quarter, industrial countries. was a little above the level of a year earlier. Starts of multifamily housing The Household Sector units, which had slumped in 1987, fell At the start of 1988, concern about the further in the first quarter of 1988, but possible effect of the stock market break then flattened out over the remainder of on the real economy centered on the the year; vacancy rates for multifamily household sector. The drop in share dwellings remain high in many areas and values had pared roughly half a trillion are likely to hold down new construction dollars from household wealth, and of these units for some time. In the singlethe degree to which spending would be family sector, starts edged down through cut in response to this loss of wealth the first three quarters of 1988, but was not clear. rebounded toward year-end to the highest Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

34 76th Annual Report, 1989 levels since the fall of 1987. By historical fell back a little from the pace of late standards, these swings in single-family 1987, but remained above the lows of starts during 1988 were relatively mild; 1986. Construction of buildings for indeed, from a longer-term perspective, industrial use was little changed over the past six years have been an unusually 1988; although capacity utilization is high stable period in the single-family market, in manufacturing, many producers also in sharp contrast to the boom-and-bust appear to be limiting their needs for cycles of the 1970s and early 1980s. additional space by shifting toward tech- Total housing starts, of course, have nologies that use more compact equipfallen sharply since 1986 because of the ment, by economizing on inventories, or steep decline in construction of multifam- by conserving on space in other ways. ily units. Inventory investment, which had been sizable in late 1987, moderated in 1988, The Business Sector and, with sales on an upward trajectory, Virtually all indicators of business activ- stock overhangs were not a problem for ity exhibited strength in 1988. Business most businesses. In manufacturing, sales, in nominal terms, rose 9 percent stocks grew more rapidly in 1988 than over the year. Hiring was brisk in most they had in recent years, but much of the sectors, and operating rates rose further; accumulation was in industries in which in the industrial sector, capacity utiliza- orders and shipments also were generally tion at the end of 1988 was at its highest strong; the ratio of inventories to sales level since 1979. Corporate profits re- for all of manufacturing moved down mained healthy. during the year from the already low A surge in business equipment spend- levels of late 1987. In retail trade, ing that had begun in 1987 extended concern about a possible overhang of the through the first half of 1988, when stocks of nondurables eased a bit during outlays grew, in real terms, at an annual the year, as the ratio of stocks to sales in rate of about 20 percent. The surge was that sector edged gradually lower from a led by sizable investment in high- February high. By contrast, auto dealers' technology items—computers, commu- stocks rose sharply in the fourth quarter, nication equipment, and the like—but and auto manufacturers have enhanced outlays for other types of equipment also sales incentives and moved to a lower were strong. After midyear, the rise in assembly rate in an effort to pare invenequipment spending slowed, and some tories. For all of manufacturing and trade weakness became evident toward the end combined, the ratio of inventories to of the year. However, most reports from sales varied little over the course of 1988 the field suggest that the underlying trend and was near the lower end of the range in in equipment spending still is pointing which it has been since the business firmly upward. expansion began. Business spending for new construction declined in 1988, reversing the The Government Sector moderate increase of the previous year. Budgetary constraints have led to a Commercial construction, the biggest slowing of government purchases, both item in the total, continued to be re- at the federal level and among state and strained in 1988 by the big overhang of local governments. The federal governvacancies that grew out of the building ment's purchases of goods and services— boom of the mid-1980s. Gas and oil the part of federal spending that adds drilling, following the lead of oil prices, directly to the gross national product— Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 35 fell 4 percent in real terms from the 1980s, was little changed during 1988 as fourth quarter of 1987 to the fourth a whole, although some pickup was quarter of 1988. Roughly half of the evident in the fourth quarter. Employdecline reflected a drought-induced re- ment in the state and local sector continduction in the farm inventories owned or ued to rise during 1988, reflecting, in financed by the Commodity Credit Cor- part, the increased demands for teachers poration (CCC), a reduction that is and other school workers associated with counted as a negative federal purchase. growth in the number of elementary Excluding this inventory swing, federal students. purchases were down 2 percent over the year—the first decline since 1976. Over The Labor Markets the eight years that preceded 1988, real The rise in the number of jobs during federal purchases, other than those of the 1988 was somewhat above that of 1987 CCC, had risen at an average pace of and brought the total increase in payroll nearly 5 percent, considerably faster than employment since late 1982 to about the growth of real GNP. The downturn in 18V2 million. Virtually all parts of the 1988 reflected cuts in the defense area; economy shared in last year's gain. The other non-CCC federal purchases rose number of jobs in manufacturing insomewhat over the year. creased 400,000; employment in con- On a budget basis, total federal outlays, struction was up 300,000. Close to a which are almost three times as great as million new jobs were created in retail federal purchases alone, continued to and wholesale trade, and 1.3 million rise in fiscal year 1988, but at a somewhat were added in services. Except for a brief slower rate than in most previous years. slowdown in the summer, the growth of There were further increases in entitle- jobs was strong throughout the year. ments, greater demands on deposit insur- The continued rise in employment last ance agencies, and increases in net inter- year led to a tightening of labor markets est payments. Meanwhile, the growth of and called attention to limits on the federal receipts slowed in 1988 from the potential growth of the supply of labor rapid pace of the previous year. Receipts and of output. Growth of the workingfrom social security taxes rose more than age population has slowed in the 1980s, 10 percent, in part because of a rate and the increase during 1988 was the increase in January of 1988. However, smallest annual rise in more than two growth in receipts from personal income decades. This slowing of population taxes slowed, as increases in employment growth in the 1980s has led, in turn, to a and nominal incomes were offset by final more moderate rate of growth in the reductions in income tax rates legislated labor force, even as the rate of labor force under the 1986 tax reforms. The federal participation, especially for adult women, budget deficit in fiscal year 1988 was has continued to rise. A big boost to $155 billion, slightly above the level of output during the expansion has come the previous year. from putting unemployed workers back The real purchases of goods and ser- on the job; now, however, with the vices by state and local governments rose unemployment rate at less than 5Vi 3 percent over the four quarters of 1988, percent, the labor force is more fully a little more than in 1987 but less than the utilized than at any time in the last decade average rate of growth over the preceding and a half. three years. Spending for construction, The tightening of labor markets in which had risen rapidly in the mid- 1988 was associated with a pickup in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

36 76th Annual Report, 1989 rise of wages and labor costs. The a rebound in energy prices and rising employment cost index for wages and prices for imports, the inflationary pressalaries in the private nonfarm sector sures this past year were augmented by increased a bit more than 4 percent over larger increases in labor costs in the U.S. the year - almost a percentage point more economy and the drought's influence on than in 1987. The pickup was most agricultural prices. pronounced among white collar workers The drought's effects appeared quickly and in the service-producing industries, at the retail level in the summer, as price where unemployment rates currently are increases picked up for a wide variety of the lowest. The cost of benefits provided consumer foods. By late autumn, howto employees rose 6% percent over the ever, the impact of the drought on food year, nearly twice the increase of 1987; prices began to dissipate, and inflation in the rise reflected both the hike in the the food sector returned to a more modpayroll tax at the start of 1988 and a surge erate path. The increase in consumer in the cost of health benefits. Total food prices over the year as a whole was compensation per hour - wages and sala- 5VA percent-about 2 percentage points ries plus benefits-rose nearly 5 percent above the average of the preceding five over the four quarters of 1988, after two years. Prices in 1989 will be sensitive to years in which the annual increases had weather developments over the spring been in the neighborhood of 3 XA percent. and summer. In the past, major droughts Productivity gains slackened some- in the United States have been one-year what in 1988. The rise in output per hour events, often separated in time by several in the nonfarm business sector over the good growing seasons, and most agriculfour quarters of the year was only 0.7 tural observers have been assuming that percent—about half a percentage point farm output will rebound in 1989, thereby below the average over this decade. This restraining the prices of farm crops. slippage in productivity growth in 1988, Currently, however, dry conditions still combined with the faster rate of increase prevail in some important growing rein hourly compensation, resulted in a 4 gions, and crop prices could rise abruptly percent rise in unit labor costs in the if moisture supplies are deficient in nonfarm business sector over the four coming months. quarters of 1988—well above the average Energy prices were little changed at rate of increase during the previous five the consumer level during 1988 after a years. sharp rise in 1987 - a pattern that resulted mainly from the continued gyrations in Price Developments world oil markets. The price of oil, which The broader measures of prices - includ- had risen sharply in 1987, moved lower ing the GNP price measures, the producer for much of 1988, as the efforts of OPEC price index, and the consumer price to restrain production unraveled. In late index-all indicate that inflation was in a 1988, a new agreement by OPEC to limit range of 4 to AVi percent in 1988. Except production, coupled with higher-thanfor the CPI, which had moved up into this expected oil consumption and production range in 1987, these measures showed shortfalls in non-OPEC countries, caused some acceleration last year, and all of prices to rise sharply once again; howthem—including the CPI—rose more ever, despite these fluctuations, prices rapidly than they did in the first four have not made any sustained departure years of the expansion. In contrast to from the range in which they generally 1987, when the indexes were boosted by have been since the summer of 1986. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 37 Price increases for goods and services ing threat of inflationary pressures, as the other than food and energy were larger in economic expansion remained strong and 1988 than in 1987. The pickup, while margins of available labor and productive fairly moderate, was widespread and capacity dwindled. To head off a potential probably reflected in large part the past acceleration of inflation, the Federal year's acceleration in hourly compensa- Open Market Committee tightened retion and unit labor costs in the domestic serve conditions in a series of steps economy. By contrast, the pressures from beginning in the spring and extending rising import prices appeared to be a bit into 1989. The monetary aggregates were less pronounced than in 1987. Even so, running close to the upper ends of their higher prices for imports probably were growth ranges before the tightening an influence in some areas; the retail actions, but subsequently slowed, and prices of apparel, for example, rose they closed the year in the middle portions nearly 5 percent for the second year in a of their ranges. row, The price increases for industrial commodities slowed in 1988 after steep Implementation of Monetary Policy increases during 1987; by most mea- During the early months of last year, the sures, however, the year-to-year rate of Committee sought to counter any ecorise in these prices has remained some- nomic weakness that could result from what above that of inflation in general. the stock market break and to ensure the The producer prices of intermediate smooth functioning of domestic financial inputs, excluding food and energy, rose markets. Indicators of aggregate demand more than 7 percent during 1988, reflect- suggested that there was a risk of weaking the high levels of capacity utilization ness in the economy that warranted some in a number of industries, as well as the easing of monetary policy. In addition, tightening of labor markets. special emphasis was placed on monitoring domestic financial markets for signs of any new distress and on being alert to Monetary Policy and Financial the need to alter the provision of reserves Developments during 1988 quickly in response to any trouble. During 1988, Federal Reserve policy Against this backdrop, reserve conditions continued to be characterized by a flexi- were eased slightly in early February, ble approach to monetary targeting, with contributing to reductions in short- and System actions responding to emerging long-term interest rates. conditions in the economy and in finan- Throughout the spring, incoming ecocial markets, as well as to growth of the nomic data suggested that the economy monetary aggregates. This approach has had overcome the effects of lower equity been necessitated by the short-run vari- prices on confidence and spending. This ability in the relation of these aggregates information indicated that the economy to economic performance, owing prima- was expanding at a rate that threatened rily to their sizable response to changing progress toward long-run price stability. interest rates, in addition to spending. In Bond yields increased during this period, the early months of last year, monetary as indications of economic strength conpolicy was eased in light of incoming data tradicted the earlier market forecasts of a suggesting a weakening in the economic general slowdown and raised concerns expansion and the possibility of further about an uptrend in inflation. Based on financial market disruptions. Subsequent evidence of a greater potential for higher information, however, suggested a grow- wage and price inflation and in the context Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

38 76th Annual Report, 1989 of rapid growth in M2 and M3, the contributed to a strengthening of the for- Federal Reserve firmed reserve condi- eign exchange value of the dollar. tions further in a series of steps beginning in March and culminating in early August Behavior of Money and Credit with hike of a one-half percentage point M2 expanded 5.3 percent last year, just in the discount rate. These moves brought below the middle of its target range of 4 about substantial increases in short-term to 8 percent. Although demands for M2 interest rates, but were accompanied by were supported by strong growth in only small increases in Treasury bond income and spending, they were reduced yields, as investors viewed Federal Re- by increases in its opportunity cost—that serve actions as heading off a long-term is, the difference between market acceleration of inflation. The upturn in interest rates and the yields on M2short-term interest rates, coupled with type instruments. Early in the year, more optimistic expectations of future opportunity costs had declined in inflation, helped boost the foreign ex- response to decreases in market interest change value of the dollar during this rates relative to deposit rates in late 1987 period. and early 1988, leading to strong growth In view of the policy restraint already in M2 and a decline in its velocity—the in place, which was being reflected in ratio of nominal GNP to M2-during the slowing growth in the monetary aggre- first quarter. But as market interest rates gates, and some signs that economic growth may have been moderating, the Committee postponed any further action Growth of Money and Debtl over the late summer and early fall, Percentage change 2 awaiting further information on the course of the economy. During October Debt of domestic and November, the foreign exchange Period Ml M2 M3 nonvalue of the dollar declined, partly in financial sectors response to a rise in foreign interest rates relative to U.S. market interest rates and Fourth quarter to fourth quarter to investor concern over the lack of 1979 7.7 8.2 10.4 12.3 1980 . . .. 7.4 9.0 9.6 9.6 progress in reducing the U.S. federal 1981 5.2 9.3 12.3 10.0 budget deficit and the slowing improve- (2.5)3 1982 8.7 9.1 9.9 9.0 ment in the U.S. trade deficit. 1983 10.2 12.1 9.8 11.3 In late fall, incoming data suggested 1984 5.3 7.7 10.5 14.2 1985 12.0 8.9 7.7 13.2 that previous monetary restraint had not (13.0)4 been sufficient to relieve the potential for 1986 15.6 9.3 9.1 13.3 1987 6.4 4.2 5.7 9.8 higher inflation, and the Committee 1988 4.3 5.3 6.2 8.7 resumed tightening reserve conditions in Quarter to quarter a series of moves beginning in November (annual rate) 1988: 1 3.2 6.2 6.8 8.2 and extending into the new year. As a 2 6.4 6.9 7.2 8.7 result of these measures, short-term 3 5.2 3.8 5.5 8.6 4 2.4 3.8 4.9 8.4 market interest rates rose. In contrast, bond yields continued to fluctuate nar- 1. Ml, M2, and M3 incorporate effects of benchmark and seasonal adjustment revisions made in February 1989. rowly, signaling the market's continued 2. From average of the preceding period to average of confidence that inflationary pressures the period indicated. would be contained. This confidence, 3. Adjusted for shifts to NOW accounts in 1981. 4. The annualized growth rate from the second quarter together with the firming of policy, to the fourth quarter of 1985. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 39 moved upward after March and deposit reflected a modest pickup in the issuance rates lagged behind, the velocity of managed liabilities in M3 to fund reversed, and it rose 1.7 percent for all credit expansion at banks and thrift of 1988. The response of offering rates institutions. M3 followed a trajectory was especially sluggish in the last part of near the upper end of its target range in 1988. One reason may have been the first half of 1988, but moderated regulatory pressure on thrift institutions thereafter, in association with slowing and the closing of many insolvent credit growth at depository institutions. institutions, which often had been overly For the year, large time deposits and aggressive in pricing deposits. The other managed liabilities included in M3 extent to which thrift institutions were but not in M2 grew rapidly, as inflows offering higher rates than banks on small into M2-type deposits were insufficient time deposits was greatly reduced, and for banks and thrift institutions to finance partly as a consequence, growth of retail their desired pace of asset expansion. deposits was much stronger at banks This was particularly true in the second than at those institutions. half of the year, when M2 growth moder- The growth of the components of M2 ated. To some extent, M3 growth last also responded to changes in deposit year was bolstered compared with 1987 rates and market interest rates. Yields by a greater reliance by banks on on liquid deposits —interest-bearing managed liabilities included in M3 than checking deposits, savings deposits, and on nonmoney stock instruments, such money market deposit accounts — as bank borrowings from overseas changed very little over the year. During branches. In contrast, as in recent years, the first half of 1988, liquid retail de- the heavy use of Federal Home Loan posits expanded at a strong pace, largely Bank advances by thrift institutions— reflecting increases in their relative which are not included in M3—has had a attractiveness stemming from declines moderating effect on M3 growth. in market interest rates and, to a lesser At 4.3 percent, Ml growth last year extent, in rates on small time deposits. was down more than 2 percentage points Their growth slowed markedly over from 1987. Growth of interest-bearing the last half of 1988, following the checking accounts moderated, while reversal in the pattern of interest rate demand deposits continued running off. movements. Growth in small-denomi- As in recent years, the growth of Ml nation time deposits was particularly displayed great sensitivity to changes in robust throughout 1988. Expansion in market rates of interest. Households the early months of the year may have shifted savings balances between NOW resulted, in part, from shifts in house- accounts and those M2 components, such hold investment preferences away from as small time deposits, whose yields stocks toward the safety of these savings responded to increases in market rates instruments. Later, rising yields on much more quickly than those on NOW small time deposits relative to those on accounts. Because substitutions of this more liquid deposits led households to type are internalized within M2, M2 has shift funds from liquid deposits to small- displayed less sensitivity to interest rates denomination time deposit accounts. than has Ml in this decade. Demand M3 grew 6.2 percent last year, placing deposits, the other highly interestit slightly above the midpoint of its target sensitive component of Ml, again derange of 4 to 8 percent. This increase clined in 1988, partly reflecting increases from a 5.8 percent growth in 1987 in their opportunity costs and declines in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

40 76th Annual Report, 1989 compensating balances. The amount of reflected FSLIC-assistance transactions such balances that businesses must hold during the third quarter, rather than a in these non-interest-bearing accounts to significant underlying improvement in compensate banks for services falls when earnings. interest rates rise. Despite the turmoil in the thrift indus- The debt of domestic nonfinancial try, there has been no noticeable disrupsectors expanded nearly 8% percent tion of mortgage activity. In part, the during 1988, down from 9 percent in development of a deep secondary mort- 1987, placing it near the midpoint of the gage market has separated the origination Committee's monitoring range of 7 to 11 of loans from the need to fund them. For percent. Although debt expansion was this reason, the base of mortgage credit well below the pace of the mid-1980s, it has broadened in recent years, making still exceeded nominal GNP growth. Fed- the provision of mortgages far less depeneral debt grew marginally faster last year dent on the condition of any one type of than in 1987. Expansion in nonfederal financial institution or on the regional debtmoderated, as state and local govern- supply of loanable funds. During the ments trimmed debt issuance and as 1980s, the share of home mortgage credit households expanded their mortgage debt held in securitized form has increased at a less robust pace in response to higher from about 10 percent to more than onemortgage rates. Growth of business debt third. The spread between interest rates picked up a bit from the 1987 pace, with on fixed-rate mortgages, which have an short-term debt growing faster than long- average life of roughly ten years, and term debt. Corporate borrowing was yields on ten-year Treasury notes did not particularly strong, reflecting increased change appreciably over 1988, which external financing needs for capital invest- also implies that the mortgage markets ments and for mergers, buyouts, and continued functioning well despite the stock repurchases. problems of many savings and loan associations. Other Financial Developments In contrast to the thrift industry, Although the economy continued to grow preliminary data indicate that U.S. at a strong pace last year and the financialcommercial bank profits were reamarkets recovered from their skittishness sonably strong in 1988, even after following the stock market break of 1987, abstracting from the one-time jump in financial developments in certain markets earnings in the fourth quarter associated and sectors warranted the attention of with the resumption of Brazilian debt policymakers. Of particular note were payments. Moreover, most large the worsening condition of the thrift money-center banks with a significant industry, the need to achieve sounder amount of loans to developing countries capitalization of commercial banking have continued to build capital, which organizations, and the rising indebted- provides a cushion against default ness of businesses involved in restructur- losses. Giving added impetus to efforts ing activity. to raise equity was the agreement by As the year wore on, the dimensions of bank supervisory authorities of major the problems facing the thrift industry industrial countries to set more strinbecame clearer. Although industry losses gent, risk-based standards of capital eased in the third quarter from their adequacy. These standards, to be fully record levels in the first half of 1988, this phased in by 1992, place a greater development appears largely to have emphasis on equity capital, take into Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 41 account the off-balance-sheet activities Report on July 20,1989 of banks, and provide a more uniform regulatory treatment of banks based in Monetary Policy and the Economic different countries. Outlook for 1989 and 1990 As in 1987, banks lent considerable sums to finance mergers and leveraged As 1989 began, a reduction in inflationbuyouts. Although banks have reported ary pressures appeared essential if the that these loans have had a lower rate of ongoing economic expansion was to be loss than all other business loans com- sustained. Monetary policy during 1988 bined, and although LBO borrowers had been directed toward reducing the typically obtain some insurance against risks of an escalation of inflation and higher loan rates, concern remains about inflation expectations, but at the time of bank exposure to losses in the event of an the Board's report to the Congress in adverse turn in business conditions. For February of this year, success in that this reason, the Federal Reserve is closely effort seemed far from assured. monitoring developments in this area and Indeed, among the data reported in the has just revised its bank examination early part of 1989 were very lafge guidelines to ensure that member bank increases in the producer and consumer loans used to finance buyouts and other price indexes, reflecting not only the highly leveraged corporate restructur- effects of run-ups in oil and agricultural ings meet prudent credit standards. commodity prices, but also broader Leveraged buyouts and other mergers inflationary developments, including unand restructurings led to a record pace of favorable trends in unit labor costs over net equity retirements by nonfinancial the preceding year. Under the circumcorporations in 1988. Despite the large stances, with pressures on productive volume of this activity in recent years, resources still intense, monetary policy the overall corporate debt-to-equity ratio was tightened further. Reserve availabilis not out of line with observations since ity was curtailed through open market the early 1970s, reflecting increased operations, and the discount rate was market valuation of equities since the raised Vi percentage point in late Februearly 1980s. Much of the recent financial ary. In response to these policy actions restructuring has been a response to and to expectations that additional tightfundamental economic factors; it may ening moves might be needed, market impose a discipline on corporate manage- interest rates climbed throughout the first ment, which in turn can stimulate efforts quarter, and money growth was subdued. to improve productivity. Nevertheless, Over the course of the second quarter, heavy commitments of cash flow to several indicators suggested the emerservice debt reduce a firm's ability to gence of conditions that were more cope with stresses or industry-specific conducive to a future easing of inflationshocks. To some extent, the substitution ary pressures. Growth of the monetary of debt for equity is motivated by simple aggregates weakened further, with M2 tax-saving considerations, such as the running noticeably below its target range full deduction for interest payments and for the year. Aggregate demand for goods the double taxation of dividends. For and services moderated, reducing somethese reasons, reforming the corpo- what the strains on productive resources, rate tax system should be a component especially in the industrial sector of the of public policy in addressing this economy. The dollar exhibited considerdifficult issue. able strength in the foreign exchange Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

42 76th Annual Report, 1989 markets, portending a direct reduction in Monetary Objectives price pressures and slower growth in for 1989 and 1990 demands on domestic production capacity. Although the unemployment rate In February, the Federal Open Market remained essentially unchanged in the Committee specified a range for M2 neighborhood of 5 lA percent—the lowest growth in 1989 that was a full percentage level since the early 1970s—trends in point below that of 1988 and ranges for wages and total compensation showed M3 and debt that were V2 percentage little, if any, further step-up, reflecting at point below those of the previous year. least in part an awareness among workers This was the third consecutive year in and management of the need to contain which the ranges had been lowered. At costs in a highly competitive world econ- the same time, the Committee recognized omy. Meanwhile, prices of actively that, in light of the continuing uncertainty traded industrial commodities leveled regarding the shorter-term relation beout, enhancing the prospects forabroader tween monetary growth and changes in slackening in the pace of inflation. income and spending, a variety of indica- In this environment, interest rates tors of inflation pressures and economic turned down during the spring, as finan- activity as well as the behavior of the cial market participants responded not aggregates would have to be considered only to the better outlook for inflation in determining policy. but also in anticipation of an easing In February, the Committee had anticof monetary restraint by the Federal ipated relatively slow money growth over Reserve. The System began to pro- the first half of the year because of the vide reserves slightly more generously effects of the firming of policy through through open market operations at the late 1988 and into 1989. In addition to the beginning of June and took an additional influence of the higher interest rates on small easing step in early July. This desired holdings of money, however, helped bring about a further decline in several special factors —including the market rates of interest, which by mid- difficulties of the thrift industry and a July generally had more than retraced the drawdown of liquid assets to meet unusuincreases that had occurred earlier in the ally large individual tax payments — year. Most short-term interest rates were appear to have further reduced money down about Vi percentage point from balances in the first half. These factors their December levels, while long-term contributed to a substantial rise in velocrates had fallen as much as 1 percentage ity, the ratio of nominal GNP to the stock point on balance. of money. By June, money growth had picked up. Nonetheless, M2 ended the quarter Ranges of Growth for Monetary just 2 percent at an annual rate above the and Credit Aggregates fourth quarter of last year, compared Percentage changex with its annual growth range of 3 to 7 Provisional percent. In June, M3 was at the lower end Aggregate 1988 1989 ranges of its annual range of 3 V2 to 7 V2 percent. for 1990 The rate of expansion of domestic nonfi- M2 4to8 3to7 3to7 nancial sector debt also slowed in the first M De 3 bt 4 7 t t o o 8 11 6 3 V 1/ 2 2 to to 7 1 1 /2 0% 6 3 V 1/ 2 2 t0 to 7 1 1 0 /2 V4 half of this year compared with 1988, though by less than the monetary aggre- 1. From average of the fourth quarter of the preceding gates; debt has grown about 8 percent so year to average of the fourth quarter of the year indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 43 far this year, near the middle of its outlook for spending, prices, and finanmonitoring range of 6V2 to IOV2 percent. cial markets in 1990 should have clarified At its meeting earlier this month, the somewhat by then, as should the influ- Committee agreed to retain the current ence on monetary expansion of the ongoranges for growth of money and debt in ing resolution of thrift industry problems. 1989. The Committee anticipates that by For the long term, the Committee recogthe fourth quarter all three aggregates nized that ultimate attainment of price will be well within those ranges. The stability will require that the ranges for more rapid growth in M2 and M3 already money and credit growth be reduced evident since mid-May is expected to further in future years. extend through the second half. The recent declines in short-term market Economic Projections for 1989 and 1990 interest rates have made M2 holdings Voting members of the Committee and more attractive, tending to offset the other Reserve Bank presidents believe restraining effects on M2 of previous that the monetary ranges specified are increases of interest rates. With M2 consistent with some progress in reducexpansion likely also to be boosted by a ing inflation, which likely will be associfurther replenishing of liquid balances ated in the near term with continuation of depleted by tax payments, this aggregate a slower pace of economic growth. The is expected to grow a little faster than central tendency of the forecasts is for nominal GNP in the second half, bringing increases in real GNP of 2 to 1 V2 percent it into the lower portion of its annual in 1989 and of 1 Vi to 2 percent in 1990. growth range. The faster growth of M2 The expected easing of pressures on should show through at least in part to a resources should contribute to a damping quickening in M3 growth over the second of inflation in 1990, although the Board half of the year, so that this aggregate members and Bank presidents also are would move into the middle part of its anticipating some near-term relief from range. Domestic nonfinancial debt is the special problems that boosted prices likely to remain in the middle portion of in the first half of this year. Larger crops its range through year-end. later this year should result in more For 1990, the Committee provision- favorable behavior of food prices, and ally decided to use, for all three aggre- the recent peaking of crude oil prices gates, the same growth ranges in force suggests the likelihood of some softening for 1989. The Committee recognized in consumer energy prices. Thus, retail that the economic and financial outlook inflation should be considerably slower over the next year and a half is uncertain; over the remainder of this year, and the in particular, it is unclear at this juncture central tendency of consumer price index whether the velocities of M2 and M3 are forecasts for 1989 as a whole is 5 to 5V£ more likely to trend higher or lower next percent—compared with the rate of more year. Although the Committee's initial than 6 percent observed through May. assessment is that growth of money and The forecasts for the CPI in 1990 center credit through 1990 within the bounds of on 4Vi to 5 percent. the reduced ranges of this year likely The Administration's economic forewould foster the slower inflation and cast, presented in connection with its sustained real economic expansion that it mid-session update of the budget outlook, is seeking, it will reevaluate the ranges does not differ greatly from the projecnext February in light of the unfolding tions of the FOMC members. Nominal economic and financial situation. The GNP is near the upper ends of the central- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

44 76th Annual Report, 1989 tendency ranges of the FOMC for 1989 gage rates, although an overhang of and 1990, but with a more favorable mix supply in some locales could damp the of real output versus inflation, especially recovery. Surveys of business plans in 1990. There appears to be no basic suggest that capital spending will post inconsistency between the policy objec- further gains over the remainder of 1989, tives of the Federal Reserve and the but some moderation from first-half economic forecast of the Administration; growth rates is to be expected in light of indeed, the Administration has indicated declining levels of capacity use and the that it shares the view that the mainte- recent weakening in corporate profits. nance of anti-inflationary monetary pol- Spending on equipment is likely to conicy is a precondition for healthy eco- tinue to be buoyed by the desire to nomic expansion. modernize industrial facilities so as to In an environment of relatively slow enhance efficiency and meet intense overall growth, such as is expected by the competition here and abroad. FOMC members, some industries and The external sector represents an area regions are likely to experience setbacks; of considerable uncertainty in the ecobut major imbalances that could threaten nomic outlook for the next year and a the continuation of the economic expan- half. Real net exports of goods and sersion are not anticipated. In the household vices increased earlier this year, but sector, growth of consumer purchases improvements may be more difficult to has been sluggish and may remain so for achieve in the period ahead as the effects a while. Residential construction activity of past depreciation of the dollar wear off should pick up some in coming months, and are offset by those associated with the in response to the recent decline of mort- more recent appreciation. In addition, Economic Projections for 1989 and 1990 Percent FOMC voting members and other FRB presidents Measure Administration Range Central tendency 1989 Change, fourth quarter to fourth quarter Nominal GNP 5to7% 6to7 7.1 Real GNP l%to2H 2to2V4 2.7 Consumer price index1 41/2to5% 5 to 5% 4.9 Average level in the fourth quarter Unemployment rate2 5 to 6 Around 5 V4 5.3 1990 Change, fourth quarter to fourth quarter Nominal GNP 4Kto7tt 5% to 6% 6.8 R C e o a n l s u G m N e P r price index1 3 lt t o o 2 5 1 % /2 l 4 V % 2 t t o o 2 5 2 4 . . 6 1 Average level in the fourth quarter Unemployment rate2 5 to6!£ 5% to6 5.4 1. For the Federal Reserve, all urban consumers 2. For the Federal Resrve, percent of civilian labor (CPI-U); for the Administration, urban wage earners and force; for the Administration, percent of total labor force, clerical workers (CPI-W). including armed forces residing in the United States. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 45 the path of exports will depend impor- Inflation rose in the first half of 1989, tantly on economic growth abroad, which but most of the increase appears to have may slow as a result of policy actions resulted from transitory events. In partictaken by some of our major trading ular, energy prices increased sharply, as partners to offset mounting inflationary the rise in crude oil prices between pressures. Ultimately, achievement of November 1988 and May 1989 was the adjustment needed in the external passed through, and food prices surged sector will depend not only on govern- as the agriculture sector continued to mental policies that foster macroecono- experience adverse supply developmic stability, but also on the determina- ments. Outside food and energy, the tion of U.S. firms to meet foreign rate of inflation has, on average, recompetition through application of strin- mained at about its 1988 pace, even in the gent cost controls and intensified market- face of relatively high levels of resource ing efforts abroad. utilization. A key ingredient in maintaining a This apparent stability of underlying healthy pace of economic expansion is price trends is attributable in part to the further progress in reducing the federal appreciation of the dollar on exchange budget deficit. Since 1983, the deficit has markets. So far in 1989, prices of imfallen relative to GNP from more than 6 ported goods other than oil have been percent to around 3 percent, but it remains virtually flat on average, restraining large by historical standards. Taking the increases in the prices of domestically actions required to meet the Gramm-Rud- produced items. In addition, despite the man-Hollings targets on schedule will tightest labor markets in some time, wage foster confidence in the U.S. economy, trends have been fairly stable, helping to particularly among financial market par- limit the acceleration in unit labor costs ticipants. At the same time, reduced during a period in which productivity has demands by the federal government for weakened. credit will free up the available supply to interest-sensitive private sectors, such as The External Sector housing and business investment. The Developments in foreign exchange Committee thus views as highly encour- markets have played an important role in aging the commitments expressed by the shaping events in the domestic economy Congress and the Administration to begin in recent years. After depreciating over soon to address the problems of meeting most of the period from 1985 to late the fiscal 1991 budget target. 1987, the foreign exchange value of the dollar in terms of other G-10 currencies changed little, on net, in 1988, as a The Performance of the Economy decline in the final few months reversed during the First Half of 1989 much of the increase that had occurred After two years of rapid expansion, eco- earlier in the year. In December the nomic activity decelerated substantially dollar began to rebound, and it rose in the first half of 1989. Even at this more substantially through mid-June before moderate pace of growth, however, job dropping back somewhat. The apcreation was considerable—nearly Wi preciation of the dollar through the first million between December and June— half of 1989 was frequently met and the civilian unemployment rate, by concerted intervention sales of fluctuating around 5 lA percent, remained dollars by U.S. and foreign monetary itl the lowest range since the early 1970s. authorities. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

46 76th Annual Report, 1989 During December, and in the first In most of the other industrial counquarter of this year, the dollar rose in tries, economic growth has been strong. response to perceptions of a relative The resulting very high rates of capacity tightening of U.S. monetary policy. utilization and the diminishing slack in Reports of somewhat higher rates of labor markets, together with higher inflation and news about the strength of world oil prices and special factors, have the economy contributed to expectations spurred an appreciable pickup in inflation that Federal Reserve policy would be abroad in recent quarters. Policymakers tightened still further. There was a brief in many foreign industrial countries have pause in the dollar's rise after the Group responded by raising official interest of Seven finance ministers and central rates. Growth of the newly industrializbank governors stated in April that a ing economies in Asia has slowed refurther rise in the dollar that undermined cently, though the rates remain relatively the adjustment process would be counter- high. In contrast, developing countries productive. that are burdened with large external In May and early June, the dollar debts have continued to struggle to appreciated significantly on balance, achieve sustained economic growth. even though interest rates on nondollar The U.S. merchandise trade deficit in assets rose relative to those on dollar- the first quarter was $110 billion at a denominated instruments. Sentiment in seasonally adjusted annual rate, signififavor of the dollar was, perhaps, partly a cantly better than the figure for the fourth response to concerns about political quarter and that for 1988 as a whole. In events abroad, but the data on the U.S. the first two months of the second quarter, trade balance, which were better than the trade deficit was essentially unexpected, also may have played a role. changed from the first-quarter pace. For a while, the dollar's rise appeared to Exports have continued to expand this be associated with expectations of capital year, although not so rapidly as in 1988. gains on U.S. stocks and bonds. Since Export gains have been broadly based, mid-June, the dollar has retraced much with notable increases for agricultural of its second-quarter rise, under the goods, industrial supplies, capital goods, influence of increasing interest rates and consumer goods. Meanwhile, imabroad, declines in dollar rates, and some ports have increased moderately; in fact, easing of demands for dollar assets after in April and May imports of products the initial response to political uncertain- other than petroleum averaged less than ties in certain other countries. 1 percent above their fourth-quarter rate. Measured in terms of a trade-weighted Notable decreases were recorded in average of the other G-10 currencies, the imports of consumer goods and automodollar is about 8 percent higher than it tive products. So far in 1989, the value of was in December 1988 and about 12 oil imports has risen sharply, as higher percent higher than it was in December prices for petroleum and petroleum prod- 1987. After adjustment for changes in ucts were accompanied by a small inrelative price levels, the appreciation of crease in physical volume. The further the dollar has been larger because U.S. improvement in the U. S. trade balance in inflation has remained above the average the first five months of this year reflects for the other G-10 countries. Meanwhile, several factors, most importantly the the currencies of South Korea and Taiwan strength of economic activity abroad, the have risen moderately against the dollar slower growth of U.S. activity, the so far in 1989. continuing, if diminished, benefit for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 47 U.S. price competitiveness from the weakening in purchases of furniture and depreciation of the dollar through the end appliances likely was related in part to of 1987, and the restraint that the recent the drop in home sales. rise in the dollar placed on prices of Consumption slowed against a backnon-oil imports. drop of strong income growth in the The current account deficit widened in early part of the year, although weaker the first quarter to $123 billion. The income growth was evident in the increase from the fourth-quarter rate was spring. Personal income gains in the more than accounted for by capital losses first quarter were accentuated by the on assets denominated in foreign cur- assumption of the national income rencies resulting from the dollar's appre- accountants that the income of farm ciation. Setting aside those losses, the proprietors would return to normal current account balance in the first quar- levels over the year, after the droughtter showed a deficit of $108 billion, an induced reductions in 1988. With hirimprovement of about $22 billion from ing down in the spring, increases in the previous quarter. Nearly all of this wages and salaries softened noticeably, improvement resulted from the narrow- showing virtually no growth in real ing of the trade deficit. Preliminary terms. Also, growth of the nonwage information on capital transactions in the components of personal income was early months of 1989 suggests an increase weaker on balance in the second quarter. in net private foreign purchases of U.S. The personal saving rate has been on a Treasury securities and corporate bonds distinct upswing since reaching a fortyand substantial foreign direct investment year low in mid-1987. Several explanain the United States. tions have been propounded for the recent The improvement in real net exports rise, among them the lower level of accounted for nearly half of the overall household net worth relative to income rise in the GNP during the first quarter, since the stock market break of 1987, more than reversing its negative contri- higher costs of consumer credit (espebution in the fourth quarter. The contri- cially in after-tax terms, because of the bution to GNP growth in the second phase-down of interest deductibility), and quarter probably was negligible, how- concerns about a potential softening of ever, as real net exports may have begun the economy. Whatever the cause, houseto be depressed by the loss in U.S. price holds appear to have adopted a more competitiveness associated with the cu- cautious spending stance, though it also mulative rise in the dollar since the end of should be noted that the personal saving 1987. rate has remained below the norms of the 1960s and 1970s. The Household Sector Residential construction declined over Much of the slowing in overall economic the first half in response to the rise in growth in the first half of 1989 reflected a interest rates and to earlier overbuilding deceleration in consumer spending. The in some markets. The more recent drop slump in demand was fairly broad, en- in rates, which began in May, likely will compassing a variety of durable and non- be reflected in some improvement in durable goods. Despite the widespread construction over the summer and fall. availability of special financing deals and Total housing starts, at an average another incentives, sales of motor vehicles nual rate of 1.44 million units through in the first half were about 6 percent May, were down 3 lA percent from their below the pace of 1988 as a whole. A 1988 pace. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

48 76th Annual Report, 1989 Starts in the single-family sector aver- The gain in investment has occurred in aged about 1 million units at an annual the equipment category. Particularly rate between March and May, a period noteworthy in the first quarter was a relatively free from the weather-related sharp rise in outlays for industrial machindistortions that affected construction in ery. Increases in that area, which includes January and February. Interest rates on spending for fabricated metal products, fixed-rate mortgages rose above 11 per- engines, turbines, and a variety of other cent for the first time since 1985, with types of industrial apparatus, have been part of the rise attributable to investor exceptionally strong since mid-1987. concerns about sizable future liquidations Spending for high-technology equipment of mortgage assets by troubled thrift also has been robust. Computer outlays institutions. Also, rates on adjustable- decelerated during the second half of rate mortgages rose nearly a full percent- 1988, possibly reflecting some hesitation age point during the early months of on the part of potential purchasers in 1989, as discounting of initial interest response to the rapid pace of new product rates on ARMs was reduced. In recent announcements; but spending was up years, relatively low initial terms on considerably in the first quarter, and ARMs led an increasing number of another gain appears in train for the households to favor this instrument for second quarter. home purchases. Since their highs in the High levels of factory utilization apparspring, interest rates on ARMs have ently have spurred a rise in industrial fallen more than Vi of a percentage point, building in recent quarters. Outlays for while fixed-rate mortgage rates have construction of office and other commerdropped about \lA percentage points. cial buildings also rose earlier this year, Meanwhile, multifamily starts fell although the level of total spending on further in the first half of the year from commercial structures remained below the already low level recorded in 1988. that of the 1985-86 period, depressed by Multifamily housing production has excess space in many areas. And, while been limited by an overhang of vacant the rise in energy prices led to some rental units. Moreover, building in this increase in oil and gas drilling in the sector continues to reflect the effects of spring, the level of activity remained the Tax Reform Act of 1986, which, very low compared with that of the early by curtailing many of the financial 1980s. advantages associated with investment Inventory investment slowed over the in rental housing, sharply reduced its first five months of 1989, as businesses after-tax profitability. adjusted with apparent promptness to the more moderate expansion of final de- The Business Sector mand . Inventory buildups by manufactur- In contrast to the household sector, ers have been concentrated in the aircraft business capital spending strengthened in and other capital goods industries, where early 1989, responding in part to high production has risen and order backlogs levels of capacity utilization in the United are large. In contrast, in the retail sector, States and to international pressures to automobile inventories rose sharply in lower costs. In the first quarter of 1989, the first quarter and have remained high. real business fixed investment rose at an In an effort to reduce the overhang before annual rate of IVi percent, and such introducing new models in the fall, spending appears to have increased sub- carmakers have lowered factory assemstantially further in the second quarter. bly rates and have enhanced sales incen- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 49 tives. Qualitative reports have suggested Spending for the space program and for that stocks at some other retailers also tax and immigration enforcement also may have risen above desired levels, has risen. although most firms appear to have been On a unified budget basis, total nomifollowing cautious inventory policies, nal outlays for the fiscal year through and problems of excess stocks seem to be May were more than 6 percent above the limited. comparable year-earlier total. Spending In the first quarter of 1989, before-tax related to the thrift institution problem economic profits of nonfinancial corpo- spiked at year-end 1988 and then dropped rations declined, in part because unit sharply in the first half of this year. On labor costs increased as sales growth the other hand, growth has continued in slowed and productivity deteriorated. entitlement spending (principally Medi- The drop in profits was spread over most care and Social Security) and in net types of businesses; the largest decline interest outlays. was in the manufacturing sector, which Federal receipts have grown even had especially strong gains in both 1987 more rapidly than outlays, buoyed by and 1988. Meanwhile, corporate tax increases in employment and income. In liabilities edged up in the first quarter, addition, there was an extraordinary owing in part to higher profits generated spurt in nonwithheld tax collections in from the rise in prices of inventories. The April and May, the sources of which are combination of lower operating profits at this point uncertain. Some possible and higher tax liabilities reduced the explanations relate to the Tax Reform internal cash flow of nonfinancial Act of 1986 and include greater-thancorporations. anticipated effects from its basebroadening provisions and a shifting of The Government Sector income from earlier years into 1988, In the first quarter, real federal pur- when the reduction in personal tax rates chases of goods and services, the was fully phased in. In addition, realizapart of federal outlays that is counted tions of taxable capital gains may have directly in GNP, were virtually un- been hefty last year because of the large changed. Such purchases are dom- number of corporate mergers and leverinated by defense; nominal spending aged buyouts. All told, receipts thus far authority in this area has been virtually in 1989 are 10 percent above year-earlier flat since 1985, and procurement of levels, and the Administration now some major new weapon systems is projects that the total budget deficit for winding down. As a result, real military FY1989 will be $148 billion, compared purchases have fallen and in the first withthe$155billionrecordedinFY1988. quarter were nearly 5 percent below Real purchases of goods and services the mid-1987 peak. The decline in by state and local governments have been defense spending has been partially on a moderate uptrend this year. Outlays offset by increases in other federal for personnel and construction in the purchases. Inventories held by the education and law enforcement areas Commodity Credit Corporation edged have been subject to considerable upward down further in the first quarter, but pressure. Some other expenditures have the rate of decline has been slowing (on risen because of federal mandates, espea seasonally adjusted basis) since the cially those in recent health legislation. middle of last year as the effects of As in the federal sector, growth of state last summer's drought have dissipated. and local outlays has been tempered by Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

50 76th Annual Report, 1989 budgetary pressures; excluding retire- 1986 through mid-1988; since then the ment trust funds, which are running a rate of increase has flattened out, and in large surplus, the sector had a deficit of June earnings were up 3 % percent from a about $17 billion at an annual rate in the year earlier. The employment cost index first quarter. Revenue experience was for wages and salaries in the private favorable this spring, however, as a nonfarm sector, a broader measure of significant number of states reported wages that is available only through personal income tax receipts that were March, indicated some easing of wage larger than expected. trends in the goods-producing sector; however, in the service-producing indus- Labor Markets tries, the trend remained sharply upward. Job growth was substantial over the first The cost of benefits provided to employhalf of 1989, though it slowed in the ees in the goods and services sectors rose spring. In the first quarter, additions to slightly faster than wages over the year nonfarm payrolls averaged 264,000 a ended in March, and total compensation month, about the same pace seen over the per hour—wages and salaries plus beneprevious two years. By spring, hiring fits - was up 4 Vi percent over that period, had begun to slow, and payroll employ- in the same range as the 12-month ment growth dropped back to 200,000 increases recorded in the preceding three per month in the second quarter as a quarters. whole. Even at this reduced rate, how- Productivity performance has deterioever, job gains were larger than are likely rated somewhat in recent quarters. In to be sustained, given the underlying some instances, higher levels of productrend in labor force growth. Manufactur- tion have forced firms to use less efficient ing employment declined in the second capital and to employ less skilled labor. quarter, while the number of construction Output per hour in the nonfarm business jobs was about unchanged. Growth of sector was down in the first quarter, and employment moderated in the service- virtually unchanged on a four-quarter producing sectors, where advances have basis. With the sizable increases in been the largest over the course of this compensation over the same period, unit business expansion. labor costs accelerated to a 514 percent The moderation in the growth of the annual rate, the largest year-over-year demand for labor in the second quarter increase since late 1982. In manufacturdid not lead to any appreciable reduction ing, the rise in unit labor costs in the year in labor market tightness. The unemploy- ended in the first quarter was about 1 ment rate has fluctuated between 5.0 and percent; unit costs had declined earlier in 5.4 percent thus far this year; in June it the business expansion. This step-up in stood at 5.3 percent. Although many unit labor costs reflects a slackening in Americans remain involuntarily unem- the improvement of factory productivity; ployed, the difficulty of matching work- compensation increases have remained ers with jobs—given considerations of moderate. skill and location—is much greater than it was earlier in the expansion. Price Developments By at least one aggregate measure, the Inflation increased sharply in early 1989, rate of increase in wages seems to have reflecting higher costs for food and leveled off in recent quarters. Average energy. The consumer price index for all hourly earnings of production and nonsu- items, a broad-based measure for finpervisory workers accelerated from late ished goods and services, rose at an Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 51 annual rate of more than 6 percent risen at a rate slightly lower than that through May, compared with the pace of recorded for 1988. A marked diminution AVi percent in 1987 and 1988. The of increases in non-oil import prices producer price index for finished goods associated with the appreciation of the recorded an even more pronounced accel- dollar apparently has restrained the prices eration, owing to the greater importance of many goods, notably apparel and a of food and energy in that index. How- variety of household items. In contrast, ever, the underlying inflation trend has inflation in the service sector has innot deteriorated: Excluding food and creased, especially in labor-intensive serenergy, inflation at the retail level has vices, such as medical care, entertainbeen running at a rate of around 434 ment, and public transportation. percent, about the same as in 1988. At early stages of processing, prices of Energy prices began rising sharply goods have risen little or declined in last November, after the OPEC nations recent months. Prices for many crude agreed to limit crude oil production. industrial commodities, which had Subsequently, temporary supply dis- climbed sharply in 1987 and 1988 with ruptions in Alaska and in the North Sea the expansion of factory output, have added to price pressures. The posted softened this year. This in turn has helped price of West Texas Intermediate, the hold down the increase in prices at the U.S. benchmark for crude oil, jumped intermediate level of production; the from about $13 per barrel in November producer price index for intermediate to over $19 in early May. As a result, materials, excluding foods and energy, energy prices at the producer level was unchanged on net in the second soared, and consumer energy prices rose quarter. nearly 25 percent at an annual rate between December and May. More Monetary Policy and Financial recently, posted prices of crude oil have Developments during the First remained between $19 and $20 per Half of 1989 barrel. Increases in retail food prices were In conducting monetary policy over the large in the first half of 1989, in part first half of the year, the Federal Open reflecting the lingering effects of last Market Committee continued its effort to summer's drought and additional damage foster long-run price stability, so as to to some crops this year. From the begin- build a base for sustainable expansion of ning of the year through May, the rise in the economy. In again reducing the the CPI for food was close to 8 percent at ranges for money and debt growth at its an annual rate. Although drought cur- February meeting, the Committee recogtailed the winter wheat crop for 1989, nized that restraint on the expansion of total crop acreage has expanded, and money and credit would be needed to overall production should rebound this promote this goal. year if weather conditions are satisfac- At the same time, the Committee tory. In addition, meat supplies seem realized that considerable uncertainty likely to hold fairly steady over the remained about the behavior of the second half of this year. Thus, pressures monetary aggregates. Relatively wide from the supply side should not be a big monetary ranges—4 percentage points in factor in the food price outlook. breadth—were retained, in part to take Excluding food and energy, prices for account of the substantial interest rate commodities at the consumer level have sensitivity of money demand over hori- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

52 76th Annual Report, 1989 zons of as long as a year and of the was weakening; and the behavior of unpredictable effects on money demand commodity prices and some other indicaof the resolution of the crisis in the thrift tors of potential price trends suggested industry. Moreover, in these circum- that inflationary momentum might begin stances, the Committee recognized that, to wane. In view of the uncertainties in addition to the behavior of the mone- surrounding the outlook and taking into tary aggregates, a variety of indicators of account the subdued pace of money inflationary pressures and the course of growth, the Committee left reserve mareconomic activity would have to be taken ket conditions unchanged through the into account in shaping policy over 1989. middle of the second quarter. Many interest rates began to move off The Implementation of Monetary Policy their March highs early in the second As noted previously, developments early quarter as indications mounted of moderin 1989 suggested that a worrisome risk ation in the pace of economic activity and remained that inflation was picking up in underlying price pressures. With the and could become more deeply embed- passing weeks, a considerable weakening ded in the economy. Wage and benefit in housing activity became evident, and costs had accelerated in 1988, and the incoming data showed employment to be readings for the consumer and producer expanding at a noticeably slower rate. price indexes were troubling. Extending Market expectations of some additional the move toward restraint that began tightening of monetary policy shifted to almost a year earlier, the Federal Reserve anticipations of an easing. The ensuing increased reserve market pressures at the decline in interest rates did not, however, start of this year and again in mid- prompt a drop in the foreign exchange February. On February 24 the discount value of the dollar. Instead, the dollar rate was raised Vi percentage point to 7 appreciated further over this period, in percent. part because of political uncertainties These policy actions were accompa- abroad and in part because of data on the nied by marked increases, of about a U.S. trade balance that were better than percentage point, in most short-term expected. The dollar also may have interest rates. Yields on long-term secu- gained support for a while from expectarities also moved up, but by considerably tions that the rallies in U.S. securities less than short-term rates. The foreign markets would continue. The monetary exchange value of the dollar strengthened aggregates weakened further in April as interest rates in the United States rose and early May, reflecting the drawdown relative to those abroad. Money growth of liquid balances to make personal tax slowed: Ml was roughly flat in the first payments that were larger than expected. quarter, and M2 and M3 decelerated In May, M2 fell to the lower edge of the from already reduced rates in the second parallel band associated with its annual half of 1988. target range, and M3 slipped just below By spring, the outlook for spending the bottom of its growth cone. and prices had become more mixed. The FOMC eased policy slightly at the Employment growth still looked strong; beginning of June and again in early July. indicators of capital spending suggested The federal funds rate moved down about a rebound from the fourth quarter of Vi percentage point in two steps to around 1988; and prices continued to advance 9lA percent. Evidence that the more rapidly. But consumer demand appeared moderate pace of economic activity was to have moderated; industrial production persisting, indicators of the behavior of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 53 wages and sensitive prices, and the posits. Yields on NOW accounts moved weakness of the monetary aggregates all up only about 10 basis points over the were consistent with a prospective ebbing year ended in March, while those on of inflationary pressures. Moreover, the other liquid deposits — savings and Money dollar was appreciably above year-end Market Deposit Accounts (MMDAs) — levels, which could be expected to have rose about lA and 1 percentage point favorable effects in restraining inflation. respectively; many short-term market While inflation remained a concern, an rates increased more than 3 percentage intensification of price pressures did not points over the same period. Rates on appear to be a present danger, and the small time accounts increased much more risks of cumulating weakness in the econ- than those on the more liquid retail deomy had increased. posits, but they too failed to keep up with Although the easing steps were largely the rise in market yields. expected, most short-term interest rates Some of the sluggishness in the adjustcontinued downward in anticipation of ment of returns on retail deposits over further monetary policy actions, more this period may have reflected continued than offsetting their first-quarter rise. regulatory pressures on thrift institutions The bond market rallied further, leaving to moderate their pricing of deposits, as long-term rates by mid-July down Vi to 1 well as the closing last year of some percentage point on balance from late- insolvent institutions with aggressive 1988 levels. Stock prices continued their pricing policies. More broadly, the slow brisk upward movement, reaching post- upward adjustment of deposit rates, October 1987 highs. The value of the especially on accounts without fixed dollar also moved down somewhat in late June and dropped further in early July; it retraced most of its rise during the second quarter, although remaining well above Growth of Money and Debt its level at year-end 1988. Percentage change The Behavior of the Monetary Aggregates Debt of domestic Growth of the monetary aggregates was Period Ml M2 M3 nonquite sluggish over the first half of 1989, financial sectors reflecting the effects of increases through March in market interest rates relative to Fourth quarter to fourth quarter returns on monetary assets, some depos- 1979 7.7 8.2 10.4 12.3 itor concern over the problems of the 1980 ... 7.4 9.0 9.6 9.6 1981 5.2 9.3 12.3 10.0 thrift industry, and large tax payments by (2.5)2 1982 8.7 9.1 9.9 9.0 individuals. From the fourth quarter of 1983 10.2 12.1 9.8 11.3 1988 through June, M2 edged up at an 1984 5.3 7.7 10.5 14.2 1985 12.0 8.9 7.7 13.2 annual rate of only 2 percent, markedly 1986 15.6 9.3 9.1 13.4 below last year's pace of 5 lA percent. M2 1987 6.4 4.2 5.7 9.8 1988 4.3 5.2 6.2 8.9 velocity rose sharply through the second quarter. Quarter to quarter (annual rate) The deceleration of M2 in the first 1989: 1 -0.4 1.9 3.7 8.2 quarter stemmed largely from a combina- 2 -5.5 1.3 3.1 7.4e tion of continued increases in market 1. From average of the preceding period to average of interest rates and unusually slow upward the period indicated. 2. Adjusted for shifts to NOW accounts in 1981. adjustment of rates paid on retail de- e Estimated Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

54 76th Annual Report, 1989 terms—NOW accounts, MMDAs, and The increased opportunity costs of the savings deposits-also reflected the con- first part of the year continued to damp tinued evolution of pricing strategies by money growth into the second quarter, depository institutions in the deregulated but, in addition, liquid balances were environment. By concentrating upward drawn down to meet large April tax rate adjustments in small time deposits payments. Nonwithheld personal tax and offering more sophisticated account payments were $16 billion greater this structures, in which larger balances April than last. The tax-related effect was receive higher rates, institutions found manifested in a sharp drop in the liquid that they could retain the bulk of their components of M2 in late April and into funds while minimizing the effects of May as the payments continued to clear. higher market rates on their overall Transaction accounts posted large deinterest expense. clines, outflows of savings and MMDA Nonetheless, as yields on market in- balances accelerated, and inflows to struments became increasingly attractive money market mutual funds paused. relative to those on deposits over the first Balances began to bounce back in late quarter, some funds were redirected to May, however, as depositors started to instruments not included in the monetary rebuild their holdings of monetary assets; aggregates. Noncompetitive tenders for and in June, M2 grew at an annual rate of Treasury bills and notes, a rough indica- 634 percent. tor of the extent to which individual Also contributing to the rebound in investors are increasing their holdings of holdings of money balances after mid- Treasury securities, surged early in the May were declines in opportunity costs year and remained strong through March. as market interest rates headed down. The increase in demand for Treasury Yields on small time deposits lagged this securities was greater than would have move, and returns on these deposits at been expected from interest rate move- times exceeded those on market instruments alone, suggesting that depositors' ments. Demand for Treasury securities nervousness about the problems of the through noncompetitive tenders fell back, thrift industry were playing a role too. and growth in small time deposits, al- Although the President submitted to the ready robust, jumped to an annual rate of Congress a comprehensive plan for re- more than 20 percent for the quarter. solving the industry's difficulties early in Yields on small time deposits at thrift the year, and gave assurances that the institutions responded somewhat more U.S. government would back insured slowly than those at banks to the downturn deposits fully, FSLIC-insured thrift in- in market interest rates, and growth of stitutions experienced large outflows of these deposits at thrift institutions surged. deposits throughout the first quarter. Largely because of this strength in small These outflows apparently depressed time accounts, and because the most overall M2 growth somewhat during anxious depositors probably had already that period, but the bulk of the funds moved their funds elsewhere, overall likely remained within the aggregate. deposit balances at FSLIC-insured thrift Commercial banks experienced rela- institutions stabilized in the second tively strong growth in core deposits, and quarter. M2-type money market mutual funds, M3 grew at an annual rate of 3Vi whose rates adjust relatively quickly to percent from the fourth quarter of last changes in market interest rates, saw year to June, placing it at the lower bound sizable inflows of funds. of its target range. In the first quarter, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 55 expansion of M3 was subject to offsetting in the quarter, however, both demand forces. It was bolstered somewhat by and other checkable deposits began to bank funding needs generated by strong increase, perhaps as some of the earlier demand for business loans. Added de- influences started to be reversed with the mand for commercial and industrial loans drop in market interest rates over the stemmed both from merger-related finan- second quarter. cings and from shifts to short-term borrowing by businesses facing rising long- Credit Flows term interest rates and investor concerns The aggregate debt of domestic nonfinanabout "event risk"—the possibility that a cial sectors expanded at an annual rate of firm's debt obligations would be signifi- close to 8 percent over the first half of this cantly downgraded in a corporate buyout year, near the midpoint of its monitoring or restructuring. Acting to damp M3 range and down somewhat from its 1988 growth over the first quarter, however, pace. The growth of federal sector debt was heavy reliance by thrift institutions slowed as tax receipts surged. Expansion on Federal Home Loan Bank advances of the debt of nonfederal sectors also and other borrowings, which are not moderated, partly in response to higher included in the money stock. M3 growth levels of market interest rates over much edged down a bit in the second quarter of the first half of the year. Household with some easing of bank credit demands borrowing in mortgage markets slowed and strong growth in government de- as increases in lending rates damped posits—also not included in the money housing demand, while the pace of stock—resulting from the large volume consumer borrowing slackened along of tax payments. By June, however, M3 with the deceleration in consumption had rebounded as tax effects unwound. spending. Reflecting interest rate and tax-related Mortgage lending by thrift institutions effects, Ml declined at an annual rate of did not appear to be unusually weak in the 3!/2 percent from the fourth quarter of first few months of 1989, given the 1988 to June. Balances in other checkable prevailing interest rates. These institudeposits, which had moved down a little tions coped with weak deposit flows by over the first quarter in response to higher running off cash and investments and, opportunity costs, dropped substantially through the first quarter, stepping up in late April and early May as the tax borrowing from the Federal Home Loan payments cleared. Demand deposits also Banks. Despite signs of a reduction in declined on balance over the first half of mortgage lending activity by these instithe year, because opportunity costs in- tutions in the second quarter, the overall creased and because the balances busi- availability of housing credit did not nesses are required to hold to compensate appear to be significantly impaired. their banks for services fell. After changes Spreads between rates on both fixedin market rates of interest, banks often rate mortgages and mortgage-backed adjust with a lag the "earnings credit" securities and rates on Treasury instrurates used to determine the level of ments of comparable maturity did widen required compensating balances; thus, over the first six months of the year, with downward adjustments to compensating some market participants reportedly fearbalances can continue for some time after ing that large-scale liquidations of market rates have stopped rising. The mortgage-backed securities by troubled large personal tax payments also affected thrift institutions could adversely affect householddemand-depositbalances.Late the market for those instruments. How- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

56 76th Annual Report, 1989 ever, the widening also may have re- level since 1984. This ratio rose someflected other developments: a general what late in the second quarter, when the increase in uncertainty about movements decline in long-term interest rates began in long-term interest rates (and therefore to bring forth an increase in refunding about prospective prepayments), and the activity and a pickup of issuance of bonds flattening of the yield curve, which to raise new capital. m discouraged issuance of derivative mortgage instruments and thus reduced demand for the underlying mortgagebacked securities. Total borrowing by nonfinancial businesses in the first half of the year was close to its 1988 pace. Credit demands continued to be buoyed by sizable mergerrelated financing in the first quarter, and an apparent pickup in capital expenditures increased business borrowing in the second quarter even as credit demands related to mergers and restructurings, while still strong, eased a bit. Because of investor fear of event risk triggered by the RJR-Nabisco acquisition in late 1988 as well as higher long-term rates through much of the period, corporate borrowing was concentrated in short-maturity vehicles. Commercial paper issuance surged during the first half of the year; businesses also relied on bank loans, albeit to a lesser extent. In response to investor concerns about event risk, many firms issued bonds with relatively short maturities of one to five years, or they brought issues to market with straight puts or with so-called poison puts—covenants designed to protect against negative effects on bondholders from future restructurings. Toward the end of the second quarter, with the introduction of these protections and the decline in rates, longterm financing in the corporate bond market was on the upswing. Net issuance of tax-exempt securities by state and local governments fell sharply over most of the first half of 1989. Investor demand for tax-exempt securities remained strong and, with diminished supply, the ratio of taxexempt to taxable yields fell to its lowest 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

59 Record of Policy Actions of the Board of Governors Regulation B from businesses with higher revenues are (Equal Credit Opportunity) subject to the regulation's modified notice requirements and recordkeeping rules. November 22, 1989-Amendments In addition, the revisions eliminate an exception that had permitted creditors to The Board amended Regulation B, effecmake inquiries about the marital status of tive April 1, 1990, to implement recent an applicant for business credit and an changes in the Equal Credit Opportunity exception concerning the reporting of Act relating to business credit. credit information. Although Governor Angell supported Votes for this action: Messrs. Greenspan and Johnson, Ms. Seger, and Messrs. the revisions to Regulation B, he pre- Angell and LaWare. Absent and not voting: ferred defining small businesses as those Mr.Kelley.1 having annual gross revenues of $500,000 or less. He believed that business credit The Women's Business Ownership Act applicants with revenues greater than of 1988 amended the Equal Credit Op- that amount have enough alternatives for portunity Act to provide small business credit that discrimination would not be as owners who borrow with the same rights much a factor in credit decisions. and protection under the act as are The amendments are effective Decemafforded consumers. The legislation had ber 8, 1989; compliance is not mandabeen enacted in response to a perception tory, however, until April 1, 1990. by women that they were being discriminated against in obtaining business credit. The act requires creditors to give Regulation C written notice to business applicants of (Home Mortgage Disclosure) their right to obtain a written explanation of a credit denial. Also, creditors are December 6, 1989—Revision required to retain records relating to The Board revised Regulation C, effecbusiness credit applications for at least a tive January 1,1990, to implement recent year. amendments to the Home Mortgage The amendments to Regulation B Disclosure Act that expanded coverage implement the statutory requirements and and required additional disclosure of define a small business as a firm that had certain residential lending data. gross revenues of $1 million or less in the preceding fiscal year. The amendments Votes for this action: Messrs. Greenspan require that creditors provide written and Johnson, Ms. Seger, and Messrs. notices and retain records on applications Angell, Kelley, and LaWare.1 involving small businesses. Applications The Home Mortgage Disclosure Act requires covered lenders in metropolitan 1. Throughout this chapter, note 1 indicates that statistical areas to disclose annually the a vacancy existed on the Board when the action was taken. amount of their mortgage and home Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

60 76th Annual Report, 1989 improvement lending, and to indicate by subject to reserve requirements set by the census tract or by county the location of Board. Initially, the Board set reserve loans originated or purchased. The Finan- requirements at 3 percent of an institucial Institutions Reform, Recovery, and tion's first $25 million in deposit balances Enforcement Act of 1989 amended the and at 12 percent of balances above that Home Mortgage Disclosure Act by (1) level. The act directs the Board to adjust extending coverage to all types of mort- annually the amount subject to the lower gage lenders, including those not affili- reserve requirement to reflect changes in ated with a depository institution or a transaction balances nationwide. By the holding company; (2) requiring disclo- beginning of 1989, the amount was $41.5 sure of information on the disposition of million. Recent declines in transaction loan applications, in addition to the balances warranted a decrease of $1.1 information on loan originations and million. The Board, therefore, amended purchases; (3) requiring disclosure of Regulation D to decrease to $40.4 million data on the race, gender, and income of the amount of transaction balances to borrowers and applicants; and (4) requir- which the lower reserve requirement ing disclosure of information on those applies. The amendment is effective with who acquire loans sold by an institution. the reserve computation period beginning The Board revised Regulation C to December 26, 1989, for institutions that implement these changes. In addition, report weekly; and December 19, 1989, the Board adopted a new loan application for institutions that report quarterly. register form to facilitate compliance The Garn-St Germain Depository with the disclosure requirements. Under Institutions Act of 1982 established a the new register format, institutions are zero percent reserve requirement on the required to record loan applications, first $2 million of an institution's reservloans made, and loans purchased. The able liabilities. The act also provides for first set of reports using the new format is annual adjustments to that exemption due March 31, 1991. based on deposit growth nationwide. Because of the lack of growth in deposits this year, no adjustment was made to the Regulation D exemption. (Reserve Requirements of Depository Institutions) Regulation H (Membership of State Banking December 6, 1989-Amendment Institutions in the Federal Reserve System) The Board amended Regulation D to decrease the amount of transaction bal- February 3, 1989—Amendment ances to which the lower reserve requirement applies. The Board amended Regulation H, effective April 1, 1989, to improve public Votes for this action: Messrs. Greenspan access to financial information about the and Johnson, Ms. Seger, and Messrs. condition of state member banks and Angell, Kelley, and LaWare.1 U.S. agencies and branches of foreign banks. Under the Monetary Control Act of 1980, depository institutions, Edge and Votes for this action: Messrs. Greenspan agreement corporations, and U.S. agen- and Johnson, Ms. Seger, and Messrs. cies and branches of foreign banks are Angell, Heller, Kelley, and LaWare. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 61 The amendment to Regulation H re- authorized member banks to invest in quires that member banks make available those funds. to shareholders and to the public, upon request, one free copy of their year-end reports of condition and of income for the Regulation Y preceding two years, or alternatively, (Bank Holding Companies and reports containing information equiva- Change in Bank Control) and lent to the data provided in the year-end Rules Regarding Delegation of statements. Agencies and branches of Authority foreign banks are required to provide, upon request, free copies of three speci- August 24, 1989—Amendments fied schedules from their year-end reports. After the effective date of the The Board amended Regulation Y, effecamendment, covered institutions must tive October 10, 1989, to permit bank provide the year-end statements no later holding companies to acquire savings than April 1 of the following year and associations. The Board amended its must notify shareholders and the public Delegation Rules, effective September when the information becomes available. 18,1989, to delegate authority to approve the acquisition of a failing savings institution to a senior Board officer. February 10, 1989—Interpretation Votes for these actions: Messrs. Greenspan Effective February 17, 1989, the Board and Johnson, Ms. Seger, and Messrs. issued an interpretation of Regulation H Angell, Kelley, and LaWare.1 that conditionally authorizes member banks to purchase stock of certain invest- The Financial Institutions Reform, ment companies. Recovery, and Enforcement Act of 1989 amended the Bank Holding Company Votes for this action: Messrs. Greenspan Act to allow holding companies to acquire and Johnson, Ms. Seger, and Messrs. healthy and failed or failing savings Angell, Heller, and LaWare. Absent and not voting: Mr. Kelley. associations. The Board revised Regulation Y to permit the acquisition of a The interpretation of Regulation H savings association in any state, without permits state member banks to purchase regard to whether the bank holding comthe stock of an investment company that pany may operate a subsidiary bank in invests in obligations of the U.S. Trea- that state. The amendments do not impose sury, federal agencies, states and munic- branching restrictions or operating limiipalities, corporate debt instruments, or tations on savings associations; the insticertain other securities. Investment in tutions, however, are required to confine these companies is permissible if the their activities to those activities that are investment portfolio of the investment permissible for bank holding companies company or mutual fund in which the under the Bank Holding Company Act. member bank would invest consists en- The revisions to the Rules Regarding tirely of securities that the bank could Delegation of Authority authorize the acquire directly itself. Because this Staff Director of the Division of Banking authorization includes investment in Supervision and Regulation to approve money market mutual funds, the Board applications to acquire a savings associaalso rescinded an interpretation that had tion if expeditious action is needed to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

62 76th Annual Report, 1989 prevent the failure of that institution. The May 31,1989- Amendments Staff Director currently has delegated authority to approve applications to The Board amended Regulation Z to acquire failing banks. implement the Home Equity Loan Consumer Protection Act of 1988. Votes for this action: Messrs. Greenspan Regulation Z and Johnson, Ms. Seger, and Messrs. (Truth in Lending) Angell, Heller, Kelley, and LaWare. March 30,1989-Amendments The Home Equity Protection Act was enacted to ensure that borrowers who The Board amended Regulation Z to pledge their homes as collateral for a line implement the Fair Credit and Charge of credit have received adequate informa- Card Disclosure Act of 1988. tion about the terms of the home-equity plan before they consummate the agree- Votes for this action: Messrs. Greenspan ment. The legislation and the Board's and Johnson, Ms. Seger, and Messrs. Angell, Kelley, and LaWare. Absent and implementing rules specify the types of not voting: Mr. Heller. disclosures that creditors must provide and stipulate that the information must be The act and the amendments require disclosed when an application for a homethat issuers of credit cards and charge equity loan is provided to a consumer. cards provide specific information on The information, which must be provided application forms and solicitations. The along with the loan application, includes required information, such as annual the following: payment terms and an percentage rate, annual fee, and any example of the payments; fees imposed grace period, must be included on all to open or use the line of credit; and an application forms in tabular form, estimate of any fees imposed by third including those provided in magazines parties. If the loan carries a variable or catalogs. The amendments also interest-rate feature, the creditor must include rules for direct-mail applications disclose that fact and indicate the index and telephone solicitations. Card issuers used to determine the rate and the frethat impose an annual fee must provide quency of changes in the rate. Besides disclosures before the annual renewal of those disclosures, creditors also must the card. If a card issuer that provides provide a brochure describing the gencredit insurance decides to change eral features of home equity plans. The insurance carriers, it must disclose to Board has developed a sample brochure consumers any substantial increase in that meets this requirement. rates or decrease in coverage that will In addition to the expanded disclosure result from the change. requirements, the act and the amend- The amendments are effective April ments establish substantive limits on 3, 1989, with compliance optional until home equity plans. The act limits, for August 31, 1989. Compliance with the example, a creditor's ability to terminate provisions pertaining to disclosures a plan or accelerate payment on an outrequired for applications and solici- standing balance. Also, plans with a tations made available to the general variable-rate feature must be based on public is optional until November 29, a publicly available index outside the 1989. creditor's control. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 63 The amendments are effective June 7, withdrawn. The problem has become 1989; compliance is optional, however, more acute since passage of the Expedited until November 7, 1989. Funds Availability Act because the act requires banks to make available for withdrawal on the next business day after deposit the proceeds of certain types of Regulation CC deposits, including cashier's checks, (Availability of Funds and teller's checks, and checks drawn on a Collection of Checks) Federal Reserve Bank or a Federal Home March 30,1989—Amendments and Loan Bank. Policy Statement The Board's policy statement urges institutions that issue official checks to The Board adopted amendments to Reg- take steps to minimize delays in the ulation CC that were technical or clarify- collection and return of checks. In taking ing in nature and issued a policy statement this action, the Board indicated that the to discourage delayed disbursement policy statement was issued in lieu of practices. more formal regulatory action and that the Board would monitor delayed dis- Votes for these actions: Messrs. Greenspan bursement practices to determine whether and Johnson, Ms. Seger, and Messrs. institutions are complying with the vol- Angell, Kelley, and La Ware. Absent and not voting: Mr. Heller. untary system. If delayed disbursement practices continue, the Board will seek The Board amended the regulation and regulatory remedies. the related official commentary to clarify and refine the regulation, which was adopted in mid-1988 to implement the July 26, 1989-Amendment Expedited Funds Availability Act. The changes are designed to remove ambigu- The Board amended provisions in Regities and to facilitate compliance. The ulation CC relating to payable-through amendments are effective April 10,1989, checks. except for the provisions governing Votes for this action: Messrs. Greenspan agencies of foreign banks and the changes and Johnson, Ms. Seger, and Messrs. to Appendix A, which are effective Angell and Kelley. Absent and not voting: August 10, 1989. Messrs. Heller and LaWare. In a related action, the Board issued a policy statement to discourage certain When the Board adopted Regulation abuses of the check collection system, CC last year to implement the Expedited particularly delayed disbursement prac- Funds Availability Act of 1988, it had tices. An institution that engages in included a provision stipulating that a delayed disbursement practices issues bank check or a credit union share draft checks drawn on an institution located in that was written on an account at one an area remote from the payee. Delayed institution but payable through another disbursement practices increase the time institution would be considered local or required to collect and return a check, as nonlocal depending on the location of the well as processing and transportation institution through which the check would costs. The practice also increases the be paid. Subsequently, a court deterlikelihood that a check will not be re- mined that that provision was inconsistent turned until after the funds have been with the act. The court's ruling indicated Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

64 76th Annual Report, 1989 that payable-through checks should be the permanent schedule in the same treated as local or nonlocal depending on manner as they are treated under the the location of the institution on which a temporary schedule. Such an amendment check is written, not on the location of the would help ensure that deposit-taking at bank through which the check is paid. nonproprietary ATMs is not restricted or The Board, therefore, made two revi- discontinued by those banks that believe sions to Regulation CC to reflect the they need the flexibility to place longer court's decision. Effective February 1, holds on these deposits to limit their risk 1991, payable-through checks are re- exposure. quired to identify conspicuously the In December the Board issued for name, location, and first four digits of the public comment proposed technical and routing number of the bank on which a clarifying amendments to Regulation CC check is written, and include the words and an amendment to shorten the maxi- "payable through," followed by the name mum time allowed for sending a notice of and location of the payable-through bank. nonpayment to the bank that first received The regulation also was revised to pro- the check. In December the Board also vide that the risk of loss for the return of a issued for comment a proposed determipayable-through check will be placed on nation of preemption regarding a Califorthe bank on which a check is written, nia law on funds availability. No final when the return of such a check takes action was taken on these proposals in longer than would have been required if 1989. the check had been returned expedi- The Board continued to evaluate comtiously by the bank on which it was ments received on its April 1988 proposal written. The latter revision is effective regarding same-day payment. The pro- February 1,1990. posal would require paying banks that receive checks by 2:00 p.m. from a private collecting bank to pay for the checks on the same day without charging Other Actions a presentment fee. An advisory group In July the Board issued its 1989 report representing commercial banks, savings to the Congress on the effects of the and loan institutions, credit unions, check Expedited Funds Availability Act and clearinghouses, Federal Reserve Banks, Regulation CC on consumers and de- and corporate cash managers has propository institutions. The report also vided information on alternatives to the recommended ways to facilitate com- proposal that would address concerns of pliance with the act, to reduce the risk thecommenters. of fraud in accepting checks that must be given next-day availability, and to clarify the Board's authority to allocate Rules Regarding Delegation liability for violations of subpart C of of Authority Regulation CC. In October the Board issued its second February 15, 1989—Amendment report to the Congress on deposits at nonproprietary automated teller ma- The Board amended its rules to delegate chines (ATMs). The report recom- authority to the Reserve Banks to permit, mended that the Congress amend the under certain conditions, interlocking Expedited Funds Availability Act to treat directorates for diversified savings and deposits at nonproprietary ATMs under loan holding companies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 65 Votes for this action: Messrs. Greenspan, private citizens and community groups Johnson, Angell, and Heller. Absent and are encouraged to comment on an institunot voting: Ms. Seger, Mr. Kelley, and Mr. tion's compliance with the act. La Ware. The Board, along with the Comptroller of the Currency, the Federal Deposit The Depository Institutions Manage- Insurance Corporation, and the Federal ment Interlocks Act authorizes the Board Home Loan Bank Board, issued a joint to determine whether a request by a policy statement, effective March 21, diversified savings and loan holding com- 1989, to provide insured financial institupany to maintain an interlocking director tions and the public with guidance regardrelationship with a state member bank or ing the requirements of the act and the bank holding company satisfies the recriteria the agencies will use when evalquirements of the act. The Board decided uating an institution's compliance record to delegate authority to make such deterduring the applications process. The minations to the Reserve Banks, after statement, which revises the information consultation with the Board's General statement adopted in 1980, reflects the Counsel. The amendment to the rule is agencies' experience during the past ten effective March 10, 1989. years in administering the act. The joint policy statement encourages institutions to expand their CRA state- Policy Statements ments to include information regarding February 10, 1989—Revisions to their record of meeting community credit the CRA Information Statement needs so that the CRA statements can be used as the basis for comment by commu- The Board authorized issuance of a nity groups. The policy statement also revised Community Reinvestment Act encourages public comment on an insti- (CRA) statement to provide guidance tution's CRA performance before an regarding the policies and procedures the application is filed so that any issues or agencies will apply when assessing an problems can be addressed more effecinstitution's compliance record. tively. The statement also describes such matters as the role of private meetings Votes for this action: Messrs. Greenspan between financial institutions and comand Johnson, Ms. Seger, and Messrs. munity groups in the applications process Angell, Heller, and La Ware. Absent and not voting: Mr. Kelley. and the agencies' policies regarding private agreements. In addition, the The Community Reinvestment Act of statement indicates the elements of a 1977 directs federal bank regulatory CRA program that the agencies have agencies to assess during examinations found to be effective. an institution's record of helping to meet the credit needs of the entire community May 31, 1989—Risk Reduction it serves, including the low- and Measures for Payments System moderate-income neighborhoods. Insti- Networks tutions are required to prepare public statements describing the communities The Board issued three policy statements, they serve and the product lines offered. effective June 15, 1989, dealing with The act also requires regulatory agencies measures to reduce the risks associated to take an institution's CRA record into with certain types of transactions on account when evaluating applications; large-dollar wire transfer systems. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

66 76th Annual Report, 1989 Votes for these actions: Messrs. Greenspanover each night. The rate of interest on and Johnson, Ms. Seger, and Messrs. such credit, however, is negotiated daily Angell, Heller, Kelley, and LaWare. by the two parties. Continuing contracts are similar to rollovers except that the The Board issued three policy state- principal amount might vary from day to ments and proposed several other actions day. Use of these two measures reduces in connection with an overall plan for the amount of funds transferred over reducing risks on both public and private Fedwire and minimizes the possibility of wire transfer systems. The first state- overdrafts by eliminating the time lag ment, dealing with private book-entry between payment of borrowings and securities systems, establishes principles receipt of credit. for reducing risks on certain deliveryagainst-payment securities systems. Such 1989 Discount Rates systems settle transactions for their participants by transferring securities and The Board approved one change in the the related payment obligations on the basic discount rate during 1989, an books of either a clearing corporation or increase in late February from 6V2 pera depository institution, and arrange for cent to 7 percent. The Board had voted at final settlement of the funds position on a a meeting in mid-January to disapprove net basis at the end of the day. The policy requests for a similar increase; it took no statement indicates that private transfer other votes during the year to approve or systems should adopt safeguards for deny requests for changes in the basic timely settlement that are commensurate discount rate. The reasons for the Board's with the risk of failure. Such safeguards decisions are reviewed below. Those could include liquidity arrangements to decisions were made in the context of the enable a system to make settlement policy actions of the Federal Open Marpayments at the end of the day and ket Committee and the general economic measures to ensure that transfers can be and financial developments that are covreversed. ered in more detail elsewhere in this The second policy statement provides REPORT. A list of Board members' votes guidance for offshore clearing systems on discount rate actions during 1989 that settle, directly or indirectly, in follows this review. dollars on Fedwire (die Federal Reserve's wire transfer system) or on the interbank Actions on the Basic Discount Rate payments system of the New York Automated Clearing House Association. The In mid-January the Board disapproved statement was issued on an interim basis, requests from seven Federal Reserve pending completion of a study and issu- Banks to increase the basic rate from ance of recommendations by the Bank for 6x/2 percent—the level in effect since International Settlements. August9,1988—to7percent. Inreaching The third policy statement encourages its decision, the Board took account of the prudential use of rollovers and con- the concerns about inflation expressed by tinuing contracts to reduce the risk of Reserve Bank directors but concluded overdrafts of an institution's account on that the earlier tightening of monetary Fedwire. Rollovers are overnight credit policy through open market operations, transactions between two banks. Under including relatively recent firming acsuch an arrangement, the amount of the tions in mid-December and at the start of principal does not change and is rolled 1989, had fostered an appropriate degree Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 67 of monetary restraint, at least for the reduction of lA percentage point in the moment. That restraint was being felt in basic rate; subsequently the proposed part through upward pressure on the reduction was increased to Vi percentage dollar, which could intensify if the dis- point. The Board reviewed but took no count rate were raised. action on these requests. The Board In mid-February, monetary policy was members increasingly came to believe tightened somewhat further through open that some lessening in the degree of market operations, and on February 24 monetary restraint was desirable, but the Board approved an increase of Vi they also took into account the easing of percentage point in the basic rate, to 7 reserve pressures through open market percent. In taking this action, Board operations that was initiated in early June. members noted that the business expan- Over the summer months, additional sion continued to display considerable easing of monetary policy was implemomentum and that there were related mented through open market operations, perceptions that inflationary pressures and no action was taken on renewed might be worsening. The members rec- requests by the Dallas Bank to lower the ognized that the full effects of earlier discount rate. As the summer progressed, policy tightening actions had not yet been indicators of business conditions pointed felt and that higher interest rates could to some pickup in the economic expanhave adverse short-run effects on interest- sion, and monetary growth accelerated to sensitive sectors of the economy, includ- a relatively rapid pace. While many ing many problem thrift depository Board members believed that the risks to institutions. Nonetheless, a majority the economy continued to be tilted toward concluded that the balance of consider- slower growth over time, they generally ations made an increase in the basic rate concluded that under prevailing circumdesirable in order to implement in a stances the decisions of the Federal Open visible way the System's continuing Market Committee to lessen pressures on commitment to the fight against infla- reserve positions should not be reinforced tion; given the strength of the expansion, by a reduction in the discount rate. they felt that an increase of Vi percentage By the latter part of September, indicapoint would not incur an unacceptable tors of business conditions had become risk to the continued growth of the more mixed, and the Federal Reserve economy. Banks of Chicago and Dallas proposed a No further requests for a change in the reduction of Vi percentage point in the discount rate were received from Federal basic rate. The directors at those Banks Reserve Banks until well into the second saw increased risks of a weaker economy quarter. During this period, signs began and an improved outlook for reduced to accumulate that some easing of infla- inflation. All of the other Reserve Banks tionary pressures might be in prospect: preferred not to change the current rate. overall spending on goods and services The Board reviewed but took no action appeared to be expanding more slowly, on the proposed reductions. Most of the monetary growth weakened appreciably, Board members acknowledged that the the dollar strengthened in foreign ex- risks of a recession might have risen, but change markets, and prices of actively they continued to view sustained, modertraded commodities leveled out. In this ate growth of the economy as a reasonable environment, interest rates turned down. expectation for the next several quarters. In the latter part of May, the Federal Key measures of inflation indicated that Reserve Bank of Dallas requested a prices had risen more slowly since mid- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

68 76th Annual Report, 1989 year, in part because of sharp reductions tions that are under sustained liquidity in energy prices, but data on labor pressure and are not able to secure funds compensation suggested no significant on reasonable terms from other sources. change in prevailing trends. Some mem- The flexible rate is somewhat higher than bers expressed concern that under current the market rates to which it is linked but is circumstances a cut in the discount rate always at least 50 basis points above the would communicate a misleading signal basic discount rate. The flexible rate is regarding the System's commitment to an adjusted periodically, subject to Board anti-inflationary policy. approval. The first 30 days of borrowing From early November through year- on extended credit may be at the basic end, the Board reviewed but took no rate, but further borrowings ordinarily action on renewed requests by the are charged the flexible rate. The highest Dallas Bank to lower the discount rate by rate applicable to any credit extended to Vi percentage point. The Board took depository institutions will be assessed account of indications of considerable on exceptionally large adjustment-credit slowing in overall economic growth in loans that arise from computer breakthe fourth quarter but noted that some of downs or other operating problems, the softening appeared to be related to unless the difficulty clearly is beyond the temporary factors that seemed likely to reasonable control of the borrowing be reversed. At the direction of the Fed- institution; under the current structure, eral Open Market Committee, some that rate is the flexible rate. further easing of monetary policy was At the end of 1989, the structure of implemented in October and the first part discount rates was as follows: a basic rate of November and again in the latter part of 7 percent for short-term adjustment of December; growth of the monetary credit and for credit under the seasonal aggregates remained relatively strong in program and a flexibler ate of 8.9 percent. this period and the dollar was weak in During 1989 the flexible rate ranged foreign exchange markets. Against that from a high of 10.5 percent to a low of background, the Board members agreed 8.9 percent. that the discount rate should not be changed. Board Votes on the Basic Discount Rate Structure of Discount Rates Under the provisions of the Federal The basic discount rate is the rate charged Reserve Act, the boards of directors of on loans to depository institutions for the Federal Reserve Banks are required short-term adjustment credit and for to establish rates on loans to depository credit extended under the seasonal pro- institutions at least every fourteen days gram; under the latter program, loans and to submit such rates to the Board of may be provided for periods longer than Governors for review and determination. those permitted under adjustment credit Reserve Bank actions on the discount rate to assist smaller institutions in meeting include requests to renew the formula for regular needs arising from certain sea- calculating the flexible rate on extended sonal movements in their deposits and credit. The votes of the Board of Goverloans. nors listed below involved changes in the A higher, flexible rate may be charged basic discount rate. Votes relating to the on extended-credit loans (for other than reestablishment of existing rates or the seasonal purposes) to depository institu- updating of market-related rates under Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 69 the extended credit program are not shown. All votes during 1989 were unanimous except for the vote on February 24. January 17,1989 The Board disapproved actions taken on the dates indicated by the directors of the following Federal Reserve Banks to raise the basic discount rate from 6Vi percent to 7 percent: Boston and New York on January 5; Cleveland, Richmond, Minneapolis, and San Francisco on January 12; and Atlanta on January 13. Votes for this action: Messrs. Greenspan and Johnson, Ms. Seger, Messrs. Angell, Heller, Kelley, and Laware. Votes against this action: None. February 24,1989 Effective February 24, 1989, the Board approved actions taken by the directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, and San Francisco to raise the basic discount rate from 6V2 percent to 7 percent. Votes for this action: Messrs. Greenspan, Johnson, Angell, Heller, Kelley, and La Ware. Vote against this action: Ms. Seger. Ms. Seger dissented because monetary policy had already been tightened considerably by the Federal Open Market Committee and she wanted to allow more time to assess the effects on the economy, which would occur only with a lag. Effective February 27,1989, the Board approved a similar action taken by the directors of the Federal Reserve Bank of Dallas. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

71 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 1989 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 1989, 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 1989. 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 unanimous vote, does not necessarily mean In Effect January 1, 1989 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

72 76th Annual Report, 1989 carry out the most recent domestic policy Bank of New York under agreements for directive adopted at a meeting of the repurchase of such securities, obligations, or Committee: acceptances in 15 calendar days or less, at (a) To buy or sell U.S. Government rates that, unless otherwise expressly authosecurities, including securities of the Federal rized by the Committee, shall be determined Financing Bank, and securities that are direct by competitive bidding, after applying reasonobligations of, or fully guaranteed as to able limitations on the volume of agreements principal and interest by, any agency of the with individual dealers; provided that in the United States in the open market, from or to event Government securities or agency issues securities dealers and foreign and interna- covered by any such agreement are not tional accounts maintained at the Federal repurchased by the dealer pursuant to the Reserve Bank of New York, on a cash, agreement or a renewal thereof, they shall be regular, or deferred delivery basis, for the sold in the market or transferred to the System System Open Market Account at market Open Market Account; and provided further prices, and, for such Account, to exchange that in the event bankers acceptances covered maturing U.S. Government and Federal by any such agreement are not repurchased by agency securities with the Treasury or the the seller, they shall continue to be held by the individual agencies or to allow them to mature Federal Reserve Bank or shall be sold in the without replacement; provided that the aggre- open market. gate amount of U. S. Government and Federal 2. In order to ensure the effective conduct agency securities held in such Account (in- of open market operations, the Federal Open cluding forward commitments) at the close of Market Committee authorizes and directs the business on the day of a meeting of the Federal Reserve Banks to lend U.S. Govern- Committee at which action is taken with ment securities held in the System Open respect to a domestic policy directive shall not Market Account to Government securities be increased or decreased by more than $6.0 dealers and to banks participating in Governbillion during the period commencing with ment securities clearing arrangements conthe opening of business on the day following ducted through a Federal Reserve Bank, under such meeting and ending with the close of such instructions as the Committee may business on the day of the next such meeting; specify from time to time. (b) When appropriate, to buy or sell in 3. In order to ensure the effective conduct the open market, from or to acceptance of open market operations, while assisting in dealers and foreign accounts maintained at the provision of short-term investments for the Federal Reserve Bank of New York, on a foreign and international accounts maintained cash, regular, or deferred delivery basis, for at the Federal Reserve Bank of New York, the the account of the Federal Reserve Bank of Federal Open Market Committee authorizes New York at market discount rates, prime and directs the Federal Reserve Bank of New bankers acceptances with maturities of up to York (a) for System Open Market Account, to nine months at the time of acceptance that (1) sell U.S. Government securities to such forarise out of the current shipment of goods eign and international accounts on the bases between countries or within the United States, set forth in paragraph l(a) under agreements or (2) arise out of the storage within the providing for the resale by such accounts of United States of goods under contract of sale those securities within 15 calendar days on or expected to move into the channels of trade terms comparable to those available on such within a reasonable time and that are secured transactions in the market; and (b) for New throughout their life by a warehouse receipt York Bank account, when appropriate, to or similar document conveying title to the undertake with dealers, subject to the condiunderlying goods; provided that the aggregate tions imposed on purchases and sales of amount of bankers acceptances held at any securities in paragraph l(c), repurchase one time shall not exceed $100 million; agreements in U.S. Government and agency (c) To buy U.S. Government securities, securities, and to arrange corresponding sale obligations that are direct obligations of, or and repurchase agreements between its own fully guaranteed as to principal and interest account and foreign and international acby, any agency of the United States, and counts maintained at the Bank. Transactions prime bankers acceptances of the types autho- undertaken with such accounts under the rized for purchase under l(b) above, from provisions of this paragraph may provide for dealers for the account of the Federal Reserve a service fee when appropriate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 73 Domestic Policy Directive The Federal Open Market Committee seeks monetary and financial conditions that In Effect January 1, 19891 will foster price stability over time, promote growth in output on a sustainable basis, and The information reviewed at this meeting contribute to an improved pattern of suggests that, apart from the direct effects of international transactions. In furtherance of the drought, economic activity has continued these objectives, the Committee at its to expand at a vigorous pace. Total nonfarm meeting in late June reaffirmed the ranges it payroll employment rose sharply in October had established in February for growth of 4 and November, with sizable increases to 8 percent for both M2 and M3, measured indicated in manufacturing after declines in from the fourth quarter of 1987 to the fourth late summer. The civilian unemployment quarter of 1988. The monitoring range for rate, at 5.4 percent in November, remained growth of total domestic nonflnancial debt in the lower part of the range that has was also maintained at 7 to 11 percent for the prevailed since early spring. Industrial year. production advanced considerably in Octo- For 1989, the Committee agreed on tentaber and November. Housing starts turned tive ranges for monetary growth, measured up in October after changing little on from the fourth quarter of 1988 to the fourth balance over the previous several months. quarter of 1989, of 3 to 7 percent for M2 and Growth in consumer spending has been 3 Vi to 7 Vi percent for M3. The Committee set somewhat more moderate in recent months, the associated monitoring range for growth of and indicators of business capital spending total domestic nonflnancial debt at 6 xh to 10 Vi suggest a substantially slower rate of percent. It was understood that all these ranges expansion than earlier in the year. The were provisional and that they would be nominal U.S. merchandise trade deficit reviewed in early 1989 in the light of intervennarrowed further in the third quarter. ing developments. Preliminary data for October indicate a small With respect to Ml, the Committee reafdecline from the revised deficit for Sep- firmed its decision in February not to establish tember. The latest information on prices and a specific target for 1988 and also decided not wages suggests little if any change from to set a tentative range for 1989. The behavior recent trends. of this aggregate will continue to be evaluated Interest rates have risen since the Commit- in the light of movements in its velocity, tee meeting on November 1, with appreciable developments in the economy and financial increases occurring in short-term markets. In markets, and the nature of emerging price foreign exchange markets, the trade-weighted pressures. value of the dollar in terms of the other G-10 In the implementation of policy for the currencies declined significantly further on immediate future, the Committee seeks to balance over the intermeeting period. increase somewhat the existing degree of Expansion of M2 and M3 strengthened in pressure on reserve positions. Taking account November from relatively slow rates of of indications of inflationary pressures, the growth in previous months, especially in the strength of the business expansion, the behavcase of M2. Thus far this year, M2 has grown ior of the monetary aggregates, and developat a rate a little below, and M3 at a rate a little ments in foreign exchange and domestic above, the midpoint of the ranges established financial markets, somewhat greater reserve by the Committee for 1988. Ml has increased restraint would, or slightly lesser reserve only slightly on balance over the past several restraint might, be acceptable in the intermeetmonths, bringing growth so far this year to 4 ing period. The contemplated reserve condipercent. Expansion of total domestic nonfl- tions are expected to be consistent with growth nancial debt for the year thus far appears to be of M2 and M3 over the period from November at a pace somewhat below that in 1987 and through March at annual rates of about 3 and around the midpoint of the Committee's 6V2 percent, respectively. The Chairman may monitoring range for 1988. call for Committee consultation if it appears to the Manager for Domestic Operations that reserve conditions during the period before the next meeting are likely to be associated 1. Adopted by the Committee at its meeting on with a federal funds rate persistently outside a Dec. 13-14, 1988. range of 7 to 11 percent. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

74 76th Annual Report, 1989 Authorization for Foreign contracts for future receipt, minus outstand- Currency Operations ing contracts for future delivery of that currency, i.e., as the sum of these elements with due regard to sign. In Effect January 1, 1989 2. The Federal Open Market Committee directs the Federal Reserve Bank of New 1. The Federal Open Market Committee York to maintain reciprocal currency arrangeauthorizes and directs the Federal Reserve ments ("swap" arrangements) for the System Bank of New York, for System Open Market Open Market Account for periods up to a Account, to the extent necessary to carry out maximum of 12 months with the following the Committee's foreign currency directive foreign banks, which are among those desigand express authorizations by the Committee nated by the Board of Governors of the Fedpursuant thereto, and in conformity with such eral Reserve System under Section 214.5 of procedural instructions as the Committee may Regulation N, Relations with Foreign Banks issue from time to time: and Bankers, and with the approval of the A. To purchase and sell the following Committee to renew such arrangements on foreign currencies in the form of cable maturity: transfers through spot or forward transactions on the open market at home and abroad, including transactions with the U. S. Treasury, Amount with the U.S. Exchange Stabilization Fund Foreign bank (millions of established by Section 10 of the Gold Reserve dollars equivalent) Act of 1934, with foreign monetary authorities, with the Bank for International Settle- Austrian National Bank 250 National Bank of Belgium 1,000 ments, and with other international financial Bank of Canada 2,000 institutions: National Bank of Denmark 250 Bank of England 3,000 Bank of France 2,000 Austrian schillings Italian lire German Federal Bank 6,000 Belgian francs Japanese yen Bank of Italy 3,000 Canadian dollars Mexican pesos Bank of Japan 5,000 Danish kroner Netherlands guilders Bank of Mexico 700 Pounds sterling Norwegian kroner Netherlands Bank 500 French francs Swedish kronor Bank of Norway 250 German marks Swiss francs Bank of Sweden 300 Swiss National Bank 4,000 Bank for International Settlements Dollars against Swiss francs 600 B. To hold balances of, and to have Dollars against authorized European outstanding forward contracts to receive or to currencies other than Swiss francs 1,250 deliver, the foreign currencies listed in paragraph A above. C. To draw foreign currencies and to Any changes in the terms of existing swap permit foreign banks to draw dollars under arrangements, and the proposed terms of any the reciprocal currency arrangements listed new arrangements that may be authorized, in paragraph 2 below, provided that drawings shall be referred for review and approval to by either party to any such arrangement shall the Committee. be fully liquidated within 12 months after any 3. All transactions in foreign currencies amount outstanding at that time was first undertaken under paragraph 1(A) above drawn, unless the Committee, because of shall, unless otherwise expressly authorized exceptional circumstances, specifically authoby the Committee, be at prevailing market rizes a delay. rates. For the purpose of providing an invest- D. To maintain an overall open position ment return on System holdings of foreign in all foreign currencies not exceeding $12.0 currencies, or for the purpose of adjusting billion. For this purpose, the overall open interest rates paid or received in connection position in all foreign currencies is defined as with swap drawings, transactions with forthe sum (disregarding signs) of net positions eign central banks may be undertaken at in individual currencies. The net position in a non-market exchange rates. single foreign currency is defined as holdings 4. It shall be the normal practice to arrange of balances in that currency, plus outstanding with foreign central banks for the coordination Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 75 of foreign currency transactions. In making B. To keep the Secretary of the Treasury operating arrangements with foreign central fully advised concerning System foreign curbanks on System holdings of foreign cur- rency operations, and to consult with the rencies, the Federal Reserve Bank of New Secretary on policy matters relating to foreign York shall not commit itself to maintain any currency operations; specific balance, unless authorized by the C. From time to time, to transmit appro- Federal Open Market Committee. Any agree- priate reports and information to the National ments or understandings concerning the Advisory Council on International Monetary administration of the accounts maintained by and Financial Policies. the Federal Reserve Bank of New York with 8. Staff officers of the Committee are the foreign banks designated by the Board of authorized to transmit pertinent informa- Governors under Section 214.5 of Regulation tion on System foreign currency operations N shall be referred for review and approval to toappropriate officials of the Treasury the Committee. Department. 5. Foreign currency holdings shall be 9. All Federal Reserve Banks shall particinvested insofar as practicable, considering ipate in the foreign currency operations for needs for minimum working balances. Such System Account in accordance with parainvestments shall be in liquid form, and graph 3 G(l) of the Board of Governors' generally have no more than 12 months Statement of Procedure with Respect to Forremaining to maturity. When appropriate in eign Relationships of Federal Reserve Banks connection with arrangements to provide dated January 1, 1944. investment facilities for foreign currency holdings, U. S. Government securities may be purchased from foreign central banks under Foreign Currency Directive agreements for repurchase of such securities within 30 calendar days. 6. All operations undertaken pursuant to In Effect January 1, 1989 the preceding paragraphs shall be reported promptly to the Foreign Currency Sub- 1. System operations in foreign currencies committee and the Committee. The Foreign shall generally be directed at countering Currency Subcommittee consists of the disorderly market conditions, provided that Chairman and Vice Chairman of the market exchange rates for the U.S. dollar Committee, the Vice Chairman of the Board reflect actions and behavior consistent with of Governors, and such other member of the the IMF Article IV, Section 1. Board as the Chairman may designate (or in 2. To achieve this end the System shall: the absence of members of the Board serving A. Undertake spot and forward puron the Subcommittee, other Board Members chases and sales of foreign exchange. designated by the Chairman as alternates, B. Maintain reciprocal currency and in the absence of the Vice Chairman of ("swap") arrangements with selected foreign the Committee, his alternate). Meetings of central banks and with the Bank for Internathe Subcommittee shall be called at the tional Settlements. request of any member, or at the request of C. Cooperate in other respects with the Manager for Foreign Operations, for the central banks of other countries and with purposes of reviewing recent or con- international monetary institutions. templated operations and of consulting with 3. Transactions may also be undertaken: the Manager on other matters relating to his A. To adjust System balances in light of responsibilities. At the request of any probable future needs for currencies. member of the Subcommittee, questions B. To provide means for meeting Sysarising from such reviews and consultations tem and Treasury commitments in particular shall be referred for determination to the currencies, and to facilitate operations of the Federal Open Market Committee. Exchange Stabilization Fund. 7. The Chairman is authorized: C. For such other purposes as may be A. With the approval of the Committee, expressly authorized by the Committee. to enter into any needed agreement or under- 4. System foreign currency operations standing with the Secretary of the Treasury shall be conducted: about the division of responsibility for foreign A. In close and continuous consultacurrency operations between the System and tion and cooperation with the United States the Treasury; Treasury; Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76 76th Annual Report, 1989 B. In cooperation, as appropriate, with strengthening in single-family construcforeign monetary authorities; and tion. Multifamily starts have remained C. In a manner consistent with the relatively flat in recent months. obligations of the United States in the International Monetary Fund regarding exchange Consumer spending was up considerarrangements under the IMF Article IV. ably in the fourth quarter, capping a strong year. Spending on household durables rose vigorously in the quarter; Meeting Held on and outlays for services again advanced February 7-8,1989 at a rapid pace, reflecting big increases in expenditures for medical care, airline Domestic Policy Directive travel, and recreation. Consumption of The information reviewed at this meeting nondurables advanced further, after a suggested that, apart from the direct steep rise the previous quarter, while effects of the drought, economic activity purchases of motor vehicles were little had continued to expand at a fairly changed over the quarter as a whole. vigorous pace. The latest information on Indicators of business capital spending prices indicated little change in the rate of suggested some weakening in recent inflation from recent trends, while labor months from the rapid increases evident costs had continued to accelerate. earlier in 1988. Real outlays for business After strong gains in the fourth quarter, fixed investment were estimated to have total nonfarm payroll employment rose fallen somewhat in the fourth quarter. sharply in January. Although some of the Softness was fairly widespread among strength may have reflected such tempo- various types of equipment, but the most rary factors as unusually mild winter pronounced weakness was in office and weather, job gains were widespread; in computing equipment. Nonresidential manufacturing, sizable increases were construction activity picked up in Decemregistered in nonelectrical machinery, ber but was estimated to have been about transportation equipment, and food pro- flat on balance for the quarter; oil drilling cessing . The civilian unemployment rate, and expenditures on commercial buildat 5.4 percent, remained in the lower part ings other than offices declined further. of the range that had prevailed since the Inventory investment in the manufacturearly spring of last year. ing sector in the fourth quarter was little Industrial production rose appreciably changed from the third-quarter pace, with further in December and January, with much of the accumulation continuing to gains continuing at about the robust pace occur in durable goods industries where experienced in 1988 as a whole. Output demand had been strong. At the retail of consumer goods advanced strongly, level, increases in nonautomobile invendespite a somewhat slower pace of auto- tories generally kept pace with the growth mobile assemblies over the two months, in sales. and production of business equipment Excluding food and energy, producer picked up a bit. Total industrial capacity prices of finished goods rose sharply in utilization moved higher, owing to a December, the rise reflecting large insizable jump in the utilization of manu- creases for tobacco products, women's facturing capacity to the highest level apparel, and passenger cars. Prices for since 1979. Housing starts declined intermediate materials again increased somewhat in December but were up substantially in November and Decemsubstantially on balance for the fourth ber. The most notable hikes occurred in quarter as a whole, largely because of a industries such as metals, chemicals, and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 11 paper products in which capacity utiliza- with some further tightening to be impletion has been high. Consumer prices, mented at the start of 1989 if economic reflecting more favorable developments and financial conditions remained consisin the food, energy, and apparel compo- tent with the Committee's expectations. nents, rose at a somewhat slower pace in These reserve conditions were expected November and December. Excluding to be associated with growth of M2 and food and energy, consumer prices rose in M3 at annual rates of about 3 percent and the fourth quarter at about the rate 6V2 percent respectively over the period observed over 1988 as a whole. Reflect- from November through March. The ing tighter market conditions, wages and members agreed that somewhat greater salaries, and labor costs more generally, reserve restraint would, or slightly lesser advanced at a faster pace in the fourth reserve restraint might, be acceptable quarter than was observed a year earlier. depending on indications of inflationary The nominal U.S. merchandise trade pressures, the strength of the business deficit was slightly larger on average in expansion, the behavior of the monetary October and November than it was in the aggregates, and developments in forthird quarter. The value of imports rose eign exchange and domestic financial as a sharp rise in the value of non-oil markets.1 imports, especially from industrial coun- In accordance with the Committee's tries, outweighed a drop in the value of instructions, a firming of reserve supply oil imports resulting from a decline in oil conditions was carried out in two stages prices. Increases were widespread across over the intermeeting period, although trade categories but were paced by a operations were complicated by continurebound in imports of passenger cars ing uncertainty about the relationship from somewhat depressed levels in the between borrowing and money market third quarter. The value of exports was little changed as a decline in agricultural exports offset a rise in nonagricultural 1. These growth rates and all subsequent data on the monetary aggregates reflect annual benchmarks products. and seasonal factors as published on February 9, In foreign exchange markets, the trade- 1989. weighted value of the dollar in terms of The monetary aggregates are defined as follows: the other G-10 currencies rose substan- Ml comprises demand deposits at commercial banks and thrift institutions, currency in circulation, tially over the intermeeting period and travelers checks of nonbank issuers, negotiable nearly reversed its decline of October order of withdrawal (NOW) and automatic transfer and November. Despite the release of service (ATS) accounts at banks and thrift institudata indicating U.S. trade deficits that tions, and credit union share draft accounts. M2 were larger than expected for October contains Ml and savings and small-denomination time deposits (including money market deposit and November, the dollar climbed persisaccounts (MMDAs) at all depository institutions, tently from early December in response overnight repurchase agreements (RPs) at commerto perceptions of a relative tightening of cial banks, overnight Eurodollars held at foreign monetary policy in the United States; branches of U. S. banks by U. S. residents other than banks, and money market mutual fund shares other short-term interest rate differentials than those restricted to institutions). M3 is M2 plus moved in favor of the dollar relative to large-denomination time deposits at all depository the yen. institutions, large-denomination term RPs at com- At its meeting on December 13-14, mercial banks and savings and loan associations, institution-only money market mutual funds, and the Committee adopted a directive calling term Euro-dollars held by U. S. residents in Canada for some immediate increase in the and the United Kingdom and at foreign branches of degree of pressure on reserve positions, U.S. banks elsewhere. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78 76th Annual Report, 1989 conditions. In the circumstances, open below and M3 at a rate around the market operations continued to be con- midpoint of the Committee's ranges. ducted with a special degree of flexibility. Growth of total domestic nonfinancial Adjustment plus seasonal borrowing debt moderated in 1988 to a pace around averaged somewhat more than $500 the midpoint of the Committee's monitormillion over the period, but such borrow- ing range. ing fluctuated over a wide range, includ- The staff projections prepared for this ing a typical bulge around the year-end. meeting suggested that the expansion was The federal funds rate rose from around likely to moderate in 1989 from the pace SV2 percent to a little above 9 percent in 1988, although the adjustments related during the intermeeting period. to the assumed end of the drought would Changes in other short-term market be reflected in relatively strong measured rates were mixed over the intermeeting growth in the first quarter. To the extent period. Treasury bill rates rose somewhat that expansion of final demand tended to on balance, although less than the federal remain at a pace that could foster higher funds rate, while rates on private market inflation but was not accommodated by instruments were generally unchanged to monetary policy, pressures would be slightly lower. To some extent, the generated in financial markets that would firming of monetary policy had been restrain domestic spending. The staff anticipated; in addition, private rates in continued to project slower growth in particular were affected by the passing of consumer spending, sharply reduced year-end pressures. Bond yields declined expansion of business fixed investment, somewhat, apparently influenced in part and some decline in housing construcby the favorable effect of actual and tion. Foreign trade was expected to make anticipated monetary restraint on infla- a smaller contribution to growth in tionary expectations. Major indexes of domestic output than in 1988. The staff stock prices rose considerably over the anticipated somewhat faster increases in intermeeting period. consumer prices and also some further Growth of the broader monetary aggre- cost pressures over the year ahead, gates weakened appreciably in January, especially because of reduced margins of especially M2, which apparently de- unutilized labor and other production clined slightly after a moderate increase resources. in December. The behavior of these In the Committee's discussion of the aggregates appeared to reflect recent economic situation and outlook, memincreases in short-term market rates, bers commented that the expansion in which in turn widened the opportunity business activity was generally well costs of holding deposits. Those costs balanced and that continuing growth was were accentuated by slower-than-usual a reasonable expectation for the year adjustments in offering rates by deposi- ahead. Nearly all the members believed tory institutions on most of their retail that the risks remained on the side of deposits. Also, needs for deposits to fund greater inflation and that the Federal credit growth were damped in this period. Reserve would need to stay especially On average in December and January, alert to inflationary developments. Howgrowth of M2 was slightly below Com- ever, views differed to some extent with mittee expectations and that of M3 con- regard to the likely strength of the siderably below. Ml changed little on expansion and the degree of inflationary balance over the two months. For the risk. Several members stressed that, in year 1988, M2 expanded at a rate a little the absence of some further monetary Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 79 restraint, economic growth was likely to continuing restraint on aggregate demand continue at a rate that would foster greater to resist any increase in inflation prespressures on already strained production sures and foster price stability over time. resources and induce more inflation. They also assumed that normal weather Other members gave more weight to conditions and a rise in acreage under indications of possible slowing in the cultivation this year would increase farm expansion and to the possibility that the output and add around 2h of a percentage substantial restraint applied over the past point to the growth of GNP, an amount year might be sufficient to foster sustain- similar to the reduction in GNP that able expansion without increased infla- resulted from the drought in 1988. Extionary pressures. The members agreed cluding this swing in farm output, the that the chances for satisfactory eco- central tendency of the forecasts implied nomic performance over time would be considerably slower growth in output greatly enhanced by progress in reducing than in 1988. Finally, the forecasts the federal budget deficit in order to assumed that fluctuations in the foreign contain domestic demands and to facili- exchange value of the dollar would not be tate the process of adjustment in the of sufficient magnitude to have a signifination's external balance. cant effect on the economy or prices. In conformance with the usual practice In the Committee's discussion of develat meetings when the Committee consid- opments bearing on the economic outers its long-term objectives for monetary look, a number of members stressed that growth, the members of the Committee the economy had a good deal of momenand the Federal Reserve Bank presidents tum and that there was little or no current not currently serving as members had evidence of a potential slowdown or prepared specific projections of eco- downturn in the expansion. Indeed, some nomic activity, the rate of unemploy- recent data, including those on employment, and inflation for the year 1989. ment and consumer spending, could be The central tendency of these forecasts viewed as consistent with some strengthpointed to somewhat slower expansion ening of the expansion in recent months. and somewhat greater inflation than had Reports from around the country sugoccurred in 1988. For the period from the gested a high level of business activity in fourth quarter of 1988 to the fourth many parts of the nation and at least quarter of 1989, the forecasts for growth modest improvement in some previously of real GNP had a central tendency of 2 Vi depressed areas. On the whole, growth in to 3 percent and a full range of 1 Vi to 3 lA production was being well maintained, percent. Forecasts of nominal GNP cen- buttressed by continuing expansion in tered on growth rates of 6V2 to IVi exports. Other members saw a greater percent and ranged from 5Vi to 8Vi potential for some softening in the rate of percent. Estimates of the civilian rate of economic growth. They referred to secunemployment in the fourth quarter of tors of relative weakness in the economy, 1989 were concentrated in a range of 5 lA including energy, nonresidential conto 5 Vi percent with a full range of 5 to 6 struction, and housing. With regard to percent. The projected increase in the the outlook for capital expenditures, consumer price index centered on rates many firms were investing in new equipof AVi to 5 percent and had an overall ment to improve their efficiency in comrange of 3 Vi to 5 Vi percent for the year. petitive markets, but they generally In making these forecasts, the members continued to hold back on investments to took account of the Committee's policy of expand production facilities. More gen- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80 76th Annual Report, 1989 erally, a number of members emphasized unfavorable developments such as a that the behavior of money, whose growth second year of drought conditions, a had been relatively damped for an ex- sharp upturn in energy prices, or a tended period and was likely to remain so substantial decline in the foreign exin 1989 under the Committee's targets, change value of the dollar. It was difficult probably was consistent with only limited to judge the point at which added presstrength in spending. sures on production resources might be A key element in the outlook for translated into stronger inflationary presbusiness was the extent of the improve- sures, but several members observed that ment in the nation's external trade bal- despite relatively vigorous economic ance. The members generally expected growth the impact on the overall rate of further gains, at least over the year ahead, inflation had been less than they might but several observed that these might be have anticipated earlier. Promising facconsiderably smaller than in 1988, given tors in the inflation outlook included the the behavior of the dollar over the past continuation of strong competitive presyear and assuming a steady dollar in the sures, notably competition from abroad future. Such an outcome could have the that tended to inhibit efforts to raise advantage of helping to moderate poten- prices, restrained monetary growth, and tial inflationary demand pressures in the generally favorable inflationary expectaeconomy but at the cost and the risks tions as evidenced by developments in associated with a continuing need to financial markets. In one view, commodfinance massive external deficits. It also ity prices, while still affected by the was noted that substantial improvement impact of the drought, might be signalling in the trade balance at a time of increasing at least tentatively a downturn in the pressure on productive resources would overall rate of inflation. require the expansion in domestic de- Against the background of the memmand to slow sufficiently—perhaps more bers' views regarding the economic outthan was currently anticipated—to permit look and in keeping with the requirements added production for exports. of the Full Employment and Balanced Turning to the outlook for inflation, Growth Act of 1978 (the Humphreyseveral members expressed concern that, Hawkins Act), the Committee at this with margins of unused labor and capital meeting reviewed the ranges of growth relatively low, any slowing in the growth for the monetary and debt aggregates that of overall demands now in train might be had been established on a tentative basis inadequate to prevent some rise in the in late June 1988 for the year 1989. The underlying rate of inflation, much less to tentative range for M2 had been reduced permit progress to be made in bringing by 1 percentage point to 3 to 7 percent inflation down. In this view the eco- and that for M3 by xh percentage point to nomy's current momentum in association 3 Vi to 7 Vi percent for 1989. The monitorwith a reduced availability of production ing range for growth of total domestic resources clearly biased the economic nonfinancial debt had been lowered by risks toward greater inflation. A number Vi percentage point to 6 Vi to 10 Vi percent of these members expressed particular for the year. The Committee had decided concern about recent indications of higher in June not to establish any range for M1. labor costs, which might augur escalating In the Committee's discussion, a mainflationary pressures. Other members jority of the members indicated that they saw a lesser risk that inflation would were in favor of affirming the reduced intensify, at least in the absence of ranges that had been set on a tentative Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 81 basis in mid-1988, while the remaining actual growth in 1988 and given the slow members expressed a preference for growth thus far this year, especially in the some further reductions. Members who case of M2, would improve the prospects supported the tentative ranges believed that expansion for the year would approxthat they were fully consistent with imate the midpoints. Moreover, the upper progress toward price level stability. ends of the tentative ranges, while below Indeed, the reduction of a full percentage those for 1988, nonetheless remained point in the M2 range was larger than appreciably higher than the rates of usual and would convey in this view an monetary growth that were likely to be appropriately strong signal of the Sys- consistent with price stability over time. tem's commitment to an anti-inflationary The Committee agreed on the desirabilpolicy. This lower range encompassed ity of retaining the relatively wide spread money growth that was fully consistent of 4 percentage points between the upper under likely economic and financial and the lower ends of the growth ranges conditions with continued expansion of for M2 and M3. These ranges were spending but at the somewhat slower initially widened in 1988 in recognition pace needed to contain inflationary pres- of the uncertain outlook for financial sures. A number of members also com- markets and the economy and the extent mented that the tentative ranges would to which the relationship between moneprovide more room in subsequent years tary growth and economic performance for continuing the desirable policy of had varied over an extended period. In gradually lowering the monetary growth particular, the growth of M2 and its targets to noninflationary levels while velocity had remained very sensitive to also reducing the possibility that unantic- fluctuations in interest rates, reflecting in ipated economic or financial develop- turn a tendency of depository institutions ments might require those targets to be to adjust only sluggishly their offering raised on a temporary basis. Even though rates on many types of deposit accounts. temporarily higher ranges might be con- In these circumstances and against the sistent with progress toward price stabil- background of the multiplicity of largely ity, a decision to raise the ranges could be unpredictable factors affecting the econmisinterpreted as a weakening of the omy and interest rates, the appropriate System's anti-inflationary resolve. rate of monetary growth remained subject Other members believed that further to considerable uncertainty and could not reductions in the ranges would provide be projected within narrow ranges with greater assurance of encompassing the any degree of confidence. An additional potential policy responses and associated uncertainty in 1989 would be the impact monetary growth that might be needed to of developments affecting thrift deposiresist inflationary pressures over the year tory institutions as serious financial probahead, should they prove to be especially lems at many of those institutions moved strong. Such reductions would under- toward resolution under the aegis of new score the Committee's commitment to its government programs. The behavior of longer-run objective of price stability, M2 and M3 was likely to be affected by since achieving that objective would such developments, but there was only require lower money growth at some limited basis in prior experience to gauge point than was indicated by the middle of the extent of the impact. the tentative ranges. Lower ranges for The members found acceptable the the broader aggregates would have mid- tentative reduction of Vi percentage points that were more clearly below point in the monitoring range for total Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

82 76th Annual Report, 1989 domestic nonfinancial debt in 1989. As domestic financial and foreign exchange in several previous years, growth of markets. total debt was expected to exceed that of At the conclusion of this discussion, nominal GNR The members anticipated the Committee approved for inclusion in that the federal government would the domestic policy directive the followcontinue to place heavy demands on ing paragraph relating to its longer-run credit markets to finance its large policy for 1989: ongoing deficits. In addition, the expansion of business borrowing would The Federal Open Market Committee seeks probably continue to be boosted by a monetary and financial conditions that will widening financing gap and by the foster price stability, promote growth in substitution of debt for equity in con- output on a sustainable basis, and contribute junction with leveraged buyouts and to an improved pattern of international transactions. In furtherance of these objectives, other corporate restructuring activities. the Committee at this meeting reaffirmed its Growth of household debt might moddecision of late June to lower the ranges for erate somewhat, reflecting the effect of growth of M2 and M3 to 3 to 7 percent and 3 xh increases in interest rates in 1988 on to IVi percent, respectively, measured from mortgage debt and of reduced expansion the fourth quarter of 1988 to the fourth quarter of 1989. The monitoring range for growth of in consumer credit in association with a total domestic nonfinancial debt was set at 6 Vi smaller rise in outlays on consumer to ICM/2 percent for the year. The behavior of durables over the year. the monetary aggregates will continue to be In keeping with the Committee's tenta- evaluated in the light of movements in their velocities, developments in the economy and tive decision in late June, no member financial markets, and progress toward price proposed the inclusion of Ml among the level stability. monetary target ranges. The Committee continued to view the prospective rela- Votes for this action: Messrs. Greenspan, tionship between Ml and aggregate mea- Corrigan, Angell, Black, Forrestal, Heller, sures of economic activity as too unpre- Johnson, Kelley, LaWare, and Parry and Ms. Seger. Vote against this action: Mr. dictable to warrant reliance on this Hoskins. monetary measure as a guide for the conduct of monetary policy. At the conclusion of the Committee's Mr. Hoskins dissented because he prediscussion, all but one of the members ferred lower ranges for the year. In his indicated that they favored or could view satisfactory progress in reducing accept the ranges for 1989 that had been the underlying rate of inflation would established on a tentative basis in late require a degree of restraint over the year June 1988. Against the background of the that would be likely to result in money uncertainties that continued to surround growth at the low end of the tentative the relationship between monetary ranges, and he believed that the ranges growth and broad measures of economic adopted should be more closely centered performance, most of the members en- on that possible outcome. He also felt dorsed a proposal to make explicit in the that lower ranges were desirable at this directive the Committee's procedure in time to underscore the System's determirecent years of evaluating money growth nation to pursue an anti-inflationary in the conduct of policy in light of the policy. behavior of other indicators, including In the Committee's discussion of policy inflationary pressures, the strength of the implementation for the period until the business expansion, and developments in next meeting, a majority of the members Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 83 indicated a preference for maintaining est rates and greater damage over time. unchanged conditions of reserve avail- Some concern also was expressed that ability, at least initially, following today's maintenance of steady reserve conditions meeting. Further monetary restraint might disappoint market expectations, might be desirable in the near future, with adverse repercussions in present perhaps during the intermeeting period. circumstances on the credibility of the However, recent information had given a System's anti-inflationary policy and thus somewhat mixed picture of economic on inflationary expectations. Should too and price developments, and these mem- much restraint later prove to have been bers preferred to wait for further confir- applied, it could be reversed more readily mation of inflationary pressures before and with less lasting implications for additional firming of monetary policy economic performance than too little was undertaken. Appreciable policy tight- restraint, which would tend to embed ening had been implemented only re- inflation and inflationary expectations in cently and the impact would be felt only the economic structure. after a considerable lag. Monetary policy A number of members observed that was now fairly restrictive, as evidenced the relatively slow monetary expansion for example by relatively high real rates that had been experienced in recent of interest, a slightly inverted yield curve, months—and indeed on balance for some and the slow growth of the monetary two years-portended restraint on prices aggregates. The credibility of the Sys- and was a welcome development. A staff tem's anti-inflationary policy was quite forecast suggested that money growth high. Some members expressed concern was likely to remain damped over coming that higher interest rates would exacer- months, with both M2 and M3 growing bate the financial difficulties of many at the lower end of the Committee's 1989 thrift depository institutions, weaken ranges. In the view of a number of heavily indebted firms, and in the context members, this might be acceptable or of a strong dollar possibly lead to an even desirable depending on the extent of undesired upward ratcheting of interest inflationary pressures being experienced rates in world financial markets. It also in the economy. At the same time some was noted that further tightening should members cautioned that a persistent be approached with special caution when shortfall from the ranges might be a cause the dollar was under upward pressure in for concern. the foreign exchange markets. In the Committee's discussion of pos- Other members indicated a preference sible intermeeting adjustments in the for some immediate firming of monetary degree of reserve restraint, members policy in light of their concerns about generally felt that there should be a clear current and prospective inflationary pres- presumption of some further firming if sures in the economy. In this view the incoming information tended to condelaying further tightening would only firm expectations of growing inflationary worsen such pressures and could greatly pressures. Indeed, several members indiincrease the difficulty and ultimate cost cated that such a presumption would of achieving the Committee's anti- enable them to accept a directive that inflationary objectives. Moreover, while called for no immediate change in the higher interest rates could have adverse degree of reserve pressure. Some memeffects on interest-sensitive sectors of the bers expressed the view that developeconomy, a failure to arrest and to reverse ments in foreign exchange markets might inflation would lead to even higher inter- have an important bearing on the timing Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

84 76th Annual Report, 1989 or even the desirability of any firming in issued to the Federal Reserve Bank of the period ahead. More generally, the New York: Committee agreed that consideration would need to be given to the usual range The information reviewed at this meeting of factors that might call for a change in suggests that, apart from the direct effects of policy implementation, including the the drought, economic activity has continued possibility that some easing might be to expand at a fairly vigorous pace. After strong gains in the fourth quarter, total warranted under certain conditions. For nonfarm payroll employment rose sharply in the immediate future, however, several January, including a sizable increase in stressed that any perceptions that mone- manufacturing. The civilian unemployment tary policy might be easing should be rate, at 5.4 percent in January, remained in resisted. the lower part of the range that has prevailed since the early spring of last year. Industrial At the conclusion of the Committee's production rose appreciably further in Decemdiscussion, all but two members indicated ber and January. Housing starts declined that they favored or could accept a somewhat in December but were up substandirective that called for maintaining the tially on balance in the fourth quarter. Concurrent degree of pressure on reserve sumer spending advanced considerably in the fourth quarter, in part reflecting stronger sales conditions and for remaining alert to of durable goods. Indicators of business potential developments that might require capital spending suggest some weakening in some firming during the intermeeting recent months. The nominal U.S. merchanperiod. Accordingly, somewhat greater dise trade deficit was slightly larger on reserve restraint would be acceptable, or average in October and November than in the third quarter. The latest information on prices slightly lesser reserve restraint might be suggests little change from recent trends, acceptable, over the intermeeting period while wages have tended to accelerate. depending on indications of inflationary The federal funds rate and Treasury bill pressures, the strength of the business rates have risen since the Committee meeting expansion, the behavior of the monetary in mid-December; other short-term interest aggregates, and developments in foreign rates are generally unchanged to somewhat exchange and domestic financial mar- lower. Bond yields have declined somewhat. In foreign exchange markets, the tradekets. The reserve conditions contemweighted value of the dollar in terms of the plated by the Committee were expected other G-10 currencies rose substantially over to be consistent with growth of M2 and the intermeeting period. M3 at annual rates of around 2 percent M2 and M3 weakened appreciably in and 3V2 percent respectively over the January, especially M2. For the year 1988, M2 expanded at a rate a little below, and M3 three-month period from December to at a rate around, the midpoint of the ranges March. It was understood that operations established by the Committee. M1 has changed would continue to be conducted with little on balance over the past several months; some flexibility in light of the persisting it grew about 4 lA percent in 1988. Expansion uncertainty in the relationship between of total domestic nonfinancial debt appears to have moderated somewhat in 1988 to a pace the demand for borrowed reserves and around the midpoint of the Committee's the federal funds rate. The intermeeting monitoring range for the year. range for the federal funds rate, which The Federal Open Market Committee seeks provides one mechanism for initiating monetary and financial conditions that will consultation of the Committee when its foster price stability, promote growth in boundaries are persistently exceeded, output on a sustainable basis, and contribute to an improved pattern of international transwas left unchanged at 7 to 11 percent. actions. In furtherance of these objectives, At the conclusion of the meeting, the the Committee at this meeting reaffirmed its following domestic policy directive was decision of late June to lower the ranges for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 85 growth of M2 and M3 to 3 to 7 percent and 3 lh pressures, thereby increasing the diffito IVi percent, respectively, measured from culty of achieving the Committee's antithe fourth quarter of 1988 to the fourth quarter inflationary objectives and leading to of 1989. The monitoring range for growth of even higher interest rates over time. total domestic nonfinancial debt was set at 6 Vi to \0Vi percent for the year. The behavior of the monetary aggregates will continue to be Meeting Held on evaluated in the light of movements in their March 28,1989 velocities, developments in the economy and financial markets, and progress toward price level stability. 1. Domestic Policy Directive In the implementation of policy for the immediate future, the Committee seeks to Information reviewed at this meeting maintain the existing degree of pressure on suggested that activity in the nonfarm reserve positions. Taking account of indica- economy expanded appreciably further tions of inflationary pressures, the strength of in the first quarter. Gains in jobs and the business expansion, the behavior of the monetary aggregates, and developments in personal income were sizable in the first foreign exchange and domestic financial two months of the year. The available markets, somewhat greater reserve restraint indicators on domestic demand presented would, or slightly lesser reserve restraint a mixed picture, but preliminary data for might, be acceptable in the intermeeting January suggested some improvement in period. The contemplated reserve conditions the external sector. The latest price data are expected to be consistent with growth of M2 and M3 over the period from December indicated some pickup in inflation from through March at annual rates of about 2 and recent trends, only in part reflecting 3 Vi percent, respectively. The Chairman may jumps in food and energy prices. call for Committee consultation if it appears Total nonfarm payroll employment to the Manager for Domestic Operations that reserve conditions during the period before rose markedly further in January and the next meeting are likely to be associated February after strong gains in the fourth with a federal funds rate persistently outside a quarter. The rise was paced by continuing range of 7 to 11 percent. steady advances in service-producing industries. Appreciable increases in fac- Votes for the paragraph on short-term tory and construction jobs also were policy implementation: Messrs. Greenspan, Corrigan, Angell, Black, Forrestal, recorded over the two months, but unusu- Heller, Johnson, Kelley, and La Ware and ally mild winter weather contributed to a Ms. Seger. Votes against this action: bunching of construction employment Messrs. Hoskins and Parry. gains in January followed by some retrenchment in February. The civilian Messrs. Hoskins and Parry dissented unemployment rate fell to 5.1 percent in because they believed that a prompt move February. to greater monetary restraint was needed. Industrial production was unchanged Mr Hoskins felt that additional restraint in February after rising considerably over was desirable to put policy on a course the previous several months. A reduced that would lead toward longer-run price rate of automobile assemblies and weakstability. Mr. Parry emphasized that ness in the output of materials contributed inflationary pressures appeared to be to the leveling of industrial activity. In intensifying as the economy had grown to other areas, production gains were well a level in excess of its long-run, noninfla- maintained for consumer goods, and the tionary potential. Both believed that any output of business equipment rose rapidly delay in implementing more restraint following weakness in the fourth quarter. probably would aggravate inflationary Total industrial capacity utilization edged Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

86 76th Annual Report, 1989 down in February. Despite appreciable als, prices continued to rise at a substandrops in utilization rates in primary tial pace. Excluding food and energy, metals, petroleum products, and paper, consumer prices advanced in January these industries continued to operate at and February at a rate a shade above the relatively high levels. In manufacturing, average for 1988. Revised data for labor the operating rate moderated a bit but costs in the fourth quarter and the limited remained high. After a weather-related data available for early 1989 continued to surge in January, housing starts fell in suggest that these costs remained under February to a level somewhat below their upward pressure. average in the fourth quarter. After a considerable increase in the Growth in consumer spending moder- fourth quarter of last year, the nominal ated in January and February. Purchases U.S. merchandise trade deficit narrowed of cars and light trucks fell back consid- in January, according to preliminary erably, and the unusually warm weather estimates. The value of imports declined held down expenditures on heating bills. substantially, reflecting an apparent re- Outlays for goods other than motor versal of the strong rise in non-oil imports vehicles changed little, while purchases that had occurred in the fourth quarter. of nonenergy services posted another The value of exports also declined, but by sizable rise. less than that for imports, with decreases Indicators of business capital spending recorded in almost all major trade catesuggested a rebound from a decline in the gories. Economic growth slackened in fourth quarter. Shipments of nondefense most of the major foreign industrial capital goods excluding aircraft were well nations in the fourth quarter, but data above the fourth-quarter level in January available so far in 1989 did not indicate and February. Nonresidential construc- further slowing. tion activity rose strongly for a second In foreign exchange markets, the trademonth in January, with gains recorded in weighted value of the dollar in terms of almost all categories of building. Petro- the other G-10 currencies rose somewhat leum drilling, which declined through on balance over the intermeeting period. much of last year, appeared to be sta- The dollar was under downward pressure bilizing. Inventory investment in the through most of February, partly in manufacturing sector picked up in early response to unexpectedly large increases 1989. Much of the rise was recorded in in U.S. price indexes. After the Federal the aircraft industry, where work-in- Reserve Board approved an increase in progress inventories were growing in the discount rate on February 24, the reflection of booming production, and in dollar rebounded as U.S. short-term nonelectrical machinery, where com- interest rates rose relative to key foreign puter demand had flattened out in the interest rates. fourth quarter. At the retail level, the At its meeting on February 7-8, the pace of non-auto inventory investment Committee adopted a directive calling generally remained in line with the for no immediate change in the degree of pattern of sales. pressure on reserve positions. It was Producer prices of finished goods rose agreed that policy would be tightened sharply in both January and February, promptly if incoming information tended mostly reflecting higher prices for food to confirm expectations of growing inflaand energy, but prices of a broad range of tionary pressures. The contemplated other finished goods also increased at a reserve conditions were expected to be faster rate. Among intermediate materi- consistent with growth of M2 and M3 at Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 87 annual rates of about 2 and 3 Vi percent more than the increase in the federal respectively over the period from Decem- funds rate, and the prime rate was raised ber through March. in two steps of Vi percentage point. Rates In the context of incoming data tending on Treasury bills moved up appreciably to reinforce earlier evidence of mounting less, at a time when there was no overall inflation, the Manager for Domestic growth in the size of the weekly auctions Operations adjusted the provision of and the supply available for competitive reserves in mid-February to incorporate awards was reduced by substantial retail a higher level of adjustment plus seasonal demand through noncompetitive tenders. borrowing. Subsequently, on February In longer-term debt markets, yields gen- 24, the Board approved an increase in the erally were up about lh to Vi percentage discount rate from 6V2 percent to 7 point, but yields on fixed-rate mortgages percent. The federal funds rate moved up rose somewhat more. Major indexes of from about 9 to 9 V% percent at the time osftock prices declined somewhat over the the February meeting to an average a intermeeting period. little above 93A percent from late Febru- After weakening appreciably in January to late March. ary, growth of M2 and M3 strengthened The uncertainties about the relation- in February and was estimated to have ship between borrowing and the federal picked up farther in March. On balance, funds rate that had complicated open however, the expansion of both aggremarket operations for many months gates had remained quite subdued this persisted during the intermeeting period. year, apparently reflecting increases in Adjustment plus seasonal borrowing short-term market rates that had widened continued to fall considerably short of the opportunity costs of holding deposits. expectations in relation to the federal In addition, the outflows of funds and funds rate and, as contemplated by the other adjustments associated with the Committee, operations continued to be problems of financially troubled thrift implemented with some flexibility. In depository institutions probably reduced light of accumulating indications of slightly the growth of the broader moneadditional weakness in borrowing de- tary aggregates. On average in the first mands relative to earlier patterns, the quarter, growth of M2 was a little below borrowing assumption was adjusted the Committee's earlier expectations, downward in the maintenance period while that of M3 was close to expectabeginning March 9. This technical adjust- tions. The levels of M2 and M3 in March ment was made to bring the assumed were estimated to be respectively, a little level of borrowing in line with recent below and a little above the lower bounds experience and with desired overall of the Committee's 1989 ranges for those conditions in reserve markets. Adjust- aggregates. Ml apparently declined on ment plus seasonal borrowing averaged balance in the first quarter, while total about $450 million in the three reserve domestic nonfinancial debt grew at a rate maintenance periods ending during the near the midpoint of the Committee's intermeeting interval. monitoring range for the year. The tightening of monetary policy The staff projections prepared for this along with growing market concerns meeting suggested that the expansion in about inflation led to sizable increases in the nonfarm economy was likely to interest rates during this period. In short- moderate appreciably during 1989. The term markets, rates on most private issues projections assumed that the drought had rose nearly 1 percentage point, somewhat ended and that normal growing condi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

88 76th Annual Report, 1989 tions would prevail in agriculture this sures . Others believed that policy already year. The staff anticipated somewhat might have been tightened sufficiently to faster increases in consumer prices and contain price pressures in 1989 and to further cost pressures over the year permit progress to be made over time in ahead, especially because of reduced bringing inflation under control. In addimargins of unutilized labor and other tion to the indications of possible moderproduction resources. A monetary policy ation in the expansion, these members to contain inflation necessarily would pointed to the sluggish growth of the involve slower growth of overall demand monetary aggregates and to the recent and an easing of pressures on resources; increases in interest rates and in the to the extent the strength in demand were exchange value of the dollar as consistent to persist, such a policy could imply with a less robust economy and a less additional pressures in financial markets. inflationary environment over time. On that basis, the staff projected slower In their review of specific developgrowth in consumer spending and in ments bearing on the economic outlook, business fixed investment than had oc- members reported that the expansion curred in 1988 and some decline in continued to display considerable vigor housing construction. Foreign trade was in many regions of the country, while at expected to make a smaller contribution least modest overall improvement was to growth in domestic output than it did in occurring in some previously depressed 1988. It was assumed that fiscal policy areas. At the same time, many business would become somewhat more restric- contacts around the country provided tive over the year. indications of marginally less ebullient In the Committee's discussion of the business conditions or business expectaeconomic situation and outlook, mem- tions . Manufacturing continued to bolster bers focused on recent indicators of economic activity in many regions and business activity that pointed at least was in turn buttressed by sales in export tentatively to some moderation in the rate markets. Another positive factor was the of economic growth. The members apparent absence of excessive inventoagreed that the extent and possible dura- ries in most industries relative to current tion of any slowing in the expansion were sales. Some members referred to strength subject to a great deal of uncertainty, and in the agricultural sector, although conthat more time was needed to assess cerns about drought conditions were whether recent developments augured growing in some regions. With regard to for a sustained period of reduced expan- developments pointing to reduced ecosion. The most recent softening in some nomic expansion, several members reof the economic data reflected at least in ferred to signs that the growth in conpart a normal adjustment to unusual, sumer spending had moderated, but it weather-related strength at the start of the also was noted that the recent softness in year and thus did not provide a firm basis the major automobile component had for concluding that more than a pause, followed a spurt in late 1988 and might be such as often occurs during an expansion, reversed later. Some slowing in the might be involved. Indeed, in the view of growth of consumer spending was many members, the economy retained deemed to be desirable to assure satisfacconsiderable momentum and there was a tory economic performance, given the substantial risk that without further policy need to ease inflationary pressures on action the expansion might not slow labor and capital resources while accomsufficiently to relieve inflationary pres- modating continuing gains in exports. In Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 89 addition, the rise in mortgage rates increasing prices, although efforts to together with reduced investor demand meet competitive pressures by curbing had dimmed the outlook for housing, costs were continuing. At the same time, although unusual weather early this year historical experience suggested that a made developments in this sector of the sustained pickup of inflation was unlikely economy especially difficult to assess. in light of the reduced rate of money Prospects for business investment were growth that had been experienced for an tempered by ongoing indications of weak extended period, especially if such construction activity in many areas and growth were to continue to be relatively by some softness in new orders for restrained. business equipment. However, overall In the Committee's discussion of policy spending on business equipment was implementation for the intermeeting being well maintained and some rebound period ahead, a majority of the members in total business fixed investment ap- expressed a clear preference for maintainpeared likely after the slowdown in the ing unchanged conditions of reserve latter part of 1988. On the whole, the availability. They emphasized the uncerexpansion, while apparently moderating, tainties surrounding the current business showed few signs of the kinds of imbal- outlook and the desirability of waiting to ances that might lead to substantial or see if the tentative indications of some cumulative weakening. slowing in the expansion signaled the The members recognized that the start of a sustained period of slower appreciation of the dollar over the past economic growth and reduced inflationyear, a byproduct of reliance on monetary ary pressures. Because of the usual lags policy to resist inflationary pressures, in the impact of monetary policy on the would help to damp price increases. On economy and prices, the full effect of the the other hand, a stronger dollar implied firming in 1988 had not yet been felt, slower progress in reducing the nation's much less the effect of the substantial trade deficit. Nonetheless, many domes- further policy tightening this year. Other tic industries remained competitive in members, while willing to accept an world markets at current dollar exchange unchanged policy for now, preferred an rates, and further growth in exports was immediate move to further restraint. seen as a reasonable expectation, at least They gave more weight to the possibility over the quarters immediately ahead. that the current slowing of the expansion As at earlier meetings, the members might be inadequate to restrain inflationgave considerable attention to the outlook ary pressures, and they felt that additional for inflation. Recent large increases in restraint should be implemented promptly key price indexes were disappointing, if to provide better assurance that sufficient not entirely unexpected, and depending monetary restraint was in place. on the performance of the volatile food Most members endorsed the view that, and energy sectors, the rate of inflation in the absence of unexpected developmight well remain relatively high over ments, policy implementation should the near term. Labor market conditions resist any perceptions that monetary remained tight in many areas, especially policy might be easing. A number also for skilled workers, and many business commented that they would not oppose contacts reported pressures on both labor some further small rise in money market and nonlabor costs. There also were interest rates. More generally, a majority indications that businesses were finding of the members felt that policy implemenit less difficult to pass on rising costs by tation over the intermeeting period should Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

90 76th Annual Report, 1989 be adjusted more readily and promptly In light of the tightening of reserve toward greater restraint than toward ease. conditions that had occurred since the Some who preferred an immediate move February meeting and the related into more restraint indicated that such an crease in the federal funds rate, the understanding would make an unchanged members decided to raise the intermeetpolicy acceptable to them at this time. ing range for the federal funds rate 1 Other members preferred not to bias the percentage point to 8 to 12 percent. Such approach to intermeeting adjustments an increase implied that the expected although all but one could accept an federal funds rate would average closer asymmetric directive. A number of to the middle of the range. That range members urged caution in implementing provides one mechanism for initiating any policy change; in particular, they consultation of the Committee when its wanted to avoid reacting to a single new boundaries are persistently exceeded. piece of information and preferred in- At the conclusion of the Committee's stead to wait for evidence to accumulate discussion, all but one member indion the possible need for a further tighten- cated that they favored or could accept ing of policy. a directive that called for maintaining The members took account of a staff the current degree of pressure on reprojection that indicated that with un- serve positions and that provided for changed reserve conditions, expansion giving particular weight to potential of M2 and M3 was likely to remain developments that might require some subdued during the second quarter, al- firming during the intermeeting period. though such growth probably would be Accordingly, some added reserve resomewhat faster than in the current straint would be acceptable, or some quarter. The expansion in these monetary slight lessening of reserve pressure aggregates was likely to continue to be might be acceptable, over the interheld back by the relatively slow adjust- meeting period depending on indications ment of offering rates on liquid deposit of inflationary pressures, the strength of accounts in response to the increases that the business expansion, the behavior had occurred in market interest rates. of the monetary aggregates, and de- Additionally, developments at thrift velopments in foreign exchange and institutions might continue to depress domestic financial markets. The reserve growth of the broad aggregates, but conditions contemplated by the Comprobably by less than in the first quarter, mittee were expected to be consistent assuming no new developments that with growth of M2 and M3 at annual aggravated depositor concerns. On a rates of around 3 percent and 5 percent cumulative basis from the fourth quarter respectively over the three-month period to June, the projection implied expansion from March to June. It was understood of M2 at a rate just below the lower bound that operations would continue to be of the Committee's 3 to 7 percent range conducted with some flexibility in light for the year, while expansion of M3 of the persisting uncertainty in the would be in the lower half of the Commit- relationship between the demand for tee's V/i to IVi percent range. A number borrowed reserves and the federal funds of members stressed that slow monetary rate. growth was a desirable development in At the conclusion of the meeting, the current circumstances, but some also following domestic policy directive was expressed concern that the slowing could issued to the Federal Reserve Bank of be overdone. New York: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 91 The information reviewed at this meeting continue to be evaluated in the light of suggests that activity in the nonfarm econ- movements in their velocities, developments omy has expanded appreciably further in in the economy and financial markets, and the current quarter. After strong gains in progress toward price level stability. the fourth quarter, total nonfarm payroll In the implementation of policy for the employment rose markedly further in immediate future, the Committee seeks to January and February. The civilian unem- maintain the existing degree of pressure ployment rate fell considerably to 5.1 percent on reserve positions. Taking account of in February. Industrial production was indications of inflationary pressures, the unchanged in February after rising sub- strength of the business expansion, the stantially over the previous several months. behavior of the monetary aggregates, and After a weather-related surge in January, developments in foreign exchange and housing starts fell in February to a level domestic financial markets, somewhat somewhat below their average in the fourth greater reserve restraint would, or slightly quarter. Growth in consumer spending lesser reserve restraint might, be acceptable moderated in January and February. Recent in the intermeeting period. The contemplated indicators of business capital spending reserve conditions are expected to be suggest a rebound after a decline in the consistent with growth of M2 and M3 over fourth quarter. The nominal U.S. mer- the period from March through June at chandise trade deficit was larger in the annual rates of about 3 and 5 percent, fourth quarter than in the third quarter; the respectively. The Chairman may call for preliminary estimate of the deficit for Committee consultation if it appears to the January was smaller than the average for the Manager for Domestic Operations that fourth quarter. The latest information on reserve conditions during the period before prices suggests some pickup in inflation from the next meeting are likely to be associated recent trends. with a federal funds rate persistently outside Interest rates in both short- and long-term a range of 8 to 12 percent. markets have risen considerably since the Committee meeting in early February. On Votes for this action: Messrs. Greenspan, February 24 the Federal Reserve Board Corrigan, Angell, Guffey, Heller, approved an increase in the discount rate Johnson, Keehn, Kelley, La Ware, Melzer, from 6V2 to 7 percent. In foreign exchange and Syron. Vote against this action: Ms. markets, the trade-weighted value of the Seger. dollar in terms of the other G-10 currencies rose somewhat on balance over the inter- Ms. Seger supported the decision to meeting period. Growth of M2 and M3 strengthened in keep policy unchanged in the period February and apparently picked up further in immediately ahead, but she could not March; over the first quarter such expansion accept a directive that allowed interwas about in line with Committee expectameeting adjustments to be made more tions. Ml appears to have declined marginally readily in a firming than in an easing since December. The Federal Open Market Committee direction as new information became seeks monetary and financial conditions that available. The lagged effects of the will foster price stability, promote growth in substantial tightening that had been output on a sustainable basis, and contribute implemented earlier coupled with to an improved pattern of international current indications of slower economic transactions. In furtherance of these objectives, the Committee at its meeting in growth suggested that policy already February established ranges for growth of had been tightened enough to lead to M2 and M3 of 3 to 7 percent and 3l/i to IV2 lower inflation over time. Under current percent, respectively, measured from the circumstances, further firming carried fourth quarter of 1988 to the fourth quarter substantial risks to interest-sensitive of 1989. The monitoring range for growth of total domestic nonfinancial debt was set at sectors of the economy, the level of the 6!/2 to 10!/2 percent for the year. The dollar in foreign exchange markets, and behavior of the monetary aggregates will the continued growth of the economy. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

92 76th Annual Report, 1989 2. Authorization for Domestic of prices had risen somewhat more Open Market Operations rapidly in 1989, with a significant contribution from sharp increases in energy Effective March 29,1989, the Committee prices. Year-over-year increases in labor approved a temporary increase of $2 costs appeared to be continuing on an billion, to $8 billion, in the limit between upward trend but at a more gradual rate. Committee meetings on changes in Sys- Gains in total nonfarm payroll employtem Account holdings of U.S. government moderated substantially in March ment and federal agency securities that is and April from the rate recorded over the specified in paragraph l(a) of the Authoprevious six months. Much of the Marchrization for Domestic Open Market Op- April increase occurred in the services erations. The increase was effective for industry, where employment continued the intermeeting period ending with the to expand at about the 1988 pace. In close of business on May 16, 1989. April, job growth slackened at wholesale and retail trade establishments, and fac- Votes for this action: Messrs. Greenspan, tory employment remained a bit lower Corrigan, Angell, Guffey, Heller, Johnson, than its January level. Although new Keehn, Kelley, LaWare, and Melzer, Ms. claims for unemployment insurance con- Seger, and Mr. Syron. Votes against this tinued low, the civilian unemployment action: None. rate rose from 5.0 percent in March to 5.3 percent in April. This action was taken on the recommen- Industrial production increased in dation of the Manager for Domestic April after declining on balance over the Operations. The Manager had advised preceding two months. The April pickup that the usual leeway of $6 billion for reflected a sizable rise in motor vehicle changes in System Account holdings assemblies after a weak first quarter as might not be sufficient over the intermeetwell as a retracing of the March decline in ing period because of seasonal increases output of other consumer goods. Producin currency in circulation and in required tion of business equipment continued to reserves and a large rise in Treasury rise in April at about the strong firstbalances at the Federal Reserve Banks quarter pace. Total industrial capacity after the tax payment date in mid-April. utilization rose in April but remained below its January level. Operating rates in manufacturing edged up despite a Meeting Held on further decline in capacity utilization in May 16,1989 primary processing industries. Growth in consumer spending had 1. Domestic Policy Directive slowed considerably this year from the Information reviewed at this meeting pace in 1988. A reduction in growth of suggested that the rate of economic spending for services along with smaller expansion had slowed in recent months. outlays for durable goods, notably motor Job gains had diminished noticeably in vehicles, more than offset a pickup in March and April, and industrial produc- expenditures for nondurable goods. In tion was growing more slowly than in April, enhanced manufacturer incentives 1988. On the demand side, growth in spurred spending on motor vehicles and consumer spending appeared to have boosted retail sales after a flat March, but slackened, and housing activity had outlays on other durable goods remained weakened considerably. Broad measures weak. After a sizable rise in the second Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 93 half of 1988, housing starts weakened excluding these components, consumer sharply this year. In April, a substantial prices advanced at a slightly faster rate in drop in starts of multifamily units brought the first quarter of 1989 than in the fourth overall housing starts to their lowest level quarter of 1988. The year over-year since December 1982. increase in this measure of consumer By contrast, recent indicators of busi- prices had edged up only marginally since ness capital spending showed a rebound the beginning of the year, a pattern also in early 1989 after a decline in the fourth evident in broad measures of labor quarter. Shipments of nondefense capital compensation. goods excluding aircraft picked up The nominal U.S. merchandise trade sharply in the first quarter; among the deficit widened somewhat in February, major components, computers posted a but the average deficit for January and sizable increase after a sharp fourth- February together was smaller than that quarter decline, and only business pur- for the fourth quarter. Exports for the chases of motor vehicles evidenced weak- January- February period were well ness . Nonresidential construction activity above their fourth-quarter level; much of rebounded sharply in March from a the increase occurred in agricultural February decline, and petroleum drilling products. Imports advanced considerably turned up, apparently in response to less, as declines in automotive products, increases in oil prices. In the first quarter, consumer goods, and foods nearly offset inventory investment in the manufactur- increases in oil, industrial supplies, and ing sector continued at about the average capital goods. Available indicators sug- 1988 pace; a substantial part of this gested that the pace of economic growth accumulation was in stocks of work-in- and inflation had increased on balance in process in the aircraft industry where the major foreign industrial countries in new orders and production remained on a early 1989. distinct uptrend. The overall inventory - In foreign exchange markets, the tradeto-shipments ratio had changed little from weighted value of the dollar in terms of the year-end level. At the retail level, the other G-10 currencies rose further on inventory-sales ratios edged up as a result balance over the intermeeting period. not only of further accumulations in the The dollar declined early in the period as automotive area but also of some rise in market participants perceived central apparel and general merchandise stocks. bank authorities as actively seeking a After rising sharply in the first two lower dollar. Despite some continued months of the year, producer prices of narrowing of short-term interest rate finished goods advanced at a substantially differentials between dollar-denominated less rapid pace in March and April. The assets and both mark and yen assets, the April increase reflected another large dollar subsequently rebounded; market jump in energy prices; prices of consumer concerns about political uncertainties in foods turned down, partially reversing Germany and Japan apparently were a their sizable first-quarter increase, and factor in the rise. prices of other finished goods were little At its meeting on March 28, the changed. At the intermediate and the Committee adopted a directive that called crude materials levels, the April price for no immediate change in the degree of increases were attributable entirely to the pressure on reserve positions but that surge in energy prices. Both food and provided for giving particular weight to energy prices contributed to the rise in potential developments that might require consumer prices in March. Nevertheless, some firming during the intermeeting Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

94 76th Annual Report, 1989 period. An unchanged availability of earlier rise in market interest rates, which reserves over the period was expected to had substantially increased the opportube consistent with the growth of M2 and nity costs of holding deposits. Through M3 over the period from March through April, expansion of M2 had been at a rate June at annual rates of about 3 percent well below the Committee's range for the and 5 percent respectively. It was agreed year, while growth of M3 had been in the that somewhat greater reserve restraint lower portion of its range. Reflecting the would, or slightly lesser reserve restraint persisting weakness in transactions balmight, be acceptable depending on indi- ances in 1989, Ml was below its average cations of inflationary pressures, the level in the fourth quarter of 1988. strength of the business expansion, the Growth in total domestic nonfinancial behavior of the monetary aggregates, debt slowed somewhat in April, damped and developments in foreign exchange by strong tax revenues that reduced the and domestic financial markets. Reserve Treasury's financing needs and by a conditions remained essentially stable virtual halt in refundings of state and over the intermeeting interval following local obligations owing to the earlier the March meeting, except that stronger climb in interest rates. than-anticipated federal tax revenues and The staff projection prepared for this related reserve flows associated with the meeting suggested that the expansion of April tax date contributed for a time to the nonfarm economy over the remainder slightly firmer reserve markets. In the of 1989 was likely to be at a pace reserve maintenance periods completed somewhat below that officially reported since the March meeting, adjustment plus for the first quarter. The projection seasonal borrowing averaged $565 mil- continued to assume that the drought had lion while federal funds generally traded ended and that normal agricultural growaround 9% percent or a little below. ing conditions would prevail. The staff With incoming information suggesting anticipated that, with margins of unutia more moderate pace of economic lized labor and other production reexpansion, other market interest rates sources remaining relatively low, most declined over the intermeeting period. measures of prices and labor costs would Rates on short- and intermediate-term increase at somewhat faster rates in 1989 U.S. Treasury issues dropped almost than in 1988. A monetary policy to 1 percentage point, and those on private contain inflation would involve slow money market instruments fell somewhat growth of overall demand and an easing less. Yields generally were down 25 to of pressures on labor and capital re- 50 basis points in long-term debt markets, sources ; to the extent that strength in final and major indexes of stock prices rose demands were to persist, such a policy substantially. would imply additional pressures in M2 and M3 grew more sluggishly in financial markets. The staff projected April than had been anticipated, as sub- sluggish consumer outlays for goods and stantial deposit outflows began after mid- services and further weakness in housing month and continued into early May. construction over the remainder of 1989. Declines in transaction and other liquid The contribution of foreign trade to balances were associated primarily with growth was likely to be limited, and fiscal outsized personal tax payments and a policy was expected to be moderately shortfall in tax refunds. Growth of the restrictive. Growth in business capital broader monetary aggregates also contin- spending, particularly for equipment ued to be restrained by the effects of the purchases, was expected to moderate Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 95 over the rest of the year from its vigorous quarters but should be sustained at a first-quarter pace. moderate pace by a high level of employ- In the Committee's discussion of the ment and further expansion in personal economic situation and outlook, mem- incomes. Housing construction was debers focused on accumulating indications pressed in many areas, and this sector of that the expansion in business activity the economy was not expected to make was slowing to a pace that they generally much, if any, net contribution to the viewed as more sustainable and more expansion this year, at least on the consistent with reducing inflation pres- assumption of unchanged financial consures over time. The apparent slowing in ditions in mortgage markets. Business the growth of domestic consumer demand fixed investment presented a mixed picwould tend to make more domestic ture by industry but, in the context of resources available for the production of high capacity utilization rates and strong export goods and the expansion of domes- pressures to cut costs, further overall tic capital. There was little evidence at growth was viewed as a reasonable this point of the kinds of imbalances that prospect following the sharp pickup in normally signal a downturn in economic the first quarter. Conditions in agriculture activity, but some members expressed were described as favorable in most parts concern that a cumulative slowing of the of the nation, though some areas were business expansion could not be ruled still affected by drought conditions. out, especially since the effects of earlier Outside the motor vehicles sector, invenpolicy tightening actions had not been tories displayed few signs of the imbalfelt fully. In this regard, the extended ances that usually presage a downturn in weakness in monetary growth, at a time production; some of the recent build-up of slowing economic expansion, was a involved work-in-process inventories in worrisome development. The latest infor- industries such as commercial aircraft mation on prices and wages was cited as that had firm order backlogs. Gains in net encouraging, possibly indicating that the exports had contributed importantly to underlying rate of inflation might be continued expansion over recent quarleveling out, although it was still undesir- ters. While further progress in reducing ably high. the nation's trade deficit was anticipated, In the course of the Committee's dis- some members emphasized the potencussion, members observed that the tially adverse implications of a strengthbroad indications of slower but continu- ening dollar for the nation's trade balance ing business expansion were supported and domestic economic growth. On the by reports on regional economic develop- whole, the economic expansion appeared ments. While conditions varied across to be stabilizing at a reduced but sustainthe country, overall activity appeared to able pace that tended to reflect both be advancing in most regions, though capacity constraints in some industries evidence of slower growth was apparent and some slowing in the growth of overall in some of them. Retail sales had flattened domestic demand. out in a number of areas. The weakness With regard to the outlook for prices in sales was more widespread and pro- and wages, a number of members emphanounced in the case of motor vehicles, sized that inflationary pressures were still particularly after taking account of incen- firmly rooted in the economy and that the tive programs introduced recently by auto rate of inflation might well remain unacmanufacturers. Consumer spending was ceptably high for an extended period. not likely to increase rapidly over coming However, the slowdown in economic Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

96 76th Annual Report, 1989 growth should tend to moderate pressures uncertainties, further developments on costs over time, and the most recent would need to be evaluated carefully and information on prices and wages had might well call for some adjustment of been encouraging. In addition, the over- policy, in either direction, before the all outlook for agricultural production next meeting of the Committee. this year had favorable implications for In the course of their discussion, the food prices, and the recent strength of the members took account of a staff analysis dollar augured well for domestic infla- that indicated that unchanged reserve tion, albeit at the cost of reduced export conditions were likely to be associated opportunities. With respect to wages, with some rebound in the growth of the some members commented that recent monetary aggregates during the interpatterns were better than they had ex- meeting period. Earlier increases in pected, given the persistence of tight market interest rates in the context of labor markets in many areas and the low typically sluggish adjustments of offering rate of unemployment for the nation as a rates on relatively liquid consumer-type whole. However, reference also was deposits had fostered slow growth in M2 made to indications of greater militancy and to a lesser extent in M3, while on the part of labor in some parts of the demand deposits had declined appreciacountry and to a recent labor settlement bly on balance since year-end. In recent that could have inflationary implications. weeks, transaction and other liquid ac- On balance, in the context of slowing counts had been depressed further in economic expansion, several members conjunction with larger-than-expected noted that the risks to the economy tax payments and atypically small tax apparently had become less one-sided, refunds. The staff analysis postulated having shifted from a strong potential for some replenishment of tax depleted degreater inflation to more equally weighted posits and a lessening impact from earlier risks of higher inflation and a substantial increases in market rates on interestshortfall in economic growth. sensitive deposit accounts, although there Turning to the conduct of monetary was as yet little evidence of a rebound. policy, nearly all of the members en- In the light of indications of slower dorsed a proposal to maintain unchanged growth in business activity and sluggish conditions of reserve availability, at least monetary expansion that had left M2 well initially in the intermeeting period. There below the lower bound of its annual was considerable uncertainty as to growth cone and M3 near the lower limit whether monetary conditions were suffi- of its annual range, members attached ciently restrictive to foster lower rates of considerable importance to the need for inflation or had become so tight as to an upturn in monetary growth. Indeed, cause an even greater slowing in the the behavior of the monetary aggregates expansion than might be needed to relieve would need to be monitored with special inflation pressures. In the circumstances, care over the weeks ahead, and a failure most members viewed a steady policy as of monetary growth to revive during this offering the best promise at this point of period might well signal some further being associated with the financialm arket weakening in the business expansion and conditions and monetary growth rates warrant a special consultation of the that would support an appropriately Committee. A pickup in M2 would be restrained rate of economic expansion to needed fairly soon to give some assurance accommodate the Committee's anti- that this aggregate was on a track that inflationary objectives. Given current would bring it within the Committee's Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 97 range for the year. In one view the shortfall appeared to have diminished in monetary aggregates already were suffi- recent weeks—largely because of a surge ciently weak to justify some immediate in seasonal borrowing-and, according easing of reserve conditions in order to to a staff analysis, unchanged reserve improve the prospects that adequate conditions over the upcoming intermeetmonetary growth would occur to sustain ing period might encompass somewhat the economic expansion. Other members higher average borrowing. In light of the preferred a more cautious approach, in persisting uncertainties in the relationpart to avert the potential need for, and ship between borrowing and the federal resulting market unsettlement that would funds rate, the members accepted the be associated with, a subsequent reversal need for continued flexibility in the of the easing, particularly if special conduct of open market operations. factors depressing recent monetary At the conclusion of the Committee's growth were reversed. discussion, all but one of the members With respect to possible adjustments indicated that they favored or could in monetary policy during the intermeet- accept a directive that called initially for ing period ahead, a majority of the no change in the degree of pressure on members supported a directive that would reserve positions. Some firming or some make an easing or a tightening of policy easing of reserve conditions would be equally likely, depending on economic acceptable during the intermeeting period and financial developments and the be- depending on indications of inflationary havior of the monetary aggregates. How- pressures, the strength of the business ever, one member preferred a directive expansion, the behavior of the monetary that was tilted toward ease in order to aggregates, and developments in foreign help assure a prompt policy response if exchange and domestic financial marmonetary growth did not rebound rela- kets. The reserve conditions contemtively soon. Other members indicated a plated by the Committee were expected preference for retaining the previous to be consistent with growth of M2 and intermeeting instruction that tilted more M3 at annual rates of around \xh and toward tightening than toward easing. 4 percent respectively over the three- Persisting inflationary pressures and, in month period from March to June. The this view, the still tentative indications of members agreed that the intermeeting a slower business expansion argued for a range for the federal funds rate, which continuing bias toward restraint. Some provides one mechanism for initiating members were concerned that, under consultation of the Committee when its prevailing circumstances, a move to a boundaries are persistently exceeded, symmetrical directive could be misinter- should be left unchanged at 8 to 12 preted, when published, as a lessening of percent. the Committee's commitment to an anti- At the conclusion of the meeting, the inflationary policy. following domestic policy directive was During the Committee's discussion, issued to the Federal Reserve Bank of consideration was given to the technical New York: relationship between the level of adjustment plus seasonal borrowing and that of The information reviewed at this meeting suggests that the rate of economic growth has the federal funds rate. In comparison slowed in recent months. Gains in total with experience in earlier years, borrownonfarm payroll employment moderated subing had been low for some time in relation stantially in March and April, and employto the federal funds rate. However, the ment in manufacturing was about unchanged Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

98 76th Annual Report, 1989 over the two months. The civilian unemploy- acceptable in the intermeeting period. The ment rate rose considerably to 5.3 percent in contemplated reserve conditions are expected April. Industrial production increased in April to be consistent with growth of M2 and M3 after declining on balance in the preceding over the period from March through June at two months. Growth in consumer spending annual rates of about IV2 and 4 percent, has slowed considerably in recent months. respectively. The Chairman may call for Housing starts declined further in April. Committee consultation if it appears to the Recent indicators of business capital spending Manager for Domestic Operations that reshow a rebound after a decline in the fourth serve conditions during the period before the quarter. The nominal U.S. merchandise trade next meeting are likely to be associated with a deficit was smaller on average in January and federal funds rate persistently outside a range February than in the fourth quarter. Broad of 8 to 12 percent. measures of prices have risen somewhat more rapidly in 1989, with a significant contribution Votes for this action: Messrs. Greenspan, from sharp increases in energy prices. Corrigan, Angell, Guffey, Heller, Johnson, Interest rates have declined considerably Keehn, Kelley, and La Ware, Ms. Seger, since the Committee meeting in late March. and Mr. Syron. Vote against this action: In foreign exchange markets, the trade- Mr. Melzer. weighted value of the dollar in terms of the other G-10 currencies rose further on balance Mr. Melzer dissented because he faover the intermeeting period. vored an immediate move to slightly less Growth of M2 and M3 was sluggish in pressure on reserve positions. While April, primarily because of a sizable decline in transactions balances. Through April, inflation was currently too high and might expansion of M2 has been at a rate below the move even higher in the short run, he felt Committee's range for the year, while growth that the monetary policy restraint of the of M3 has been in the lower portion of its past two years would eventually reduce range. inflationary pressures. In addition, he The Federal Open Market Committee seeks monetary and financial conditions that will was concerned that the very restrictive foster price stability, promote growth in monetary policy of recent quarters, evioutput on a sustainable basis, and contribute denced by extremely sluggish growth of to an improved pattern of international trans- reserves, the monetary base, and the actions. In furtherance of these objectives, monetary aggregates, heightened the the Committee at its meeting in February risks of a recession unless the policy were established ranges for growth of M2 and M3 of 3 to 7 percent and 3V2 to 7*/2 percent, to be reversed soon. In the event of a respectively, measured from the fourth quar- recession, a policy response aimed at a ter of 1988 to the fourth quarter of 1989. The quick recovery could make the longermonitoring range for growth of total domestic term goal of price stability even more nonfinancial debt was set at 6!/2 to 10 Vi difficult to attain. percent for the year. The behavior of the monetary aggregates will continue to be evaluated in the light of movements in their velocities, developments in the economy and 2. Foreign Currency Authorization financial markets, and progress toward price level stability. At this meeting the Committee approved In the implementation of policy for the an increase in the limit on holdings of immediate future, the Committee seeks to maintain the existing degree of pressure on foreign currencies in the System Open reserve positions. Taking account of indica- Market Account. Paragraph ID of the tions of inflationary pressures, the strength of Committee's Authorization for Foreign the business expansion, the behavior of the Currency Operations permitted the Fedmonetary aggregates, and developments in eral Reserve Bank of New York, for the foreign exchange and domestic financial markets, somewhat greater reserve restraint System Open Market Account, to mainor somewhat lesser reserve restraint would be tain an overall open position in all foreign Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 99 currencies not exceeding $12.0 billion. Recent data on production and spending System holdings of such currencies had suggested a fairly consistent pattern of risen rapidly this year and totaled nearly weakness in housing and in consumer $11 billion, based on historical costs. In goods, notably motor vehicles. Running light of the potential for further System counter to that trend was a further sizable acquisitions of foreign currencies in increase in spending for business equipcoordination with similar transactions by ment following a strong first quarter; in the U.S. Treasury and in cooperation addition, the trade deficit had narrowed with foreign monetary authorities, the further. Broad measures of prices contin- Committee agreed to raise the limit in ued to rise more rapidly than in 1988, Paragraph ID of the Authorization to reflecting sharp upward pressures on $15.0 billion, effective immediately. energy and food prices. There had been no discernible step-up in the pace of wage Votes for this action: Messrs. Greenspan, inflation, however, even though levels of Corrigan, Angell, Guffey, Heller, Johnson, labor utilization remained relatively high. Keehn, Kelley, and Melzer, Ms. Seger, and Mr. Syron. Vote against this action: Mr. Growth in total nonfarm payrolls mod- LaWare. erated substantially in recent months from the pace of the previous two years. Mr. LaWare dissented because he Employment in manufacturing and conwanted to convey his skepticism about struction fell in May and on balance had the effectiveness of sterilized intervention changed little in both sectors since Januin foreign exchange markets. He did not ary. Job growth in services was relatively object to the specific transactions that had weak in May, judged by recent standards, been conducted recently. as gains in trade and business services Following the meeting the dollar re- were small. Despite the slower pace of mained under strong upward pressure payroll growth this year, the factory that was resisted through very large workweek remained high by historical additional System purchases of foreign standards in May, and initial claims for currencies. Effective June 14, 1989, the unemployment insurance had increased Committee approved a further increase only slightly through mid-June. The to $18.0 billion in the limit on System civilian unemployment rate, at 5.2 perholdings of foreign currencies under cent in May, stayed close to its average Paragraph ID of the Authorization for level in earlier months of the year. Foreign Currency Operations. Industrial production increased on balance in April and May at about the Votes for this action: Messrs. Greenspan, reduced rate experienced earlier in the Corrigan, Angell, Guffey, Heller, Johnson, year. Assemblies of motor vehicles, Keehn, Kelley, LaWare, and Melzer, Ms. Seger, and Mr. Syron. Votes against this which had turned up in April, fell appreaction: None. ciably in May. Production of consumer goods other than automobiles also softened in May, and output of construction Meeting Held on supplies registered a decline for the July 5-6,1989 fourth consecutive month. Production of business equipment excluding automo- 1. Domestic Policy Directive biles continued to advance strongly in The information reviewed at this meeting April and May, partly as a result of a tended to confirm earlier indications that surge in the manufacture of computers economic growth had slowed this year. but also owing to gains for a variety of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

100 76th Annual Report, 1989 other types of equipment, particularly where production had been strong. In the capital goods for manufacturing indus- retail sector, dealer stocks of automobiles tries. Total industrial capacity utilization remained high, and inventories at other retraced its April rise in May but re- retail establishments had risen a bit mained well above its relatively high relative to sales, measured on a constantlevel of a year ago. Operating rates in dollar basis, but there were only limited manufacturing slipped farther in May for indications of excess stocks in the nonauprimary processing industries, while tomotive segments of retailing. those for advanced processing industries The nominal U.S. merchandise trade were sustained at the already high levels deficit narrowed in April from a firstevident in earlier months of the year. quarter average that was the smallest in Despite considerable gains in real four years. Exports strengthened a little disposable income in recent quarters, the in April when a decline in sales of sluggish growth in consumer spending agricultural products from their high that had emerged earlier in 1989 contin- March levels was outweighed by inued into the second quarter. In May, a creases in most other major trade catedecline in expenditures was led by a gories, especially industrial supplies and reduction in outlays for motor vehicles, machinery. Appreciable declines in imalthough spending also was flat or down ports of automotive products, machinery, for a broad range of other goods, both and foods more than offset a rise in oil durable and nondurable. In contrast to imports. Available data suggested some outlays on goods, growth in purchases of slowing recently in the growth of ecoservices was well maintained. Housing nomic activity in the major foreign starts declined slightly further in May, as industrial countries following robust single-family starts slipped back to their expansion in the first quarter; inflation weak level of March. Starts of multifam- rates had moved up in most of those ily units were little changed in May from countries. the seven-year low recorded in April. Continuing a pattern of sharp increases Home sales had fallen this year. this year, producer prices of finished Recent indicators of business capital goods were up substantially further in spending suggested a further substantial May. The May rise was led by further increase in the second quarter after a advances in prices of food and energy strong first quarter. Shipments of nonde- products, but prices of nonfood, nonfense capital goods advanced sharply in energy goods also rose after being about April, with solid gains for most broad unchanged in April. In April and May, categories, and remained high in May. increases in prices of most materials were Nonresidential construction activity had noticeably smaller than those registered changed little in recent quarters although for finished goods. The consumer price industrial structures put in place strength- index rose sharply further in April and ened somewhat, perhaps reflecting sus- May. Over the first five months of the tained high levels of factory utilization in year consumer prices increased at a faster some industries. Inventory investment rate than in 1988; however, excluding by manufacturers continued in April at food and energy, the rate of increase in about the first-quarter pace and such these prices differed little from last year's inventories remained in line with ship- pace, partly because of the damping ments. Much of the increase in factory effect of the appreciation of the dollar on inventories was concentrated in work-in- the prices of a broad range of imported process stocks in the aircraft industry, goods. Recent data for labor compensa- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 101 tion indicated that year-over-year in- Immediately after the Committee meetcreases in average hourly earnings of ing, the Manager for Domestic Operaproduction and nonsupervisory workers tions directed operations toward mainremained near the average pace evident taining the existing degree of pressure on since mid-1988. reserve positions. A technical upward In foreign exchange markets, the revision was made to the assumed level dollar recorded significant gains against of adjustment plus seasonal borrowing to most of the other G-10 currencies in the bring it in line with desired overall weeks after the Committee meeting on conditions in reserve markets; this revi- May 16; in mid-June, the dollar reached sion resulted from the recent, unusual a two and one-half year high against strength of seasonal borrowing that perthe mark and a one and one-half year haps was associated with heavier dehigh against the yen. Smaller-than- mands for crop production loans at a time anticipated trade deficits announced for of weak deposit growth at agricultural March and April, political events in banks. Later in the intermeeting period, a China and Japan, and expectations of variety of developments began to suggest capital gains in U.S. bond and equity that a slackening in inflation pressures markets appeared to have helped trigger might be in prospect as indications of buying pressure at a time of narrowing slower economic expansion continued to differentials between interest rates in the accumulate, monetary growth remained United States and abroad. The dollar sluggish, and the dollar climbed further. subsequently fell back sharply in often In these circumstances, the Manager for volatile trading, its weighted-average Domestic Operations acted in early June value in terms of the other G-10 cur- to reduce somewhat the degree of presrencies more than retracing the earlier sures on reserve positions. Adjustment rise. The decline in the value of the plus seasonal borrowing averaged about dollar occurred largely in the absence of $550 million over the three full reserve significant new economic developments maintenance periods completed since the or clear indications of a reassessment May 16 meeting, while the federal funds of economic fundamentals by market rate moved down about lA percentage participants. point to 9Vi percent or slightly higher At its meeting on May 16, the Commit- more recently. tee adopted a directive calling for no Other market interest rates also fell immediate change in the degree of pres- over the intermeeting period in response sure on reserve positions. The Committee to indications of a continuing softness in agreed that somewhat greater or some- the economy and a better outlook for what lesser reserve restraint would be inflation as well as to the easing of acceptable over the intermeeting period monetary policy. Short-term market rates depending on indications of inflationary dropped 25 to 70 basis points, and the pressures, the strength of the business prime rate was lowered Vi percentage expansion, the behavior of the monetary point to 11 percent in early June. In aggregates, and developments in foreign long-term debt markets, yields on Treaexchange and domestic financial mar- sury coupon issues dropped 70 to 90 kets. This policy stance was expected to basis points. Stock prices rallied through be consistent with growth of M2 and M3 much of the intermeeting period, and at annual rates of around Wi and 4 per- major indexes reached new post-1987cent respectively over the period from crash highs before giving up most of March through June. those gains. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

102 76th Annual Report, 1989 M2 and M3 declined in May, primarily employment and real income, consumer because of sizable reductions in transac- spending would be sluggish through tion and other liquid deposit balances that 1990. Housing activity was projected to seemed to be related to the clearing of benefit from the recent drop in interest unexpectedly large payments to cover rates. Relatively sluggish final demands federal tax liabilities for 1988. Through along with reduced capacity utilization mid-June, growth of these aggregates rates were expected to have a restraining appeared to have rebounded in conjunc- effect on the growth of business capital tion with some rebuilding of tax-depleted spending. balances and the declines in market In the Committee's discussion of curinterest rates that brought some narrow- rent and prospective economic condiing of the large opportunity costs associ- tions, members focused on accumulating ated with holding liquid deposits. None- indications of reduced growth in business theless, the growth of M2 for the year to activity and on the implications for the date remained below the lower end of the outlook for the economy and prices. The Committee's annual target range. Ml members generally concluded that concontinued to contract through mid-June, tinuing expansion at a relatively slow as weakness in transaction balances, pace was a reasonable expectation for the especially in demand deposits, persisted. next several quarters and that the associ- Domestic nonfinancial debt expanded in ated lessening of pressures on labor and May at a slightly lower rate than it did in capital resources was likely to foster the first quarter. progress in curbing inflation over time. The staff projections prepared for this Members noted that the economic outmeeting suggested that growth of the look was subject to considerable uncernonfarm economy over the remainder of tainty and that substantial deviations from 1989 and for 1990 was likely to be at a current expectations might well occur. pace a little lower than that estimated for The latest information suggested some the first half of this year. The projection risk that the expansion might weaken continued to assume that normal agricul- further, but current business conditions tural growing conditions would prevail. provided few indications of the kinds of Although the recent strengthening of the imbalances and distortions that often lead dollar was tending to damp import prices to downturns in economic activity. Some and thereby domestic inflation, the staff members emphasized that a recession, anticipated that, with margins of unuti- should one materialize, might be aggralized labor and other production re- vated by the debt burdens or debt exposources still relatively low, most mea- sure of many business and financial sures of prices and labor costs would firms. At the same time, inflation reincrease at slightly faster rates in 1989 mained unacceptably high and cost presthan in 1988. Inflationary pressures were sures substantial; however, in the context expected to abate a bit in 1990, partly in of a weaker economic outlook and an response to gradually mounting slack in extended period of slow monetary labor and product markets. The staff growth, the risks of a sustained acceleraprojected that the contribution of foreign tion in inflation appeared to be more trade to growth would be very limited, as limited than they had earlier in the year. real export gains dropped well below the Nonetheless, a policy designed to bring pace of recent quarters, and that fiscal about some reduction in underlying inflapolicy would remain moderately restric- tion pressures and improvement in the tive. In view of expected meager gains in nation's external accounts might be asso- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 103 ciated with relatively slow growth of els. In general, business sentiment redomestic spending for some time. mained favorable, though the emergence In keeping with the usual practice at of somewhat more cautious attitudes was meetings when the Committee considers detected in a number of areas and indusits long-run objectives for monetary tries. With regard to specific sectors of growth, the members of the Committee the economy, current data and business and the Federal Reserve Bank presidents contacts did not suggest any general not currently serving as members pro- backup in inventories apart from motor vided specific projections of growth in vehicles; however, there were some real and nominal GNP, the rate of unem- recent reports of marginally excessive ployment, and the rate of inflation. With inventories in a few nonautomotive busiregard to the rate of expansion in real nesses, and a further slippage in the GNP, the projections had a central ten- growth of final demand could lead to dency of 2 to 2lh percent for 1989 as a efforts to pare inventories and production whole, implying continuing growth at a schedules. The members generally anticreduced pace in the second half of the ipated continued overall growth in busiyear; for the year 1990 the central ness fixed investment, though at a pace tendency was IV2 to 2 percent. Projec- much reduced from that experienced tions of growth in nominal GNP con- earlier in the year. Nonresidential converged on rates of 6 to 7 percent for 1989 struction activity was lagging in many and 5Vi to 6% percent for 1990. The areas, but the demand for business equipprojected rates of unemployment cen- ment remained relatively vigorous, in tered around 5Vi percent for the fourth part because of sales abroad. Housing quarter of 1989 and 5Vi to 6 percent for activity was weak in a number of markets, the fourth quarter of 1990. With respect including some that had displayed considto the rate of inflation, the projections erable vigor until recently, but the decline had a central tendency for the consumer in mortgage rates was believed likely price index of 5 to 5 V2 percent for 1989 to sustain activity in this sector of the and 4V2 to 5 percent for 1990. In making economy. these projections the members took ac- A key element in the outlook for count of the Committee's decisions at this overall business activity was the prosmeeting with regard to the objectives for pects for consumer spending; many monetary growth in 1989 and 1990. The members saw little basis for anticipating members assumed that progress would further slowing in the expansion of be made in reducing the federal budget consumer expenditures, but others were deficit and that fluctuations in the ex- less persuaded and some cited in particuchange value of the dollar would not be of lar the possibility that relatively weak sufficient magnitude to affect economic sales of motor vehicles might continue. growth and inflation materially in the Foreign trade was another important period through the end of 1990. sector bearing on the economic outlook. In their review of specific develop- Some further growth in net exports was ments bearing on the outlook for the viewed as a reasonable prospect, but the economy, members observed that growth improvement might be limited if the appeared to be slowing in many parts of dollar remained strong and growth slowed the country but that the utilization of in key economies abroad. Finally, a labor and capital resources remained high number of members stressed that some in most regions and continued to improve acceleration in monetary growth from in others from relatively depressed lev- the pace in the first half of the year likely Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

104 76th Annual Report, 1989 was needed to help support expansion in Against the background of the Combusiness activity. mittee's views regarding prospective eco- Turning to the outlook for inflation, nomic developments and in keeping with members generally anticipated that re- the requirements of the Full Employment duced economic growth in line with the and Balanced Growth Act of 1978 (the central tendency of their forecasts would Humphrey-Hawkins Act), the Committee contribute to some damping of underly- at this meeting reviewed the ranges for ing inflationary pressures by 1990. The growth in the monetary and debt aggrerate of increase in the consumer price gates that it had established in February index might well moderate over the for 1989 and decided on tentative ranges balance of this year, assuming relief from for growth in those measures in 1990. special factors that had affected food and The 1989 ranges included growth of 3 to energy prices during the first half. In 7 percent for M2 and 3Vi to IVi percent particular, the larger farm crops that for M3 for the period from the fourth were anticipated this year would tend to quarter of 1988 to the fourth quarter of reduce pressures on food prices, and 1989. A monitoring range of 6V2 to IOV2 recent oil price developments suggested percent had been set for growth in total some softening in consumer energy domestic nonfinancial debt in 1989. For prices. Other favorable developments the year to June, the cumulative expanincluded generally restrained increases sion of M2 was at a rate about 1 in wages despite ongoing labor shortages percentage point below the Committee's in many parts of the nation and, as range, while that of M3 placed it at the evidenced in part by business contacts lower bound of its range. The expansion around the country, some apparent less- in nonfinancial debt was near the middle ening of inflationary expectations. In of its range in the first half of the year. addition, commodity prices had been In the Committee's review of the subdued in recent months, supporting ranges for 1989, all of the members indications of less intense demands in endorsed a proposal to retain the ranges industrial sectors and perhaps pointing to set in February. The Committee took slower increases in consumer prices in account of a staff analysis that indicated the months ahead. On the negative side, that the more rapid growth in M2 and M3 some members stressed that underlying since mid-May was likely to persist over inflation pressures remained strong and, the months ahead and that by the fourth given current levels of resource use, an quarter both aggregates would be well expansion in line with the forecasts of within the current ranges for the year. most members might avert accelerating The staff assessment incorporated the inflation but was less likely to foster any impact of the recent declines in market significant decline over the forecast interest rates, which would tend to reduce horizon. More generally, the members' the opportunity costs of holding M2 forecasts pointed to a rate of inflation that balances, and also assumed that there was unacceptably high and that moder- would be no special factors influencing ated only slightly over this period; more- the growth of the aggregates such as over, the risks of some acceleration, those experienced earlier in the year. while small, were not negligible espe- Expansion in total domestic nonfinancial cially if economic growth turned out to debt was projected to continue at a rate be appreciably faster than most members around the middle of its range through currently anticipated, putting additional year-end; growth in this measure had pressure on resources. been trending lower in recent years but it Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 105 remained at a pace appreciably above effectiveness over time. Especially in that for nominal GNR The members light of the foregoing considerations, a concluded that the ranges set in February marginal reduction in the ranges, alfor 1989 were still consistent with the though it might be seen as more consistent Committee's objectives of fostering sus- with the long-run objective of price tained expansion in economic activity stability, would seem to imply greater and progress toward price stability. precision than was warranted by the The ranges for 1989 represented reduc- Committee's current ability to project tions from those for 1988, and the next year's developments. If small adjustmembers agreed that restrained monetary ments were called for, they could be growth and further reductions in the made early next year when a more firmly ranges would be needed over time to based decision would be possible. achieve and maintain price stability. Members who preferred lower ranges Views differed, however, as to whether for 1990 gave a good deal of emphasis to the ranges for 1990 should be reduced at the desirability of continuing the Committhis meeting. tee's policy of reducing the ranges from A majority of the members indicated a year to year in order to implement anti preference for extending the 1989 ranges inflationary objectives. In this view, a provisionally to 1990, subject to the usual failure to reduce the ranges at least review next February in light of the eco- slightly in present circumstances might nomic and financialc onditions prevailing be read as an implicit acceptance of then. The outlook for next year was current rates of inflation. These members uncertain, especially this far in advance. recognized the possibility that monetary Nonetheless, the 1989 ranges were likely growth next year might be at the upper in this view to encompass monetary end, or even above, the ranges that they growth that would foster desired eco- favored, especially if interest rates were nomic expansion and moderation of price to decline farther in the interim. If ecopressures in 1990. This outcome could be nomic and financial conditions early next associated with somewhat more rapid year suggested a need, they would be growth of M2 in 1990 than appeared to be prepared to raise the ranges at that time. in train for 1989. Such a pickup in Such a decision would be made in the monetary growth would be consistent light of circumstances that provided the with expansion of nominal GNP along rationale for it and need not therefore the lines of the central tendency of the have the adverse consequences for inflamembers' forecasts and should be associ- tionary expectations that some members ated with only minor changes in interest feared. Members who favored lower rates and hence in velocity next year. ranges also did not want to rule out the Moreover, somewhat faster growth in possibility that inflation pressures next M2 might be needed next year to counter year might turn out to be more intense any potential weakening tendencies that than was currently anticipated and that might develop in the economy. In these relatively limited monetary expansion circumstances there existed a consider- therefore might remain appropriate. able risk that a reduction in the range for In light of the persisting uncertainties M2 might have to be reversed next year about the relationship between monetary or growth in excess of the range tolerated. expansion and ultimate policy objectives, Either development might be viewed as the members were in favor of retaining inconsistent with the stability and predict- relatively wide ranges of 4 percentage ability of policy that tended to enhance its points for M2 and M3. For many years Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

106 76th Annual Report, 1989 prior to 1988, the Committee had set Votes for this action: Messrs. Greenspan, narrower ranges, almost uniformly of 3 Corrigan, Angell, Guffey, Johnson, Kelley, percentage points, for the broader mone- LaWare, and Melzer, Ms. Seger, and Mr. Syron. Vote against: Mr. Keehn. Absent tary aggregates and for total domestic and not voting: Mr. Heller. nonfinancial debt. Wider ranges provided greater scope for achieving monetary Mr. Keehn dissented because he growth that was consistent with the wanted to reduce the ranges for 1990. In Committee's objectives for the economy. his view, a reduction of the ranges for In assessing appropriate rates of mone- next year would provide an important tary expansion in the prevailing uncertain signal of the System's continuing comenvironment, the Committee would con- mitment to price stability. While the tinue to evaluate a wide assortment of velocity of the monetary aggregates had economic and financial indicators. been erratic recently, lower ranges for At the conclusion of this review, the the aggregates would encompass de- Committee approved for inclusion in the sirable rates of monetary growth should domestic policy directive the following more normal conditions prevail next statement of its objectives for growth of year. Given the uncertainty in the relathe broader monetary aggregates and tionship between the monetary agnonfinancial debt for the year 1989: gregates and economic growth, he would, however, be prepared to adjust The Committee reaffirmed at this meeting the ranges early next year on the basis of the ranges it had established in February for intervening developments. growth of M2 and M3 of 3 to 7 percent and 3 Vi In the Committee's discussion of policy to IVi percent, respectively, measured from the fourth quarter of 1988 to the fourth quarter implementation for the period until the of 1989. The monitoring range for growth of next meeting, the members generally total domestic nonfinancial debt also was agreed that recent developments sugmaintained at 6 Vi to 10 Vi percent for the year.gested that some further easing of reserve conditions would be appropriate. Nearly Votes for this action: Messrs. Greenspan, Corrigan, Angell, Guffey, Johnson, Keehn, all endorsed a proposal to lessen the Kelley, LaWare, and Melzer, Ms. Seger, degree of reserve pressure marginally at and Mr. Syron. Votes against this action: this time, but one member favored some- None. Absent and not voting: Mr. Heller. what greater easing and another saw merit in a phased lessening of reserve For the year 1990, the Committee pressures in the weeks ahead. Many approved for inclusion in the domestic emphasized that current economic and policy directive the following statement financial uncertainties called for caution regarding the ranges for growth of the in adjusting policy at this point. In this monetary aggregates and nonfinancial view, more than a slight move to less debt: restraint could have an undesirable effect on inflationary expectations and, at least For 1990, on a tentative basis, the Commitin the absence of further indications of tee agreed to use the same ranges as in 1989 for growth in each of the monetary aggregates lagging economic growth, could lead and debt, measured from the fourth quarter of eventually to upward pressure on long- 1989 to the fourth quarter of 1990. The term interest rates. Moreover, in the view behavior of the monetary aggregates will of some members, there remained some continue to be evaluated in the light of risk that inflationary pressures would movements in their velocities, developments in the economy and financial markets, and intensify and that the easing might have progress toward price level stability. to be reversed later. Caution also was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 107 indicated in light of the prevailing sensi- intermeeting instruction that was tilted tivity and volatility of financial markets. toward ease partly to help underscore— Several members emphasized the need in conjunction with a decision to ease— for faster monetary growth than had been their view that the risks were in the experienced in recent months. Some direction of a shortfall in economic acceleration in the rate of monetary growth from current expectations and expansion had occurred since the middle therefore that any intermeeting adof May, and a staff analysis suggested justment would very likely be in the that such growth was likely to continue as direction of less restraint. Indeed, in this the full effect of recent declines in market view a dramatic and unlikely turnaround interest rates was felt. On the assumption would be needed in the tenor of the of no further changes in interest rates, the incoming economic information to staff projection anticipated that cumula- warrant any firming in the weeks ahead. tive M2 growth would reach the bottom In light of the easing of reserve condiof the Committee's annual range by late tions in early June and the further slight summer. However, given the uncertain- easing contemplated at this meeting, the ties that were involved, a number of members decided to lower the intermeetmembers felt that some further easing ing range for the federal funds rate by was desirable to improve the prospects 1 percentage point to 7 to 11 percent. that monetary growth would be within Such a reduction centered the range more the Committee's ranges for the year, if closely around the federal funds rate that only in the lower part of the range in the was expected after this meeting. The case of M2. A moderate pickup in range for the federal funds rate provides monetary growth at this time would help one mechanism for initiating consultation assure continued expansion of the econ- of the Committee when its boundaries are omy and possibly avoid a situation in persistently exceeded. which a substantial weakening of the At the conclusion of the Committee's economy would be followed by rapid discussion, all but one of the members monetary growth and a marked rebound indicated that they preferred or could in activity —a pattern that would be accept a directive that called for some unlikely to foster the Committee's objec- slight easing in the degree of pressure on tive of price stability over time. reserve positions. Some firming or some Turning to the question of possible easing of reserve conditions would be intermeeting adjustments in the degree acceptable during the intermeeting period of reserve restraint, a majority of the depending on indications of inflationary members indicated a preference for pressures, the strength of the business retaining an unbiased instruction as in expansion, the behavior of the monetary the directive for the May meeting. This aggregates, and developments in foreign approach, in the context of the indicated exchange and domestic financial marpreference of the members to move kets. The reserve conditions contemtoward some immediate easing, was in plated by the Committee were expected keeping with the caution about future to be consistent with some acceleration in policy moves favored by most members. the growth of M2 and M3 to annual rates This caution was dictated by current of around 7 percent over the three-month uncertainties regarding the economic period from June to September. outlook, the still rapid rate of inflation, At the end of the meeting, the following and the relatively sensitive conditions in domestic policy directive was issued to financial markets. Others preferred an the Federal Reserve Bank of New York: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 76th Annual Report, 1989 The information reviewed at this meeting tentative basis, the Committee agreed to use tends to confirm earlier indications that eco- the same ranges as in 1989 for growth in each nomic growth has slowed this year. Gains in of the monetary aggregates and debt, total nonfarm payroll employment have measured from the fourth quarter of 1989 to moderated substantially in recent months, the fourth quarter of 1990. The behavior of but the civilian unemployment rate, at 5.2 the monetary aggregates will continue to be percent in May, remained close to its average evaluated in the light of movements in their level in earlier months of the year. Industrial velocities, developments in the economy and production increased on balance in April and financial markets, and progress toward price May at about the reduced rate experienced level stability. earlier in the year. Growth in consumer In the implementation of policy for the spending has weakened considerably this immediate future, the Committee seeks to year. Housing starts declined slightly further decrease slightly the existing degree of presin May. Recent indicators of business capital sure on reserve positions. Taking account of spending suggest a substantial additional indications of inflationary pressures, the increase in the second quarter after a rebound strength of the business expansion, the behavin the first quarter. The nominal U.S. ior of the monetary aggregates, and developmerchandise trade deficit narrowed in April ments in foreign exchange and domestic from a substantially reduced average value in financial markets, somewhat greater reserve the first quarter. Broad measures of prices restraint or somewhat lesser reserve restraint have risen more rapidly this year than in would be acceptable in the intermeeting 1988, reflecting sharp increases in energy period. The contemplated reserve conditions and food prices. are expected to be consistent with growth of Interest rates have fallen since the Commit- M2 and M3 over the period from June through tee meeting on May 16, with the largest September at annual rates of about 7 percent. declines generally occurring in long-term The Chairman may call for Committee conmarkets. In foreign exchange markets, the sultation if it appears to the Manager for trade-weighted value of the dollar in terms of Domestic Operations that reserve conditions the other G-10 currencies rose sharply earlier during the period before the next meeting are in the intermeeting period but subsequently likely to be associated with a federal funds more than retraced mat rise in often volatile rate persistently outside a range of 7 to 11 trading. percent. M2 and M3 declined in May, primarily because of sizable reductions in transaction Votes for the paragraph on short-term and other liquid balances arising from the policy implementation: Messrs. Greenclearing of unusually large tax payments; data span, Corrigan, Angell, Guffey, Johnson, through mid-June point to a rebound in these Keehn, Kelley, LaWare, Melzer, andSyron. measures of money. Thus far this year expan- Vote against this action: Ms. Seger. Absent sion of M2 has been at a rate below the and not voting: Mr. Heller. Committee's annual range, while growth of M3 has been around the lower bound of the Ms. Seger dissented because she felt Committee's range. that somewhat greater easing was The Federal Open Market Committee seeks monetary and financial conditions that warranted. In her view, the expansion in will foster price stability, promote growth in business activity already had slowed output on a sustainable basis, and contribute substantially and recent developments to an improved pattern of international pointed to further weakness. While a transactions. In furtherance of these obchange in monetary policy would have jectives, the Committee reaffirmed at this meeting the ranges it had established in little effect on the economy over the February for growth of M2 and M3 of 3 to 7 remainder of this year, a more propercent and 3lA to IV2 percent, respectively, nounced easing than the Committee measured from the fourth quarter of 1988 to currently contemplated was needed to the fourth quarter of 1989. The monitoring foster financial conditions that would range for growth of total domestic nonfinancial debt also was maintained at 6V2 to support the economy in 1990 and IOV2 percent for the year. For 1990, on a beyond. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 109 2. Authorization for Domestic owing to further official foreign currency Open Market Operations transactions and smaller-than-expected increases in currency in circulation. The Effective July 7, 1989, the Committee Manager anticipated that additional leeapproved a temporary increase of $2 way might be necessary to meet continubillion, to $8 billion, in the limit between ing needs to absorb reserves in upcoming Committee meetings on changes in Sysreserve maintenance periods. tem Account holdings of U.S. government and federal agency securities specified in paragraph l(a) of the Autho- Meeting Held on rization for Domestic Open Market Op- August 22,1989 erations. Subsequently, effective July 31, 1989, the Committee approved a further 1. Domestic Policy Directive increase of $2 billion, to $10 billion, in The information reviewed at this meeting the intermeeting limit. Both increases suggested that economic activity had applied to the period ending with the continued to expand at a moderate pace in close of business on August 22, 1989. recent months. Job growth had remained sizable; and final demands, most notably Votes for the action effective July 7: Messrs. Greenspan, Corrigan, Angell, Guffey, in the consumer sector, appeared to be Johnson, Keehn, Kelley, La Ware, and better maintained than had been indicated Melzer, Ms. Seger, and Mr. Syron. Votes earlier. At the same time, price inflation against this action: None. Absent and not had slowed, in large part reflecting a voting: Mr. Heller. retracing of price increases in the food and energy sectors that had boosted Votes for the action effective July 31: Messrs. Greenspan, Angell, Boy kin, Guf- inflation rates earlier this year; wage fey, Johnson, Keehn, Kelley, and Oltman, trends gave no signs of upward pressures. Ms. Seger, and Mr. Syron. Votes against Total nonfarm payroll employment this action: None. Absent and not voting: rose appreciably further in July after a Messrs. Heller and LaWare. (Messrs. Boykin and Oltman voted as alternates for large advance in June. Most of the July Messrs. Melzer and Corrigan respectively.) increase took place at service establishments and in the construction industry The increases were approved on the where hiring had slowed during the first recommendation of the Manager for half of the year. Employment was little Domestic Operations. The Manager had changed in manufacturing after three advised on July 5 that the usual leeway of months of declines; much of the recent $6 billion for changes in System account weakness had reflected layoffs in the holdings probably would not be sufficient automobile and electrical equipment over the intermeeting period, partly industries. The civilian unemployment because of expected sales of securities to rate, at 5.2 percent, remained close to its offset large declines in balances held by average level in earlier months of the the U.S. Treasury at the Federal Reserve year. Banks and because of large foreign cur- Industrial production edged higher in rency transactions. On July 28, the July, offsetting the decline of the two Manager advised that the remaining previous months and continuing the genleeway under the $8 billion limit had eral pattern of slow growth since the been reduced to about $650 million, beginning of the year. Output of capital mainly as a result of declines in Treasury equipment posted another strong gain in balances at the Reserve Banks but also July. Production of motor vehicles and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 76th Annual Report, 1989 parts declined substantially, but output of while stocks of materials declined furother consumer goods continued to rise ther. Inventories of work-in-process in at a moderate pace. Production of mate- the aircraft industry continued to grow, rials rebounded after declining on balance as the industry expanded production to over the first half of the year. Total keep pace with mounting orders. At the industrial capacity utilization held steady retail level, dealer stocks of automobiles in July at a relatively high level. In rose a bit further. Inventories at other manufacturing, despite a pickup in pri- retail establishments also increased, but mary processing industries, operating imbalances with sales appeared to be rates edged lower and were down appre- limited. ciably since January. In June, the nominal U.S. merchandise Retail sales rose considerably in July, trade deficit narrowed considerably, and and revisions for earlier months sug- for the second quarter as a whole it was gested that consumer spending in the about unchanged from a substantially second quarter had not been as weak as reduced average value in the first quarter. previously estimated. Purchases of non- Exports rebounded in June as increases durable goods advanced appreciably in both capital and consumer goods further in July from the upward revised outweighed a further decline in sales of levels of recent months. With a new agricultural goods. Imports declined round of manufacturers' incentives boost- appreciably, largely because of a drop in ing sales of motor vehicles, spending on the value of oil imports. In the major durable goods also increased. Housing foreign industrial countries, economic starts rose slightly further in July follow- growth slowed significantly in the second ing a large gain in June. The upturn in quarter, following exceptionally rapid starts occurred in the wake of a bounce- expansion in the first quarter. back in sales of both new and existing Partly reflecting farther sharp dehomes that was associated with the clines in consumer energy prices, sizable decline in mortgage rates since producer prices of finished goods fell in April. July for a second consecutive month. Recent indicators of business capital Prices of finished consumer goods other spending suggested some slowing of than food and energy also declined, growth from the substantial pace of while prices of capital goods held steady. earlier months in the year. In June, Apart from food and energy, prices of shipments of nondefense capital goods materials had fallen somewhat on increased modestly as a brisk rise in balance at the intermediate level in outlays for aircraft and computers out- recent months and had come down weighed a sharp decline in spending for markedly at the crude stage. Consumer other categories of producers' durable prices rose modestly in June after equipment. Nonresidential construction increasing sharply in earlier months of activity, led by stepped-up outlays for the year. Lower prices were registered industrial structures, advanced strongly for gasoline, fuel oil, and electricity; for a second consecutive month. Inven- and consumer food prices rose more tory investment in manufacturing and slowly. Prices of consumer services trade slowed in June to a pace well below continued to advance in June at about the the average rate of increase observed rate observed over the past year and a earlier in the year. In the manufacturing half. Average hourly earnings jumped in sector, inventories of most types of July after showing little change in the finished goods rose only moderately, previous two months, and on balance the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 111 data for recent months suggested no cators that were viewed as suggesting change in prevailing wage trends. less weakness in the expansion and At its meeting on July 5-6, the Com- therefore a reduced likelihood of further mittee adopted a directive that called for easing. As a result, most rates ended the a slight reduction in the existing degree period with only modest net changes. of pressure on reserve positions. The Treasury bill rates were up about lA Committee agreed that somewhat greater percentage point on balance, while prior somewhat lesser reserve restraint vate short-term interest rates declined by would be acceptable in the intermeeting roughly 30 basis points, and major banks period depending on indications of infla- lowered their prime rate Vi percentage tionary pressures, the strength of the point to 10V2 percent. In long-term debt business expansion, the behavior of the markets, yields were about unchanged to monetary aggregates, and developments slightly higher over the period. Most in foreign exchange and domestic finan- major stock price indexes reached record cial markets. This policy stance was highs during the intermeeting period expected to be consistent with growth of before giving up part of their gains. M2 and M3 over the period from June In foreign exchange markets, the tradethrough September at annual rates of weighted value of the dollar in terms of about 7 percent. the other G-10 currencies moved lower Immediately after the Committee meet- on balance through July as interest rate ing, the Manager for Domestic Opera- differentials favorable to the dollar were tions conducted operations to achieve the narrowing. In August, the dollar resumed slight easing in reserve conditions that its upward climb, spurred by continued the Committee had directed. At the same political uncertainties abroad and a reastime, to reflect strength in seasonal sessment by market participants of the borrowing, a small technical upward outlook for U. S. interest rates in light of a revision was made to the assumed level spate of new economic data. Over the of adjustment plus seasonal borrowing. intermeeting period as a whole, the dollar Late in July, as incoming data continued rose but at the end of the period remained to portray a softer economy and some below the highs of last June. lessening in inflationary pressures, the Growth of M2 and M3 accelerated in Manager sought a further slight reduction July and appeared to have continued at a in the degree of pressure on reserve fairly strong pace into August, evidently positions. Adjustment plus seasonal bor- reflecting both the rebuilding of balances rowing averaged nearly $600 million drawn down to meet April tax liabilities over the three reserve maintenance peri- and the substantial narrowing of opportuods completed since the July 5-6 meet- nity costs associated with holding liquid ing, while the federal funds rate moved deposits. Through July, expansion of M2 down a little more than Vi percentage had been around the lower end of the point to around 9 percent. Committee's annual range, and M3 re- Other market interest rates fluctuated mained somewhat above the lower bound over a wide range during the intermeeting of its range. interval. Early in the period, rates tended The staff projection prepared for this to decline in response to weaker-than- meeting suggested that the nonfarm econanticipated economic data and related omy was likely to grow over the remainmarket expectations of further monetary der of 1989 at about the pace estimated easing. Subsequently, rates rebounded for the first half of the year but that some after the release of other economic indi- slowing of the expansion would occur in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

112 76th Annual Report, 1989 1990. The projection assumed that fiscal in business activity. However, because of policy would move noticeably toward the uncertainties that were involved, the restraint over the projection period and members differed to some extent in their that the contribution of foreign trade to views regarding the risks of some deviagrowth would be very limited, owing in tion in the expansion from its present part to the earlier appreciation of the course; some felt that those risks were dollar. Consumer demand was likely to about evenly balanced or were tilted be somewhat stronger over the next toward some strengthening in the months several quarters, bolstered by continued ahead; several others saw some weakenjob growth and reflecting the ongoing ing as the most likely prospect, or at least effects on consumer sentiment of the the one that had to be guarded against advance in stock prices this year and the because of the broad economic and social declines in interest rates since spring; in consequences of a downturn in economic subsequent quarters, gradually mounting activity. No member anticipated a sharp slack in labor markets would exert a turn in the economy in either direction. restraining effect on consumer spending. The members also differed to some The lower levels of interest rates also degree in their views on the outlook for were expected to produce some pickup in inflation. Recent developments provided residential construction activity. Growth a basis for some optimism, but progress in business capital spending, although in reducing the underlying rate of inflamoderating somewhat from the pace in tion would depend importantly on the the first half of the year, was projected to strength of the business expansion and remain a source of strength. The recent also on the behavior of the dollar in weakening in food and energy prices foreign exchange markets. pointed to a slower rise in consumer In their discussion of specific developprices for the next few quarters; how- ments bearing on the economic outlook, ever, with margins of unutilized labor members noted that consumer spending and other production resources still low, appeared to have strengthened somewhat the underlying trend in inflation was not in recent months, and most members expected to improve through 1990. expected such spending to hold up, or In the Committee's discussion of the possibly to increase somewhat further, in economic situation and outlook, mem- the months ahead. Others placed more bers observed that indicators of business weight on the possibility that further activity looked somewhat stronger on gains, if any, might be relatively limited, balance than at the time of the July in part because they expected automotive meeting and that, despite some earlier sales to be curtailed by higher prices and concerns about a progressive slowdown, lower rebates when the new model year the economy appeared to be continuing to began. In the housing sector, current grow at a moderate pace. Several com- conditions were quite uneven across the mented that further expansion at a rate country, with an increasing number of close to that experienced recently was a areas showing weakness, and the outlook reasonable expectation for the next sev- was clouded to an extent by the possible eral quarters and would constitute a effects of the disposition of properties in desirable economic performance under conjunction with the resolution of insolprevailing circumstances. A number of vent savings and loan associations. Howmembers noted that there were no major ever, recent declines in mortgage rates imbalances in the economy of the sort would help to sustain the overall demand that often lead to a recession or to a surge for houses. Should housing markets Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 113 weaken, for whatever reason, the effect pressures, the prices of many materials could be to depress not only construction had increased less rapidly or had actually activity but consumption spending as declined in recent months, and increases well. In the business investment sector, in labor compensation had been relatively current demand conditions appeared moderate despite still tight labor markets consistent with further growth in overall in many parts of the country. While a investment spending, though probably at number of members observed that little a much reduced pace from that experi- or no progress had been made thus far in enced in the first half of the year, reducing the underlying rate of inflation, especially given the likely weakness in most remained confident that the curconstruction activity in many areas be- rently restrained growth in overall ecocause of earlier overbuilding. With re- nomic activity had established the necesgard to the outlook for foreign trade, sary conditions for lowering inflation and members emphasized that the strength of achieving the Committee's price stability the dollar could have negative implica- objective over time. Some anticipated tions for the nation's trade prospects, and that favorable inflation results might well several expressed the view that further emerge sooner rather than later. For some improvement in the trade balance, if any, others a troubling question remained as was likely to be limited over the next to whether significant progress in reducseveral quarters; on the positive side, ing inflation was possible with the current reports suggested that export markets degree of pressure on production reremained relatively robust for many sources. In this connection, a few exproducts. pressed concern that some intensification In their comments on regional business of labor-cost pressures could not be ruled conditions and business attitudes, mem- out under current economic conditions, bers reported a somewhat mixed picture, and they noted in particular that there depending on the industries that were were indications of growing labor miliinvolved. On balance, most parts of the tancy in some industries and parts of the country continued to experience a high country. The strength of the dollar aplevel of business activity or at least peared to have damped inflation, but that modest further improvement from rela- effect would be reversed if the dollar tively depressed conditions. However, were to depreciate substantially in forsigns of somewhat slower growth had eign exchange markets. become more widespread and there were Turning to the conduct of monetary indications that business activity might policy, all of the members supported a have leveled out or turned down in some proposal to maintain unchanged condiareas. Many business contacts appeared tions of reserve availability at least to be more bearish on the outlook than initially during the intermeeting period they had been earlier. In general, these ahead. The easing steps implemented contacts expected the overall economy to since early June had been appropriate in settle into a pattern of relatively slow the context of earlier indications of some growth. Few expressed concern about a slowing in the business expansion and a possible decline in business activity. prospective lessening of inflation pres- In their comments on the outlook for sures. Partly as a consequence of the inflation, members noted that the behav- easing in policy, growth of the monetary ior of key price and wage measures in aggregates had picked up, and both M2 recent months was an encouraging devel- and M3 were within the Committee's opment. From the perspective of cost ranges for the year. For the period ahead, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

114 76th Annual Report, 1989 a steady policy course was desirable in government strategy for resolving insollight of the latest evidence suggesting vent institutions. The expansion of M3 that price pressures were not intensify- would be slowed as savings and loan ing; in addition, the expansion appeared associations reduced their funding needs to have stabilized at a moderate and by selling assets or curbing the growth of provisionally acceptable pace, and con- assets; the expansion of M2 might also be siderable uncertainty existed with regard affected depending on the impact of these to the timing and direction of future developments on deposit offering rates deviations from the expansion's current and related opportunity costs of holding momentum. Some members commented deposits. Any weakness in money growth on indications that financial markets for these reasons, however, would not be anticipated some further easing of mone- an indication of a slowing economy, tary policy in the months ahead, if not given the presumption that highly develimmediately. If such easing failed to oped secondary markets would maintain materialize, the result could be some the availability of mortgage credit. Memupward adjustments in interest rates that bers commented that despite its recent could have an adverse impact on interest- acceleration, monetary growth remained sensitive sectors of the economy such as damped when measured over a longer housing and that could place undesirable period, suggesting a basically restrained upward pressure on the value of the monetary policy. While continued mondollar in foreign exchange markets. etary expansion at the recent rapid pace Despite such concerns, the members clearly would be undesirable in a period agreed that for now an unchanged policy when underlying inflation was unacceptoffered the best prospect of fostering the ably high, a renewed shortfall in relation financial market conditions and the mon- to the Committee's ranges also should be etary growth that would accommodate averted. satisfactory economic performance. They With regard to possible adjustments in recognized that economic developments the degree of reserve pressure in the would have to be monitored closely to intermeeting period, a majority of the assess whether any change in policy members believed that operations should might be needed. be adjusted more readily toward further In their consideration of an appropriate easing than toward any firming, and a policy course, the members took account few indicated that they viewed the incorof a staff analysis indicating that the poration of such an understanding as a expansion of M2 and M3 was likely to key element of an acceptable directive. slow substantially from the recent pace While most members anticipated that a but to remain well within the Committee's steady policy course might well prove to ranges for the year. The analysis took be appropriate for the entire intermeeting note of the decline in market interest rates period, any adjustment called for by over the past several months and assumed prospective developments was more that they would stabilize at current levels likely to be, in the majority view, in the and that the expansion of nominal income direction of some reduction in the degree would remain near its recent pace. The of reserve restraint and such an expectaoutlook for money growth was subject to tion should be reflected in the directive. unusual uncertainty, however, stemming Most of the other members indicated that from the range of possible responses by they could accept such a directive, but thrift depository institutions to the re- because they believed that the risks to the cently enacted legislation and associated economy were more evenly balanced, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 115 they favored a directive that did not Committee when its boundaries are perinclude a presumption as to the likely sistently exceeded, was left unchanged at direction of any intermeeting adjust- 7 to 11 percent. ments. These members also noted that At the conclusion of the meeting, the the current directive was symmetric in following domestic policy directive was form and that a bias in the new directive issued to the Federal Reserve Bank of toward ease might lead to a misreading of New York: System policy in the context of an unac- The information reviewed at this meeting ceptably high rate of inflation. suggests that economic activity has continued At the conclusion of the Committee's to expand at a moderate pace in recent months. discussion, all but one of the members In July, total nonfarm payroll employment indicated that they preferred or could rose appreciably further after a large advance in June, and the civilian unemployment rate, accept a directive that called for maintainat 5.2 percent, remained close to its average ing the current degree of pressure on level in earlier months of the year. Industrial reserve positions and that provided for production edged higher in July, continuing giving special weight to potential devel- the slower growth observed since the beginopments that might require some slight ning of the year. Retail sales have grown at a easing during the intermeeting period. moderate pace in recent months. Housing starts rose slightly further in July following a With regard to the factors that were large gain in June. Recent indicators of important in considering any intermeet- business capital spending suggest slower ing changes in reserve conditions, the growth after the substantial increase in the Committee continued to give primary first half of the year. The nominal U.S. weight to the inflation outlook. In that merchandise trade deficit narrowed considerably in June and for the second quarter as a regard, they emphasized that policy whole was about unchanged from a substanactions ought to be consistent with fur- tially reduced average value in the first thering achievement of the ultimate ob- quarter. Partly reflecting reductions in energy jective of price stability. Accordingly, prices, increases in consumer prices moderslightly greater reserve restraint might be ated in June and July. The latest wage data suggest no change in prevailing trends. acceptable during the intermeeting pe- Interest rates show mixed changes on riod, while some slight lessening of balance since the Committee meeting on reserve pressure would be acceptable, July 5-6. In foreign exchange markets, the depending on progress toward price trade-weighted value of the dollar in terms of stability, the strength of the business the other G-10 currencies has risen on balance expansion, the behavior of the monetary over the intermeeting period. M2 and M3 grew markedly in July, lifting aggregates, and developments in foreign expansion of M2 thus far this year to around exchange and domestic financial marthe lower end of the Committee's annual kets. The reserve conditions contem- range, and keeping M3 somewhat above the plated by the Committee were expected lower bound of the Committee's range. to be consistent with growth of M2 and The Federal Open Market Committee seeks M3 at annual rates of around 9 percent monetary and financial conditions that will foster price stability, promote growth in and around 7 percent respectively over output on a sustainable basis, and contribute the three-month period from June to to an improved pattern of international trans- September; in the case of M2, such actions. In furtherance of these objectives, growth was somewhat faster than that the Committee at its meeting in July reanticipated at the time of the July meeting. affirmed the ranges it had established in February for growth of M2 and M3 of 3 to 7 The intermeeting range for the federal percent and 3V6 to IV2 percent, respectively, funds rate, which provides one mecha- measured from the fourth quarter of 1988 to nism for initiating consultation of the the fourth quarter of 1989. The monitoring Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

116 76th Annual Report, 1989 range for growth of total domestic nonfinan- indication of the weight that the Commitcial debt also was maintained at 6V2 to \QVi tee continued to place on achieving its percent for the year. For 1990, on a tentative long-run price stability objective. basis, the Committee agreed in July to use the same ranges as in 1989 for growth in each of the monetary aggregates and debt, measured 2. Authorization for Foreign from the fourth quarter of 1989 to the fourth Currency Operations quarter of 1990. The behavior of the monetary aggregates will continue to be evaluated in the As part of a proposed multilateral bridge light of movements in their velocities, develfinancing facility for Mexico, the Comopments in the economy and financial markets , and progress toward price level stability. mittee approved a special reciprocal cur- In the implementation of policy for the rency arrangement of $125 million with immediate future, the Committee seeks to the Bank of Mexico. The new facility maintain the existing degree of pressure on supplements the regular $700 million reserve positions. Taking account of progress arrangement with the Bank of Mexico set toward price stability, the strength of the business expansion, the behavior of the out in paragraph 2 of the Authorization monetary aggregates, and developments in for Foreign Currency Operations. The foreign exchange and domestic financial Committee delegated to Chairman Greenmarkets, slightly greater reserve restraint span the authority to approve a drawing might or slightly lesser reserve restraint would on both of these arrangements by the be acceptable in the intermeeting period. The contemplated reserve conditions are expected Bank of Mexico, subject to his determito be consistent with growth of M2 and M3 nation that the appropriate terms and over the period from June through September conditions had been met. at annual rates of about 9 and 7 percent, Under the terms of the multilateral respectively. The Chairman may call for facility, the Bank of Mexico may draw up Committee consultation if it appears to the Manager for Domestic Operations that re- to $2 billion in short-term financing in serve conditions during the period before the support of the program of the government next meeting are likely to be associated with a of Mexico for economic reform and ecofederal funds rate persistently outside a range nomic growth. Participating with the of 7 to 11 percent. Federal Reserve in making funds available are the U.S. Treasury through its Votes for this action: Messrs. Greenspan, Corrigan, Angell, Johnson, Keehn, Kelley, Exchange Stabilization Fund, central LaWare, and Melzer, Ms. Seger, and Mr. banks from the other Group of Ten Syron. Vote against this action: Mr. Guffey. countries acting under the aegis of the Bank for International Settlements, and Mr. Guffey supported an unchanged the Bank of Spain. The final maturity date policy for the period ahead, but he could of the facility is February 15, 1990. not accept a directive that would allow possible intermeeting adjustments to be Votes for this action: Messrs. Greenspan, Corrigan, Angell, Guffey, Johnson, Keehn, made more readily in an easing than in a Kelley, LaWare, and Melzer, Ms. Seger, firming direction as new information and Mr. Syron. Votes against this action: became available. In his view, the risks None. to the expansion were fairly evenly balanced and did not warrant an asymmet- On September 14, 1989, the multilatric directive biased toward ease, espe- eral bridge financing facility became cially in light of undesirably high rates of effective, and on September 22, 1989, inflation both current and prospective. Chairman Greenspan, acting under the He also noted his concern that a directive delegation of authority from the Committilted toward ease could give a misleading tee, gave final clearance for drawings by Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 117 the Bank of Mexico on the reciprocal potential for further System acquisitions currency arrangements. of foreign currencies in coordination with similar transactions by the U.S. Treasury. In approving the increase, the 3. Agreement to "Warehouse" Committee took account of the views Foreign Currencies expressed by the Finance Ministers and On September 19, 1989, the Committee Central Bank Governors of the Group of agreed to a request by the Treasury for an Seven countries at their meeting on increase from $5.0 billion to $ 10.0 billion September 23, 1989. These officials in the amount of eligible foreign cur- considered the rise of the dollar in recent rencies that the Sy stem would be prepared months to be inconsistent with longerto "warehouse" for the Treasury and the run economic fundamentals, and they Exchange Stabilization Fund (ESF). The agreed that a rise of the dollar above warehousing facility involves spot pur- current levels or an excessive decline chases of foreign currencies from the could adversely affect prospects for the Treasury or the ESF and simultaneous world economy. In this context, they forward sales of the same currencies at agreed to cooperate closely in exchange the same exchange rate to the Treasury or markets. the ESF. Such transactions are authorized under Paragraphs l.A and l.B of the Votes for this action: Messrs. Greenspan, Committee's "Authorization For Foreign Corrigan, Guffey, Keehn, Kelley, LaWare, and Melzer, Ms. Seger, and Mr. Syron. Currency Operations," and the maximum Votes against this action: Messrs. Angell size of the facility is determined periodiand Johnson. cally by the Committee; the most recent change involved an increase from In dissenting from this action, Messrs. $134 billion to $5 billion in December Angell and Johnson indicated that they 1978. The proposed increase was in- could not consent to an increase in the tended to enable the ESF to finance its authorized limits for holding foreign continued participation in foreign cur- currencies when such authorization rency operations. facilitates exchange rate intervention to drive the dollar lower as compared Votes for this action: Messrs. Greenspan, with intervention to avoid disorderly Corrigan, Angell, Guffey, Keehn, Kelley, conditions by stabilizing or limiting La Ware, and Melzer, Ms. Seger, and Mr. Syron. Votes against this action: None. increases in the dollar exchange rate. Abstention: Mr. Johnson. Intervention of the former type confuses market participants concerning the Effective September 25, 1989, the policy commitment toward price level Committee approved an increase from stability and can contribute to disorderly $18 billion to $20 billion in the limit on markets. It can increase inflation fears as holdings of foreign currencies specified can be seen in decreases in long-term in paragraph ID of the Committee's bond prices and in increases in the Authorization for Foreign Currency Op- price of inflation-sensitive commodities. erations. That limit applies to the overall Interest rate risk premiums also may open position in all foreign currencies increase. Finally, such intervention can held in the System Open Market Account; work to limit flexibility in the exercise of at the time of this action, System holdings fundamental monetary policy options had reached nearly $18 billion. The that depend on evidence of improvement higher limit was approved in light of the in the future inflation environment. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 76th Annual Report, 1989 Meeting Held on relatively high level. In manufacturing, October 3,1989 factory utilization edged further below its January peak, partly as a result of additional declines in primary processing Domestic Policy Directive industries, such as paper and chemicals, The information reviewed at this meeting where utilization had been very high. suggested that economic activity contin- Consumer spending rose substantially ued to expand at a moderate pace in the in August, following a July increase that third quarter and that rates of resource was somewhat larger than the sluggish utilization remained at relatively high gains of previous months. Much of the levels. Aggregate final demand appeared August pickup reflected a surge in outlays to be well sustained by a pickup in for cars and light trucks, but gains in consumption at a time of somewhat spending for goods and services other reduced growth in business fixed invest- than motor vehicles also appeared to be ment. At the same time, price inflation running somewhat above the relatively had slowed, in large part because of a sluggish pace for the second quarter. steep drop in energy costs and a continu- Housing starts in July and August were ing decline in prices of non-oil imports; slightly higher than their second-quarter wage data evidenced no deviation from average, and sales of new homes picked recent trends. up noticeably in July. However, building Growth in total nonfarm payroll em- permits had shown no discernible trend ployment slowed noticeably in July and in recent months. August from the pace of the second Recent indicators of business capital quarter. Nevertheless, adjusted for the spending suggested somewhat slower depressing effects of strike activity, job growth in the third quarter after a substangains remained appreciable on balance. tial increase in the first half of the year. In Hiring was brisk in construction, trade, July and August, shipments of nondeand services; in manufacturing indus- fense capital goods excluding aircraft tries, though, employment levels gener- were only a little above the secondally held steady or fell a bit, apart from quarter level, and orders data suggested a temporary fluctuations in the auto indus- farther slowing in growth of spending in try. The civilian unemployment rate coming months. In July, office building remained around 5 lA percent. remained a notable area of weakness in Industrial production rose in August, nonresidential construction and partially and revisions for earlier months sug- offset another strong rise in outlays for gested that the expansion of production industrial structures. Inventory investhad not been as weak as previously ment in manufacturing moderated in estimated. Much of the August gain August after a sizable increase in July, reflected a rebound in automobile produc- with much of the increase in both months tion after three months of decline and a occurring at aircraft firms. In July, stocks pickup in coal mining as striking coal also rose markedly at manufacturers of miners returned to work. Output of primary metals and of many types of consumer goods other than autos edged machinery; the buildup at these indusdown in August with small but wide- tries, like that at aircraft firms, was spread declines in nondurable goods. concentrated in work-in-process. Exclud- Despite a sizable jump in operating rates ing motor vehicles and aircraft, manufacfor coal mining, total industrial capacity turing stocks remained at relatively low utilization was unchanged in August at a levels compared with shipments. At the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 119 retail level, increases in inventories on a year-over-year basis this decline slowed in July and imbalances with sales did not indicate a change in trend. remained limited. At its meeting on August 22, the The nominal U.S. merchandise trade Committee adopted a directive that called deficit recorded a further decline in July for maintaining the current degree of relative to June and to the average for the pressure on reserve positions and that second quarter as a whole. Exports in provided for giving special weight to July fell below their strong June level and potential developments that might require were little changed from the second- some slight easing during the intermeetquarter average. While most categories ing period. The Committee agreed that, of exports fell, deliveries of civilian in furtherance of the ultimate achieveaircraft increased sharply. Imports reg- ment of price stability, primary weight in istered a further decline in July, as considering the need for intermeeting decreases in most categories of non-oil changes in reserve conditions would goods outweighed a small rise in the continue to be given to the inflation value of oil imports. Economic growth in outlook. Slightly greater reserve restraint the major foreign industrial countries might, or slightly lesser reserve restraint slowed sharply in the second quarter would, be acceptable in the intermeeting from the very rapid rate of the first period depending on progress toward quarter, but this pattern appeared to be price stability, the strength of the business due largely to special factors rather than expansion, the behavior of the monetary to a slackening of the underlying pace of aggregates, and developments in foreign activity. exchange and domestic financial mar- Producer prices of finished goods kets. The contemplated reserve condideclined in August for the third con- tions were expected to be consistent with secutive month, reflecting a further growth of M2 and M3 over the period large drop in consumer energy prices; from June through September at annual for the July-August period, price rates of about 9 and 7 percent respectively. increases for nonfood, non-energy fin- Reserve conditions remained essenished goods moderated from the pace tially unchanged over the period since the of earlier months of the year. At earlier August meeting. Adjustment plus seaprocessing stages, prices of intermediate sonal borrowing averaged about $550 materials other than food and energy million for the two full reserve mainteedged down further in August and had nance periods since the meeting, and registered little net change over the federal funds traded mostly in the narrow previous six months, while prices of range around 9 percent that had prevailed crude nonfood materials other than since late July. With federal funds rates energy turned up after four months of steady and economic data released over declines. Consumer prices were un- the intermeeting period generally in line changed in August following a small with market expectations, other interest increase in July. Sharp reductions in rates changed little on balance over the energy prices and smaller increases for intermeeting period. Some softening in food items helped damp the rise in interest rates took place through midconsumer prices in July and August, but September, owing at least partly to a prices for other consumer goods also market view that an easing of monetary rose more slowly. Average hourly earn- policy might be in the offing given the ings slipped a little in August after a strengthening dollar, but when the dollar sizable jump in the previous month, but subsequently declined against other G-10 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 76th Annual Report, 1989 currencies, interest rates generally re- associations for managed-liability funds; bounded. Most stock market indexes undercapitalized institutions were shrinkreached record highs in early September ing their balance sheets as a means of but partially retraced their increases as complying with new, more stringent problems emerged in the "junk bond" capital standards, and insolvent institumarket for a few prominent issuers. tions were receiving funds from the In foreign exchange markets, the trade- Resolution Trust Corporation (RTC). weighted value of the dollar in terms of The staff projection prepared for this the other G-10 currencies rose substan- meeting suggested that the nonfarm econtially early in the intermeeting period; omy was likely to grow over the remainbetter-than-expected U.S. job growth in der of 1989 at about the pace estimated August and U.S. trade data for July for the first half of the year but that the outweighed the effects of a slight decline expansion would slow in 1990. The in U.S. interest rates and some increase projection assumed that fiscal policy in rates abroad. The dollar fell sharply would remain moderately restrictive and after the release on September 23 of the that the contribution of foreign trade to G-7 statement that the rise of the dollar in growth would be very limited, owing in recent months was inconsistent with part to the earlier appreciation of the longer-run fundamentals, and the ensuing dollar. Consumer demand was expected coordinated central-bank intervention in to be bolstered in the near term by exchange markets. Also contributing to continued growth in labor income and the the slippage of the dollar were growing positive effect on real purchasing power market expectations of some tightening of the recent slowing of price increases, of monetary policies abroad. On balance, but over the rest of the projection period the dollar depreciated somewhat over the steadily mounting slack in labor markets intermeeting period. would exert a restraining effect on real Growth of the monetary aggregates income and consumer demand. Declines slowed in August from their advanced in interest rates earlier in the year were July rates, which likely had been boosted expected to provide some temporary by the replenishment of balances used to stimulus to residential construction activpay taxes last spring; their slower growth ity over the next quarter or so. Expansion evidently carried over to September. in business capital spending was pro- Despite its deceleration, M2 still grew jected to moderate substantially over the fairly briskly in August and apparently projection period from the pace in the also in September, bringing its expansion first half of the year as output growth thus far this year to somewhat above the slowed, capacity pressures eased, and lower end of the Committee's annual profits eroded. The recent weakening in range. Continued rapid growth of the food and energy prices pointed to a retail components of M2 reflected in part slower rise in consumer prices for the the lagged effects of earlier declines in next few quarters; however, with margins market interest rates. M3 increased at a of unutilized labor and other production substantially reduced pace over the resources still low, the underlying trend August-September period, and it had in inflation was not expected to show expanded for the year to date at a rate much improvement. around the lower bound of the Commit- In the Committee's discussion of the tee's annual range. The sluggish growth economic situation and outlook, memof M3 apparently was related in part to bers commented that current indicators the declining needs of savings and loan of business activity, including economic Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 121 conditions in different parts of the coun- tions of declining business profits totry, presented a somewhat mixed picture. gether with the financial difficulties of a On the whole, however, members gener- number of firms pointed to more really viewed the evidence as pointing to strained investment spending. The key to sustained expansion over the next several actual capital spending, of course, would quarters, though many expected eco- be the evolving demand for goods and nomic growth to slow somewhat from its services and in that regard consumer recent pace. In assessing the chances of a spending, while subject to some volatility different outcome, the members did not stemming especially from purchases of rule out the possibility of a slightly motor vehicles, was likely to continue to stronger economic performance, but they provide support for sustained growth. generally felt that the risks were tilted Business inventories, with some notable toward marginally greater slowing and a exceptions such as stocks of motor vehifew expressed concern that a more pro- cles, were reported to be at acceptable nounced weakening could emerge. With levels and were not likely to contribute to regard to the outlook for inflation, many wide swings in production unless final commented that, given moderate eco- demands differed greatly from current nomic growth and a sustained period of expectations. The members were more monetary restraint, underlying inflation- uncertain about the outlook for housing ary pressures were likely to ease a little and net exports. In the housing sector, over the next several quarters, but some considerable weakness had emerged in anticipated somewhat greater progress in several parts of the country, and some reducing inflation. Concern was ex- members questioned whether any impressed by some, however, that wage- provement could be expected over the cost pressures might intensify. The mem- next several quarters even though interest bers agreed that progress against inflation rates had fallen since last spring. With would depend importantly on the behav- regard to the prospects for foreign trade, ior of the dollar in foreign exchange the dollar's appreciation this year had markets; a very substantial decline in the retarded improvement in the trade balvalue of the dollar would put upward ance and, barring a substantial real pressure on prices and make achievement depreciation, was expected to continue to of the Committee's price stability objec- do so for some time. It was presumed that tive correspondingly more difficult. fiscal policy would remain moderately With regard to developments in spe- restrictive, but that there would be no cific sectors of the economy, members dramatic turn in the federal budget deficit commented that a key uncertainty in the of the sort that would substantially reduce business outlook related to the prospects demand pressures in the domestic econfor capital expenditures. Growth in such omy while accommodating significant spending had slowed from a very high improvement in the trade deficit. rate in the first half of the year, and it was In the Committee's discussion of the not clear from the recent data whether outlook for inflation, members observed business investment was weakening fur- that the recent improvement largely ther or whether its growth had stabilized reflected a number of special factors— at a reduced pace. New orders for capital such as developments in the food and equipment had softened, but order back- energy sectors and the appreciation of the logs remained substantial and suggested dollar this year—that could not be procontinued high levels of production for jected to recur. Several saw only limited many firms. On the other hand, indica- prospects for further improvement over Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 76th Annual Report, 1989 the year ahead, given their expectations Members also were concerned that an with regard to the overall performance of easing of policy so soon after the G-7 the economy and related pressures on meeting would be misinterpreted as an resources. Others felt that the behavior of attempt to use monetary policy to force prices and wages might continue to be the dollar lower. While the dollar was an better than had been expected. They important factor influencing the course noted that reduced monetary growth over of the U.S. economy and prices, monean extended period was continuing to tary policy should not be used, in the restrain inflationary pressures and that judgment of the Committee, to attain the economy also was benefiting from particular levels for the foreign exchange ongoing cost-reducing measures induced value of the dollar that could conflict with by strong competition in domestic and domestic policy objectives. In current international markets. A tendency for the circumstances, an easing might well prices of many commodities and interme- provoke an undesirable sharp decline in diate materials to soften, if only margin- the external value of the dollar. The ally, also supported a relatively optimistic members also discussed the recent suboutlook for inflation. Moreover, there stantial intervention by G-7 and other was a continuing pattern of restraint in nations against the dollar. Some members labor settlements despite tight labor expressed concern that if this intervention markets in many areas. Reflecting demo- resulted in a sizable depreciation of the graphic factors, upward pressures on dollar, the inflationary consequences wages tended to be concentrated on entry- could be viewed as inconsistent with the level jobs, while pressures in many of the Committee's long run policy of achieving more skilled job categories appeared to price stability. have diminished in various parts of the In further discussion of an appropriate country. However, some members ex- course for monetary policy, the Commitpressed concern that faster wage in- tee took account of a staff analysis that creases remained a threat, especially if suggested that, on the assumption of the economy continued to operate at unchanged conditions of reserve availlevels close to its potential. ability and steady interest rates, M2 In the Committee's discussion of mon- growth would moderate somewhat over etary policy for the intermeeting period the balance of the year from its rapid pace ahead, most of the members endorsed a in recent months; nonetheless, growth of proposal to maintain unchanged condi- this aggregate would continue to be tions of reserve availability and preferred supported to some extent by the lagged or found acceptable a suggestion to retain effects of earlier declines in market the asymmetry toward ease that was interest rates on the opportunity costs of incorporated in the latest directive. While holding M2 balances, and on a cumulanoting that developments in the near term tive basis M2 was projected to rise might alter the economic outlook, most somewhat further within the lower half members felt that prevailing conditions of the Committee's range for the year. in the domestic economy did not warrant The expansion of M3 was expected to a policy change in either direction at continue to be damped, though to a this time. The focus of policy continued reduced extent, in the fourth quarter by to be that of gradually reducing inflation further reductions in the assets and M3 over time and a steady policy course liabilities of undercapitalized thrift instiseemed consistent with that objective, at tutions and by RTC outlays that substileast for now. tuted in part for managed liabilities in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 123 M3; by year-end, this aggregate was ing the current degree of pressure on projected to be a little above the lower reserve positions and that provided for bound of the Committee's range. The giving particular weight to potential pickup in the growth of money and developments that might require some reserve aggregates since around midyear slight easing during the intermeeting and the projected expansion of the broad period. Accordingly, slightly greater money aggregates within the Commit- reserve restraint might be acceptable tee's ranges for the year were cited as during the intermeeting period, while welcome developments that were consis- some slight lessening of reserve restraint tent with the Committee's overall policy would be acceptable, depending on objectives. progress toward price stability, the In the Committee's consideration of strength of the business expansion, the possible adjustments in the degree of behavior of the monetary aggregates, reserve pressure during the intermeeting and developments in foreign exchange period, a majority of the members sup- and domestic financial markets. The ported a proposal to adjust operations reserve conditions contemplated by the more readily toward some easing than Committee were expected to be consistoward any firming. In the view of these tent with growth of M2 and M3 at anmembers, the risks to the expansion were nual rates of around 6l/i percent and more heavily weighted toward a shortfall AVi percent respectively over the threefrom current expectations than toward month period from September to Decemfaster growth and greater inflationary ber. The intermeeting range for the fedpressures. Members who preferred a eral funds rate, which provides one symmetrical instruction generally saw mechanism for initiating consultation of the risks to the economy as more evenly the Committee when its boundaries are balanced, and some observed that the persistently exceeded, was left unpresent dollar situation warranted extra changed at 7 to 11 percent. caution before any easing was under- At the conclusion of the meeting, the taken; however, a bias toward ease would following domestic policy directive was not involve any change from the current issued to the Federal Reserve Bank of directive and most of these members New York: indicated that they could accept such an instruction. The information reviewed at this meeting suggests that economic activity continued to It was noted in further discussion that expand at a moderate pace in the third quarter. seasonal borrowing was likely to drop in In July and August, total nonfarm payroll the weeks ahead, so that a declining total employment rose appreciably despite the of adjustment plus seasonal borrowing depressing effect of strike activity. The would be associated with a given degree civilian unemployment rate remained around of reserve restraint and a given federal 5 lA percent. Industrial production picked up in August, mainly because of a rebound in funds rate. It was understood that, subject auto assemblies and coal mining. Consumer to the Chairman's review, the necessary spending has registered larger gains in recent technical reductions in borrowing objec- months, reflecting in part a surge in auto tives would be made during the intermeet- sales. Housing starts in July and August were ing period. slightly above their second-quarter average. Indicators of business capital spending sug- At the conclusion of the Committee's gest somewhat slower growth in the third discussion, all but two of the members quarter after the substantial increase in the indicated that they preferred or could first half of the year. The nominal U.S. accept a directive that called for maintain- merchandise trade deficit recorded a further Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 76th Annual Report, 1989 decline in July relative to June and to the markets, slightly greater reserve restraint average for the second quarter as a whole. might or slightly lesser reserve restraint would Sharp reductions in energy prices over the be acceptable in the intermeeting period. The summer months damped increases in con- contemplated reserve conditions are expected sumer prices and contributed to declines in to be consistent with growth of M2 and M3 producer prices. The latest wage data suggest over the period from September through no change in prevailing trends. December at annual rates of about 61/4 and Interest rates generally show small mixed AVi percent, respectively. The Chairman may changes on balance since the Committee call for Committee consultation if it appears meeting on August 22. In foreign exchange to the Manager for Domestic Operations that markets, the trade-weighted value of the reserve conditions during the period before dollar in terms of the other G-10 currencies the next meeting are likely to be associated fell after the release of the G-7 statement on with a federal funds rate persistently outside a September 23; on balance, the dollar depreci- range of 7 to 11 percent. ated somewhat over the intermeeting period. M2 grew fairly briskly in August and Votes for this action: Messrs. Greenspan, evidently also in September, lifting its expan- Corrigan, Angell, Johnson, Keehn, Kelley, sion thus far this year to somewhat above the LaWare, Melzer, and Syron. Votes against lower end of the Committee's annual range. this action: Mr. Guffey and Ms. Seger. M3 grew at a substantially reduced pace in this period, as assets of thrift institutions and Mr. Guffey favored an unchanged their associated funding needs apparently policy for the period ahead, but he contracted further; for the year to date, M3 has grown at a rate around the lower bound of dissented because he could not support a the Committee's annual range. directive that was biased toward easing The Federal Open Market Committee seeks during the intermeeting period. He remonetary and financial conditions that will mained concerned that the rate of inflafoster price stability, promote growth in tion would continue to be undesirably output on a sustainable basis, and contribute high. to an improved pattern of international transactions. In furtherance of these objectives, Ms. Seger dissented because she felt the Committee at its meeting in July reaf- that some easing of monetary policy was firmed the ranges it had established in Febru- desirable at this time. In her view develary for growth of M2 and M3 of 3 to 7 percent opments in manufacturing, notably in the and 3 Vi to 7 Vi percent, respectively, measured motor vehicles sector, along with potenfrom the fourth quarter of 1988 to the fourth quarter of 1989. The monitoring range for tial softness in capital expenditures, growth of total domestic nonfinancial debt housing construction, and exports sigalso was maintained at 6 Vi to 10 Vi percent for naled a weaker overall economy. In the the year. For 1990, on a tentative basis, the circumstances, she believed that an easier Committee agreed in July to use the same monetary policy was needed to help ranges as in 1989 for growth in each of the monetary aggregates and debt, measured from sustain the expansion and that such a the fourth quarter of 1989 to the fourth quarter policy would be consistent with continuof 1990. The behavior of the monetary ing progress in reducing the rate of aggregates will continue to be evaluated in the inflation. light of movements in their velocities, developments in the economy and financial markets, and progress toward price level stability. Meeting Held on In the implementation of policy for the November 14,1989 immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. Taking account of progress Domestic Policy Directive toward price stability, the strength of the The information reviewed at this meeting business expansion, the behavior of the monetary aggregates, and developments in suggested that the economy had continforeign exchange and domestic financial ued to expand, though unevenly and at a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 125 somewhat slower pace than earlier in the level since mid-1982. For the third year. While the service-producing sector quarter as a whole, starts were about appeared to be growing moderately, unchanged from their reduced secondmanufacturing had been weak, owing to quarter average. sluggish demand and to strikes and other Indicators of business capital spending disruptions to production. Price increases continued to suggest that growth had had been smaller since midyear, but there moderated from its rapid pace in the first had been no abatement of wage inflation. half of the year, primarily as a result of Total nonfarm payroll employment slower growth in outlays for information increased appreciably in October, but its processing equipment. Shipments of growth had been more moderate on nondefense capital goods edged lower in balance over the past several months, September, and orders data suggested especially in the private sector. Wide- that equipment outlays would remain spread job gains were apparent in the sluggish in coming months. Nonresidenservice-producing sector, but manufac- tial construction activity also fell, largely turing payrolls declined further as a result owing to a decline in commercial strucof continued weakness in motor vehicles tures other than office buildings, and and other durable goods industries. In the construction permits continued the downpublic sector, hiring by state and local trend evident over the past few months. governments was robust in October and The sparse data available on business had contributed substantially to total inventories for September indicated that employment growth over the past three manufacturers' stocks had declined somemonths. The civilian unemployment rate what in that month after a sizable gain on remained within the narrow range around balance over the previous two months. 5 lA percent that had prevailed since early At the wholesale level, inventories fell 1989. for a second straight month. After three months of modest increases The nominal U.S. merchandise trade on balance, industrial production was deficit increased in August to its highest depressed noticeably in October by strike level thus far this year, as the value of activity and other disruptions; adjusted non-oil imports surged. For July and for these temporary influences, produc- August combined, the value of imports— tion was about unchanged. Output of especially of consumer goods and maconsumer goods declined as the produc- chinery-was somewhat above the tion of appliances and motor vehicles, second-quarter level. The quantity of particularly light trucks, fell sharply. imports rose even more strongly over Production of business equipment that two month period as import prices dropped substantially, reflecting the strike declined on average. The value of exports at a major aircraft manufacturer and the in the July-August period was someearthquake in northern California. Total what below the level in the second industrial capacity utilization dropped in quarter; the quantity of exports rose October, mostly because of the effects of appreciably, but the prices received fell. temporary disruptions to production. In most foreign industrial countries, Retail sales fell appreciably in October indicators of economic activity suggested from upward revised levels for August that the slower pace of the second quarter and September, as purchases of motor had continued in the third quarter. In vehicles dropped sharply. Housing starts Germany, however, industrial producfell further in September, and the multi- tion had rebounded strongly from its family component registered its lowest second-quarter decline. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 76th Annual Report, 1989 Producer prices for finished goods rose After the Committee meeting, open further in October, boosted by sizable market operations were directed initially jumps in the prices of a variety of food toward maintaining the existing degree products. Excluding food and energy of pressure on reserve positions. For a items, prices for finished goods were few days after the steep drop in stock little changed. Consumer prices rose prices on October 13, while financial slightly in September after registering markets remained highly sensitive and little change over the previous two volatile, the Manager for Domestic Opmonths. Energy prices fell further, while erations followed an accommodative a sharp increase in apparel prices contrib- approach in supplying reserves. Around uted to a rebound in the prices of con- the same time, a decision was made sumer goods. The latest data on labor under the provisions of the October 3 compensation suggested no easing of directive to implement a slight easing of labor cost pressures. Average hourly reserve conditions on a more permanent earnings jumped in October, although the basis; a further slight easing was effectuyear-over-year change remained within ated during the first part of November. the range of recent experience. In the These decisions were made in light of broader-based employment cost index, information that suggested some increase growth of wages and salaries continued in the risk of a pronounced weakening in to show a persistent updrift through the the growth of business activity. To reflect third quarter on a year-over-year basis in a decline in seasonal borrowing, several most industry and occupational group- technical reductions also were made ings; growth of benefits had slowed but during the period in the assumed level of remained at a high rate mainly because of adjustment plus seasonal borrowing used rising health insurance costs. in constructing the target paths for the At its meeting on October 3, the provision of reserves, and actual borrow- Committee adopted a directive that called ing fell from about $635 million in the for maintaining the existing degree of first full maintenance period after the pressure on reserve positions and that early October meeting to around $200 provided for giving particular weight to million in the week prior to this meeting. developments that might require some The federal funds rate declined from slight easing during the intermeeting slightly above 9 percent at the time of the period. The Committee agreed that October meeting to around %Vi percent slightly greater reserve restraint might be more recently. acceptable, or slightly lesser reserve Most short- and intermediate-term restraint would be acceptable, in the interest rates fell by amounts comparable intermeeting period depending on to the decline in the federal funds rate, progress toward price stability, the though Treasury bill rates dropped by strength of the business expansion, the less as a result of disruptions and supply behavior of the monetary aggregates, pressures associated in part with delays and developments in foreign exchange in debt-ceiling legislation. Yields on most and domestic financial markets. The bonds and fixed-rate mortgages also fell contemplated reserve conditions were somewhat less than the federal funds expected to be consistent with growth of rate. Rates on lower-quality bonds rose M2 and M3 over the period from Sep- appreciably, and stock prices were contember through December at annual rates siderably lower on balance in this period. of about 6V2 percent and AVi percent In the days following the October 13 respectively. break in stock prices, the Committee held Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 127 a number of telephone conferences to The staff projection prepared for this assess developments in financial markets. meeting suggested that the economy was At these and a subsequent consultation, likely to grow at a slower pace over the the Committee also discussed the deci- next several quarters. The outlook for the sions to ease reserve conditions during near term was clouded by uncertainties the intermeeting period. associated with the effects of a major In foreign exchange markets, the trade- hurricane, a severe earthquake, and a weighted value of the dollar in terms strike at a large manufacturer of aircraft. of the other G-10 currencies declined On balance, those developments were slightly further on balance over the projected to curb overall growth someintermeeting period. During the first part what in the current quarter but to provide of the period, the dollar had appreciated a temporary boost in the first quarter of somewhat despite substantial interven- next year. The projection assumed that tion sales of dollars by central banks and the budget deficit would decline moderincreases in official interest rates in a ately and that net exports would make number of major industrial countries. little contribution to domestic growth in Following the drop in stock prices in 1990. Consumer demand was expected mid-October, the dollar moved lower. to buoy the near-term expansion of the Expectations of further increases in economy, reflecting the strong growth of interest rates abroad and of lower rates in the real income of consumers in recent the United States apparently contributed months and indications of a continued to the dollar's decline. high level of consumer confidence. Over Expansion of the monetary aggregates the rest of the projection period, howpicked up in October. A surge in demand ever, steadily mounting slack in labor deposits in early October contributed markets was expected to exert a restrainto considerable strength in Ml. The ing effect on consumer demand. The effects of this acceleration were offset projection continued to indicate substanto an extent by slower expansion of the tial slackening in the expansion of busiretail-type components of M2, possibly ness capital spending from the pace in the reflecting the waning effects of earlier first half of this year. With pressures on declines in market interest rates on the labor and other production resources opportunity costs of holding liquid expected to ease only marginally, little savings-type deposits included in M2. improvement was anticipated in the un- The faster growth of M3, while remain- derlying trend of inflation over the next ing well below that of M2, reflected several quarters. an accelerated issuance of large- In the Committee's discussion of the denomination CDs by banks to help economic situation and outlook, memfinance substantially stronger expansion bers commented that broad economic of bank credit. Runoffs of assets at indicators and local conditions in differcapital-deficient thrift institutions and ent parts of the country pointed on associated declines in RPs and large- balance to a sustained expansion in denomination CDs continued to restrain business activity, though at a somewhat growth of M3. For the period from the slower pace than in recent quarters. fourth quarter of 1988 through October, Views differed to some extent regarding growth of M2 was within the lower half the risks of a different outcome, reflecting of the Committee's annual range, while uncertainties concerning developments expansion of M3 was near the lower end in such key sectors of the economy as of its range. business investment and net exports and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 76th Annual Report, 1989 in the demand for housing and consumer modity prices remained high and did durables, notably motor vehicles. While not suggest a slowdown in economic some members regarded those risks as activity. Business investment was an about evenly balanced in both directions, area of major uncertainty in the ecoa number stressed that a period of mini- nomic outlook. Developments that mal growth or even a downturn in activity could have adverse implications for could not be ruled out; others saw greater investment included a squeeze on profit odds that the rate of economic growth margins from rising costs, both interest and levels of resource utilization might and labor expenses, on the one hand and be closer to the economy's potential. from competitive pressures that re- With regard to the outlook for inflation, strained price increases on the other. On several members observed that the pros- the foreign side, the earlier appreciapects for significant progress were lim- tion of the dollar had arrested the ited for the next several quarters, espe- improvement in the nation's trade balcially in light of the tendency for increases ance, but further gains still might be in labor costs to remain in a relatively forthcoming at current dollar levels, high range. Other members expressed given expectations of relatively strong greater confidence that appreciable growth in business activity in foreign progress would be made, partly in the industrial countries. Such a development context of reduced growth in economic would have favorable implications for activity. the manufacturing sector and for the In their discussion of specific develop- domestic expansion more generally. ments relating to the outlook for overall Views on the outlook for inflation business activity, members noted that differed to some extent, depending in economic conditions had softened in part on somewhat varying expectations some parts of the country, with manufac- with regard to the level of business turing tending to weaken more generally, activity and associated pressures on particularly in the automotive and production resources. Several members automotive-related sectors. Many busi- continued to expect that, in light of the ness contacts appeared to be less optimis- behavior of labor costs, little or no tic about prospects for sales and more progress would be made in reducing cautious about investment decisions. Real inflation over the quarters ahead, even estate markets and nonresidential con- assuming relatively slow growth in struction ranged from quite weak to business activity. Labor markets might moderately strong in different sections of be softening in some areas, but data on the country. On balance, local business labor compensation showed no changes conditions were characterized by steady from earlier trends, and some members activity or slow growth in many regions remained concerned that underlying to continued fairly vigorous expansion in demand conditions would be associated some others. with persisting upward pressures on With regard to broad indicators of labor costs. Other members were more economic performance, members cited optimistic. They noted that the behavior the continuing weakness, but absence of prices had been better than might of further deterioration, in new orders. have been anticipated in recent quarters, Order backlogs, while below earlier apparently reflecting a variety of factors highs, appeared consistent with sus- that were tending to arrest the motained production. From a different mentum of inflation, including ongoing perspective, it was noted that com- efforts to hold down costs in the context Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 129 of strong competition in international expand at a rate just below the midpoint and domestic markets. of the Committee's range for 1989. M3 In the Committee's discussion of policy was projected to continue to grow at a for the weeks immediately ahead, nearly slower pace than M2, reflecting the all of the members supported a proposal ongoing though waning effects on some to maintain unchanged conditions of M3 components of the disposition of reserve availability. A majority favored assets by undercapitalized thrift instituand the others could accept a related tions and the funding made available suggestion to retain the current asymme- through RTC resolutions; for the year, try toward ease that had been incorpo- the growth of M3 was projected to be rated in recent directives. While current somewhat above the lower bound of the indicators of economic activity suggested Committee's range. a somewhat weaker expansion, most of Turning to the instruction in the the members agreed that a steady policy directive relating to possible adjustments course was desirable at this point, espe- in the degree of reserve pressure during cially in light of the stimulus provided by the intermeeting period, a majority of recent easing actions, whose effects on the members expressed a preference for the economy would be felt only with retaining the existing asymmetry that some lag. In reconciling concerns about a would permit any adjustments to be cumulative weakening in the economy made more readily toward easing than against a desire for progress in the fight toward firming. In this view, current against inflation, a steady policy seemed tendencies toward weakening in the to give reasonable prospects for achiev- economy outweighed the sources of ing both sustained expansion and declin- strength, and some further easing might ing inflation. Some members commented be needed if the incoming information that these objectives could be attained on business activity suggested more with less pressure in credit markets if the softening than most members currently federal budget deficit were to turn more expected. In these circumstances, an definitely downward. easing would be consistent with the In the course of the Committee's dis- Committee's long-run inflation objeccussion, a number of members observed tive. Other members, who saw the that, as a result of the pickup in M2 over risks to the expansion as more evenly the course of the past several months, balanced, indicated a preference for a growth of the monetary aggregates symmetric instruction in the directive; seemed consistent with the Committee's however, they could accept retention of long-run goals, and thus money growth the bias toward ease contained in the did not in itself suggest the need for any October 3 directive. Some of these current adjustment in reserve conditions. members nonetheless stressed the According to a staff analysis prepared for desirability of not overreacting to posthis meeting, growth of M2 was likely to sible indications of slower economic remain relatively brisk, assuming un- growth in the period ahead for fear of changed reserve conditions and steady creating financial conditions and stiminterest rates. Growth of this aggregate ulating monetary growth that would would be buoyed by the further decline prove to be inconsistent with the that had occurred recently in market Committee's long-run goal of price interest rates and in the related opportu- stability. In light of these consideranity costs of holding M2 balances, and tions and in the context of the recent for the year as a whole M2 was likely to easing actions, the members generally Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 76th Annual Report, 1989 endorsed or found acceptable a proposal in October, reflecting a sharp drop in purto approach with caution any further chases of motor vehicles, but some upward revisions were made for August and Septemeasing in the weeks ahead. ber. Housing starts fell further in September At the conclusion of the Committee's and for the third quarter as a whole were about discussion, all but one of the members unchanged from their reduced second-quarter indicated that they preferred or could average. Indicators of business capital spendaccept a directive that called for maintain- ing suggest slower growth after a substantial increase in the first half of the year. The ing the existing degree of pressure on nominal U.S. merchandise trade deficit widreserve positions and that provided for ened in August from its July rate as non-oil giving greater weight to developments imports increased markedly. Consumer prices that might require some slight easing have risen more slowly on balance since during the intermeeting period. Accord- midyear, partly reflecting sharp reductions in energy prices, but the latest data on labor ingly, slightly greater reserve restraint compensation suggest no significant change might be acceptable during the intermeetin prevailing trends. ing period, while some slight easing of Most interest rates have declined apprereserve restraint would be acceptable, ciably since the Committee meeting on Octodepending on progress toward price ber 3. In foreign exchange markets, the tradestability, the strength of the business weighted value of the dollar in terms of the other G-10 currencies declined slightly on expansion, the behavior of the monetary balance over the intermeeting period. aggregates, and developments in foreign M2 continued to grow fairly briskly in exchange and domestic financial mar- October, largely reflecting strength in its Ml kets. The reserve conditions contem- and other liquid components; thus far this plated by the Committee were expected year M2 has expanded at a pace somewhat to be consistent with growth of M2 and below the midpoint of the Committee's annual range. Growth of M3 picked up in October M3 at annual rates of around 7 Vi percent but has remained much more restrained than and AV2 percent respectively over the that of M2, as assets of thrift institutions and three-month period from September to their associated funding needs apparently December. The intermeeting range for continued to contract; for the year to date, M3 the federal funds rate, which provides has grown at a rate around the lower bound of the Committee's annual range. one mechanism for initiating consultation The Federal Open Market Committee seeks of the Committee when its boundaries are monetary and financial conditions that will persistently exceeded, was left un- foster price stability, promote growth in changed at 7 to 11 percent. output on a sustainable basis, and contribute to an improved pattern of international trans- At the conclusion of the meeting, the actions. In furtherance of these objectives, following domestic policy directive was the Committee at its meeting in July reafissued to the Federal Reserve Bank of firmed the ranges it had established in Febru- New York: ary for growth of M2 and M3 of 3 to 7 percent and 3 Vi to7 Vi percent, respectively, measured The information reviewed at this meeting from the fourth quarter of 1988 to the fourth suggests continuing expansion in economic quarter of 1989. The monitoring range for activity, though at a somewhat slower pace growth of total domestic nonfinancial debt than earlier in the year. Total nonfarm payroll also was maintained at 6Vi to 10 V6 percent for employment increased appreciably in Octo- the year. For 1990, on a tentative basis, the ber, but on balance its growth has been more Committee agreed in July to use the same moderate over the past several months, ranges as in 1989 for growth in each of the especially in the private sector. The civilian monetary aggregates and debt, measured from unemployment rate has remained around the fourth quarter of 1989 to the fourth quarter 5 XA percent. Strike activity and other disrup- of 1990. The behavior of the monetary tions depressed industrial production notice- aggregates will continue to be evaluated in the ably in October. Retail sales fell appreciably light of movements in their velocities, devel- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 131 opments in the economy and financial mar- year only partly attributable to strikes kets, and progress toward price level stability. and other special factors. Abstracting In the implementation of policy for the from these factors, the growth of final immediate future, the Committee seeks to demands had slowed, and the effects were maintain the existing degree of pressure on reserve positions. Taking account of progress especially evident in the manufacturing toward price stability, the strength of the sector. By contrast, growth of the service business expansion, the behavior of the sector appeared to be well sustained, and monetary aggregates, and developments in overall construction activity seemed relforeign exchange and domestic financial atively firm. Broad measures of inflation markets, slightly greater reserve restraint might or slightly lesser reserve restraint would indicated that prices had risen more be acceptable in the intermeeting period. The slowly on balance since midyear, partly contemplated reserve conditions are expected reflecting sharp reductions in energy to be consistent with growth of M2 and M3 prices; recent wage data suggested no over the period from September through significant change in prevailing trends. December at annual rates of about 7 Vi and 4 Vi percent, respectively. The Chairman may call Total nonfarm payroll employment for Committee consultation if it appears to the rose appreciably in November after a Manager for Domestic Operations that re- small gain in October. All of the Novemserve conditions during the period before the ber increase occurred at service, trade, next meeting are likely to be associated with a and financial establishments. Job losses federal funds rate persistently outside a range of 7 to 11 percent. continued in manufacturing, especially in motor vehicle and related industries, Votes for this action: Messrs. Greenspan, but cutbacks were evident elsewhere, Corrigan, Angell, Guffey, Johnson, Keehn, notably in electrical machinery. The Kelley, La Ware, Melzer, and Syron. Vote civilian unemployment rate edged up to against this action: Ms. Seger. 5.4 percent in November, its highest level since January. Ms. Seger dissented because she felt Industrial production rose slightly in that a further easing of monetary policy November after a sizable decline in was needed at this time. In her view, the October that resulted from strike activity persisting weakness in the manufacturing and other disruptions; adjusting for these sector, most notably in motor vehicles, temporary influences, production was along with a likely softening in construcdown slightly, on balance, in recent tion activity and capital expenditures months. Output of consumer goods deposed a substantial risk to the economy. clined in November as production of In these circumstances, a moderate easdurables other than motor vehicles ing of policy could help forestall a slide dropped sharply further. Output of busiinto recession in the months ahead withness equipment increased appreciably, out adding to inflationary pressures. owing in part to a recovery in the production of computers in the aftermath of the earthquake in the San Francisco Meeting Held on area. Total industrial capacity utilization December 18-19,1989 slipped a bit in November and was nearly Wi percent below its level a year earlier. 1. Domestic Policy Directive Nominal retail sales in November The information reviewed at this meeting partially retraced the sharp October suggested that economic activity was decline; sales for the month were little expanding slowly in the fourth quarter, changed from the third-quarter average, with the moderation from earlier in the reflecting continued weakness in motor Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 76th Annual Report, 1989 vehicles. Outside of vehicles, sales re- Much of the widening reflected a sharp bounded for a wide range of goods, increase in imports of industrial supplies, especially for apparel items. Housing notably paper, steel, and textiles. The starts declined in November as construc- value of exports showed a small increase tion of multifamily units fell back to for the third straight month as larger about the average pace that had prevailed shipments of automotive products and since April. However, for the October- other industrial goods outweighed a November period, starts were up some- substantial decline in exports of aircraft. what on average from their third-quarter Indicators of economic activity in the level because of a pickup in single-family major foreign industrial countries sugunits. gested a mixed performance in the third Recent indicators of business capital quarter, although growth remained fairly spending suggested a weakening in ex- strong on balance. Economic growth penditures after a substantial increase appeared to have rebounded strongly in earlier in the year. Shipments of nonde- Japan and, adjusted for special factors, to fense capital goods fell in October for a have remained firm in Germany. second straight month. Part of the Octo- Producer prices for finished goods ber decline stemmed from the effects of edged down in November after sizable the strike at Boeing on shipments of increases in the previous two months aircraft; small declines were widespread and, on balance, had risen at lower rates elsewhere, and a considerable drop oc- since midyear. Prices of finished energy curred in computing equipment. The products, especially gasoline, fell orders data for October suggested contin- sharply; the drop more than offset a ued weakness in equipment outlays in the second month of increases in finished near term. Nonresidential construction food prices. Consumer prices excludactivity posted another gain, led by a ing food and energy items rose a little sizable increase in non-office commercial faster in October and November than in construction; however, office vacancy other recent months. Over the Octoberrates, construction permits, and other November period, food prices were indicators pointed to renewed weakness. boosted by sharp increases in dairy Total manufacturing and trade invento- products, meats, and fresh produce while ries rose in October at about the third the rise in energy prices was held down quarter pace. Accumulation of manufac- by a net decline in the price of gasoline. turing inventories was moderate, and Average hourly earnings slipped in stocks remained at relatively low levels November, and the large increase inicompared to shipments. Stocks at whole- tially reported for October was revised salers jumped but, in relation to sales, downward. However, the results of reremained in the middle of the range that cent collective bargaining activity sughas prevailed over the past two years. gested a continuation of the larger wage Retail inventories fell appreciably in settlements evident earlier in the year. October, reflecting a large decline in auto At its meeting on November 14, the dealers' stocks. Excluding auto dealers, Committee had adopted a directive that the retail inventory-sales ratio increased called for maintaining the existing degree in October to a level well above its range of pressure on reserve positions and that over the past year. provided for giving special weight to The nominal U.S. merchandise trade potential developments that might require deficit widened appreciably in October some easing during the intermeeting from an upward revised September rate. period. The availability of reserves had Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 133 been eased slightly earlier in November. Major indexes of stock prices generally With regard to the intermeeting period rose over the period. In foreign exchange ahead, the Committee had agreed that markets, the trade-weighted value of the slightly lesser reserve restraint would be dollar in terms of the other G-10 curacceptable, or slightly greater reserve rencies fell substantially despite some restraint might be acceptable, depending easing of short-term interest rates in on progress toward price stability, the Germany and Japan. The decline of the strength of the business expansion, the dollar primarily reflected the buoyancy behavior of the monetary aggregates, of the German mark as exchange market and developments in foreign exchange participants interpreted political developand domestic financial markets. The ments in Eastern Europe as having favorcontemplated reserve conditions were able implications for the German econexpected to be consistent with growth of omy. The dollar declined somewhat less M2 and M3 over the period from Septem- against other European currencies linked ber through December at annual rates to the mark in the European Monetary of about IVi percent and AVi percent System and was little changed against the respectively. yen. In the period since the November Growth of the broader monetary aggremeeting, the Manager for Domestic gates accelerated somewhat further in Operations had directed open market November and remained robust in early transactions toward maintaining an un- December, despite a contraction in dechanged degree of reserve availability. mand deposits that resulted in consider- Conditions in reserve markets softened ably slower expansion of M1. The expantemporarily around Thanksgiving when sion of M2 continued to reflect the effects operations to meet seasonal reserve needs of earlier reductions in market interest were misread as signaling a further easing rates and related opportunity costs, and it of monetary policy. Over most of the seemed likely that the velocity of M2 intermeeting period, however, federal would decline substantially further in the funds traded around %Vi percent, the fourth quarter. Assets of thrift institutions level prevailing at the time of the mid- and their associated funding needs appar- November meeting. Adjustment plus ently continued to contract, keeping seasonal borrowing fell to an average of growth of M3 below that of M2, but the around $150 million in the first half of decline seemed to be at a reduced pace December. To reflect a continuing de- and in November M3 grew at its fastest cline in seasonal borrowing, technical rate since the summer. Through Novemreductions were made at the start of the ber, M2 had expanded at a pace near the intermeeting period and in the second midpoint of the Committee's annual range week of December in the assumed level while M3 had grown at a rate a little of adjustment plus seasonal borrowing above the lower bound of its annual used in constructing the target paths for range. the provision of reserves. The staff projection prepared for this Against the background of an un- meeting continued to suggest that the changed monetary policy and incoming economy would expand at a reduced pace information that generally was viewed as over the next several quarters. Growth in consistent with expectations of continu- the first quarter was expected to rebound ing but slow growth in economic activity, from temporary disturbances to producmost market interest rates changed little tion stemming from strike activity and on balance over the intermeeting period. natural disasters in the fourth quarter, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 76th Annual Report, 1989 although the extent of the rebound would activity. These members recognized that be limited by further reductions in the there were imbalances in the economy, production of motor vehicles in the early but they felt that, among other developmonths of the year. Over the remainder ments, prevailing patterns in orders and of 1990, a relatively moderate expansion production, though softening, were not in consumer spending was projected to inconsistent with somewhat faster ecobe a key factor in sustaining overall nomic growth once current difficulties demand and production. Business outlays such as those in the automobile industry for fixed investment also were expected were worked through and the effects of to increase, but at a much reduced pace in the monetary policy easing over the past an environment of slow revenue growth half year were felt more fully. It also was and deteriorating cash flows. Housing noted that certain forward-looking indiconstruction was forecast to expand at a cators, including commodity prices, relatively sluggish pace over the course monetary growth, foreign exchange of the year. The projection continued to rates, and the Treasury yield curve, were assume that the federal budget deficit consistent with some pickup in economic would decline moderately and that net expansion next spring. With regard to the exports would make little contribution to outlook for inflation, those who believed domestic economic growth in 1990. the risks were on the side of a weaker Pressures on labor and other production economy and less pressure on production resources were expected to ease only resources generally saw favorable prosmarginally and the underlying trend of pects for further progress toward price inflation was not projected to change stability next year. Some of the members significantly. who expected a somewhat stronger econ- In the Committee's discussion of the omy were less optimistic about the extent economic situation and outlook, mem- of such progress, if any, but they also bers emphasized that signs of a weaker believed that there was little risk of a expansion had accumulated and that the pickup in the underlying rate of inflation. economy was likely to remain sluggish at In the course of the Committee's disleast over the near term. While most cussion, members reported more slugmembers agreed that further economic gish business conditions in a number of growth was a reasonable expectation for areas and some loss of business confithe year ahead, several observed that dence, but overall economic activity recent developments suggested greater appeared to be continuing to grow in risks in the direction of a weaker eco- most, if not all, parts of the country. With nomic performance. These members some notable exceptions, manufacturing expressed concern that problems in some activity had moderated across the counsectors of the economy such as motor try, with particular weakness in the vehicles and commercial and residential production of motor vehicles, other real estate might lead to greater caution in durable consumer goods, and some types credit extensions and overall spending, of capital equipment. Members observed especially given indications of some that conditions in the automobile industry deterioration in business confidence, and probably would continue to have a negato more widespread softening in the econ- tive effect on overall economic activity in omy. Other members saw more favorable the months ahead, and some noted that prospects for some strengthening of the the longer-term outlook was difficult to expansion next year, though they did not predict because structural problems reanticipate a strong rebound in economic lated to changing demand patterns ap- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 135 peared to be involved. Construction to differ to some extent. Several anticiactivity also was cited as a source of pated that little or no progress was likely weakness in many areas, though it re- to be made in reducing inflation over the mained relatively robust in others. In year ahead, in part because the effects of general, nonresidential construction the recent decline of the dollar would seemed likely to be damped by over- tend to offset expected gains from dimincapacity in office and other commercial ished pressures on labor and other prostructures. Overall demand for new duction resources. Some of these memhousing appeared to be essentially flat, ber s also expressed concern that a possible though with considerable local varia- resumption of economic growth at a pace tions, despite earlier declines in mort- closer to the economy's potential, perhaps gage interest rates. It was noted that the later next year, would reverse any tenavailability of financing for the construc- dency for inflation to decline. Other tion of housing appeared to have been members were somewhat more optimisreduced by tighter supervisory regula- tic about the outlook for prices and tions and some decrease in the number of wages. Some commented that they were traditional institutional lenders to this encouraged by the performance of prices industry. In addition, the availability of in the second half of 1989, and a number such financing appeared to have been cited the strong competition for many adversely affected by the weakness of products from both domestic and foreign real estate markets in a number of areas producers, the behavior of industrial and the large resulting losses on loans. materials and commodity prices, and On a more positive note, a number of the growth of capacity in some key members commented that consumer industries. spending was likely to be sustained by In the Committee's discussion of moncontinuing gains in incomes and the etary policy for the intermeeting period ample liquid assets of households that ahead, the members focused on the were available to support greater spend- possible need to ease reserve conditions ing. Consumer spending on services was slightly further to provide greater assurlikely to continue to grow. The outlook ance that weaknesses in demand did not for retail sales was somewhat uncertain, persist or deepen. The current slowdown including at this point the still very limited in economic growth was to a considerable information on holiday sales, but outside extent the result of the policy implethe most depressed areas retailers ap- mented much earlier to restrain emerging peared to be relatively optimistic. The inflation pressures, and this policy seemed recent depreciation of the dollar would at least to have avoided an upsurge in tend over time to boost overall demand inflation. Over time, a further damping and economic growth. More generally, of price pressures was needed if the the recent slowing in the expansion could economy was to realize the benefits of be attributed in part to special or tempo- price stability, but that need not involve a rary factors and to the lagged effects of downturn in the economy. Several memthe tightening of monetary policy through bers observed that the choice between early 1989. On the whole, current de- some slight easing at this time or waiting mand conditions were not seen by most for additional evidence that the economy members as suggesting a cumulative might be weakening further was a close weakening in the economy. one. A majority indicated that on balance With regard to the outlook for infla- they viewed the risks of a shortfall in tion, the views of the members continued economic activity as sufficiently high to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

136 76th Annual Report, 1989 justify an immediate move to slightly prompt adjustment of reserve conditions. easier reserve conditions, and one mem- Most of these members were willing to ber expressed a preference for somewhat accept a slight immediate move toward greater easing. In this regard, some noted easier reserve conditions but, in that case, that the next several months might be a they doubted that any further easing critical period in terms of avoiding a would be appropriate over the intermeetrecession and that some modest easing at ing period unless the economy, prices, or this point might have a calming effect on financial developments deviated very financial markets and help to boost busi- substantially from current expectations. ness confidence. Given downward pres- Two members indicated that they could sures on many prices and softness in not accept any further easing at this time, business conditions, some slight easing in part because of their concerns about was not likely in this view to be inconsis- the consequences for growth of the tent with the long-run objective of price monetary aggregates and, more generstability or the public's perception of the ally, for inflation expectations and inflaimportance that the System placed on that tion over time. Members referred to the objective. These members recognized strong growth of M2 over the past several that an easing of reserve pressures imme- months and took note of a staff analysis diately after the meeting would make the that concluded that such growth would need for further easing less likely over remain fairly strong over months ahead if the coming intermeeting period. As a reserve conditions stayed unchanged or consequence, they favored a directive were eased slightly. Earlier declines in that did not contain a tilt toward less short-term interest rates and typically restraint but one that gave equal weight to slow adjustments of offering rates on potential intermeeting adjustments in M2-type deposits had tended to make either direction. such deposits relatively more attractive Members who supported an unchanged by reducing the opportunity costs of policy commented that current reserve holding them. The outlook for M3 was conditions appeared to be consistent with subject to considerable uncertainty, but ongoing expansion in business activity at growth of that aggregate was expected to a pace that over time would serve to remain below that of M2. The extent of moderate pressures on labor and other the shortfall would depend in important production resources, and they were measure on the degree to which solvent concerned that further easing might but capital-deficient thrift institutions overcompensate for current weaknesses continued to reduce assets to meet new in the economy at the cost of delaying capital requirements and on the extent of progress toward price stability. In current RTC activity in resolving insolvent thrift circumstances, an easing also might institutions. foster some concern about the System's At the conclusion of the Committee's commitment to achieving price stability discussion, all but two of the members and put undesirable downward pressure indicated that they favored or could on the dollar in the foreign exchange accept a directive that called for a slight markets. At the same time, these mem- easing of reserve conditions. In keeping bers recognized the risk of some further with the Committee's usual approach to weakening in the economy, and several policy, the conduct of open market operfavored a directive that incorporated a ations would be subject to further adjuststrong presumption that indications of ment during the intermeeting period such a development would trigger a depending on progress toward price Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 137 stability, the strength of the business increase earlier in the year. The preliminary expansion, the behavior of the monetary data indicate that the nominal U.S. merchandise trade deficit widened appreciably in aggregates, and developments in foreign October from an upward revised September exchange and domestic financial marrate. Broad measures of inflation suggest that kets. On the basis of such developments, prices have risen more slowly on balance slightly greater or slightly lesser reserve since midyear, partly reflecting sharp reducrestraint would be acceptable during the tions in energy prices, but the latest data on labor compensation suggest no significant period ahead. The reserve conditions change in prevailing trends. contemplated at this meeting were ex- Interest rates have changed little on balance pected to be consistent with growth of since the Committee meeting on November M2 and M3 at annual rates of about 8V2 14. In foreign exchange markets, the tradeand 5V2 percent respectively over the weighted value of the dollar in terms of the other G-10 currencies declined substantially four-month period from November 1989 over the intermeeting period, with a particuthrough March 1990. In light of the larly pronounced depreciation against the easing of reserve conditions over the German mark and related European curcourse of recent months and the further rencies in the last week of the period. slight easing favored by a majority of the M2 continued to grow fairly briskly in members at this meeting, the Committee November, largely reflecting strength in its retail deposit components; M2 has expanded decided to lower the intermeeting range this year at a pace near the midpoint of the for the federal funds rate by 1 percentage Committee's annual range. Growth of M3 point to 6 to 10 percent. Such a reduction picked up in November but has remained would center the range more closely more restrained than that of M2, as assets of around the average federal funds rate thrift institutions and their associated funding needs apparently continued to contract; for that was expected to prevail after this the year to date, M3 has grown at a rate a little meeting. above the lower bound of the Committee's At the conclusion of the Committee's annual range. meeting, the following domestic policy The Federal Open Market Committee seeks directive was issued to the Federal Re- monetary and financial conditions that will foster price stability, promote growth in serve Bank of New York: output on a sustainable basis, and contribute to an improved pattern of international trans- The information reviewed at this meeting actions. In furtherance of these objectives, suggests that economic activity is expanding the Committee at its meeting in July reafslowly in the current quarter. Total nonfarm firmed the ranges it had established in Februpayroll employment has increased at a re- ary for growth of M2 and M3 of 3 to 7 percent duced pace on average over the past several and 3 Vi to 7 Vi percent, respectively, measured months, with declines continuing in the from the fourth quarter of 1988 to the fourth manufacturing sector. The civilian unemploy- quarter of 1989. The monitoring range for ment rate edged up to 5.4 percent in Novem- growth of total domestic nonfinancial debt ber. Industrial production rose slightly in also was maintained at 6V2 to IOV2 percent for November after a decline in October resulting the year. For 1990, on a tentative basis, the from strike activity and other disruptions. Committee agreed in July to use the same Nominal retail sales excluding motor vehicles ranges as in 1989 for growth in each of the strengthened in November, but continued monetary aggregates and debt, measured from weak sales of vehicles held total retail sales the fourth quarter of 1989 to the fourth quarter for the month to a level that was little changed of 1990. The behavior of the monetary from the third-quarter average. Housing starts aggregates will continue to be evaluated in the fell in November but for the October- light of movements in their velocities, devel- November period were up somewhat on opments in the economy and financial maraverage from their third-quarter level. Indica- kets , and progress toward price level stability. tors of business capital spending suggest a In the implementation of policy for the weakening in expenditures after a substantial immediate future, the Committee seeks to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

138 76th Annual Report, 1989 decrease slightly the existing degree of pres- in the fourth quarter, could raise doubts sure on reserve positions. Taking account of about the System's commitment to its progress toward price stability, the strength objective of price stability, especially of the business expansion, the behavior of the given that the easing would further monetary aggregates, and developments in foreign exchange and domestic financial stimulate M2 growth. Under such condimarkets, slightly greater reserve restraint or tions, further easing of reserve pressures slightly lesser reserve restraint would be would tend to accommodate rising prices, acceptable in the intermeeting period. The foster uncertainty in financial markets, contemplated reserve conditions are expected and drive up long-term interest rates, to be consistent with growth of M2 and M3 over the period from November through thereby increasing the likelihood of eco- March at annual rates of about 8Vfc and nomic instability. Steady policy in pursuit 5 Vi percent respectively. The Chairman may of price stability, using forward-looking call for Committee consultation if it appears indicators, would reduce uncertainty to the Manager for Domestic Operations that about price trends, bolster confidence in reserve conditions during the period before the dollar domestically and internationthe next meeting are likely to be associated with a federal funds rate persistently outside a ally, and bring about lower interest rates range of 6 to 10 percent. and higher economic growth. Mr. Melzer dissented because he fa- Votes for this action: Messrs. Greenspan, vored an unchanged degree of reserve Corrigan, GufFey, Johnson, Keehn, Kelley, restraint. He noted that policy had been and LaWare, Ms. Seger, and Mr. Syron. Votes against this action: Messrs. Angell eased considerably over the last six and Melzer. months in anticipation of prospective sluggishness in the economy and that Messrs. Angell and Melzer dissented ample liquidity was now being provided because they did not believe that policy by the central bank. In addition, based on should be eased. Mr. Angell was con- recent and projected growth in the moncerned that the Committee was respond- etary aggregates, he was concerned that ing to indicators of recent weakness in long-term progress toward price stability economic activity, a weakness that was a would be jeopardized by a more accomconsequence of somewhat cautious pol- modative short-run policy stance. icy responses earlier. Policy decisions should rely mainly on leading indicators, 2. Foreign Currency Authorization including commodity prices, the exchange rate, the yield curve, and money At this meeting, the Committee approved supply growth. Attention to such indica- an increase in the limit on holdings of tors had served policy well in the past. foreign currencies in the System Open During the spring and summer while the Market Account. Paragraph ID of the dollar was appreciating and commodity Committee's Authorization for Foreign prices, including gold, were generally Currency Operations permitted the Fedfalling, easing of reserve conditions was eral Reserve Bank of New York, for the accompanied by the lower long-term System Open Market Account, to maininterest rates necessary to undergird tain an overall open position in all foreign housing and other long-term invest- currencies not exceeding $20 billion, ments. At this meeting, price-level indi- based on historical costs. System purcators were not signaling a need for chases of foreign currencies, which were further ease. In these circumstances, an coordinated with similar transactions by additional drop in the federal funds rate, the U.S. Treasury, had been relatively coming after two previous easing moves limited recently, but, with the accumula- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 139 tion of interest, total holdings were approaching the $20 billion limit. The Manager for Foreign Operations advised that even in the absence of new market purchases, continuing accruals of interest would raise total holdings to the current limit by February. The Committee agreed to raise the limit to $21 billion, effective immediately. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Guffey, Johnson, Keehn, Kelley, LaWare, and Melzer, Ms. Seger, and Mr. Syron. Votes against this action: None. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

141 Consumer and Community Affairs The Community Reinvestment Act was ments their record of meeting the comthe focus of much activity during the munity's needs as a way of facilitating year. In March the Board and the other such communication. federal financial regulatory agencies Other aspects of the Board's activities issued a joint policy statement to guide under the Community Reinvestment Act insured depository institutions in help- are discussed below. ing to meet the credit needs of their Overall, this chapter presents the local communities, including low- and Board's implementation in 1989 of new moderate-income neighborhoods. The statutory protections for consumers statement aims to turn the focus of while minimizing regulatory burdens on attention away from the applications financial institutions, reports on the process as the primary means for the System's examination of institutions for public to air concerns related to the compliance with consumer laws and on act; it seeks instead to promote more the System's handling of consumer comlasting mechanisms for outreach and plaints, discusses the community affairs dialogue between institutions and their program of the Board and Reserve communities. Banks, details the activities of the According to the policy statement, Board's Consumer Advisory Council, institutions should have appropriate com- and reports on testimony and legislative munity reinvestment policies in place, recommendations. and working well, before filing an application to expand operations. Although Regulatory Matters commitments for future actions may be used to address specific problems in an The Board amended Regulation B to give otherwise satisfactory record, such com- owners of small businesses certain rights mitments will not compensate for seri- related to notices and recordkeeping as ously deficient performance. In February required by the Women's Business Ownthe Board underscored the importance of ership Act of 1988. The Board amended an institution's current record when it Regulation C to implement statutory denied, in part because of deficiencies in amendments that expand reporting reperformance under the act, a proposal by quirements under the Home Mortgage Continental Illinois Bancorp, Inc., of Disclosure Act. The Board amended Chicago, to acquire an Arizona bank. Regulation Z to implement the Fair The policy statement encourages insti- Credit and Charge Card Disclosure Act tutions to develop an effective process for of 1988, which requires credit and charge ascertaining and responding to commu- card issuers to give consumers early nity credit needs over time and lists disclosures. The Board also amended examples of initiatives the agencies have Regulation Z to implement the Home found to be effective. The statement Equity Loan Consumer Protection Act of highlights the importance of dialogue 1988, which requires extensive new between financial institutions and repre- disclosures and imposes limitations on sentatives of their communities and urges the terms of home equity loans. In other institutions to discuss in formal state- matters, the Board updated advertising Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

142 76th Annual Report, 1989 rules and poster requirements to imple- up to one year upon request from the ment 1988 changes to the Fair Housing applicant. Act and issued a new brochure for consumers about home equity lines of credit. Regulation C (Home Mortgage Disclosure) Regulation B (Equal Credit In December the Board adopted revisions Opportunity): Business Credit to Regulation C to carry out amendments to the Home Mortgage Disclosure Act In November the Board amended Regu- approved by the Congress in August lation B to implement the Women's 1989. Previously, lenders covered by Business Ownership Act of 1988, which the law reported mortgages and home gives owners of small businesses some of improvement loans they made or purthe same rights under the Equal Credit chased by type of loan and by census Opportunity Act (ECOA) that are given tract. Beginning January 1, 1990, covto borrowers of consumer credit. Busi- ered lenders must report the following ness credit has always been covered by additional material: the ECOA and Regulation B, but the • Information from all applications regulatory requirements for retention of they receive for mortgages and home records and for written notice of credit improvement loans denial differed significantly from those • The race, sex, and income level of applicable to consumer credit. applicants for mortgage or home improve- Beginning April 1, 1990, creditors of ment loans small businesses must follow rules for • For loans that they sell, the type of written notice that are similar to require- purchaser, such as the Federal National ments for consumer transactions. A small Mortgage Association, the Federal Home business is defined, for purposes of Loan Mortgage Corporation, or an affil- Regulation B, as one having revenues of iate of the lender. $1 million or less. To help institutions comply with the Creditors will have three options for law and keep their costs to a minimum, complying with the notice requirements the Board decided that institutions will regarding reasons for denial. Creditors use a loan register to report data. This may give all applicants, at the time of approach allows institutions to provide application, a written notice of their raw data without cross-tabulating it by right to find out the reasons if credit is type of loan, census tract, location, and denied; they may give such notice to characteristics of the applicant or borrejected applicants at the time of denial; rower. Institutions will keep a running or they may automatically give rejected log of the required information and at applicants the specific reasons, in year-end send the registers to their writing, upon denial. supervisory agency. The Federal Finan- Under the new rules, creditors will cial Institutions Examination Council have to keep the records used in evaluat- (FFIEC) will prepare the disclosure ing credit applications of small businesses statements required by the new law and for one year. For businesses with reve- send copies to the individual institutions, nues greater than $1 million, creditors which will in turn make them available to must keep records for at least sixty days the public. The FFIEC will continue to after taking action on the application and prepare, and to make public, tables that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 143 aggregate for each metropolitan statisti- plans; and prohibit certain credit terms in cal area the data submitted by financial home equity plans. Compliance with the institutions. rules became mandatory on November 7, 1989. When a lender gives a prospective Regulation Z (Truth in Lending): customer an application form, the lender Credit Card Disclosures must disclose payment terms, an example In April the Board amended Regulation Z of the payments, fees the creditor charges to implement the Fair Credit and Charge to open or use the plan, an estimate of Card Disclosure Act of 1988. The amend- fees imposed by third parties such as ments require that card issuers give appraisers, and information about any consumers certain information early to variable-rate features. A creditor also allow credit shopping. After August 31, must alert consumers to the circum- 1989, issuers that offer cards to consum- stances under which it may terminate the ers by mail must disclose, in a table plan, prohibit additional credit extenaccompanying the application, the annual sions, or change specified terms. The percentage rate, annual fees, transaction creditor must provide much of this inforcharges, grace periods, and the method mation again when the account is opened. used to calculate the balance on which the The rules spell out proper advertising finance charge is based. Previously, these of home equity plans. If an advertisement disclosures could be made later, when the includes any payment information, for card was issued. Special rules apply to example, it must state certain costs such disclosures in telephone solicitations and as points or other loan fees, the periodic to application forms placed in retail rate used to compute the finance charge, establishments and in magazines. and the maximum annual percentage rate The law requires disclosures in two for variable-rate plans. Special rules other circumstances. First, card issuers apply to the mention of balloon payments that impose fees to renew credit and and tax implications. charge card accounts must give card- The new rules set some restrictions on holders renewal notices, including a new credit terms. Lenders generally may not set of credit disclosures. Second, card terminate a plan or unilaterally change issuers that offer credit insurance must the loan terms except in specified circuminform their cardholders if they change stances (for example, if the consumer insurance providers and must disclose fails to honor the contract's repayment any accompanying increase in rate or terms or commits fraud). If the plan has a decrease in coverage. variable-rate feature, the lender must use an index that is publicly available and not under its control. Lenders must refund Regulation Z: all fees paid by the consumer if the Home Equity Lines of Credit consumer chooses to cancel because the In June the Board amended Regulation Z terms disclosed (other than a variable to carry out the Home Equity Loan rate) changed between the time the con- Consumer Protection Act of 1988. The sumer received an application and the new rules expand the disclosures that account was opened. lenders must give with applications; The Board issued a pamphlet for require that some disclosures be given a consumers that describes the features of second time, when an account is opened; home equity lines of credit and how they govern the advertising of home equity compare with other types of credit pro- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 76th Annual Report, 1989 grams. This pamphlet, or one substan- Community Reinvestment Act tially similar, must be given to consumers along with the creditor's disclosures. The Community Reinvestment Act (CRA) requires the Board to encourage financial institutions under its jurisdiction Regulation Z: to help meet the credit needs of their Determination of Preemption entire communities, including low- and moderate-income neighborhoods, in a In December the Board determined that manner consistent with safe and sound provisions of Wisconsin law that require banking practices. The Board assesses disclosures and adjustment notices for the CRA performance of state member certain variable-rate transactions are not banks during regular compliance examiinconsistent with Regulation Z and therenations and takes the CRA record into fore are not preempted. The Board conaccount, along with other factors, when cluded that a creditor could comply with acting on applications from state member both sets of rules without violating either banks and bank holding companies. As the state or federal law. The Board also reported at the outset of this chapter, the concluded that Wisconsin's requirements Board in March joined the other federal for disclosing information not covered financial regulators in issuing an interaby the federal law, or for more detailed gency policy statement to guide institudisclosures, do not contradict the federal tions in meeting their responsibilities rules. under the act. The Federal Reserve System maintains a three-faceted program for enforcing Interpretations and fostering better bank performance In 1989 the Board continued to offer legal under the CRA. The components are a interpretations and guidance on Regula- compliance examination program, distion B (Equal Credit Opportunity), Reg- semination of information on community ulation E (Electronic Fund Transfers), development strategies and techniques to and Regulation Z (Truth in Lending) bankers and members of the public through official staff commentaries. Pub- through community affairs offices at the lished by April 1 each year, these com- Reserve Banks, and analyses of CRA mentaries help financial institutions and issues presented in bank and bank holding others apply the regulations to specific company applications. situations. Federal Reserve examiners review fair lending, community revitalization, and other areas relevant to assessing CRA Fair Housing Act performance. During the 1989 reporting In March the Board revised advertising period (July 1, 1988, through June 30, rules and poster requirements to imple- 1989), they examined 634 state member ment 1988 amendments to the Fair Hous- banks and, when appropriate, suggested ing Act. Among other things, the amend- ways to improve CRA performance. ments added two new categories of During 1989 the number of applicaprotected persons: those with handicaps tions in which adverse CRA examination and those with children under the age of ratings were at issue increased signifi- 18. The revised housing poster is avail- cantly. The Board received forty-two able free of charge from each of the such cases, compared with twenty in Reserve Banks. 1988 and fifteeni n 1987. But the number Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 145 of applications protested because of CRA bilities in managing the CRA programs performance in 1989 fell to sixteen, a of their deposit subsidiaries, economic sharp decline from the record high of development, community development thirty-six in 1987 and thirty-one in 1988. corporations, the development of low- At year-end, eleven of the protested income housing, and lending to small applications had been approved, two had businesses. Many sessions included parbeen returned to the applicant or with- ticipation from agencies such as the drawn, and three were still pending. Federal Home Loan Banks, the Federal National Mortgage Corporation, the Department of Housing and Urban Community Affairs Development, the Small Business Ad- The Federal Reserve's Community ministration, and the Farmers Home Affairs Program continued to emphasize Administration. training, education, and dissemination of The informational brochures and painformation to financial institutions and pers produced under the Community to community and government represen- Affairs program included several new tatives about community development profiles published by the Federal Reserve lending. Increased interest in the mechan- Banks of Philadelphia and San Francisco ics of public-private partnerships fol- on local communities within their dislowed the release in March of the inter- tricts. The Federal Reserve Bank of agency policy statement on the CRA by Minneapolis published a technical manthe federal financial regulatory agencies. ual on community development lending, Given the heightened emphasis on a practical guide that takes the reader step CRA, the Board joined with the Reserve by step through the process of credit Banks of Chicago and New York in analysis and decisionmaking. In addition, developing an advanced CRA training six Reserve Banks now publish regular program for System examiners in those newsletters on community development two districts; plans are under way to train issues in their districts. examiners in the other Reserve Bank Financial institutions continued to districts in 1990. express interest in forming community The Board coordinated two training development corporations (CDCs). The seminars for Community Affairs Officers Board's staff worked with the Economic and staff of the Reserve Banks: A confer- Development Administration in promotence on rural economic development at ing the formation of bank and bank the Federal Reserve Bank of Atlanta and holding company CDCs through technia week-long seminar on community- cal assistance to institutions. development lending at the Baltimore Branch of the Richmond Bank. The Compliance Examinations Board's staff also made forty-five speeches in 1989 before various groups. The Federal Reserve System conducts Members of the Community Affairs separate examinations to monitor complistaff at the Reserve Banks provided ance of state member banks with contraining for bankers and others involved sumer protection laws. The Office of in community development in their dis- Thrift Supervision (OTS) also has impletricts. Conferences, seminars, and work- mented a program of specialized complishops covered a variety of topics, includ- ance examinations under its Division of ing the interagency policy statement on Compliance Programs; and OTS districts CRA, bank holding company responsi- began using a new compliance handbook Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 76th Annual Report, 1989 and a separate schedule for compliance regulations declined from 1988 levels. examinations in April 1989. Information about compliance with the The Office of the Comptroller of the Expedited Funds Availability Act, which Currency (OCC), the Federal Deposit became effective September 1, 1988, is Insurance Corporation (FDIC), and the reported for the first time.1 National Credit Union Administration (NCUA) maintained their various en- Truth in Lending Act forcement policies and procedures to (Regulation Z) monitor the compliance of the institutions they supervise. The Board, the FDIC, the OCC, the OTS, and the NCUA report that 30 percent of examined institutions were in Examination Procedures full compliance with the regulation, down for the CRA from 46 percent in 1988. The OCC, the The Financial Institutions Reform, Re- FDIC, and the OTS noted declines in covery, and Enforcement Act of 1989 compliance, while the NCUA and the (FIRREA) amended the Community Re- Board reported levels of compliance investment Act in two ways. First, it similar to those of 1988. Data from the requires agencies to disclose to the Board, the OCC, and the NCUA (the public, for examinations that take place agencies that provide frequency of violaafter July 1, 1990, written evaluations tions) indicate that, of the financial and performance ratings under CRA; the institutions not in full compliance, half evaluations will state conclusions and had no more than five violations. supporting facts for each assessment The five most frequent violations of factor set out in the CRA regulations. Regulation Z were the failure to disclose Second, the act contains a new four-point properly the finance charge; the annual rating system that replaces the agencies' percentage rate; the number, amounts, existing five-point system. and timing of payments scheduled to To implement these changes, the repay the obligation; and the total of FFIEC assembled an interagency work- payments on closed-end credit; plus ing group of Washington and field office the failure to provide notice to consumrepresentatives. The group developed a ers entitled to rescind certain credit uniform rating system and methods for transactions. disclosing the CRA rating and presenting The FDIC and the OTS issued four the written evaluations. In December, cease-and-desist orders involving violathe FFIEC issued for public comment an tions of Regulation Z. Under the Interinteragency proposal to implement the agency Enforcement Policy on Regunew requirements. lation Z, a total of 425 institutions supervised by the Board, the OTS, the FDIC, and the OCC reimbursed about Compliance with Consumer $8 million on 87,447 accounts during the Regulations 1989 reporting period, compared with This section summarizes compliance data from the five agencies that supervise financial institutions and from other fed- 1. The federal agencies that regulate financial institutions do not all use the same method to eral regulators for the reporting period compile information on compliance; however, the July 1, 1988, to June 30, 1989. The data data support the general conclusions presented indicate that compliance with consumer here. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 147 approximately $2 million on 23,419 vises. As a result of examinations and accounts in 1988. The increase in reim- other regulatory activities, the FCA took bursements is explained, in part, by one formal enforcement actions against five institution's reimbursement of $3.6 mil- institutions. They are now in substantial lion on 59,297 credit card accounts. compliance. The Federal Trade Commission (FTC) The Packers and Stockyards Admincontinued its program of voluntary com- istration of the Department of Agriculpliance to enforce the credit-advertising ture reports that they find a satisfactory requirements of Regulation Z, with an level of compliance among the entities emphasis on those applicable to real they supervise. estate and automobile credit. Companies contacted by the FTC that were not in full compliance with the Truth in Lending Equal Credit Opportunity Act Act promptly brought their programs (Regulation B) into compliance. The FTC continued its enforcement The five financial regulatory agencies program against certain deceptive tele- report that 60 percent of all examined marketing practices and other frauds institutions were in full compliance with involving credit card charges. The agency Regulation B in 1989, down from 67 brought three actions in federal district percent in 1988. The Board, the OCC, court alleging violation of the Truth in and the NCUA (the three agencies that Lending Act: The failure to disclose collect data on the frequency of viofinance charges and other required infor- lations) report that 72 percent of the mation, misrepresentations, and unlaw- institutions not in full compliance had no ful billing and crediting procedures. more than five violations. The most To heighten consumer and creditor frequent violations involved the failure awareness of the rights and responsibili- of the creditor to meet the following ties established by the act, the FTC requirements: continues to publish educational pam- • To notify the applicant of the action phlets. This year the FTC issued a new taken within thirty days after receiving a pamphlet entitled Choosing and Using completed application Credit Cards and a revised edition of • To provide a written notice of ad- Electronic Banking. A news release verse action that contains the information outlined provisions of the Fair Credit specified by the regulation Billing Act that would assist customers • To provide the specific reasons for with canceled airline tickets. credit denial and other adverse action The Department of Transportation • To request information for monitor- (DOT) reports that they find a satisfactory ing purposes about race or national origin level of overall compliance by foreign and sex on credit applications for the and domestic carriers under its jurisdic- purchase or refinancing of a primary tion. As a result of consumer inquiries, dwelling the DOT entered into a formal order with • To note the race or national origin an air carrier that required prompt pro- and sex, based on the lender's visual cessing of refunds to credit card accounts. observation, if an applicant chooses not The Farm Credit Administration to provide the requested information. (FC A) reports that they find a satisfactory The FTC continued an investigatory level of compliance with Truth in Lend- program in which testers pose as credit ing among the institutions that it super- applicants to monitor compliance with Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

148 76th Annual Report, 1989 the ECO A. The FTC settled one lawsuit The other agencies responsible for involving practices that were in violation enforcing the act—the FTC and the of the ECOA and obtained consent de- SEC - report that they find a satisfactory crees in three other cases. level of compliance among the entities As part of its educational effort, the they supervise. FTC published a manual that teaches creditors how to comply with the notifi- Expedited Funds Availability Act cation provisions of the ECOA and the (Regulation CC) Fair Credit Reporting Act. The Farm Credit Administration re- The Board, the OCC, and the FDIC ports that they find a satisfactory level of report that 90 percent of examined insticompliance with the ECOA by its institu- tutions were in full compliance with the tions. As a result of examinations and regulation. The Board and the OCC (the other regulatory activities, the FCA took agencies that provide a breakdown of formal enforcement actions against four the violation frequency) report that 78 institutions. They are now in substantial percent of the institutions not in full compliance with the ECOA. compliance had fewer than five viola- The other agencies that enforce the tions. The five most frequent violations ECOA-the DOT, the Interstate Com- involved the failure to meet the following merce Commission, the Small Business requirements: Administration, the Packers and Stock- • To provide next-day availability for yards Administration, and the Securities certain items and Exchange Commission (SEC) — • To notify customers when placing report that they find substantial compli- exception holds on their transactions ance among the entities they supervise. • To train employees and provide procedures for compliance • To post availability policies at loca- Electronic Fund Transfer Act tions where employees accept deposits (Regulation E) • To notify customers when placing The five financial regulatory agencies case-by-case holds on their transactions. report that 84 percent of examined institutions were in full compliance with Economic Effect of the Electronic Regulation E, a decline from the 88 Fund Transfer Act percent reported last year. The five most frequent violations of Regulation E in- In keeping with statutory requirements, volved the failure to give the following the Board monitors the effects of the disclosures: Electronic Fund Transfer Act on the costs • A written statement outlining the and benefits of EFT services to financial terms and conditions of the EFT service institutions and consumers. During 1989 • A summary of the customer's liabil- the economic effect of the act increased ity for unauthorized transfers because of continued growth in the • A summary of the customer's right availability and use of EFT services. to stop payment of EFTs and the proce- About two-thirds of the depository instidures for initiating a stop-payment order tutions in the United States offer EFT • A statement for each monthly cycle services and are covered by the act and in which an EFT occurred Regulation E. • A periodic notice of the procedures Most of the nation's banks and thrifts for resolving alleged errors. offer customers access to automated teller Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 149 machines. The number of installed ATMs of the complaints processed involved increased in 1989 about 6 percent, to electronic transactions. The Federal Re- 87,000, from 82,000 in 1988; more than serve System forwarded nineteen, which 85 percent of these ATMs are part of did not involve state member banks, to shared networks. In the same period, the other agencies for resolution. Of the number of ATM transactions increased remaining twenty-nine, two involved a about 4 percent, or 0.2 billion, to 5.2 possible violation of the regulation. billion. Because the industry practices that Point-of-sale (POS) systems grew would have evolved in the absence of more rapidly than ATM systems during statutory requirements are unknown, the 1989. The number of terminals capable incremental costs associated with the act of supporting direct-debit POS transac- are difficult to quantify. Cost estimates tions grew about 18 percent, from 43,400 from 1981 suggest that the ongoing in 1988 to 51,000 in 1989. Thevolumeof compliance cost of electronic transac- POS transactions, however, remains tions was not high enough to compromise below that of ATM transactions. About their cost advantage over check-based 70 million POS transactions were pro- transactions. Since that time, the volume cessed in 1989. of transactions has increased, which has Direct deposit accounts for a large allowed financial institutions to exploit share of electronic payments. In the economies of scale. private sector, the direct deposit of salary There were no revisions to Regulation and pension payments covers about 40 E in 1989. The Board is reviewing the percent of commercial payments handled regulation for possible changes under its by automated clearinghouses. In the Regulatory Improvement Program. public sector, about half of social security payments and two-thirds of federal salary Complaints about and retirement payments are made by State Member Banks direct deposit. The benefits to consumers from the The Board and the Federal Reserve Banks Electronic Fund Transfer Act are diffi- investigate complaints against state memcult to measure because they cannot be ber banks and forward to appropriate isolated from consumer protections that enforcement agencies complaints that would have been provided in the absence involve other creditors or businesses. In of regulation. Statistics from examination 1989 the System received 2,146 comreports do not suggest widespread viola- plaints against state member banks, tion of consumer rights established by nonmember banks, and other creditors the act. In 1989, according to reports and businesses: 1,846 by mail, 294 by by the federal agencies that regulate telephone, and 6 in person (see the financial institutions, about 16 percent of accompanying table). The Board also institutions were not in full compliance received 963 written inquiries concernwith the regulation. The violations prima- ing consumer credit and banking policies rily involved the failure of institutions and practices. In responding, the Board's to provide one or more disclosures to staff gave consumers brochures on the consumers. general issues plus explanations of laws, Data from the Board's Consumer Com- regulations, and banking practices speplaint Control System do not indicate cific to their complaints or inquiries. serious consumer problems with elec- The Board's staff continues regularly tronic transactions. In 1989, forty-eight to review the System's handling of com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 76th Annual Report, 1989 plaints by sending follow-up question- cerned credit denial on nonprohibited naires to complainants to assess percep- bases (such as length of residency) and tions of how well the System did. In other unregulated lending practices (such 1989, 57 percent of the complainants as release or use of credit information). returned the questionnaires. Approxi- About 23 percent involved disputes about mately 63 percent reported that the interest on deposits and general practices explanations received were clear and concerning deposit accounts. understandable; 63 percent were satisfied with the promptness in handling; 96 Unregulated Practices percent said they were treated courteously by Federal Reserve staff; 93 percent In 1989 the Board continued to monitor, said they would contact the Federal under section 18(f) of the Federal Trade Reserve again if they had another prob- Commission Act, complaints about banklem with a bank; and 56 percent found the ing practices that are not subject to resolution of their complaints acceptable. existing regulations to focus on those that The proportion of those satisfied with the may be unfair or deceptive. Four cateoutcome is lower relative to the propor- gories each accounted for 6 percent or tion of those satisfied with the System's less of the 1,120 complaints: credit handling of complaints because many of denial based on credit history (sixtythe complaints involved practices that, eight), discrepancies in deposit accounts while of concern to consumers, are (sixty- one), debt collection practices permissible banking practices. (fifty- four), and miscellaneous other A second table summarizes the nature practices (seventy). Many of the comand resolution of complaints filed against plaints about credit denials based on state member banks in 1989, classified credit history indicated that the appliaccording to bank functions. Of the 839 cant underestimated the importance complaints received about state member lenders give to a poor credit history or a banks, 55 percent concerned loan func- lack of borrowing experience when tions: 7 percent alleged discrimination on considering the applicant's credita prohibited basis, and 48 percent con- worthiness. Complaints about discrep- Consumer Complaints Received by the Federal Reserve System, by Subject, 1989 Subject State b a m n e k m s ber le O n t d h e e r r s1 Tlortitaai\ Regulation B (Equal Credit Opportunity).. 60 45 105 Regulation E (Electronic Fund Transfers). 29 19 48 Regulation M (Consumer Leasing) , 4 4 8 Regulation Q (Interest on Deposits) 41 48 89 Regulation Z (Truth in Lending) 184 294 478 Regulation BB (Community Reinvestment) 0 5 5 Regulation CC (Expedited Funds Availability). 21 50 71 Fair Credit Reporting Act 23 67 90 Fair Debt Collection Practices Act 9 9 18 Fair Housing Act 0 2 2 Municipal Securities Dealer Regulation 0 2 2 Transfer agents 1 1 2 Unregulated bank practices 467 653 1,120 Other2 0 108 108 Total. 839 1,307 2,146 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 151 ancies in deposit accounts usually in- Consumer Advisory Council volved cases in which consumers had noticed errors on their savings or check- The Consumer Advisory Council (CAC) ing account statements. Complaints about met in March, June, and October to debt collection tactics usually involved advise the Board on its responsibilities objections to the manner in which banks under the consumer credit protection were attempting to collect outstanding laws and to discuss other issues dealing debts. Miscellaneous complaints covered with financial services to consumers. The a wide range of practices, including council's thirty members come from merchants' minimum-charge require- consumer organizations, financial instiments on credit cards, the number of tutions, academia, and state government. points charged on a mortgage loan, or a Council meetings are open to the public. lender's failure to close on a mortgage During the year, the council considloan by the agreed settlement date. ered issues related to the Community Consumer Complaints Received by the Federal Reserve System, by Function and Resolution, 1989 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 839 60 400 192 29 8 150 Percent 100 7 48 23 3 1 18 Complaints about state member banks, by type Insufficient information* 23 0 15 3 0 0 5 Information furnished to complainant2 79 6 32 17 1 2 21 Bank legally correct No accommodation 252 26 118 53 11 3 41 Accommodation made3 93 4 53 17 1 0 18 Clerical error, corrected 103 3 45 31 10 0 14 Factual dispute4 44 0 18 12 0 1 13 Bank violation, resolved5 10 4 2 1 2 0 1 Possible bank violation, unresolved6 2 0 10 0 0 1 Customer error 21 2 4 11 0 0 4 Pending, December 31 212 15 112 47 4 2 32 Complaints referred to other agencies7 1,307 52 591 258 19 13 374 Total, all complaints 2,146 112 991 450 48 21 524 1. The staff has been unable, after follow-up correspondence that can be resolved only by the courts. Consumers wishing to with the consumer, to obtain sufficient information to process pursue the matter may be advised to seek legal counsel or legal the complaint. aid or to use small claims court. 2. When it appears that the complainant does not understand 5. In these cases a bank appears to have violated a law or the law and that there has been no violation on the part of the regulation and has taken corrective measures voluntarily or as bank, the Federal Reserve System explains the law in question indicated by the Federal Reserve System. and provides the complainant with other pertinent information. 6. When a bank appears to have violated a law or regulation, 3. In these cases the bank appears to be legally correct but customers are advised to seek civil remedy through the courts. has chosen to make an accommodation. Cases that appear to involve criminal irregularity are referred 4. These cases involve factual disputes not resolvable by to the appropriate law enforcement agency. 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

152 76th Annual Report, 1989 Reinvestment Act and the Home Mort- lation C to implement amendments to the gage Disclosure Act, disclosures for Home Mortgage Disclosure Act. credit and deposit accounts, the restruc- During the year, the CAC considered turing of the savings and loan industry, several issues related to disclosures given and consumer use of financial services, to consumers. The council discussed the among others. In March, CAC members Board's proposed amendments to Reguoffered views on the interagency policy lation Z, which require creditors to give statement on CRA; the statement calls consumers early disclosures about home for financial institutions to implement equity lines of credit and set substantive CRA programs, to be managed at the limits on some aspects of these plans. highest levels of the institution, that The final regulation reflected council involve outreach and dialogue, and en- recommendations concerning the form courages institutions to fully document and content of disclosures to consumers. their CRA activities. The CAC also In June the council discussed proposals discussed the need for affordable housing for truth in savings legislation. and received an update about media The council also discussed the use of reports of mortgage lending patterns by credit cards in telemarketing operations. banks in Atlanta and Detroit that showed Consumers and financial institutions may wide disparities between predominately encounter problems when goods purwhite and predominately minority neigh- chased with a credit card from telemarkborhoods. In June the council discussed eters are not delivered or are of unsatispublic disclosure of CRA ratings. factory quality. (The Truth in Lending The council's Community Affairs Act places certain limits on the right of Committee looked at ways to address consumers to withhold payment for faulty community development needs by pro- merchandise; for example, disputed sales moting partnerships among lenders, non- have to occur in the same state or within profit development organizations, and 100 miles of the consumer's home.) government agencies. In June the com- Financial institutions face potential finanmittee presented a report on community cial loss because they are responsible for development credit unions (CDCUs), responding to consumer claims and posfinancial cooperatives that primarily sibly reversing charges to their accounts. serve low-income communities. One Banks are also at risk if they hold the member suggested that sponsoring account of a merchant who engages in CDCUs is one way that banks might meet fraudulent or deceptive practices. The obligations under CRA. In October the council passed a resolution suggesting council passed a resolution suggesting that the Congress hold hearings to deterspecific mention of CDCUs in the inter- mine whether legislative amendments to agency policy statement on CRA and in the claims and defenses section of the appropriate Federal Reserve programs Truth in Lending Act are needed to and publications. The policy statement address telemarketing fraud. The resolugives examples of approaches financial tion also asked that the Congress consider institutions might take to support commu- both criminal and civil penalties for salesnity development lending and the provi- draft laundering and telemarketing fraud. sion of other financial services. The The council received briefings on council asked that the Board consider legislative proposals to restructure the listing CDCUs as one of those examples. savings and loan industry. It adopted a In October the council also discussed resolution urging the Congress to work the Board's proposed revisions to Regu- immediately and cooperatively for rapid Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 153 resolution of the crisis; the resolution sures, and consumer surveys conducted also supported the timely and positive by the Board show that most depositors approach of the Bush administration in say the information they receive is adeaddressing this problem. quate. The Board believes the bill would A roundtable discussion among mem- add to an already heavy regulatory burbers of the council and of the Board, den, particularly for small institutions. known as the "Members Forum," was The Board offered technical changes initiated this year to give council mem- should the Congress decide to proceed bers the opportunity to offer their views with the bill. These include amendments on a variety of topics. Forum discussions to make more meaningful to consumers focused on issues identified by the Board. the disclosure of the interest yields on During the year, council members dis- funds deposited for less than one year and cussed matters such as the state of com- to conform the civil liability provisions munity development lending in their more closely to other consumer proteccities and trends they have noticed in tion statutes. consumers' use of financial services. In a resolution, the council asked that the Board encourage banks to refer cus- Flood Insurance tomers to nonprofit credit-counseling ser- In May the Board testified before a vices that adhere to ethical and business- House Banking subcommittee on the like codes of operations. Federal Reserve's enforcement of the Flood Disaster Protection Act, which Testimony and Legislative prohibits federally regulated banks and Recommendations savings and loan associations from making loans in a designated flood In 1989 the Board testified before Conhazard area unless any improvements on gress about truth in savings, flood insurreal property that secures the loan is ance, the Community Reinvestment Act, covered by flood insurance. The Board basic banking and government-check reported that specially trained examiners cashing, and loan discrimination. routinely review compliance during regularly scheduled examinations of Truth in Savings state member banks. In 1988, 83 percent of the institutions examined had no flood In May the Board testified before a insurance violations, compared with 78 subcommittee of the House Banking, percent in 1987 and 81 percent in 1986. Finance and Urban Affairs Committee Among banks with violations, most had about a proposed truth in savings bill that failed to record the fact that they had would require institutions to give certain checked the need for flood insurance; information about the terms of deposit few violations involved a failure to accounts to prospective and existing obtain insurance when it was required. account holders. Institutions also would have to disclose rates and costs in advertisements and to inform account holders Community Reinvestment Act of changes in account terms. The Board supported the concept of In June the Board testified before a account disclosures but saw no compel- subcommittee of the Senate Committee ling need for legislation. A majority of on Banking, Housing and Urban Affairs state member banks already give disclo- on legislative proposals relating to the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 76th Annual Report, 1989 Community Reinvestment Act, and in sound CRA performance before pursuing July about the Federal Reserve's imple- expansion. mentation of the CRA. The Board endorsed public disclosure of CRA perfor- Basic Banking and Check Cashing mance through a written summary of the examiner's evaluation (with supporting The Board testified in June before the information) but opposed other aspects Senate Banking subcommittee (and in of the proposals before the Congress. October before a subcommittee of the The Board testified that, in enforcing House Committee on Banking, Finance the CRA, it has tried to balance the and Urban Affairs) about legislative competing interests and responsibilities proposals that would require institutions of banks and community groups. The to offer specific banking services. The Board outlined its CRA program, which Board opposed legislation that mandates integrates compliance examinations, a specific services, preferring instead a community affairs program, and an anal- voluntary approach that lets institutions ysis of CRA performance in deciding design products to meet the specific applications by banks and bank holding needs of their customers. Surveys by the companies. During CRA examinations, Board, the General Accounting Office, examiners collect information that, taken and others support the view that basic as a whole, represents the bank's CRA accounts and check-cashing services are record. As part of the community affairs not so scarce as to warrant legislation. program, community affairs offices at the Moreover, alternatives like electronic Reserve Banks share their expertise in delivery of government payments show community development financing with strong promise for addressing the conbanks, bank holding companies, and the cerns prompting the bills and should be public sector through educational semi- encouraged by the Congress. nars and publications on the tools and The Board expressed the following techniques of community development concerns about the bills: lending. The Board also considers CRA • Setting fees based on an average performance when reviewing appli- industry cost means that some institutions cations for mergers, acquisitions, or would not recover costs while others branching. might exceed them. And, while financial In the past, institutions often made institutions would have to offer these commitments during the application pro- services at cost, stores and other check cess to address weaknesses in their cashers could continue to offer them at a records, commitments that the Board profit. took into account in deciding the applica- • Letting the Board suspend mandation. About one-third of some 150 CRA- tory check cashing for certain types of protested applications were approved checks would not effectively minimize with such commitments. Under the recent fraud because of the time it takes to interagency policy statement on CRA, discover patterns of fraud. commitments may be used to address • A single, federally mandated bankspecific problems in an otherwise satis- ing service could inhibit the development factory record but generally will not of different and possibly cheaper products compensate for a seriously deficient tailored to the special and changing needs record of performance. The Board's of low-income and elderly individuals testimony reiterated the interagency (for example, savings accounts with a policy that institutions should have a money-order feature, and accounts with Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 155 per-check fees in place of monthly main- able to make a formal finding of actual tenance charges). lending discrimination. They do, however, fully explore questionable variations in lending practices with bank Loan Discrimination personnel to assure that illegal discrimination is not taking place. In October the Board testified before a The Federal Reserve's procedures give Senate Banking subcommittee on its special guidance for handling complaints report to the Congress concerning mort- of loan discrimination by state member gage loan discrimination. The main banks and authorize on-site investigapoints of the report, which was required tions by Reserve Bank staff as needed. by the recent thrift legislation, are sum- But the Federal Reserve receives few marized below. such complaints, which could mean several things: that discrimination rarely occurs; that discouraged loan applicants Profile of State Member Banks are unaware they have been discrimi- The Board's enforcement authority is nated against; that they do not know their limited to state chartered banks that are rights under the antidiscrimination laws; members of the Federal Reserve System or that they do not believe it is worth (about 8 percent of commercial banks). filing a complaint. Most serve rural areas, and about 90 percent of them have total assets of less Racial Disparities than $500 million. They originate less in Home Mortgage Lending than 3 percent of all home purchase loans Recent studies have examined the relaand thus are not a significant presence in tionship between the racial make-up of the mortgage lending industry. neighborhoods and home mortgage lending in Atlanta, Boston, Cleveland, and Detroit. The studies have found differ- Detecting Loan Discrimination ences in lending patterns across neighbor- To detect possible loan discrimination by hoods but draw no definitive conclusions state member banks, compliance examabout the presence or extent of racial iners make a comprehensive assessment discrimination. Regardless of the cause, of lending practices, comparing the such findings should prompt institutions treatment of members of a class protected to review their product offerings in by the law with other applicants. But any minority neighborhoods, an action emdiscrimination that might exist in the phasized in the March 1989 interagency financial system today is increasingly policy statement on CRA. subtle and difficult to define and substantiate. Consequently, even these extensive examination procedures cannot totally Mortgage Lending Initiative guarantee the absence of isolated in- under Review stances of discrimination. Flexible credit The Board discussed several initiatives standards, the different factors used to currently under review by the Board and gauge creditworthiness, and variations in other member agencies of the FFIEC: pricing and structure that can occur for • Creating mortgage review boards legitimate business reasons are among representing consumer groups and lendthe factors that make substantiation diffi- ers to give rejected loan applicants a cult. As a result, examiners are seldom second chance Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 76th Annual Report, 1989 • Producing educational pamphlets suggests a more detailed notice about for consumers and lenders to help assure rights under the Fair Credit Reporting nondiscriminatory lending Act. • Sharing among the agencies of The FDIC again recommended amendinformation obtained from community ing the ECOA to prohibit discrimination contacts and others to help enhance on the basis of handicap, a change that examiners' understanding of the local would bring it into conformity with recent community and their ability to judge an amendments to the Fair Housing Act. • institution's lending efforts • Providing banks with information on their lending patterns to give management a more complete picture of the bank's mortgage lending efforts • Reviewing examination and training procedures regarding loan discrimination. 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 to the underlying statutes. The FDIC recommended several revisions to the Equal Credit Opportunity Act and Regulation B. The FDIC suggested that creditors' denial notices include the name, address, and telephone number of the office that the applicant could contact for further information about the reasons for denial of credit. Encouraging a credit applicant to contact the creditor for a more complete explanation of the reasons for denial, the FDIC believes, would help reduce the number of complaints and inquiries to the financial regulatory agencies. In addition, to reduce confusion on the part of consumers who are turned down for credit, and to reduce the involvement of federal regulators, the FDIC also Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

157 Litigation During 1989 the Board of Governors was and of Manufacturers National Corporanamed in thirty-nine pending lawsuits, tion to expand activities of trust company compared with forty-four in 1988. Of the subsidiaries in Florida (73 Federal fourteen new lawsuits filed in 1989, eight Reserve Bulletin 609 and 735). The raised questions under the Bank Holding cases have been stayed pending Supreme Company Act, compared with six in Court review of Continental Illinois 1988. As of December 31, 1989, fifteen Corp. v. Lewis, 827 F.2d 1517 (11th cases were pending, nine of which in- Cir. 1987), modified, 838 F.2d 457, volved questions under the Bank Holding prob.juris. noted, 109S. Ct. 2446(1989). Company Act. In National Association of Casualty and Surety Agents v. Board of Governors, Nos. 87-1354 and 87-1355 (D.C. Cir- Bank Holding Companies cuit, filed July 29, 1987), the Court of Antitrust Action Appeals upheld (856 F.2d 282) Board In 1989 no bank holding company acqui- orders dated June 29, 1987, and July 2, sitions or mergers that had been approved 1987, permitting Sovran Financial by the Board were challenged by the Corporation and MNC Financial, Inc., Department of Justice under antitrust to retain insurance agency activities laws, and no such cases were pending (73 Federal Reserve Bulletin 672 and from previous years. 740). Several other cases involved petitions for review of similar Board orders; all were denied review by court orders Bank Holding Company Act— dated January 19, 1989. These cases are Review of Board Actions as follows: National Association of In CBC, Inc. v. Board of Governors, No. Casualty and Surety Agents v. Board of 86-1001 (10th Circuit, filed January 2, Governors, No. 87-1644 (D.C. Circuit, 1986), petitioner sought review of the filed November 14, 1987), No. 87-1801 Board's amendment to Regulation Y (D.C. Circuit, filed December 21,1987), requiring certified financial statements in No. 88-1001 (D.C. Circuit, filed January annual reports for bank holding com- 4, 1988), No. 88-1206 (D.C. Circuit, panies with assets of $150 million or filed March 18, 1988), No. 88-1245 more (50 Fed. Reg. 50,950, December (D.C. Circuit, filed March 30, 1988), 13,1985). The Board's order was upheld and No. 88-1270 (D.C. Circuit, filed by the Court of Appeals (855 F.2d 688) April 7, 1988); and Independent Insuron August 30, 1988, and on March 27, ance Agents of America, Inc. v. Board of 1989, the Supreme Court denied a peti- Governors, No. 87-1686 (D.C. Circuit, tion for certiorari (109 S. Ct. 1568). filed November 19, 1987). On May 30, In Lewis v. Board of Governors, Nos. 1989, the Supreme Court denied a peti- 87-3455 and 87-3545 (1 lth Circuit, filed tion for certiorari in these cases (109 June 25 and August 3, 1987), petitioner S.Ct. 2430). seeks review of Board orders dated May In American Land Title Association v. 29 and July 1, 1987, approving applica- Board of Governors, No. 88-1872 (D.C. tions of Chemical New York Corporation Circuit, filed December 16, 1988), peti- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 76th Annual Report, 1989 tioner sought review of a Board order action was dismissed on November 16, dated November 17,1988, approving the 1989. application by First Wisconsin Corpora- In Babcock and Brown Holdings, Inc. tion to acquire a company engaged in title v. Board of Governors, No. 89-70518 insurance agency activities (75 Federal (9th Circuit, filed November 22, 1989), Reserve Bulletin 31). The case involved petitioners seek review of a Board order the application of exemption G from the dated October 25, 1989, in which the prohibition on insurance activities con- Board requested the Federal Deposit tained in section 4(c)(8) of the Bank Insurance Corporation to condition de- Holding Company Act. The Court of posit insurance for a proposed District Appeals upheld the Board's order on bank on Board approval of the acquisition December 29, 1989 (892 F.2d 1059). of control of the bank by Babcock and In Independent Insurance Agents of Brown Holdings, Inc., a brokerage firm. America, Inc. v. Board of Governors, The case is pending. No. 89-4030 (2nd Circuit, filed March 9, 1989), petitioner sought review of a Board order dated March 3,1989, granted Other Litigation Involving at the request of Merchants National Challenges to Board Procedures Corporation, determining that the non- and Regulations banking prohibitions of the Bank Holding In 1989, ten actions were commenced, Company Act do not apply to activities of were pending, or were dismissed under banks (75 Federal Reserve Bulletin 388). The Court of Appeals upheld the Board's the Financial Institutions Supervisory Act order on November 29, 1989 (890 F.2d and the Glass-Steagall Act. 1275). A second case raising the identical issue, Independent Insurance Agents of Financial Institutions America v. Board of Governors, No. Supervisory Act 89-4046 (2nd Circuit, filed April 6, 1989), has been held in abeyance. In Stoddard v. Board of Governors, No. In Synovus Financial Corporation v. 88-1148 (D.C. Circuit, filed February Board of Governors, No. 89-1394 (D.C. 25, 1988), the Court of Appeals (868 Circuit, filed June 21, 1989), petitioner F.2d 1308) vacated a removal order seeks review of a Board order dated May initiated by the Office of the Comptroller 22, 1989, approving the application of of the Currency against a former officer SouthTrust Corporation to acquire a and director of Michigan National Bank, national bank in Georgia by relocating an who had resigned before the institution Alabama national bank subsidiary across of removal proceedings. Section 905 of state lines pursuant to 12 U.S.C. §30 the Financial Institutions Reform, Re- (75 Federal Reserve Bulletin 516). The covery, and Enforcement Act of 1989 case is pending. (FIRREA) amended the statute to permit In Executive National Bank v. Board removal actions to be brought against of Governors, Nos. 89-4831, 89-4852 nonincumbents. (5th Circuit, filed November 6, 1989), In Bonilla v. Board of Governors, No. petitioners sought a declaratory judgment 88-1464 (7th Circuit, filed March 11, that a pending application for approval to 1988), petitioner sought review of a acquire the petitioner bank was deemed Board order prohibiting him from particapproved under the Bank Holding Com- ipating in the affairs of any insured bank pany Act's ninety-one day rule. The or bank holding company. The case was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 159 dismissed by stipulation on November (73 Federal Reserve Bulletin 729). The 14, 1989. cases were dismissed by stipulation on In Van Dyke v. Board of Governors, December 28, 1989. No. 88-5280 (8th Circuit, filed July 18, In Securities Industry Association v. 1988), the Court of Appeals (876 F.2d Board of Governors, No. 89-1127 (D.C. 1377) affirmed the Board's removal order Circuit, filed February 16, 1989), the against a national bank president and petitioner seeks review of a Board order director who had engaged in check kiting dated January 18, 1989, at the request of involving an account in his bank. J.P. Morgan & Co. Incorporated, The In MCorp v. Board of Governors, No. Chase Manhattan Corporation, Bankers 89-1677 (S.D. Texas, filed May 2, Trust New York Corporation, Citicorp, 1989), the district court (101 Bankr. 483) and Security Pacific Corporation, which entered a preliminary injunction against expanded the scope of securities that the Board enjoining pending and future could be underwritten and dealt in by enforcement actions against a bank bank holding companies to include all holding company that was in bank- types of debt and equity securities, ruptcy. The case is now awaiting decision subject to certain conditions (75 Federal on the Board's appeal to the Fifth Cir- Reserve Bulletin 192). The case is cuit (No. 89-2816). A related case, pending. MCorp v. Board of Governors, No. In Securities Industry Association v. CA3-88-2693-F (N.D. Texas, filed Board of Governors, No. 89-1730 (D.C. October 28,1988), is stayed pending the Circuit, filed November 29, 1989), the outcome of the Fifth Circuit appeal. petitioner seeks review of a Board order In Board of Governors v. Consoli- dated October 30, 1989, approving an dated Bancorp, No. W-89-CA251 application by Bankers Trust New York (W.D. Texas, filed September 8, 1989), Corporation for its subsidiary to act as the Board sought to enforce an adminis- agent in the placement of all types of trative subpoena permitting inspection of securities and to buy and sell all types the records of a bank holding company in of securities on the order of investors as bankruptcy. In Consolidated Bancorp v. a "riskless principal" (75 Federal Reserve Board of Governors, No. AP-89-6081 Bulletin 829). The case has been held in (Bankr. W.D. Texas, filed September 15, abeyance pending the determination in 1989), the bank holding company sought Securities Industry Association v. Board to enjoin enforcement of the subpoena. of Governors, No. 89-1127, discussed Both cases were dismissed by stipulation above. on November 28, 1989. Other Actions Glass-Steagall Act In Teichgraeber v. Board of Governors, In Chase Manhattan Corporation v. No. 87-2505-0 (D. Kansas, filed Octo- Board of Governors, Nos. 87-1333 and ber 16, 1987), the court on March 20, 87-1580 (D.C. Circuit, filed July 20, 1989, granted the Board's motion for 1987), petitioner and the applicant sought summary judgment with respect to the review of a Board order dated July 17, plaintiffs request for disclosure of docu- 1987, conditionally approving the appli- ments under the Freedom of Information cation of Chase Manhattan Corporation Act. to underwrite and deal in mortgage- In Cohen v. Board of Governors, No. related securities to a limited extent 88-1061 (D. New Jersey, filed March 7, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

160 76th Annual Report, 1989 1988), plaintiff seeks to require disclosure of documents under the Freedom of Information Act. The case is pending. In Fidata Trust Company New York v. Board of Governors, No. 88-4846 (D. New Jersey, filed November 9, 1988), plaintiff seeks to enjoin the Board from disclosing certain documents involved in the Cohen case. The case was dismissed on January 30, 1990. In White v. Board of Governors, No. 88-623 (D. Nevada, filed July 29,1988), the plaintiff alleges discriminatory practices under the Age Discrimination in Employment Act. The case is pending. In First Savings Bank v. Board of Governors, No. 89-4117 (D. South Dakota, filed August 31, 1989), the plaintiff sought to enjoin the Board from granting final approval of a branch application. The case was dismissed on November 21, 1989. In Consumers Union of U. S., Inc. v. Board of Governors, No. 89-3008 (D.D.C. filed November 1, 1989), the plaintiff challenges various amendments to Regulation Z implementing the Home Equity Loan Consumer Protection Act. The case is pending. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

161 Legislation Enacted In 1989 the Congress passed a bill to Title III amends the Home Owners' reform the structure and regulation of Loan Act to create the Office of Thrift savings institutions. One of the most Supervision (OTS) under the Designificant pieces of banking legislation partment of the Treasury. This title in recent history, the law reaches beyond gives the OTS general responsibility for the thrift industry to affect all financial the supervision and regulation of fedinstitutions and their regulators. The eral and state savings associations and following discussion briefly summarizes savings and loan holding companies. each title of the act and then describes in Title III contains provisions intended to more detail those with a significant strengthen the liquidity and capibearing on the Federal Reserve and the talization of thrifts; it also restricts the institutions it regulates. expansion of savings associations that do not maintain a minimum of 70 percent of their portfolios in certain assets related Financial Institutions Reform, to housing finance, such as home loans Recovery, and Enforcement or mortgage-backed securities. Title III Act of 1989 extends to thrifts the restrictions on Public Law 102-73, the Financial Insti- transactions with affiliates and loans to tutions Reform, Recovery, and Enforce- insiders that are already applicable to ment Actof 1989 (FIRREA), was enacted banks. on August 9, 1989. Title I states the Title IV abolishes the Federal Home purposes of FIRRE A, which include Loan Bank Board and the Federal Savings promoting a safe system of affordable and Loan Insurance Corporation (FSLIC) housing finance, improving the supervi- and provides for the transfer of certain sion of savings associations and the safety regulations, functions, and employees to and soundness of federal deposit insur- other agencies. ance funds, and dealing expeditiously Title V establishes the Oversight Board with failed savings associations. and the Resolution Trust Corporation Title II addresses the Federal Deposit (RTC). The Oversight Board is to oversee Insurance Corporation (FDIC). The act and establish policy for the RTC, which increases the number of members of the is to act as conservator or receiver for Board of the FDIC from three to five. It failing savings and loan associations that makes the FDIC responsible for insuring were insured by the FSLIC before the the deposits of the savings and loan enactment of FIRRE A. The RTC will industry and gives the FDIC certain also liquidate the Federal Asset Disposiexamination and regulatory responsibili- tion Association, which had been created ties over thrift institutions. This title also by Federal Home Loan Bank Board to clarifies the FDIC's powers as conserva- liquidate certain assets of failed thrifts. tor or receiver of failed depository insti- Title V also establishes the Resolution tutions under its jurisdiction and further Finance Corporation (Refcorp) to prodefines the FDIC's authority to set up vide funds to the RTC through the new or bridge banks to receive the assets issuance of bonds in an amount up to $30 and liabilities of failed institutions. billion. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

162 76th Annual Report, 1989 Title VI amends the Bank Holding agencies, including the Federal Reserve, Company Act to allow bank holding com- to monitor and review state and federal panies to acquire thrift institutions. standards for appraisals made in connec- Title VII establishes the Federal tion with federally related transactions. Housing Finance Board to take over the Title XI also requires each of the regulasupervision of the Federal Home Loan tory agencies and the RTC to develop Banks from the Federal Home Loan certain minimum appraisal standards for Bank Board. This title also amends the use in connection with transactions by the Federal Home Loan Bank Act to deny institutions each oversees. advances to institutions that are not Title XII creates a Credit Standards members of a Federal Home Loan Bank Advisory Committee, to include the and to extend eligibility for membership Chairman of the Federal Reserve Board to any depository institution meeting or his designee, to recommend consistent certain requirements for involvement credit standards to be employed by all in residential mortgage lending. In insured depository institutions. The title addition, title VII amends the Federal also simplifies the examination ratings Home Loan Mortgage Corporation Act specified in the Community Reinvestto restructure the Federal Home Loan ment Act and requires that ratings of Mortgage Corporation and makes tech- institutions be made available to the nical amendments to numerous other public. In addition, title XII contains federal statutes. provisions concerning a General Ac- Through amendments to the Bank counting Office study of the credit union Conservation Act, title VIII grants more system and compensation of employees clearly articulated powers to the Comp- of federal financial regulatory agencies. troller of the Currency to appoint a Title XIII authorizes state housing conservator or receiver for a national finance agencies and nonprofit organizabank; the title also extends such powers tions to purchase mortgage-related assets over all other federally chartered or from the RTC or from institutions under federally licensed depository institution the conservatorship or receivership of subject to the Comptroller's supervision. the FDIC. The agencies must invest any Title IX increases the civil and crim- profits from such purchases in low- and inal sanctions available to federal agen- moderate-income housing. cies that regulate financial institutions Title XIV provides a tax exemption for and otherwise enhances the powers of the RTC and Refcorp, contains provisions agencies to supervise and control depos- relating to the taxation of transactions itory institutions. involving federal financial assistance, Title X orders studies of federal de- and requires reports and studies from the posit insurance jointly by the regulatory Secretary of the Treasury. agencies and separately by the General The following summary describes in Accounting Office; it also orders the more detail portions of titles II, III, VI, Federal Reserve Board to study banking and IX that have particular relevance to services and the Comptroller of the Cur- the Federal Reserve System and to the rency to study the safety and soundness institutions it regulates. of government-sponsored enterprises. Title XI amends the Federal Financial Title II Institutions Examination Council Act to establish an appraisal subcommittee with Under title II, the FDIC will now insure members from each of the regulatory the deposits of savings and loan associa- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 163 tions as well as of banks. The title creates and Treasury jointly) and entrance fee (to two separately maintained insurance be determined by the FDIC) to the funds within the FDIC: the Bank Insur- appropriate funds. ance Fund (BIF), essentially a continua- A bank holding company may merge a tion of the FDIC's current insurance fund, savings association subsidiary into a suband the Savings Association Insurance sidiary bank, subject to the approval of Fund (SAIF), which replaces the FSLIC the Federal Reserve Board, but the bank insurance fund. All institutions previ- must pay assessments to SAIF on deously insured by the FDIC and the FSLIC posits attributable to the savings associawill automatically be insured by the new tion. In order to approve such a merger, units. Under the new law, the FDIC may the Federal Reserve must consider the suspend the insurance of any insured size of the bank holding company in depository institution on 30 days' notice relation to the savings association, the rather than the 120 days' notice previ- nature of the transaction, and whether ously required, and under certain circum- applicable capital standards are met. In stances it may temporarily suspend the addition, the thrift institution must be insurance of an institution. When evalu- deemed a bank at the time of the merger ating an institution's application for insur- for purposes of considering the interstate ance, the FDIC must consider certain banking provisions of the Bank Holding financial criteria and may deny the appli- Company Act and of relevant state law. cation on the basis of those criteria. Cross-Guarantees Conversion Transactions Depository institutions shall be held Title II places a five-year moratorium on liable for any losses incurred by the the conversion of deposit coverage be- FDIC because of the default of any tween BIF and SAIF. The FDIC may commonly controlled depository instituwaive the moratorim period when (1) the tion or because of any assistance provided conversion is in connection with the to such an institution in danger of default. acquisition of a SAIF member in danger The FDIC may waive this provision of default, if the FDIC and the RTC agree under certain circumstances, and the new that the benefits to SAIF or the RTC law provides an exclusion for institutions exceed the loss of assessment income to acquired in debt-collection proceedings SAIF, or (2) the conversion occurs in or in connection with certain FSLICconnection with the acquisition of a BIF assisted transactions. member in danger of default, if the FDIC The title clarifies and details the powers finds that the benefits to BIF outweigh the of the FDIC as conservator or receiver, loss of assessment income to BIF, or (3) including its powers to establish new or where the conversion does not involve a bridge banks, repudiate contracts, and substantial portion of the institution's de- transfer assets. The title also covers the posits. Savings associations may convert requirements for establishing a valid to bank charters but must remain mem- claim against the FDIC as receiver or bers of SAIF for the duration of the conservator as well as procedures for the moratorium. determination and review of claims. Any depository institution participat- The title generally prohibits banking ing in a conversion transaction must pay agencies, including the Federal Reserve an exit fee (to be determined by the FDIC Board, from allowing any insured depos- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

164 76th Annual Report, 1989 itory institution under their supervision ings associations or savings and loan to include any unidentifiable intangible holding companies. asset acquired after April 12, 1989, in capital for the purpose of compliance with capital standards. Title IX Title IX broadens the class of persons subject to enforcement orders by any Title III federal financial regulatory agency. The Title III brings savings associations under class now extends beyond directors, the requirements of sections 23A and officers, and employees to include any 23B of the Federal Reserve Act, which "institution-affiliated party:" agents, perprohibit or restrict certain transactions sons required to file change-in-control between member banks and their affili- notices, controlling shareholders, shareates, including loans to or purchases of holders that participate in the affairs of securities issued by the affiliate. In addi- the institution, and under certain circumtion to these restrictions, savings associ- stances, independent contractors. ations may not (1) extend credit to an affiliate unless the affiliate engages in activities permissible for a bank holding Cease and Desist Orders company, (2) purchase or invest in secu- Title IX clarifies the power of federal rities issued by an affiliate, or (3) engage banking agencies to issue cease and desist in any affiliate transaction that the Direcorders that require affirmative action. tor of OTS has chosen to restrict for The title declares that such orders can reasons of safety and soundness. include reimbursement, restitution, reci- Savings associations are also now sion, or other actions the agency may required to comply with the restrictions consider appropriate. Federal banking contained in section 22(h) of the Federal regulators may also place limits on the Reserve Act governing extensions of growth of an institution. credit to executive officers, directors, The title reduces the standard for and principal shareholders. issuing a temporary cease and desist order to a showing of a "significant" rather than a "substantial" dissipation of Title VI assets. The title also declares that a temporary corrective cease and desist Title VI amends section 4 of the Bank order may be issued whenever an institu- Holding Company Act to allow the Board tion's records are so incomplete or inacto approve acquisitions of savings associcurate that determining the true financial ations by bank holding companies as an condition of the institution is impossible. activity closely related to banking. Companies holding nonbank banks grandfathered under the Competitive Removal and Prohibition Equity Banking Act will be allowed to acquire, as a passive investment, up to 15 Whenever a person's conduct causes percent of the outstanding shares of harm to a financial institution or prejunonaffiliated banks or savings associa- dices the interests of depositors, the fedtions. Such companies may also make eral agencies regulating financial institupassive investments subject to less strin- tions may initiate proceedings to remove gent conditions in certain troubled sav- that person from any institution with Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 165 which he or she is affiliated or to prohibit The agencies must publish all their that person from participating in the formal enforcement orders, but they may affairs of any insured depository institu- delay publication for a reasonable time tion; the agencies need not quantify the if public disclosure would seriously harm caused by the person in order to threaten the safety and soundness of an initiate such proceedings. institution. In addition, the agencies must The title intends orders to remove a submit annual reports to the Congress person or to prohibit participation to be concerning enforcement actions and other effective industry-wide. Generally, any enforcement efforts made during the person under such an order is prohibited year. from participating in the affairs of any Title IX gives the regulatory agencies insured bank, savings association, credit the authority to disapprove the appointunion, bank holding company or its sub- ment of directors and senior executive sidiary, foreign bank or bank holding officers for any depository institution or company, or farm credit institution, and depository institution holding company of certain governmental institutions. The that has been chartered or undergone a title allows agencies to begin enforcement change of control within the last two proceedings against an individual up to years, or that is not in compliance within six years after the person has ceased to minimum capital standards, or that is participate in the affairs of an institution, otherwise in troubled condition. and it raises the penalty for violations of The federal banking agencies are reremoval orders to the level of a felony quired to develop uniform rules and punishable with a fine of up to $1 million procedures for administrative hearings and a prison term of up to five years. within two years of enactment of FIR- REA and are required to establish a task force to report to Congress on the desir- Civil Money Penalties ability of delegating investigatory and The title expands the grounds on which a enforcement authority to regional offices federal bank regulatory agency may or banks. impose civil money penalties to include Insured depository institutions that the submission of late, inaccurate, false, engage outside auditors must give to the or misleading reports or other informa- auditors copies of their most recent tion and unsafe and unsound banking reports of condition and examination practices and, in certain cases, breaches reports and information concerning enof fiduciary duty. The civil money penal- forcement actions. ties that may be assessed have been No insured institution may discrimiarrayed in three tiers, to a maximum of nate against or discharge an employee for $1 million per day for violations that giving to a banking agency or federal law knowingly or recklessly cause substantial enforcement agency information conloss to the financial institution. cerning possible violations of law by the institution or by its officers, directors, or employees. The regulatory agencies may Other Provisions pay rewards for information that leads to Under title IX, federal banking agencies the imposition of criminal fines, or to the must make all supervisory records of a restitution of funds, or to civil penalties depository institution available to the exceeding $50,000. FDIC when it acts as receiver for that Title IX amends the Right to Financial institution. Privacy Act to specify that the exemption Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

166 76th Annual Report, 1989 in the act allowing the disclosure of bank customer records to federal supervisory authorities is applicable when the Federal Reserve Board is exercising its supervisory and regulatory functions with respect to a bank holding company, to its subsidiary, or to any institutionaffiliated party. The amendments also specify that the Board is exempt from the act when exercising its authority to extend credit. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

167 Banking Supervision and Regulation Substantial change occurred in the super- Department, the Office of Thrift Supervisory and regulatory structure of the vision. The act also set down capital banking industry in the United States in standards and other requirements for 1989. Major features were the passage of thrift institutions and enhanced the enthe Financial Institutions Reform, Recov- forcement powers of the supervisors of ery, and Enforcement Act (the savings federally insured depositories. Other and loan rescue bill); final approval of important provisions of FIRREA include risk-based capital guidelines; new exam- the establishment of a subcommittee of ination guidelines for highly leveraged the Federal Financial Institutions Examtransactions; and the approval of new ination Council charged with responsibilpowers for bank holding companies in ity for establishing appraisal standards the securities field. and monitoring state licensing standards To address serious and widespread for appraisers and the requirement that problems in the nation's savings and loan various studies be conducted by federal industry, the Congress passed and the agencies on such matters as federal de- President signed the Financial Institu- posit insurance and the need for capital tions Reform Recovery and Enforcement requirements for government sponsored Act (FIRREA) in August 1989. FIRREA enterprises. created the Resolution Trust Corporation Before passage of FIRREA, a large (RTC), a government agency charged number of insolvent thrift institutions, at with the responsibility for resolving the direction of the President, were insolvencies of thrift institutions, and placed in conservatorships under the established arrangements for financing control of the Federal Deposit Insurance the RTC. FIRREA also created the RTC Corporation. The Federal Reserve con- Oversight Board, a government agency tributed several examiners to assist in that is ultimately responsible for the assessing the condition of these thrift operations of the RTC. Chairman Green- institutions before they were placed in span serves as one of the cabinet-level conservatorships. The Federal Reserve members of the RTC Oversight Board. also provided, on a temporary basis, Other members include the Secretary of substantial resources in the initial staffing the Treasury, Nicholas F. Brady, who of the RTC Oversight Board. Staff memserves as Chairman; the Secretary of the bers of the Federal Reserve are also Department of Housing and Urban De- participating on various boards estabvelopment, Jack Kemp; and two "public" lished by FIRREA and in various studies members of the Board. required by the act. FIRREA also transferred responsibil- During 1989, the Federal Reserve took ity for thrift deposit insurance from the several important steps relating to capital Federal Savings and Loan Insurance standards for banks and bank holding Corporation to the Federal Deposit Insur- companies. Early in the year, the Board ance Corporation and transferred respon- issued final guidelines implementing the sibility for the supervision of thrift risk-based capital framework adopted in institutions from the Federal Home Loan July 1988 by the Basle Committee on Banks to a new office in the Treasury Banking Regulations and Supervisory Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 76th Annual Report, 1989 Practices, which includes supervisory proposed standard, which would become authorities from twelve industrial coun- effective on adoption, specifies a minitries. Known as the Basle Accord, the mum ratio of tier 1 capital to total assets risk-based capital framework encourages of 3 percent for organizations that have international banking organizations to the highest supervisory rating and no strengthen their capital positions and plans to expand. Banks with lower ratings reduces a source of competitive inequal- or plans to expand would be expected to ity arising from differences in super- have a ratio of at least 100 to 200 basis visory requirements among nations. points above the minimum level. This The U.S. guidelines implementing the same general stance will also apply to the Accord provide a uniform capital frame- risk-based capital standards. work applicable to all federally super- Besides requesting comment on the vised banking organizations. The frame- leverage standard of 3 percent, the prowork sets forth a definition of capital that posal also requests comment on a transiincludes tier 1 (primarily common equity tion standard for risk-based capital under and qualifying perpetual preferred stock which a banking organization could less goodwill) and total capital, which choose to conform either to the existing consists of tier 1 capital plus tier 2 capital minimum capital adequacy ratios (5.5 (perpetual preferred stock not eligible to percent primary capital and 6 percent be included in tier 1, hybrid capital total capital to total assets) or to the instruments, subordinated debt, limited- year-end 1990 risk-based capital standard life preferred stock, and loan loss re- of 7.25 percent. serves up to specified limits). Early in the year, the Federal Reserve The guidelines also include a frame- issued examination guidelines for highly work for assigning assets to one of four leveraged transactions (HLTs). These broad categories based on credit risk. In guidelines, which supersede those issued addition to on-balance-sheet assets, the in 1984, were issued because of the guidelines also take into account signifi- increasing volume of these types of cant off-balance-sheet risk exposure. transactions and their implications for The risk-based capital standards will the quality of bank asset portfolios and be phased in through the end of 1992. By the overall level of the risk exposure of year-end 1990, banking organizations are banks. The guidelines define HLTs to expected to meet an interim target ratio of include leveraged buyouts (LBOs) and tier 1 capital to risk-weighted assets of similar transactions, including mergers 3.62 percent, and total capital to risk- and acquisitions funded by debt that weighted assets of 7.25 percent. At year- results in high leverage. "High leverage" end 1992, these percentages rise to 4.0 was initially defined as a ratio of total percent and 8.0 percent respectively. debt to total assets of 75 percent or more. The Board also published for comment This definition was expanded in October a proposed leverage standard for bank 1989 when the Federal Deposit Insurance and bank holding company capital. This Corporation (FDIC), the Office of the standard would supplement the risk- Comptroller of the Currency (OCC), and based capital framework, which does not the Federal Reserve agreed on a common at present incorporate a comprehensive definition for HLTs. As an alternative measure of interest rate risk, by imposing HLT leverage criterion, the transaction an overall limitation on the extent to must, at least, double the subject comwhich a banking organization could pany's liabilities and result in a leverage leverage its equity capital base. The ratio higher than 50 percent. In addition, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 169 the transaction may be designated as an enforcement authorities during the year HLT by a syndication agent. to resolve several problem situations In another significant action in 1989, arising from the activities of branches, the Board permitted several bank holding agencies, representative offices, and companies, by order, to underwrite and Edge corporations of foreign banks in the deal, on a limited basis, in all types of United States. corporate debt securities. The Board also Also, staff members of the Division indicated that early in 1990 it would of Banking Supervision and Regulation review whether to authorize the com- provided technical assistance to other panies to engage in underwriting and agencies throughout the year in selecting dealing in equity securities based on a appropriate owners for failing institudetermination by the Board that the com- tions. Through this process, the agencies panies have established the managerial attempt to select bidders that will provide and operational infrastructure necessary optimal financial and managerial reto exercise this authority. In granting its sources to the successor at the least cost permission, the Board specified that these to the insurance funds. activities must be conducted in nonbank subsidiaries of the companies and that the Scope of Supervisory subsidiaries must not engage principally and Regulatory Responsibilities in underwriting and dealing in so-called ineligible securities—securities that mem- The Federal Reserve is the primary fedber banks may not underwrite or deal in eral supervisor and regulator of state under section 16 of the Glass-Steagall chartered commercial banks that are Act. The Board further specified, as it members of the Federal Reserve System had previously in authorizing securities and of all U.S. bank holding companies. subsidiaries of bank holding companies A principal concern of the Federal Reto underwrite and deal in other ineligible serve in its supervision of the general securities, that the securities subsidi- operations of these organizations is to aries are to be subject to a framework promote their safety and soundness and of structural and operating limitations their compliance with laws and reguladesigned to insulate commercial bank tions, including the Bank Secrecy Act affiliates of the companies from the risks and consumer and civil rights laws.l The associated with the activities of these following specialized activities of these subsidiaries and to avoid conflicts of institutions are also reviewed: electronic interest and unfair competition. In another international effort, the Federal Reserve, in conjunction with the 1. The Board's Division of Consumer and Community Affairs is charged with the responsibil- Basle Committee on Bank Supervision, ity of coordinating the Federal Reserve's superviissued a Statement of Principles for sory activities with regard to the compliance of financial institutions designed to assist in banking organizations with consumer and civil eliminating money laundering in the rights laws. This supervision is accomplished mainly through examination by specially trained international banking system. Efforts Reserve Bank examiners. These regulatory responcontinue in working with the Basle Comsibilities are described in the section of this Report mittee toward exploring attitudes on covering consumer and community affairs. Comfurther supervisory convergence on such pliance with other statutes and regulations, which is issues as foreign exchange and interest treated in this section, is the responsibility of the Board's Division of Banking Supervision and rate risk. Members of the staff of the Regulation and of the Reserve Banks, whose Federal Reserve worked closely with examiners check for safety and soundness. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 76th Annual Report, 1989 data processing, fiduciary activities, institution's assets; (2) an evaluation of government securities dealing and bro- management, including internal policies, kering, municipal securities dealing and operations, and procedures; (3) an assessclearing, and securities underwriting and ment of the key financial factors of dealing through Section 20 securities capital, earnings, asset and liability subsidiaries. management, and liquidity; and (4) a The Federal Reserve also has respon- review for compliance with applicable sibility for the supervision of (1) all Edge laws and regulations. and agreement corporations (organizations chartered by the Federal Reserve State Member Banks Board to provide all segments of the U. S. At the end of 1989 there were 1,047 state economy with a means of financing member banks. These banks represented international trade, especially export- about 8 percent of all insured commercial ing); (2) the international operations of banks and accounted for about 17 percent state member banks and U.S. bank hold- of their assets. ing companies; and (3) the operations of The Federal Reserve in 1986 increased foreign banking companies in the United the frequency of scheduled examinations States. of state member banks. The guidelines Through its administration of the Bank call for state member banks to be exam- Holding Company Act, the Bank Merger ined at least annually either by a Reserve Act, and the Change in Bank Control Act Bank or by a state banking agency. Large for bank holding companies and state or troubled banks must be examined at member banks, the Federal Reserve also least annually by a Reserve Bank. Beexercises important regulatory influence cause of the reassignment of examiners over the structure of the U.S. banking to thrift industry problems in 1989, the system. The Federal Reserve is also examinations of several healthy, wellresponsible for regulatory margin re- managed banks were deferred into 1990. quirements on securities transactions. In 1989, 1,029 state member banks were examined at least once either by the Federal Reserve or by a state banking agency. Supervision for Safety Altogether, the Federal Reserve conand Soundness ducted 836 examinations, some of them The Federal Reserve conducts the follow- jointly with the state agencies. The state ing activities to ensure the safety and agencies conducted 300 independent soundness of financial institutions: on- examinations of state member banks. site examinations and inspections, sur- Additionally, under policy guidelines, veillance and monitoring, and enforce- Reserve Bank officials held 293 meetings ment and other supervisory actions. with directors of either the largest state member banks, or those that displayed significant weaknesses. Examinations and Inspections The on-site review of operations is an integral part of ensuring the safety and Bank Holding Companies soundness of financiali nstitutions. Exam- At year-end 1989 the number of bank inations of state member banks and Edge holding companies totaled 6,444, 30 corporations and inspections of bank fewer than in 1988. These organizations holding companies and their subsidiaries control 8,846 commercial banks, which entail (1) an appraisal of the quality of the hold approximately 92 percent of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 111 assets of all insured commercial banks in eight civil money penalty actions and the United States. assessed a total of $3,340,000. By year- Large bank holding companies and end 1989, the Board had collected smaller companies with significant non- $2,240,000, with most of the remainder bank assets are to be inspected annually of the assessments to be paid in accorunder the revised guidelines on frequency dance with agreed-upon schedules. A and scope. Medium-sized companies are description of all formal supervisory inspected at least every three years. For actions undertaken during the year and the smallest companies without nonbank the reasons for them are available to the assets, inspections are conducted on a public in the Board's twice-yearly "Report sample basis. The inspection focuses on on Formal Enforcement Actions." In the operations of the parent holding com- addition, in accordance with a provision pany and its nonbank subsidiaries. In of FIRREA, all final enforcement orders judging the condition of bank subsidi- issued by the Board of Governors are aries, the examination reports of the fed- available to the public. eral and state banking authorities that have primary responsibility for their supervision are consulted. Of the 2,247 Specialized Examinations inspections conducted in 1989, System The Federal Reserve conducts specialexaminers made 2,182 on-site inspecized examinations in the following tions and 169 off-site inspections. State areas of bank activity: electronic data examiners inspected sixty-five bank holdprocessing, fiduciary activities, governing companies, sixteen more than in ment securities dealing and brokering, 1988. Because members of the examining municipal securities dealing and clearstaff were detailed to working with thrift ing, and securities underwriting and industry problems in 1989, fifty-eight dealing through section 20 securities bank holding company inspections were subsidiaries. deferred until 1990. During 1989, Reserve Bank officials held 540 meetings with bank holding company directorates Electronic Data Processing to discuss supervisory concerns. Under the Interagency EDP Examination Program, the Federal Reserve examines the electronic data processing (EDP) activities of state member banks, Edge Enforcement Actions and agreement corporations, and indeand Civil Money Penalties pendent centers that provide EDP ser- In 1989, the Reserve Banks recom- vices to these institutions. In 1989, mended, and the Board's staff initiated System examiners conducted 286 on-site and worked on, one hundred twenty-five EDP reviews. In addition, the Federal enforcement cases that involved two Reserve reviews reports of EDP examihundred seventy-nine separate actions nations issued by other bank regulatory such as cease-and-desist orders, remov- agencies on organizations that provide data processing services to state member als, and prohibitions and civil money banks. penalties, most dealing with unsafe or unsound banking practices and violations of law. Of these, twenty-four cases Fiduciary Activities involving forty-two actions were com- The Federal Reserve System has superpleted by year-end. The Board completed visory responsibility for 292 state- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

172 76th Annual Report, 1989 chartered member banks that exercise Municipal Securities Dealers trust powers and 179 trust companies and and Clearing Agencies investment advisory companies that are The Securities Act Amendments of 1975 subsidiaries of bank holding companies. made the Board responsible for supervis- These institutions hold more than $3 ing state member banks and bank holding trillion of discretionary and nondis- companies that act as municipal securities cretionary assets in various fiduciary dealers or as clearing agencies. In 1989 capacities. the Board examined twenty-one state During 1989, Federal Reserve System member banks that deal in municipal examiners conducted trust examinations securities. There are currently forty-six of 165 state member banks and state such banks registered with the Board. A member trust companies and 31 inspec- clearing agency acts as a custodian of tions of bank holding company sub- securities involved in transactions settled sidiaries engaged in fiduciary activities. by bookkeeping entries. The four agen- The institutions examined in 1989 held cies registered with the Board were approximately $2 trillion in fiduciary examined in 1989. assets. On-site examinations are essential to ensure the safety and soundness of finan- Securities Subsidiaries cial institutions that engage in fiduciary of Bank Holding Companies operations. The scope of these examina- Section 20 of the Banking Act of 1933, tions includes (1) an evaluation of man- commonly known as the Glass-Steagall agement, policies, audit procedures, and Act, prohibits the affiliation of a member risk management; (2) an appraisal of the bank with a company that is "engaged quality of trust assets; (3) an assessment principally" in underwriting or dealing of earnings; (4) a review for conflicts of in securities. The Board, in 1987, apinterest; and (5) a review for compliance proved proposals by banking organizawith laws, regulations, and general fidu- tions to underwrite and deal, on a limited ciary principles. basis, in specified classes of bank "ineligible" securities (that is, commercial paper, municipal revenue bonds, conven- Government Securities Dealers tional residential mortgage-related secuand Brokers rities, and securitized consumer loans) in Under the Government Securities Act a manner consistent with the Glassof 1986, the Board is responsible for Steagall Act and the Bank Holding Comexamining the activities of state mem- pany Act. At that time, the Board limited ber banks and some foreign banks that revenues from these newly approved are government securities dealers and activities to no more than 5 percent of brokers for compliance with the act total revenues for each securities suband with the Treasury Department's sidiary. In January 1989, the Board regulations. Forty-three state member approved applications by five bank holdbanks, three state branches of foreign ing companies to underwrite and deal in banks, and one state agency of a foreign corporate and sovereign debt and equity bank currently have on file with the securities, in each case subject to mana- Board notices that they are government gerial and operational infrastructure securities dealers or brokers that are reviews and other conditions and requirenot otherwise exempt from Treasury ments specified by the Board. Four of Department regulations. these organizations subsequently re- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 173 ceived authorization to underwrite and International Activities deal in corporate and sovereign debt securities. In September 1989, the Board The Federal Reserve is responsible increased the revenue limit of 5 percent for supervising several international previously imposed to 10 percent. Cur- activities. rently, twenty-two bank holding companies have section 20 subsidiaries that Edge and Agreement Corporations have received authority to underwrite Edge corporations are international bankand deal in "ineligible" securities. Speing organizations chartered by the Board cialized inspection procedures are being to provide all segments of the U.S. econdeveloped for use in reviewing the operomy with a means of financing internaations of these securities subsidiaries. tional trade, especially exports. An agreement corporation is a company that enters Transfer Agents into an agreement with the Board not to Federal Reserve System examiners con- exercise any power that is impermissible duct separate reviews of state member for an Edge corporation. In 1989 the banks and bank holding companies that Federal Reserve examined 110 Edge and act as transfer agents. Transfer agents agreement corporations. countersign and monitor the issuance of securities, register their transfer, and Foreign-Office Operations exchange or convert them. During 1989, of U.S. Banking Organizations System examiners conducted examina- The Federal Reserve examines the intertions of 92 of the 165 banks and bank national operations of state member holding companies registered as transfer banks, Edge corporations, and bank agents with the Board. holding companies principally at their head offices in the United States because these offices have the ultimate responsi- Surveillance and Monitoring bility for all their operations. Also, the The Federal Reserve monitors the finan- Federal Reserve conducts on-site reviews cial condition of the state member banks of important foreign offices at least every and bank holding companies on a quar- three years to supplement the results of terly basis. This surveillance program the examinations of head offices. In 1989, supplements the Federal Reserve's on- the Federal Reserve examined seventeen site examination program with automated foreign branches of state member banks screening systems that identify organiza- and thirty-six foreign subsidiaries of tions with poor or deteriorating financial Edge corporations and bank holding comprofiles. These automated systems use panies. In 1989 the Federal Reserve, in financial statements submitted by the coordination with the Office of the Compbanking organizations and compute nu- troller of the Currency, conducted extenmerous financial ratios, which are then sive on-site examinations of merchant analyzed by the staff members of the banking activities of U.S. banking orga- Division and of the Reserve Banks to nizations in the United Kingdom and in determine whether the organizations Australia. All the examinations abroad have potential emerging problems that were conducted with the cooperation of require the commitment of examiner the supervisory authorities of the counresources for on-site examinations or tries in which the examinations took other appropriate supervisory responses. place. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

174 76th Annual Report, 1989 U.S. Activities of Foreign Banks FIRREA Foreign banks continue to be significant Several provisions of FIRREA require participants in the U.S. banking systhe Federal Reserve to initiate actions or tem. As of year-end 1989, two hundred draft regulations to implement the law's sixty-three foreign banks operated four requirements. Some of the more imporhundred seventy-nine state-licensed tant provisions in FIRREA that affect the branches and agencies, of which fifty- Federal Reserve are the following: nine are insured by the Federal Deposit Insurance Corporation. At year-end • Permitting bank holding companies these foreign banks also operated eighty- to acquire healthy thrift institutions six branches and agencies licensed by • Requiring the federal banking agenthe Office of the Comptroller of the cies to establish, within one year, uniform Currency, of which nine have FDIC accounting and capital standards insurance. Foreign banks also directly • Requiring the federal banking owned sixteen Edge corporations and agencies to prescribe standards for real ten commercial lending companies. In estate appraisals used in federally related addition, foreign banks held a 25 percent transactions or more interest in one hundred and one • Removing tandem restrictions on U.S. commercial banks. Together, these the operations of bank holding comforeign banks at year-end controlled panies and thrift institutions. approximately 22 percent of U.S. banking assets. Members of the staff of the Federal Reserve have begun work to comply with The Federal Reserve has broad FIRREA and will continue to work authority to supervise and regulate fortoward its successful implementation for eign banks that engage in banking in several years. This process will include the United States through branches, providing staff members to certain subagencies, commercial lending comcommittees, such as the newly estabpanies, Edge corporations, or banks. In lished subcommittee of the FFIEC conexercising this authority, the Federal cerning the establishment of real estate Reserve relies on examinations conappraisal standards.2 ducted by the appropriate federal or state regulatory agency. Although states have primary authority for examining Highly Leveraged Transactions state-licensed uninsured branches and As noted earlier, in 1989 the Board issued agencies, the Federal Reserve parexamination guidelines for highly leverticipated in the examination of 169 such aged transactions (HLTs). Besides specoffices during the past year. ifying criteria for defining HLTs, the guidelines outline procedures to be followed by a banking organization's management and by bank examiners in assess- Supervisory Policy The following sections summarize the principal aspects of changes in 2. The FFIEC consists of representatives from supervisory policy. Additionally, these the Board of Governors of the Federal Reserve sections review activities carried out System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National during the year to enhance the super- Credit Union Administration, and the Office of the visory program. Comptroller of the Currency. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 175 ing the effect of such transactions on the scrutiny. The Task Force issued a threecondition of an organization. In general, volume report that includes background banking organizations are expected to and educational materials, accounting evaluate the adequacy and stability of the standards, and examination guidelines. borrower's current and prospective cash The report, as stated in the introduction, flow under varying economic scenarios focused on the aspects of securitization through the following actions: "indigenous to all types of securitized assets—the motivations for the selling of • Setting reasonable "in-house" limits assets, the mechanics generally emon a consolidated holding company basis ployed in or associated with the process, regarding exposure to individual borand the potential risks and rewards of rowers, total exposure to all HLT borboth issuing and investing in assetrowers, and industry concentrations rebacked securities." sulting from HLTs • Establishing procedures for credit analysis, approval, and review that take Problem Loans in Agriculture into account the high levels of debt involved in these transactions The policy of forbearance introduced by • Maintaining internal systems, conthe federal banking agencies in 1986 for trols, reporting procedures, and limits banks with problem loans in the agricul- • Establishing pricing policies and ture and energy sectors was continued in practices that take account in a prudent 1989. This policy calls for the Reserve manner of the trade-off between risk and Banks to exercise appropriate forbearreturn ance in applying capital adequacy guide- • Avoiding any compromise of sound lines for banks that are essentially sound banking practices in an effort to broaden and well managed if they demonstrate a market share or to realize substantial clear potential for restoring their capital fees. position over a reasonable period. At Examiners are responsible for review- year-end 1989, three state member ing the organization's operations to en- banks were under the capital forbearance sure that the foregoing policies and program. procedures are in place. The Competitive Equality Banking Act of 1987 required the federal banking agencies to issue regulations permitting Asset Securitization agricultural banks with assets of less than $100 million to amortize losses on agri- A Federal Reserve System Task Force cultural loans and related real or perwas convened during 1989 to study the sonal property over a period not to issue of asset securitization, an increas- exceed seven years. Banks seeking to ingly popular financial tool involving the amortize losses on qualified agriculissuance of securities by banking organi- tural loans must apply to their Reserve zations as claims against a pool of assets Bank for acceptance into the program, held in trust. In general, the Task Force must have capital in need of restoration, believed that supervisory efforts should and must have reasonable procedures continue to be left to the discretion of for restoring capital to acceptable levels. examiners; however, it also concluded At year-end 1989, four state member that particular aspects of the securitiza- banks were under the loan loss amortization process and the market need closer tion program. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

176 76th Annual Report, 1989 Accounting Standards sessions of an intermediate-level course, and Regulatory Reporting Banking II (two held regionally); and four of an advanced-level course, Bank- The Board and the FFIEC are continuing ing III (one held regionally); each course to work on eliminating, to the extent lasted three weeks. Two sessions of a possible, differences between regulatory Senior Forum for Current Banking and reporting requirements and generally Regulatory Issues were also conducted. accepted accounting principles (GAAP). The Senior Forum, an interactive semi- In 1989, a policy was adopted for regulanar designed for commissioned examintory reporting standards for push down ers with at least five years' experience, is accounting that is consistent among fedthe foundation for a continuing education eral banking agencies and with GAAP. program for senior examiners and other Also, for Call Report purposes, Financial senior personnel assigned to System Accounting Standards Board (FASB) supervision and regulation functions. Statement No. 96, which addresses ac- Other schools conducted included sevencounting for income taxes, was accepted, teen sessions of Effective Writing for and guidance for banking organizations Banking Supervision Staff (fifteen held in implementing this accounting standard regionally), ten sessions of a credit is being developed. Progress also was analysis course (seven held regionally), made toward the adoption of a regulatory two sessions of a bank holding company reporting standard on futures contracts applications school, ten sessions of a that is consistent with GAAP. bank holding company inspection school Members of the Board's staff have (nine held regionally), one basic trust and served on various committees of the one advanced trust school, and three FASB as advisors to that group's projects consumer compliance schools (one seson financial instruments and consolida- sion of an introductory course and two tions. Board staff members also provide sessions of an advanced course). Also, commentary on proposals issued by staff members attended four schools FASB and by the American Institute of conducted jointly by a financial institu- Certified Public Accountants that affect tions regulator and the Federal Bureau of banking organizations. Investigation on bank fraud and bank failures. In 1989, System staff members partic- Staff Training ipated in eighty-five sessions of courses The training of System staff members offered by the Federal Financial Instituemphasizes analytical and supervisory tions Examination Council (FFIEC) in themes common to the four areas of specialized areas of income property supervision and regulation—examina- lending, payment systems risk, whitetions, inspections, applications, and sur- collar crime, international banking, trust veillance—and stresses the interdepen- issues, off-balance-sheet risks, EDP techdence among these areas. nology, management training, conduct- During 1989, the Federal Reserve ing meetings with management, and conducted fifty-eight sessions of a variety instructor training. of schools: Twenty-four were held in System staff members also participated Washington, while thirty-four sessions in ten sessions of training programs were held regionally. Core banking conducted by the FDIC and OCC in courses included three sessions of an the specialized areas of activities of introductory course, Banking I; four municipal securities dealers, electronic Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 177 data processing, and foreign exchange question of what constitutes a sale of activities. assets without recourse and the appropri- During 1989, the Federal Reserve co- ate accounting treatment for such sales. sponsored with the World Bank two This study will continue into 1990. It is training sessions for senior supervisors expected that an advance notice of profrom developing nations. Seventy-eight posed rulemaking will be published in the representatives from twenty-five coun- first quarter of 1990. tries attended these programs. Also, the Federal Reserve System Regulation of provided scholarship assistance to the the U.S. Banking Structure states for the training of their examiners in Federal Reserve and FFIEC schools. The Board administers the Bank Holding Through this program, 468 state examin- Company Act, the Bank Merger Act, and ers were trained: 232 in Federal Reserve the Change in Bank Control Act for bank courses, 235 in FFIEC programs, and 1 holding companies and state member in an FDIC course. banks. In doing so, the Federal Reserve In 1989, the Federal Reserve trained acts on a variety of proposals that directly 1,218 persons in System schools, 773 in or indirectly affect the structure of U.S. FFIEC schools and 49 in FDIC and banking at the local, regional, and na- OCC schools, for a total of 2,040 stu- tional levels. The Board also has primary dents, including 125 representatives from responsibility for regulating the internaforeign central banks. tional operations of domestic banking organizations and the overall U.S. banking operations of foreign banks, whether Federal Financial Institutions conducted directly through a branch or Examination Council agency or indirectly through a subsidiary During 1989 the Federal Reserve adopted commercial bank or Edge corporation. several policies recommended by the In addition, the Board has established FFIEC. The Board joined the other regulations that limit the interstate bankconstituent agencies of the FFIEC in ing activities of these foreign banks and approving a revision to the Monthly of foreign banks that control a U.S. sub- Report on Foreign Exchange Transac- sidiary commercial bank. tions (FFIEC 035) to collect data on various financial products, such as cur- Bank Holding Company Act rency options, swaps, and futures. In connection with the risk-based By law, a company must obtain the capital framework, the banking agencies Board's approval to form a bank holding developed changes to the FFIEC Call company by acquiring control of one or Report, which have been submitted to the more banks. Moreover, once formed, a Office of Management and Budget for bank holding company must receive the final approval. Implementation of these Board's approval before acquiring addichanges is planned for March 1990 and tional banks or nonbanking companies. will include a schedule of risk-based In reviewing an application filed by a capital information, as will the revised bank holding company, the Board considschedule of off-balance-sheet transac- ers factors relating to the financial and tions and positions (Schedule RC-L). managerial resources and prospects of Finally, the FFIEC began a study on the applicant and the firm to be acquired, recourse arrangements, including the the convenience and needs of the com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 76th Annual Report, 1989 munity or the public benefits, and the institutions be acted upon by the approcompetitive effects of the proposal. priate federal banking agency. If the In 1989 the Federal Reserve acted on institution surviving the merger is a state 1,137 bank holding company and related member bank, the Federal Reserve has applications. The System approved 336 primary jurisdiction. Before acting on a proposals to organize bank holding com- proposed merger, the Federal Reserve panies and denied 2; approved 266 bank considers factors relating to the financial acquisitions by existing bank holding and managerial resources and prospects companies and denied 1; approved 63 of the existing and proposed institubank holding company merger applica- tions, the community's convenience and tions and denied 1; approved 447 requests needs, and the competitive effects of the by existing companies to acquire nonbank proposal. The Board must also consider firms engaged in activities closely related the views of certain other agencies on to banking; and approved 21 other appli- the competitive factors involved in the cations relating to bank service corpora- transaction. tions and modifications of commitments. During 1989 the Federal Reserve Data on these and related bank holding System approved ninety-two merger company decisions are shown in the applications. As required by law, each accompanying table. merger is described in this Report (in table 16 of the Statistical Tables section). Bank Merger Act When the Office of the Comptroller of The Bank Merger Act requires that all the Currency, the Federal Deposit Insurproposed mergers of insured depository ance Corporation, or the Director of the Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1989 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 Approved Denied Approved Approved Permitted Formation of holding company 20 2 21 0 3 311 0 338 Merger of holding company 10 1 0 0 2 51 0 64 Retention of bank 0 0 0 0 0 00 0 Acquisition Bank 25 1 31 0 14 224 0 267 Nonbank 117 0 42 0 14 123 189 447 Bank service corporation 10 0 0 0 0 1 2 Other 3 0 14 2 0 0 0 19 Total 176 4 23 2 33 709 190 1,137 1. These actions were specifically delegated by the savings association that was subsequently merged into an Board to the Staff Director of the Division of Banking existing subsidiary of a bank holding company, as permitted Supervision and Regulation and to the General Counsel of by the Financial Institutions Reform, Recovery, and the Board for joint action. Enforcement Act of 1989. 2. Each of these actions represented the acquisition of a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 179 Office of Thrift Supervision has jurisdic- Public Notice of Board Decisions tion over a merger, the Board is asked to comment on the competitive factors to Each decision by the Board that involves assure comparable enforcement of the a bank holding company, bank merger, antitrust provisions of the act. The Board change in control, or international bankand these agencies have adopted standard ing proposal is effected by an order or terminology for assessing competitive announcement. Orders state the decision factors in merger cases to assure consis- along with the essential facts of the tency in administering the act. On behalf application and the basis for the decision; of the Board, the Reserve Banks sub- announcements state only the decision. mitted 480 reports on competitive factors All orders and announcements are reto the other federal banking agencies in leased immediately to the public; they are 1989. also reported in the Board's weekly H.2 statistical release and in the monthly Federal Reserve Bulletin. The H.2 release also contains announcements of applica- Change in Bank Control Act tions and notices that have been received by the System but not yet acted on. The Change in Bank Control Act requires persons seeking control of a bank or of a bank holding company to obtain approval from the appropriate federal banking Timely Processing of Applications agency before the transaction occurs. Under the act, the Board is responsible The Federal Reserve maintains target for reviewing changes in the control of dates and procedures for the processing state member banks and of bank holding of applications. This practice promotes companies. In so doing, it must review in efficiency at the Board and at the part the financial condition, competence, Reserve Banks and reduces the burden experience, and integrity of the acquiring on applicants. The time allowed for a person; also it must consider the effect decision is sixty days; during 1989, on the financial condition of the bank or about 95 percent of the decisions met bank holding company to be acquired; this standard. and it must determine the effect on competition in any relevant market. The appropriate federal banking agen- Delegation of Applications cies are required to publish notice of each proposed change in control and to invite The Board has delegated certain regulapublic comment, particularly from per- tory functions—including the authority sons located in the markets served by the to approve, but not to deny, certain types institution to be acquired. The federal of applications—to the Reserve Banks, to banking agencies are also required to the Staff Director of the Board's Division assess the qualifications of each person of Banking Supervision and Regulation, seeking control; the Board routinely and to the Secretary of the Board. The makes such a determination and verifies delegation of responsibility for applicainformation contained in the proposal. In tions permits greater efficiency by remov- 1989 the Federal Reserve System acted ing routine cases from the Board's agenda. on 250 proposed changes in control of During 1989, 90 percent of the applicastate member banks and bank holding tions were acted on under delegated companies. authority. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

180 76th Annual Report, 1989 Board Policy Decisions equity underwriting authority for one and Developments year to determine whether the proper in Bank-Related Activities managerial and operational infrastructures were in place. In 1989, the Board amended its rules to During 1989 the Board also increased permit bank holding companies to ac- from 5 to 10 percent the amount of gross quire healthy, as well as failed or failing, revenues of a bank holding company's savings associations. The Board also underwriting subsidiary that may be approved several new financially related derived from securities that member nonbanking activities for individual bank banks are prohibited from underwriting holding companies and had under consid- and dealing in under the Glass-Steagall eration other nonbanking proposals. Act. In addition, in early 1990, the Board approved, subject to many of the same limitations, the applications by three for- Approval of Permissible eign banks to underwrite and deal in Nonbanking Activities corporate debt and equity securities in In adopting its rule enabling the acquisi- the United States. tion of savings associations, the Board The Board for the first time also expanded the scope of previous actions in approved the following activities for which it had allowed individual bank individual bank holding companies: (1) holding companies to acquire failed or acting as a specialist in certain foreign failing thrift institutions and certain exchange options on a U.S. exchange healthy savings institutions in parts of and (2) acting as an originator and New England. The Board's action broad- principal in interest rate swap and curened its rules to allow bank holding com- rency swap transactions and also for panies in general to acquire savings certain swap derivative products. associations—regardless of their financial condition or location—subject to a case-by-case evaluation of the competi- Proposals to Engage tive, financial, and public interest consid- in New Nonbanking Activities erations of each proposal. The Board also At year-end 1989, the Board was considrescinded certain operating limitations ering a proposal by a U.S. bank holding between bank holding companies and company to engage in leasing transactheir thrift subsidiaries. tions in a manner consistent with ex- The Board for the first time also panded national bank leasing powers approved the following activities for authorized by the Competitive Equality individual bank holding companies: (1) Banking Act of 1987. The Board was also underwriting and dealing in, on a limited considering proposals by several foreign basis, corporate debt and equity securi- banks to engage in the private placement ties; and (2) engaging in the private of all types of securities. placement of all types of securities and in Two rulemakings pertaining to bank- "riskless principal" transactions. The related activities were pending at year- Board's actions contained several condi- end 1989. One was a proposal to rescind tions aimed at avoiding conflicts of an existing rule that permits bank holding interest and other potential adverse ef- companies to establish or acquire indifects and at ensuring the maintenance of rectly, through their state-chartered bank safe and sound operations. The Board subsidiaries, nonbank operations subalso deferred the effective date of the sidiaries engaged in activities that may be Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 181 conducted by the parent bank. If adopted, subsidiaries. The Board's regulations this proposal would require bank holding require holding companies to give adcompanies to obtain approval to acquire vance notice of repurchases that retire 10 or to retain control of such nonbank percent or more of their consolidated operations subsidiaries. The Board had equity capital. The Board may object to also requested comment on a proposal to stock repurchases by holding companies permit retention of all or most existing that fail to meet certain standards, includoperations subsidiaries without further ing the Board's capital guidelines. During action. The other proposed rulemaking 1989 the Federal Reserve reviewed 111 would permit bank holding companies to proposed stock repurchases by bank engage in real estate investment activities holding companies, all of which were within certain limitations. acted on by the Reserve Banks on behalf of the Board. Applications by State Member Banks International Activities State member banks must obtain the of U.S. Banking Organizations permission of the Board to open new The Board has several statutory respondomestic branches, to make investments sibilities in supervising the international in bank premises that exceed 100 percent operations of U.S. banking organizaof capital stock, and to add to their capital tions . The Board must provide authorizabases from sales of subordinated debt. tion and regulation of foreign branches of State member banks must also give six member banks; of overseas investments months' notice of their intention to withby member banks, Edge corporations, draw from membership in the Federal and bank holding companies; and of Reserve System, although the Board may investments by bank holding companies shorten or eliminate the notice period in in export trading companies. The Board specific cases. These matters are noris also required to charter and regulate mally handled by the Federal Reserve Edge corporations and their investments. Banks under delegated authority or, in the case of certain investments in bank premises or proposed sales of subordi- Foreign Branches of Member Banks nated debt, by the Staff Director of the Board's Division of Banking Supervision Under provisions of the Federal Reserve and Regulation. Act and of Regulation K, member banks in most cases must seek Board approval to establish branches in foreign countries. Stock Repurchases In reviewing proposed foreign branches, by Bank Holding Companies the Board considers the requirements of A bank holding company sometimes the law, the condition of the bank, and the purchases its own shares from its share- bank's experience in international busiholders. When the company borrows the ness. In 1989 the Board approved the money to buy the shares, the transaction opening often foreign branches. increases the debt of the bank holding By the end of 1989,133 member banks company and simultaneously decreases were operating 845 branches in foreign its equity. Relatively larger purchases countries and overseas areas of the United may undermine the financial condition of States; 105 national banks were operating a bank holding company and its bank 724 of these branches, and 28 state Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 76th Annual Report, 1989 member banks were operating the remain- engaged in banking to maintain a ratio of ing 121 branches. equity to risk-adjusted assets of at least 7 percent. International Banking Facilities Foreign Investments The Board amended its Regulations D and Q to permit the establishment of Under authority of the Federal Reserve international banking facilities (IBFs) in Act and the Bank Holding Company Act, the United States as of December 3, U.S. banking organizations may engage 1981. An IBF is essentially a set of asset in activities overseas with the authorizaand liability accounts that is segregated tion of the Board. To a significant extent, from the accounts of the office establish- the Board's Regulation K permits such ing the IBF. Deposits from, and credits investments without prior Board review. extended to, foreign residents or other In 1989 the Board reviewed and permitted IBFs generally can be booked at these forty foreign investments by member facilities free from domestic reserve banks, Edge and agreement corporarequirements and interest rate limita- tions, and bank holding companies. In tions. Subject to conditions specified by most cases, the applicant requested the Board, IBFs may be established by permission to increase an existing U.S. depository institutions, by Edge investment. and agreement corporations, and by U. S. branches and agencies of foreign banks. Export Trading Companies By the end of 1989, 533 IBFs had been established. In 1982 the Bank Export Services Act amended Section 4 of the Bank Holding Company Act to permit bank holding Edge and Agreement Corporations companies, their subsidiary Edge or Under sections 25 and 25(a) of the Fed- agreement corporations, and bankers' eral Reserve Act, Edge and agreement banks to invest in export trading comcorporations may engage in international panies, subject to certain limitations and banking and foreign financial transac- after Board review. The purpose was to tions. These corporations, which are allow effective participation by bank usually subsidiaries of member banks, holding companies in the financing and provide their owner organizations with development of export trading comthe following powers: (1) They may panies. The Export Trading Company conduct a deposit and loan business in Act Amendments of 1988 provide addistates other than that of the parent, tional flexibility for bank holding comprovided that the business is strictly panies engaging in export trading comrelated to international transactions; and pany activities. Since 1982 the Board has (2) their powers to make foreign invest- acted affirmatively on notifications by ments are broader than those of member forty-seven bank holding companies to banks because they can invest in foreign establish export trading companies. financial organizations, such as finance companies and leasing companies, as Enforcement of Other well as in foreign banks. By the end of Laws and Regulations 1989, there were 110 Edge corporations, which had 47 branches. The Board This section describes the Board's responrequires each Edge corporation that is sibilities for the enforcement of laws, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 183 rules, and regulations other than those institutions for the purchase of monetary specifically related to bank safety and instruments in excess of $3,000 and allow soundness and the integrity of the banking for the Secretary of the Treasury to lower structure. the Currency Transaction Report threshold in a defined geographic area. Similarly, the Federal Reserve offered its Bank Secrecy Act assistance to the Treasury Department in The Federal Reserve is responsible for developing recordkeeping requirements monitoring compliance with the require- for wire transfers. ments of the Currency and Foreign Transactions Reporting Act (the Bank Securities Regulation Secrecy Act) by institutions it supervises. The provisions of the Bank Secrecy Act Under the Securities Exchange Act of were designed to create records of vari- 1934, the Board is responsible for reguous transactions as an aid in detecting lating credit in certain transactions involvunlawful activity. The most important ing the purchase or carrying of securities. among these recordkeeping and reporting In fulfilling its responsibility under the requirements is the filing of Currency act, the Board limits the amount of credit Transaction Reports with the Internal that may be provided by securities bro- Revenue Service for each transaction of kers and dealers (Regulation T), by banks cash in excess of $10,000. (Regulation U), and by other lenders During 1989, the Federal Reserve (Regulation G). Regulation X extends continued its efforts to promote compli- these credit limitations, or margin reance with the Bank Secrecy Act. In quirements, to certain borrowers and to addition to continual Bank Secrecy Act certain credit extensions, such as credit compliance audits and the issuance of obtained from foreign lenders by U.S. several forward enforcement orders ad- citizens. dressing violations of the act, the Federal Several regulatory agencies enforce Reserve provides a quarterly report to compliance with the securities credit the Department of the Treasury that regulations. Brokers and dealers are details all violations of the Bank Secrecy examined for compliance with Regula- Act discovered during the examinations tion T by the Securities and Exchange of financial institutions under Federal Commission, the National Association Reserve supervision. Also, the Federal of Securities Dealers, and the national Reserve created a new position for an securities exchanges. The federal bankattorney with expertise in the Bank ing agencies examine banks under their Secrecy Act and the investigation and respective jurisdictions for compliance prosecution of offenses related to the act. with Regulation U. Other lenders are This individual will provide expertise in examined for compliance with Regulasuch areas as examinations and enforce- tion G by the Board, the National Credit ment actions under the Bank Secrecy Act Union Administration, the Farm Credit and will coordinate the Federal Reserve's Administration, or the Office of Thrift efforts in this area with those of other Supervision, according to the jurisdiction federal agencies. involved. At the end of 1989, there were The Federal Reserve has supported 589 "G-lenders," of which 321 were new regulations as promulgated by the subject to the Board's supervision. Of Department of the Treasury that create these 321, 188 were subject to regular recordkeeping requirements by financial inspection by the Federal Reserve Sys- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

184 76th Annual Report, 1989 tern. During the year, Federal Reserve broker-dealers on the same basis as examiners inspected 36 G-lenders for domestic margin securities; (2) eliminate compliance with the Federal Reserve's the current requirement that all accountmargin requirements (these lenders are ing be in U.S. dollars; (3) ease restricinspected on either a biennial or triennial tions on payment for foreign securities to basis, according to the type of credit accommodate the settlement practices of extended). the market where the trade occurs; and Regulations G and U, in general, (4) allow a broker-dealer subject to impose credit limits on loans whose Regulation T to arrange for credit on purpose is the purchasing or carrying of foreign securities. Final Board action is publicly held equity securities and that expected in 1990. are collateralized by such securities. Under section 8 of the Securities Regulation T limits the amount of credit Exchange Act, a nonmember domestic that brokers and dealers may extend when or foreign bank may lend to brokers or securities serve as collateral for credit dealers posting registered securities as that is used to purchase or carry securi- collateral only if the bank has filed an ties . This collateral must consist of stocks agreement with the Board that it will and bonds traded on national securities comply with all the statutes, rules, and exchanges, of certain over-the-counter regulations applicable to member banks (OTC) stocks that the Board designates regarding credit on securities. During as having characteristics similar to those the year, the Board processed five such of stocks listed on national exchanges, or agreements. of bonds meeting certain requirements. In 1989 the Securities Regulation The staff of the Federal Reserve mon- Section of the Board's Division of Bankitors the market activity of all OTC stocks ing Supervision and Regulation issued to determine which of them are subject to seventy-six interpretations of the margin the Board's margin regulations. The regulations. Those that presented suffi- Board publishes the resulting "List of ciently important or novel issues were Marginable OTC Stocks" quarterly. In published in the "Securities Credit Trans- 1989, the list was revised in February, actions Handbook," which is part of the May, August, and November. The No- Federal Reserve Regulatory Service. vember list contained 2,893 stocks. These interpretations serve as a guide to In the fall of 1989, the Board proposed the margin regulations. for public comment amendments to Regulation T to accommodate the increasing Financial Disclosure international integration of the securities by State Member Banks markets. The amendments would (1) permit certain foreign equity and debt State member banks must disclose certain securities to be eligible for margin at information of interest to investors, Loans by State Member Banks to their Executive Officers, 1988-89 Range of interest Period Number Amount (dollars) rates charged (percent) October 1-December 31, 1988 919 20,246,161 6.0-18.0 January 1-March 31,1989 898 18,310,668 6.0-19.8 April 1-June 30,1989 1,199 26,346,000 5.5-21.0 July 1-September 30,1989 916 18,048,000 7.6-25.2 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 185 including financial reports and proxy statements, if they issue securities registered under the Securities Exchange Act of 1934. The Board's financial disclosure rules are required by statute to be substantially similar to those issued by the Securities and Exchange Commission. At the end of 1989, thirty-five state member banks, most of which are of small or medium size, were registered with the Board under the Securities Exchange Act. 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 1988 and the first three quarters of 1989. Federal Reserve Membership At the end of 1989, 5,256 banks were members of the Federal Reserve System, a decrease of 196 from the previous year. Member banks operated 32,898 branches on December 31, 1989, a net increase of 1,431 for the year. Member banks accounted for 42 percent of all commercial banks in the United States and for 64 percent of all commercial banking offices. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

187 Regulatory Simplification In 1978 the Board of Governors estab- Elimination lished the Regulatory Improvement of Tandem Restrictions Project, in the Office of the Secretary, to In August the Board approved an minimize the burdens imposed by reguamendment to Regulation Y that lation. In 1986 the Board reaffirmed its eliminated many operating restrictions commitment to regulatory improvement, previously required of thrift institutions renaming the project the Regulatory owned by bank holding companies. Review Section and creating a subcom- Known as the Regulation Y "tandem mittee of the Board called the Regulatory restrictions," the rules had prevented Policy and Planning Committee. The cooperative ventures and had limited regulatory simplification function works operating efficiencies between thrift to ensure that the economic effect of and bank subsidiaries of the same holdregulation on small business is considing company. Eliminating the tandem ered, to afford interested parties the restrictions substantially eased the acquiopportunity to participate in designing sition of thrifts by bank holding comregulations and to comment on them, and panies as permitted by the Financial to ensure that regulations are written in Institutions Reform, Recovery, and simple and clear language. Board staff Enforcement Act of 1989, which the members periodically review all existing President had signed earlier that month. regulations for adherence to these objectives. Home Mortgage Disclosure Community Reinvestment In December the Board approved a In the spring the Board issued a policy revised format for the collection of statement in conjunction with the other data under the Home Mortgage Disfederal banking agencies to help deposi- closure Act. In August, the Congress tory institutions meet their responsibili- had expanded the act's scope and ties under the Community Reinvestment requirements for collection of data, Act (CRA). The Board's version pro- prompting the Board to search for ways vides guidance and clarification to banks to meet the act's goals without unduly and bank holding companies on how to increasing burdens on regulated instimake their CRA responsibilities part of tutions. The Board approved a loantheir day-to-day operations. The state- register approach to reporting, which ment sets out the basic components of a permits lenders to record the inforresponsive CRA policy; discusses the mation during the course of the year role of examination reports, periodic without further processing; at the end review, and documentation by banking of the year, the regulatory agencies agencies; and addresses the role of com- produce each institution's report from mitments to the Board in the applications the loan register submitted by the process (see the chapter on consumer and institution. Thus, the lender is recording community affairs for further discussion more information but is freed from of the policy statement). creating tables and reports. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 76th Annual Report, 1989 Equal Credit Opportunity review program, deletes certain reporting requirements, eliminates the appen- In December the Board amended Reguladixes, and simplifies the rest of the tion B to reflect changes required by the regulation. The proposed regulation high- Women's Business Ownership Act of lights the security responsibilities of 1988, which amended the Equal Credit boards of directors and security officers Opportunity Act (ECOA). The amendof banks rather than the technological ments require lenders to notify business factors, which become obsolete and reowners of their right to the reasons for quire frequent updating. The proposal credit denial and require lenders to retain allows management greater flexibility in applications for at least one year. The designing security programs that include legislative history of the ECOA amendcertain devices and procedures required ments suggest that the new provisions are by the act. • intended primarily to extend to owners of small businesses the same information afforded to applicants for consumer credit and that an exemption for large businesses would be acceptable because these firms are generally well informed about the credit process. The Board considered several criteria that would exclude large firms, cover most small businesses, and simplify compliance with the ECOA amendments. The Board chose annual gross revenue as a measure of firm size because it is easy to understand and is readily available to both the credit applicant and the financial institution. To further aid the efforts of banks to comply with the amendments, the Board's staff summarized the new rules, described various courses of action that creditors could take to comply, and distributed the information to small banks and other interested parties. Security Devices and Procedures In December the Board approved for public comment a redraft of Regulation P. Regulation P implements the Bank Protection Act of 1968, which requires the federal financial supervisory agencies to establish minimum standards for the installation, maintenance, and operation of security devices and procedures in banking institutions. The new draft, prepared under the Board's regulatory Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

189 Federal Reserve Banks Developments In tained by one district as a result of Federal Reserve Services implementing new services for processing returned checks. The number of Since it began pricing its services to checks that the Reserve Banks handled depository institutions in 1981, the Fedwas 18.0 billion, an increase of 2.3 eral Reserve System has generally narpercent from 1988. rowed the year-to-year variance between In March the Board approved revised costs and revenues.1 In 1989, revenues at prices for Reserve Bank returned check the Reserve Banks from all priced serservices, which became effective May 1, vices were $865.8 million, and costs 1989. The action was taken in response to were $865.0 million, for net revenue of declining cost recovery rates that were $0.8 million and a recovery rate of 100.0 primarily a function of lower-thanpercent; in 1988, the System recovered anticipated revenue from returned checks 100.6 percent of its service costs. The and higher-than-anticipated costs resultaverage rate of recovery since 1983, the ing partly from the poor quality of first year in which essentially all services qualified returned-check deposits. The were priced, is 102.7percent. The results Reserve Banks began several initiatives are discussed below and presented in the during the year to address the quality statements for priced services, at the end issue, including developing guidelines to of this chapter. improve the quality of carrier envelopes and working with banks to reduce the Check Collection number of misdirected qualified returned checks, improve the quality of endorse- The operating and imputed costs of check ments, and reduce the reject rate of collection by the Federal Reserve in 1989 qualified deposits. were $537.7 million (see the pro forma In November the Board issued for income statement for priced services, by public comment proposed modifications service). Check operations for the year to the Reserve Banks' notice of nonpaygenerated $535.1 million in revenue and ment service. The modifications will be a net of $ 14.3 million in other income and adopted if the Board adopts an amendexpenses. Income from operations after ment to Regulation CC shortening the imputed costs was a negative $2.6 miltime in which the paying bank must notify lion, primarily because of losses susthe bank that first received the check (the depositary bank) when returning largedollar checks. Three Federal Reserve districts initi- 1. The Monetary Control Act of 1980 requires ated pilot programs for accepting interthe Federal Reserve to price these services on the basis of the direct costs of the services and the mingled deposits of returned and forward indirect costs, which include overhead, the interest collection checks and for presenting on items credited before actual collection (float), intermingled cash letters. and the private sector adjustment factor (PSAF). The Federal Reserve continued to The PSAF represents the taxes and costs of capital that the System would have incurred had it been a investigate the use of digitized image private-sector firm. technology in the check collection pro- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 76th Annual Report, 1989 cess. The initial area of interest is the Wire Transfer of Funds processing of U.S. government checks. The number of wire transfers originated during 1989 increased 7.7 percent over Electronic Payments 1988, to 60.6 million. Operating and imputed costs totaled $67.6 million, and Under its strategic study of electronic revenue was $76.8 million. On January payments services in the 1990s, the Fed- 1, 1989, the basic fee for funds transfers eral Reserve is conducting pilot tests of was increased from $0.47 to $0.50. two alternative production processes. In June the Board announced that One alternative uses fault-tolerant surcharges would be assessed on funds processors, and the other involves imand securities transfers in 1990 for proving the existing architecture to redepository institutions that have not duce redundancies and otherwise streamconverted their communication links to line operations. the System's standard protocols by April The Federal Reserve also has ex- 1990, for funds transfers, and by July panded its electronic network for the 1990, for securities transfers. By yeardelivery of Federal Reserve services. end 1989 the System had converted more Standardized intelligent-terminal softthan 80 percent of its high-volume elecware was deployed in late 1988, and the tronic connections to standard protocols. Reserve Banks have begun to implement the software Systemwide. In November the Board published for public comment a proposal to standardize the operating hours for Fedwire transfers Automated Clearinghouse of funds and securities. The proposal recommended establishing a uniform Operating and imputed costs of providing deadline of 6:00 p.m. Eastern time for all automated clearinghouse (ACH) serthird-party transfers of funds on Fedwire vices in 1989 were $45.2 million; reveand requested comment on whether the nues were $48.9 million. The Reserve Federal Reserve should establish uniform Banks processed 740.6 million commertimes at which Reserve Banks begin cial transactions during the year, an processing funds and book-entry securiincrease of 22.9 percent over 1988. ties transfers. The Board took no final In February the Board published for action on the proposal in 1989. Federal public comment a proposal to modify the Reserve staff is conducting a longer-term times at which the Federal Reserve grants study to assess whether further modificafinality to receivers of ACH credit transtions of operating hours are required by actions, finality to originators of ACH the continuing evolution of the payments debit transactions, and credit for debitsystem and financial markets. item adjustments. In addition, under the proposal the Reserve Banks would advise depository institutions when a depository Coin and Currency institution's inability to settle for the payments caused payments to be re- A major activity in coin and currency versed. An advisory group representing operations in 1989 was an automation commercial banks, corporations, and effort that enables the Board, the Reserve clearinghouse associations has offered Banks, the Bureau of Engraving and information on alternatives to the pro- Printing, and the U.S. Mint to better posed finality rules. The Board took no manage the supply of cash through the final action on this proposal in 1989. exchange of data and thus better ensure Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 191 that the currency distributed to the public processed 2.5 million such transfers by Federal Reserve Banks is of high during the year, an increase of 13.4 quality. The Federal Reserve also contin- percent compared to 1988. ued to work with the Departments of The Federal Reserve sells savings Treasury and Justice and with others to bonds in its role as fiscal agent. Under a deter the counterfeiting and laundering new program called the Regional Delivof U.S. currency. ery System (RDS), developed by the The revenue from priced cash services Federal Reserve and the U.S. Treasury, was $14.4 million in 1989, and the cost depository institutions will, as in the past, was $13.8 million. In 1989, four Federal receive applications from the public for Reserve Districts provided transporta- Series EE savings bonds, but the institution of cash by armored carrier and four tions will no longer issue the bonds. Districts provided wrapped coin to depos- Instead, the institutions will forward the itory institutions. applications to a regional Federal Reserve office, which will inscribe the bonds and deliver them. RDS, which originated Definitive Securities as a pilot proj ect in Ohio and was managed and Noncash Collection by the Pittsburgh Branch of the Federal The System received $17.0 million in Reserve Bank of Cleveland, is expected revenue for definitive safekeeping and to be operational in parts or all of eight noncash collection services in 1989; the Federal Reserve Districts by the end of cost of these services was $16.4 million. 1990. The Treasury expects that begin- The average number of definitive securi- ning in 1994, when the program is fully ties issues and deposits maintained in implemented, annual savings to U.S. safekeeping accounts at the Reserve taxpayers will amount to $18.5 million. Banks decreased 20.3 percent in 1989 to 110,000. The number of noncash collec- Float tion items processed decreased 4.7 percent, to 3.2 million. With the declining Federal Reserve float increased to a daily volumes, Reserve Banks continued to average of $588 million in 1989, comstreamline and consolidate both defini- pared with $606 million in 1988. The tive and noncash collection operations. costs of all Federal Reserve float associated with priced services are recovered each year. Securities and Fiscal Agency Services Examinations The Federal Reserve provides bookentry (computerized) securities services The Board's Division of Federal Reserve for the Department of the Treasury and Bank Operations examines the twelve for certain federally sponsored agencies, Reserve Banks and their twenty-five such as the Federal National Mortgage Branches each year, as required by Association and the Federal Home Loan section 21 of the Federal Reserve Act. Mortgage Corporation. Book-entry ser- The results of the audits are reported to vices for federal agency securities are the management and directors of the treated as a Federal Reserve priced respective Banks and to the Board of service; these services incurred costs of Governors. Also, to assess conformance $8.9 million and earned revenue of $10.2 with the policies issued by the Federal million in 1989. The Federal Reserve Reserve System Open Market Commit- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

192 76th Annual Report, 1989 tee, the division annually audits the dividends to member banks totaled $130 accounts and holdings of the Federal million, $4 million more than in 1988. Reserve System Open Market Account at The rise reflected an increase in the the Federal Reserve Bank of New York capital and surplus of member banks and and the foreign currency operations a consequent increase in the paid-in conducted by that Bank. The division capital stock of the Reserve Banks. furnishes copies of these reports to the Payments to the U.S. Treasury in the Committee. The examination procedures form of interest on Federal Reserve notes used by the division are reviewed each totaled $21,646 million, compared with year by a private firm of certified public $17,364 million in 1988. The payments accountants. consist of all net income after the deduction of dividends and after the deduction of the amount necessary to bring the Income and Expenses surplus of the Banks to the level of capital Income of the Federal Reserve Banks paid-in. was $22,249 million in 1989 and $19,526 In the Statistical Tables section of this million in 1988 (see accompanying table). REPORT, table 6 details income and Total expenses were $1,422 million expenses of each Federal Reserve Bank ($1,184 million in operating expenses, for 1989, and table 7 shows a condensed $148 million in earnings credits granted statement for each Bank for 1914-89. A to depository institutions, and $90 million detailed account of the assessments and in assessment for expenditures by the expenditures of the Board of Governors Board of Governors). The cost of cur- appears in the next chapter, "Board of rency was $175 million. Income from Governors Financial Statements." financial services was $702 million. The profit and loss account showed a Federal Reserve Bank Premises net addition of $1,296 million, primarily a result of gains from the revaluation of During 1989 the Board of Governors assets denominated in foreign currencies approved the site and the initial design to market exchange rates. Statutory for a new building for the Dallas Bank. Income, Expenses, and Distribution of Net Earnings of Federal Reserve Banks, 1989 and 1988l Thousands of dollars Item 1989 1988 Current income 22,249,276 19,526,431 Current expenses 1,332,161 l,205,96C Operating expenses2 1,184,253 1,081,684 Earnings credits granted 147,907 124,276 Current net income 20,917,115 18,320,471 Net addition to (deduction from) current net income 1,295,623 -489,058 Cost of unreimbursed services to Treasury 41,009 27,852 Assessments by the Board of Governors 264,623 248,656 For expenditures of Board 89,580 84,411 For cost of currency 175,044 164,245 Net income before payments to Treasury 21,907,105 17,554,905 Dividends paid 129,885 125,616 Payments to Treasury (interest on Federal Reserve notes) . 21,646,417 17,364,319 Transferred to surplus 130,802 64,971 1. Details may not sum to totals because of rounding. pension costs of $47 million in 1989 and $70 million in 2. Operating expenses include a net periodic credit for 1988. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 193 Construction of the new operations center accompanying table). From 1988 to for the New York Bank and of the new 1989, holdings of U.S. government building for the Helena Branch of the securities increased $870 million and Minneapolis Bank continued. Expansion loans decreased $1,217 million; the of the main building of the Chicago Bank average rate of interest increased from and construction of the new building for 7.85 percent to 8.64 percent on the the Charlotte Branch of the Richmond securities and increased from 7.59 per- Bank were completed. Vacated buildings cent to 8.70 percent on the loans. and property of the Charlotte Branch and of the Los Angeles Branch were sold. Volume of Operations Table 8, in the Statistical Tables section of this REPORT, shows the cost and book Table 9, in the Statistical Tables section value of premises owned by the Federal of this REPORT, shows the volume of Reserve Banks and Branches and of real operations in the principal departments estate acquired for future banking-house of the Federal Reserve Banks for the purposes. years 1986-89. Financial Statements Holdings of Securities and Loans for Priced Services Average daily holdings of securities and The following tables show pro forma loans by the Federal Reserve Banks statements for priced services for 1989, during 1989 were $233,449 million, a including a balance sheet, income statedecrease of $347 million from 1988 (see ments, and a breakdown of volumes. Securities and Loans of Federal Reserve Banks, 1987-89 Millions of dollars, except as noted U.S. Item and year Total government Loans securitiesl Average daily holdings2 1987 217,392 216,722 670 1988 233,796 231,442 2,354 1989 233,449 232,312 1,137 Earnings 1987 16,418 16,371 47 1988 18,358 18,180 179 1989 20,163 20,065 99 Average interest rate (percent) 1987 7.55 7.55 6.99 1988 . 7.85 7.85 7.59 1989 8.64 8.64 8.70 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

194 76th Annual Report, 1989 Pro forma balance sheet for priced services, December 31, 1989 and 1988l Millions of dollars Item 1989 1988 Short-term assets2 Imputed reserve requirement on clearing balances . 203.8 201.7 Investment in marketable securities 1,494.2 1,479.3 Receivables 58.2 57.7 Materials and supplies 6.4 6.4 Prepaid expenses 11.1 10.9 Items in process of collection 3,652.3 4,283.2 Total short-term assets 5,426.0 6,039.2 Long-term assets3 Premises 289.8 271.8 Furniture and equipment 123.9 126.1 Leases and leasehold improvements 6.2 6.1 Prepaid pension costs 52.1 37.4 Total long-term assets 472.1 441.4 Total assets 5,898.0 6,480.6 Short-term liabilities Clearing balances and balances arising from early credit of uncollected items 2,584.8 2,712.5 Deferred availability items 2,765.5 3,251.7 Short-term debt 75.7 75.0 Total short-term liabilities 5,426.0 6,039.2 Long-term liabilities Obligations under capital leases .. 1.2 1.2 Long-term debt 133.2 128.1 Total long-term liabilities . 134.4 129.3 Totalliabilities 5,560.4 6,168.5 Equity 337.7 312.1 Total liabilities and equity4. 5,898.0 6,480.6 1. Details may not sum to totals because of rounding. CIPC during the period (the difference between gross 2. The imputed reserve requirement on clearing CIPC and deferred-availability items, which is the portion balances held at Reserve Banks by depository institutions of gross CIPC that involves a financing cost), valued at the reflects a treatment comparable to that of compensating federal funds rate. balances held at correspondent banks by respondent 3. Long-term assets used solely in priced services, the institutions. The reserve requirement imposed on priced services portion of long-term assets shared with respondent balances must be held as vault cash or as nonpriced services, and an estimate of the assets of the nonearning balances maintained at a Reserve Bank; thus, a Board of Governors used in the development of priced portion of priced services clearing balances held with the services. Effective Jan. 1, 1987, the Reserve Banks Federal Reserve is shown as required reserves on the asset implemented Financial Accounting Standards Board side of the balance sheet. The remainder of clearing Statement No. 87, Employers' Accounting for Pensions. balances is assumed to be invested in three-month Accordingly, in 1989 the Reserve Banks recognized a Treasury bills, shown as investment in marketable credit to expenses of $14.7 million and a corresponding securities. Receivables are (1) amounts due the Reserve increase in this asset account. Banks for priced services and (2) the share of 4. Under the matched-book capital structure for assets suspense-account and difference-account balances related that are not "self-financing," short-term assets are financed to priced services. Materials and supplies are the inventory with short-term debt. Long-term assets are financed with value of short-term assets. Prepaid expenses include salary long-term debt and equity in a proportion equal to the ratio advances and travel advances for priced service personnel. of long-term debt to equity for the twenty-five largest bank Items in process of collection (CIPC) is gross Federal holding companies, which are used in the model for the Reserve CIPC stated on a basis comparable to that of a private sector adjustment factor (PSAF). The PSAF concommercial bank. It reflects adjustments for intra-System sists of the taxes that would have been paid and the return items that would otherwise be double-counted on a on capital that would have been provided had priced serconsolidated Federal Reserve balance sheet; for items vices been furnished by a private-sector firm. Other shortassociated with nonpriced items, such as those collected term liabilities include clearing balances maintained at for government agencies; and for items associated with Reserve Banks and deposit balances arising from float. providing fixed availability or credit before items are Other long-term liabilities consist of obligations on capital received and processed. Among the costs to be recovered leases. under the Monetary Control Act is that of float, or net Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 195 Pro forma income statement for Federal Reserve priced services, calendar years 1989 and 1988l Millions of dollars Item 1989 1988 Income from services provided to depository institutions2... 702.4 667.7 Production expenses3 599.4 552.9 Income from operations 103.1 114.8 Imputed costs4 Interest on float . 50.8 43.4 Interest on debt . 16.9 16.2 Sales taxes 7.6 8.4 FDIC insurance. 1.6 76.9 1.8 69.9 Income from operations after imputed costs . 26.2 44.9 Other income and expenses5 Investment income 163.4 134.0 Earnings credits 147.1 16.2 123.0 11.0 Income before income taxes. 42.4 55.9 Imputed income taxes6 8.7 18.1 Net income 33.7 37.9 MEMO Targeted return on equity7 32.9 32.7 1. Details may not add to totals because of rounding. Unrecovered float includes that generated by services to 2. Income for priced services is realized from direct government agencies or by other central bank services. charges to an institution's account or from charges against Float recovered through income on clearing balances is the accumulated earnings credits. result of the increase in investable clearing balances; the 3. Production expenses include direct, indirect, and increase is produced by a deduction for float for cash items other general administrative expenses of the Reserve Banks in process of collection, which reduces imputed reserve for priced services and the expenses of staff members of the require ments. The income on clearing balances reduces Board of Governors working directly on the development the float to be recovered through other means. As-of of priced services, which were $1.4 million in 1989 and adjustments and direct charges are midweek closing float $1.7 million in 1988. The credit to expenses under FASB and interterritory check float, which may be recovered 87 is reflected in production expenses (see the pro forma from depositing institutions through adjustments to the balance sheet, note 3). institution's reserve or clearing balance or by valuing the 4. Interest on float is derived from the value of float to float at the federal funds rate and billing the institution be recovered, either explicitly or through per-item fees, directly. Float recovered through per-item fees is valued at during the period. Float costs include those for checks, the federal funds rate and has been added to the cost base book-entry securities, noncash collection, ACH, and wire subject to recovery in 1989. transfers. 5. Investment income is on clearing balances and Interest is imputed on debt assumed necessary to finance represents the average coupon-equivalent yield on threepriced service assets. The sales taxes and FDIC insurance month Treasury bills applied to the total clearing balance assessment that the Federal Reserve would have paid had it maintained, adjusted for the effect of reserve requirements been a private-sector firm are among the components of the on clearing balances. Expenses for earnings credits granted PSAF (see the pro forma balance sheet, note 4). to depository institutions on their clearing balances are The following list shows the daily average recovery of derived by applying the average federal funds rate to the float by the Reserve Banks for 1989 in millions of dollars. required portion of the clearing balances, adjusted for the net effect of reserve requirements on clearing balances. Total float 917.2 6. Calculated at the effective tax rate derived from the Unrecovered float 63.7 PSAF model. Float subject to recovery 853.5 7. The after-tax rate of return on equity that the Federal Sources of recovery of float Reserve would have earned had it been a private business Income on clearing balances 102.4 firm, as derived from the PSAF model. As-of adjustments 329.5 Direct charges 130.7 Per-item fees 290.9 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

196 76th Annual Report, 1989 Pro forma income statement for Federal Reserve priced services, by service, 1989l Millions of dollars Definitive Com- Wire Com- safekeeping Bookmercial transfer Cash Item Total mercial and entry check and net services ACH noncash securities collection settlement collection Income from services 702.4 535.1 76.8 48.9 17.0 10.2 14.4 Operating expenses 599.4 468.9 63.9 42.6 15.3 8.3 13.7 [ncome from operations . 103.1 66.2 12.9 6.3 1.8 1.9 .7 Imputed costs2 76.9 68.8 3.7 2.6 1.1 .6 .1 Income from operations after imputed costs .. 26.2 -2.6 9.2 3.7 .7 1.3 .6 Other income and expenses, net3 16.2 14.3 .8 .6 .2 .1 .2 [ncome before income taxes 42.4 11.7 10.0 4.3 .9 1.4 .8 1. Details may not sum to totals because of rounding. allocated among priced services according to the ratio of The effect of implementing FASB 87 (see the pro forma operating costs less shipping costs in each service to the balance sheet, note 3) is reported only in the "total" column total costs of all services less the total shipping costs of all in this table and has not been allocated to individual priced services. services. Taxes and the aftertax targeted rate of return on 3. Income on clearing balances and the cost of earnequity, as shown on the overall pro forma income ings credits. Because clearing balances relate directly to statement, have not been allocated among services because the Federal Reserve's offering of priced services, the these elements relate to the organization as a whole. income and cost associated with these balances are 2. Includes float, interest on debt, sales taxes, and the allocated to each service based on the ratio of income from FDIC assessment. Float costs are based on the actual float each service to total income. incurred in each priced service. Other imputed costs are Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 197 Revenue and expenses of locally priced Federal Reserve services, by District, 1989l Millions of dollars Total Operating Float Total Net District cost revenue Commercial check collection Boston 38.2 33.3 3.4 36.7 1.5 New York 67.9 59.9 5.9 65.8 2.1 Philadelphia 24.8 20.9 .5 21.4 3.4 Cleveland 31.9 25.9 2.4 28.2 3.7 Richmond 52.2 42.6 5.3 47.9 4.2 Atlanta 65.7 58.6 1.4 60.0 5.6 Chicago 73.5 58.5 5.4 63.9 9.6 St. Louis 24.4 20.6 2.7 23.3 1.1 Minneapolis 29.9 26.7 .4 27.1 2.7 Kansas City 34.2 31.1 2.1 33.2 1.0 Dallas 36.4 32.2 2.2 34.5 1.9 San Francisco... 56.1 65.7 7.7 73.4 -17.3 System total 535.1 476.0 39.4 515.5 19.6 Definitive safekeeping and noncash collection Boston .8 .6 .6 .2 New York 2.8 2.4 2.4 .4 Philadelphia 1.2 1.0 1.0 .2 Cleveland 2.0 1.7 .1 1.7 .3 Richmond .9 .8 .8 .1 Atlanta 2.4 2.4 2.4 * Chicago 2.4 2.1 2.1 .3 St. Louis 1.0 .9 .9 .1 Minneapolis .8 .8 .8 * Kansas City 1.3 1.2 1.2 .2 Dallas 1.4 1.4 .3 1.7 -.3 San Francisco... * * * * * System total 17.0 15.3 .3 15.6 1.4 Cash services Boston New York Philadelphia 1.7 1.6 Cleveland 1.9 1.8 Richmond .1 .1 Atlanta * * Chicago .3 .3 St. Louis .2 .2 Minneapolis 2.9 2.4 Kansas City .5 .5 Dallas * * San Francisco... 6.5 6.4 System total.... .7 14.4 13.7 1. Details may not sum to totals because of rounding; To reconcile net revenue by priced service shown in this also, expenses related to research and development table with that shown in the income statement by service, projects are reported at the System level, and therefore the adjustments must be made for imputed interest on debt, sum of expenses for the twelve Districts may not equal the sales taxes, FDIC assessment, Board expenses for priced System total. The financial results for each Reserve Bank services, and net income on clearing balances. shown here do not include the dollars to be recovered •Less than $50,000 in absolute value. through the PSAF and the net income on clearing balances. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

198 76th Annual Report, 1989 Activity in Federal Reserve priced services, calendar years 1989, 1988, and 1987l Thousands of items, except as noted Percent change Service 1989 1988 1987 1989-88 1988-87 Fund transfers 60,645 56,334 53,278 7.7 5.7 Commercial ACH 740,623 602,406 475,114 22.9 26.8 Commercial checks 18,014,301 17,617,744 17,007,924 2.3 3.6 Securities transfers 2,536 2,236 2,061 13.4 8.5 Definitive safekeeping 110 138 163 -20.3 -15.3 Noncash collection 3,180 3,337 3,803 -4.7 -12.3 Cash transportation 322 341 357 -5.6 -4.5 1. Activity is defined as follows: for wire transfer of securities, number of basic transfers originated on-line; funds, the number of basic transactions originated; for for definitive safekeeping, average number of issues or ACH, total number of commercial items processed; for receipts maintained; for noncash collection, number of commercial checks, total number of commercial checks items on which fees are assessed; and for cash transcollected, including both processed and fine-sort items; for portation, number of armored-carrier stops. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

199 Board of Governors Financial Statements The financial statements of the Board accountants Coopers &Lybrand for 1989 were examined by the independent public and Price Waterhouse for 1988. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Governors of the Federal Reserve System We have audited the accompanying balance sheet of the Board of Governors of the Federal Reserve System (the Board) at December 31, 1989, and the related statements of revenues and expenses and fund balance and cash flows for the year then ended. 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 audit. The financial statements of the Board of Governors of the Federal Reserve System for the year ended December 31, 1988, were audited by other auditors, whose report, dated February 24, 1989, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards and the financial audit standards in Government Auditing Standards issued by the Comptroller General of the United States. Those 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. An audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Board of Governors of the Federal Reserve System as of December 31,1989, and the results of its operation and its cash flows for the year then ended in conformity with generally accepted accounting principles. Washington, D.C. February 16, 1990 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 76th Annual Report, 1989 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BALANCE SHEETS As of December 31, 1989 1988 ASSETS CURRENT ASSETS Cash $ 6,911,025 $ 7,312,846 Accounts receivable 830,753 602,478 Stockroom and cafeteria inventories, at cost 253,530 333,601 Prepaid expenses and other assets 679,246 654,077 Total current assets 8,674,554 8,903,002 PROPERTY, BUILDINGS AND EQUIPMENT, Net (Note 3) 53,297,829 58,487,676 Total assets $61,972,383 $67,390,678 LIABILITIES AND FUND BALANCE CURRENT LIABILITIES Accounts payable $ 4,860,780 $ 4,020,776 Accrued payroll and related taxes 3,031,416 2,915,138 Accrued annual leave 4,338,262 4,288,264 Unearned revenues and other liabilities 903,140 833,578 Total current liabilities 13,133,598 12,057,756 COMMITMENTS (Note 5) FUNDBALANCE 48,838,785 55,332,922 Total liabilities and fund balance $61,972,383 $67,390,678 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 STATEMENTS OF REVENUES AND EXPENSES AND FUND BALANCE For the years ended December 31, 1989 1988 BOARD OPERATING REVENUES Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $ 89,579,700 $ 84,410,500 Other revenues (Note 4) 4,474,753 3,460,332 Total operating revenues 94,054,453 87,870,832 BOARD OPERATING EXPENSES Salaries 61,281,560 56,229,044 Retirement and insurance contributions 8,269,511 7,095,176 Depreciation and net losses on disposals 7,432,273 7,601,609 Travel 3,345,743 3,171,355 Contractual services and professional fees 3,281,235 3,062,980 Utilities 3,113,889 3,169,953 Postage and supplies 2,986,854 3,035,304 Repairs and maintenance 2,787,101 3,099,672 Printing and binding 2,678,987 2,305,362 Software 2,599,191 2,461,366 Equipment and facility rentals 515,558 876,944 Other expenses (Note 4) 2,256,688 2,272,076 Total operating expenses 100,548,590 94,380,841 BOARD OPERATING REVENUES (UNDER) EXPENSES (6,494,137) (6,510,009) ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES Assessments levied on Federal Reserve Banks for currency costs 174,313,207 164,975,182 Expenses for currency printing, issuance, retirement, and shipping 174,313,207 164,975,182 CURRENCY ASSESSMENTS (UNDER) OVER EXPENSES — — TOTAL REVENUES (UNDER) EXPENSES (6,494,137) (6,510,009) FUND BALANCE, Beginning of year 55,332,922 61,842,931 FUND BALANCE, End of year $ 48,838,785 $ 55,332,922 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 76th Annual Report, 1989 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF CASH FLOWS For the years ended December 31, 1989 1988 CASH FLOWS FROM OPERATING ACTIVITIES Board operating revenues (under) expenses $(6,494,137) $(6,510,009) Adjustments to reconcile operating revenues (under) expenses to net cash provided by operating activities: Depreciation and net losses on disposals 7,432,273 7,601,609 (Increase) decrease in accounts receivable, inventories and prepaid expenses, and other assets (173,373) 324,593 Decrease in other non-current assets - 429,357 Increase in accrued annual leave 49,998 103,038 Increase in accounts payable, accrued payroll and related taxes, and other liabilities 1,025,844 390,623 Net cash provided by operating activities 1,840,605 2,339,211 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposals of furniture and equipment 2,453,537 42,608 Capital expenditures (4,695,963) (2,774,969) Net cash used in investing activities (2,242,426) (2,732,361) NET DECREASE IN CASH (401,821) (393,150) CASH BALANCE, Beginning of year 7,312,846 7,705,996 CASH BALANCE, End of year $6,911,025 $ 7,312,846 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 203 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM NOTES TO FINANCIAL STATEMENTS were not required for the years 1989 and 1988 and the Board was not assessed a contribution for these years. DECEMBER 31, 1989 AND 1988 Excess Plan assets will continue to fund future years' contributions. (1) SIGNIFICANT ACCOUNTING POLICIES Board contributions to the Civil Service Plan directly Board Operating Revenues and Expenses—Assessments match employee contributions. The Board's contributions made on the Federal Reserve Banks for Board operating to the Civil Service Plan totaled $585,600 in 1989 and expenses and capital expenditures are calculated based on $555,700 in 1988. expected cash needs. These assessments, other operating Employees of the Board may also participate in the revenues, and operating expenses are recorded on the Federal Reserve System's Thrift Plan. Under the Thrift accrual basis of accounting. Plan, members may contribute up to a fixed percentage of their salary. Board contributions are based upon a fixed Issuance and Redemption of Federal Reserve Notes— percentage of each member's basic contribution and were The Board incurs expenses and assesses the Federal $1,751,100 in 1989 and$l,586,700 in 1988. Reserve Banks for the cost of printing, issuing, shipping and retiring Federal Reserve Notes. These assessments The Board also provides certain health benefits for and expenses are separately reported in the statements of retired employees. The cost of providing the benefits is revenues and expenses because they are not Board recognized by expensing the insurance premiums which operating transactions. were $323,800 in 1989 and $245,400 in 1988. Property, Buildings, and Equipment—The Board's property, buildings and equipment are stated at cost less (3) PROPERTY, BUILDINGS, AND EQUIPMENT accumulated depreciation. Depreciation is calculated on a The following is a summary of the components of the straight-line basis over the estimated useful lives of the Board's fixed assets, at cost, net of accumulated assets, which range from 3 to 10 years for furniture and depreciation. equipment and from 10 to 50 years for building equipment and structures. Upon the sale or other disposition of a As of December 31, depreciable asset, the cost and related accumulated 1989 1988 Land and depreciation are removed from the accounts and any gain improvements . $ 1,301,314 $ 1,301,314 or loss is recognized. Buildings 63,556,144 63,290,586 Furniture and (2) RETIREMENT BENEFITS equipment 30,920,877 38,865,250 Substantially all of the Board's employees participate in 95,778,335 103,457,150 either the Retirement Plan for Employees of the Federal Less accumulated Reserve System or the Civil Service Plan. The System's depreciation . 42,480,506 44,969,474 Total property, Plan is a multiemployer plan which covers employees of buildings and the Federal Reserve Banks, the Board, and the Plan equipment ... $ 53,297,829 $ 58,487,676 Administrative Office. Employees of the Board who entered on duty prior to 1984 are covered by a contributory defined benefits program under the plan. Employees of the (4) OTHER REVENUES AND OTHER EXPENSES Board who entered on duty after 1983 are covered by a The following are summaries of the components of non-contributory defined benefits program under the plan. Other Revenues and Other Expenses. The Civil Service Plan is a defined contribution plan. Contributions to the System's Plan are actuarially For the years determined and funded by participating employers at ended December 31, amounts prescribed by the Plan's administrator. No 1989 1988 separate accounting is maintained of assets contributed by Other Revenues the participating employers and net pension cost for the Subscription period is the required contribution for the period. As of revenue $1,736,244 $ 924,783 January 1,1989, actuarial calculations showed that the fair Contingency Processing value of the assets of the System's Plan exceeded the Center fees 878,371 $1,672,667 projected benefit obligations by 85 percent. Based on these Assistance to calculations and similar calculations performed for 1988, Federal agencies . 551,000 _ it was determined that employer funding contributions Miscellaneous 1,309,138 862,882 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

204 76th Annual Report, 1989 (4) OTHER REVENUES AND OTHER EXPENSES-Cont. Total other revenues $4,474,753 $3,460,332 Other Expenses Cafeteria operations, net $ 654,051 $ 598,004 Tuition, registrations and membership fees 524,934 571,271 Subsidies and contributions... 413,020 697,237 Miscellaneous 664,683 405,564 Total other expenses $2,256,688 $2,272,076 Through June 30,1989, the Board operated on behalf of the Federal Reserve System a contingency processing center to handle data processing requirements during emergency situations. The Board recovered from the Federal Reserve Banks a proportionate amount of the operating expenses of the center in the form of fees. Beginning on July 1, 1989, the equipment and the responsibility for operating the center were transferred to the Federal Reserve Bank of Richmond. Effective July 1, 1989, the Board began reimbursing the Federal Reserve Bank of Richmond for the Board's share of the center's operating expenses. (5) COMMITMENTS The Board has entered into several operating leases to secure office, classroom and warehouse space for periods ranging from two to five years. Minimum future rental commitments under those operating leases having an initial or remaining noncancelable lease term in excess of one year at December 31, 1989, are as follows: 1990 $238,900 1991 257,800 1992 224,900 1993 189,400 1994 65,900 $976,900 Rental expenses under these operating leases were $243,400 and $194,900 in 1989 and 1988, respectively. (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 1989 and 1988, the Board paid $259,780 and $187,200, respectively, in assessments for operating expenses of the Council. These amounts are included in subsidies and contributions for 1989 and 1988. 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 $30,300 and $31,700 for 1989 and 1988, respectively. 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

206 76th Annual Report, 1989 1. Detailed Statement of Condition of All Federal Reserve Banks Combined., December 31, 1989l Thousands of dollars ASSETS Gold certificate account 11,059,129 Special drawing rights certificate account 8,518,000 Coin 456,342 Loans and securities Loans to depository institutions 480,585 Federal agency obligations Bought outright 6,524,611 Held under repurchase agreement 525,000 U.S. Treasury securities Bought outright Bills 104,580,590 Notes 91,381,098 Bonds 30,813,595 Total bought outright 226,775,283 Held under repurchase agreement 1,592,000 Total securities 228,367,283 Total loans and securities 235,897,479 Items in process of collection Transit items 7,309,113 Other items in process of collection 1,548,718 Total items in process of collection 8,857,831 Bank premises Land 110,561 Buildings (including vaults) 623,533 Building machinery and equipment 177,837 Construction account 90,452 Total bank premises 891,822 Less depreciation allowance 212,485 679,337 Bank premises, net 789,898 Other assets Furniture and equipment 659,117 Less depreciation 390,668 Total furniture and equipment, net 268,449 Denominated in foreign currencies2 31,332,540 Interest accrued 3,149,884 Premium on securities 1,493,006 Due from Federal Deposit Insurance Corporation 1,513,650 Overdrafts 563,913 Prepaid expenses 205,240 Suspense account 139,060 Real estate acquired for banking-house purposes 15,648 Other 164,866 Total other assets 38,846,255 Totalassets 304,424,934 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 207 1. — Continued LIABILITIES Federal Reserve Notes Outstanding (issued to Federal Reserve Banks) 279,664,679 Less held by Federal Reserve Banks 37,925,546 Total Federal Reserve notes, net 241,739,133 Deposits Depository institutions 38,326,523 U.S. Treasury, general account 6,216,516 Foreign, official accounts 589,487 Other deposits Officers' and certified checks 22,090 International organizations 76,238 Other3 1,203,430 Total other deposits 1,301,758 Deferred credit items 7,771,590 Other liabilities Discount on securities 2,781,906 Sundry items payable 49,054 Suspense account 25,811 All other 1,137,436 Total other liabilities 3,994,207 Total liabilities 299,939,214 CAPITAL ACCOUNTS Capital paid in 2,242,860 Surplus 2,242,860 Other capital accounts4 0 Total liabilities and capital accounts 304,424,934 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 $6,960.4 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

208 76th Annual Report, 1989 2. Statement of Condition of Each Federal Reserve Bank, December 31,1989 and 1988 Millions of Dollars1 Total Boston Item 1989 1988 1989 1988 ASSETS Gold certificate account 11,059 11,060 699 680 Special drawing rights certificate account 8,518 5,018 531 314 Coin 456 395 26 20 Loans To depository institutions 481 2,170 42 Other 0 0 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 6,525 6,966 406 423 Held under repurchase agreements 525 2,101 0 0 U. S. Treasury securities Bought outright2 226,775 233,662 14,112 14,181 Held under repurchase agreements 1,592 4,760 0 0 Total loans and securities 235,898 249,659 14,523 14,646 Items in process of collection 8,903 8,739 470 480 Bank premises 790 750 91 92 Other assets Denominated in foreign currencies3 31,333 9,129 1,097 301 All other 7,465 8,924 311 312 Interdistrict Settlement Account 0 0 2,705 605 Total assets 304,422 293,674 20,453 17,450 LIABILITIES Federal Reserve notes 241,739 229,640 17,166 14,322 Deposits Depository institutions 38,327 39,347 2,510 2,386 U.S. Treasury, general account 6,217 8,656 0 0 Foreign, official accounts 590 347 5 5 Other 1,298 548 52 20 Total deposits 46,430 48,898 2,567 2,411 Deferred credit items 7,773 7,453 376 373 3,994 3,457 178 194 Other liabilities and accrued dividends4 99,935 289,448 20,286 17,300 Total liabilities CAPITAL ACCOUNTS 2,243 2,113 83 75 Capital paid in 2,243 2,113 83 75 Surplus 0 0 0 0 Other capital accounts Total liabilities and capital accounts 304,423 293,674 20,453 17,450 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes outstanding (issued to Bank) 279,665 271,492 19,741 16,862 Less: Held by Bank 37,926 41,852 2,575 2,540 Federal Reserve notes, net 241,739 229,640 17,166 14,322 Collateral for Federal Reserve notes Gold certificate account 11,059 11,060 Special drawing right certificate account 8,518 5,018 Other eligible assets U.S. Treasury and federal agency securities 222*162 213*562 Total collateral 241,739 229,640 Digitized for FRASER http://fraserF.osrt lnoouteiss fseeed e.ondrg o/f tahie Federal Reserve Bank of St. Louis

Tables 209 2.-Continued New York Philadelphia Cleveland Richmond 1989 1988 1989 1988 1989 1988 1989 1988 3,410 3,310 400 389 661 655 943 917 2,896 1,489 247 162 508 314 745 461 13 14 33 29 35 25 78 62 27 34 45 168 261 890 3 122 0 0 0 0 0 0 0 0 2,300 2,381 188 197 375 402 541 541 525 2,101 0 0 0 0 0 0 79,934 79,855 6,544 6,624 13,046 13,498 18,794 18,142 1,592 4,760 0 0 0 0 0 0 84,378 89,131 6,778 6,989 13,682 14,790 19,338 18,805 1,070 1,235 442 421 311 244 534 459 47 32 46 46 34 32 127 124 8,398 2,411 1,535 438 1,692 502 1,817 511 2,125 2,049 254 172 305 291 408 390 -928 114 862 470 1,214 -559 3,702 3,132 101,408 99,785 10,597 9,116 18,441 16,294 27,692 24,861 81,921 78,077 7,703 6,655 15,566 13,704 23,180 20,096 8,130 9,199 1,943 1,777 2,107 1,894 3,456 3,836 6,217 8,656 0 0 0 0 0 0 480 237 7 7 8 8 9 9 498 310 38 6 62 14 88 45 15,324 18,402 1,988 1,790 2,178 1,916 3,553 3,890 822 795 619 375 288 266 447 387 2,126 1,379 87 90 163 178 233 242 100,192 98,653 10,397 8,910 18,194 16,064 27,413 24,615 608 566 100 103 124 115 139 123 608 566 100 103 124 115 139 123 0 0 0 0 0 0 0 0 101,408 99,785 10,597 9,116 18,441 16,294 27,692 24,861 86,003 84,057 9,601 10,019 17,776 16,071 26,559 23,687 4,082 5,980 1,898 3,364 2,210 2,367 3,379 3,591 81,921 78,077 7,703 6,655 15,566 13,704 23,180 20,096 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

210 76th Annual Report, 1989 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1989 and 1988-Continued Millions of Dollars1 Atlanta Chicago Item 1989 1988 1989 1988 ASSETS Gold certificate account 508 584 1,361 1,394 Special drawing rights certificate account 330 203 1,100 656 Coin 46 36 36 44 Loans To depository institutions 27 35 10 44 Other 0 0 0 0 Acceptances held under repurchase agreements 0 0 0 0 Federal agency obligations Bought outright 298 325 775 846 Held under repurchase agreements 0 0 0 0 U.S. Treasury securities Bought outright2 10,358 10,895 26,940 28,367 Held under repurchase agreements 0 0 0 0 Total loans and securities 10,682 11,255 27,725 29,257 Items in process of collection 763 721 851 774 Bank premises 59 59 110 100 Other assets Denominated in foreign currencies3 2,914 803 4,042 1,168 Allother 241 273 612 3,017 Interdistrict Settlement Account -3,167 360 1,787 -1,715 Total assets 12,376 14,294 37,624 34,695 LIABILITIES Federal Reserve notes 7,315 8,889 32,241 29,658 Deposits Depository institutions 3,773 4,189 3,710 3,413 U.S. Treasury, general account 0 0 0 0 Foreign, official accounts 14 13 19 19 Other 73 5 189 107 Total deposits 3,860 4,207 3,918 3,539 Deferred credit items 630 657 561 565 132 149 343 387 Other liabilities and accrued dividends4 1,938 13,902 37,062 34,149 Total liabilities CAPITAL ACCOUNTS 219 196 281 273 Capital paid in 219 196 281 273 Surplus 0 0 0 0 Other capital accounts 12,376 14,294 37,624 34,695 Total liabilities and capital accounts FEDERAL RESERVE NOTE STATEMENT 11,148 12,528 35,397 32,902 Federal Reserve notes outstanding (issued to Bank) 3,833 3,639 3,156 3,244 Less: Held by Bank Federal Reserve notes, net 7,315 8,889 32,241 29,658 1. Components may not add to totals because of 3. Valued monthly at market exchange rates. rounding. 4. Includes exchange-translation account reflecting the 2. Includes securities loaned - fully guaranteed by U. S. monthly revaluation at market exchange rates of foreign- Treasury securities pledged with Federal Reserve Banks - exchange commitments. and excludes securities sold and scheduled to be bought Digitized bfaocrk FunRdAerS mEaRtch ed sale-purchase transactions. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 211 2. - Continued St. Louis Minneapolis Kansas City Dallas San Francisco 1989 1988 1989 1988 1989 1988 1989 1988 1989 1988 370 368 198 168 494 490 613 676 1,402 1,429 290 160 153 66 362 216 433 307 922 670 30 29 12 11 30 30 39 28 77 67 53 95 9 12 15 30 28 688 0 10 0 0 0 0 0 0 0 0 0 0 201 205 110 99 261 262 274 391 796 894 0 0 0 0 0 0 0 0 0 0 6,982 6,875 3,818 3,329 9,069 8,789 9,528 13,105 27,652 30,002 0 0 0 0 0 0 0 0 0 0 7,235 7,175 3,936 3,440 9,345 9,081 9,829 14,184 28,447 30,906 387 422 434 383 1,478 1,542 754 696 1,409 1,362 23 21 27 24 52 47 25 22 150 151 877 256 1,003 283 1,285 374 2,350 785 4,324 1,296 153 156 85 88 202 198 1,736 1,300 1,032 679 -140 742 -405 1,010 -2,110 712 -1,511 -2,813 -2,008 -2,058 9,226 9,329 5,444 5,473 11,138 12,690 14,268 15,185 35,756 34,502 7,420 7,847 4,147 4,124 8,052 9,758 11,166 11,664 25,863 24,846 1,201 874 686 807 1,316 1,122 1,949 2,401 7,547 7,449 0 0 0 0 0 0 0 0 0 0 4 4 5 5 6 6 11 13 21 21 31 8 31 2 44 4 62 0 129 27 1,236 886 721 814 1,367 1,132 2,022 2,414 7,697 7,497 360 389 390 353 1,428 1,507 617 616 1,235 1,170 87 91 52 48 115 119 121 173 357 407 9,103 9,213 5,309 5,339 10,962 12,516 13,927 14,867 35,152 33,920 61 58 67 67 88 87 171 159 302 291 61 58 67 67 88 87 171 159 302 291 0 0 0 0 0 0 0 0 0 0 9,226 9,329 5,444 5,473 11,138 12,690 14,268 15,185 35,756 34,502 9,009 9,425 5,003 4,928 10,306 12,204 14,620 14,640 34,502 34,169 1,589 1,578 857 804 2,254 2,446 3,454 2,976 8,639 9,323 7,420 7,847 4,147 4,124 8,052 9,758 11,166 11,664 25,863 24,846 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

212 76th Annual Report, 1989 3. Federal Reserve Open Market Transactions, 1989] 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 154 Exchanges 0 Redemptions 600 Others within 1 year Gross purchases 0 Gross sales 0 Maturity shift 620 Exchanges -2,703 Redemptions 0 1 to 5 years Gross purchases 0 Gross sales 3 Maturity shift -541 Exchanges 2,492 5 to 10 years Gross purchases 0 Gross sales 20 Maturity shift -79 Exchanges 212 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 Repurchase agreements2 Gross purchases Gross sales Net change in agency obligations Total net change in System Open Market Account .. oooo 0 3,688 0 1,600 0 0 5,418 -2,308 0 0 225 -5,319 2,008 0 0 -100 200 0 177 600 94,204 94,252 17,208 21,969 oooo 0 3,913 1,600 110,393 112,472 0 0 oooo 0 0 2,646 -2,322 0 0 0 -2,646 2,322 oooo oooo ooo 3,077 0 0 0 172 0 1,657 -110 0 1,436 0 -1,532 0 287 0 -125 110 284 0 0 0 5,255 0 0 83,677 77,349 82,821 78,259 0 22,244 0 12,547 -5,489 -3,434 -856 15,863 0 0 0 0 148 40 8,980 0 11,081 0 -2,249 -40 -7,738 -3,474 ooo 0 0 125 0 7,207 0 3,366 0 3,716 -856 19,579 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 213 3.-Continued May June July Aug. Sept. Oct. Nov. Dec. Total 311 0 0 0 0 219 8,794 1,883 14,284 321 571 5,517 934 0 1,633 0 0 12,818 0 0 0 0 0 0 0 0 0 1,200 1,200 2,400 800 0 1,400 3,530 0 12,730 0 0 0 0 0 0 155 0 327 0 0 0 0 0 0 0 0 0 2,863 1,828 1,749 4,200 1,832 852 3,915 1,268 28,848 -3,628 -1,434 -1,073 -4,025 0 -2,678 -5,502 0 -25,783 0 0 0 0 0 500 0 0 500 0 0 0 0 0 0 0 0 1,436 75 0 13 150 0 24 0 0 490 -2,036 -1,828 -1,584 -3,321 -1,832 -758 -2,869 -1,268 -25,534 3,328 1,434 787 3,425 0 2,552 4,902 0 23,250 0 0 0 0 0 0 0 0 287 0 0 9 0 0 0 0 0 29 258 0 -165 -879 0 -95 -1,046 0 -2,231 200 0 286 400 0 126 400 0 1,934 0 0 0 0 0 0 0 0 284 0 0 0 0 0 0 0 0 0 -1,086 0 0 0 0 0 0 0 -1,086 100 0 0 200 0 0 200 0 600 311 0 0 0 0 219 8,949 1,883 16,617 396 571 5,539 1,084 0 1,657 0 0 13,337 1,200 1,200 2,400 800 0 1,900 3,530 0 13,230 123,029 128,139 123,373 146,611 116,502 111,430 105,696 103,077 1,323,480 113,041 138,141 118,221 147,228 120,144 111,893 105,243 104,827 1,326,542 31,419 6,203 4,961 0 9,396 0 15,350 22,737 129,518 41,117 6,203 4,961 0 9,396 0 15,350 21,145 132,688 -20,971 8,232 -13,091 -1,267 3,642 -2,875 4,966 5,225 -10,055 ooo 12,732 16,573 -3,841 -24,812 ooo 0 0 45 1,666 1,137 1,666 1,137 0 -45 8,232 -13,136 ooo 0 0 54 0 4,011 0 4,011 0 -54 -1,267 3,588 ooo 0 0 -30 -2,905 ooo 1,247 1,247 0 4,966 ooo 0 0 442 2,992 39,972 2,467 41,548 525 -2,018 5,750 -12,073 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

214 76th Annual Report, 1989 4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities, December 31, 1987-89l Millions of dollars Increase or December 31 decrease (-) Description 1989 1988 1987 1989 1988 U.S. Treasury securities, total 228,367 238,422 222,551 -10,055 15,871 By term 1-15 days2 9,413 9,935 11,364 -522 -1,429 16-90 days 55,523 58,448 46,112 -2,925 12,336 91 days to 1 year 70,687 75,236 76,827 -4,549 -1,591 1-5 years 53,509 55,326 47,512 -1,817 7,814 5-10 years 12,529 12,568 15,313 -39 -2,745 More than 10 years 26,707 26,909 25,424 -203 1,485 By type of holding Held outright Treasury bills3 104,580 112,782 107,691 -8,202 5,091 Treasury notes 91,381 90,950 82,973 431 7,977 Treasury bonds 30,814 29,929 28,242 885 1,687 Held under RPs 1,592 4,760 3,645 -3,168 1,115 Federal agency obligations, total 7,050 9,067 8,869 -2,017 198 By term 1-15 days2 678 2,271 1,561 -1,593 710 16-90 days 568 697 691 -129 6 91 days to 1 year 1,346 1,492 1,653 -146 -161 1-5 years 3,198 3,419 3,416 -221 3 5-10 years 1,071 1,000 1,358 71 -358 More than 10 years 188 189 189 -1 0 By type of holding Held outright Federal Farm Credit Banks 1,630 1,997 2,294 -367 -297 Federal Home Loan Banks 2,251 2,251 2,251 0 0 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 0 0 0 Federal Land Banks 130 130 200 0 -70 Federal Home Administration 0 35 99 -35 -64 Federal National Mortgage Association 2,347 2,387 2,490 -40 -103 Federal National Sinking Fund 0 0 0 0 0 Government National Mortgage Association participation certificates4 0 0 51 0 -51 U.S. Postal Service 37 37 37 0 0 Washington Metropolitan Area Transit Authority 117 117 117 0 0 General Services Administration 13 14 14 -1 0 Held under RPs 525 2,101 1,315 -1,576 786 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 agreements. (repurchase agreements and matched sale-purchase 4. There were no outstanding issues as of December 31, agreements). 1989. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 215 5. Number and Salaries of Officers and Employees of Federal Reserve Banks, December 31, 1989 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 140,000 55 4,312,827 1,264 287 39,685,437 1,607 44,138,264 New York 214,400 157 14,091,700 3,718 59 116,314,710 3,935 130,620,810 Philadelphia 158,000 54 4,174,400 1,176 151 33,252,902 1,382 37,585,302 Cleveland 151,000 62 4,441,050 1,334 68 33,055,092 1,465 37,647,142 Richmond 163,500 81 5,799,300 1,824 149 44,791,854 2,055 50,754,654 Atlanta 177,000 72 5,191,000 2,187 81 54,490,289 2,341 59,858,289 Chicago 188,000 87 6,296,960 2,427 31 66,629,596 2,546 73,114,556 St. Louis 160,000 49 3,297,700 1,082 90 26,988,982 1,222 30,446,682 Minneapolis 142,500 50 3,495,700 964 132 25,744,070 1,147 29,382,270 Kansas City 160,000 61 4,272,100 1,592 57 40,606,090 1,711 45,038,190 Dallas 152,000 60 4,357,200 1,575 45 41,366,156 1,681 45,875,356 San Francisco 185,000 101 7,774,495 2,393 74 69,109,743 2,569 77,069,238 Total 1,991,400 889 67,504,432 21,536 1,224 592,034,920 23,661 661,530,752 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

216 76th Annual Report, 1989 6. Income and Expenses of Federal Reserve Banks, 1989 Dollars Item1 Total Boston New York Philadelphia Cleveland CURRENT INCOME Loans 396,923,632 1,917,148 4,067,423 2,486,347 555,846 U.S. Treasury and federal agency securities 20,064,562,087 1,232,848,634 7,085,347,122 572,880,876 1,149,099,468 Foreign currencies 1,037,446,163 36,218,306 277,850,953 50,788,707 56,068,247 Priced services 702,420,500 48,019,383 97,924,772 33,690,691 42,968,475 Other 47,923,342 545,043 27,754,280 632,802 592,146 Total 22,249,275,725 1,320,201,179 7,493,515,660 659,956,484 1,251,157,967 CURRENT EXPENSES Salaries and other personnel expenses 702,343,680 45,741,163 141,549,646 37,168,497 40,478,835 Retirement and other benefits2 103,831,827 9,496,360 26,962,994 8,619,597 8,732,225 Fees 14,425,046 2,467,740 2,566,400 391,970 2,459,927 Travel 27,374,825 1,138,712 4,075,861 1,328,074 2,052,039 Postage and other shipping costs 82,162,042 4,368,042 10,597,656 4,583,369 5,755,630 Communications 11,104,424 1,092,675 2,279,076 543,587 607,479 Materials and supplies 54,387,876 2,900,561 9,890,886 3,048,591 3,189,798 Building expenses Taxes on real estate 23,301,795 3,944,075 3,711,959 1,646,227 1,111,292 Property depreciation 30,711,596 2,411,148 3,475,158 1,699,726 1,542,938 Utilities 24,831,536 2,005,864 3,411,492 2,568,479 1,654,855 Rent 21,244,887 586,314 14,574,167 36,330 370,464 Other 20,394,726 1,014,015 4,058,080 1,481,866 683,790 Equipment Purchases 4,840,730 188,451 0 343,646 188,811 Rentals 22,961,085 309,916 4,368,470 635,181 1,521,689 Depreciation 80,576,559 6,614,121 16,404,776 4,440,742 5,198,600 Repairs and maintenance 49,828,850 3,258,749 7,706,126 2,239,597 3,326,715 Earnings-credit costs 147,907,312 9,605,023 14,270,137 10,190,699 11,691,875 Other 74,323,442 3,539,209 11,676,508 5,861,309 3,430,283 Shared costs, net3 3 (467,700) (156,826) 2,026,802 170,142 Recoveries (34,608,399) (8,239,219) (3,975,441) (2,614,856) (3,172,267) Expenses capitalized4 (2,710,550) (135,888) (5,676) (82,412) (384,240) Total 1,436,381,379 91,839,331 277,441,449 86,157,021 90,610,880 Reimbursements (127,072,580) (5,389,318) (25,920,952) (15,833,562) (12,539,943) Net expenses 1,332,160,712 86,450,013 251,520,497 70,323,459 78,070,937 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 111 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 1,624,011,524 916,622,952 2,384,805,935 606,577,478 321,298,501 784,485,967 917,443,350 2,469,140,280 60,079,568 96,251,719 133,784,400 29,048,493 33,152,122 42,535,293 78,316,165 143,352,190 62,099,088 81,636,420 94,098,692 31,105,362 38,513,000 45,602,797 48,078,870 78,682,950 748,780 876,593 12,103,973 494,681 475,992 487,056 1,014,884 2,197,113 1,748,551,212 1,096,973,751 2,773,052,735 674,238,536 399,612,814 876,312,278 1,256,582,936 2,699,120,173 52,953,840 64,130,085 78,186,918 33,756,833 31,023,681 47,377,576 47,485,784 82,490,822 11,998,717 14,701,240 17,149,911 7,569,598 6,647,428 10,340,594 9,785,998 18,520,020 636,654 1,098,638 590,735 570,863 1,658,271 463,514 461,428 1,058,906 1,973,281 2,313,837 3,530,894 1,441,024 1,382,420 2,085,543 2,366,414 3,686,726 6,957,585 9,135,271 9,181,604 3,960,198 5,284,518 5,851,122 4,176,386 12,310,661 705,776 1,258,214 1,201,722 483,147 433,394 767,454 900,296 831,604 4,929,425 5,694,784 6,125,744 3,235,493 2,264,959 3,714,096 3,943,450 5,450,089 2,311,403 1,754,300 2,201,064 453,113 2,358,598 888,129 640,369 2,281,266 3,686,711 2,473,825 3,927,170 1,054,299 1,072,098 2,327,959 1,402,580 5,637,984 2,344,676 2,207,438 2,581,138 1,510,575 777,746 1,508,910 1,112,086 3,148,277 572,323 453,156 2,405,007 436,211 150,599 251,039 1,192,882 216,395 1,809,317 2,174,585 4,030,790 747,074 814,002 757,024 730,102 2,094,081 472,582 396,177 408,101 408,513 622,198 152,248 524,685 1,135,318 1,256,814 1,883,428 5,260,930 466,125 600,223 1,368,026 2,345,039 2,945,244 6,877,521 8,301,286 9,779,601 2,896,430 3,840,206 3,319,130 4,752,179 8,151,967 4,917,125 6,054,119 7,680,036 1,927,024 2,460,865 2,274,162 2,569,296 5,415,036 12,053,257 14,584,038 27,038,513 6,108,728 7,371,329 11,665,008 7,743,599 15,585,106 4,642,494 5,719,186 7,464,461 2,899,951 2,929,654 3,268,273 4,197,168 18,694,946 (1,403,855) 959,965 (6,253,459) 1,208,006 1,784,185 855,455 939,560 337,727 (4,538,132) (2,384,773) (2,128,224) (1,246,663) (446,237) (689,274) (1,508,024) (3,665,289) (253,062) (286,551) (463,540) (79,332) (47,152) (499,483) (401,279) (71,935) 114,904,452 142,622,248 179,899,116 69,807,210 72,982,985 98,046,505 95,359,999 186,254,951 (7,784,795) (9,350,029) (12,548,912) (7,052,269) (4,177,436) (7,165,316) (6,061,211) (13,248,837) 107,119,657 133,272,219 167,350,204 62,754,941 68,805,549 90,881,189 89,298,788 173,006,114 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

218 76th Annual Report, 1989 6. Income and Expenses of Federal Reserve Banks, 1988 — Continued Dollars Item1 Total Boston New York Philadelphia Cleveland PROFIT AND LOSS Current net income 20,917,115,014 1,233,751,166 7,288,688,019 589,633,025 1,173,087,030 Additions to and deductions from current net income Profits on sales of U.S. Treasury and federal agency securities 80,065,694 823,379 4,735,164 374,603 68,403,659 Profit on foreign exchange transactions 1,204,173,436 45,075,533 341,954,948 62,602,870 702,956 Other additions 12,300,866 3,291,177 25,923 3,556 3,270 Total additions 1,296,539,996 49,190,089 346,716,034 62,981,029 69,109,885 Total deductions (917,412) (1,241) (641,832) (15,084) (1,190) Net additions to or deductions(-) from current net income 1,295,622,584 49,188,848 346,074,202 62,965,945 69,108,695 Cost of unreimbursed Treasury services 41,009,218 1,776,930 5,487,856 4,032,471 3,338,604 Assessments by Board Board expenditures5 89,579,700 3,207,100 24,011,500 4,399,100 4,877,500 Cost of currency 175,043,736 10,871,391 59,997,193 5,051,423 10,402,141 Net income before payment to U.S. Treasury 21,907,104,945 1,267,084,593 7,545,265,672 639,175,976 1,223,577,480 Dividends paid 129,885,339 4,737,306 34,813,338 6,070,853 7,054,527 Payments to U.S. Treasury (interest on Federal Reserve notes) 21,646,417,306 1,254,035,287 7,468,561,334 635,905,173 1,207,926,053 Transferred to surplus 130,802,300 8,312,000 41,891,000 (2,800,050) 8,596,900 Surplus, January 1 2,112,057,800 74,955,100 565,787,250 102,778,950 114,903,250 Surplus, December 31 2,242,860,100 83,267,100 607,678,250 99,978,900 123,500,150 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 of $46,692,855. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 219 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 1,641,431,556 963,701,533 2,605,702,530 611,483,594 330,807,264 785,431,089 1,167,284,148 2,526,114,059 1208,662 531,242 1,377,332 428,615 299,159 577,983 25,293 1,280,603 74,329,418 119,684,327 164,355,514 35,613,425 40,980,433 52,148,230 92,319,971 174,405,808 6,538,983 951,609 12,704 4,689 61,127 2,979 15,693 1,389,157 82,077,064 121,167,178 165,745,551 36,046,730 41,340,719 52,729,192 92,360,956 177,075,569 (53,116) (88,491) (6,949) (455) (37,427) (38,031) (1,283) (32,315) 82,023,948 121,078,687 165,738,602 36,046,275 41,303,293 52,691,161 92,359,674 177,043,253 2,919,938 3,099,228 4,132,680 2,368,717 1,681,810 2,703,004 2,776,689 6,691,289 5,258,200 8,420,900 11,605,300 2,480,400 2,823,400 3,678,300 6,562,300 12,315,700 15,253,971 6,747,839 22,512,552 5,956,456 3,130,489 7,407,095 8,853,543 18,859,643 1,700,023,395 1,066,512,253 2,733,190,600 636,724,296 364,474,858 824,333,851 1,241,451,289 2,665,290,681 7,902,912 12,610,959 16,791,352 3,611,424 4,026,093 5,224,277 9,328,249 17,714,049 1,676,145,633 1,030,846,694 2,708,899,298 629,990,373 359,912,165 817,783,874 1,219,589,590 2,636,821,832 15,974,850 23,054,600 7,499,950 3,122,500 536,000 1,325,700 12,533,450 10,754,800 123,455,850 195,767,650 273,006,400 58,459,650 66,845,800 86,911,700 158,031,050 291,155,150 139,430,700 218,822,250 280,506,350 61,582,150 67,382,400 88,237,400 170,564,500 301,909,950 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 76th Annual Report, 1989 7. Income and Expenses of Federal Reserve Banks, 1914-89 * 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 221 7. - Continued Payments to U.S. Treasury Transferred Transferred. Dividends Interest on X Xt Uoll JsXvui X rpVVAlus X t1.o C4 Js.lkujXrWp&l Xu sv\i 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 '. '. '. 297^667 27,695 607,422 7,829,581 227,448 102,880 352,524 7,940,966 176,625 67,304 2,616,352 8,019,137 119,524 -419,140 1,862,433 8,110,462 24,579 -425,653 4,533,977 8,214,971 82,152 -54,456 17,617,358 8,429,936 141,465 -4,333 570,513 8,669,076 197,672 49,602 3,554,101 8,911,342 244,726 135,003 40,327,237 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

222 76th Annual Report, 1989 1. Income and Expenses of Federal Reserve Banks, 1914-89 — Continued Assessments by Period, or Federal Current Net Net additions Board of Governors 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 ,102,444,454 (412,943,156) 82,115,700 162,606,410 1985 . 18,131,982,786 127,744,490 1,301,624,294 77,377,700 173,738,745 1986. 17,464,528,361 ,156,867,714 1,975,893,356 97,337,500 180,779,673 1987 . 17,633,011,623 ,146,910,699 1,796,593,9172 81,869,800 170,674,979 1988 . 19,526,431,297 ,205,960,134 (516,910,320) 84,410,500 164,244,653 1989 . 22,249,275,725 ,332,160,712 1,295,622,583 89,579,700 175,043,736 Total, 1914-89 . 260,759,760,307 19,073,996,934 3,294,866,788 1,360,594,408 2,142,554,746 Aggregatefor each Bank, 1914-89 Boston 13,325,298,022 1,260,555,762 104,323,390 48,986,386 125,789,311 New York 76,869,638,072 3,777,000,569 880,241,305 352,695,286 552,362,532 Philadelphia 10,496,789,614 1,005,530,769 149,136,563 66,499,618 95,627,033 Cleveland 17,531,985,980 1,276,304,240 136,314,156 103,000,190 134,760,176 Richmond 20,536,936,637 1,500,901,394 174,207,621 71,427,476 200,410,547 Atlanta 10,995,255,027 1,658,117,365 303,252,709 103,195,260 127,745,146 Chicago 37,511,095,602 2,502,306,078 391,960,548 191,962,972 297,703,894 St. Louis 8,861,525,563 1,011,653,152 81,196,393 42,164,372 81,187,907 Minneapolis 4,712,877,540 884,907,520 107,981,247 40,649,815 37,455,680 Kansas City 11,224,699,526 1,217,374,670 139,371,190 58,033,009 102,375,522 Dallas 15,020,463,816 1,101,579,357 301,969,932 89,485,073 125,515,905 San Francisco... 33,673,194,909 1,973,661,401 524,911,730 192,494,951 261,621,093 Total 260,759,760,307 19,073,996,9344 3,294,866,788 1,360,594,408 2,142,554,746 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 $2,371,553,299 transferred to surplus was $220,619,072 on Dec. 31, 1989. 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 223 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 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 64,971,100 129,885,339 21,646,417,306 130,802,300 2,289,915,830 149,138,300 2,188,893 236,623,679,128 (3,657) 2,371,553,2993 93,742,302 7,111,395 280,843 11,797,881,147 135,411 93,361,925 620,906,530 68,006,262 369,116 71,824,445,161 (433,412) 644,934,821 123,007,176 5,558,901 722,406 9,230,348,020 290,661 114,309,122 182,831,595 4,842,447 82,930 15,826,415,917 (9,906) 136,733,943 116,859,613 6,200,189 172,493 18,667,013,483 (71,517) 145,310,508 159,979,024 8,950,561 79,264 9,013,247,738 5,491 224,088,790 315,118,268 25,313,526 151,045 34,270,520,898 11,682 295,835,104 72,344,483 2,755,629 7,464 7,663,543,975 (26,515) 66,722,778 64,850,455 5,202,900 55,615 3,714,730,505 64,874 71,259,613 95,226,712 6,939,100 64,213 9,788,985,809 (8,674) 92,377,350 141,324,291 560,049 102,083 13,686,192,985 55,337 174,841,978 303,725,380 7,697,341 101,421 31,140,353,490 (17,089) 311,777,367 2,289,915,830 149,138,300 2,188,893 236,623,679,128 (3,657) 2,371,553,299 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

224 76th Annual Report, 1989 Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks and Branches, December 31, 1989l Dollars Acquisition costs Federal Reserve Net Other Bank or Buildings Building ma- book real Branch Land (including chinery and Total3 value estate4 vaults)2 equipment BOSTON. 22,036,681 80,834,172 5,360,169 108,231,022 90,796,444 Annex.. 27,840 91,092 44,538 163,470 144,188 NEW YORK 3,436,277 35,013,736 21,735,584 60,185,597 42,961,060 Annex 477,863 1,136,219 745,855 2,359,936 784,227 Buffalo 887,844 2,714,398 2,265,777 5,868,019 3,076,497 PHILADELPHIA. 1,876,601 53,799,827 5,903,704 61,580,131 45,870,427 CLEVELAND. 1,074,281 7,668,170 6,742,717 15,485,168 10,074,467 1,224,363 Cincinnati 2,246,599 13,693,245 7,618,302 23,558,146 12,775,797 Pittsburgh 1,658,376 8,390,480 3,321,583 13,370,439 10,786,426 RICHMOND . 3,912,575 56,828,288 14,314,313 75,055,176 54,649,526 Annex 522,733 3,725,466 3,924,584 8,172,784 3,755,797 Baltimore 6,476,335 26,826,903 3,842,189 37,145,427 31,862,732 Charlotte 1,471,529 35,529,494 0 37,001,023 36,728,497 ATLANTA .. 1,202,255 14,762,133 3,564,698 19,529,086 14,206,492 13,071,576 Birmingham. 3,031,888 1,905,770 1,067,791 6,005,449 4,156,649 Jacksonville . 1,652,056 16,259,535 2,418,745 20,330,337 19,209,176 909,313 Miami 3,717,791 11,978,362 2,136,599 17,832,752 14,603,968 Nashville.... 592,342 1,474,678 1,434,027 3,501,048 1,525,135 New Orleans. 3,087,693 3,031,265 1,476,257 7,595,215 4,902,313 292,710 CHICAGO . 4,511,942 103,723,344 15,487,743 123,723,029 102,259,054 Annex 53,066 904,562 426,419 1,384,047 1,215,238 Detroit 797,734 3,323,021 4,049,085 8,169,840 6,288,871 ST. LOUIS 700,378 11,285,257 5,283,870 17,269,505 12,814,230 Little Rock , 1,148,492 2,116,765 1,003,022 4,268,280 2,525,381 Louisville ., 700,075 2,886,531 1,131,238 4,717,844 2,745,151 Memphis .. 1,135,623 4,435,493 2,128,684 7,699,799 4,792,596 MINNEAPOLIS. 1,394,384 26,664,805 7,829,924 35,889,112 21,204,551 Helena 1,595,886 4,676,874 68,689 6,341,449 6,123,035 226,682 KANSAS CITY.. 1,798,804 19,293,282 8,839,833 29,931,919 21,515,937 149,948 Denver 3,187,962 4,096,303 3,577,637 10,861,902 8,272,522 Oklahoma City... 646,386 2,370,331 2,162,878 5,179,594 4,254,688 Omaha 6,534,583 11,053,589 1,401,083 18,989,255 17,952,696 DALLAS.... 3,772,638 8,962,282 3,737,706 16,475,627 13,656,104 El Paso 262,477 1,436,467 393,301 2,092,245 2,027,344 Houston 2,049,064 3,535,122 1,133,316 6,538,502 5,852,198 San Antonio . 482,284 2,609,708 1,332,801 4,424,793 3,820,369 SAN FRANCISCO. 15,541,937 67,475,175 17,386,765 100,403,878 83,614,738 Los Angeles 3,891,887 49,020,125 8,334,890 61,246,902 57,002,828 Portland 207,381 2,299,414 983,879 3,490,673 2,923,776 Salt Lake City 480,222 3,998,031 1,389,875 5,868,128 3,460,762 Seattle 274,772 2,334,457 1,836,988 4,446,217 2,685,989 Total 110,560,536 713,985,173 177,837,057 1,002,382,766 789,897,875 15,874,592 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 225 9. Operations in Principal Departments of Federal Reserve Banks, 1986-89 Operation 1989 1988 1987 1986 Millions of pieces (except as noted) Loans (thousands) 22 22 25 19 Currency received and counted 19,857 17,580 16,881 15,408 Currency verified and destroyed 6,319 5,910 5,217 5,584 Coin received and counted 12,668 17,137 19,871 20,461 Checks handled U.S. government checks 541 547 568 585 Postal money orders 147 144 146 140 All other 18,014 17,623 17,006 16,226 Issues, redemptions, and exchanges of U.S. Treasury and federal agency securitiesu 40 186 191 204 Transfer of funds 60 56 52 50 Food stamps redeemed 2,334 2,327 2,210 2,216 Millions of dollars Loans 229,358 537,952 151,323 193,424 Currency received and counted 246,598 195,647 216,151 197,516 Currency verified and destroyed 59,985 47,184 44,907 47,842 Coin received and counted 1,828 3,684 3,517 3,088 Checks handled U.S. government checks 635,064 608,307 610,678 606,029 Postal money orders 14,284 13,189 12,511 11,103 All other 12,321,576 11,789,787 11,453,158 10,546,900 Issues, redemptions, and exchanges of U.S. Treasury and federal agency securitiesu 98,130,603 89,516,419 90,056,338 75,447,899 Transfer of fund4 182,575,303 160,730,050 152,453,528 125,028,070 Food stamps redeemed 11,714 10,748 10,322 10,475 1. Before 1988, data included book-entry securities 3. Agents' savings bonds transactions, although extransfers both sent and received. After 1987, the data cluded from the 1989 data, are small in dollar amounts. include only the transfers sent. 4. Before 1987, funds transfer dollar volume data were 2. Agents' savings bonds transactions are not included compiled using a different methodology. in the 1989 data. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

226 76th Annual Report, 1989 10. Federal Reserve Bank Interest Rates, December 31, 1989 Loans to depository institutions Bank Adjustment credit Extended credit2 and seasonal creditl First 30 days After 30 days of borrowing3 of borrowing All Federal Reserve Banks.. 7.0 7.0 8.9 1. Adjustment credit is available on a short-term basis to sources, when exceptional circumstances or practices help depository institutions meet temporary needs for involve only a particular institution or when an institution funds that cannot be met through reasonable alternative is experiencing difficulties adjusting to changing market sources. After May 19,1986, the highest rate established conditions over a longer period of time. for loans to depository institutions may be charged on 3. For extended-credit loans outstanding more than 30 adjustment credit loans of unusual size that result from a days, a flexible rate somewhat above rates on market major operating problem at the borrower's facility. sources of funds ordinarily will be charged, but in no case Seasonal credit is available to help smaller depository will the rate charged be less than the basic discount rate institutions meet regular, seasonal needs for funds that plus 50 basis points. The flexible rate is reestablished on cannot be met through special industry lenders and that the first business day of each two-week reserve maintearise from a combination of expected patterns of movement nance period. At the discretion of the Federal Reserve in their deposits and loans. See sections 201.3(a) and Bank, the time period for which the basic discount rate is 201.3(b)(l) of Regulation A. applied may be shortened. See section 201.3(b)(2) of 2. Extended credit is available to depository institutions, Regulation A. if similar assistance is not reasonably available from other Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 227 11 Reserve Requ irements 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 accounts34 $0 million-$40.4 million 3 12/19/89 More than $40.4 million 12 12/19/89 Nonpersonal time deposits5 By original maturity Less than 1 xh years 3 10/6/83 1 Vi years or more 0 10/6/83 Eurocurrency liabilities All types 3 11/13/80 1. Reserve requirements in effect on Dec. 31, 1989. 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 the percentage change 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. 19, 1989, for institutions requirement each year for the succeeding calendar year by reporting quarterly and Dec. 26, 1989, for institutions 80 percent of the percentage increase in the total reservable reporting weekly, the amount was decreased from $41.5 liabilities of all depository institutions, measured on an million to $40.5 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

228 76th Annual Report, 1989 12. Initial Margin Requirements under Regulations T, U, G, and Xl 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 July 5 .. 75 75 1946,Jan. 21 . 100 100 1947, Feb. 21. 75 75 1949, Mar. 3 . 50 50 1951, Jan. 17. 75 75 1953, Feb.20. 50 50 1955,Jan. 4 .. 60 60 Apr. 23. 70 70 1958,Jan. 16. 50 50 Aug. 5 . 70 70 Oct. 16. 90 90 1960, July 28. 70 70 1962, July 10. 50 50 1963, Nov. 6. 70 70 1968, Mar. 11 70 50 70 June 8.. 80 60 80 1970, May 6.. 65 50 65 1971, Dec. 6.. 55 50 55 1972, Nov. 24 65 50 65 1974,Jan. 3 .. 50 50 50 1. These regulations, adopted by the Board of 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 firstt ime 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 229 13. Principal Assets and Liabilities and Number of Insured Commercial Banks, by Class of Bank, June 30, 1989 and 1988l Asset and liability items shown in millions of dollars Member banks Nonmember Item Total banks Total National State June 30,1989 Loans and investments 2,259,427 1,670,844 1,356,464 314,381 588,583 Gross loans 1,757,409 1,327,557 1,087,994 239,563 429,852 Net loans 1,743,883 1,317,868 1,080,100 237,769 426,014 Investments 502,018 343,287 268,469 74,818 158,731 U.S. Treasury and federal agency securities 341,394 229,814 183,443 46,371 111,580 Other 160,624 113,473 85,026 28,446 47,151 Cash assets, total 216,225 168,094 134,473 33,621 48,131 Deposits, total 2,093,121 1,520,354 1,235,203 285,151 572,767 Interbank 52,659 45,443 33,406 12,037 7,216 Other transaction 579,742 429,729 344,286 85,443 150,013 Other nontransaction 1,650,150 1,176,079 967,559 208,520 474,071 Equity capital 202,419 146,170 113,775 32,395 56,250 Number of banks 12,874 5,306 4,270 1,036 7,568 June 30, 1988 Loans and investments 2,130,609 1,578,755 1,272,420 306,335 551,854 Gross loans 1,650,128 1,252,073 1,016,003 236,070 398,055 Net loans 1,637,127 1,242,918 1,008,842 234,076 394,209 Investments 480,481 326,682 256,417 70,266 153,799 U.S. Treasury and federal agency securities 311,925 207,957 166,270 41,688 103,968 Other 168,556 118,725 90,147 28,578 49,830 Cash assets, total 209,739 160,954 128,303 32,651 48,785 Deposits, total 1,990,055 1,442,088 1,158,607 283,481 547,967 Interbank 59,954 52,181 36,755 15,427 7,773 Other demand 583,863 434,551 343,689 90,863 149,312 Other time and savings 1,535,293 1,084,794 886,477 198,316 450,499 Equity capital 184,490 132,574 102,691 29,883 51,916 Number of banks 13,334 5,530 4,460 1,070 7,804 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

230 76th Annual Report, 1989 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items- Year-End 1918-89, and Month-End 1989l Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. 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 r h ti t f s - r o e u n t c - y Total o B u o t u ri 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 2,486 10,125 2,476 1936 .... 2,430 2,430 0 3 39 28 0 2,500 11,258 2,532 1937 .... 2,564 2,564 0 10 19 19 0 2,612 12,760 2,637 1938 .... 2,564 2,564 0 4 17 16 0 2,601 14,512 2,798 1939 .... 2,484 2,484 0 7 91 11 0 2,593 17,644 2,963 1940 .... 2,184 2,184 0 3 80 8 0 2,274 21,995 3,087 1941 .... 2,254 2,254 0 3 94 10 0 2,361 22,737 3,247 1942 .... 6,189 6,189 0 6 471 14 0 6,679 22,726 3,648 1943 .... 11,543 11,543 0 5 681 10 0 12,239 21,938 4,094 1944 .... 18,846 18,846 0 80 815 4 0 19,745 20,619 4,131 1945 .... 24,252 24,252 0 249 578 2 0 15,091 20,065 4,339 1946 .... 23,350 23,350 0 163 580 1 0 24,093 20,529 4,562 1947 .... 22,559 22,559 0 85 535 1 0 23,181 22,754 4,562 1948 .... 23,333 23,333 0 223 541 1 0 24,097 24,244 4,589 1949 .... 18,885 18,885 0 78 534 2 0 19,499 24,427 4,598 1950 .... 20,778 20,725 53 67 1,368 3 0 22,216 22,706 4,636 1951 .... 23,801 23,605 196 19 1,184 5 0 25,009 22,695 4,709 1952 .... 24,697 24,034 663 156 967 4 0 25,825 23,187 4,812 1953 .... 25,916 25,318 598 28 935 2 0 26,880 22,030 4,894 1954 .... 24,932 24,888 44 143 808 1 0 25,885 21,713 4,985 1955 .... 24,785 24,391 394 108 1,585 29 0 26,507 21,690 5,008 1956 .... 24,915 24,610 305 50 1,665 70 0 26,699 21,949 5,066 1957 .... 24,238 23,719 519 55 1,424 66 0 25,784 22,781 5,146 1958 .... 26,347 26,252 95 64 1,296 49 0 27,755 20,534 5,234 1959 .... 26,648 26,607 41 458 1,590 75 0 28,771 19,456 5,311 1960 .... 27,384 26,984 400 33 1,847 74 0 29,338 17,767 5,398 1961 .... 28,881 30,478 159 130 2,300 51 0 31,362 16,889 5,585 1962 .... 30,820 28,722 342 38 2,903 110 0 33,871 15,978 5,567 1963 .... 33,593 33,582 11 63 2,600 162 0 36,418 15,513 5,578 1964 .... 37,044 36,506 538 186 2,606 94 0 39,930 15,388 5,405 Digitized for FRASER http://fraseFr.osr tnloouteiss sfeeed l.aostr gtw/ o pages of table. 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 - F ei o g r n - Other counts 4 a b n a c l e - s ca a p n it d al4 R Fe e d se e r r v a e l re a n n c d y qu R ir e e - d 10 ce E s x s - 10 Banks 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 :J,029 121 20 169 241 0 0 4,096 0 2,282 1,814 5,882 :>,566 544 29 226 253 0 0 5,587 0 2,743 2,844 6,543 :>,376 244 99 160 261 0 0 6,606 0 4,622 1,984 6,550 :$,619 142 172 235 263 0 0 7,027 0 5,815 1,212 6,856 :>,706 923 199 242 260 0 0 8,724 0 5,519 3,205 7,598 :1,409 634 397 256 251 0 0 11,653 0 6,444 5,209 8,732 :>,213 368 1,133 599 284 0 0 4,026 0 7,411 6,615 11,160 :1,215 867 774 586 291 0 0 12,450 0 9,365 3,085 15,410 :>,193 799 793 485 256 0 0 13,117 0 11,129 1,988 20,499 :>,3O3 579 1,360 356 339 0 0 12,886 0 11,650 1,236 25,307 :>,375 440 1,204 394 402 0 0 14,373 0 12,748 1,625 28,515 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 f 3 o 9 r , 6 F 1 R 9 ASE 6 R 12 820 229 321 1,036 0 0 18,086 4,151 21,663 574 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

232 76th Annual Report, 1989 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items- Year-End 1918-89, and Month-End 1989 ^Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- US. 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 he ll r3 R Fe e d se e r r v a e l Total stock5 c ri e g r h ti t f s - r o en u c t- y Total 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 1989 235,417 233,300 2,117 481 1,093 0 39,631 276,622 11,059 8,518 19,620 1989 Jan 239,752 239,752 0 863 798 0 19,643 261,056 11,056 5,018 18,855 Feb ... 236,278 236,278 0 1,602 1,296 0 19,253 258,429 11,061 5,018 18,911 Mar... 235,422 235,422 0 2,454 559 0 19,780 258,215 11,061 5,368 18,961 Apr ... 255,001 241,462 13,539 1,952 545 0 21,515 279,013 11,061 5,518 19,017 May... 230,189 230,189 0 2,033 2,064 0 22,383 256,669 11,060 8,518 19,073 June... 238,421 238,421 0 841 -203 0 29,978 269,037 11,063 8,518 19,211 July... 225,285 225,285 0 594 351 0 32,915 259,145 11,066 8,518 19,309 Aug... 224,018 224,018 0 541 634 0 31,722 256,914 11,066 8,518 19,344 Sept... 227,606 227,606 0 598 501 0 35,433 264,137 11,066 8,518 19,425 Oct.... 224,701 224,701 0 270 1,471 0 38,275 264,717 11,062 8,518 19,494 Nov... 229,667 229,667 0 181 668 0 36,544 267,060 11,060 8,518 19,564 Dec ... 235,417 233,300 2,117 481 1,093 0 39,631 276,622 11,059 8,518 19,620 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. Components may not add to Coin in Circulation," Treasury Bulletin. totals because of rounding. 1. Coin and paper currency held by the Treasury, as 2. Beginning with 1960, figures reflect a minor change well as any gold in excess of the gold certificates issued to in concept; see Federal Reserve Bulletin, vol. 47 (February the Reserve Bank. 1961), p. 164. 8. Beginning in November 1979, includes reserves of 3. Principally acceptances and, until Aug. 21, 1959, member banks. Edge corporations, and U.S. agencies and industrial loans, authority for which expired on that date. branches of foreign banks. Beginning on Nov. 13, 1980, 4. For the period before Apr. 16, 1969, includes the includes reserves of all depository institutions. total of Federal Reserve capital paid in, surplus, other 9. Between Dec. 1, 1959, and Nov. 23, 1960, part was capital accounts, and other liabilities and accrued divi- allowed as reserves; thereafter all was allowed. dends, less the sum of bank premises and other assets, and 10. Estimated through 1958. Before 1929, data were was reported as "Other Federal Reserve accounts"; there- available only on call dates (in 1920 and 1922 the call dates after, "Other Federal Reserve assets" and "Other Federal were Dec. 29). Beginning on Sept. 12,1968, the amount is Digitized Rfoesre FrvRe AliaSbEiliRtie s and capital" are shown separately. based on close-of-business figures for the reserve period http://frase5r.. stFlooru tihsef epder.ioordg b/ efore Jan. 30, 1934, includes gold two weeks before the report date. held in Federal Reserve Banks and in circulation. Federal Reserve Bank of St. Louis

Tables 233 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- With Curhold- ac- bilities c t u io la n - ings7 T s r u e r a y - F ei o g r n - Other counts 4 ca a p n it d al4 R Fe e d se e r r v a e l re a n n c d y qu R ir e e - d 10 fts E s x 1 - 0,13 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 9813 72,497 317 2,542 251 1,41914 0 0 2,669 27,060 6,781 35,268 -1,360 79,743 185 2,113 418 1,27514 0 0 2,935 25,843 7,370 37,011 -3,798 86,547 483 7,285 353 1,090 0 0 2,968 26,052 8,036 35,197 -1,10315 93,717 460 10,393 352 1,357 0 0 3,063 25,158 8,628 35,461 -1,535 103,811 392 7,114 379 1,187 0 0 3,292 26,870 9,421 37,615 -1,265 114,645 240 4,196 368 1,256 0 0 4,275 31,152 10,538 42,694 -893 125,600 494 4,075 429 1,412 0 0 4,957 29,792 11,429 44,217 -2,835 136,829 441 3,062 411 617 0 0 4,671 27,456 13,654 40,558 675 144,774 443 4,301 505 781 0 117 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 ,013 5,392 20,413 17,821 39,179 -945 183,796 513 5,316 253 867 0 ,126 5,952 20,693 i i i 197,488 550 9,351 480 1,041 0 1,490 5,940 27,141. 211,995 447 7,588 287 917 0 1,812 6,088 46,295 230,205 454 5,313 244 1,027 0 ,687 7,129 40,097 247,649 395 8,656 347 548 0 1,605 7,683 37,742 260,453 450 6,217 589 1,298 0 1,626 8,486 36,701 239,581 412 11,766 279 390 0 1,589 7,746 34,221 240,733 432 6,298 326 517 0 1,595 8,127 35,390 n.a. n.a. n.a. 242,880 457 4,462 351 380 0 1,671 7,681 35,723 243,411 476 22,952 352 481 0 1,667 8,969 36,301 247,525 488 5,288 429 524 0 1,616 7,513 31,937 249,139 474 12,153 275 229 0 1,616 8,178 35,765 248,637 451 5,312 371 236 0 1,592 8,693 32,747 249,245 420 6,652 265 273 0 1,611 7,063 30,313 247,581 440 13,452 326 318 0 1,630 8,776 30,623 249,025 444 13,124 252 292 0 1,623 8,303 30,728 253,960 445 5,500 307 311 0 1,638 8,402 35,639 260,453 450 6,217 589 1,298 0 1,626 8,486 36,701 ^ r 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 ment week of quarter, in millions): 1973-Ql, $279; Q2, effective Nov. 19, 1975. Digitized $f1o7r2 ;F QR3A, S$1E1R2; Q4, $84; 1974-Q1, $67; Q2, $58. The http://frastrearn.ssittiloonu pisefreiodd. eonrdge/d with the second quarter of 1974. Federal Reserve Bank of St. Louis

234 76th Annual Report, 1989 15. Changes in Number of Banking Offices in the United States, 19891 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. 31,1988... 13,791 13,415 5,448 4,354 1,094 7,717 250 376 0 Changes during 1989 New banks 235 233 91 72 19 110 32 2 0 Ceased banking operation -243 -243 -132 -116 -16 -93 -18 0 0 Banks converted into branches -401 -396 -163 -133 -30 -233 0 -5 0 Other4 - 4 -4 7 1 6 - 5 -6 0 0 Net change -413 -410 -197 -176 -21 -221 8 -3 0 Banks, Dec. 31,1989 .. 13,378 13,005 5,251 4,178 1,073 7,496 258 373 0 Branches and additional offices, Dec. 31,1988 49,519 46,713 30,384 24,942 5,442 16,218 111 2,806 0 Changes during 1989 De novo . 1,770 1,678 1,096 895 201 578 4 92 0 Banks converted into branches 401 396 203 145 58 193 0 5 0 Discontinued -650 -581 -419 -325 -94 -158 -4 -69 0 Sale of branch 0 18 30 21 9 -12 0 -18 0 Other4 1,672 1,634 1,476 1220 256 148 10 38 0 Net change4 3,193 3,145 2,386 1,956 430 749 10 48 0 Branches and additional offices, Dec. 31,1989 52,712 49,858 32,770 26,898 5,872 16,967 121 2,854 0 1. Preliminary. Final data will be available in the Annual 3. As of Dec. 31, 1988, includes noninsured national Statistical Digest, 1989, 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 235 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1989 First Western Bank Custer, Custer, South to the convenience and needs of the community are Dakota, to acquire the Hill City South Dakota consistent with approval. branch of Rushmore State Bank, Rapid City, South Dakota The Bank of Mid Jersey, Bordentown, New SUMMARY REPORT BY THE ATTORNEY GENERAL Jersey, to acquire the University Plaza branch (12/16/88) office of Howard Savings Bank, Livingston, New The proposed transaction would not be significantly Jersey adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/17/89) (1/20/89) The proposed transaction would not be significantly First Western Bank Custer (Applicant) has assets of adverse to competition. $32 million and the Hill City Branch (Branch) has BASIS FOR APPROVAL BY THE FEDERAL RESERVE assets of $5.6 million. Applicant and Branch (3/17/89) operate in the same banking market. The Bank of Mid Jersey (Applicant) has assets of The banking factors and considerations relating $527.8 million and the University Plaza Branch to the convenience and needs of the community are (Branch) has assets of $5.7 million. Applicant and consistent with approval. Branch operate in the same banking market. The banking factors and considerations relating to the convenience and needs of the community are Central Bank, Hollidaysburg, Pennsylvania, to consistent with approval. acquire the Pleasant Valley and Logan Valley branches of United States National Bank, Johns- Kent City State Bank, Kent City, Michigan, to town, Pennsylvania acquire the Sparta, Michigan branch office of SUMMARY REPORT BY THE ATTORNEY GENERAL PrimeBank Federal Savings Bank, Grand Rap- (1/13/89) ids, Michigan The proposed transaction would not be significantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (3/3/89) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be significantly (2/17/89) adverse to competition. Central Bank (Applicant) has assets of $167 million and the two branches (Branches) have assets of BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/31/89) $15.7 million. Applicant and Bank operate in the Kent City State Bank (Applicant) has assets of same banking market. $53.6 million and the Sparta Branch (Branch) has The banking factors and considerations relating assets of $7.5 million. Applicant and Bank operate to the convenience and needs of the community are consistent with approval. in the same banking market. The banking factors and considerations relating to the convenience and needs of the community are Crestar Bank, Richmond, Virginia, to merge consistent with approval. with Colonial American National Bank, Roanoke County, Virginia Central Bank of Oklahoma City, Oklahoma City, Oklahoma, to acquire certain assets and SUMMARY REPORT BY THE ATTORNEY GENERAL (1/13/89) assume liabilities o/Allied Oklahoma Bank, N. A., The proposed transaction would not be significantly Oklahoma City, Oklahoma adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/14/89) competitive factors was dispensed with, as autho- Crestar Bank (Applicant) has assets of $9.4 billion rized by the Bank Merger Act, to permit the Federal and Colonial American National Bank (Bank) has Reserve System to act immediately to safeguard the assets of $367 million. Applicant and Bank operate depositors of Allied Oklahoma Bank. in the same banking market. BASIS FOR APPROVAL BY THE FEDERAL RESERVE The banking factors and considerations relating (4/13/89) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

236 76th Annual Report, 1989 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1989-Continued Central Bank of Oklahoma City (Applicant) has billion and the Prospect Avenue Branch (Branch) assets of $229.3 million and Allied Oklahoma Bank has assets of $3.4 million. Applicant and Bank (Bank) has assets of $ 59.1 million. The OCC has operate in the same banking market. recommended immediate action by the Federal The banking factors and considerations relating Reserve System to prevent the probable failure of to the convenience and needs of the community are Bank. consistent with approval. Family Bank of Hallandale, Hallandale, Florida, Union Colony Bank, Greeley, Colorado, to merge to merge with Seminole National Bank, Holly- with Northern Bank and Trust, Ft. Collins, wood, Florida Colorado SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the No report received. Request for report on the competitive factors was dispensed with, as autho- competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal rized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the Reserve System to act immediately to safeguard the depositors of the Bank. depositors of Northern Bank and Trust. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (4/26/89) (6/15/89) Family Bank (Applicant) has assets of $93.3 million Union Colony Bank (Applicant) has assets of and Seminole National Bank (Bank) has assets of $ 115.6 million and Northern Bank and Trust (Bank) $7.3 million. The OCC has recommended immedi- has assets of $6.2 million. The FDIC has recomate action by the Federal Reserve System to prevent mended immediate action by the Federal Reserve the probable failure of Bank. System to prevent the probable failure of Bank. Bank of Fountain Hills, Fountain Hills, Arizona, Liberty Bank South, San Francisco, California, to assume deposit liabilities of Grand Canyon to acquire certain assets and liabilities of the State Bank, Scottsdale, Arizona Boulder Creek Branch of Pacific Western Bank, SUMMARY REPORT BY THE ATTORNEY GENERAL San Jose, California No report received. Request for report on the SUMMARY REPORT BY THE ATTORNEY GENERAL competitive factors was dispensed with, as autho- (3/3/89) rized by the Bank Merger Act, to permit the Federal The proposed transaction would not be significantly Reserve System to act immediately to safeguard the adverse to competition. depositors of the Bank. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (6/16/89) (5/22/89) Liberty Bank (Applicant) has assets of $47 million Bank of Fountain Hills (Applicant) has assets of and the Boulder Creek Branch (Branch) has assets $6.9 million and Grand Canyon State Bank (Bank) of $14 million. Applicant and Bank do not operate has deposits of $12.3 million. The State has in the same banking market. recommended immediate action to prevent the The banking factors and considerations relating probable failure of the Bank. to the convenience and needs of the community are consistent with approval. Banco De Ponce, Ponce, Puerto Rico, to acquire the Prospect Avenue Branch of Banco Central Texas Commerce Bank Rio Grande Valley, S.A., New York, New York Brownsville, Texas, to merge with National Bank SUMMARY REPORT BY THE ATTORNEY GENERAL of Brownsville, Brownsville, Texas (4/14/89) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be significantly No report received. Request for report on the adverse to competition. competitive factors was dispensed with, as autho- BASIS FOR APPROVAL BY THE FEDERAL RESERVE rized by the Bank Merger Act, to permit the Federal (6/1/89) Reserve System to act immediately to safeguard the Banco De Ponce (Applicant) has assets of $2.9 depositors of the National Bank of Brownsville. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 237 16. -Continued BASIS FOR APPROVAL BY THE FEDERAL RESERVE $360.2 million and Cherry River National Bank (7/13/89) (Bank) has assets of $36.8 million. Applicant and Texas Commerce Bank (Applicant) has assets of Bank operate in the same banking market. $442.2 million and National Bank of Brownsville The banking factors and considerations relating (Bank) has assets of $32.7 million. The Federal to the convenience and needs of the community are Reserve System has acted immediately to prevent consistent with approval. the probable failure of Bank. First Interstate Bank of California, Los Angeles, Bank of Fountain Hills, Fountain Hills, Arizona, California, to merge with Bank of Alex Brown, to merge with Fidelity Bank, Scottsdale, Arizona Sacramento, California SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the (5/10/89) competitive factors was dispensed with, as autho- The proposed transaction would not be significantly rized by the Bank Merger Act, to permit the Federal adverse to competition. Reserve System to act immediately to safeguard the BASIS FOR APPROVAL BY THE FEDERAL RESERVE depositors of the Fidelity Bank. (8/1/89) BASIS FOR APPROVAL BY THE FEDERAL RESERVE First Interstate Bank of California (Applicant) has (7/21/89) assets of $19.6 billion and Bank of Alex Brown Bank of Fountain Hills (Applicant) has assets of (Bank) has assets of $324 million. Applicant and $11.8 million and Fidelity Bank (Bank) has assets Bank operate in the same banking market. of $11.5 million. The Federal Reserve System has The banking factors and considerations relating acted immediately to prevent the probable failure of to the convenience and needs of the community are Bank. consistent with approval. BancFirst, Oklahoma City, Oklahoma, to assume Comerica Bank-Detroit, Detroit, Michigan, to the liabilities o/The Liberty State Bank, Tahlemerge with Dearborn Bank and Trust Company, quah, Oklahoma Dearborn, Michigan SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (7/14/89) (8/11/89) The proposed transaction would not be significantly The proposed transaction would not be significantly adverse to competition. adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (7/27/89) (9/21/89) BancFirst (Applicant) has assets of $657 million Comerica Bank Detroit (Applicant) has assets of and The Liberty State Bank (Bank) has assets of $41 $9.1 billion and Dearborn Bank and Trust Commillion. Applicant and Bank do not operate in the pany (Bank) has assets of $287.2 million. Applicant same banking market. and Bank do not operate in the same banking The banking factors and considerations relating market. to the convenience and needs of the community are The banking factors and considerations relating consistent with approval. to the convenience and needs of the community are consistent with approval. Manufacturers Hanover First Community Bank, Princeton, West Vir- Trust Company, New York, New York, to purchase ginia, to merge with Cherry River National Bank, certain branches of Goldome, Buffalo, New York Richwood, West Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (4/14/89) (7/5/89) The proposed transaction would not be significantly The proposed transaction would not be significantly adverse to competition. adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (9/26/89) (7/28/89) Manufacturers Hanover Trust Company (Appli- First Community Bank (Applicant) has assets of cant) has assets of $57 billion and the 12 branches Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

238 76th Annual Report, 1989 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1989 —Continued (Branches) has assets of $1.2 billion. Applicant and million and Lyndon Guaranty Bank of Ohio (Bank) Bank operate in the same banking market. has assets of $16 million. Applicant and Bank do The banking factors and considerations relating not operate in the same banking market. to the convenience and needs of the community are The banking factors and considerations relating consistent with approval. to the convenience and needs of the community are consistent with approval. Central Savings Bank, Sault Ste. Marie, Michigan, to acquire certain assets and liabilities of the CivicBank of Commerce, Oakland, California, Main Street Branch of First of America Bank, to merge with Meridian National Bank, Concord, Northern Michigan, Cheboygan, Michigan California SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (9/1/89) (10/18/89) The proposed transaction would not be significantly The proposed transaction would not be significantly adverse to competition. adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (10/3/89) (11/9/89) Central Savings Bank (Applicant) has assets of $68 CivicBank of Commerce (Applicant) has assets of million and The Main Street Branch (Branch) has $232 million and Meridian National Bank (Bank) assets of $2.2 million. Applicant and Bank do not has assets of $87 million. Applicant and Bank operate in the same banking market. operate in the same banking market. The banking factors and considerations relating The banking factors and considerations relating to the convenience and needs of the community are to the convenience and needs of the community are consistent with approval. consistent with approval. Meridian Bank, Reading, Pennsylvania, to merge with Hill Financial Savings Association, Central Bank, Hollidaysburg, Pennsylvania, to Red Hill, Pennsylvania merge with two branches of Landmark Savings SUMMARY REPORT BY THE ATTORNEY GENERAL Association (9/12/89) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be significantly (10/12/89) adverse to competition. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (10/13/89) BASIS FOR APPROVAL BY THE FEDERAL RESERVE Meridian Bank (Applicant) has assets of $8.5 billion (12/6/89) and Hill Financial Savings Association (Bank) has Central Bank (Applicant) has assets of $203.8 assets of $2.0 billion. Applicant and Bank operate million and the two branches (Branches) have in the same banking market. assets of $ 17.0 million. Applicant and Bank operate The banking factors and considerations relating in the same banking market. to the convenience and needs of the community are The banking factors and considerations relating consistent with approval. to the convenience and needs of the community are consistent with approval. Heartland Bank, Croton, Ohio, to merge with Lyndon Guaranty Bank of Ohio, Columbus, Rapides Bank and Trust Company in Alexan- Ohio dria, Alexandria, Louisiana, to merge with First SUMMARY REPORT BY THE ATTORNEY GENERAL Bank, Pineville, Pineville, Louisiana (10/4/89) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be significantly No report received. Request for report on the adverse to competition. competitive factors was dispensed with, as autho- BASIS FOR APPROVAL BY THE FEDERAL RESERVE rized by the Bank Merger Act, to permit the Federal (10/23/89) Reserve System to act immediately to safeguard the Heartland Bank (Applicant) has assets of $36 depositors of First Bank. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 239 16. —Continued BASIS FOR APPROVAL BY THE FEDERAL RESERVE immediate action by the Federal Reserve System to (12/8/89) prevent the probable failure of Bank. Rapides Bank and Trust Company (Applicant) has assets of $415.9 million and First Bank (Bank) has Mergers Approved Involving Wholly Owned assets of $84.6 million. The State has recommended Subsidiaries of the Same Bank Holding immediate action by the Federal Reserve System to Company prevent the probable failure of Bank. The following transactions involve banks that are subsidiaries of the same bank holding company. In Central State Bank, Elkader, Iowa, to merge with each case, the summary report by the Attorney First State Savings Bank, McGregor, Iowa General indicates that the transaction would not SUMMARY REPORT BY THE ATTORNEY GENERAL have a significantly adverse effect on competition No report received. Request for report on the because the proposed merger is essentially a competitive factors was dispensed with, as authocorporate reorganization. The Board of Governors, rized by the Bank Merger Act, to permit the Federal the Federal Reserve Bank, or the Secretary of the Reserve System to act immediately to safeguard the Board of Governors, whichever approved the depositors of First State Savings Bank. application, determined that the competitive effects BASIS FOR APPROVAL BY THE FEDERAL RESERVE of the proposed transaction, the financial and (12/12/89) managerial resources and prospects of the banks Central State Bank (Applicant) has assets of $44.7 concerned, as well as the convenience and needs million and First State Savings Bank (Bank) has of the community to be served were consistent assets of $7.8 million. The FDIC has recommended with approval. Assets Date of Institutionl (millions approval of dollars) Texas Bank of Denton, Denton, Texas 16 1/9/89 Merger Texas Bank of Weatherford, Weatherford, Texas 153 BancFirst and Trust Company, Oklahoma City, Oklahoma 657 2/10/89 Merger American Bank of Commerce, McAlester, Oklahoma 41 Citizens State Bank, Hugo Oklahoma 26 City Bank, Muskogee, Oklahoma 34 Federal Bank and Trust Company, Shawnee, Oklahoma 239 First Bank & Trust Company, Sand Springs, Oklahoma 50 First National Bank of Guthrie, Guthrie, Oklahoma 45 First National Bank in Madill, Madill, Oklahoma 35 First National Bank of Prague, Prague, Oklahoma 40 First National Bank of Seminole, Seminole, Oklahoma 40 First National Bank, Stillwater, Oklahoma 93 First Oklahoma Bank and Trust Company, Sulphur, Oklahoma 30 Oklahoma State Bank, Konawa, Oklahoma 22 Sovran Bank, Memphis Tennessee 303 2/16/89 Merger First National Bank, Collierville, Tennessee 54 Sovran Bank, Chattanooga, Tennessee 213 3/1/89 Merger First Bank of Marion County, South Pittsburg, Tennessee 96 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

240 76th Annual Report, 1989 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1989 - Continued Assets Date of Institution * (millions approval of dollars) Macomb County Bank, Richmond, Michigan 54 3/23/89 Merger First State Bank of East Detroit, (Clinton Branch), East Detroit, Michigan 6 Chemical Bank Bay Area, Bay City, Michigan 28 4/17/89 Merger Cass City State Bank, Cass City, Michigan 18 Huron City Bank, Harbor Beach, Michigan , 32 The Peoples State Bank of Caro, Caro, Michigan , 37 Sovran Bank Central South, Nashville, Texas 3,200 4/26/89 Merger Sovran Bank Marshall City, N.A., Lewisburg, Tennessee 76 First of America Bank-Northern Michigan, Cheboygan, Michigan , 131 5/25/89 Merger First of America-Petoskey, N. A., Petoskey, Michigan , 165 First Bank of Stockton/Warren, Stockton, Illinois 40 5/31/89 Merger First National Bank of Freeport, Freeport, Illinois 152 Mount Carroll National Bank, Mount Carroll, Illinois . 29 First Bank/Dixon, Dixon, Illinois 56 5/31/89 Merger Polo National Bank, Polo, Illinois 34 Lincolnway State Bank, Sterling, Illinois 22 First Nebraska Bank-Valley, Valley, Nebraska .... 78 6/8/89 Merger First Nebraska Bank-Arcadia, Arcadia, Nebraska . 10 Lake Buchanan State Bank, Buchanan Dam, Texas 12 6/8/89 Merger Lake Country National Bank, Burnet, Texas 6 Pioneer Bank and Trust Company, Belle Fourche, South Dakota .. 96 6/16/89 Merger First State Bank, Buffalo, South Dakota 19 Bank of New York, New York, New York 23 6/29/89 Merger Irving Trust Company, New York, New York 21 Bank of Long Island, Babylon, New York 294 Dutchess Bank & Trust Company, Poughkeepsie, New York 299 Nanuet National Bank, Nanuet, New York 385 Scarsdale National Bank & Trust Company, Scarsdale, New York . 498 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 241 16.-Continued Assets Date of Institutionl (millions approval of dollars) First of America Bank-Northern Michigan, Cheboygan, Michigan .. 131 6/30/89 Merger First of America Bank-Grand Travers, N. A., Traverse City, Michigan 165 Norstar Bank, Hepstead, New York 2520 7/5/89 Merger First National Bank of Downsville, Downsville, New York 72 Crestar Bank, Richmond, Virginia 10,038 7/10/89 Merger Mountain National Bank of Clifton Forge, Clifton Forge, Virginia .. 58 Sovran Bank/Central South, Nashville, Tennessee 3,221 8/23/89 Merger Sovran Bank/Eastern, Oak Ridge, Tennessee 199 Sovran Bank/Hickman County, Centerville, Tennessee 39 Security Bank and Trust Company, Southgate, Michigan 1,403 8/30/89 Merger Trenton Bank and Trust Company, Trenton, Michigan 135 Indian Head Bank and Trust Company, Portsmouth, New Hampshire. 377 8/31/89 Merger Indian Head National Bank, Nashua, New Hampshire 976 Indian Head Bank North, Littleton, New Hampshire 208 Dartmouth National Bank, Hanover, New Hampshire 175 Indian Head National Bank of Keene, Keene, New Hampshire 166 Fleet Bank of New Hampshire, Nashua, New Hampshire 3 Victoria Bank & Trust Company, Victor, Texas 613 9/25/89 Merger Bank of Commerce Calhoun City, Point Comfort, Texas 9 Jackson County State Bank, Edna County, Texas 52 Chemical Bank and Trust Company, Midland, Michigan 447 10/17/89 Merger Chemical Bank Bay Area (Saginaw Township Branch), Bay City, Michigan 4 American Bank of St. Louis, St. Louis, Missouri 117 10/31/89 Merger American Bank of St. Louis County, Chesterfield, Missouri 11 Liberty Bank-Oakland, Troy, Michigan 354 11/8/89 Merger Liberty State Bank and Trust, Hamtramck, Michigan 99 Villa Grove State Bank, Villa Grove, Illinois 24 11/10/89 Merger First National Bank of Villa Grove, Villa Grove, Illinois 11 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

242 76th Annual Report, 1989 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1989 - Continued Assets Institution1 (millions Date of approval of dollars) First of America Bank-Northern Michigan, Cheboygan, Michigan ... 168 11/14/89 Merger Antrim County State Bank, Maoncelona, Michigan 32 Landmark Bank of Highland, Highland, Illinois 96 12/1/89 Merger Landmark Bank of Alton, Alton, Illinois 35 Landmark Bank of Madison County, Glen Carbon, Illinois 26 Union Bank/Streator, Streator, Illinois 127 12/15/89 Merger Union Bank/Triumph, Triumph, Illinois 18 Sovran Bank/Central South, Nashville, Tennessee 3,621 12/28/89 Merger Sovran Bank/Chattanooga, Chattanooga, Tennessee 218 Sovran Bank/Greenville, Greenville, Tennessee 131 Sovran Bank/Memphis, Memphis, Tennessee 388 Sovran Bank/Tri Cities, Johnson City, Tennessee 95 Sovran Bank/Union City, Union City, Tennessee 105 1. Each proposed transaction was to be effected under chronological order of approval. the charter of the first-named bank. The entries are in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 243 16, —Continued Mergers Approved Involving a Nonoperating surviving bank by the holding company, the merger Institution with an Existing Bank would 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 competholding company. In such cases, the summary itive effects and that the financial factors and report by the Attorney General indicates that the considerations relating to the convenience and needs transaction will merely combine an existing bank of the community were consistent with approval. with a nonoperating institution; in consequence, and without regard to the acquisition of the Assets Institutionl (millions Date of of dollars)2 approval New Byron Bank, Byron Center, Michigan 1/19/89 Merger Byron Center State Bank, Byron Center, Michigan 118 1st United Interim Bank, Boca Raton, Florida 3/7/89 Merger First United Bank, Boca Raton, Florida 30 Citizens Bank of Virginia, Arlington, Virginia 3/21/89 Merger Arlington Bank, Arlington, Virginia 64 Romney Interim Bank Corporation, 5/23/89 Merger Bank of Romney, Romney West Virginia 66 First Interim Bank of Crestview, Crestview, California 8/4/89 Merger First Bank of Crestview, Crestview, California 42 CB Interim State Bank, Philadelphia, Pennsylvania 11/3/89 Merger Constitution Bank, Philadelphia, Pennsylvania 117 Effingham Interim Bank, Inc., Effingham, Illinois 12/8/89 Merger Effingham State Bank, Effingham, Illinois 132 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

246 76th Annual Report, 1989 Board of Governors of the Federal Reserve System December 31,1989 Term expires ALAN GREENSPAN of New York, Chairman1 January 31,1992 MANUEL H. JOHNSON of Virginia, Vice Chairmanx January 31, 2000 MARTHA R. SEGER of Michigan January 31,1998 WAYNE D. ANGELL of Kansas January 31,1994 EDWARD W. KELLEY, JR., of Texas January 31,1990 JOHN P. LAWARE of Massachusetts January 31, 2002 OFFICE OF BOARD MEMBERS OFFICE OF THE SECRETARY Joseph R. Coyne, Assistant to the Board William W. Wiles, Secretary Donald J. Winn, Assistant to the Board Jennifer J. Johnson, Associate Secretary Bob Stahly Moore, Special Assistant Barbara R. Lowrey, Associate Secretary to the Board LEGAL DIVISION DIVISION OF MONETARY AFFAIRS J. Virgil Mattingly, Jr., General Counsel Donald L. Kohn, Director Richard M. Ashton, Associate David E. Lindsey, Deputy Director General Counsel Brian F. Madigan, Assistant Director Oliver Ireland, Associate General Richard D. Porter, Assistant Director Counsel Normand R.V. Bernard, Special Assistant Ricki R. Tigert, Associate General Counsel to the Board Scott G. Alvarez, 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 David J. Stockton, Associate Director OFFICE OF STAFF DIRECTOR FOR Martha Bethea, Deputy FEDERAL RESERVE BANK ACTIVITIES Associate Director Theodore E. Allison, StaffDirector Peter A. Tinsley, Deputy Associate Director OFFICE OF THE EXECUTIVE Myron L. Kwast, Assistant Director DIRECTOR FOR INFORMATION Susan J. Lepper, Assistant Director RESOURCES MANAGEMENT Patrick M. Parkinson, Assistant Director Allen E. Beutel, Executive Director Martha S. Scanlon, Assistant Director Stephen R. Malphrus, Deputy Executive Joyce K. Zickler, Assistant Director Director Levon H. Garabedian, Assistant 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 247 DIVISION OF INTERNATIONAL FINANCE DIVISION OF CONSUMER Edwin M. Truman, Staff Director AND COMMUNITY AFFAIRS Larry J. Promisel, Senior Griffith L. Garwood, Director Associate Director Glenn E. Loney, Assistant Director Charles J. Siegman, Senior Ellen Maland, Assistant Director Associate Director Dolores S. Smith, Assistant Director David H. Howard, Deputy Associate Director Robert F. Gemmill, Staff Adviser DIVISION OF HUMAN Donald B. Adams, Assistant Director RESOURCES MANAGEMENT Peter Hooper, III, Assistant Director David L. Shannon, Director Karen H. Johnson, Assistant Director John R. Weis, Associate Director Ralph W. Smith, Jr., Assistant Director Anthony V. DiGioia, Assistant Director Joseph H. Hayes, Jr., Assistant Director Fred Horowitz, Assistant Director DIVISION OF FEDERAL RESERVE BANK OPERATIONS ClydeH. Farnsworth, Jr., Director DIVISION OF SUPPORT SERVICES David L. Robinson, Associate Director Robert E. Frazier, Director C. William Schleicher, Jr., Associate George M. Lopez, Assistant Director Director David L. Williams, Assistant Director Bruce J. Summers, Associate Director2 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 Florence M. Young, Assistant Director (Programs and Budgets) Darrell R. Pauley, Assistant Controller (Finance) DIVISION OF BANKING SUPERVISION AND REGULATION William Taylor, Staff Director DIVISION OF HARDWARE Don E. Kline, Associate Director AND SOFTWARE SYSTEMS Frederick M. Struble, Associate Director Bruce M. Beardsley, Director William A. Ryback, Deputy Associate Day W. Radebaugh, Jr., Assistant Director Director Elizabeth B. Riggs, 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 Richard C. Stevens, Assistant Director James I. Garner, Assistant Director Patricia A. Welch, Assistant Director James D. Goetzinger, Assistant Director Robert J. Zemel, Assistant Director Michael G. Martinson, Assistant Director Robert S. Plotkin, Assistant Director Sidney M. Sussan, Assistant Director OFFICE OF THE INSPECTOR GENERAL Laura M. Homer, Securities Credit Officer Brent L. Bo wen, Inspector General Barry R. Snyder, Assistant Inspector General 2. On loan from Federal Reserve Bank of Richmond. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

248 76th Annual Report, 1989 Federal Open Market Committee December 31,1989 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 ROGER GUFFEY, President, Federal Reserve Bank of Kansas City SILAS KEEHN, President, Federal Reserve Bank of Chicago MANUEL H. JOHNSON, Board of Governors EDWARD W. KELLEY, JR., Board of Governors JOHN P. LAWARE, Board of Governors THOMAS C. MELZER, President, Federal Reserve Bank of St. Louis MARTHA R. SEGER, Board of Governors RICHARD F. SYRON, President, Federal Reserve Bank of Boston Alternate Members EDWARD G. BOEHNE, President, Federal Reserve Bank of Philadelphia ROBERT H. BOYKIN, President, Federal Reserve Bank of Dallas W. LEE HOSKINS, President, Federal Reserve Bank of Cleveland GARY H. STERN, President, Federal Reserve Bank of Minneapolis JAMES H. OLTMAN, First Vice President, Federal Reserve Bank of New York Officers DONALD L. KOHN, THOMAS E. DAVIS, Secretary and Economist Associate Economist NORMAND R.V. BERNARD, DAVID E. LINDSEY, Assistant Secretary Associate Economist GARY P. GILLUM, ALICIA H. MUNNELL, Deputy Assistant Secretary Associate Economist J. VIRGIL MATTINGLY, LARRY J. PROMISEL, General Counsel Associate Economist ERNEST T. PATRIKIS, KARL A. SCHELD, Deputy General Counsel Associate Economist MICHAEL J. PRELL, CHARLES J. SIEGMAN, Economist Associate Economist EDWIN M. TRUMAN, THOMAS D. SIMPSON, Economist Associate Economist ANATOL B. BALBACH, LAWRENCE SLIFMAN, Associate Economist Associate Economist RICHARD G. DAVIS, 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 1989, 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 249 Federal Advisory Council December 31,1989 Members District 1 - J. TERRENCE MURRAY, Chairman, President, and Chief Executive Officer, Fleet/Norstar Financial Group, Inc., and 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, Chairman and Chief Executive Officer, Meridian Bancorp, Inc., Reading, Pennsylvania District 4-THOMAS H. O'BRIEN, Chairman, 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-KENNETH L. ROBERTS, Chairman and Chief Executive Officer, First American Corporation, Nashville, Tennessee District 7-B. KENNETH WEST, Chairman and Chief Executive Officer, Harris Bankcorp, Inc. and Harris Trust and Savings Bank, Chicago, Illinois District 8-DONALD N. BRANDIN, Retired Chairman of the Board, Boatmen's Bancshares, Inc., St. Louis, Missouri District 9-LLOYD P. JOHNSON, Chairman and Chief Executive Officer, Norwest Corporation, Minneapolis, Minnesota District 10-JORDAN L. HAINES, Chairman, Fourth Financial Corporation and BANK IV Wichita, Wichita, Kansas District 11 -JAMES E. BURT III, President and Chief Executive Officer, Commercial National Bank in Shreveport, Shreveport, Louisiana District 12-PAUL HAZEN, President and Chief Operating Officer, Wells Fargo and Co., San Francisco, California Officers DONALD N. BRANDIN, President SAMUEL A. MCCULLOUGH, Vice President HERBERT V. PROCHNOW, Secretary WILLIAM J. KORSVIK, Associate Secretary Directors FREDERICK DEANE, JR. PAUL HAZEN J. TERRENCE MURRAY The Federal Advisory Council met on Feb- the twelve Federal Reserve Districts, is ruary 2-3, May 4-5, September 7-8, and required by law to meet in Washington at least November 2-3, 1989. The Board of Gover- four times each year and is authorized by the nors met with the council on February 3, May Federal Reserve Act to consult with, and 5, September 8, and November 3,1989. 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

250 76th Annual Report, 1989 Consumer Advisory Council December 31,1989 MembersJ GEORGE H. BRAASCH, Corporate Credit Counsel, Spiegel, Inc., Oak Brook, Illinois JUDITH N. BROWN, President, Judith N. Brown and Associates, Minneapolis, Minnesota BETTY TOM CHU, Chairman, Trust Savings Bank, Arcadia, California CLIFF E. COOK, Vice President, Puget Sound National Bank, Tacoma, Washington JERRY D. CRAFT, Senior Vice President, First National Bank of Atlanta, Atlanta, Georgia DONALD C. DAY, President, New England Securities Corporation, Boston, Massachusetts R. B. DEAN, JR., Administrator, South Carolina National Bank, Columbia, South Carolina RICHARD B. DOBY, Financial Services Consultant, Doby and Associates, Denver, Colorado WILLIAM C. DUNKELBERG, Professor of Economics, Temple University, Philadelphia, Pennsylvania RICHARD H. FINK, Executive Vice President, George Mason University, Fairfax, Virginia JAMES FLETCHER, President and Director, South Shore Bank of Chicago, Chicago, Illinois STEPHEN GARDNER, Assistant Attorney General, State of Texas, Dallas, Texas ELENA HANGGI, Director, Institute for Social Justice, Little Rock, Arkansas JAMES W. HEAD, Executive Director, National Economic Development and Law Center, Berkeley, California ROBERT HESS, President, Wright Patman Congressional Federal Credit Union, Washington, D.C. RAMON E. JOHNSON, Professor of Finance, University of Utah, Salt Lake City, Utah BARBARA KAUFMAN, Co-Director, KCBS Call for Action, San Francisco, California A. J. KING, Chairman, Valley Bank of Kalispell, Kalispell, Montana MICHELLE MEIER, Counsel for Government Affairs, Consumers Union, Washington, D.C. 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 LINDA K. PAGE, Director, Department of Commerce, State of Ohio, Columbus, Ohio SANDRA PHILLIPS, Executive Director, Pittsburgh Partnership for Neighborhood Development, Pittsburgh, Pennsylvania VINCENT QUAYLE, Director, St. Ambrose Housing Aid Center, Baltimore, Maryland CLIFFORD N. ROSENTHAL, Executive Director, National Federation of Community Development Credit Unions, New York, New York ALAN M. SILBERSTEIN, Senior Vice President, Chemical Bank, New York, New York RALPH E. SPURGIN, President, Limited Credit Services, Inc., Columbus, Ohio DAVID B. WARD, Consultant, Chester, New Jersey LAWRENCE WINTHROP, President, Consumer Credit Counseling Service of Oregon, Inc., Portland, Oregon 1. Naomi G. Albanese, Former Professor of Home council in January 1988 to a three year-term, died on Economics, Greensboro, North Carolina, appointed to the December 6,1989. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 251 Consumer Advisory Council—Continued Officers JUDITH N. BROWN, Chairman WILLIAM E. ODOM, 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 30-31, June 22, and October 26, 1989. The established pursuant to the 1976 amendments 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 31,1989 Members CHARLOTTE CHAMBERLAIN, Executive Vice President for Strategic Planning, Glendale Federal Savings and Loan Association, Glendale, California 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 ADAM A. JAHNS, Chairman and President, Cragin Federal Bank for Savings, Chicago, Illinois H. C. KLEIN, President and Chief Executive Officer, Little Rock Air Force Base Federal Credit Union, Jacksonville, Arkansas PHILIP E. LAMB, Chairman and Chief Executive Officer, Springfield Institution for Savings, Springfield, Massachusetts 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 Louis H. PEPPER, Chairman and Chief Executive Officer, Washington Mutual Savings Bank, Seattle, Washington MARION O. SANDLER, President and Chief Executive Officer, World Savings and Loan Association, Oakland, California DONALD B. SHACKELFORD, Chairman of the Board, State Savings Bank, Columbus, Ohio CHARLES B. STUZIN, Chairman, President, and Chief Executive Officer, Citizens Federal Savings and Loan Association, Miami, Florida Officers GERALD M. CZARNECKI, President DONALD B. SHACKELFORD, 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 March 21, May 23, September 12, and Board on issues pertaining to the thrift December 5, 1989. 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

252 76th Annual Report, 1989 Officers of Federal Reserve Banks, Branches, and Offices December 31,1989! BANK, Chairman2 President Vice President Branch, or facility Deputy Chairman First Vice President in charge of Branch BOSTON3 George N. Richard F. Syron Hatsopoulos Robert W. Richard N. Cooper Eisenmenger NEW YORK3.... Cyrus R. Vance E. Gerald Corrigan Ellen V. Futter James H. Oltman Buffalo Mary Ann Lambertsen JohnT. Keane PHILADELPHIA Peter A. Benoliel Edward G. Boehne Gunnar E. Sarsten William H. Stone, Jr. CLEVELAND3.. Charles W. Parry W. Lee Hoskins John R. Miller William H. Hendricks Cincinnati Vacancy Charles A. Cerino4 Pittsburgh Robert P. Bozzone Harold J. Swart4 RICHMOND3 ... Hanne M. Merriman Robert P. Black Leroy T. Canoles, Jimmie R. Jr. Monhollon Baltimore Thomas R. Shelton Robert D. McTeer, Jr.4 William E. Masters Albert D. Charlotte Tinkelenberg4 JohnG. Stoides4 Culpeper Bradley Currey, Jr. Robert P. Forrestal ATLANTA Larry L. Prince Jack Guynn Donald E. Nelson Nelda P. Stephenson FredR.Herr4 Birmingham HughM. Brown James D. Hawkins4 Jacksonville Jose L. Saumat James T. Curry, III Miami Patsy R. Williams Melvyn K. Purcell Nashville James A. Hefner 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 L. Dickson Flake John F. Breen Little Rock Thomas A. Alvey Howard Wells Louisville Seymour B.Johnson Raymond Laurence Memphis Michael W.Wright Gary H. Stern John A. Rollwagen Thomas E. Gainor MINNEAPOLIS . J. Frank Gardner John D. Johnson Helena Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 253 BANK, Chairman2 President Vice President Branch, or facility Deputy Chairman First Vice President in charge of Branch KANSAS CITY Fred W. Lyons, Jr. Roger Guffey Burton A. Dole, 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 Hugh G. Robinson William H. Wallace El Paso Diana S. Natalicio Sammie C. Clay Houston Andrew L. Jefferson, Jr. Robert Smith III4 San Antonio Lawrence E. Jenkins Thomas H. Robertson SAN FRANCISCO Robert F. Erburu Robert T. Parry Carolyn S. Carl E. Powell Chambers Los Angeles Yvonne B. Burke Thomas C. Warren5 Portland Paul E. Bragdon Angelo S. Carella4 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 October 25, 1988, the Conference elected Robert P. Forrestal, President of the The Chairmen of the Federal Reserve Banks Federal Reserve Bank of Atlanta, as its are organized into the Conference of Chair- Chairman for 1989, and Thomas C. Melzer, men, which meets to consider matters of President of the Federal Reserve Bank of St. common interest and to consult with, and Louis, as its Vice Chairman. The Conference advise, the Board of Governors. Such meet- appointed Christopher G. Brown, of the Fedings, attended also by the deputy chairmen, eral Reserve Bank of Atlanta, as its Secretary, were held in Washington on May 31 and and Frances E. Sibley, of the Federal Reserve June 1, and on November 29 and 30, 1989. Bank of St. Louis, as its Assistant Secretary. The Executive Committee of the Confer- On December 6, 1988, the Conference ence of Chairmen during 1989 comprised voted to establish a two-year term for the Robert F. Erburu, Chairman; Bradley Currey, Chairman and Vice Chairman of the Confer- Jr., Vice Chairman; and Peter A. Benoliel, ence, beginning in 1989. member. On November 30, 1989, the Conference elected its Executive Committee for 1990, Conference of First naming Cyrus R. Vance as Chairman, Peter Vice Presidents A. Benoliel as Vice Chairman, and Bobby R. Inman as the third member. The Conference of First Vice Presidents of the Federal Reserve Banks was organized in Conference of Presidents 1969 to meet periodically for the consideration of operations and other matters. The presidents of the Federal Reserve Banks On November 4, 1988, the Conference are organized into the Conference of Presi- elected Jack Guynn, First Vice President dents, which meets periodically to consider of the Federal Reserve Bank of Atlanta, as matters of common interest and to consult its Chairman for 1989, and James R. with, and advise, the Board of Governors. Bo wen, First Vice President of the Federal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

254 76th Annual Report, 1989 Reserve Bank of St. Louis, as its Vice For the name of the chairman and deputy Chairman. The Conference appointed chairman of the board of directors of each Christopher G. Brown, of the Federal Reserve Reserve Bank and of the chairman of each Bank of Atlanta, as its Secretary, and Frances Branch, see the preceding table, "Officers of E. Sibley, of the Federal Reserve Bank of St. Federal Reserve Banks, Branches, and Louis, as its Assistant Secretary. Offices." Directors 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 255 Term expires Dec. 31 DISTRICT 1-BOSTON Class A JoelB. 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 William H. Chadwick Vice Chairman of the Board and Chief Operating 1991 Officer, Banknorth Group, Inc., Burlington, Vermont Class B 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 Edward H. Ladd President and Chief Executive Officer, Standish, 1991 Ayer and Wood, Inc., Boston, Massachusetts Class C 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 George N. Hatsopoulos Chairman of the Board and President, 1991 Thermo Electron Corporation, Waltham, Massachusetts DISTRICT 2 -NEW YORK Class A Alberto M. Paracchini Chairman of the Board and Chief Executive 1989 Officer, Banco de Ponce, Ponce, Puerto Rico J. Kirby Fowler President and Chief Executive Officer, The 1990 Flemington National Bank and Trust Company, Flemington, New Jersey JohnF. McGillicuddy Chairman ofthe Board and Chief Executive 1991 Officer, Manufacturers Hanover Trust Company, New York, New York Class B John A. Georges Chairman of the Board and Chief Executive 1989 Officer, International Paper, Purchase, New York John F. Welch, Jr Chairman of the Board and Chief Executive 1990 Officer, GE, Fairfield, Connecticut Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

256 76th Annual Report, 1989 Term expires Dec. 31 DISTRICT 2, Class B-Continued RichardL. Gelb Chairman of the Board and Chief Executive 1991 Officer, Bristol-Myers Squibb Company, New York, New York Class C Cyrus R. Vance Presiding Partner, Simpson Thacher & Bartlett, 1989 New York, New York Ellen V. Futter President, Barnard College, New York, New York 1990 Maurice R. Greenberg President and Chief Executive Officer, American 1991 International Group, Inc., New York, New York BUFFALO BRANCH Appointed by the Federal Reserve Bank Harry J. Sullivan President, Salamanca Trust Company, 1989 Salamanca, New York Norman W. Sinclair Chairman of the Board, Lockport Savings Bank, 1990 Lockport, New York Richard H. Popp Operating Partner, Southview Farm, Castile, 1991 New York Robert G. Wilmers Chairman of the Board and Chief Executive 1991 Officer, Manufacturers and Traders Trust Company, Buffalo, New York Appointed by the Board of Governors 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 Mary Ann Lambertsen Vice President-Human Resources and 1991 Information Systems, Fisher-Price Division, The Quaker Oats Company, East Aurora, New York DISTRICT 3-PHILADELPHIA Class A George A. Butler Chairman and Chief Executive Officer, First 1989 Pennsylvania Bank, N.A., Philadelphia, Pennsylvania Constantinos I. Costalas Chairman, President, and Chief Executive 1990 Officer, Glendale National Bank of New Jersey, Voorhees, New Jersey Gary E. Burl President, Delaware National Bank, 1991 Georgetown, Delaware Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 257 Term expires Dec. 31 DISTRICT 3 - Continued Class B Carl E. Singley Attorney, Philadelphia, Pennsylvania 1989 Charles F. Seymour Chairman, Jackson-Cross Company, 1990 Philadelphia, Pennsylvania Nicholas Riso Executive Vice President, AHOLD, U.S.A., 1991 Harrisburg, Pennsylvania Class C Peter A. Benoliel Chairman of the Board, Quaker Chemical 1989 Corporation, Conshohocken, Pennsylvania Jane G. Pepper President, The Pennsylvania Horticultural 1990 Society, Philadelphia, Pennsylvania Gunnar E. Sarsten Chairman, President, and Chief Executive 1991 Officer, United Engineers & Constructors, Inc., Philadelphia, Pennsylvania DISTRICT 4-CLEVELAND Class A Frank Wobst Chairman and Chief Executive Officer, 1989 Huntington Bancshares Incorporated, Columbus, Ohio William H. May Chairman and President, First National Bank 1990 of Nelsonville, Nelsonville, Ohio William T. McConnell President, The Park National Bank, Newark, Ohio 1991 Class B Laban P. Jackson, Jr Chairman of the Board, Clearcreek Properties, 1989 Lexington, Kentucky Verna K. Gibson President, The Limited Stores, Inc., Columbus, 1990 Ohio Douglas E. Olesen President and Chief Executive Officer, Battelle 1991 Memorial Institute, Columbus, Ohio Class C Charles W. Parry Director and Retired Chairman and Chief 1989 Executive Officer, Aluminum Company of America, Pittsburgh, Pennsylvania Robert D. Storey Partner, Burke, Haber & Berick, Cleveland, 1990 Ohio John R. Miller Former President and Chief Operating Officer, 1991 The Standard Oil Company (Ohio), Cleveland, Ohio CINCINNATI BRANCH Appointed by the Federal Reserve Bank Robert M. Duncan President, First National Bank of Louisa, 1989 Louisa, Kentucky Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

258 76th Annual Report, 1989 Term expires Dec. 31 DISTRICT 4, CINCINNATI BRANCH, Appointed by the Federal Reserve Bank—Continued 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 & Loan Assn., Dayton, Ohio Allen L. Davis President and Chief Executive Officer, 1991 The Provident Bank, Cincinnati, Ohio Appointed by the Board of Governors Owen B. Butler Chairman of the Board (Retired), The Procter 1989 & Gamble Company, Cincinnati, Ohio Marvin Rosenberg Partner, Towne Properties, Ltd., Cincinnati, 1990 Ohio Kate Ireland National Chairman, Frontier Nursing Service, 1991 Wendover, Kentucky PITTSBURGH BRANCH Appointed by the Federal Reserve Bank 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 E. James Trimarchi President and Chief Executive Officer, First 1991 Commonwealth Financial Corporation, Indiana, Pennsylvania Appointed by the Board of Governors Robert P. Bozzone President and Chief Operating Officer, 1989 Allegheny Ludlum Corporation, Pittsburgh, Pennsylvania Milton A. Washington President and Chief Executive Officer, 1990 Allegheny Housing Rehabilitation Corporation, Pittsburgh, Pennsylvania JackB. Piatt Chairman of the Board and President, Millcraft 1991 Industries, Inc., Washington, Pennsylvania DISTRICT 5 -RICHMOND Class A Chester A. Duke President and Chief Executive Officer, Marion 1989 National Bank, Marion, South Carolina Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 259 Term expires Dec. 31 DISTRICT 5, Class A - Continued John F. McNair III President and Chief Executive Officer, 1990 Wachovia Bank & Trust Company, N. A. and The Wachovia Corporation, Winston-Salem, North Carolina C. R. Hill, Jr Chairman of the Board and President, 1991 Merchants & Miners National Bank, Oak Hill, West Virginia Class B Thomas B. Cookerly President, Cookerly Communications, 1989 Bethesda, Maryland Jack C. Smith Chairman of the Board and Chief Executive 1990 Officer, K-VA-T Food Stores, Inc., Grundy, Virginia Edward H. Covell President, The Covell Company, Easton, 1991 Maryland Class C Leroy T. Canoles, Jr President, Kaufman & Canoles, Norfolk, 1989 Virginia Hanne Merriman Retail Business Consultant, Washington, D.C. 1990 Anne Marie Whittemore Partner, McGuire, Woods, Battle & Boothe, 1991 Richmond, Virginia BALTIMORE BRANCH Appointed by the Federal Reserve Bank Charles W. Hoff III President and Chief Executive Officer, 1989 Farmers and Mechanics National Bank, Frederick, Maryland Raymond V. Haysbert, Sr. ... President and Chief Executive Officer, Parks 1990 Sausage Company, Baltimore, Maryland H. Grant Hathaway Chairman of the Board, Equitable Bank, N.A., 1991 Baltimore, Maryland Joseph W. Mosmiller Chairman of the Board, Loyola Federal Savings 1991 and Loan Association, Baltimore, Maryland Appointed by the Board of Governors 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 Thomas R. Shelton President, Case Foods, Inc., Salisbury, Maryland 1991 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

260 76th Annual Report, 1989 Term expires Dec. 31 DISTRICT 5 - Continued CHARLOTTE BRANCH Appointed by the Federal Reserve Bank William McKay President, First Federal Savings Bank, 1989 Hendersonville, North Carolina James M. Culberson, Jr Chairman and President, The First National 1990 Bank of Randolph County, Asheboro, North Carolina Crandall C. Bowles President, The Springs Company, Lancaster, 1991 South Carolina James G. Lindley Chairman and Chief Executive Officer, South 1991 Carolina National Corporation; Chairman, President, and Chief Executive Officer, The South Carolina National Bank, Columbia, South Carolina Appointed by the Board of Governors Anne M. Allen President, Allen-Austin, Inc., Greensboro, 1989 North Carolina William E. Masters President, Perception, Inc., Easley, 1990 South Carolina Harold D. Kingsmore President and Chief Operating Officer, 1991 Graniteville Company, Graniteville, South Carolina DISTRICT 6-ATLANTA Class A 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 Virgil H. Moore, Jr Chairman and Chief Executive Officer, First 1991 Farmers and Merchants National Bank, Columbia, Tennessee Class B Paul W. Green President and Chief Executive Officer, 1989 American Cast Iron Pipe Company, Birmingham, Alabama Gary J. Chouest President and Chief Executive Officer, Edison 1990 Chouest Offshore, Inc., Galliano, Louisiana Saundra H. Gray Co-Owner, Gemini Springs Farm, DeBary, 1991 Florida Class C Bradley Currey, Jr President, Rock-Tenn Company, Norcross, 1989 Georgia Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 261 Term expires Dec. 31 DISTRICT 6, Class C-Continued Edwin A. Huston Senior Executive Vice President-Finance, 1990 Ryder System, Inc., Miami, Florida Larry L. Prince President and Chief Executive Officer, Genuine 1991 Parts Company, Atlanta, Georgia BIRMINGHAM BRANCH Appointed by the Federal Reserve Bank John H. Newman, Jr President and Chief Executive Officer, 1989 First National Bank of Scottsboro, Scottsboro, Alabama Harry B. Brock, Jr. Chairman and Chief Executive Officer, Central 1990 Bank of the South, Birmingham, Alabama Shelton E. Allred Chairman, President, and Chief Executive 1991 Officer, Frit Industries, Inc., Ozark, Alabama William F. Childress President, First American Federal Savings and 1991 Loan Association, Huntsville, Alabama Appointed by the Board of Governors Nelda P. Stephenson President, Nelda Stephenson Chevrolet, Inc., 1989 Florence, Alabama A. G. Trammell President, Alabama Labor Council, AFL-CIO, 1990 Birmingham, Alabama RoyD. Terry President and Chief Executive Officer, Terry 1991 Manufacturing Company, Inc., Roanoke, Alabama JACKSONVILLE BRANCH Appointed by the Federal Reserve Bank A. Bronson Thayer Chairman and Chief Executive Officer, First 1989 Florida Banks, Inc., Tampa, Florida Hugh H. Jones, Jr Chairman and Chief Executive Officer, 1990 Barnett Bank of Jacksonville, N. A., Jacksonville, Florida Perry M. Dawson President and Chief Executive Officer, 1991 Suncoast Schools Federal Credit Union, Tampa, Florida Samuel H. Vickers President and Chief Executive Officer, Design 1991 Containers, Inc., Jacksonville, Florida Appointed by the Board of Governors Lana Jane Lewis-Brent Vice Chairman, President, and Chief Executive 1989 Officer, Sunshine Jr. Stores, Inc., Panama City, Florida Joan Dial Ruffier Chairman, Florida Board of Regents, Orlando, 1990 Florida HughM. Brown President and Chief Executive Officer, BAMSI, 1991 Inc., Titusville, Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

262 76th Annual Report, 1989 Term expires Dec. 31 DISTRICT 6-Continued MIAMI BRANCH Appointed by the Federal Reserve Bank James H. Robinson President, Sun Bank/South Florida, N. A., 1989 Fort Lauderdale, Florida Robert M. Taylor Chairman and Chief Executive Officer, The 1990 Mariner Group, Inc., Fort Myers, Florida Frederick A. Teed President and Chief Executive Officer, 1990 Community Savings, F.A., North Palm Beach, Florida Roberto G. Blanco Vice Chairman and Chief Financial Officer, 1991 Republic National Bank of Miami, Miami, Florida Appointed by the Board of Governors Jose L. Saumat Chairman, Kaufman and Roberts, Inc., 1989 Miami, Florida Robert D. Apelgren President, Apelgren Corporation, Pahokee, 1990 Florida Dorothy C. Weaver Vice President, Intercap Investments, Inc., 1991 Miami, Florida NASHVILLE BRANCH Appointed by the Federal Reserve Bank James A. Rainey Chairman, Sovran Financial 1989 Corporation/Central South, Nashville, Tennessee Vincent K. Hickam President and Chief Executive Officer, 1990 Executive Park National Bank, Kingsport, Tennesse William Baxter Lee III Chairman and President, Southeast Services 1991 Corporation, Knoxville, Tennessee Edwin W. Moats, Jr Chairman and Chief Executive Officer, 1991 Metropolitan Federal Savings and Loan Association, Nashville, Tennessee Appointed by the Board of Governors 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 Shirley A. Zeitlin President, Shirley Zeitlin & Co. Realtors, 1991 Nashville, Tennessee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 263 Term expires Dec. 31 DISTRICT 6-Continued NEW ORLEANS BRANCH Appointed by the Federal Reserve Bank RobertS. 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 Joel B. Bullard, Jr President, Joe Bullard Automotive Companies, 1991 Mobile, Alabama Stanley S. Scott President, Crescent Distributing Company, 1991 Harahan, Louisiana Appointed by the Board of Governors James A. Hefner President, Jackson State University, Jackson, 1989 Mississippi Caroline G. Theus President, Inglewood Land and Development 1990 Company, Alexandria, Louisiana Andre M. Rubenstein Chairman and Chief Executive Officer, 1991 RubensteinBrothers, Inc., New Orleans, Louisiana DISTRICT 7-CHICAGO Class A 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 John W. Gabbert President and Chief Executive Officer, First of 1991 America Bank-LaPorte, N.A., LaPorte, Indiana Class B PaulJ. Schierl Chairman ofthe Board and Chief Executive 1989 Officer, Fort Howard Corporation, Green Bay, Wisconsin Edward D. Powers President, Fire Brick Engineers, Milwaukee, 1990 Wisconsin Max J. Naylor President, Naylor Farms, Inc., Jefferson, Iowa 1991 Class C Robert J. Day Chairman and Chief Executive Officer, USG 1989 Corporation, Chicago, Illinois Marcus Alexis Dean, College of Business Administration, 1990 University of Illinois at Chicago, Chicago, Illinois Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

264 76th Annual Report, 1989 Term expires Dec. 31 DISTRICT 7, Class C-Continued CharlesS. McNeer Chairman of the Board and Chief Executive 1991 Officer, Wisconsin Energy Corporation, Milwaukee, Wisconsin DETROIT BRANCH Appointed by the Federal Reserve Bank 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 Robert J. Mylod Chairman, President and Chief Executive 1991 Officer, Michigan National Corporation, Farmington Hills, Michigan Appointed by the Board of Governors Richard T. Lindgren Birmingham, Michigan 1989 Beverly Beltaire President, P R Associates, Inc., Detroit, 1990 Michigan Phyllis E. Peters Director, Professional Standards Review, 1991 Deloitte & Touche, Detroit, Michigan DISTRICT 8-ST. LOUIS Class A 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, Commerce Bancshares, Inc., Kansas City, Missouri H. L. Hembree III Chairman of the Executive Committee, 1990 Merchants National Bank, Fort Smith, Arkansas Henry G. River, Jr President and Chief Executive Officer, First 1991 National Bank in Pinckneyville, Pinckneyville, Illinois Class B Frank M. Mitchener, Jr President, Mitchener Farms, Inc., Sumner, 1989 Mississippi Roger W. Schipke Senior Vice President, GE Appliances, GE, 1990 Louisville, Kentucky Thomas F. McLarty III Chairman and Chief Executive Officer, Arkla, 1991 Inc., Little Rock, Arkansas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 265 Term expires Dec. 31 DISTRICT 8-Continued Class C H. Edwin Trusheim Chairman and Chief Executive Officer, 1989 General American Life Insurance Company, St. Louis, Missouri Janet MeAfee Weakley President, Janet McAfee, Inc., Clayton, 1990 Missouri Robert L. Virgil, Jr Dean, John M. Olin School of Business, 1991 Washington University in St. Louis, St. Louis, Missouri LITTLE ROCK BRANCH Appointed by the Federal Reserve Bank 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 Barnett Grace President and Chief Executive Officer, First 1991 Commercial Bank, N.A., Little Rock, Arkansas Appointed by the Board of Governors L. Dickson Flake President, Barnes, Quinn, Flake & Anderson, 1989 Inc., Little Rock, Arkansas William E. Love President, Sound-Craft Systems, Inc., 1990 Morrilton, Arkansas James R. Rodgers Airport Manager, Little Rock Regional Airport, 1991 Little Rock, Arkansas LOUISVILLE BRANCH Appointed by the Federal Reserve Bank Morton Boyd President, First Kentucky National Corporation, 1989 Louisville, Kentucky Irving W. Bailey II Chairman, President, and Chief Executive 1990 Officer, Capital Holding Corporation, Louisville, Kentucky Wayne G. Overall, Jr President, First Federal Savings Bank, 1990 Elizabethtown, Kentucky Douglas M. Lester Chairman, President, and Chief Executive 1991 Officer, Trans Financial Bancorp, Inc., Bowling Green, Kentucky Appointed by the Board of Governors Thomas A. Alvey Delegate, Owensboro Council of Labor, 1989 Owensboro, Kentucky Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

266 76th Annual Report, 1989 Term expires Dec. 31 DISTRICT 8, LOUISVILLE BRANCH, Appointed by the Board of Governors—Continued Raymond M. Burse Partner, Wyatt, Tarrant and Combs, 1990 Louisville, Kentucky LoisH. Gray Chairman of the Board, James N. Gray 1991 Construction Company, Inc., Glasgow, Kentucky MEMPHIS BRANCH Appointed by the Federal Reserve Bank Michael J. Hennessey President, Munro & Company, Inc., Wynne, 1989 Arkansas Thomas M. Garrott President and Chief Operating Officer, National 1990 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 Ray U. Tanner Chairman and Chief Executive Officer, Jackson 1991 National Bank and Volunteer Bancshares, Inc., Jackson, Tennessee Appointed by the Board of Governors 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 Katherine Hinds Smythe President, Memorial Park, Inc., 1991 Memphis, Tennessee DISTRICT 9-MINNEAPOLIS Class A Charles W. Ekstrum President and Chief Executive Officer, First 1989 National Bank, Philip, South Dakota Joel S. Harris President, Yellowstone Bank, Billings, Montana 1990 James H. Hearon III Chairman of the Board and Chief Executive 1991 Officer, National City Bank, Minneapolis, Minnesota Class B Bruce C. Adams Partner, Triple Adams Farms, Minot, 1989 North Dakota Earl R. St. John, Jr President, St. John Forest Products, Inc., 1990 Spalding, Michigan Duane E. Dingmann President, Trubilt Auto Body, Inc., 1991 Eau Claire, Wisconsin Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 267 Term expires Dec. 31 DISTRICT 9-Continued Class C Michael W. Wright Chairman, President, and Chief Executive 1989 Officer, Super Valu Stores, Inc., Minneapolis, Minnesota Delbert W. Johnson President and Chief Executive Officer, Pioneer 1990 Metal Finishing, Minneapolis, Minnesota John A. Rollwagen Chairman and Chief Executive Officer, Cray 1991 Research Inc., Minneapolis, Minnesota HELENA BRANCH Appointed by the Federal Reserve Bank F. Charles Mercord President and Managing Officer, First Federal 1989 Savings Bank of Montana, Kalispell, Montana Noble E. Vosburg President and Chief Executive Officer, Pacific 1990 Hide and Fur Corporation, Great Falls, Montana RobertH. Waller.. President and Chief Executive Officer, First 1990 Interstate Bank of Billings, N. A., Billings, Montana Appointed by the Board of Governors Vacancy 1989 J. Frank Gardner President, Montana Resources, Inc., Butte, 1990 Montana DISTRICT 10-KANSAS CITY Class A 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 Robert L. Hollis Chairman of the Board and Chief Executive 1991 Officer, First National Bank and Trust Co., Okmulgee, Oklahoma Class B Richard D. Harrison Honorary Chairman, Fleming Companies, Inc., 1989 Oklahoma City, Oklahoma S. Dean Evans, Sr Partner, Evans Grain Company, Salina, Kansas 1990 Frank J. Yaklich, Jr President, CF & I Steel Corporation, Pueblo, 1991 Colorado Class C Fred W. Lyons, Jr President, Marion Merrell Dow Inc., 1989 Kansas City, Missouri Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

268 76th Annual Report, 1989 Term expires Dec. 31 DISTRICT 10, Class B-Continued Thomas E. Rodriguez President and General Manager, 1990 Thomas E. Rodriguez & Associates, P.C., Aurora, Colorado Burton A. Dole, Jr Chairman and President, Puritan-Bennett 1991 Corporation, Overland Park, Kansas DENVER BRANCH Appointed by the Federal Reserve Bank 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 Norman R. Corzine President and Chief Executive Officer, First 1991 National Bank in Albuquerque, Albuquerque, New Mexico W Richard Scarlett III Chairman and Chief Executive Officer, Jackson 1991 State Bank, Jackson Hole, Wyoming Appointed by the Board of Governors James C. Wilson Management Consultant, Longmont, Colorado 1989 Gilbert Sanchez President, New Mexico Highlands University, 1990 Las Vegas, New Mexico Barbara B. Grogan President, Western Industrial Contractors, Inc., 1991 Denver, Colorado OKLAHOMA CITY BRANCH Appointed by the Federal Reserve Bank William H. Crawford Chairman and Chief Executive Officer, First 1989 National Bank and Trust Company, Frederick, Oklahoma W. Dean Hidy Chairman of the Board, Triad Bank, N. A., 1990 Tulsa, Oklahoma John Wm. Laisle President, MidFirst Savings and Loan 1990 Association, Oklahoma City, Oklahoma Appointed by the Board of Governors Patience S. Latting Oklahoma City, Oklahoma 1989 John F Snodgrass President and Trustee, The Samuel Roberts 1990 Noble Foundation, Inc., Ardmore, Oklahoma OMAHA BRANCH Appointed by the Federal Reserve Bank John T. Selzer President, Scottsbluff National Bank and Trust 1989 Company, Scottsbluff, Nebraska Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 269 Term expires Dec. 31 DISTRICT 10, OMAHA BRANCH, Appointed by the Federal Reserve Bank—Continued Charles H. Thorne Chairman of the Board, First Federal Savings 1989 and Loan Association of Lincoln, Lincoln, Nebraska John R. Cochran President and Chief Executive Officer, Norwest 1990 Bank Nebraska, N.A., Omaha, Nebraska Appointed by the Board of Governors Kenneth L. Morrison President, Morrison Enterprises, Hastings, 1989 Nebraska Herman Cain President and Chief Executive Officer, 1990 Godfather's Pizza, Inc., Omaha, Nebraska DISTRICT 11-DALLAS Class A RobertG. 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 Charles T. Doyle Chairman of the Board and Chief Executive 1991 Officer, Gulf National Bank, Texas City, Texas Class B Gary E. Wood President, Texas Research League, Austin, 1989 Texas Robert L. Pfluger Rancher, San Angelo, Texas 1990 Charles Dickie Williamson... Chairman of the Board and Chief Executive 1991 Officer, Williamson-Dickie Manufacturing Company, Fort Worth, Texas Class C Leo E. Linbeck, Jr Chairman of the Board and Chief Executive 1989 Officer, Linbeck Construction Corporation, Houston, Texas Bobby R. Inman Chairman of the Board and Chief Executive 1990 Officer, Westmark Systems Inc., Austin, Texas Hugh G. Robinson Chairman of the Board and Chief Executive 1991 Officer, The Tetra Group, Inc., Dallas, Texas EL PASO BRANCH Appointed by the Federal Reserve Bank 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

270 76th Annual Report, 1989 Term expires Dec. 31 DISTRICT 11, EL PASO BRANCH, Appointed by the Federal Reserve Bank—Continued Ethel Ortega Olson Owner, NAMBE of Ruidoso, Ruidoso, 1990 New Mexico Humberto F. Sambrano President, SamCorp General Contractors, 1991 El Paso, Texas Appointed by the Board of Governors W. Thomas Beard III President, Leoncita Cattle Company, Alpine, 1989 Texas Diana S. Natalicio President, The University of Texas at El Paso, 1990 El Paso, Texas Donald G. Stevens Owner, Stevens Oil Company, Roswell, 1991 New Mexico HOUSTON BRANCH Appointed by the Federal Reserve Bank 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 President (Retired), First Victoria National 1990 Bank, Victoria, Texas Jeff Austin, Jr President, First National Bank of Jacksonville, 1991 Jacksonville, Texas Appointed by the Board of Governors Walter M. Mischer, Jr President and Chief Operating Officer, The 1989 Mischer Corporation, Houston, Texas Andrew L. Jefferson, Jr Attorney, Jefferson and Mims, Houston, Texas 1990 Gilbert D. Gaedcke, Jr Chairman of the Board and Chief Executive 1991 Officer, Gaedcke Equipment Company, Houston, Texas SAN ANTONIO BRANCH Appointed by the Federal Reserve Bank C. Ivan Wilson Chairman of the Board, Chief Executive Officer, 1989 and Regional Director, First City, Texas- Corpus Christi, Corpus Christi, Texas Javier Garza Executive Vice President, The Laredo National 1990 Bank, Laredo, Texas Sam R. Sparks President, Sam R. Sparks, Inc., Progreso, Texas 1990 Jane Flato Smith Investor and Rancher, San Antonio, Texas 1991 Appointed by the Board of Governors Lawrence E. Jenkins Vice President (Retired), Lockheed Missiles 1989 & Space Co., Inc., Austin, Texas Scott H. Glass President and Chief Operating Officer, 1990 Scarbroughs, Austin, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 271 Term expires Dec. 31 DISTRICT 11, SAN ANTONIO BRANCH, Appointed by the Board of Governors—Continued Roger R. Hemminghaus Chairman and Chief Executive Officer, Diamond 1991 Shamrock R&M, Inc., San Antonio, Texas DISTRICT 12-SAN FRANCISCO Class A Rayburn S. Dezember Chairman of the Board and Chief Executive 1989 Officer, Central Pacific Corporation; and Chairman of the Board, American National Bank, Bakersfield, California R. Blair Hawkes President and Chief Executive Officer, Ireland 1990 Bank, Malad City, Idaho William E. B. Siart Chairman of the Board, President, and Chief 1991 Executive Officer, First Interstate Bank of California, Los Angeles, California Class B 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 William L. Tooley Chairman, Tooley & Company, Investment 1991 Builders, Los Angeles, California Class C 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 Carolyn S. Chambers President and Chief Executive Officer, 1991 Chambers Communications Corp., Eugene, Oregon Los ANGELES BRANCH Appointed by the Federal Reserve Bank 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 Ignacio E. Lozano, Jr Editor-in-Chief, La Opinion, Los Angeles, 1991 California Howard C. McCrady Vice Chairman, Valley National Corporation, 1991 Phoenix, Arizona Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

272 76th Annual Report, 1989 Term expires Dec. 31 DISTRICT 12, Los ANGELES BRANCH-Continued Appointed by the Board of Governors Yvonne Brathwaite Burke .... Partner, Jones, Day, Reavis & Pogue, 1989 Los Angeles, California Richard C. Seaver Chairman, Hydril Company, Los Angeles, 1990 California Harry W. Todd Chairman and Chief Executive Officer, Rohr 1991 Industries, Inc., Chula Vista, California PORTLAND BRANCH Appointed by the Federal Reserve Bank Wayne E. Phillips, Jr Vice President, Phillips Ranch, Inc., Baker, 1989 Oregon Stephen G. Kimball President and Chief Executive Officer, Baker 1990 Boyer Bancorp, Walla Walla, Washington G. Dale Weight Chairman of the Board, President, and Chief 1990 Executive Officer, The Benjamin Franklin Savings and Loan Association, Portland, Oregon Stuart H. Compton Chairman and Chief Executive Officer, Pioneer 1991 Trust Bank, N.A. Salem, Oregon Appointed by the Board of Governors Paul E. Bragdon Assistant to the Governor for Education, Office 1989 of the Governor, Salem, Oregon Sandra A. Suran Former Small Business Advocate, State of 1990 Oregon, Lake Oswego, Oregon William A. Hilliard Editor, The Oregonian, Portland, Oregon 1991 SALT LAKE CITY BRANCH Appointed by the Federal Reserve Bank Ronald S. Hanson President, Zions First National Bank, 1989 Salt Lake City, Utah Curtis H. Eaton President and Vice Chairman of the Board, 1990 Twin Falls Bank & Trust Company, Twin Falls, Idaho Virginia P. Kelson Associate, Ralston & Associates, Salt Lake City, 1990 Utah Gerald R. Christensen President and Chairman, First Federal Savings 1991 Bank, Salt Lake City, Utah Appointed by the Board of Governors Robert N. Pratt President and Chief Operating Officer, 1989 Bonneville Pacific Corporation, Salt Lake City, Utah Don M. Wheeler President, Wheeler Machinery Company, 1990 Salt Lake City, Utah Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 273 Term expires Dec. 31 DISTRICT 12, SALT LAKE CITY BRANCH, Appointed by the Board of Governors—Continued D. N. Rose President and Chief Executive Officer, Mountain 1991 Fuel Supply Company, Salt Lake City, Utah SEATTLE BRANCH Appointed by the Federal Reserve Bank H. H. Larison President, Columbia Paint & Coatings, 1989 Spokane, Washington B. R. Beeksma Chairman of the Board, InterWest Savings Bank, 1990 Oak Harbor, Washington William S. Randall Chairman, President and Chief Executive 1990 Officer, First Interstate Bank of Washington, N.A., Seattle, Washington Robert P. Gray President, National Bank of Alaska, Anchorage, 1991 Alaska Appointed by the Board of Governors Carol A. Nygren Partner, Laventhol & Horwath, Certified Public 1989 Accountants, Seattle, Washington Irma Goertzen Goertzen & Associates, Health Care 1990 Consultants, Seattle, Washington Bruce R. Kennedy Chairman and Chief Executive Officer, Alaska 1991 Air Group, Inc., 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

277 Index Acceptances, bankers (See Bankers Bank holding companies — acceptances) Continued Accounting standards, 176 Surveillance and monitoring, 173 Agriculture Transfer agents, 173 Loan problems, 175 Bank Holding Companies and Change in Price developments in 1989, 11 Bank Control (See Regulations: Y) Agriculture, U.S. Department of, Packers Bank Insurance Fund, 163 and Stockyards Administration, 147, Bank Merger Act, regulation and 148 compliance, 178 American Institute of Certified Public Bank mergers and consolidations, 235 Accountants, 176 Bank Protection Act of 1968, 188 Assets and liabilities Bank Secrecy Act, 183 Banks, by class, 229 Bankers acceptances, Federal Reserve Board of Governors, 200 Banks, holdings, 208 Federal Reserve Banks, 208 Banking Act of 1933,172 Audits (See Examinations, inspections, Banking offices, changes in number, 234 regulations, and audits) Banking supervision and regulation by the Automated clearinghouse, fees for services, Federal Reserve System, 167 190 Basic banking and check cashing, testimony, Availability of funds and collection of 154 checks {See Regulations: CC) Basle Accord, 168 Basle Committee, Banking Regulations and Balance of payments (See International Supervisory Practices, 167, 169 developments, review of 1989) Board of Governors (See also Federal Bank Conservation Act, 162 Reserve System) Bank for International Settlements, 66 Cash, sources, uses, and balance at end of Bank Holding Company Act of 1956 (See 1989, 200 also Regulations: Y) Consumer Advisory Council (See Examinations, 172 Consumer Advisory Council) Legislative recommendations and Financial statements, 199 litigation, 157 Interpretations (See Interpretations) Regulation and compliance, 177 Litigation, 157 Bank holding companies (See also Members and officers, 245 Regulations: Y) Policy actions (See Policy actions) Applications by, processing and notice of Pricing of Federal Reserve services (See Board decisions, 177 Fees) Bank Merger Act, 178 Publications (See Publications) Change in Bank Control Act, 179 Regulations (See Regulations) Delegation of applications, 179 Regulatory simplification, 187 Enforcement, 171 Salaries, 215 Examinations, inspection, and regulation, Testimony 170 Basic banking and check cashing, 154 International activities, 173, 182 Community Reinvestment Act, 153 Litigation, 157 Flood insurance, 153 Policy statement, 71 Loan discrimination, 155 Regulatory simplification, 187 Truth in Savings, 153 Stock repurchases, 181 Boeing strike, 23 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

278 76th Annual Report, 1989 Brady, Nicholas R, Secretary of the Depository institutions — Treasury, 22, 167 Continued Branch banks Reserve requirements (See Regulations: Federal Reserve (See Federal Reserve D) Banks, Branches) Reserves and related items, 230 Foreign branches of U.S. banking Services to (See Fees) organizations, 173, 181 Depository Institutions Management Interlocks Act, 65 Capital accounts Deposits Banks, by class, 224 Banks, by class, 229 Federal Reserve Banks, 207, 208, 210 Checks (See Check clearing and Check clearing and collection collection) Fees for Federal Reserve services, 189 Federal Reserve Banks, 208, 230 Float, 191 Interest rates (See Interest rates) Volume of operations, 193, 225 Reserve requirements (See Reserve Commercial banks (See also Insured requirements of depository commercial banks), banking offices, institutions) changes in number, 234 Directors, Federal Reserve Banks and Commodity Credit Corporation, 9, 35, 49 Branches, list, 254 Community Affairs Program, 145 Discount rates at Federal Reserve Banks Community Development Corporations, (See Interest rates) 145 Dividends Community development credit unions, Federal Reserve Banks, 218, 220 152 Community Reinvestment Act of 1977 Earnings of Federal Reserve Banks (See Compliance, 144 also Federal Reserve Banks, income Consumer Advisory Council, 152 and expenses, 216 Consumer affairs, 141 Economic Development Administration, Regulatory simplification, 187 145 Revision, 65 Economy in 1988 Testimony, 153 Business, 34 Title XII, Financial Institutions Reform, External, 32 Recovery, and Enforcement Act, Government, 34 162 Household, 33 Competitive Equality Banking Act of 1987 Labor markets, 35 (See also Expedited Funds Availability Price developments, 36 Act), 164, 175 Economy in 1989 Comptroller of the Currency, Office of, 65, Business, 7, 48 146, 162,168, 174,176,178 External, 45 Condition statements of Federal Reserve Government, 9, 49 Banks, 206 Household, 5, 47 Consumer Advisory Council, 151,250 Labor markets, 9, 50 Consumer and community affairs, 141 Price developments, 11,50 Credit Standards Advisory Committee, 162 Educational activities (See Training) Currency and Foreign Transactions Electronic Fund Transfer Act, compliance Reporting Act (See Bank Secrecy Act) with, 148 Engraving and Printing, U.S. Bureau of, Definitive securities, 191 190 Depository institutions Equal Credit Opportunity Act Checks (See Check clearing and Compliance with, 147 collection) Regulation B (See Regulations: B) Interest on deposits (See Interest rates) Regulatory simplification, 188 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 279 Examinations, inspections, regulation, and Federal Home Loan Mortgage Corporation, audits 162, 191 Bank holding companies, 170 Federal Home Loan Mortgage Corporation Compliance, 144, 145, 146 Act, 162 Enforcement actions, civil money Federal Housing Finance Board, 162 penalties, 171 Federal National Mortgage Association, 191 Federal Reserve Banks, 191 Federal National Mortgage Corporation, International activities, 173 145 Specialized Federal Open Market Committee Electronic data processing, 171 Meetings, 76, 85, 92, 99, 109, 118, 124, Fiduciary activities, 171 131 Government securities dealers, 172 Members and officers Municipal securities dealers and List, 248 clearing agencies, 172 Policy actions, 37, 71 Securities subsidiaries of bank holding Federal Reserve Act, 164, 191 companies, 172 Federal Reserve Banks Transfer agents, 173 Assessments for expenses of Board of State member banks, 145, 170 Governors, 218, 220 Surveillance and monitoring, 173 Bank premises, 206, 208, 224 Exchange Stabilization Fund, 25 Banks Expedited Funds Availability Act of 1988, Atlanta, 145 63, 64, 146 Chicago, 145, 193 Expenses {See Income and expenses) Cleveland, Pittsburgh Branch, 191 Dallas, 192 Fair Credit and Charge Card Disclosure Los Angeles, 193 Act of 1988,62 Minneapolis, 145 Fair Credit Reporting Act, 148 Helena Branch, 193 Fair Housing Act, 144 New York, 145, 192, 193 Farm Credit Administration, 147, 148, 183 Philadelphia, 145 Farmers Home Administration, 145 Richmond Federal Advisory Council, 249 Baltimore Branch, 145 Federal agency securities Charlotte Branch, 193 Federal Reserve Bank holdings and San Francisco, 145 earnings, 208, 230 Branches Federal Reserve open market Bank premises, 224 transactions, 1989, 212 Directors, list, 254 Repurchase agreements, 207, 208, 212, Vice presidents in charge, 252 214 Capital accounts, 207, 208 Federal Asset Disposition Association, 161 Chairmen and deputy chairmen, 252 Federal Deposit Insurance Corporation, 65, Check clearing and collection, 189 146, 161, 162, 167, 168, 174, 176, 178 Condition statement, 206 Federal Financial Institutions Examination Deposits, 207, 208 Council Directors, list, 254 Act, 162 Dividends paid, 218, 221, 223 Disclosure statements under Regulation Examination or audit, 191 C, 142 Income and expenses, 192 Regulation, 177 Interest rates, 66, 226 Training courses, 176 Loans and securities, 206, 208, 214, 216, Federal Home Loan Bank Act, 162 230, 232 Federal Home Loan Bank Board, 65, 161, Officers and employees, number and 162 salaries, 215 Federal Home Loan Banks, 145 Operations, volume, 225 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

280 76th Annual Report, 1989 Federal Reserve Banks—Continued Financial Institutions Reform, Recovery, Premises, 192 and Enforcement Act of 1989— Presidents and first vice presidents, 215, Continued 252 Conversion transactions, 163 Priced services Cross-guarantees, 163 Developments, 189 Enacted, 161 Financial statements, 193 Home Mortgage Disclosure Act, 60 Pro forma balance sheet, 194 Monetary policy, 3 Pro forma income statement, 195 Removal and prohibition, 164 Tables, 230 Supervision and regulation, 174 Securities and loan holdings, 193 Tandem restrictions elimination, 187 Training, 176 Financial Institutions Supervisory Act, Federal Reserve Board (See Board of litigation, 158 Governors) Float (See also Check clearing and Federal Reserve notes collection), 19.1 Condition statement data, 208 Flood Disaster Protection Act, 153 Cost of issuance and redemption, 203, Flood insurance, testimony, 153 218 Foreign currencies Federal Reserve System (See also Board of Authorization and directive for operations Governors) in, and review of documents, 25 Consumer affairs (See Consumer and Federal Reserve income on, 216 community affairs) Foreign economies, 20 Foreign currency operations (See Foreign currencies) Garn-St Germain Depository Institutions Map, 284, 285 Act of 1982,60 Training, 176 General Accounting Office, 162 Federal Reserve System Task Force, 175 Glass-Steagall Act Federal Reserve's Reciprocal Currency Litigation, 159 (Swap) network, 25 Securities regulation, 169 Federal Savings and Loan Insurance Securities subsidiaries of bank holding Corporation, 161, 167 companies, 172 Federal Trade Commission, 147, 148 Gold certificate accounts of Reserve Banks Federal Trade Commission Act, state and gold stock, 208, 232 member banks, complaints against, 150 Government Securities Act of 1986, 172 Fed wire, 66 Fees, Federal Reserve services to depository Highly leveraged transactions, 168,174 institutions Home Equity Loan Consumer Protection Automated clearinghouse, 190 Act of 1988 Check clearing and collection, 189 Amendment to expand the disclosures that Coin and currency, 190 lenders must give with applications, Electronic payments, 190 62,143 Pricing of, 193,216, 189 Home Mortgage Disclosure Act (See also Securities, 191 Regulations: C) Wire transfer of funds, 190 Consumer Advisory Council, 152 Financial Accounting Standards Board, 176 Regulatory simplification, 187 Financial Institutions Reform, Recovery, Revision to Regulation C, 59 and Enforcement Act of 1989 Home Owners' Loan Act, 161 Bank Holding Company Act, 61 Housing and Urban Development, U.S. Bank supervision and regulation, 167 Department of, 145 Cease and desist orders, 164 Civil money penalties, 165 Income and expenses Community Reinvestment Act, 146 Board of Governors, 201 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 281 Income and expenses—Continued Management and Budget, U.S. Office of, Federal Reserve Banks, 192, 216 177 Insured commercial banks {See also Margin requirements, 228 Commercial banks) Member banks {See also Depository Assets and liabilities, by class of bank, institutions and National banks) 229 Assets, liabilities, and capital accounts, Banking offices, changes in number, 234 229 Number, by class of bank, 229 Borrowings and loans {See Loans) Interest on deposits {See Interest rates) Banking offices, changes in number, 234 Interest rates Number, 229 Table, 226 Reserve requirements, 227 Interest rates, Federal Reserve Banks State member banks {See State member Discount rates, 1989,66 banks) Votes, 68 Surveillance and monitoring, 173 International banking activities ,181 Transfers of funds {See Transfers of International developments, review of 1989, funds) 19 Menem, [Carlos], President of Argentina, International Monetary Fund, 22 21 International transactions, 22 Mint, U.S., 190 Interpretations of regulations, 61, 144 Monetary Control Act of 1980, 60 Interstate Commerce Commission, 148 Monetary policy Investments Aggregates, 16 Federal Reserve Banks, 206, 208 Credit markets, 17 State member banks, 229 Financial markets relative to, 13 Reports to the Congress, 27 Review of 1988, 37 Justice, U.S. Department of, 157, 191 Review of 1989, 3 Mutual savings banks, 234 Kemp, Jack, Secretary, Department of Housing and Urban Development, 167 National Association of Securities Dealers, 183 Legislation enacted {See also specific act), National banks {See also Member banks) 161 Assets, liabilities, and capital accounts, Legislative recommendations 227 Other agencies with enforcement Banking offices, changes in number, 234 responsibilities, 156 National Credit Union Administration, 146, 183 Litigation New York Automated Clearing House Bank holding companies, 157 Board procedures and regulations, Association, 66 challenges to, 158 Nonmember depository institutions Financial Institutions Supervisory Act, Assets and liabilities, 229 Banking offices, changes in number, 234 158 Number, 229 Loans Agricultural {See Agriculture) Banks, by class, 229 Oil, price developments in 1989,11 Discrimination, testimony, 155 Organisation for Economic Co-operation Federal Reserve Banks and Development, 21 Depository institutions, 206, 208, 216, Over-the-counter marginable stocks, 184 232 Holdings and income, 206, 208, 232 Payments mechanism {See Fees) Interest rates, 226 Payments system networks, policy Volume of operations, 225 statements, 65 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

282 76th Annual Report, 1989 Policy actions Regulations—Continued Board of Governors H, Membership of State Banking Discount rates at Federal Reserve Institutions in the Federal Reserve Banks, 66 System Regulations, 59 Amendment to improve public access Statements and other actions, 63, 65 to financial information about state Federal Open Market Committee (See banks, 60 also System Open Market Account), Interpretation, 61 71 P, Bank Protection Act of 1968, Presidents and vice presidents of Federal amendment, 188 Reserve Banks Y, Bank Holding Companies and Change Conferences, 253 in Bank Control List, 252 Amendment to permit bank holding Salaries of presidents, 215 companies to acquire savings Priced services, Federal Reserve, 189, 216 associations, 61 Profit and loss, Federal Reserve Banks, 218 Tandem restrictions elimination, 187 Publications Z, Truth in Lending Choosing and Using Credit Cards, 147 Amendment to implement the Fair Electronic Banking, 147 Credit and Charge Card Fair Credit Billing Act, 147 Disclosure Act of 1988, 62, 143 Amendment to implement the Home Equity Loan Consumer Protection Regional Delivery System, 191 Act of 1988, 62,143 Regulation of banking organizations Preemption determination, Wisconsin Change in Bank Control Act, 179 law, 144 Delegation of applications, 179 Regulatory Improvement Project, 187 Public notice of board decisions, 179,180 Regulatory Policy and Planning Committee, State member bank applications, 181 187 Timely processing of applications, 179 Regulatory Review Section, 187 Regulations Regulatory simplification, 187 B, Equal Credit Opportunity Reserve requirements of depository Women's Business Ownership Act of institutions 1988, amendment, 59, 142 Regulation D (See Regulations: D) Women's Business Ownership Act of Table, 227 1988, regulatory simplification, Reserves and related items, 230 188 Resolution Finance Corporation, 161 C, Home Mortgage Disclosure Resolution Trust Corporation, 9,161,167 Financial Institutions Reform, Right to Financial Privacy Act, 165 Recovery and Enforcement Act Risk-based capital, 177 (FIRREA), requirements, 142 RTC Oversight Board, 161, 167 Revision requiring additional Rules Regarding Delegation of Authority disclosure of certain residential Amendment to delegate authority to a lending data, 59 senior Board officer to approve the CC, Availability of Funds and Collection acquisition of a failing savings of Checks institution, 61 Amendment to clarify the regulation, 63 Amendment to permit interlocking Policy statement to discourage certain directorates for diversified savings abuses of the check collection and loan holding companies, 64 system, 63 D, Reserve Requirements of Depository Institutions Salaries Decrease in the amount of transaction Board of Governors, 201 balances, 60 Federal Reserve Banks, 215 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 283 Savings Association Insurance Fund, 163 System Open Market Account, authority to Schools (See Training) effect transactions in domestic Securities (See also specific types) operations Credit, 228 Domestic Open Market Operations Definitive, 191 Authorization for, 71, 92, 109 Over-the-counter, 184 Domestic Policy Directive, 73, 76, 85, Regulation, 183 92,99,109,118,124,131 Services, 191 Foreign currency directive, 75 Securities Act Amendments of 1975, 172 Foreign currency operations Securities and Exchange Commission, 148, Authorization for, 74, 98, 116, 138 183 Securities Exchange Act of 1934, 183 Tandem restrictions, elimination, 187 Security devices, Regulation P, 188 Tax Reform Act of 1986, 49 Senior Forum for Current Banking and Telemarketing operations, credit card use, Regulatory Issues, 176 152 Small Business Administration, 145, 148 Thrift Institutions Advisory Council, 251 Special drawing rights, 206, 208, 230, 232 Thrift Supervision, Office of, 145, 167, 179, State member banks (See also Member 183,161 banks) Training, 176 Application regulation, 181 Transfer agents, 173 Assets and liabilities, 229 Transfers of funds (See also Fees and Bank Merger Act, 178 Regulations: E) Banking offices, changes in number, 234 Check clearing and collection (See Check Board decisions, 179, 180 clearing and collection) Complaints against, 149 Federal Reserve operations, volume, 225 Examinations and inspections, 170 Priced services, Federal Reserve, 216 Federal Reserve membership, 185 Transportation, U.S. Department of, 147, Fees (See Fees) 148 Financial disclosure by, 184 Treasury securities Interest on deposits (See Interest rates) Bank holdings, by class of bank, 229 Loans to executive officers, 185 Federal Reserve Banks Mergers and consolidations (See Bank Holdings, 206, 208, 214, 230, 232 mergers and consolidations) Income, 216 Number, by class of bank, 229 Open market transactions, 212 Reserve requirements (See Reserve Repurchase agreements requirements of depository Tables, 206, 208, 212, 214, 230, 232 institutions) Treasury, U.S. Department of, 183, 191, Stock market credit (See Securities credit) 172 Supervision of banking organizations (See Truth in Lending Act, compliance with, 146 Banking supervision and regulation Truth in Savings, testimony, 153 by Federal Reserve System) Surveillance and monitoring, 173 Wire transfer of funds, fees for services, Transfer agents, 173 190 Statement of Principles, 169 Women's Business Ownership Act of 1988 Supervision Equal Credit Opportunity amendment, Policy, 174 59, 142 Safety and soundness, 170 Regulatory simplification, 188 Scope, regulatory responsibilities, 169 World Bank, 22, 177 FRB 1-12,500-0590 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

284 76th Annual Report, 1989 Maps of the Federal Reserve System 1 Hi 9 l|fcv 1 MINNEAPOLIS • %i BOS•TON 12 7 •NEW YORK • SANFRANCISCO CHICAGO • CLEVELAND "^ 'IPHILADELPHIA 10 4 a KANSAS CITYH g • I& B •I S 8 T. LOUIS R 5 ICHMOND ii • ATLANTA DALLAS ALASKA HAWAII :; LEGEND Both pages Facing page • Federal Reserve Bank city • Federal Reserve Branch city • 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

Maps of the Federal Reserve System 285 1-A 2-B 3-C 4-D Pittsburgh Buffalo NJ NY BOSTON NEW YORK PHILADELPHIA CLEVELAND RICHMOND 7-G 8-H Littl? Rock ATLANTA CHICAGO ST. LOUIS 9-1 MINNEAPOLIS 10-J m 12-L Oklahoma City ^^H 01 KANSAS CITY 1-K •. c ., El Paso f r^l • Los Angeles m ^S-a^nVlfeHnioOCUS«O, Antonio £^ DALLAS SAN FRANCISCO Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis