Annual Report of the Federal Reserve Board, 1990

7&> ebort 1990 VJ 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 ofTransmittal BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Washington, D.C., April 26, 1991 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-Seventh Annual Report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 1990. 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 1990 3 INTRODUCTION 5 THE ECONOMY IN 1990 6 The household sector 8 The business sector 10 The government sector 12 Labor markets 14 Price developments 17 MONETARY POLICY AND FINANCIAL MARKETS IN 1990 17 The implementation of monetary policy 21 The monetary aggregates 23 The condition of financial institutions 24 Credit markets 27 INTERNATIONAL DEVELOPMENTS 28 Foreign economies 30 U.S. international transactions 33 Foreign currency operations 35 MONETARY POLICY REPORTS TO THE CONGRESS 35 Report on February 20,1990 50 Report on July 18, 1990 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Part 2 Records, Operations, and Organization 73 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS 73 Regulation D (Reserve Requirements of Depository Institutions) 74 Regulation H (Membership of State Banking Institutions in the Federal Reserve System) 74 Regulation H (Membership of State Banking Institutions in the Federal Reserve System) and Regulation Y (Bank Holding Companies and Change in Bank Control) 75 Regulation J (Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers through Fedwire) 75 Regulation T (Credit by Brokers and Dealers) 76 Regulation Y (Bank Holding Companies and Change in Bank Control) 77 Regulation Z (Truth in Lending) 77 Regulation BB (Community Reinvestment) 78 Regulation CC (Availability of Funds and Collection of Checks) 79 Policy statements and other actions 80 1990 discount rates 85 RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE 85 Authorization for domestic open market operations 87 Domestic policy directive 87 Authorization for foreign currency operations 89 Foreign currency directive 90 Meeting held on February 6-7, 1990 101 Meeting held on March 27, 1990 110 Meeting held on May 15, 1990 117 Meeting held on July 2-3, 1990 128 Meeting held on August 21, 1990 136 Meeting held on October 2, 1990 144 Meeting held on November 13, 1990 151 Meeting held on December 18, 1990 161 CONSUMER AND COMMUNITY AFFAIRS 161 Regulatory matters 164 Community affairs 166 FFIEC activities Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

CONSUMER AND COMMUNITY AFFAIRS-Continued 166 Compliance with consumer regulations 169 Economic effect of the Electronic Fund Transfer Act 170 Complaints about state member banks 172 Unregulated practices 172 Consumer Advisory Council 173 Testimony and legislative recommendations 174 Recommendations of other agencies 175 LITIGATION 175 Bank holding companies - antitrust action 175 Bank Holding Company Act - review of Board actions 176 Other litigation involving challenges to Board procedures and regulations 177 Other actions 179 LEGISLATION ENACTED 179 Market Reform Act of 1990 179 Cranston-Gonzales National Affordable Housing Act 179 Crime Control Act of 1990 183 BANKING SUPERVISION AND REGULATION 184 Scope of supervisory and regulatory responsibilities 189 Supervisory policy 195 Regulation of the U. S. banking structure 198 International activities of U. S. banking organizations 199 Enforcement of other laws and regulations 202 Federal Reserve membership 203 REGULATORY SIMPLIFICATION 203 Foreign securities transactions 203 Funds transfers on Fedwire 203 Price reductions on credit cards 204 Changes in bank control 204 Nonbanking activities 205 FEDERAL RESERVE BANKS 205 Other developments in Federal Reserve services 208 Examinations 209 Income and expenses 209 Holdings of securities and loans 210 Volume of operations 210 Federal Reserve Bank premises 210 Financial statements for priced services Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

215 BOARD OF GOVERNORS FINANCIAL STATEMENTS 221 STATISTICAL TABLES 222 1. Detailed statement of condition of all Federal Reserve Banks combined, December 31, 1990 224 2. Statement of condition of each Federal Reserve Bank, December 31,1990andl989 228 3. Federal Reserve open market transactions, 1990 230 4. Federal Reserve Bank holdings of U. S. Treasury and federal agency securities, December 31, 1988-90 231 5. Number and salaries of officers and employees of Federal Reserve Banks, December 31, 1990 232 6. Income and expenses of Federal Reserve Banks, 1990 236 7. Income and expenses of Federal Reserve Banks, 1914-90 240 8. Acquisition costs and net book value of premises of Federal Reserve Banks and Branches, December 31, 1990 241 9. Operations in principal departments of Federal Reserve Banks, 1987-90 242 10. Federal Reserve Bank interest rates, December 31, 1990 243 11. Reserve requirements of depository institutions 244 12. Initial margin requirements under Regulations T, U, G, and X 245 13. Principal assets and liabilities and number of insured commercial banks, by class of bank, June 30, 1990 and 1989 246 14. Reserves of depository institutions, Federal Reserve Bank credit, and related items—year-end 1918-90, and month-end 1990 252 15. Changes in number of banking offices in the United States, 1990 253 16. Mergers, consolidations, and acquisitions of assets or assumptions of liabilities approved by the Board of Governors, 1990 265 FEDERAL RESERVE DIRECTORIES AND MEETINGS 266 Board of Governors of the Federal Reserve System 268 Federal Open Market Committee 269 Federal Advisory Council 270 Consumer Advisory Council 271 Thrift Institutions Advisory Council 272 Officers of Federal Reserve Banks, Branches, and Offices 273 Conferences of chairmen, presidents, and first vice presidents 274 Directors 295 INDEX 304 MAPS OF THE FEDERAL RESERVE SYSTEM Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Parti Monetary Policy and the US. Economy in 1990 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction The year 1990 was a difficult one for the move forcefully toward a more accom- U.S. economy and a challenging one for modative policy stance. monetary policy. As the year began, Earlier in the second half, policy had policy was aimed at supporting an expand- been eased slightly on two occasions: in ing economy while trying to hold in July, to offset the effects on the economy check, and eventually reduce, the rate of of apparent restraint in private credit price inflation, which had moved up a supplies, and in October, when prospecnotch in the latter part of the 1980s. tive reductions in federal budget deficits Through midyear, that delicate balancing enabled interest rates to decline. Over the act appeared to be succeeding despite balance of the year, money market rates problems in some industries and regions. were reduced aggressively through open But in early August, Iraq's invasion of market operations and, late in the year, Kuwait and a related surge in oil prices through a half-point decrease in the bumped the economy off course, giving discount rate. In total, short-term rates at new impetus to inflation and tilting the the end of 1990 were down more than economy from a path of slow growth to 1 percentage point from their levels of one of recession. The longest peace-time midyear, and long-term rates also had expansion in the nation's history thus moved lower. Falling interest rates concame to an end. tributed to an appreciable decline in the That the oil shock threatened both to foreign exchange value of the U. S. dollar raise inflation and to reduce activity was in the second half of the year. recognized from the outset, but which of The Federal Reserve's decisions to those threats posed the greater danger ease policy in the latter part of 1990 were was not immediately clear. The reaction influenced not only by developments in of household and business spending to the economy but also by the behavior of the oil shock was difficult to predict, as the monetary and credit aggregates. M2 was the degree to which the oil shock and M3 ended 1990 within the ranges set would feed more generally into wage and by the Federal Open Market Committee price decisions. Moreover, the extent (FOMC), but they were in the lower and duration of the disruption of world parts of those ranges, and their expansion oil markets were subject to great uncer- over the fourth quarter continued to be tainty. By mid-autumn, however, it ap- quite sluggish. The sluggishness of the peared that the inflationary spillover of aggregates during this period was worrithe oil shock was being effectively con- some because it suggested that the econtained and that the risk of an appreciable omy was weaker than anticipated and economic contraction was growing. At because it indicated the possibility of that point, the Federal Reserve began to some undesirable restraint on future spending from the constricted flow of credit from depository institutions. In NOTE. The discussion here and in the following particular, the thrift industry was con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

77th Annual Report, 1990 come increasingly reluctant to lend, appeared to be deeply rooted; these raising interest margins and tightening factors seemed to have the potential to nonprice terms. To bolster lending incen- push back the economic recovery or tives, the Federal Reserve in December cause it to be distinctly subpar. eliminated the reserve requirements on Looking beyond the cyclical processes nonpersonal time deposits and net Euro- of recession and recovery, monetary currency liabilities. policy will need to continue aiming at the To a significant extent, overall credit longer-run objective of reducing the rate flows were sustained in 1990 by sources of price inflation over time. In that outside depositories: Debt of the domes- regard, price increases in 1990 were tic nonfinancial sectors grew about 7 per- larger than those of other recent years, a cent over the year and ended in the middle result that reflected both the surge in oil of the FOMC's monitoring range. The prices and more general inflation presshift toward nondepository sources of sures. These inflation pressures seemed credit made it possible to achieve a to be easing a little in the latter part of the greater amount of growth in nominal year, however, perhaps setting the stage income and expenditure for a given for a more favorable inflation perforexpansion of the money stock. One facet mance in 1991. Such an outcome clearly of this process was a shifting by the would enhance the prospects for achievpublic out of assets that are included in ing maximum sustainable economic the monetary aggregates and into hold- growth. • ings of Treasury issues and other securities. Velocity, the ratio of nominal GNP to the money stock, thus exhibited strength that was unusual, given the circumstances. Although declines in interest rates ordinarily are associated with falling velocity, M2 velocity was about unchanged in 1990, and M3 velocity registered an exceptionally large increase. As 1990 drew to a close, the immediate concern was that of bringing the recession to a halt and of getting the economy back on a path of expansion. Support for renewed expansion seemed likely to come from lagged effects of the declines in interest rates over the second half of 1990 as well as from a rise in purchasing power brought on by a sharp drop in the price of crude oil after mid-autumn. The prospects for exports continued to look favorable given the improved competitiveness of U.S. producers. At the same time, however, the confidence of households and businesses was low at the end of 1990, and problems in construction and among some financial institutions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1990 When 1990 began, the economy was in in the latter part of the year. Real gross its eighth year of expansion, and it national product declined at an annual remained on a positive course into the rate of about Wi percent in the fourth summer. During this period, problems quarter, according to final estimates from were evident in some sectors of the econ- the Department of Commerce, and the omy, notably construction, where activity gain over the four quarters of the year was being damped by the persistence of amounted to only 0.5 percent. The civilhigh vacancy rates; and finance, where a ian unemployment rate, which had held significant number of institutions were around 5lA percent through the first half encountering difficulties that reduced of the year, moved up steadily in the their ability or willingness to provide second half, to 6.1 percent in December. credit. Overall, however, production and The consumer price index rose 6.1 perspending still were on a course of expan- cent from December 1989 to December sion at mid-year; and, while the rate of 1990, the largest annual increase in nearly price increase had not yet started to abate, a decade, and a surge in energy prices the conditions for slower inflation ap- after the invasion was only one of the peared to be developing without major factors pushing inflation higher. The disruption to the economy. year-to-year rate of increase in the CPI Then, in early August, oil prices excluding food and energy—a rough surged with Iraq's invasion of Kuwait; indicator of basic inflation trends - mainthe price surge gave further impetus to tained a gradual upward tilt through the inflation, and it also portended reduced first three quarters of 1990, peaking at a domestic purchasing power and weaker rate of 5.5 percent in August and Septemeconomic activity. Uncertainties about ber; a slight easing of pressures over the the course of the economy were heightened enormously. Household and business sentiment plummeted almost over- Real GNP night, a response that perhaps grew in Percentage change, Q4 to Q4 part out of memories of the difficult adjustments that had followed the oil shocks of the 1970s. At the time of the invasion, and on into the autumn, sentiment also was being affected by the considerable uncertainty that had developed regarding the course of fiscal policy. Actual production and spending held MIL up for a time after the oil shock but started to decline in early autumn. The production cuts reduced real incomes still further and added to the cumulating forces of contraction, which included a 1986 1988 1990 continued shift toward caution by lend- The data are preliminary, seasonally adjusted, and come ers. The economy thus fell into recession from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

77th Annual Report, 1990 balance of 1990 brought the rate down to uncertainty regarding the future course 5.2 percent by year-end. The year-to- of oil prices. year rate of increase in nominal labor compensation, as measured by the em- The Household Sector ployment cost index, also moved up in the first half of 1990. After midyear, In midsummer, consumer spending still however, wage pressures moderated, and was on an uptrend, and it edged up a little the rise in nominal compensation over further after the oil shock, peaking in the year ended up at 4.6 percent, slightly September. But with real incomes being less than the increase recorded in each of dragged down by slumping employment the two previous years. and soaring energy prices, the rise in Support for the growth of real activity spending eventually ran out of steam. in 1990 continued to come from the Real outlays fell at an annual rate of about external sector, as real exports of goods 3V2 percent in the fourth quarter; the and services rose about 5% percent quarterly drop likely would have been over the four quarters of the year. By greater but for tax changes that caused contrast, gross domestic purchases, the broadest indicator of domestic demand, fell Vi percentage point on net over the year; within this category an increase in government purchases was more than Income, Consumption, and Saving Percentage change, Q4 to Q4 offset by weakness in consumption, homebuilding, and business fixed invest- Real income and consumption ment and by a swing in inventories from moderate accumulation late in 1989 to Disposable personal income decumulation in the fourth quarter of Personal consumption expenditures 1990. As was true during much of the long expansion of the 1980s, economic trends I in 1990 varied appreciably across different regions of the country. The New England economy, which had been very strong through much of the 1980s, slumped in 1990; by year-end, unemploy- Percent of disposable income ment rates in that region had moved well Personal saving above the national average. By contrast, the economies of many locales with heavy concentrations of manufacturing—especially capital goods manufacturing—held up fairly well until the oil shock; the continued growth of exports supported activity in those areas. The farm economy was relatively strong again in 1990, although some indications of softening did show up in the second half. Energy producers benefited from the climb in oil i {_ 1986 1988 1990 prices; exploration and drilling activity The data are preliminary, seasonally adjusted, and come was restrained, however, by the great from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1990 7 some households to make purchases in 1990; they had fallen about 1V4 percent advance of the turn of the year. in 1989. Purchases of motor vehicles The declines in real income and spend- and parts declined for a second year. In ing in the latter part of the year essentially addition, outlays for the other durreversed the moderate gains made earlier. ables—furniture, household equipment, Over the year, after-tax income was down and the like—turned down, after having about Vi percent in real terms; real grown at a moderate pace in 1989. These consumption spending was up over the patterns of change in spending seemed four quarters of 1990, but only fraction- to reflect both macroeconomic forces, ally. The personal saving rate rose over notably the slower pace of real income the first half of the year, but then dropped growth after the start of 1989, and the % percentage point over the last two normal workings of household inquarters. This drop in the saving rate vestment cycles. With regard to the after midyear was a little surprising from latter, household spending for cars, one perspective, in that an unprecedented trucks, and other consumer durables plunge in consumer attitudes between over the 1983-88 period were almost 50 July and October might have been ex- percent above the average for the six pected to generate some increase in best years of the 1970s. By 1989 many precautionary saving. Moreover, many households may have reached a point households had suffered losses of wealth where they were in effect "stocked up" because of decreases in house prices or in and therefore well positioned to delay the value of securities they held; these making new purchases if the timing did developments would seem to have called not seem right. for a shift toward reduced consumption Spending for residential construction out of current income. But while such got a transitory boost from good weather forces may well have been at work, they in the first quarter of 1990 but then fell apparently were outweighed by a ten- sharply in each of the three subsequent dency of households to dip into savings in quarters. Over the year as a whole, the short run when faced with a sudden residential investment outlays declined surge in expenses for energy. 1014 percent in real terms; they had Patterns of change in the various cate- dropped 7 percent in 1989. gories of consumer spending were mixed This slump in housing investment in 1990. Real outlays for services contin- reflected a variety of influences, most of ued to trend up over the year but at a which appeared to enter on the demand slower pace than during most years of the side of the equation. The downshifting of expansion; on a quarterly basis, growth real income growth after the start of 1989 in these outlays was quite erratic, largely may have led households to view their because of weather-related volatility in longer-run prospects in a more cautious gas and electric bills. Real outlays for light and to hold back from housing nondurables fell 2lA percent over the investments that they might otherwise course of the year, an unusually large haveundertaken. In addition, theunwinddecline by historical standards. The drop ing in some regions of the country of real presumably was brought on in large part estate booms seen in the 1980s tarnished by the downturn in real income over the attractiveness of housing as a longerthe four quarters of 1990, the first such term investment. These negative develdecline since 1974. opments came at a time when housing The real outlays for consumer durables demand already was being restrained by fell VA percent over the four quarters of a much slower rate of growth of the adult Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 77th Annual Report, 1990 population than was seen in the 1970s and volumes of problem loans already on early 1980s. their books, banks were sensitive to the Builders cut back sharply on new poor conditions in many local housing construction in 1990. The annual starts of markets. single-family units fell 11 percent from In contrast to builders, potential hometheir 1989 level, and starts of multi- buyers did not seem to have serious family units declined about 20 percent problems in obtaining financing in 1990; from an already low level. However, mortgage credit remained readily availthese reductions in starts still were not able, and the spreads between mortgage large enough to balance the market. The rates and the rates on other long-term ratio of unsold new homes to the pace of loans actually narrowed. For the most sales jumped sharply in the first part of part, consumer credit also appeared to 1990 and then remained high over the be readily available, with lenders exhibrest of the year; the vacancy rate on iting only a mild tendency to tighten multifamily rental units also remained standards on this generally profitable line high. of business. In some instances, prospective builders were deterred from construction in The Business Sector 1990 by the difficulty of obtaining credit. Failures of thrift institutions severed The business sector began 1990 on a established credit relationships for some rather shaky note. Profits had declined builders; the thrift institutions that sur- during 1989, and overhangs of business vived moved toward more conservative inventories had developed in the second lending policies either out of choice or in half of that year in some markets, notably response to the more stringent capital autos. In manufacturing, production requirements and lending limits man- growth had been restrained late in 1989; dated by the Financial Institutions Re- a sharp drop in output in January 1990 form, Recovery, and Enforcement Act of was led by a steep cutback in auto 1989. Banks also were cautious about assemblies. But conditions improved extending credit to builders; with large Corporate Profits after Taxes Private Housing Starts Percent of gross domestic product Millions of units, annual rate 1986 1988 1990 1986 1988 1990 Profits of nonfinancial corporations from domestic The data are seasonally adjusted and are from the operations, with adjustments for inventory valuation and Department of Commerce. capital consumption. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1990 9 over the next few months. Industrial matched or exceeded the highs of the production rose fairly briskly, in fact, previous two or three years. The invenfrom January into midsummer, and the tory-sales ratio in manufacturing also drop in business profits was halted for a increased on net between July and Decemtime. ber, and manufacturers continued to cut From August on, the business climate output through the end of the year. Over was dominated by the oil shock and its 1990 as a whole, the level of real business attendant uncertainties. After peaking in inventories in the nonfarm sector de- September, industrial production plum- clined $5 billion. The rapid reductions of meted over the last three months of 1990, nonfarm inventories that were seen in the and it closed out the year about 1 lA per- fourth quarter of 1990 more than accent below the level of a year earlier. counted for all of that quarter's drop in Over the latter part of the year, the real GNP. operating rate in industry also fell sharply. After relatively strong gains in each Corporate profits went into renewed year from 1987 to 1989, business outlays decline in the second half of the year. for fixed investment slowed in 1990; the Serious overhangs of business inven- gain over the four quarters of the year tories were not apparent when the oil was 2lA percent. Spending for equipment shock hit in August, and prompt produc- was damped by the squeeze on profits, tion adjustments that followed the shock the easing of pressures on capacity, and forestalled stockbuilding in the ensuing the heightened uncertainties regarding months. Indeed, real manufacturing and the business outlook. These influences trade inventories fell moderately on net showed through most clearly in the between the end of July and the end of outlays for industrial equipment, which December. Under the circumstances, fell almost 6 percent over the year. however, these reductions clearly were Business purchases of motor vehicles not great enough to get actual stocks bounced around from quarter to quarter down to desired levels. In wholesale and but held to essentially the same range that retail trade, sales declined sharply from they have been in for the past several July to December, and the constantdollar ratios of inventories to sales in these sectors moved up to levels that Changes in Real Business Inventories Billions of 1982 dollars, annual rate Industrial Production 1986 1988 1990 Total nonfarm sector. The data are preliminary, seasonally adjusted, and come from the Department of 1986 1988 1990 Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

10 77th Annual Report, 1990 years. By contrast, business outlays for first three quarters of 1990 but fell sharply aircraft, which have been strong in recent in the fourth quarter, and the indicators of years, rose further in 1990. Real spending future construction continued to weaken. for computers and other information Investment in oil drilling remained relaprocessing equipment also increased, but tively subdued in the second half of 1990 the gain in this sector was not nearly so despite the rise in oil prices. In some large as it was in many other recent instances drillers may have been hamyears. In total, business outlays for pered by shortages of experienced crews, equipment rose about AVi percent over but more important, the uncertainty about the year. whether prices would remain high enough Nonresidential construction declined tojustifystepped-upinvestmentprompted 5Vi percent over the four quarters of a cautious response. 1990. Weakness was concentrated mainly Signs of mounting financial stress were in the outlays for offices and other evident in the business sector in 1990. commercial structures, which together The number of corporations reducing, account for about one-third of the total. omitting, or deferring dividends in the An excess supply of these structures fourth quarter was the highest in more developed in many cities during the than thirty years. A record dollar amount building boom of the mid-1980s, and of corporate bonds went into default in despite sharp cutbacks in construction 1990; the default rate, calculated as a after 1985, vacancy rates remained high percentage of the par amount of noninthrough 1990. Reflecting this continued vestment grade bonds outstanding, was imbalance—and the reluctance of credi- 8.7 percent, the highest in twenty years. tors to finance new projects in this While the number of downgradings also troubled sector of the economy —such reached a record high, most of the indicators of future activity as the data on downgradings were attributable to detenew contracts and building permits con- riorating conditions affecting belowtinued to have a decidedly negative cast investment-grade nonfinancial corporathrough the second half of 1990. Spend- tions and financial institutions. ing for industrial structures rose over the The Government Sector Real Business Fixed Investment In the government sector, budgetary Percentage change, Q4 to Q4 pressures intensified in 1990. At the federal level, the rate of growth of receipts Producers'durable equipment slowed to 4.1 percent in fiscal year 1990, Jl less than half the rate of increase in the Jl „ Jl previous fiscal year and more than 1 per- 1 centage point below the rate of growth in nominal GNP. Meanwhile, spending jumped 9.4 percent in fiscal 1990, and the federal budget deficit increased to Structures $220 billion, up $67 billion from the 1989 fiscal year and well above the target for 1990 that had been laid out in the i t i Gramm-Rudman-Hollings legislation. 1986 1988 1990 Finding a way to get back on the track of The data are preliminary, seasonally adjusted, and come deficit reduction occupied the Congress from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1990 11 and the Administration through much of to the big jump in these receipts in 1989. 1990; an agreement reached in October On the expenditure side of the ledger, prescribed new targets and new proce- about one-third of the increase of $ 108 bildures for the five-year period starting in lion in nominal federal outlays in fiscal the 1991 fiscal year. 1990 was attributable to federal deposit Part of the slowing of receipts in the insurance programs; the main portion of 1990 fiscal year stemmed from the weak- these outlays went to honor obligations to ness in corporate profits; collections from holders of deposits in failed thrift instituthat source fell almost $10 billion. In tions. Spending also moved up rapidly in addition, the growth of tax receipts drawn 1990 for entitlements. The outlays for from the incomes of individuals slowed medicare rose 15 percent, pushed up by appreciably, from 11 percent in 1989 to a continued rapid inflation in health costs bit less than 5 percent in 1990; this and an expansion in the number of slowdown mainly reflected the absence beneficiaries. Outlays for social security in 1990 of transitory factors that had led and other income security programs, which together account for close to onethird of total federal spending, rose about IV2 percent in fiscal 1990, a pickup from Government Surpluses and Deficits the pace of recent years. Net interest Billions of dollars outlays, which now account for almost Federal government 15 percent of total spending, also continued to climb rapidly. Federal purchases of goods and services, the portion of federal spending that is included directly in GNP, increased 100 5*4 percent in real terms over the four quarters of 1990. Excluding the volatile changes in the inventories owned or 200 financed by the Commodity Credit Corporation, federal purchases of goods and services increased 4lA percent on net State and local government over the year; nondefense purchases were 15 up 5J/2 percent and defense purchases, which had declined moderately in each of the three previous years, increased 4 percent in 1990. The rise in defense purchases came mainly in the fourth quarter 15 of the year and apparently reflected, in part, outlays associated with Operation 30 Desert Shield. The deficit in the combined operating and capital accounts of state and local 1986 1988 1990 governments (excluding social insurance The data on the federal government are for fiscal years. funds) averaged $30 billion at an annual They are on a unified budget basis and are from the rate over the first three quarters of 1990, Department of the Treasury. The data on state and local governments are preliminary. and it widened considerably in the fourth They are for operating and capital accounts on a national quarter as the recession cut into tax income accounts basis and are from the Department of Commerce. receipts. State and local budgets first Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

12 77th Annual Report, 1990 moved into deficit in late 1986, and they nonfarm sector increased about 250,000 slipped further into the red in each on net. succeeding year. By 1990, concerns had Sectoral patterns of employment intensified about the repayment abilities change varied considerably in 1990. of some state and local governing units; Employment in manufacturing fell about as evidence of this, the downgradings of state and local credit ratings outnumbered upgradings by a wide margin in 1990. Labor Market Conditions In an effort to strengthen their finances, Net change, millions of jobs, Dec. to Dec. many state and local governments raised mu Nonfarm payroll employment taxes in 1990. Reflecting those increases, total state and local receipts moved up faster than nominal GNP through most of Total _ the year, just as they had in 1989. In m addition, spending was scaled back from planned levels in many cases. Overall, however, the efforts to control spending collided with the growing demands for services that state and local governments traditionally have provided in areas such Manufacturing as education, public protection, and I I i health and income support. Thus, while Percent the growth of state and local outlays Civilian unemployment rate slowed from the rate of rise seen earlier in the expansion, it nonetheless ran above that of total GNP. The nominal rise in state and local purchases of goods and services over the four quarters of 1990 was 8 percent; in real terms, purchases grew 2% percent over the year. Labor Markets Percentage change, Dec. to Dec. Employment cost index Payroll employment increased in each Total compensation month in the first half of 1990 and fell in each month of the second half. The declines of July and August, however, reflected layoffs of federal workers who had been hired temporarily to conduct the 1990 census. In the private nonfarm sector, employment continued to edge up through early August and did not turn down decisively until October. More than 600,000 jobs were lost over the final three months of the year. Over the year as 1986 1988 1990 a whole (December 1989 to December The employment cost index is for private industry excluding farms and households. The data arefrom the 1990), the number of jobs in the private Department of Labor. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1990 13 590,000 from December 1989 to Decem- unemployment rate been at such low ber 1990; losses of factory jobs proceeded levels for so long. As in other periods of at a slow and fairly steady pace through reduced slack in the labor market, this the first half but accelerated after the recent period of low unemployment was onset of the oil shock. The troubled marked by sharply increased wage inflaconstruction sector shed roughly 230,000 tion. The employment cost index, which jobs over the course of the year; after a includes the cost of workers' benefits as weather-related jump early in the year, well as wages and salaries, moved up the declines went on almost without about 4% percent in both 1988 and 1989, interruption through December. Employ- after rising about 3V4 percent in both ment in retail and wholesale trade was 1986 and 1987. And in the first half of down 50,000 on net over the course of 1990, the year-to-year rate of increase in 1990 as small gains through the first this measure of compensation rose still seven months of the year were more than further, to 5lA percent. oifset by sharp declines in the fourth Factors besides tightness in the labor quarter. The number of jobs in the ser- market were also pushing up wages and vices industries increased in each month compensation between the end of 1987 of 1990, but the rate of gain slowed and the middle of 1990. The updrift in progressively over the year; health ser- inflation caused workers to press for vices was the only major area in which nominal increases in wages and benefits hiring was going on with much vigor at that were big enough to keep real incomes year-end. on a reasonably even keel, and with labor Growth in the supply of labor was in short supply, businesses found it quite subdued in 1990. The civilian labor necessary to accede to hefty increases to force increased only 0.5 percent from attract and keep workers. The actions of December to December, the smallest government also added to cost pressures: annual gain in almost thirty years. Part of A rise in social security taxes in 1990 the explanation for this slow labor force added 0.2 percent to total compensation, growth is that the working-age population and a boost in the minimum wage may has not been growing very rapidly in have added another 0.1 percent. recent years. In addition, the share of the A marked slowing of wage increases working-age population that chose to emerged in the second half of 1990, and participate in the work force declined by the end of the year the twelve-month enough in 1990 to cut labor force growth rate of increase in the employment cost to half of what it would have been had the index had dropped to 4l/z percent. Alrate of participation not changed. The though workers' real incomes were batsluggishness of the labor markets in 1990 tered by the surge in energy prices during no doubt discouraged some potential this period, attempts to regain those entrants from seeking jobs, a phenome- income losses appear to have been overnon typical of economic slowdowns. whelmed by the increase in labor market Still, the drop in participation in 1990 left slack and associated concerns about job some uncertainties regarding the future security. The efforts of management to trend in the growth of labor supply. contain costs in a time of declining profits By mid-1990, the unemployment rate probably also were a factor helping to had held tightly around 5 lA percent for limit wage increases during this period. seven quarters and had stayed below Productivity measures in 1990 marked 6 percent for nearly three years. Not a second successive year of subpar persince the first half of the 1970s had the formance . Output per hour in the nonfarm Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 77th Annual Report, 1990 business sector was unchanged over the Persian Gulf set off a scramble for four quarters of the year, after having inventories by refiners and others seeking dropped 1.6 percent in 1989. More than to guard against a possible further disruplikely, the poor productivity results dur- tion in supplies. The price of oil fluctuing 1989-90 mainly reflected the cyclical ated widely in this period, but generally slowing of demand in those years—under maintained an upward trend into early such circumstances, firms typically cut output faster than they cut hours. Unit labor costs increased about 4V£ percent Prices over the four quarters of 1990, the largest Percentage change, Q4 to Q4 annual rise since 1982. GNP fixed-weight Price Developments All of the major price measures—the indexes of consumer, producer, and GNP prices—rose faster in 1990 than they did in 1989. In general, the increases seen in 1990 also were the largest since those of the early 1980s. The surge in oil import Consumer prices had a particularly strong effect on those indexes, such as the CPI, that measure price changes for goods and services purchased by domestic buyers. By contrast, the GNP price indexes cover goods and services produced domestically, and they exhibited a less pronounced degree of acceleration this past year. The CPI for energy rose 18 percent from December 1989 to December 1990. Consumer excluding food and energy Although the bulk of the 1990 rise came after the start of August, intermittent Services less energy Commodities less pressures had surfaced earlier in the year. food and energy A severe bout of cold weather at the end of 1989 cut into the inventories of heating oil, disrupted operations at several refineries, and caused the prices of fuel oil and gasoline to soar. After January, fuel oil prices fell back, but gasoline prices remained relatively firm into the summer as still more supply interruptions prevented a rebuilding of stocks. Iraq's invasion of Kuwait in August set 1986 1988 1990 off another round of steep price increases. Consumer prices are for all urban consumers. The data World oil production dropped tempo- are seasonally adjusted. For GNP fixed-weight prices, the rarily after the invasion, and the uncer- data are preliminary and are from the Department of Commerce; the data for consumer prices are from the tainties associated with the tensions in the Department of Labor. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1990 15 October. By then, however, the losses of surge in the prices of orange juice and oil from Iraq and Kuwait were being fully fresh vegetables early in 1990; toward offset by increased production from other the end of 1990, another cold snap countries, and demand was weakening. destroyed citrus crops in California and As a result, oil prices turned down and boosted citrus prices. By contrast, big held on a choppy downward pattern wheat crops here and abroad in 1990 through the end of the year, retracing caused wheat prices to plunge and led to about half of the runup of the August- some rebuilding of stocks; at retail, the October period. rise in the CPI for cereals and bakery The CPI for fuel oil also turned down products slowed from 7 Vi percent in 1989 over the last two months of the year, but to AVi percent in 1990. gasoline prices again held firm,s upported The CPI for non-energy services, this time by a December 1 rise of five which accounts for more than half of the cents per gallon in the federal excise tax. total CPI, rose 6 percent during 1990, Over the year, fuel oil prices increased after an increase of 5.3 percent in 1989. about 30 percent at the consumer level, Within this broad category, increases and gasoline prices were up almost were large for a number of items. The 37 percent. By contrast, increases over prices of medical services, which have the year in the prices of natural gas and been increasing rapidly for many years electricity were quite small—in the range and had risen 8.6 percent in 1989, were of Wi to 2 percent; the reaction of these up 9.9 percent in 1990. The cost of prices to the oil shock apparently was tuition, another CPI category in which damped by ample supplies of natural gas pressures have been evident for some and coal, as well as the customary lags in time, rose more than 8 percent in both adjusting rate structures at retail. 1989 and 1990. Elsewhere in the services The consumer price index for food sector, prices soared for public transporrose 5.3 percent in 1990. This rise was tation and lodging. Airlines, which were about the same as in 1988 and 1989, but hit hard by the surge in energy costs, exceeded the pace of the preceding few raised their fares almost 23 percent over years, when food price increases had the year. Price increases for other forms tended to run more in the 3 to 4 percent of public transportation were in the 6 to range. To a considerable degree, the 7 percent range. continued sharp increases in food prices The CPI for commodities excluding in 1990 seemed to reflect underlying food and energy rose 3.4 percent in 1990, inflation processes similar to those at up sharply from 2.7 percent in 1989. work in other sectors of the economy. In Within this category, tobacco prices were addition, prices were affected by the up especially sharply, about 11 percent in changing supply conditions in agricul- all; the increase reflected the passture. Production of beef and pork de- through to consumers of a jump in clined in 1990, and their prices at retail manufacturers' prices and the continued increased 9 percent and 17 percent respec- reliance by governments on higher taxes tively over the course of die year. Dairy on tobacco products as an attractive way production, which had fallen in 1989, to boost revenues. The CPI for apparel turned up in 1990; but with stocks initially was up 5 percent in 1990; apparel prices at low levels, the rise in production did had changed little over the course of not have a damping effect on prices at 1989, and thus at least part of the 1990 retail until relatively late in the year. The rise may have been an effort to restore spell of cold weather late in 1989 led to a margins. Prices of new cars continued to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

16 77th Annual Report, 1990 go up, even as sales were coming down; by contrast, used car prices declined a bit for a second year. The prices of many household appliances fell in 1990, extending the gradual downward trend seen in previous years. Apart from energy, increases in producer prices were comparatively moderate in 1990. The producer price index for finished goods excluding food and energy rose 3.5 percent over the year, about % percentage point less than in either of the preceding two years. In manufacturing, the pressures from rising wages and soaring energy costs were partly damped by continued rapid gains in productivity and softening demand. The prices of intermediate materials excluding food and energy rose 1.9 percent during 1990, the second year in a row in which increases for that category have been small; materials prices had increased sharply in 1987 and 1988. The spot prices of raw industrial commodities moved up on net in the first half of 1990, held firm through September, and then fell rapidly in the fourth quarter as the economy weakened. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

17 Monetary Policy and Financial Markets in 1990 Monetary policy held steady in the first through depository institutions that could half of 1990, but it progressively eased in adversely affect spending in the future. the second half in resumption of the trend that began in 1989. In moving again The Implementation toward ease, the Federal Reserve acted of Monetary Policy against the backdrop of a weakening economy, sluggish money growth, im- During the first half of 1990, the Federal proved inflation prospects, greater fiscal Reserve took no actions in reserve marrestraint, and indications of tightening kets designed to produce changes in credit to private borrowers. Short-term money market interest rates. Federal interest rates, in response to the System's funds—overnight interbank loans of imactions and to the softening of aggregate mediately available funds—traded around demand after the oil shock, fell more than the %lA percent level that had been 1 percentage point in the second half, to a established in December 1989, and other level more than 2*/2 percentage points short-term rates were little changed as below the peak that was reached in the well. Throughout this period economic spring of 1989. Long-term rates also activity continued to expand, the unemmovedlower over the second half, revers- ployment rate held steady, and inflation ing most of the rise of the first half. showed no clear signs of abatement. In the formulation of policy in 1990, as Yields on longer-term debt instruments in other recent years, the Federal Reserve rose considerably during the early months examined a variety of information bear- of 1990, restoring the yield curve's usual ing on economic activity and prices. In upward tilt, which had been absent for addition, certain developments in finan- much of 1989. This rise in long-term cial markets also took on special signifi- rates reflected an economy stronger than cance for the economy and monetary some had expected, greater concern policy. The cost and availability of credit about inflation, and higher foreign interwas monitored in light of indications that est rates. As the second quarter protightening credit supplies were constrain- gressed, however, bond rates began to ing output to a greater degree than was recede, responding to a shift in market desirable; and considerable attention was sentiment about the strength of the econpaid to changes in the money stock, omy and the likely path of monetary especially in the latter part of 1990, when policy. money growth virtually stalled. The Fed- Growth of the broader monetary aggreeral Reserve recognized that the relation gates began to slow appreciably in the of the monetary aggregates to broad second quarter. To a large extent, the measures of economic performance re- weakness in growth of the aggregates mained subject to considerable uncer- was associated with a redirection of credit tainty, but the marked sluggishness of flows away from depository institutions. money growth was seen as suggesting That shifting of credit flows appeared to both weak contemporaneous growth of stem mainly from the ongoing restructurincome and spending and the existence of ing of the thrift industry, but it also constraints on the availability of credit reflected an apparent decrease in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

18 77th Annual Report, 1990 willingness or ability of banks to lend. centage points. Shortly thereafter, by Because these developments represented mid-July, it had become apparent that the an abrupt departure from previous trends, pullbackby depositories was constricting initial assessments of their potential effect credit supplies to some classes of boron the economy were subject to some rowers; in response, the Committee eased extra uncertainty. For the most part, how- reserve conditions to bring down interest ever, the decline in depository credit rates slightly to offset the effects of this seemed likely to be taken up by other tightening of credit conditions on an lenders, with minimal impact on the already soft economy. overall cost and availability of credit. The invasion of Kuwait at the begin- Growth of M3, the aggregate most af- ning of August fundamentally altered the fected by the reduction in depository environment for monetary policy. World credit, was expected to be damped con- oil prices soared, and a considerable siderably, and M3 velocity was expected measure of uncertainty was added to the to rise substantially. In recognition of outlook for the economy, complicating these developments, the FOMC at its the formulation of monetary policy. meeting in early July reduced the annual Business and consumer confidence plumtarget range for this aggregate by 1 Vi per- meted, and the adverse effects of high oil prices on the public's spending plans, domestic economic activity, and inflation Interest Rates started to become apparent. As volatility Percent in financial markets increased, investor Short-term preference for liquidity and safety was Treasury bills heightened: Treasury bill rates fell during Three-month August and September while private Federal funds short-term rates changed little; money market mutual funds experienced large inflows, boosting growth of the monetary aggregates late in the summer as investors apparently fled stock and bond markets; and the ongoing decline in the foreign Long-term exchange value of the dollar was halted 18 ^•A Conventionalmortgages for a while by safe-haven demands. \ /s 15 In these circumstances, the benefits of U.S. government bonds any easing action taken to cushion the 12 possible effects on output in the near term \ needed to be weighed against the potential v 9 for embedding higher energy prices in i i i I I I! the price level and, more important, into 1982 1984 1986 1988 1990 inflationary expectations, a reaction that The data are monthly averages. ultimately would seriously undercut the The federal funds rate is from the Federal Reserve. prospects for sustainable economic The rate for three-month Treasury bills is the market rate on three-month issues on a coupon-equivalent basis and is growth. Policy decisions were further from the Department of the Treasury. complicated by the fact that the military The rate for conventional mortgages is the weighted and political situation underlying the oil average for thirty-year fixed-rate mortgages with level payments at major financial institutions and is from the price shock was so fluid; in fact, it clearly Federal Home Loan Mortgage Corporation. was a war-risk premium rather than a The rate for U. S. government bonds is their market yield current shortage of supply that was adjusted to thirty-year constant maturity by the Treasury. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 19 maintaining a higher price of crude oil. As the economy weakened, more and The possibility existed that any substan- more lending institutions came under tial moves in monetary policy might financial strain as problems emerged in prove ill-advised as circumstances many real estate portfolios and as a changed, and it appeared that the most growing number of highly leveraged constructive role monetary policy might firms ran into trouble. Efforts by banks play, until the balance of risks was and other lenders to protect or improve clarified, would be to foster a sense of their capital positions as their loan portstability in the very nervous financial folios deteriorated were reflected in markets. widespread signs of cutbacks in the As it was, financial markets had to availability of credit and increases in its contend not only with the Gulf crisis cost, especially to less-than-prime borduring the late summer and early fall, but rowers lacking access to securities maralso with uncertainties surrounding the kets. While much of the tightening of timing and extent of a reduction in the lending standards was welcome from the federal budget deficit. Yields were buf- standpoint of safety and soundness, it feted whenever the odds of a meaningful exerted a contractionary influence on the deficit-reduction package appeared to economy and was reflected in slow growth change. For example, Treasury bond of bank credit and the broad monetary rates fell appreciably when an initial aggregates. budget accord was hammered out but Against this backdrop, the Federal rose when the government was forced to Reserve took additional actions designed shut down temporarily after the pact to support the economy and to counter failed to win congressional approval. By the tightening in credit terms. In midthe end of October, a budget agreement November, the FOMC moved to lower involving a major degree of fiscal re- money market rates through open marstraint over a multiyear horizon had been ket operations, and in early December, successfully concluded, and long-term the Board eliminated the 3 percent rates had come down again. In light of the reserve requirement on nonpersonal budget agreement, which promised time deposits and net Eurocurrency greater and more durable fiscal restraint, liabilities. This action was taken in and with the economy weakening, the response to the increased restraint on Federal Reserve took another step to ease lending by commercial banks: Lower pressures on reserves. reserve requirements reduce funding Late in the year, indications accumu- costs to depository institutions, enlated that inflationary pressures, apart couraging them to expand lending. Ultifrom those closely connected to the surge mately, the lower funding costs are in energy prices, were easing. As the passed through as a combination of lower economy softened and wage pressures rates for borrowers and higher rates also diminished, it seemed more likely offered to depositors. that the effects of higher oil prices would Following the reduction in reserve not be built into ongoing inflation trends. requirements, further actions were taken Market interest rates declined across the in reserve markets to bring down shortmaturity spectrum; the declines were term interest rates. These actions inespecially large for government obliga- cluded additional steps toward a more tions, as investors concerned about credit accommodative supply of nonborrowed quality were drawn toward these high- reserves through open market operations grade assets. and, in December, a reduction of Vi per- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

20 77th Annual Report, 1990 centage point in the discount rate. All of 1 percentage point from mid-1990 to the these moves were made in light of further end of the year. declines in economic activity, sluggish Under the impetus of the easing of money and credit growth, and evidence monetary policy and the softening of the of ebbing inflation pressures. In total, the economy, most other short-term rates federal funds rate fell a bit more than also fell significantly in the second half of Reserves, Money Stock, and Debt Aggregates Annual rate of change based on seasonally adjusted data unless otherwise noted, in percentl 1990 Item 1987 1988 1989 Year Ql Q2 Q3 Q4 Depository institution reserves2 Total 4.8 2.8 -1.6 .3 2.7 -1.4 -1.4 1.7 Nonborrowed 4.9 2.5 -1.3 .4 1.6 -.8 -2.9 3.9 Required 4.7 2.7 -1.4 .0 2.5 -.9 -1.5 -.2 Monetary base3 7.6 6.8 3.4 8.5 8.2 7.4 8.6 9.0 Concepts of money4 Ml 6.3 4.2 .6 4.2 5.2 4.2 3.7 3.4 Currency and travelers checks . 8.7 8.0 4.6 11.0 10.2 9.7 11.3 11.2 Demand deposits -.9 -1.3 -2.9 -.6 -.4 -2.7 1.3 -.7 Other checkable deposits 13.7 7.6 1.0 3.5 6.7 6.7 -.3 .7 M2 4.3 5.2 4.7 3.9 6.2 3.9 3.0 2.2 Non-Mi components 3.6 5.5 6.1 3.8 6.5 3.8 2.7 1.8 MMDAs, savings, and smalldenomimation time deposits 3.1 5.7 3.8 2.6 4.1 3.5 2.1 General-purpose and broker-dealer money market mutual fund assets ... 5.9 7.9 30.1 11.4 18.1 4.7 9.9 11.2 Overnight RPs and Eurodollars (n.s.a.).. 7.0 -4.9 -8.7 3.0 30.7 -1.3 -5.1 -21.0 M3 5.8 6.3 3.6 1.7 2.9 1.3 1.6 1.1 Non-M2 components 12.2 10.7 -.6 -6.4 -9.7 -9.1 -3.9 -3.7 Large-denomination time deposits 9.4 11.7 4.9 -9.5 -7.3 -10.1 -8.9 -13.0 Institution-only money market mutual fund assets 3.0 -.6 17.0 20.2 9.1 14.7 21.6 30.4 Term RPs (n.s.a.) 36.7 14.7 -13.5 -12.0 -29.2 4.5 1.6 -25.9 Term Eurodollars (n.s.a.) 14.1 11.3 -22.0 -12.8 -52.0 -24.1 12.2 13.6 Domestic nonfinancial sector debt. 9.7 9.2 7.7 6.8 6.3 7.0 7.1 6.0 Federal 9.0 8.0 7.5 11.0 6.8 9.7 14.4 11.4 Nonfederal 10.0 9.5 7.8 5.5 6.2 6.2 4.9 4.3 1. Changes are calculated from the average amounts money market deposit accounts (MMDAs); savings and outstanding in each quarter. Annual changes are measured small-denomination time deposits at all depository institufrom Q4 to Q4. tions (including retail repurchase agreements), from which 2. Data on reserves and the monetary base incorporate have been subtracted all individual retirement accounts adjustments for discontinuities associated with regulatory (IRAs) and Keogh accounts at commercial banks and thrift changes in reserve requirements. institutions; taxable and tax-exempt general-purpose and 3. The monetary base consists of total reserves plus the broker-dealer money market mutual funds, excluding currency component of the money stock plus, for institu- IRAs and Keogh accounts; wholesale overnight and tions without required reserve balances, the excess of continuing-contract repurchase agreements (RPs) issued current vault cash over the amount applied to satisfy by commercial banks and thrift institutions net of money current reserve requirements. fund holdings; and overnight Eurodollars issued to U.S. 4. Ml consists of currency in circulation excluding residents by foreign branches of U.S. banks worldwide net vault cash; travelers checks of nonbank issuers; demand of money fund holdings. M3 is M2 plus large-denomination deposits at all commercial banks other than those due to time deposits at all depository institutions other than those depository institutions, the U.S. government, and foreign due to money stock issuers; assets of institution-only banks and official institutions, less cash items in the process money market mutual funds; wholesale term RPs issued by of collection and Federal Reserve float; and other checkable commercial banks and thrift institutions net of money fund deposits, which consist of negotiable orders of withdrawal holdings; and term Eurodollars held by U.S. residents in and automatic transfer service accounts at depository Canada and the United Kingdom and at foreign branches of institutions, credit union share draft accounts, and U.S. banks elsewhere net of money fund holdings. demand deposits at thrift institutions. M2 is Ml plus Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 21 1990. The drop in yields on Treasury was about 4 percent, well down in the bills roughly paralleled that in the federal lower half of the FOMC's range. Growth funds rate. Declines in the rates on of M2 was robust in the first quarter but commercial paper and certificates of de- weakened markedly over the remainder posit were less than those on federal of the year. M2 was affected by the sharp funds or Treasury bills; this widening of dropoff in the expansion of nominal yield spreads was additional evidence of income toward the end of 1990, but the investor concern about private credits, slow growth of M2 also reflected the though these spreads generally remained unusual behavior of velocity; M2 velocity narrower than those seen in past eco- was fairly stable through 1990, even nomic downturns. In contrast to other though historical relationships suggest short-term rates, the prime rates charged that velocity should have fallen given the by banks held steady through the end of decline in interest rates. 1990, a consequence of the tightening of The shortfall of money growth, relacredit supplies. tive to historical patterns, probably re- In the weeks leading up to the end of flected, in part, the shifting of financial the year, yields on private money market flows associated with the contraction of instruments were pressued upward as the the thrift industry and the increased publication dates for financial statements reluctance or the inability of commercial approached; to put their year-end state- banks to expand their balance sheets. ments in the best light, banks held down Indeed, the slowdown of M2 growth credit extensions in order to bolster coincided with a pickup in the activity capital ratios, and lenders in general of the Resolution Trust Corporation intensified their focus on asset quality. (RTC), the federal agency responsible Spreads soared at times in this period; but for resolving the problems of thrift with the Federal Reserve injecting large institutions. Depository credit fell over amounts of reserves into the market the year, and although this drop affected toward year-end, major dislocation was M3 the most, it also may have damped averted. M2 by reducing the need of commercial In the second half of 1990, rates on banks and thrift institutions to bid for longer-term securities came down consid- retail deposits. In addition, the abroerably less than did the rates on short- gation of some high-rate contracts in the term paper. Declines in these longer- process of closing failed thrift institerm yields may have been limited in part tutions reduced the attractiveness of that by the increased uncertainty and volatility type of deposit; also, depositors who that followed the invasion of Kuwait. In were dislodged from existing relationthe stock market, indexes of share prices ships when thrift institutions were closed had reached record highs in July 1990, may have reallocated their assets away but the uncertain outlook both at home from depositories. and abroad after the invasion of Kuwait Nevertheless, even after taking acand the slump in economic activity pushed count of these factors, M2 growth was stock prices significantly lower in the much slower than seems explainable, ensuing months. indicating an underlying reevaluation of, and shift away from, M2 assets. One factor behind such a shift may have been The Monetary Aggregates concerns generated by the publicity about M2 grew unexpectedly slowly in 1990; savings and loan failures and about the the rise over the four quarters of the year problems at banks. To the extent that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

22 77th Annual Report, 1990 households moved assets to money mar- been shifted in ways that would affect ket funds, which grew rapidly in the M2. For example, noncompetitive tensecond half of the year, M2 was not ders at Treasury auctions were unusually affected. However, funds may also have strong, suggesting a shift toward direct holding of assets that are not included in M2. In addition, M2 growth may have Monetary Aggregates, Nonfinancial been damped by a tendency of households Sector Debt, and Reserves to lag in adjusting their spending in the Trillions of dollars face of higher prices for energy products and a sudden plunge in real income; by contrast, households apparently were 3.4 reluctant to borrow to maintain spending, as growth of consumer credit was especially slow in the fourth quarter. 3.2 The slowdown in M2 last year would Range have been even more pronounced had it not been for the rapid expansion of currency, which was up 11 percent over the year, more than twice the 1989 pace and the most rapid yearly rise of the postwar period. However, the bulk of the pickup appears attributable to increased demands for U.S. currency outside our borders. Information on shipments abroad sug- Total domestic nonfinancial debt gests that demands for U.S. currency were particularly heavy in areas experiencing economic and political turmoil, Billions of dollars Velocity of Money Ratio scale 1.6 1989 1.4 The ranges were adopted by the FOMC for the period from 1989:4 to 1990:4. _LJ_ Reserves have been adjusted to remove discontinuities associated with changes in reserve requirements. Nonbor- 1960 1970 1980 1990 rowed reserves include extended credit; the difference Velocity is the ratio of gross national product, measured between total and nonborrowed reserves is used to meet in current dollars, to the stock of money. The data are seasonal and adjustment needs. quarterly averages. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 23 especially Eastern Europe, Latin Amer- the shift of M2 deposits from thrift ica, and, after the Iraqi invasion of institutions to banks thus contributed to Kuwait, the Middle East. sharp declines in M3 managed liabilities The faster growth of currency, along at banks. with the effects of lower market interest rates on incentives to hold transactions The Condition of Financial balances, boosted Ml growth from near Institutions zero in 1989 to more than 4 percent in 1990. The monetary base grew 8% per- By and large, banks remained sound and cent over the year, also propelled by well capitalized in 1990. Some banks ran strong currency growth. By contrast, the into difficulties, however, in large part total reserves portion of the monetary because of problems in their portfolios of base was about unchanged, reflecting commercial real estate loans. Before the little net growth in reservable liabilities; mid-1980s, developers typically artransactions deposits increased slightly, ranged permanent financing for construcbut declines were registered in nonper- tion and land development projects, sonal time deposits and net Eurodollar usually from institutional investors, beborrowing (abstracting from the effects fore obtaining initial bank financing. But of the reserve requirement decrease at with real estate values rising rapidly in year-end). the mid-1980s, many banks stopped The growth of M3 in 1990, 1% per- requiring such prearranged "takeouts." cent, was less than had been anticipated Later, when the real estate market early in the year. In following a quarterly cracked, those banks found themselves pattern roughly similar to that of M2, holding a substantial volume of undercolgrowth of M3 fell off noticeably after the lateralized loans. At about the same time, first quarter, and the aggregate ended the prospects declined for many of the highly year somewhat above the lower bound of leveraged transactions (HLTs) that banks its target range. That range itself had had financed in recent years; while bank been lowered by 1 Vi percentage points in losses attributable to HLTs were not July 1990 amid evidence that the drop in significant, the virtual disappearance of thrift assets was proceeding more rapidly the market for new low-rated bonds in than had been expected and that credit 1990 implied that many HLT loans would flows were being directed away from not be repaid as promptly as had been depository institutions. Banks acquired a hoped. Growing uneasiness about banks' substantial amount of deposits from thrift assets contributed to increases in their institutions resolved by the RTC, but in cost of capital and, for some banks, the contrast to their behavior in 1989, banks cost of wholesale funding. did not use newly acquired deposits to Concerns about the weakness of the expand their balance sheets. Significant banking industry intensified in 1990. The loan losses in 1990 limited the ability of General Accounting Office and the Conbanks to generate capital internally and gressional Budget Office issued reports raised the cost of external capital as that questioned the financial health of investors reevaluated risks. At the same some large banks and explored the possitime, banks were facing the prospect of ble difficulties that problems in banking adjusting to new capital standards. Banks might pose for the Bank Insurance Fund. used the deposits they acquired from Banks had to make large provisions for thrift institutions to pay down other loan losses in 1990 as delinquency and liabilities, especially large time deposits; loss rates rose on most major categories Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

24 77th Annual Report, 1990 of loans, especially real estate. By mid- ever, growth of the total debt of all September, interest rates on the subordi- nonfinancial sectors slowed only modernated debt obligations of some major ately from the pace of 1989 even as the banking firms had jumped appreciably as growth of credit extended by depositories investors reevaluated the health of these dwindled. institutions. Rather than pay sharply Banks tightened lending standards and higher rates, several major bank holding raised their margins in 1990 in response companies chose to redeem portions of to the rising cost of funds, capital shorttheir outstanding auction-rate preferred ages, and perceptions of greater risk of stock. Spreads between bank and Trea- default among some classes of borsury obligations widened significantly, rowers. In the wake of HLT disclosure and bank stock prices tumbled. These guidelines, banks imposed caps on their price movements began to be reversed exposure to these types of transactions. toward the latter part of the year, how- Banks with low capital cut back lending; ever. Spreads on subordinated and other banks that were adequately capitalized bank obligations narrowed in the fourth maintained credit growth at a substantial quarter but remained well above their pace but appeared to be reluctant to pick levels of the summer. up the slack. Financial institutions other than banks The banks' tightening of credit stanand thrift institutions also encountered dards and lending terms, together with difficulty in 1990. Finance companies the weakening economy and attendant and insurance companies took a beating softening of the demand for credit, caused in the securities markets beginning in the growth of bank assets to slow in 1990, September, as these companies' holdings especially in the fourth quarter. Growth of commercial real estate and HLT loans of bank loans during the year was roughly were reevaluated in light of expectations half its 1989 pace, with slowing evident of a weaker economy. Yield spreads on in business, real estate, and consumer the obligations of the companies widened lending. Regional disparities in the significantly at that time. growth of bank lending were substantial. In New England, bank lending turned down sharply at the beginning of 1990, shifting from robust growth to outright Credit Markets decline. Banks in that region were partic- Extraordinary changes took place in the ularly aggressive in selling loans into credit markets in 1990. With lending by securities markets; these sales, together thrifts continuing to decline and bank with the write-off of problem loans, lending slowing, growth of the total contributed importantly to the overall volume of credit provided by depositories drop in loan volume. In the Southwest, turned slightly negative; this represented the volume of bank lending continued to a sharp break from past trends. Some decline in 1990. In the rest of the country, borrowers found themselves seeking loan volume continued to grow. alternative sources of finance or facing The volume of credit held by thrift less favorable terms of credit than they institutions shrank rapidly during 1990. had previously. These problems were The RTC resolved insolvent thrifts, greatest among borrowers in troubled acquiring the bulk of their assets in the sectors of the economy like commercial process. In addition, many viable thrift construction, but they also were evident institutions shed assets in an effort to to some extent in other sectors. How- meet the new capital guidelines. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 25 While the weakness of depository the sluggishness that was evident in the credit may have damped total credit growth of these types of credit in 1990 growth to some extent, the effect was far would seem mainly to have come from less than one for one. Both the secondary the demand side of the market and market in mortgages and the securitiza- reflected influences such as the slump in tion of consumer loans substituted for sales of automobiles, other consumer bank and thrift intermediation in those durables, and housing. sectors. Securitization alone is estimated Business borrowing slowed further in to have removed more than $40 billion in 1990. The credit needed to finance corconsumer loans from bank balance sheets porate restructuring diminished—as indiduring 1990 as banks pared their asset cated by a falloff in net equity retirements totals to improve capital ratios. With to roughly half the pace of the previous these alternative financial arrangements two years. In addition, the gap between gaining greater prominence, homebuyers corporate capital expenditures and interand consumers generally appeared to nal funds changed little over the year, on have continued access to credit, on terms net, thus limiting credit requirements. A that were no less favorable than before. tightening of credit availability for all but While spreads on both asset-backed and investment-grade firms became increasmortgage-backed securities did widen a ingly evident as the year progressed. The bit in the fourth quarter, they remained pullback in lending to lower-rated borwell within their historical ranges. Thus, rowers was not limited to domestic banks; U.S. offices of foreign banks, which previously had been aggressive suppliers of funds to U.S. borrowers, also cut Changes in Debt of back, as did domestic nonbank lenders the Domestic Nonfinancial Sector such as insurance companies. In addition, and in Depository Credit bond markets remained unreceptive to Percent offerings of below-investment grade is- Debt sues. The outstanding debt of state and local governments grew slowly in 1990 as they reduced new borrowing and retired sizable amounts of old debt. At the same time, pressures on their credit ratings increased. The ratings of a significant number of local housing issues were downgraded in response to the slipping credit quality of several banks and insurance companies that provide credit en- 1960 1970 1980 1990 hancements. Also, late in the year, certain Domestic nonfinancial debt covers borrowing by households, farm businesses, nonfarm noncorporate businesses, municipalities and some states found corporate nonfinancial businesses, state and local govern- themselves paying substantially higher ments, and the federal government. Depository credit is the sum of credit market funds rates in light of their own financial advanced by savings institutions and commercial banks. difficulties. The percentage changes are four-quarter moving aver- Growth of the debt of all domestic ages . They are calculated by first subtracting the level at the end of the previous quarter from the level at the end of a nonfinancial sectors was boosted last year given quarter (flow) and dividing by the level at the end of by the federal government, which borthe previous quarter. The quarterly percentage rates are then used in computing four-quarter moving averages. rowed in part to fund acquisitions of thrift Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

26 77th Annual Report, 1990 assets by the RTC. Borrowing for the RTC accounted for about Vi percentage point of the roughly 7 percent growth of total debt from December 1989to December 1990. The growth of total nonfinancial debt has slowed over recent years, but even abstracting from the effects of RTC activity, it continued in 1990 at a pace well in excess of the expansion of nominal GNP. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

27 International Developments Economic growth in the major foreign the Canadian dollar, fell 12 percent in industrial economies slowed significantly nominal terms against a trade-weighed in 1990 as real GNP increased by about average of ten currencies. Adjusted for 2Vi percent, compared with VA in 1989. changes in relative consumer price levels, Economic performance among the indus- the dollar's depreciation was smaller trial countries was quite mixed, with because U.S. inflation exceeded foreign Canada and the United Kingdom, both inflation by VA percent. important U.S. trading partners, moving In the first half of the year the dollar into recession. Growth in non-OPEC declined somewhat against European curdeveloping countries also slowed, to less rencies, but it continued to rise against than 2 Vi percent on average; performance the yen as the market remained concerned there too was quite mixed, with Brazil about Japanese political uncertainties and and Argentina experiencing substantial economic policy. This continued weakdeclines in output. Adjustment of external ening of the yen was countered by coorimbalances was obscured by the in- dinated intervention by U.S. and Japacrease in oil import bills and by some nese monetary authorities. After midfinancial transfers related to the crisis in year, however, the dollar began a sharp the Persian Gulf. Nevertheless, the U.S. decline against all major currencies as current account deficit narrowed some- U.S. monetary policy eased in the face of what to $99 billion in 1990. Japan's weakening U.S. economic activity while current account surplus declined about $20 billion, and Germany's declined $10 billion. The combined surplus of the Asian newly industrialized economies Exchange Value of the Dollar declined almost $10 billion. and Interest Rate Differential The dollar, which depreciated against Percentage points Ratio scale, March 1973 = 100 all major foreign currencies other than 6 ~ Price-adjusted exchange value Exchange Value of the Dollar against Selected Currencies December 1989 = 100 Long-term 80 Japanese yen real interest 110 2 - rate differential Canadian dollar U.S. minus foreign i i i i i i i i i i i i i i i i i 1975 1980 1985 1990 The exchange value of the U.S. dollar is its weighted average exchange value against currencies of other Group of 10 (G-10) countries using 1972-76 total trade weights adjusted by relative consumer prices. The interest rate differential is the rate on long-term U.S. government bonds minus the rate on comparable foreign 1990 securities, both adjusted for expected inflation estimated by a thirty-six-month moving average of actual consumer price inflation or by staff forecasts where needed. Foreign currency units per dollar. The data are monthly. The data are quarterly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

28 77th Annual Report, 1990 monetary policies in European countries points higher than its level of a year and Japan were tightening. The dollar earlier. In contrast, Japanese unemploycontinued to decline into December, ment rates remained near record low when mounting concerns about year-end levels last year amid other signs of laborpressures in dollar funding markets and market tightness, causing heightened mounting fears of a military conflict in concern about inflationary pressures. the Persian Gulf contributed to some Unemployment rates moved down during dollar strengthening. the year in Western Germany as the Official exchange market intervention economy boomed, but in Eastern Gerby authorities in fourteen major foreign many measures of unemployment and countries amounted to net dollar sales "short-time" employment indicated slack totaling a little more than $3V4 billion, labor-market conditions. Unemployment while U.S. official intervention amounted rates in most other major foreign industo net dollar sales of a little more than trial countries remained steady or contin- %VA billion. ued to move lower last year. Foreign Economies GNP, Demand, and Prices Economic growth in the foreign industrial Percentage change from previous year economies slowed on average last year, Gross national product as performance in individual countries Constant prices I y^v Foreign continued to diverge. Investment de- \ ^\ // XT 4 mand, which had been an important ^ 2 source of strength, weakened during the year in many countries. Slower growth i i i Unitei d Statesi \was a reaction to tight monetary condi- Total domestic demand tions, decelerating activity in the United Constant prices 6 States, and the repercussions on oil prices \^ Foreign and on consumer and investor confidence ^ / 4 of developments in the Persian Gulf. The \ pace of economic growth in Japan and ^ 2 Germany was comparatively strong. United States^*^ Growth in other key European countries v \ o 4was less robust, and both Canada and the i t t United Kingdom experienced recessions in 1990. Consumer price index Changes in labor market conditions last year reflected differences in cyclical United States A conditions among industrial countries. Foreign During 1990 the United Kingdom reversed almost four years of steadily declining unemployment. After reaching _j i a low point of about 5Vi percent in the 1986 1988 1990 first quarter, the U.K. unemployment Foreign data are multilaterally weighted averages for the G-10 countries using 1972-76 total trade weights and are rate rose a full percentage point by the from foreign official sources. end of the year. At the end of 1990, Data for the United States are from the Departments of Canadian unemployment was above Commerce and Labor. For GNP and domestic demand, the data are quarterly 9VA percent, more than VA percentage and preliminary; for consumer prices, the data are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 29 On average during 1990, monetary Hemisphere, where output declined in conditions were tightened slightly as for- Brazil and Argentina. eign monetary authorities remained Among subgroups of developing cautious with regard to inflationary countries, there was another large pressures—particularly following the reduction in the current account surplus increase in oil prices in the second of the newly industrializing economies half—but important differences emerged of Asia. The surplus of the four Asian among the major industrial countries NIEs fell from about $24 billion in 1989 during the year. Japanese short-term to $14 billion in 1990, with most of the interest rates moved up by more than adjustment taking place in Korea, which 1 percentage point, and the discount rate recorded a current account deficit last was increased twice by a total of 134 per- year. The reduction in the combined centage points. German monetary condi- surplus of the NIEs in 1990 resulted tions also were tightened after mid-year from accumulated real appreciations of as activity continued to be robust. Al- these currencies and slower growth in though price pressures appeared to ease major export markets. in the United Kingdom near year-end as The current account deficit of the group the economy slumped, monetary condi- of fourteen heavily indebted developing tions there remained tight, as U.K. entry countries was roughly unchanged in 1990 into the exchange rate mechanism of at $7 billion. As a result of higher oil the European Monetary System in Octo- prices and export volumes, Venezuela's ber added an additional constraint on surplus widened about $5 billion. Brazil's U.K. policy. Reduced inflationary pres- current account balance declined nearly sure in Canada and softness in the domes- $4 billion as exports declined and imports tic economy provided scope for some showed some increase. Mexico's deficit monetary easing and lower Canadian increased slightly despite increased oil interest rates. exports, as imports boomed. In 1990 the combined current account Economic performance in the larger surplus of the foreign G-10 industrial heavily indebted developing countries countries narrowed about $40 billion, to was mixed in 1990. Growth in Mexico $30 billion. About half of that change accelerated to nearly 4 percent, although was accounted for by a $20 billion inflation also accelerated somewhat. contraction of the Japanese current ac- Output declined in Brazil and Argentina count surplus, due in part to increased as those countries continued to struggle payments for imported oil. The German with a variety of programs aimed at current account surplus narrowed about combating high inflation. $10 billion, reflecting in part a sub- A number of financing packages instantial increase in imports following volving debt and debt-service reduction reunification. were implemented between commercial In 1990 the combined current account banks and debtor countries following deficit of developing countries declined suggestions of Treasury Secretary Brady about $ 10 billion, to $9 billion. The large in March 1989. Mexico, the Philippines, increase in the surplus of oil exporters Costa Rica, and Venezuela completed more than explains the decline in the such deals in 1990. aggregate deficit of the developing coun- In June President Bush announced the tries as a group. Economic growth in Enterprise for the Americas initiative. most regions of the developing world This initiative allows for reductions on slowed in 1990, especially in the Western bilateral concessional debt owed the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

30 77th Annual Report, 1990 United States by Latin American and Merchandise exports rose 9 percent Caribbean countries. The initiative sug- over the four quarters of 1990, about the gests liberalizing trade flows between the same pace recorded in the preceding United States and the region and encour- year. Virtually all of the increase was in ages foreign and domestic investment in quantity. This growth was supported by the region. It also allows for limited significant gains in U.S. price competireduction in nonconcessional loans of the tiveness. The average dollar price of Agriculture Department's Commodity exports was little changed, held down by Credit Corporation and of the Export- moderate increases in the domestic prices Import Bank to facilitate debt-for-equity of goods that are exported. However, swaps. Aspects of the initiative need to be relative to foreign goods, the price of approved by the Congress. U.S. exports declined sharply, largely because of the substantial depreciation of the dollar over the past year and a half. During 1990, slower economic growth U.S. International Transactions The deficits in the U.S. merchandise trade account and current account narrowed a bit further in 1990. A $29 billion U.S. International Trade increase in merchandise exports and a Billions of dollars $23 billion increase in merchandise Balances + imports yielded a trade deficit of $ 109 bilo lion for the year, compared with $ 115 bil- 50 lion in 1989. There was a somewhat Current account larger improvement in the current ac- V 100 count balance, as increased net receipts ^ —~ 150 from direct investments abroad and from Merchandise trade net service receipts exceeded the rise in i i i i i net payments of portfolio income to Ratio scale, billions of 1982 dollars foreigners. Recorded unilateral transfers Merchandise trade were affected by several special transac- 600 tions related to the war in the Middle Total imports _ —— East. In the fourth quarter, forgiveness of ^" " _ ^ ^ -— * 400 Egyptian debt was recorded as a $7 bil- Total exports .* lion U.S. government grant offset by a ** $2.1 billion payment of interest by the i i i i i Egyptians and a $4.9 billion reduction in Ratio scale, 1982=100 principal; this transaction increased the GNP fixed-weight price index U.S. current account deficit by $4.9 bil- ' 120 lion in 1990. Cash contributions by foryr Non-oil imports eign governments to the United States to 110 ... ^^+ help offset costs of the war in the Middle East—recorded as receipts of government 100 grants in the unilateral transactions sector Total exports of the current account—were received i i i i i beginning in the fourth quarter and 1986 1988 1990 reduced the size of the current account The data are preliminary; they are quarterly, seasonally adjusted at annual rates, and come from the Department of deficit. Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 31 abroad, on average, tended to damp the categories. The largest increases were in growth of U. S. exports. industrial supplies, capital goods, and By geographical area, the largest (and consumer goods. Overall, the quantity of one of the sharpest) of the increases in nonagricultural exports rose 10 percent nonagricultural exports in 1990 was to in 1990 (Q4 to Q4). Agricultural exports Western Europe, which accounts for declined in 1990; about half the decline 30 percent of U.S. nonagricultural ex- was in quantity. ports. Exports to Mexico also rose Merchandise imports rose IVi percent sharply, particularly automotive parts in value but declined nearly 1 percent in used by Ford, General Motors, and quantity in 1990 (Q4 to Q4). Almost all Chrysler in their Mexican plants. Non- of the increase in prices resulted from a agricultural exports to Canada (22 per- jump in oil prices (61 percent). Prices of cent of nonagricultural exports) rose at a non-oil imports rose only about 3 percent much slower rate than in 1989 as that (Q4 to Q4) despite the much larger economy entered a recession. decline in the dollar's foreign exchange The expansion of exports during 1990 value. Worldwide declines in prices of was broadly based across commodity primary commodities helped hold down U.S. International Transactionsl Billions of dollars, seasonally adjusted Quarter Year Transaction 1989 1990 1989 1990 Q4 Ql Q2 Q3 Q4 Merchandise trade, net -115 -109 -29 -27 -23 -30 -29 Exports 360 389 92 96 97 96 100 Imports 475 498 120 123 120 126 129 Investment income, net - 18 1 2 - 1 24 Direct investment, net 40 49 11 12 10 13 14 Portfolio investment, net -41 -42 -10 -10 -11 -11 -9 Services, net 21 23 6 6 6 6 6 Military transactions, net -6 -6 -2 -1 -1 -2 -2 Other services, net 27 29 8 7 7 7 8 Unilateral transfers, private and government, net -15 -21 -5 -3 -4 -4 -9 Current account balance -110 -99 -27 -22 -23 -26 -28 Private capital flows, net 103 -5 31 12 -11 9 -15 Bank-related capital, net (outflows, —) 11 21 4 20 -9 14 -5 U.S. net purchases of foreign securities (-) -22 -27 -4 oo -11 -1 -7 Foreign net purchases of U.S. Treasury securities (+) 30 1 6 -1 4 * -2 Foreign net purchases of U.S. corporate bonds 33 19 12 6 7 1 6 Foreign net purchases of U.S. corporate stock 7 -15 -2 -3 -4 -3 -5 U.S. direct investment abroad -32 -36 -9 -9 -5 -19 -3 Foreign direct investment in United States 72 26 21 6 7 12 1 Other corporate capital flows, net 4 6 2 2 * 5 0 Foreign official assets in United States (increase, +)... 9 31 -7 -8 6 14 20 U.S. official reserve assets, net (increase, -) -25 -2 -3 -3 * 2 -1 U.S. government foreign credits and other claims, net. 1 3 • -1 -1 • 5 Total discrepancy 22 73 6 22 29 2 19 Seasonal adjustment discrepancy * 4 3 -1 -5 3 22 73 2 19 30 7 16 Statistical discrepancy 1. Details may not sum to totals because of rounding. SOURCE. Department of Commerce, Bureau of Eco- •In absolute value, greater than zero and less man nomic Analysis. $500 million. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

32 77th Annual Report, 1990 import prices. In the fourth quarter, how- imports averaging 8.9 million barrels ever, non-oil import prices rose 5 percent per day in the first quarter (the highest at an annual rate after increasing about rate of imports since the first quarter of half that rate on average during the first 1979) and a healthy rebound in stocks. three quarters; this boost in prices showed Falling world oil prices in the second up most strongly in prices of imported quarter encouraged additional stockcapital goods and consumer durables. building from the healthy first quarter The prices of petroleum-related goods levels and, coupled with further declines also rose. in U.S. crude oil production (especially The quantity of non-oil imports rose in Alaska), kept imports relatively high 2 percent in 1990 (Q4 to Q4), less than through July. Oil imports dropped off in half the rate of increase recorded in 1989. the fourth quarter in response to the Excluding computers, non-oil imports decline in U.S. economic activity, the grew about Vi percent, reflecting the effects of mild weather, and the runup in sluggishness of U.S. domestic spending. prices. Imports of automotive products and The counterpart to the U.S. current industrial supplies showed only small account deficit in 1990 did not show up in increases. Imports of consumer goods, recorded capital flows, so that the statismachinery, and foods declined slightly tical discrepancy in the U. S. international from levels recorded at the end of 1989. transactions accounts reached $73 bil- The value of oil imports rose sharply lion. A positive statistical discrepancy in 1990, primarily because of a jump in represents some combination of net unrethe import price of oil at the end of the corded exports of goods, services, and year. Prices had declined during the first investment income and net unreported half, the result of relatively strong OPEC capital inflows from abroad.1 While production in the face of flat demand. errors and omissions doubtless exist in Prices began to turn around in the middle the reporting of current account transacof July on the announcement of an OPEC tions as well as capital account transacaccord to limit production, and after tions, it seems likely that the increase in Iraq's invasion of Kuwait in August, the statistical discrepancy from $22 bilprices surged. The rise in prices of lion in 1989 was largely accounted for by imported oil lagged the sharp increases in net unreported private capital flows. The posted and spot prices, a repeat of the past relationship between the changes in pattern in previous oil market disrup- relative prices and incomes and changes tions, and peaked in the fourth quarter at in the current Account provide no reason an average of $28.47 per barrel. to believe that the actual current account The quantity of imported oil averaged 8.28 million barrels per day in 1990, slightly more than in the previous year. The quantity imported was strongest in 1. In principle, the sum of all transactions in the the first three quarters of the year. An U.S. balance of payments accounts, a double-entry bookkeeping system, should equal zero; for each extremely cold December in 1989 had transaction there should be two equal entries of pushed stocks of petroleum and products opposite sign. In practice, the recorded accounts in the United States well below average never sum exactly to zero because the data that historical levels by year-end 1989. A would reflect the debit and credit counterparts of each single transaction generally are obtained from scramble by companies to replenish different sources. The statistical discrepancy is the these stocks in the face of an unexnet of errors and omissions in all the components of pectedly mild first quarter resulted in the international transactions accounts. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 33 improved by an additional $50 billion inflows are small, the sum of recorded between 1989 and 1990. and unrecorded net private capital in- Certain omissions from the private flows must be large and positive. Alcapital flows data are obvious. For exam- though changes in relative interest rates ple, no estimate is included of increases can affect exchange rates and alter the in foreign holdings of U.S. currency. composition of capital flows, they cannot, Fragmentary evidence indicates a sharp initially at least, change the total of rise in net bank shipments of currency realized net capital flows. Over time, as abroad in 1990, a year of increased the current account responds to a decline political and economic instability in many in the dollar's value, realized net capital parts of the world. inflows will tend to decline. The data on However, increased foreign holdings capital flows in 1990 should be viewed of U.S. currency could explain only part with suspicion. of the statistical discrepancy, and it is difficult to pinpoint exactly where the Foreign Currency Operations other errors and omissions occurred. In recent decades, financial innovation, The foreign exchange intervention opertechnical change, deregulation of finan- ations of U.S. monetary authorities in cial markets, and elimination of capital 1990 were much less frequent and on a controls have all contributed to the much smaller scale than in 1989. U.S. increasing internationalization of finan- authorities (the Federal Reserve and the cial markets. New channels for capital Treasury's Exchange Stabilization Fund) flows have developed, involving new sold $2,380 million through April, instruments and new participants; infor- $2,180 million of which was against mation from current reporting institu- Japanese yen and $200 million against tions —a limited number of large financial German marks. intermediaries and corporations located Of this intervention, $675 million was in the United States—no longer covers for the System account and $1,705 milthe bulk of U.S. capital flows. These lion was for the account of the ESF. developments have made the tracking of Some FOMC members expressed coninternational capital flows far more cern about sending uncertain signals to difficult. the market about the System's intention to The private capital flows that were achieve price stability and about the level recorded in 1990 indicate an increase in of System balances of foreign currency; net inflows reported by banks. However, in view of this concern, all intervention net inflows resulting from securities sales of dollars from March 5 onward transactions and direct investment were were for the ESF account. In the late down sharply; other recorded capital spring and early summer, the ESF purinflows were small. The decline in U.S. interest rates while rates abroad were System Profits and Losses on Foreign rising made dollar assets less attractive Currency Operations relative to yen and mark-denominated Millions of dollars assets and made raising funds in the United States more attractive for multina- Year Realized Translation tional corporations financing acquisitions and operations. However, as long as the 1987 . 1,139 ooo 1988 610 -1,121 United States runs substantial current 1989 0 1,204 account deficits and net official capital 1990 0 2,139 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

34 77th Annual Report, 1990 chased $1,000 million against marks in the market and another $1,000 million directly from a foreign monetary authority to adjust ESF balances and to repurchase marks previously warehoused with the System. At year-end 1990 the System held $32,633 million equivalent of foreign currencies, valued at current exchange rates. Of this amount $4,500 million equivalent represented foreign currency held under the warehousing agreement with the ESF. The warehoused amount was reduced by $4,500 million from its March 1990 peak. System foreign currency holdings were denominated almost entirely in marks and yen. The System realized no profits or losses on foreign operations in 1990 but recorded a translation gain of $2,139 million from the net appreciation of the mark and the yen against the dollar. The only activity on the Federal Reserve swap network in 1990 involved the Bank of Mexico, which in February fully repaid the $784.1 million it drew the previous September. In March 1990, the Bank of Mexico drew $700 million, which it repaid in full by July. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

35 Monetary Policy Reports to the Congress Given below are reports submitted to the Around midyear, risks of an accelera- Congress on February 20 and July 18 tion in inflation were perceived to have y 1990, pursuant to the Full Employment diminished as pressures on industrial and Balanced Growth Act of 1978. capacity had moderated, commodity prices had leveled out, and the dollar had strengthened on exchange markets, rein- Report on February 20,1990 forcing the signals conveyed by the weakness in the monetary aggregates. In June, Monetary Policy and the Economic the FOMC began a series of steps, Outlook for 1990 undertaken with care to avoid excessive The U.S. economy recorded its seventh inflationary stimulus, that trimmed consecutive year of expansion in 1989. Wi percentage points from short-term Although growth was slower than in the interest rates by year-end. Longer-term preceding two years, it was sufficient to interest rates moved down by a like support the creation of 2Vi million jobs amount, influenced by both the System's and to hold the unemployment rate steady easing and a reduction in inflation at 5*4 percent, the lowest reading since expectations. the early 1970s. On the external front, Growth of M2 rebounded to end the the trade and current account deficits year at about the midpoint of the 1989 shrank further in 1989. And while infla- target range. Growth of M3, however, tion remained undesirably high, the pace remained around the lower end of its was lower than many analysts—and, range, as a contraction of the thrift indeed, most members of the Federal industry, encouraged by the Financial Open Market Committee (FOMC)-had Institutions Reform, Recovery, and Enpredicted, in part because of the continu- forcement Act of 1989 (FIRREA), reing diminution in longer-range inflation duced needs to tap M3 sources of fluids. expectations. The primary effect of the shrinkage of the In 1989, monetary policy was tailored thrift industry's assets was a rechanneling to the changing contours of the economic of funds in mortgage markets, rather than expansion and to the potential for infla- a reduction in overall credit availability; tion. Early in the year, as for most of growth of the aggregate for nonfinancial 1988, the Federal Reserve tightened sector debt that is monitored by the money market conditions to prevent FOMC was just a bit slower in the second pressures on wages and prices from half than in the first, and this measure building. Market rates of interest rose ended the year only a little below the relative to those on deposit accounts, and midpoint of its range. unexpectedly large tax payments in April Thus far this year, the overnight rate and May drained liquid balances, restrain- on federal funds has held at %lA percent, ing the growth of the monetary aggre- but other market rates have risen. Ingates in the first half of the year. By May, creases of as much as Vi percentage point M2 and M3 lay below the lower bounds have been recorded at the longer end of of the annual target ranges established by the maturity spectrum. The bond markets theFOMC. responded to indicators suggesting a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

36 77th Annual Report, 1990 somewhat greater-than-anticipated buoy- slower M2 growth will be required to ancy in economic activity—which may achieve and maintain price stability. have both raised expected real returns on The Committee reduced the M3 range investment and renewed some apprehen- to 2 Vi to 6 Vi percent to take account of the sions about the outlook for inflation. The effects of the restructuring of the thrift rise in yields occurred in the context of a industry, which is expected to continue in general runup in international capital 1990. A smaller proportion of mortgages market yields, which appears to have is likely to be held at depository institubeen in part a response to emerging tions and financed by elements in M3; opportunities associated with the opening thrift institution assets should continue to of Eastern Europe; this development had decline, as some solvent thrift institutions particularly notable effects on the ex- will be under pressure to meet capital change value of the West German mark, standards and insolvent thrift institutions which rose considerably relative to the will continue to be shrunk and closed, dollar, the yen, and other non-European with a portion of their assets carried, Monetary System currencies. temporarily, by the government. While some of the assets shed by thrift institutions are expected to be acquired by Monetary Policy for 1990 commercial banks, overall growth in the The Federal Open Market Committee is asset portfolios of banks is expected to be committed to the achievement, over time, moderate, as these institutions exercise of price stability. The importance of this caution in extending credit. An increase objective derives from the fact that the in lender—and borrower—caution more prospects for long-run growth in the generally points to some slowing in the economy are brightest when inflation pace at which nonfinancial sectors take need no longer be a material consider- on debt relative to their income in 1990. ation in the decisions of households and In particular, recent developments sugfirms. The members recognize that cer- gest that leveraged buyouts and other tain short-term factors—notably a sharp transactions that substitute debt for equity increase in food and energy prices-are in corporate capital structures will be likely to boost inflation early this year, noticeably less important in 1990 than in but they anticipate that these factors will recent years. Moreover, a further decline not persist. Under these circumstances, in the federal sector's deficit is expected policy can support further economic to reduce credit growth this year. In light expansion without abandoning the goal of these considerations, the Committee of price stability. reduced the monitoring range for debt of To foster the achievement of those the nonfinancial sectors to 5 to 9 percent. objectives, the Committee has selected a target range of 3 to 7 percent for M2 Target Ranges of Growth for Monetary growth in 1990. Growth in M2 may be and Debt Aggregates more rapid in 1990 than in recent years Percentage change] and yet be consistent with some modera- Aggregate 1988 1989 1990 tion in the rate of increase in nominal income and restraint on prices; in partic- M2 4to8 3to7 3to7 ular, M2 may grow more rapidly than M3 4to8 Debt2 7toll 6V4 to lOVi 5to9 nominal GNP in the firstp art of this year in lagged response to last year's interest 1. From average of the fourth quarter of the preceeding year to average of the fourth quarter of the year indicated. rate movements. Eventually, however, 2. Domestic nonfinancial sector. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 37 The setting of targets for money growth GNP growth over the four quarters of the in 1990 is made more difficult by uncer- year to be between VA and 2 percent— tainty about developments affecting thrift essentially the same increase as in 1989, institutions. The behavior of M3 and, to a excluding the bounceback in farm output more limited extent, M2 is likely to be after the 1988 drought. It is expected that affected by such developments, but there this pace of expansion will be reflected in is only limited basis in experience to some easing of pressures on domestic gauge the likely effect. In addition, in resources; the central tendency of foreinterpreting the growth of nonfinancial casts is for an unemployment rate of debt, the Committee will have to take 5lA to 53A percent in the fourth quarter. into account the amount of Treasury Certain factors have caused an uptick borrowing (recorded as part of the debt in inflation early this year. Most notably, aggregate) used to carry the assets of prices for food and energy increased failed thrift institutions, pending their sharply as the year began, reflecting the disposal. With these questions adding to effect of the unusually cold weather in the usual uncertainties about the relation- December. However, these run-ups ship among movements in the aggregates should be largely reversed in coming and output and prices, the Committee months, and inflation in food and energy agreed that, in implementing policy, they prices for the year as a whole may not would need to continue to consider, in differ much from increases in other addition to the behavior of money, indi- prices. cators of inflationary pressures and eco- Given the importance of labor inputs nomic growth as well as developments in in determining the trend of overall costs, financial and foreign exchange markets. a deceleration in the cost of labor inputs is an integral part of any solid progress toward price stability. Nominal wages Economic Projections for 1990 and total compensation have grown rela- The Committee members, and other tively rapidly during the past two years, Reserve Bank presidents, expect that while increases in labor productivity have growth in the real economy will be diminished. With prices being conmoderate during 1990. Most project real strained by domestic and international Economic Projections for 1990 FOMC members and Measure other FRB presidents Administration MEMO 1989 actual Range Central tendency Percentage change, fourth quarter to fourth quarter' NominalGNP 4 to 7 5% to 6% 7.0 6.4 RealGNP lto2K IK to2 2.6 2.4 Consumer price index2 3% to 5 4to4V4 4.1 4.5 Average level in the fourth quarter (percent) Unemployment rate 51/2to61/2 5V4to5K 5.4 5.3 1. Average for the fourth quarter of the preceding consumers; Administration forecast is for urban wage year to the average for the fourth quarter of the year earners and clerical workers. indicated. 3. Percentage of total labor force, including armed 2. Data for 1989 and FOMC forecasts are for all urban forces residing in the United States. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

38 77th Annual Report, 1990 competition, especially in goods markets, Council of Economic Advisers argues profit margins have been squeezed to low that, if nominal GNP were to grow at a levels. A restoration of more normal 7 percent annual rate this year—as the margins ultimately will be necessary if Council is projecting—then M2 could businesses are to have the wherewithal exceed its target range, particularly if and the incentive to maintain and improve interest rates fall as projected in the the stock of plant and equipment. Administration forecast. As suggested Unfortunately, the near-term prospects above, monetary relationships cannot be for a moderation in labor cost pressures predicted with absolute precision, but the are not favorable. Compensation growth Council's assessment is reasonable. And, is being boosted in the first half of 1990 although most Committee members beby an increase in social security taxes and lieve that growth in nominal GNP more a hike in the minimum wage. The antici- likely will be between 5Vi and 6V2 perpated easing of pressures in the labor cent, a more rapid expansion in nominal market should help produce some mod- income would be welcome if it promised eration in the pace of wage increases in to be accompanied by a declining path for the second half of 1990, but the Commit- inflation in 1990 and beyond. tee will continue to monitor closely the growth of labor costs for signs of progress in this area. The Performance of the Economy Finally, the recent depreciation of the in 1989 dollar likely will constitute another impetus to near-term price increases, revers- Real GNP grew 2 Vi percent over the four ing the restraining influence exerted by a quarters of 1989, 2 percent after adjuststrong dollar through most of last year. ment for the recovery in farm output Prices of imported goods, excluding oil, from the drought losses of the prior year. increased in the fourth quarter after This rate of growth of GNP constituted a declining through the first three quarters significant downshifting in the pace of of 1989. The full effect of this upturn expansion from the unsustainably rapid likely will not be felt on the domestic rates of 1987 and 1988, which had carried price level until some additional time has activity to the point that inflationary passed. strains were beginning to become visible Despite these adverse elements in the in the economy. As the year progressed, near-term picture, the Committee be- clear signs emerged that pressures on lieves that progress toward price stability resource utilization were easing, particucan be achieved over time, given the larly in the industrial sector. Nonetheless, apparently moderate pace of activity. In the overall unemployment rate remained terms of the consumer price index, most at 5.3 percent, the lowest reading since members expect an increase of between 1973, and inflation remained at AVi per- 4 and AVi percent, compared with the cent despite the restraining influence of a 4.5 percent advance recorded in 1989. dollar that was strong for most of the Relative to the Committee, the Admin- year. istration currently is forecasting more The deceleration in business activity rapid growth in real and nominal GNP. last year reflected, to some degree, the At the same time, the Administration's monetary tightening from early 1988 projection for consumer price inflation is through early 1989 that was undertaken at the low end of the Committee's central- with a view toward damping the inflation tendency range. In its Annual Report, the forces. Partly as a consequence of that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 39 tightening, the U.S. dollar appreciated in saving rate increased to 5 34 percent in the the foreign exchange markets from early fourth quarter of 1989. 1988 through mid-1989, contributing to The slackening in consumer demand a slackening of foreign demand for U.S. was concentrated in spending on goods. products. At the same time, domestic Real spending on durable goods was demand also slowed, more for goods about unchanged from the fourth quarter than for services. Reflecting these devel- of 1988 to the fourth quarter of opments, the slowdown in activity was 1989—after jumping 8 percent in the concentrated in the manufacturing sector: prior year-chiefly reflecting a slump in Factory employment, which increased a purchases of motor vehicles. Spending total of 90,000 over the first three months on nondurable goods also decelerated, of 1989, declined 195,000 over the increasing only Vi percent in 1989 after remainder of the year, and growth in an advance of 2 percent in 1988. The manufacturing production slowed from principal support to consumer spending 5x/2 percent in 1988 to only 1% percent came from continued large gains in last year. Employment in manufacturing outlays for services. Spending on medical fell further in January of this year, but care moved up IVi percent in real terms that decline was largely attributable to last year, and now constitutes 11 percent temporary layoffs in the automobile of total consumption expenditures-up industry, and most of the affected workers from 8 percent in 1970. Outlays for other have since been recalled. services rose 3W percent, with sizable As noted above, the rate of inflation increases in a number of categories. was about the same in 1989 as it had been Sales of cars and light trucks fell in the preceding two years. While the 34 million units in 1989, to 14V4 million. appreciation of the U.S. dollar through Most of the decline reflected reduced the first half of the year helped to hold sales of cars produced by U.S.-owned down the prices of imported goods, the automakers; a decline in sales of imported high level of resource utilization contin- automobiles was about offset by an ued to exert pressure on wages and prices. increase in sales of foreign nameplates In that regard, the moderation in the produced in U.S. plants. The slowing in expansion of real activity during 1989 sales of motor vehicles was most prowas a necessary development in establish- nounced during the fourth quarter of ing an economic environment that is more 1989, reflecting a "payback" for sales that conducive to progress over time toward had been advanced into the third quarter price stability. and a relatively large increase in sticker prices on 1990-model cars. Although part of this increase reflected the inclusion The Household Sector of additional equipment—notably the Household spending softened signifi- addition of passive restraint systems to cantly in 1989, with a marked weakening many models—consumers nevertheless in the demand for motor vehicles and reacted adversely to the overall increase housing. Real consumer spending on in prices. Beyond these influences, goods and services increased 2XA percent longer-run factors appear to have been over the four quarters of 1989, \Vi per- damping demand for autos and light centage points less than in 1988. Growth trucks during 1989; in particular, the in real disposable income slowed last robust pace of sales earlier in the expanyear, but continued to outstrip growth in sion seems to have satisfied demand pent spending, and, as a result, the personal up during the recessionary period of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

40 77th Annual Report, 1990 early 1980s. The rebuilding of the motor profits reduced the availability of internal vehicle stock suggests that future sales finance. are likely to depend more heavily on Spending on equipment moved up replacement needs. briskly during the first half of 1989, with Residential investment fell in real particularly notable gains in outlays for terms through the first three quarters of information-processing equipment — 1989, and with only a slight upturn in the computers, photocopiers, telecommunifourth quarter, expenditures decreased cations devices, and the like. However, 6 percent on net over the year. Construc- equipment outlays were flat in the second tion was weighed down throughout 1989 half of the year; growth in the information by the overbuilding that occurred in processing category slowed sharply, and some locales earlier in the decade. Va- spending in most other categories was cancy rates were especially high for either flat or down. Purchases of motor multifamily rental and condominium vehicles dropped sharply in the fourth units. In the single-family sector, afford- quarter from the elevated levels of the ability problems constrained demand, second and third quarters. There were a dramatically so in those areas in which few exceptions to the general pattern of home prices had soared relative to house- weakness during the second half. Spendhold income. ing on aircraft was greater in the second Mortgage interest rates declined more half of 1989 than in the first half, and than a percentage point, on net, between would have increased still more had it not the spring of 1989 and the end of the year, been for the strike at Boeing. Outlays for helping to arrest the contraction in hous- tractors and agricultural machinery ing activity; however, the response to the moved up smartly; spending on farm easing in rates appears to have been equipment has been buoyed by the submuted somewhat by a reduction in the stantial improvements over the past availability of construction credit, likely several years in the financial health of the reflecting, in part, the tightening of agricultural sector. Over the four quarters regulatory standards in the thrift industry of 1989, total spending on equipment and the closing of several insolvent increased 6 percent in real terms—about institutions. Exceptionally cold weather 1 percentage point below the robust pace also hampered building late in the year, of 1988. but a sharp December drop in housing Business spending for new construcstarts was followed by a record jump in tion edged down xh percent in real terms activity last month. during 1989-the second consecutive yearly decline. Commercial construction, which includes office buildings, was The Business Sector especially weak; vacancy rates for office Business fixed investment, adjusted for space remain at high levels in many areas, inflation, increased only 1 percent at an lowering prospective returns on new annual rate during the second half of investment. Outlays for drilling and 1989 after surging 7 V* percent during themining, which had dropped 20 percent first half. Although competitive pressures over the four quarters of 1988, moved forced many firms to continue seeking down further in the first quarter of 1989; efficiency gains through capital invest- later in the year, drilling activity revived ment, the deceleration in overall eco- as crude oil prices firmed. The industrial nomic growth made the need for capacity sector was the most notable exception to expansion less urgent, and shrinking the overall pattern of weakness: Real Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 41 outlays increased 11 percent in 1989, months' supply at the sluggish fourthlargely because of construction that had quarter sales pace. In response, the been planned in 1987 and 1988 when domestic automakers implemented a new capacity in many basic industries tight- round of sales incentives and cut sharply ened substantially and profitability was the planned assembly rate for the first improving sharply. quarter of 1990. Elsewhere in the retail As noted above, the slowdown in sector, inventories moved up substaninvestment spending during the second tially relative to sales at general merchanhalf of last year likely was exacerbated dise outlets. Overall, however, most by the deterioration in corporate cash sectors of the economy have adjusted flow. Before-tax operating profits of fairly promptly to the deceleration in nonfinancial corporations dropped 12per- sales and appear to have succeeded in cent from the fourth quarter of 1988 to preventing serious overhangs from the third quarter of 1989 (latest data developing. available); after-tax profits were off in about the same proportion. Reflecting the increased pressures from labor and mate- The Government Sector rials costs-and a highly competitive Budgetary pressures continued to restrain domestic and international environ- the growth of purchases at all levels of ment—before-tax domestic profits of government. At the federal level, purnonfinancial corporations as a share of chases fell 3 percent in real terms over gross domestic product declined to an the four quarters of 1989, with lower average level of 8 percent during the first defense purchases accounting for the bulk three quarters of 1989, the lowest reading of the decline. Nondefense purchases since 1982. At the same time, taxes as a also declined in real terms from the fourth share of before-tax operating profits quarter of 1988 to the fourth quarter of increased to an estimated 44 percent in 1989; increases in such areas as the space the first three quarters of 1989; since program and drug interdiction were more 1985, this figure has retraced a bit more than offset by general budgetary restraint than half of its decline from 54 percent in that imposed real reductions on most 1980. other discretionary programs. Nonfarm business inventory invest- In terms of the unified budget, the ment averaged $21 billion in 1989. federal deficit in fiscal year 1989 was Although the average pace of accumula- $152 billion, slightly smaller than in tion last year was slower than in 1988, the 1988. Growth in total federal outlays, pattern across sectors was somewhat which include transfer payments and uneven. Some of the buildup in stocks interest costs as well as purchases of took place in industries—such as air- goods and services, picked up a bit in craft—where orders and shipments have fiscal year 1989. Outlays were boosted at been strong for some time now. But the end of the fiscal year by the initial inventories in some other sectors became $9 billion of spending by the Resolution uncomfortably heavy at times and precip- Trust Corporation. On the revenue side itated adjustments in orders and produc- of the ledger, growth in federal receipts tion. The clearest area of inventory also increased in fiscal 1989. The accelimbalance at the end of the year was at eration occurred in the individual income auto dealers, where stocks of domesti- tax category, but strong increases also cally produced automobiles were at 1.7 were recorded in corporate and social million units in December—almost three security tax payments. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

42 77th Annual Report, 1990 Purchases of goods and services at the above its level in December 1988, but the state and local level increased 2 Vi percent dollar has moved lower thus far in 1990. in real terms over the four quarters of In real terms, the net appreciation of the 1989, down more than a percentage point dollar during 1989 in terms of the other from the average pace of the preceding G-10 currencies was about 5 percent as five years. Nonetheless, there were some consumer prices rose somewhat faster areas of growth. Spending for educational here than they did abroad, on average. buildings increased, and employment in Over the year, the dollar moved lower on the state and local sector rose 350,000 balance against the currencies of South over the year, largely driven by a pickup Korea, Singapore, and especially Taiin hiring by schools. Despite the overall wan. From a longer perspective, the slowdown in the growth of purchases, modest uptrend on balance in the dollar the budgetary position of the state and over the past two years marked a sharp local sector deteriorated further over the departure from the substantial weakening year; the annualized deficit of operating seen during the 1985-87 period. and capital accounts, which excludes The behavior of the dollar differed social insurance funds, increased $6 greatly between the two halves of 1989. billion over the first three quarters of In the first half, the dollar appreciated 1989 and appears to have worsened 12 percent in terms of the other G-10 further in the fourth quarter. currencies, while depreciating against the currencies of South Korea and Taiwan. The dollar fluctuated during the The External Sector summer, and later in the year unwound The U.S. external deficits improved most of the prior appreciation, as U.S. somewhat in 1989, but not by as much as interest rates eased relative to rates in 1988. Onabalance-of-paymentsbasis, abroad and in response to concerted the deficit on merchandise trade fell from intervention in exchange markets in the an annual rate of $128 billion in the weeks immediately after the September fourth quarter of 1988 (and $127 billion meeting of Group of Seven officials and for the year as a whole) to $114 billion in to events in Eastern Europe. In the second the first quarter of 1989. Thereafter, there half of the year, the dollar rose against the was no further net improvement. The currencies of South Korea and Taiwan appreciation in the foreign exchange while depreciating in terms of the Singavalue of the dollar between early 1988 pore dollar. Over the course of 1989, the and mid-1989 appears to have played an dollar appreciated nearly 16 percent important role in inhibiting farther against the Japanese yen and 14 percent progress on the trade front. During the against the British pound, but it deprecifirst three quarters of 1989, the current ated slightly against the German mark, account, excluding the influence of capi- the Canadian dollar, and most other major tal gains and losses that are largely caused currencies. by currency fluctuations, showed a deficit On a GNP basis, merchandise exports of $106 billion at an annual rate—some- increased about 11 percent in real terms what below the deficit of $124 billion in over the four quarters of 1989—roughly the comparable period of 1988. 4 percentage points less than in 1988. Measured in terms of the other Group This deceleration took place despite of Ten (G-10) currencies, the foreign continued strong growth in economic exchange value of the U.S. dollar in activity in most foreign industrial coun- December 1989 was about 3 percent tries (with the exception of Canada and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 43 the United Kingdom), and appears to creased almost $15 billion, but this have reflected, in large part, the effect on increase was more than offset by the U.S. competitiveness of the dollar's increase in U. S. official holdings of assets appreciation and the more rapid U.S. abroad, largely associated with U.S. inflation over 1988 and much of 1989. intervention operations to resist the dol- Exports were also depressed in the fourth lar's strength. quarter of 1989 by several special factors, including the Boeing strike. The volume of agricultural exports increased about Labor Markets 11 percent in 1989 - a bit faster even than Employment growth slowed in the second the robust pace of 1988. The value of half of 1989; nonetheless, nonfarm payagricultural exports rose much less, how- rolls increased nearly 2lA million during ever, as agricultural export prices re- the year. The bulk of this expansion versed the drought-induced increases of occurred in the service-producing sector. the previous year. By contrast, the manufacturing sector Merchandise imports excluding oil shed 100,000 jobs. These job losses were expanded about 7 percent in real terms more than accounted for by declines in during 1989, with much of the rise the durable goods industries and appeared accounted for by imports of computers. to reflect the slump in auto sales, the Imports of oil increased 6 percent from weakening in capital spending, and the the fourth quarter of 1988 to the fourth effects of a stronger dollar on exports and quarter of 1989, to a rate of 8.3 million imports. barrels per day. At the same time, the Despite the slowdown in new job average price per barrel increased almost creation, the overall balance of supply 40 percent, and the nation's bill for for- and demand in the labor market remained eign oil jumped 45 percent. steady over the year. The civilian unem- The counterpart of the current account ployment rate, which had declined about deficit of $106 billion at an annual rate Vz percentage point over the twelve over the first three quarters of 1989 was a months of 1988, finished 1989 at 5.3 perrecorded net capital inflow of about cent—unchanged from twelve months $60 billion at an annual rate and an earlier. Moreover, there was no increase unusually large statistical discrepancy, in the number of "discouraged" workespecially in the second quarter. More ers—those who say they would re-enter than half of the recorded net inflow of the labor force if they thought they could capital reflected transactions in securi- find a job. Nor was there any net increase ties, as foreign private holdings of U.S. in workers who accepted part-time emsecurities rose nearly $50 billion (half of ployment when they would have prethe increase being in holdings of U.S. ferred full-time. The proportion of the Treasury securities), while U.S. holdings civilian population with jobs reached a of foreign securities increased a bit less historic high. than $20 billion. Net direct investment Reflecting the tightness of labor maraccounted for another substantial portion kets and the persistence of inflation of the inflow; foreign direct investment expectations in the range of 4 to 5 percent, holdings in the United States rose more according to surveys, the employment than $40 billion, and U.S. holdings cost index for wages and salaries in abroad rose only half as much. Over the nonfarm private industry increased first three quarters of 1989, foreign 414 percent over the twelve months of official assets in the United States in- 1989 -about the same as in 1988. Benefit Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

44 77th Annual Report, 1990 costs continued to rise more rapidly than energy prices retraced about a third of the wages and salaries last year, with health earlier run-up. Prices for imported goods insurance costs remaining a major factor; excluding oil were little changed over nonetheless, the rate of growth in overall 1989, on net, and acted as a moderating benefit costs slowed in 1989, in part influence on consumer price inflation. because of a smaller increase in social Food prices increased 5lA percent at security taxes than in 1988. Total com- the retail level, slightly more than in pensation—including both wages and 1988 when several crops were severely salaries and benefits—rose 43A percent damaged by drought. Continued supply during 1989. Compensation growth in problems in some agricultural markets in the service-producing sector—at 5 per- 1989—notably a poor wheat crop and a cent—continued to outpace the gain in shortfall in dairy production—likely prethe goods-producing sector by about vented a deceleration from the drought- 3A percentage point. induced rate of increase in 1988. At the A slowdown in the growth of produc- same time, increases in demand, includtivity often accompanies a softening in ing sharp increases in exports of some the general economy, and productivity commodities, also appear to have played gains were lackluster in 1989. Output per a role. Still another impetus to inflation in hour in the private nonfarm business the food area last year evidently came sector increased only Vi percent over the from the continuing rise in processing four quarters of the year— 1 percentage and marketing costs. point below the rate of increase in 1988. Consumer energy prices surged 17 per- In the manufacturing sector, productivity cent at an annual rate during the first six gains during the first half of 1989 kept months of 1989, before dropping back pace with the 1988 average of 3 percent; 6 percent in the second half. During the in the second half, however, productivity first half of the year, retail energy prices growth slowed to an annual rate of 2% were driven up by increases in the cost of percent. Reflecting both the persistent crude oil. The increase in gasoline prices growth in hourly compensation and the at midyear was exaggerated by the introdisappointing developments in productiv- duction of tighter standards governing ity, unit labor costs in private nonfarm the composition of gasoline during sumindustry rose 5 percent over the four mer months. Gasoline prices eased conquarters of 1989—the largest increase siderably in the second half, reflecting a since 1982. dip in crude oil prices and the expiration of the summertime standards. Taking the twelve months of 1989 as a whole, the Price Developments increase in retail energy prices came to a Inflation in consumer prices remained in bit more than 5 percent. Heating oil the neighborhood of 4Vi percent for the prices jumped sharply at the turn of the third year in a row, as the level of eco- year, reflecting a surge in demand caused nomic activity was strong and continued by December's unusually cold weather. to exert pressures on available resources. The spike in heating fuel prices largely During the first half of the year, overall reversed itself in spot markets during inflation was boosted by a sharp run-up in January of this year, but crude oil prices energy prices and a carry-over from 1988 remained at high levels. of drought-related increases in food Consumer price increases for items prices. However, inflation in food prices other than food and energy remained at slowed during the second half, and about41/2 percent in 1989. Developments Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 45 in this category likely would have been materials excluding energy declined less favorable had the dollar not been 3 3A percent over the year, and spot prices appreciating in foreign exchange markets for industrial metals moved sharply lower through the first half of 1989. The prices during the year, in part because of large of consumer commodities excluding food declines for steel scrap, copper, and and energy decelerated sharply, and this aluminum. slowdown was particularly marked for some categories in which import penetra- Monetary and Financial tion is high, including apparel and recre- Developments during 1989 ational equipment. Given the dollar's more recent depreciation, however, the In 1989, the Federal Reserve continued moderating effect of import prices on to pursue a policy aimed at containing overall inflation may be diminishing. and ultimately eliminating inflation while Indeed, prices for imported goods exclud- providing support for continued ecoing oil turned up in the fourth quarter of nomic expansion. In implementing that 1989, after declining earlier in the year. policy, the Federal Open Market Com- In contrast to goods prices, the prices of mittee maintained a flexible approach to nonenergy services—which make up half monetary targeting, with policy respondof the overall consumer price index— ing to emerging conditions in the econincreased 5 lA percent in 1989, lA percent- omy and financial markets as well as to age point more than in 1988. The pickup the growth of the monetary aggregates in this category was led by rents, medical relative to their established target ranges. services, and entertainment services. This flexibility has been necessitated by At the producer level, prices of fin- the substantial variability in the short-run ished goods increased IVi percent at an relationship between the monetary aggreannual rate during the first half—almost gates and economic performance; howtwice the pace of 1988— before slowing ever, when viewed over a longer perto an annual rate of increase of 2 Vz percent spective, those aggregates are still useful over the second half. In large part, in conveying information about price developments in this sector reflected the developments. same sharp swings in energy prices that As the year began, monetary policy affected consumer prices. At earlier was following through on a set of meastages of processing, the index for inter- sured steps begun a year earlier to check mediate materials excluding food and inflationary pressures. By then, howenergy decelerated sharply during the ever, evidence of a slackening in aggrefirst half of the year and then edged down gate demand, along with sluggish growth in the second half. For the year as a of the monetary aggregates, suggested whole, this index registered a net increase that the year-long rise in short-term of only 1 percent, compared with more interest rates was noticeably restraining than 7 percent in 1988. The sharp decel- the potential for more inflation. But, after eration in this category appears to have an increase of xh percentage point in the reflected a relaxation of earlier pressures discount rate at the end of February, the on capacity in the primary processing Federal Reserve took no further policy industries, and the influence of the rising action until June. Over the balance of dollar through the first half of last year. 1989, the Federal Reserve moved toward Also consistent with the weakening in the an easing of money market conditions, as manufacturing sector and the strength of indications mounted of slack in demand the dollar, the index for crude nonfood and lessened inflation pressures. The Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

46 77th Annual Report, 1990 easing in reserve availability induced in June began to ease pressures on reserve declines in short-term interest rates of markets. As the information on the real l!/2 percentage points; money growth economy, along with the continued rise strengthened appreciably, and M2 was in the dollar, suggested that the outlook near the middle of its target range by the for inflation was improving, most longend of 1989. The level of M3, on the term nominal interest rates fell as much other hand, remained around the lower as a percentage point from their March bound of its range, with its weakness peaks; the yield on the bellwether thirtymostly reflecting the shifting pattern of year Treasury bond moved down to about financial intermediation as the thrift 8 percent by the end of June. The decline industry retrenched. The growth of non- in interest rates outstripped the reduction financial debt was trimmed to 8 percent in most measures of investors' inflation in 1989, about in line with the slowing in expectations, so that estimated real interthe growth of nominal GNP, and ended est rates fell from their levels earlier in the year at the midpoint of its monitoring the year. These declines in nominal and range. real interest rates, however, were not accompanied by declines in the foreign exchange value of the dollar. Rather, Implementation of Monetary Policy because of better-than-expected trade In the opening months of the year, the reports and political turmoil abroad, the Federal Open Market Committee, seek- dollar strengthened further. ing to counter a disquieting intensification In July, when the FOMC met for its of inflationary pressures, extended the semiannual review of the growth ranges move toward restraint that had begun for money and credit, M2 and M3 lay at, almost a year earlier. Policy actions in or a bit below, the lower bounds of their January and February, restraining re- target cones. This weakness, reinforcing serve availability and raising the discount the signals from prices and activity, rate, prompted a further increase of contributed to the Committee's decision 34 percentage point in short-term market to take additional easing action in reserve interest rates. Longer-term rates, how- markets. The Committee reaffirmed the ever, moved up only moderately; the existing annual target ranges for the tightening apparently had been widely monetary and debt aggregates and tentaanticipated and was viewed as helping to tively retained those ranges for the next avoid an escalation in underlying infla- year, since they were likely to encompass tion . Real short-term interest rates—nom- money growth that would foster further inal rates adjusted for expected price economic expansion and moderation of inflation—likely moved higher, though price pressures in 1990. remaining below peak levels earlier in Late in the summer, longer-term interthe expansion; these gains contributed to est rates turned higher, as several releases a strengthening of the foreign exchange of economic data suggested reinvigorated value of the dollar over this period, while inflationary pressures. With growth in the growth of the monetary aggregates the monetary aggregates rebounding, the slowed as the additional policy restraint Committee kept reserve conditions about reinforced the effects of actions in 1988. unchanged until the direction of the econ- As evidence on prospective trends in omy and prices clarified. inflation and spending became more Beginning in October, amid indications mixed in the second quarter, the Commit- of added risks of a weakening in the tee refrained from further tightening and economic expansion, the FOMC reduced Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 47 pressures on reserve markets in three real, long-term rates in the United States separate steps, which nudged the federal were incoming data pointing away from funds rate down to around 8 lA percent by recession in the economy and from any year-end, about Wi percentage points abatement in price pressures, especially below its level when incremental tighten- as oil prices moved sharply higher. ing ceased in February. Over those ten months, other short- and long-term nom- Behavior of Money and Credit inal interest rates fell about 1 to VA per- Growth in M2 was uneven over 1989, centage points; and most major stock with marked weakness in the first part of price indexes reached record highs at the the year giving way to robust growth turn of the year, more than recovering the thereafter. On balance over the year, M2 losses that occurred on October 13. expanded 4V2 percent, down from 5lA Reflecting some reduction in inflation percent growth in 1988, placing it about anticipations over the same period, estiat the midpoint of its 1989 target range of mated short- and long-term real interest 3 to 7 percent. The slower rate of increase rates fell somewhat less than nominal in M2 reflected some moderation in rates, dropping probably about Vi to nominal income growth as well as the 3A percentage point. Still, most measures pattern of interest rates and associated of short- and long-term real interest rates opportunity costs of holding money, with remained well above their trough levels the effects of increases in 1988 and 1989 of 1986 and 1987-levels that had preoutweighing the later, smaller drop in ceded rapid growth in the economy and a rates. buildup of inflationary pressures. M2 has grown relatively slowly over Over the last three months of the year the past three years, as the Federal and into January 1990, the foreign exchange value of the dollar declined substantially from its high, which was Growth of Money and Debt Percentage change • reached around midyear and largely sustained through September. The dollar Debt of fell amid concerted intervention under- domestic Period Ml M2 M3 nontaken by the G-7 countries in the weeks financial sector immediately after a meeting of the finance ministers and central bank governors of Fourth quarter 1980 7.4 8.9 9.5 9.5 these countries in September. The dollar 1981 5.4 9.3 12.3 10.2 continued to decline in response to the (2.5)2 1982 8.8 9.1 9.9 9.1 easing of short-term interest rates on 1983 10.4 12.2 9.8 11.1 dollar assets and increases in rates in 1984 5.4 7.9 10.6 14.2 1985 .. 12.0 8.9 7.8 13.1 Japan and Germany. The German cur- 1986 15.5 9.3 9.1 13.2 1987 6.3 4.3 5.8 9.9 rency rate rose particularly sharply as 1988 4.3 5.2 6.3 9.2 developments in Eastern Europe were 1989 .6 4.6 3.3 8.1 viewed as favorable for the West German Quarter economy, attracting global capital flows. (annual rate) 1989:1 -.1 2.3 3.9 8.4 Rising interest rates in Germany likely 2 -4.4 1.6 3.3 7.9 contributed to an increase in bond yields 3 1.8 6.9 3.9 7.2 4 5.1 7.1 2.0 8.0 in the United States early in 1990, even as U.S. short-term rates remained essen- 1. From average of the preceding period to average of tially unchanged. More important, how- the period indicated. 2. Figure in parentheses is adjusted for shifts to NOW ever, for the rise in nominal, and likely accounts in 1981. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

48 77th Annual Report, 1990 Reserve has sought to ensure progress outsized tax payments in April. After its over time toward price stability. There riseof AlA percent in 1988, Ml grew only appears to be a fairly reliable long-term Vi percent in 1989, with much of the link between M2 and future changes in weakness in this transactions aggregate inflation. One method of specifying that occurring early in the year. By May, Ml link is to estimate the equilibrium level of had declined at an annual rate of about prices implied by the current level of M2, 2V2 percent from its fourth-quarter 1988 assuming that real GNP is at its potential level, reflecting a lagged response to and velocity is at its long-run average, earlier increases in short-term interest and compare that to actual prices. The rates and an extraordinary bulge in net historical record suggests that inflation individual tax remittances to the Treatends to rise when actual prices are below sury. From May to December, Ml rethe equilibrium level and to moderate bounded at a 4 percent rate as the when equilibrium prices are below ac- cumulating effects of falling interest rates tual. At the end of 1986, the equilibrium and post-tax-payment rebuilding boosted level of prices was well above the actual demands for this aggregate. Ml velocity level, reinforcing the view that the risks continued the upward trend that resumed weighed on the side of an increase in in 1987, increasing in the first three inflation; at the end of 1989, that equilib- quarters before turning down in the fourth rium price had moved into approximate quarter of 1989. equality with the actual price level, The shift of deposits from thrift instiindicating that basic inflation pressures tutions to commercial banks and money had steadied. fund shares owed, in part, to regulatory In 1989, compositional shifts within pressures that brought down rates paid by M2 reflected the pattern of interest rates, some excessively aggressive thrift instithe unexpected volume of tax payments tutions. Beginning in August, the newly in the spring, and the flowo f funds out of created Resolution Trust Corporation thrift deposits and into other instruments. (RTC) targeted some of its funds to pay Early in the year, rising market interest down high-cost deposits at intervened rates buoyed the growth of small- thrift institutions and began a program of denomination time deposits at the ex- closing insolvent thrift institutions and pense of more liquid deposits, as rates on selling their deposits to other instituthe latter accounts adjusted only slug- tions—for the most part, banks. On gishly to the upward market movements. balance, the weak growth of retail de- The unexpectedly large tax payments in posits at thrift institutions appears to have April and May contributed to the weak- been about offset by the shift into comness in liquid instruments as those bal- mercial banks and money market mutual ances also were drawn down to meet tax funds, leaving M2 little affected overall obligations. As market interest rates fell, by the realignment of the thrift industry. the relative rate advantage reversed in M3 was largely driven, as usual, by favor of liquid instruments and the growth the funding needs of banks and thrift in liquid deposits rebounded, boosted as institutions; under the special circumwell by the replenishment of accounts stances of the restructuring of the thrift drained by tax payments. industry, it was a less reliable barometer The Ml component of M2 was espe- of monetary policy pressures than is cially affected by the swings in interest normally the case. After expanding rates and opportunity costs last year, and 6lA percent in 1988, M3 hugged the in addition was buffeted by the effects of lower bound of its 3lA to IVi percent Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 49 target cone in 1989, closing the year stable. The share of mortgages held in about 3 lA percent above its fourth quarter securitized form again climbed in 1989, of 1988base. In 1989, bank credit growth facilitating the tapping of a base of about matched the previous year's 7 Vi per- investors. Diversified lenders, acting in cent increase, but credit at thrift institu- part through other intermediaries, such tions is estimated to have contracted a bit as federally sponsored agencies, mostly on balance over the year, in contrast to its filled the gap left by the thrift institutions. 6lA percent growth in 1988. This weak- However, some shrinkage of credit availness in thrift credit directly owed to asset able for acquisition, development, and shrinkage at savings and loan institutions construction appeared to follow from insured by the Savings Association Insur- limits imposed by the FIRREA on loans ance Fund; credit unions and mutual by thrift institutions to single borrowers, savings banks expanded their balance though the reduction in funds available sheets in 1989. In addition, funds paid for these purposes probably also reflected out by the RTC to thrift institutions and to problems in some residential real estate banks acquiring thrift deposits directly markets. substituted for other sources of funds. As Aggregate debt of the domestic nonfia result, thrift institutions lessened their nancial sectors grew at a fairly steady reliance on managed liabilities, as evi- pace over 1989, averaging 8 percent, denced by the decline of 14% percent which placed it near the midpoint of its over the year in the sum of large time monitoring range of 6lA to \Wi percent. deposits and repurchase agreements at Although the annual growth of debt thrift institutions. Institution-only money slowed in 1989, as it had during the market mutual funds were bolstered by a preceding two years, it still exceeded the relative yield advantage, as fund returns 6V2 percent growth of nominal GNP. lagged behind declining market interest Federal sector debt grew IVi percent, rates in the second half of the year; these about Vi percentage point below the 1988 funds provided the major source of increase—and the lowest rate of expangrowth for the non-M2 component of sion in a decade—as the deficit leveled M3. On balance, the effects of the thrift off. Debt growth outside the federal restructuring dominated the movements sector eased by more to average 8*4 perin M3, and the rebound in M2 in the cent, mostly because of a decline in the second half of the year did not show growth of household debt. Mortgage through to this broader aggregate. As a credit slowed in line with the reduced consequence, the velocity of M3 in- pace of housing activity, and consumer creased 3 percent in 1989,1 lA percentage creditgrowth, though volatile from month points faster than the growth in M2 to month, trended down through much of velocity, and its largest annual increase the year. The growth of nonfinancial in twenty years. business debt slipped further below the Many of the assets shed by thrift extremely rapid rates of the mid-1980s. institutions were mortgages and mort- Corporate restructuring continued to be a gage-backed securities, but this appears major factor buoying business borrowto have had little sustained effect on home ing, although such activity showed dismortgage cost and availability. The spread tinct signs of slowing late in the year as between the rate on primary fixed-rate lenders became more cautious and the mortgages and the rate on ten-year Trea- use of debt to require equity ebbed. sury notes rose somewhat early in the The second half of 1989 was marked year, but thereafter remained relatively by the troubling deterioration in indica- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

50 77th Annual Report, 1990 tors of financial stress among certain and Eurodollar deposits, over comparaclasses of borrowers, with implications ble Treasury bill rates narrowed early in for the profitability of lenders, including 1990. commercial banks. In the third quarter, several measures of loan delinquency Report on July 18,1990 rates either rose sharply or continued on an uptrend. Delinquency rates on closed- Monetary Policy and the Economic end consumer loans at commercial banks Outlook for 1990 and 1991 and auto loans at "captive" auto finance companies were close to historically high The Federal Reserve delivered its initial levels. At commercial banks as a whole Humphrey-Hawkins report of 1990 to in 1989, both delinquency and charge-off the Congress in February, and the period rates for real estate loans were little since then has been an especially challengchanged from the previous year. Still, ing one for monetary policy decisionmakproblem real estate loans continued to be ing. The already difficult task of moving a drag on the profitability of banks in a quite fully employed economy toward Texas, Oklahoma, and Louisiana; in the price stability without contractionary second half, such loans emerged as a mishap has been complicated by a variety serious problem for banks in New En- of disturbances to business activity and gland. On the other hand, smaller, agri- financial markets—among them developculturally oriented banks continued to ments that distorted some of the basic recover from the distressed conditions of indicators of the Federal Reserve's influthe mid-1980s. Since 1987, agricultural ence on the economic system. banks have charged off loans at well On the whole, events in the economy below the national rate, and their nonper- have been broadly in line with the projecforming assets represented a smaller tions for 1990 contained in the February portion of their loans than that for the monetary policy report. Inflation has country as a whole. been somewhat greater on average than The upswing in the profitability of most members of the Federal Open insured commercial banks that began in Market Committee (FOMC) and other 1988 only extended through the first half Reserve Bank presidents expected in of 1989. A slowing in the buildup of loan February; however, this mainly reflected loss provisions, along with improvements the influence of transitory factors early in in interest rate margins, contributed to the year, and price increases recently these gains, with the money center banks have been more moderate. Meanwhile, showing the sharpest turnaround. Infor- the economy has continued to expand, mation for the second half of 1989, but apparently rather sluggishly overall although still incomplete, clearly points since the winter. to an erosion of these profit gains, in part, While these aspects of the economic because of problems in the quality of situation were important elements in the loans. Several money center banks FOMC's review of its policy plans earlier sharply boosted their loss provisions on this month, the Committee also gave loans to developing countries, while careful attention to developments in evidence of rising delinquency rates on financial markets. Although market interreal estate and consumer loans suggested est rates had changed little on net since more widespread weakening. Despite February, slow growth of the monetary these developments, the spread of rates stock and other evidence in hand pointed on bank liabilities, certificates of deposit, to a small but significant tightening of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 51 credit supplies. This implied greater policy. Early in the year, bond yields in effective restraint on aggregate demand the United States rose along with rates in in the months ahead than was thought Japan and Western Europe, as developdesirable, and in the past week the System ments in Eastern Europe suggested a shifted to a slightly more accommodative further spur to worldwide economic stance in the provision of reserves to activity, carrying the potential for greater depository institutions. As a result, the inflation and heightened pressures on a overnight federal funds rate, which had limited international pool of savings. fluctuated narrowly around SlA percent In the second quarter, some of the throughout the first half of the year, has weather-related increases in food and declined to about 8 percent, and other energy prices that had caused inflation to market rates of interest also have eased a pick up earlier in the year were reversed, bit in recent days. and price increases for many other goods and services moderated. Inflation trends remained in the range prevailing over the Developments Thus Far in 1990 previous three years, though price pressures in the industrial sector gave signs of In the early part of 1990, economic some easing. The incoming information activity appeared to be regaining momen- pointed to a sluggish pace of economic tum, a development that reduced previous expansion; most notably, growth in priconcerns about recessionary risks. At the vate sector employment slackened, consame time, even discounting weather- sumer spending flattened, and real estate related spurts in food and energy prices markets weakened. Moreover, advance and an unusual bunching of price in- indicators in some sectors—particularly creases for some other items, there durable goods orders and construction appeared to be no abatement in underly- contracts—gave no evidence of a signifiing inflationary pressures. Through the cant pickup in the second half. With the first quarter, M2 remained near the top of economy appearing somewhat less buoythe annual range set by the FOMC, and ant, over May and June bond yields in the although M3 was near the lower bound of United States retraced some of their its range, this weakness appeared consis- earlier increases. Long-term rates in tent with the anticipated effects of the Japan and West Germany also declined, restructuring of the thrift industry. but by much less, with the result that The Federal Reserve maintained a yields in those countries have risen steady pressure on reserve positions appreciably this year relative to those in during the first quarter, rather than the United States. extending the sequence of easing steps In foreign exchange markets, the dollar that had fostered a drop in the federal has depreciated somewhat on balance funds rate of Wi percentage points be- thus far this year, under the influence of a tween June and December 1989. How- diverse set of economic, financial, and ever, in keeping with the tenor of most of political developments around the world. the economic data released during the The dollar has appreciated slightly in quarter, other interest rates generally terms of the yen, while depreciating moved higher, particularly at the long somewhat in terms of the German mark end of the yield curve. This shift sug- and other currencies of the European gested thatmarketparticipantshadreeval- Monetary System exchange rate mechauated the prospects for moderating infla- nism and somewhat more in terms of the tion and a further easing of monetary Swiss franc and pound sterling. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

52 77th Annual Report, 1990 The monetary aggregates flattened out has had, to date, only limited effects on during the second quarter, and by spending: The bulk of the credit formerly midyear M2 was in the lower half of its supplied by depositories has been proannual range, and M3 had fallen below vided by other lenders, in part through the lower bound of its annual range. The the securities markets, with little change weakness in the monetary aggregates in the terms to most borrowers. mainly, though not wholly, reflected a rechannelling of credit flows away from Monetary Objectives depository institutions. Total borrowing for 1990 and 1991 by domestic nonfinancial sectors moderated only a little in the first half of In reevaluating its ranges for money and 1990 from the pace of 1989, and growth credit for 1990 and in establishing tentain the aggregate debt of these sectors tive ranges for 1991, the FOMC had to was in the middle of the FOMC's take account of the redirection of credit monitoring range. However, the propor- flows away from depository institutions tion of lending accounted for by deposi- and the resulting effect on the growth of tories was down substantially. Much of the financial aggregates relative to spendthe decrease related to the shrinkage ing and prices. In February, the Commitof savings and loan associations: Mar- tee expected that the continued shrinkage ginal institutions continued to retrench, of the thrift industry would damp growth and the Resolution Trust Corporation in M3; to take account of this, it lowered (RTC) transferred large volumes of assets the M3 range for 1990 to 2*4 to 6Vi perto banks and onto its own books in the cent, 1 percentage point below the range course of closing failed thrift institu- set tentatively in July 1989. However, tions. Meanwhile, concerns about credit the contraction of thrift assets has been quality and pressures on capital posi- faster than anticipated, in part because of tions led banks to adopt more cautious the step-up in RTC activity, and bank lending postures and to hold down asset credit has expanded less rapidly. As a growth. consequence, through June, M3 grew at Therweakness in lending by deposito- an annual rate of only 1 lA percent from its ries was reflected dramatically in the fourth-quarter 1989 base. behavior of M3; this aggregate, encom- Barring a marked slowdown in RTC passing managed liabilities as well as activity or a significant strengthening in M2 deposits, comprises most of the bank credit, M3 growth is likely to liabilities used by these institutions to remain sluggish over the balance of the fund credit extensions. With depository year. As in the first half, the weakness in credit damped, not only were managed M3 growth is expected to be associated liabilities weak, but banks and thrift with a further substantial increase in institutions did not bid aggressively for velocity—the ratio of nominal GNP to retail funds—thereby contributing to money—rather than with substantial rereduced growth of M2. In addition, straint on overall credit supplies. Recogincreases in expected returns on stocks nizing this unusual behavior of M3 and bonds may have restrained expansion velocity, the FOMC voted in early July to of this aggregate, although some portion reduce the M3 range for 1990 to 1 to of the slowdown in M2 remains unex- 5 percent. At the same time, the Commitplained by changes in relative yields or tee reaffirmed its range of 5 to 9 percent income. The weakness in depository for total growth in the debt of domestic credit and the monetary aggregates likely nonfinancial sectors. The Committee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 53 seeks to ensure that credit will remain light of developments over the second available in amounts and at terms com- half of this year. patible with moderate expansion of the For growth in M2, the Committee economy, and it will continue to assess tentatively adopted a range of 2*/2 to the implications of developments at de- 6^2 percent— Vi percentage point below positories for credit conditions more the 1990 range. The adjustment is consisgenerally. tent with the Committee's intention to As noted above, the contraction of the move over time toward the low trend thrift industry and the moderate growth rates of monetary expansion that would in bank credit also have affected the be consistent with price stability. At the growth of M2, as potential inflows of same time, the range is expected to allow retail deposits have outpaced the needs of for sufficient expansion of money to depository institutions for such funds. sustain moderate growth in the economy. The velocity of this aggregate has risen, There may be some further upward shift unexpectedly, but less than that of M3: in velocity, but the range should be wide Growth of M2 from its fourth-quarter enough to accommodate considerable base through June was at a 334 percent variation in credit market conditions. annual rate, within its annual range, The range for growth of M3 was though in the lower half. M2 velocity is tentatively set at 1 to 5 percent, the same likely to increase further over the second as that now in effect for 1990. Growth of half of the year; however, a substantial this aggregate is especially sensitive to slowing of M2 could suggest more re- the pattern of credit flows. Thus, the straint than would be consistent with continuing downsizing of the thrift indussustained upward momentum of the econ- try is likely to result in slower growth of omy, and thus the Committee reaffirmed M3 than of M2 again next year, as the established range for M2 growth for managed liabilities in the broader aggre- 1990. gate run off. It also is likely to mean a In setting tentative ranges for 1991, substantial further increase in M3 velocthe Committee faced more than the usual ity. Given that growth of this aggregate uncertainty about the growth of money currently is running along the lower that would foster its objectives of bound of the new range for 1990, even if sustained expansion and a gradual abate- the pace of credit flows at banks and thrift ment of inflation. Developments in institutions were to pick up somewhat, credit markets will be shaped not only M3 growth between 1 and 5 percent by the special factors that have altered should be consistent with the Committee's patterns of intermediation thus far this basic objectives. year, but also by the outcome of the For debt, the FOMC adopted a tentacurrent deliberations regarding the fed- tive monitoring range of 4V4 to 8V2 pereral budget. At this point, the forces that cent, a half percentage point below the recently have diminished the role of range for 1990. The Committee viewed depository credit seem likely to persist slower growth of debt, more in line with for some time, and they may foster the expansion of nominal income, as a further upward shifts in monetary healthy development for the economy. velocities, albeit probably smaller ones The rapid expansion of debt over the past than now appear in train for 1990. To be decade, relative to the ability to service sure, though, subsequent events may it, occasioned many of the difficulties dictate adjustments to the ranges next with asset quality now facing our lending February, when they are reexamined in institutions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

54 77th Annual Report, 1990 Economic Projections for 1990 and 1991 In the aggregate, demands from sectors The members of the FOMC and the outside of exports are unlikely to provide Reserve Bank presidents not currently much impetus to manufacturing activity. serving as members believe that the Defense procurement is declining in real monetary ranges for 1990 and 1991 are terms. And there is little prospect of a consistent with achievement of sustain- substantial resurgence in motor vehicle able economic growth and a reduction of production: High levels of auto sales in inflation over time. Most of them expect the past several years appear to have that the pace of expansion will be moder- satisfied demands that were pent up ate over the remainder of 1990 and during the deep economic slump of the through next year, with the central ten- early 1980s. Demand for construction dency of their forecasts of real GNP materials and equipment probably also growth being Wi to 2 percent over the will remain subdued, because building four quarters of 1990 and 1% to 2Vi per- activity will be damped by the current cent over the course of 1991. overhang of vacant residential and com- Demand from abroad is likely to mercial space. That overhang, more than provide support for continued growth in any disruption of credit flows, explains U.S. production and employment. At the current weakness in construction, current exchange rates, U.S. producers and, especially in the case of office appear to be in a position to compete building, it will take some time for effectively in most international markets, existing space to be absorbed and to lay and economic activity is growing rela- the base for a solid upturn in activity. tively rapidly on average in other major In sum, the growth of total output industrial countries. In time, export projected for 1990 and 1991 probably demand should be bolstered by the shift will involve rather slow gains for the toward more open, market-based eco- goods-producing sectors of the econnomic systems in Eastern Europe; al- omy. The service-producing industries though the continental European nations are likely to continue to be the locus of may be most immediately affected by important increases in output and, espethese developments, given the high rates cially, employment. Demands for a wide of capacity utilization in those econo- range of services have remained robust mies, the United States is likely to benefit thus far this year, and demographic trends both directly and indirectly from the suggest that such sectors as medical care increased demand for consumer and and education will continue to experience capital goods. appreciable growth. Target Ranges of Growth for Monetary and Debt Aggregates Percentage change' 1990 Provisional Aggregate 1989 ranges Adopted in Adopted in for 1991 February July M M De 3 2 bt2 3 6 1 1 / / 3 2 2 t t t o o o 7 7 l0 1/ 12 / 2 2V 3 5 4 t t t o o o 6 7 9 V 4 3 5 I t t t o o o 7 5 9 2 4 1 V /2 I t 4 o t t o o 6 5 8 1/ V 2 i 1. From average of the fourth quarter of the preceding 2. Domestic nonfinancial sector. year to average of the fourth quarter of the year incidated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 55 The overall growth in economic activ- upturn in crude oil prices, gasoline prices ity forecast by the Board members and are widely expected to decline in coming Bank presidents for the period ahead is months, as the return of refinery output to expected to be consistent with a slight normal levels alleviates the tightness that easing of pressures on resources and a has characterized the product market. diminution of inflation. With respect to With inflation for other goods and serthe labor market, the central tendency of vices expected to remain below the firstthe forecasts for the civilian unemploy- quarter pace, the central tendency of the ment rate is 5lA to 5% percent in the policymakers' forecasts of the overall fourth quarter of this year and 5^2 to consumer price index is for an increase 6 percent in the final quarter of 1991; the of between 4V2 and 5 percent over the jobless rate has fluctuated narrowly at a four quarters of 1990-compared with little below 5V2 percent since late 1988. the 5% percent annual rate of increase Moderate growth in demands on indus- recorded during the first five months trial capacity should be conducive to an of the year. The lower trajectory of the extension of the recent more favorable consumer price index is projected to be trends in producer prices for intermediate sustained in 1991, with forecasts for the and finished goods, which were, respec- year centering on the 3% to 4V4 percent tively, virtually unchanged and up just range. 3 percent in the past twelve months. The Administration's economic projec- Inflation at the retail level also should tions, presented in connection with its be damped over the remainder of this mid-session update of the budget, indiyear by favorable developments in the cate similar expectations about inflation energy sector. Despite the very recent trends but a more favorable outlook for Economic Projections for 1990 and 1991 FOMC members and other FRB presidents Measure Administration Range Central tendency 1990 Percentage change, fourth quarter to fourth quarter! Nominal GNP 5to6V2 S'^toe^ 6.8 Real GNP Ito2 I1/2to2 2.2 Consumer price index2 4 to 5 4% to 5 4.8 Average level in the fourth quarter (percent) Civilian unemployment rate 51/2to61/2 5V2to53/4 5.63 1991 Percentage change, fourth quarter to fourth quarterl Nominal GNP V/iiol 51/* to 6*4 7.2 Real GNP 0to3 134 to2*2 2.9 Consumer price index2 3**to5 3Hto4** 4.2 Average level in the fourth quarter (percent) Civilian unemployment rate 5*4 to 7 5V4to6 5.63 1. Average for the fourth quarter of the preceding Administrative forecast is for urban wage earners and year to the average for the fourth quarter of the year clerical workers. indicated. 3. Percentage of total labor force, including armed 2. FOMC forecasts are for all urban consumers; forces residing in the United States. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

56 77th Annual Report, 1990 real GNP. As a result, the Administra- prices of some other goods and services. tion's projection of nominal GNP growth Given the character of the spurt, most is somewhat above the central tendency analysts—and policymakers in the Fedof those of the FOMC participants, and eral Reserve—judged that the runup in might imply the need for faster monetary aggregate price indexes overstated undergrowth than is currently contemplated by lying inflation trends. In the event, some the Committee. These differences must of the transitory elements of the earlier be regarded as small, however, relative spurt were reversed in the spring, and to the degree of uncertainty that attaches inflation moved down. Despite the recent to any prediction of the economy—and, slowing, however, the twelve-month in particular, of the short-run relation change in the CPI as of May, at 4.4 perbetween growth in GNP and the money cent, was about the same as that recorded stock. More important, the differences for each of the past three years. In part, do not signal any basic inconsistency the persistence of inflation during a period between the goals of the Federal Reserve of slower economic growth reflects conand the Administration, for the Federal tinued cost pressures from relatively tight Reserve would welcome a more rapid labor markets and weak productivity expansion of output that occurred in the performance. However, there have been context of solid progress toward price encouraging signs, particularly at the stability. earlier stages of processing, that an easing of resource constraints in the manufacturing sector is reducing some of the pressures that had boosted prices from 1987 The Performance of the Economy to early 1989. during the First Half of 1990 Activity in many sectors of the economy followed an erratic course during the first The Household Sector half of the year, in part because of Total personal consumption expenditures transitory factors, such as last winter's were buffeted this winter by large swings unusual weather. On balance, production in outlays for energy items and motor expanded further during the first half of vehicles. Expenditures for home heating 1990, but evidently no faster than the declined sharply in the first quarter as reduced pace of 1989. The comparatively unseasonably warm temperatures in Janslow rate of growth largely reflected uary and February followed a December weaker spending by domestic businesses that had been colder than usual. This and households, while merchandise ex- influence was largely offset by a rise in ports apparently remained on a fairly motor vehicle sales. In late 1989 sales of strong growth path. Although job cre- cars and light trucks had been depressed ation in the private sector of the economy by a scaling back of incentives and by has slowed this year, the civilian unem- large price increases for new model-year ployment rate has remained near 5 lA per- vehicles. Around the turn of the year, cent, the lowest level in nearly twenty enriched incentive programs revived years. these sales. To date this year, sales of Prices rose sharply early in the year, cars and light trucks have averaged but the increases moderated this spring. 14 million units (annual rate) - a pace not In the first quarter, there were large far below the total for 1989-and seem weather-related surges in food and energy largely to reflect replacement demand prices and a bunching of increases in and growth in the driving age population. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 57 Abstracting from the swings in outlays to have weakened; in the first five months on home heating and motor vehicles, of the year, housing starts totaled 1.36 milconsumption spending appears to have lion units (annual rate), somewhat below stagnated this spring after posting a the pace of activity in 1989. By region, moderate gain in the first quarter of housing markets have been very weak in 1990. The recent sluggishness in spend- the Northeast, while homebuilding has ing reflects declines in outlays for a been better maintained, albeit at moderate wide variety of consumer goods, includ- levels, in the North Central and Western ing furniture and other household dura- regions of the country. bles. In contrast, spending for services Both demand and supply factors have other than energy, especially medical contributed to the recent weakness in services, continues to outpace real in- housing construction. Sales of new and come growth. existing homes generally have been mov- Growth of consumption has slowed ing lower for more than a year; in part, this year against a backdrop of somewhat demand may have been restrained by smaller gains in real disposable personal slower growth in income and reduced income. But consumption has slowed investment motivation for home purchase even more than income, and the personal because of softening house prices. Desaving rate rose above 6 percent in the mand also may have been tempered this spring. Consumers may be spending spring by some edging up in mortgage more cautiously as they reassess their rates. Since early May, however, mortincome and wealth prospects in light of gage rates have moved down about the slower growth of the economy and a Vi percentage point, and there is no softening of residential property values evidence that access to home loans has in many parts of the country. These been curtailed. factors probably have been particularly On the supply side, building is being important in the Northeast, where con- deterred in some parts of the country by sumer sentiment has deteriorated mark- an overhang of unsold or unrented housedly. However, other indicators, such as ing units. In addition, it appears that a delinquency rates on consumer loans, do reduction in credit availability for connot reveal broad pressure on household struction may be playing some role in finances. Nor are there signs that credit damping building activity. To a degree, availability has been reduced: Federal this less favorable credit climate is attrib- Reserve surveys of bank lending officers utable to the cutback in financing supplied suggest no change in the willingness to by thrift institutions owing to the closure lend to consumers. of savings and loans as well as the more Residential investment spending also stringent capital requirements and lendwas affected by unusual weather patterns ing limits mandated by the Financial this winter. Housing starts were strong in Institutions Reform, Recovery, and Enthe first two months of the year, as mild forcement Act. At the same time, other temperatures allowed builders to catch institutions do not appear to be filling the up on work delayed by cold weather in void completely. In part, the shift in late 1989 and to begin projects that credit availability reflects the elimination normally would have been started later in of the imprudently aggressive lending the year. Then starts slumped this spring, that capsized so many thrift institutions. in part reflecting a "payback" for the A number of commercial banks also have winter activity. Averaging over this recently experienced reductions in their period, residential construction appears lending capacity as they have written off, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

58 77th Annual Report, 1990 or reserved against, bad loans. But, in however, has been the growth in outlays addition, the number of sound lending for computers and other informationopportunities undoubtedly has shrunk as processing equipment, after some slowa consequence of economic weakness ing during the second half of 1989. and soft property values in specific Nonresidential construction was locales. boosted by favorable weather early in the year, but most of the gain has since been reversed. The weakness is most evident The Business Sector in office and commercial real estate, for The financial position of the business which vacancy rates are high, and data on sector deteriorated further during the contracts and permits suggest that the early part of 1990. Before-tax profits outlook for building remains decidedly from current operations of nonfinancial negative. In some areas, this reflects corporations edged down in the first sluggish growth in the regional econoquarter after falling nearly 18 percent mies. However, activity also may be over the four quarters of 1989. Profits hindered by the shift in the credit climate, have been squeezed by a combination of as more speculative projects that previmarked increases in wages and benefits ously might have been financed no longer during a period of weak growth in qualify. An exception to the weakness in productivity, competitive pressures from business construction has been in the both home and abroad that have pre- industrial sector; lead times can be quite vented firms from completely passing long for these projects, however, and increases in labor costs through to prices, much of the continued strength undoubtand higher debt-servicing costs associ- edly reflects in large part decisions made ated in part with increased leverage. when capacity pressures were mounting Shrinking profits, which have reduced in 1988 and early 1989. Indeed, contracts the availability of internal funds, along and permits for new industrial construcwith the slower growth of final sales and tion have been trending down for about a easing of capacity pressures over the past year. year, have muted the demand for new The emergence of uncomfortably high plant and equipment. Reflecting these inventories in some sectors in late 1989 developments, real business fixed invest- led to corrective actions in the first part of ment has decelerated considerably since this year. Most prominently, manufacturthe first half of 1989. ers of motor vehicles cut production Although total real spending on pro- sharply and reinstated widespread sales ducers' durable equipment rose at an incentives to eliminate an overhang of annual rate of about 7 percent in the first stocks on dealer lots. In most other quarter, spending was boosted by a sectors, stocks have been trimmed or rebound in outlays for motor vehicles have been increased only modestly this and a resurgence in aircraft shipments year, and they appear to be in good after the settlement of the strike last alignment with sales trends. Among the November at Boeing. Excluding these possible exceptions are wholesale distribtransitory swings, real equipment spend- utors of machinery and nonauto retailers, ing slowed further in the first quarter, where some mild overhangs appear to and shipments of most types of capital have developed this spring; these could goods—especially industrial machin- precipitate further adjustments, probably ery—remained soft in April and May. affecting both domestic and foreign One bright spot in the equipment picture, producers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 59 The Government Sector temporary Census workers added to fed- The federal budget deficit over the first eral purchases. eight months of the fiscal year was Real state and local government pur- $152 billion, up from $113 billion in the chases increased at an annual rate of year-earlier period. About $15 billion of AVA percent in the first quarter, compared this increase resulted from spending by with the 3 to 2>l/i percent pace recorded the Resolution Trust Corporation, and over the past three years. Revenue growth further RTC outlays during June imply generally has not kept up with gains in that the year-to-year increase in the deficit spending, however, and an increasing is likely to widen. Most of the RTC number of state and local governments spending reflects financial transactions in face significant budgetary difficulties; which existing federal insurance obliga- indeed, the overall deficit of the sector tions to thrift depositors are being recog- (excluding social insurance funds) was nized in the government's budget outlay about $45 billion (annual rate) in the first and public debt accounts. The RTC's quarter of 1990, almost $11 billion borrowing and spending thus should have greater than the deficit recorded in the little effect on real economic activity or 1989 calendar year. These difficulties are interest rates. compounded by growing spending re- However, several other budget compo- quirements in several important areas. nents have contributed to the higher An increase in the number of school-age deficit. Spending on Medicare and other children has boosted public school enrollhealth care programs, and some discre- ments, the number of medicaid recipients tionary spending for the space and other has increased, and prison populations programs, has surged. During the same have risen rapidly. Meanwhile, legislaperiod, revenue growth has lagged as tures have been reluctant to increase weak corporate profits have cut into personal income taxes, and federal grants receipts and last year's surprisingly large and increases in state excise taxes have personal income tax collections have not failed to prevent the widening of the gap been sustained. The latter suggests that between spending and revenues. some of last year's receipts reflected special factors, such as the deferral of tax liabilities in response to the phased The External Sector reduction of income tax rates under the Movements in the exchange rate have Tax Reform Act of 1986, and the capital been smaller than those in 1989, when gains realized during sharp movements the dollar appreciated about 12 percent in in financial markets. terms of the other G-10 currencies over Federal purchases of goods and ser- the first half of the year and then deprecivices, the part of expenditures that is ated by a similar amount between last included directly in GNP, fell in real summer and this past February. The terms over 1988 and 1989, owing dollar appreciated approximately 2 permainly to declines in defense spending. cent between February and March this Real defense purchases continued to year but has since declined about 4 permove lower in the first quarter of 1990; cent, partly in response to publication of however, the downtrend in total weaker data on U.S. economic activity purchases was interrupted by a pickup and the associated washing out of exin nondefense spending, mainly a pected increases in interest rates. transitory surge in space expenditures. While the value of the dollar has not In the second quarter, compensation for changed dramatically on a trade-weighted Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

60 77th Annual Report, 1990 average basis against the other G-10 cur- rebound in activity at Boeing, as well as rencies this year, there have been some by notable increases in other classes of divergences in bilateral exchange rates. machinery, agricultural products, indus- On balance, the dollar has depreciated trial supplies, and consumer goods. Two significantly against sterling and the factors have contributed to further large Swiss franc, and somewhat less against gains in the quantity of U.S. exports: the German mark and related currencies. Many of our major trading partners In contrast, the dollar has appreciated abroad have continued to register strong against the yen, despite exchange market economic growth, and the average dollar intervention by the Bank of Japan and prices of U.S. exports have declined other central banks to support the value somewhat relative to average prices of the yen early in the year. Against the abroad. Movements in nominal exchange currencies of our other major trading rates do not appear to have contributed partners in the Pacific Basin, the dollar significantly to either export growth or has depreciated against the Singapore overall U.S. external adjustment in recent dollar, but appreciated in terms of the quarters; the effects of the large depreci- South Korean won and the new Taiwan ation of the dollar through 1987 have dollar. waned, and any residual positive effects Prices of non-oil imports, which fell at probably have been offset by the average about a 3 percent annual rate between the strengthening of the dollar last year. first and third quarters of last year, rose atHowever, the depreciation of the dollar a similar pace between the third quarter since last summer should lend some of 1989 and the first quarter of 1990, stimulus to external adjustment in coming partly in response to the drop in the dollar quarters. between last summer and the early part of Meanwhile, slower import growth has this year. Prices of imported oil surged accompanied the slackening pace of around the turn of the year, moving above activity in the United States. Total im- $20 per barrel in January, but since then ports were boosted by a surge in oil they have more than retraced this runup. imports in the first quarter, but, on On the export side, prices rose at an balance, non-oil merchandise imports annual rate of just 134 percent in the first have edged down this year. The slowquarter of 1990 after recording little down in imports has been pronounced in change, on balance, over 1989 as a automotive products and consumer whole. In the first quarter, prices for goods, reflecting both weaker domestic agricultural exports fell somewhat, but final demands and the inventory adjustthere was an acceleration in prices for ments in these sectors of the U.S. exported consumer and capital goods that economy. appears to have been related to some Together, the continued growth in pickup in prices for these items in domes- exports and the slowdown in imports tic markets around the turn of the year. narrowed the merchandise trade balance Merchandise exports continue to pro- to $ 105 billion at an annual rate in the first vide an important impetus to growth in quarter of 1990, its lowest rate since the domestic economy, although the early 1985. The current account deficit increases in exports have slowed some- was reduced to $92 billion at an annual what from the very rapid advances re- rate. corded in the latter part of the 1980s. So Net private capital inflows, and a large far this year, exports have been boosted statistical discrepancy, provided thecounby strong shipments of aircraft with the terpart to the current account deficit in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 61 the first quarter of 1990, as they did for this reflects longer-run demographic 1989 as a whole. Most of the private trends; but it may also reflect a tendency capital inflow in the first quarter came for fewer people to seek jobs when the through the banking sector. Private for- growth of employment opportunities is eign investors continued to acquire U.S. perceived to have slackened. Survey data corporate bonds in the firstq uarter; how- suggest that individuals have increasingly ever, they sold a small amount of U.S. viewed jobs as harder to find. Treasury securities, and they continued The slower rates of growth in employto sell U.S. corporate stocks as they have ment and the labor force have been since last October. Foreign direct invest- roughly matching, and the civilian unemment flows into the United States slowed ployment rate has remained near 5 lA permarkedly in thef irst quarter to a rate well cent throughout the year. While unembelow that recorded in recent years. ployment rates have risen noticeably in Official capital showed a net outflow in the Northeast and moved up in some the first quarter, as it did throughout most Midwestern states, jobless rates in other of 1989, reflecting the net sale of dollars regions of the country either have changed in exchange market intervention. little or have edged down. With labor markets remaining relatively tight by historical standards, pres- Labor Markets sures on labor costs have not abated. Job growth was strong early in the year, Although the rate of increase in straightbut has softened recently. In January and time wages has changed little over the February, increases in nonfarm payroll past year and a half, benefit costs, which employment averaged more than currently constitute roughly one-fourth 350,000, fueled by large increases in of compensation, have picked up markservice-producing industries as well as edly. In part, this increase reflected the by robust hiring in construction during higher social security taxes that went into the warmer than normal winter weather. effect in January, but benefits also have Since March, however, job growth has been boosted by the continued rise of averaged about 125,000 per month, health insurance costs and an acceleration despite the net addition of about 300,000 of lump-sum payments and bonuses. All temporary workers to help carry out the told, employee compensation in private 1990 Census; private payrolls have in- nonfarm industry rose 5lA percent over creased less than 20,000 per month. the twelve months ended in March, a bit Manufacturing employment has contin- above the pace recorded in the year ended ued to shrink this year at about the same last December. rate as in the second half of 1989, and In addition to gains in hourly compenconstruction payrolls also have declined sation, unit labor costs have been boosted since the winter. Meanwhile, job growth by a poor performance in labor producin the service-producing industries has tivity, as output per hour in the nonfarm slowed in recent months. Although hiring business sector rose just lA percent gains have continued strong for health between the first quarter of 1989 and the services, growth in jobs in business ser- first quarter of 1990. While productivity vices has moderated, and there have been has remained strong in the manufacturing only small gains in employment at retail sector, rising almost 5 percent at an establishments. annual rate in the first quarter, productiv- Growth in the labor force also has been ity performance outside of manufacturing subdued in recent months. To an extent, has been quite weak. As a consequence, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

62 77th Annual Report, 1990 unit labor costs in the first quarter of 1990 prices retraced most of their earlier were 5 percent above their level a year climb. The prices for other foods for earlier, about the same increase as re- home consumption have continued on an corded over 1989 as a whole, but well upward course. In addition, the prices of above the rates that prevailed earlier in foods and beverages purchased at restauthe expansion. rants have risen at a 6 percent annual rate so far this year, about \xh percentage points above the average rate of increase Price Developments over the past two years; these prices After surging in the first quarter of 1990, probably have reflected a dwindling price increases moderated this spring. supply of entry-level workers and related Food and energy prices were boosted increases in labor costs, and perhaps in early in the year by weather-related some regions by the higher federal minidevelopments, and prices for a wide mum wage. range of other goods and services also The CPI excluding food and energy picked up sharply. However, by May, the rose about 4% percent over the twelve transitory effects of the weather on infla- months ending in May, near the upper tion largely had been reversed, and price end of the range experienced during the increases for many other items slowed current expansion. Price increases for significantly. consumer goods, particularly apparel, Energy prices surged this past winter, rose sharply early in the year. However, as a result of demand pressures from the the burst in prices did not carry through unseasonably cold weather in December to the second quarter, as prices for and supply disruptions at U.S. refineries commodities excluding food and energy and in Eastern Europe. The posted price changed little in April and May. of West Texas Intermediate (WTI) oil, In the service sector, inflation rose the benchmark for U.S. crude prices, markedly in the first quarter, in part rose about $3 per barrel to a peak of reflecting some bunching of increases $22 in January. Since early February, on for items whose prices tend to change balance, the posted price for WTI has in irregular jumps, such as public moved down substantially, in large part transportation fares and auto registration reflecting the effects on crude markets of fees. Although inflation in service prices increased output by OPEC nations. moderated in the spring, there was little Movements in energy prices at the con- retracing of the earlier increases; sumer level normally follow develop- indeed, in May, the CPI for nonenergy ments in crude oil prices. Gasoline prices, services was 5*/2 percent above its level however, remain higher than in Decem- twelve months earlier, the upper end of ber. In part, pump prices have been the range of increases seen over the boosted by the additional costs to refiners past three and a half years. As in 1989, of complying with environmental stan- increases in prices of rents and medical dards. In addition, inventories of gasoline services contributed importantly to the were relatively low during the first half of rise in overall service prices so far this the year as a result of a variety of supply year. However, there also have been disruptions at refineries. widespread pickups in prices for a Overall, consumer food prices were variety of labor-intensive services, and boosted by sharp increases in prices for it is likely that, in addition to strong fresh fruits and vegetables after the freeze consumer demands, higher labor costs in December, but during the spring these have boosted service prices. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 63 The signs of moderating inflation for in fact, have curtailed their own lending goods at earlier stages of processing, in some sectors, thus further depressing which had surfaced as capacity utilization depository credit. With little need to fund rates moved down during 1989, appear asset growth, banks and thrift institutions to have continued into 1990. After rising have pursued retail deposits less aggres- AlA percent in 1989, the producer price sively, leading to the opening of a sizable index for finished goods excluding food gap between yields available in the open and energy has increased at an annual market and those on such deposits. Partly rate of about VA percent during the first as a result, M2 also has slowed, moving six months of 1990. Producer prices for down into the lower portion of its annual intermediate materials excluding food growth range. and energy increased at an annual rate of The deceleration of the monetary just 3A percent between December and aggregates mainly reflects a reduction in June, roughly the same rate of increase as the share of credit provided by depositorecorded over 1989 as a whole. The ries, rather than a sharp slowing of moderation of inflation for goods at the income or total credit flows. The velociproducer level is perhaps one indication ties of both M2 and M3 posted sizable that earlier moves toward monetary increases, particularly in the second restraint and the slower pace of economic quarter. Total debt of domestic nonfinanactivity have worked to ease the resource cial sectors grew at an annual rate of constraints that had pushed up materials 7 percent over the first half of the year— prices between 1987 and early 1989. down only slightly from its pace in the latter half of 1989 and in the middle of its monitoring range. However, growth of Monetary and Financial total debt was boosted by federal govern- Developments during the First ment borrowing to support thrift resolu- Half of 1990 tions; the debt of nonfederal sectors grew Shifts in financial intermediation and somewhat less rapidly than it did last credit flows, stemming from the contin- year. Uncertainty about the effects of the ued restructuring of the thrift industry restructuring of credit flows, and about and a more cautious attitude of banks the reasons for the extent of the slowdown toward certain credit extensions, exerted in money growth, underlined the need a major influence on the monetary aggre- for the FOMC to assess the behavior of gates and their relation to economic the aggregates in light of information on activity during the first half of 1990. In spending and prices and the likely course anticipation of further contraction in the of monetary velocities. thrift industry, and its associated effects The somewhat more cautious lending on depository intermediation, the Com- posture that commercial banks have mittee reduced the annual growth range recently adopted is mainly a response to for M3 by a full percentage point in heightened credit risks caused by the February. In the event, M3 has slowed more moderate pace of economic expaneven more dramatically than had been sion overall and a downturn in several anticipated, leaving this aggregate below sectors. The resulting loan write-offs and the lower bound of its reduced range. Not pressures on capital positions may also only has the thrift industry contracted have induced some tightening of stanmore rapidly than expected, but commer- dards. Growing markets for securitized cial banks have picked up little of the loans largely have filled the vacuum lending forgone by thrift institutions and, created by the retrenchment of thrift Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

64 77th Annual Report, 1990 institutions in the area of mortgage to increases in long-term rates in the lending, with little attendant effect on the United States and abroad. By late April, cost or availability of residential mort- market participants expected a near-term gage credit to households. Both banks tightening of U.S. monetary policy. and thrift institutions have cut back on In early May, the pendulum of market other types of lending that can less easily opinion began to swing away from the be rechannelled, however, including view that a tightening of U.S. monetary construction and nonresidential real es- policy was in the offing. Beginning with a tate loans, loans to highly leveraged bor- lackluster employment report on May 4, rowers, and loans to small and medium- economic data have pointed to a somesized businesses. To offset tighter credit what slower pace of activity and reduced market conditions, which could exert price pressures. In addition, a proundue restraint on aggregate demand, the nounced slowdown in the monetary ag- Federal Reserve has recently adopted a gregates began in April, followed by slightly more accommodative stance with outright declines in May. Although both regard to reserve provision, fostering a M2 and M3 recovered a little in June, small decline in market interest rates. they remained below the midpoint and the lower bound respectively of their annual ranges at midyear. Evidence also The Implementation of Monetary Policy suggested that restricted credit availabil- The FOMC maintained a steady degree ity, in part the result of tightened credit of pressure in reserve markets during the standards, may have spread beyond first six months of the year. Policy had commercial real estate, construction, and been eased in the second half of 1989 merger-related lending. In response to amid concerns that the economic slow- this firming of credit conditions, the Feddown might cumulate and thereby eral Reserve began providing reserves threaten the expansion. In the first half of slightly more generously through open 1990, however, the Committee viewed market operations in mid-July. the balance of evidence as suggesting that Market interest rates, which already underlying trends were generally consis- had receded somewhat from their early tent with its objectives of sustaining eco- spring highs, declined further with the nomic growth while containing and even- Federal Reserve's recent easing, though tually reducing inflationary pressures. intermediate and long-term rates re- In the opening months of the year, mained above the levels seen last Decemincoming information on spending and ber. Lower interest rates also bolstered prices caused markets to reevaluate the the stock market, and some share price prospects for a near-term reduction of indexes reached record highs this month. inflationary pressures and further easing Spreads between high-quality private of monetary policy. As a result, market instruments and Treasury issues narinterest rates rose, despite a steady fed- rowed slightly over the firsth alf of 1989. eral funds rate. The rise was most pro- This narrowing reflected the continued nounced at the longer end of the maturity availability of funds for investmentspectrum, and it restored the usual up- grade borrowing as well as increases in ward tilt to the yield curve that had been the borrowing needs of the RTC, which absent much of last year. Developments are met partly through the Treasury. The in Eastern Europe, which portended pickup in Treasury borrowing for the increases in demands on the world's RTC was necessitated by the faster pace limited pool of savings, also contributed of thrift resolutions, which require the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 65 government to carry thrift assets on its wholesale components, mainly overnight own balance sheet pending their disposi- RPs and Eurodollars. By the second tion. The market for investment-grade quarter, a steep runoff in retail money issues continued to function reasonably market mutual fund (MMMF) shares and well, with stable rate spreads between a sharp decline in demand deposits reinquality tiers and generally well-main- forced weakness in core deposits in tained issuance volumes. On average, damping growth in aggregate M2. however, the business sector faced some- Increases in the opportunity costs of what higher borrowing costs, largely as holding M2 balances-that is, the rise in the result of numerous downgradings of other interest rates relative to those on debt issues. The collapse of Drexel M2—retarded growth in this aggregate Burnham Lambert had a marginal impact during the first half of the year. This was on an already debilitated market for particularly evident for retail MMMFs. below-investment-grade issues, widen- Through much of 1989, the yield curve ing spreads somewhat more between was inverted, and MMMFs, whose portyields on such bonds and those on other folios typically average about 30 to 40 long-term securities. days in maturity, had historically large yield advantages relative to longer-term Treasury bills and short-dated Treasury Monetary and Credit Flows notes. As a result, MMMFs expanded Growth of the monetary aggregates was briskly. As the yield curve began to flatten sluggish over the first half of 1990, with toward year-end, flows into MMMFs M2 and M3 expanding at annual rates of ebbed, though they remained a key only 3x/2 percent and VA percent respec- element of overall M2 growth. With the tively from the fourth quarter of 1989 steepening of the yield curve in the early through June. The weakness in money part of 1990, MMMF growth stopped in growth primarily reflected a redirection March. The recent rally in the stock of credit extensions away from deposi- market also may have depressed tory institutions owing to the continued MMMFs, as data through May indicate downsizing of the thrift industry and a strong inflows to equity mutual funds, a more cautious lending posture of com- substantial portion of which may have mercial banks. been transferred from MMMFs. The deceleration of M2 growth did not When yield curves have become more begin until the second quarter of 1990, steeply upward sloping in the past, the when growth slowed to a 2XA percent effect on M2 of weakness in MMMFs annual rate fromt he 6 to 7 percent range and other liquid balances often has been seen in the previous three quarters. Retail partially offset by strength in retail time deposits (which include NOW accounts deposits, as households lengthen the as well as savings, small time deposits, maturity of their assets. This year, howand similar instruments) had begun to ever, retail certificate of deposit (CD) decelerate in the first quarter, slowing to rates were unusually slow to respond to a pace of less than 4 percent from the the rise in market rates through April, 5 3A percent rate seen in the fourth quarter contributing to unexpected weakness in of 1989. The effects of this slowdown on M2. The reluctance of banks to raise M2 were partially masked, however, by deposit rates in response to rising market a surge in currency growth—apparently rates was particularly evident in the owing in part to increased demand from intermediate-term area where, for examoverseas—and a bulge in some of M2's ple, the rise of 100 basis points in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

66 77th Annual Report, 1990 yield on the three-year Treasury note tion of deposits toward commercial banks during the first four months of the year was the direct result of RTC resolutions. elicited an increase of less than 20 basis In the first half of the year, the RTC points in rates on bank retail CDs of resolved 170 thrift institutions holding comparable maturity. Evidence of the $32 billion of nonbrokered retail derising opportunity cost of holding M2 can posits, much of which was immediately be seen in the unusually heavy volume of assumed by commercial banks. noncompetitive tenders in Treasury bill Although deposit transfers do not and note auctions, which suggest a shift directly depress M2, they may have out of M2 balances. contributed to the weakness in this aggre- The unwillingness of banks to price gate by reducing banks' need to raise their deposits as aggressively as in the their offering rates to attract additional past is partly an indirect result of the deposits at a time when growth in bank contraction of the thrift industry. During credit was slow. Through the first half of the first six months of 1990, commercial 1990, commercial banks were able to banks enjoyed $62 billion in retail de- fund nearly 80 percent of their total credit posit inflows—about a 10 percent in- growth with retail deposits—almost crease at an annual rate-while thrift double the proportion seen in recent institutions were shedding $28 billion in years—even though they allowed spreads retail deposits—about a 5 percent annual between market rates and their retail rate of contraction. Much of this deflec- offering rates to widen substantially. Widening opportunity costs of holding M2 can explain only some of the moderation in this aggregate in the first half of Growth of Money and Debt 1990, however. M2 may also have been Percentage change * responding to slower spending, and other Debt of factors, some of which may have been domestic associated with deposit restructuring Period Ml M2 M3 nonfinancial under the RTC. Brokered deposits sector formerly attracted to thrift institutions by Fourth quarter relatively high yields may have been 1980 7.4 8.9 9.5 9.5 particularly sensitive to the recent slug- 1981 5.4 9.3 12.3 10.2 (2.5)i gishness in deposit pricing; about $7 bil- 1982 8.8 9.1 9.9 9.1 lion of brokered deposits were held at 1983 10.4 12.2 9.8 11.2 1984 5.4 7.9 10.6 14.2 thrift institutions that were resolved in 1985 12.0 8.9 7.8 13.1 the first six months of the year, and many 1986 15.5 9.3 9.1 13.2 1987 6.3 4.3 5.8 9.9 of these high-rate contracts were subse- 1988 4.3 5.2 6.3 9.1 quently abrogated or not rolled over by 1989 .6 4.5 3.3 8.1 the acquiring institutions. Evidence also Quarter suggests that, in light of large deposit (annual rate) 1990-1 4.8 6.0 2.7 6.9 inflows from thrift institutions, banks 2 3.6 2.3 .4 7.0e have curtailed marketing and promo- Halfyear tional activity designed to attract retail (annual rate) 1990:1 4.2 4.2 1.6 7.0 deposits. Finally, the issuance of shortterm Treasury paper to fund RTC hold- 1. From average of the preceding period to average of the period indicated. ings of former thrift assets has boosted 2. Figure in parentheses is adjusted for shifts to NOW the supply of, and raised the rates on, a accounts in 1981. close M2 substitute just when depositoe Estimated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 67 ries were becoming less aggressive in tions. In addition, commercial banks seeking retail deposits. The rise in oppor- apparently have filledl ess of the void left tunity costs and these other factors con- by thrift institutions than was originally tributed to an increase in the velocity of anticipated. As a result, they too have M2 in the first half of 1990, though some pared their M3 managed liabilities, furof this increase remains difficult to ther depressing this aggregate. explain. Rates on large time deposits, like those The link between changes in deposi- on retail deposits, have remained low tory intermediation and M3 is somewhat relative to yields on Treasury bills. more direct. This aggregate encompasses Facing a substantial deterioration in the managed liabilities, as well as deposits quality of their assets and constraints on and other sources of funds in M2, and is capital, banks apparently have attempted thus a better barometer of the overall to bolster profit margins and have not funding needs of banks and thrift institu- aggressively pursued new lending opportions. As has been evident since last tunities. Not only have deposit rates been summer, the contraction of the thrift held down, but loan rates also appear to industry and the failure of banks fully to have been raised slightly relative to pick up the slack have already resulted in market rates and nonprice terms have a significant slowdown in growth of tightened for certain types of credits. depository credit relative to that of The pullback in credit supplies, toaggregate nonfinancial sector debt and a gether with some leveling out of demands concomitant increase in M3 velocity. for credit, likely contributed to a deceler- This trend continued into the first half of ation of bank asset growth. Over the 1990, as growth in depository credit all second quarter, growth of bank credit but ceased-though overall debt growth slowed to a 5% percent pace from the continued at a moderate pace—and M3 near 7 percent rate of growth seen over fell well below the lower bound of its the first quarter of 1990 and the second annual growth cone. half of 1989, with much of the decelera- Although the FOMC foresaw some tion centered in real estate and consumer significant damping effects on M3 lending. Although the slowdown in real growth in 1990 in association with the estate lending has been especially procontinued shrinkage of the thrift in- nounced in New England, this type of dustry, the actual weakness in M3 so far lending remains sluggish in several other this year has been more pronounced regions as well. Some of the deceleration than anticipated. In setting out its expec- in consumer lending represents sales of tations for M3 in 1990, the Committee loans by banks attempting to bolster recognized that considerable uncertain- capital-asset ratios. Even adjusted for ties surrounded the thrift industry contrac- these sales, however, growth of contion in terms of the pace of RTC resolu- sumer loans at banks slowed further in tions, the extent of asset shrinkage at the second quarter from an already capital-impaired thrift institutions, and reduced first-quarter pace. The weakness the desire of commercial banks to step in consumer borrowing this year is due into the breach. To this point, a faster- primarily to sluggish retail sales, particthan-expected shrinkage of thrift assets ularly of automobiles and other durable has been manifested not only in weaker goods; banks evidently have remained M2 deposit inflows, but also in faster willing lenders to households, and interrunoffs of large time deposits and other est rates on consumer loans have changed M3 managed liabilities at thrift institu- little. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

68 77th Annual Report, 1990 Bank lending to businesses also has government borrowing, which owed been depressed this year. Surveys of primarily to the growing working capital commercial bank lending officers through needs of the RTC. RTC spending, net of early May suggest that the slowdown in capital raised off-budget by the Resolubank credit largely reflects diminished tion Funding Corporation, jumped to demand for credit and deteriorating $31 billion in the second quarter, up from conditions in the real estate market, the $4 billion to $5 billion levels of the although tighter lending terms and more previous two quarters. This spending is stringent credit standards were frequently financed through the Treasury and is cited for borrowers below investment therefore included in the debt aggregate. grade, including many small businesses. The pace of household borrowing Banks seem to have raised lending rates slowed considerably in the firsts ix months somewhat to small firms, judging from of 1990, reflecting decelerations in both the slight increase in the spread between mortgage and consumer credit. The rates on small business loans and on recent slowing of home mortgage borrowfederal funds. Separate surveys in which ing appears to be largely the result of small businesses were queried about gen- reduced demand, owing to increases in eral credit availability have pointed to interest rates earlier in the year and some recent increases in the difficulty weakening economic activity in some these firms face in obtaining credit, regions of the country. Although banks though on balance they found credit have picked up only some of the slack for availability little changed from mid- thrift institutions in the area of mortgage 1989. The slowdown in bank business lending, the expanding market for seculending this year has mainly reflected ritized mortgages has facilitated an orreduced merger activity. Bank retrench- derly flow of mortgage credit. In fact, ment in this area is consistent with other spreads of mortgage-backed securities private credit judgments, as evidenced over comparable Treasury issues remain by the major slump in the market for low by historical standards and rates on bonds below investment grade. home loans have not risen noticeably The reduced volume of corporate relative to other long-term rates. restructurings, coupled with a diminished Consistent with households' sluggish household demand for credit, has slowed spending, overall consumer installment the growth of the aggregate debt of credit has risen at a 23A percent rate from domestic nonfinancial sectors to a 7 per- the fourth quarter of 1989 through May cent annual rate from the fourth quarter of this year, well below the 5!/2 percent of 1989 through May of this year, com- clip in 1989. Some of this deceleration pared with the 8 percent rate seen last reflects substitution of home equity loans year. Debt growth is currently in the for previously existing consumer indebtmiddle of its monitoring range and edness; households apparently continue broadly consistent with growth in nomi- to recognize the lower relative after-tax nal GNP. With the increasing leverage cost of mortgage debt since the 1986 tax and the attendant dramatic declines in reform, which phased out the interest debt velocity witnessed in the 1980s deductibility of non-mortgage household apparently ending, the Committee re- indebtedness. The slowdown in conduced the 1990 monitoring range for debt sumer loans on the books of depositories by Wi percentage points in February. has been even more pronounced, reflect- Debt growth decelerated in the first ing a marked pickup in securitizations. half of the year despite a spike in U.S. The trend toward securitization of con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 69 sumer loans, which has been evident in the past few years, appears to have accelerated in 1990, possibly because depositories are making efforts to reduce assets in order to meet the new risk-based capital requirements. Through the first half of the year, the total borrowing of nonfinancial firmsh as been maintained at about the same pace as in the last half of 1989, despite a sharp drop in equity retirements. Although business lending by banks has slowed, commercial paper issuance picked up the slack, particularly in the first few months of the year. More recently, in light of declines in bond yields, firms have stepped up their issuance of bonds and slowed their use of commercial paper. Despite a recent slight narrowing of spreads relative to investment-grade securities, issuance of below-investmentgrade bonds has remained in the doldrums. Spreads between investmentgrade paper and Treasury issues are still low by historical standards, held down in part by supply pressures in the Treasury market. In the municipal market, the increase in market interest rates and the downgradings of a number of key issuers during the first half of 1990 combined to slow refunding issuance to a crawl. As a result, the total debt of state and local governments expanded at only an annual rate of 3 percent in the second quarter, compared with 4 Vi percent in 1989. • 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

73 Record of Policy Actions of the Board of Governors Regulation D The amendment is effective with the (Reserve Requirements reserve computation period beginning of Depository Institutions) December 25, 1990, for institutions that report weekly and December 18, 1990, for institutions that report quarterly. November 28, 1990-Amendments The Garn-St Germain Depository The Board amended Regulation D to Institutions Act of 1982 established a increase the amount of transaction bal- zero percent reserve requirement on ances to which the lower reserve require- the first $2 million of an institution's ment applies. reservable liabilities. The act also provides for annual adjustments to that Votes for this action: Mr. Greenspan, exemption based on deposit growth na- Ms. Seger, and Messrs. Angell, Kelley, tionwide. By the beginning of 1990, that LaWare, and Mullins.1 amount had been increased to $3.4 million. Because of a lack of growth in Under the Monetary Control Act of deposits this year, no adjustment was 1980, depository institutions, Edge and made to the exemption. agreement corporations, and U.S. agencies and branches of foreign banks are subject to reserve requirements set by the Board. Initially, the Board set December 3, 1990—Amendments reserve requirements at 3 percent of an institution's first $25 million in trans- The Board amended Regulation D to action balances and at 12 percent of eliminate reserve requirements on certain balances above that level. The act directs short-term nonpersonal time deposits and the Board to adjust annually the amount on Eurocurrency liabilities. subject to the lower reserve requirement to reflect changes in transaction Votes for this action: Mr. Greenspan, balances nationwide. By the beginning Ms. Seger, and Messrs. Angell, Kelley, of 1990, the amount was $40.4 mil- LaWare, and Mullins.1 lion. Recent increases in transaction balances warranted an increase of $0.7 mil- The Board reduced from 3 percent to lion. The Board therefore amended zero percent the required reserve ratio Regulation D to increase to $41.1 mil- on nonpersonal time deposits with origilion the amount of transaction balances to nal maturities of eighteen months or less which the lower reserve requirement and on net Eurocurrency liabilities. The applies. Board took this action to ease credit conditions and to encourage lending by depository institutions. 1. Throughout this chapter, note 1 indicates that a vacancy existed on the Board when the action was For institutions that report weekly, the taken. reduction would be phased in over two Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

74 77th Annual Report, 1990 reserve maintenance periods, with re- Regulation H serve requirements of Wi percent appli- (Membership of State Banking cable during the first period, and zero Institutions in the Federal percent reserve requirements applicable Reserve System) and the following period. For other institu- Regulation Y tions, the new reserve requirements (Bank Holding Companies and would be effective January 17,1991. Change in Bank Control) June 20,1990-Amendments Regulation H The Board amended Regulations H and (Membership of State Banking Y to adopt real estate appraisal standards, Institutions in the Federal effective August 9, 1990, and July 1, Reserve System) 1991. December 17,1990 -Amendments Votes for this action: Messrs. Greenspan and Johnson, Ms. Seger, and Messrs. The Board amended provisions in Regu- Angell, Kelley, LaWare, and Mullins. lation H governing the payment of dividends. Provisions of the Financial Institutions Reform, Recovery, and Enforcement Act Votes for this action: Mr. Greenspan, Ms. of 1989 required federal regulators of Seger, and Messrs. Angell, Kelley, and financial institutions to establish stan- LaWare. Absent and not voting: Mr. Mullins.1 dards for the performance of appraisals of all federally related transactions requir- The Board amended Regulation H by ing the services of an appraiser. The adding a new section to clarify the Board, therefore, amended Regulations circumstances under which state mem- H and Y, as follows: (1) to stipulate those ber banks may pay dividends and to transactions covered by the new stanmake the calculation of their ability to dards —those transactions not covered by pay dividends align more closely with the new standards would be governed by current regulatory reporting standards the existing interagency appraisal guideand generally accepted accounting lines; (2) to provide minimum standards principles. The rule specifies that a bank for performing an appraisal; and (3) to may pay a dividend if the payment will distinguish those transactions that require not impair its capital and if it can be paid the services of an appraiser certified by from recent earnings. Proposed dividend the state from those that require a licensed payments that do not satisfy those appraiser. Transactions of less than requirements must be approved by the $100,000 would not require an appraisal Federal Reserve. performed by a licensed or certified Most of the provisions are effective appraiser. The amendments specify that January 25, 1991, except for the portion a state-certified appraiser is required governing capital limitations on the pay- for all real estate transactions valued at ment of dividends. Those provisions are $ 1 million or more, and for nonresidential effective December 20, 1990, to allow transactions and complex one- to fourbanks the option of applying the rule to family residential properties valued at dividend payments in 1990. $250,000 or more. For other transac- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 75 tions, the services of a licensed appraiser and its leverage ratio in making an would suffice. assessment of the organization's overall The appraisal standards are effective capital position. August 9,1990, and the certification and licensing standards are effective July 1, Regulation J 1991. (Collection of Checks and After adoption of these standards, the Other Items by Federal Reserve Board sought comment on a possible Banks and Funds Transfers amendment that would lower from through Fedwire) $100,000 to $50,000 the transaction September 28, 1990-Revision amount below which an appraisal by a licensed or certified appraiser would not The Board revised subpart B of Regulabe required. tion J, governing funds transferred over Also on June 20, the Board amended Fedwire, effective January 1,1991. Regulations H and Y, effective September 7, 1990, to adopt transition guidelines Votes for this action: Messrs. Greenspan, and a leverage constraint for the new Angell, Kelley, LaWare, and Mullins. risk-based capital standards. Absent and not voting: Ms. Seger.1 Votes for this action: Messrs. Greenspan The Board revised subpart B of the and Johnson, Ms. Seger, and Messrs. regulation to make it consistent with Angell, Kelley, LaWare, and Mullins. new provisions—article 4A—of the Uniform Commercial Code. In addition, the In early 1989 the Board, as well as revisions will: (1) provide a more comother U.S. and foreign regulators, an- prehensive set of rules for funds transnounced new international risk-based fers involving Federal Reserve Banks; capital standards that would become (2) make the subpart consistent with effective at the end of 1992. At that time, state laws applicable to funds transfers, the Board indicated that after 1990, as individual states adopt article 4A; and transitional standards would be phased in (3) help ensure that the Reserve Banks, and that a new leverage constraint also subject to their central banking responsimight be adopted. bilities, compete on an equitable basis The Board adopted transition standards with private-sector providers of funds to assist banks and bank holding comtransfer services. panies in developing their capital plans and in strengthening their capital base. Regulation T The Board also adopted a leverage con- (Credit by Brokers and Dealers) straint as a supplement to the risk-based capital framework. In adopting these March 21, 1990 - Amendments measures, the Board indicated that the standards are minimums. An institution The Board amended Regulation T, effecthat has a high level of risk is expected to tive April 30, 1990, to accommodate operate well above the minimum stan- the settlement and clearance of transacdards. When an institution proposes to tions in foreign securities and to make expand, engage in new activities, or foreign securities eligible for margin otherwise faces unusual risks, the Board credit by brokers and dealers under will consider the organization's capital certain conditions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76 77th Annual Report, 1990 Voting for this action: Messrs. Greenspan connection with the quarterly publication and Johnson, Ms. Seger, and Messrs. of its "List of Marginable OTC Stocks." Angell, Kelley, and LaWare.1 The amendments to Regulation T per- Regulation Y mit foreign equity and debt securities that (Bank Holding Companies and meet the prescribed criteria to be eligible Change in Bank Control) for margin credit at broker-dealers on the same basis as domestic securities. In November 7,1990-Amendment addition, brokers may isolate and recognize debt denominated in foreign cur- The Board amended Regulation Y, effecrencies and may use that debt as margin tive December 18,1990, to permit banks without converting it to dollars. The to offer reduced-rate credit cards under amendments also ease the restrictions on certain conditions. payment and settlement for foreign securities to recognize differences in trading Votes for this action: Mr. Greenspan, practices in the market in which the trade Ms. Seger, and Messrs. Angell, Kelley, occurs. Broker-dealers also may arrange LaWare, and Mullins.1 with foreigners to extend credit on foreign securities. Previously, Regulation Y had prohibited banks from offering discounts or Under the revised regulation, a forother reduced consideration if, to obtain eign equity security is eligible for marthat consideration, customers also had to gin credit if it meets the following condipurchase other services from the bank or tions: (1) it has been traded for at least its holding company affiliate. Because of six months on a recognized exchange the significant amount of competition in or market outside the United States; the national credit card market, the Board (2) U.S. broker-dealers have continuous decided to provide an exemption to access to quotations of both bid and permit reduced-rate credit cards under asked, or last sale, prices through an certain conditions. The Board, therefore, electronic system; (3) the aggregate amended Regulation Y to allow banks to value of the stock is at least $1 billion; offer a price reduction on credit cards (4) weekly trading volume in the security when a customer also purchases any of averages at least 200,000 shares or certain additional products or services $1 million; and (5) the issuer of the from another subsidiary of the holding security, or a predecessor, has been in company. The exemption is available existence at least five years. only on the condition that both the credit The revisions to the regulation make card and the other products or services foreign debt securities eligible for margin offered in the arrangement can be purcredit under the following conditions: chased separately. (1) the issue is not in default, (2) the issue is rated in one of the two highest rating categories, and (3) at least $100 million November 9, 1990-Amendment was outstanding after the initial offering of the securities. The Board amended Regulation Y, effec- The Board will publish a "List of For- tive immediately, to reduce filing requireeign Margin Stocks"-foreign equity ments under the Change in Bank Control securities eligible for margin credit—in Act. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 11 Votes for this action: Messrs. Greenspan, Regulation Z Angell, Kelley, LaWare, and Mullins. (Truth in Lending) Absent and not voting: Ms. Seger.1 The portions of Regulation Y that September 12, 1990—Amendments implement the Change in Bank Control Act identify several circumstances under The Board amended provisions of Reguwhich a person will be presumed to be lation Z relating to home equity lines of acquiring control of a bank or bank credit. holding company and for which the acquiring person must file notice with the Votes for this action: Messrs. Greenspan, Federal Reserve. Under the current Angell, Kelley, LaWare, and Mullins. Absent and not voting: Ms. Seger.1 provisions of Regulation Y, a person must file a notice under the act before acquiring 10 percent of the voting shares The Board amended Regulation Z to of an institution, and must file again each stipulate that creditors who want to freeze time additional shares are acquired, until a line of credit when the interest rate cap the person owns or controls 25 percent on that line is reached must specifically or more of the institution's voting shares, provide for that event in the credit if no other person will own a greater agreement. Previously, the regulation portion of the shares immediately after had not expressly required creditors to the transaction. state in the loan contract that they had That requirement created unnecessary retained the right to freeze a line of credit regulatory burden in two types of situa- when the rate cap is reached. tions: (1) when an acquiring person who The regulation also was amended to already has been subject to regulatory remove a provision that had permitted review seeks to acquire a small number creditors to delay providing certain disof additional shares, and (2) when the closures about the repayment phase of redemption of shares by another share- home equity plans until after the plan is holder increases the person's percentage opened. The regulation now requires that ownership, even though that person has creditors provide the disclosure at the not acquired additional shares. The Board time of application. decided to amend Regulation Y to remove The amendments are effective Septemthe requirement that a person who already ber 19, 1990; compliance is not mandahas received authority to acquire 10 per- tory, however, until October 1, 1991. cent or more of the shares of a bank or bank holding company file additional notices for subsequent acquisitions that Regulation BB result in ownership of between 10 per- (Community Reinvestment) cent and 25 percent of the bank or its holding company. Notices are still required, however, when a person initially May 2, 1990-Amendments acquires 10 percent or more of the shares of a bank holding company, or when The Board amended Regulation BB to making any acquisition that results in the implement changes in the Community ownership of 25 percent or more of a Reinvestment Act required by recent bank or bank holding company. legislation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78 77th Annual Report, 1990 Votes for this action: Messrs. Greenspan December 5, 1990-Amendment and Johnson, Ms. Seger, and Messrs. Angell, Kelley, and LaWare.1 The Board amended Regulation CC, effective September 1, 1990, to imple- The Financial Institutions Reform, ment recent legislation. Recovery, and Enforcement Act of 1989 amended the Community Reinvestment Votes for this action: Mr. Greenspan, Act (CRA) to require regulatory agencies Ms. Seger, and Messrs. Angell, Kelley, LaWare, and Mullins.1 to make certain additional disclosures. Accordingly, the Board and the other Provisions of the Cranston-Gonzales federal agencies that regulate financial National Affordable Housing Act institutions made the following revisions amended the Expedited Funds Availabilto their implementing regulations: The ity Act by extending for two years the agencies will use a four-tiered descriptive availability schedules for deposits at rating system, instead of the five-tiered nonproprietary automated teller masystem currently in use, in their assesschines. The legislation was enacted in ments of institutions' compliance with the November, with a retroactive effective act. Also, the agencies will publish date of September 1,1990. institutions' CRA ratings, as well as the evaluations that support those ratings, Provisions of the Expedited Funds for examinations conducted after July 1, Availability Act specified the time 1990. period within which funds deposited at an automated teller machine (ATM) must be made available for withdrawal. The act distinguished between deposits Regulation CC made at a proprietary ATM and a non- (Availability of Funds and proprietary ATM. (An ATM is con- Collection of Checks) sidered to be proprietary if it is located at or near the receiving institution or if it May 21, 1990-Amendments is owned or operated by, or exclusively for, the receiving institution.) The act The Board approved certain technical had provided, on a temporary basis, amendments to Regulation CC. different availability schedules for deposits at each type of ATM because of Votes for this action: Messrs. Greenspan the special operating limitations related and Johnson, Ms. Seger, and Messrs. Angell, Kelley, and LaWare.1 to deposits at nonproprietary ATMs. The temporary schedules were set to The revisions include changes to the expire August 31, 1990, and it had been model forms as well as technical and expected that a viable technology would clarifying amendments to the regulation be developed within the two-year period and the official commentary. Most of the during which the temporary schedules changes were effective May 22,1990. In were in effect to address the special taking this action, the Board decided not operating limitations of nonproprietary to adopt a proposal that would have ATMs. Since an operational solution has shortened the amount of time within not yet been developed, the Congress which a depository institution must notify extended the temporary schedules for an a customer that a check for a large amount additional two years. The Board, there- ($2,500) has been returned unpaid. fore, made conforming changes to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 79 Regulation CC on an interim basis and Policy Statements sought comment on the rule. and Other Actions May 2, 1990-Revisions to Payment System Policies Other Actions The Board approved modifications to its policy statements pertaining to risks on In March the Board reported to the the payment systems. Congress for a second time on the Expedited Funds Availability Act and Regula- Votes for these actions: Messrs. Greenspan tion CC, summarizing related activities and Johnson, Ms. Seger, and Messrs. undertaken by the Federal Reserve since Angell, Kelley, and LaWare.1 the first report, issued in July 1989. The report described improvements in the The Board approved a number of check collection and return system and operating changes governing transactions summarized data on bank compliance on Fedwire and other large-dollar paywith the act and Regulation CC. The ment systems, to reduce the risks associ- Board made legislative recommendations ated with such systems. Following are in the report to reduce the risk of fraud in the primary changes: accepting checks for deposit and facilitate • The new risk-based capital measures compliance with the act. Another recom- will be substituted for adjusted primary mendation sought to clarify the Board's capital when calculating sender net debit authority to allocate liability among caps for U.S. depository institutions. entities such as states, their political • Net debits incurred on the Clearing subdivisions, or other nonbank payors House Interbank Payments System for losses such as those resulting from the (CHIPS) by U. S. and foreign institutions mishandling of a returned check. will be excluded from the amount of In July the Board issued the third and daylight overdraft credit subject to crossfinal report to the Congress, as required system sender net-debit caps when CHIPS by the Expedited Funds Availability Act, adopts settlement finality. (After issuance on deposits at nonproprietary automated of this statement, CHIPS adopted settleteller machines (ATMs). As in the Octo- ment finality. Accordingly, CHIPS net ber 1989 report, the Board recommended debits will be excluded from the calculathat the Congress amend the act so that, tion of cross-system caps beginning under the permanent schedule of avail- January 10, 1991.) ability, banks could treat checks depos- • Healthy institutions whose overited at nonproprietary ATMs as if they drafts are less than $10 million or less were nonlocal checks (that is, provide than 20 percent of their risk-based capital availability not later than the fifth busi- are exempt from the self-evaluation and ness day following the banking day of cap-filing requirements. deposit). The proposed amendment • The frequency test and the dollar would help ensure that deposit-taking at limit will no longer be used for meeting nonproprietary ATMs would not be the requirements of the de minimis cap; restricted or discontinued by those insti- only the 20 percent capital limit will be tutions that need the flexibility to place used. longer holds on these deposits to limit • The net debit cap will be applied to their risk. overdrafts caused both by funds transfers Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80 77th Annual Report, 1990 and by book-entry transfers of U.S. Actions on the Basic Discount Rate government and agency securities. • Institutions that frequently and ma- During the first half of 1990, the Board terially exceed their caps because of considered but took no action on requests overdrafts arising from book-entry secu- from three Reserve Banks to lower or rities transactions are required to pledge raise the basic discount rate. The rate had collateral for those overdrafts; other been maintained at a level of 7 percent institutions may exclude book-entry se- since February 1989. One Bank submitcurities overdrafts from their caps if the ted requests to lower the rate to 6Vi peroverdrafts are collateralized. cent, while two Banks proposed increases • For U.S. agencies and branches of to IV* and IVi percent respectively. One foreign institutions that are headquartered or more of these requests were pending in countries that are participating in the during most of the period. Basle accord, the uncollateralized Fed- In the early months of the year, the wire cap will be calculated using a "U.S. economic expansion appeared to have capital equivalency" of 10 percent of the strengthened somewhat, and sharp inworldwide capital that would meet the creases in food and energy prices associ- Basle risk-based capital accord. ated with adverse weather conditions These revisions are effective January pushed broad measures of inflation con- 10,1991. siderably higher. In the first quarter, M2 expanded at a pace near the top of the FOMC's growth range for the year, 1990 Discount Rates though the expansion of M3 was held The Board approved one change in the down by the effects of the restructuring of basic discount rate during 1990, a reduc- thrift depository institutions. Both the tion from 7 percent to 6Vi percent in pace of the business expansion and the December. During the year the Board rate of inflation moderated somewhat in also voted at two meetings to disapprove the second quarter, and monetary growth requests for increases or decreases in the slowed markedly. Problems clearly evibasic rate submitted by two Federal dent in some industries and regions Reserve Banks. In early November the tended to cloud the outlook for business Board decided to restructure, effective activity at midyear, but the economy was January 1992, the rate imposed on sea- still expanding and the core rate of sonal borrowing by linking it to market inflation did not appear to be trending rates; until then, the Reserve Banks will down. Throughout this period, the policy continue to charge the basic rate on such of the FOMC was directed at maintaining credit. a steady degree of pressure on reserve positions following a sequence of easing The reasons for the Board's decisions steps implemented during the second half are reviewed below. Those decisions of 1989. In the circumstances, the Board were made in the context of the policy endorsed the view of the majority of the actions of the Federal Open Market Reserve Banks in deciding that, on bal- Committee (FOMC) and the related ecoance, economic and financial developnomic and financial developments that ments pointed to the desirability of an are covered in more detail elsewhere in unchanged basic discount rate. this REPORT. A listing of the Board's actions on the discount rate during 1990, In mid-July the Board turned down including the votes on those actions, pending requests by the Federal Reserve follows this review. Banks of Cleveland and Dallas to raise Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 81 and to lower, respectively, their basic over a multiyear horizon. Over the discount rates by V2 percentage point. In balance of the year, evidence of worsenreaching its decision, the Board took into ing business conditions continued to account an earlier decision by the FOMC mount and inflationary pressures apto implement some slight easing of re- peared to be easing. At the same time, serve conditions. However, because of more and more lending institutions were the minor tightening that appeared to encountering increasing financial diffihave occurred in the general availability culties largely because of growing probof credit, such easing was viewed in lems in their real estate portfolios, and a effect as serving to maintain the overall rising number of highly leveraged busidegree of monetary restraint that the ness firms also were experiencing finan- FOMC had sought since late 1989. In cial strain. Efforts by banks and other these circumstances, the Board con- lenders to protect and improve their cluded that a change in the discount capital positions as their loan portfolios rate in either direction would not be deteriorated were reflected in widespread appropriate. indications of cutbacks in the availability Iraq's invasion of Kuwait in early of credit and more stringent lending August precipitated a surge in oil prices terms. that added to existing inflationary pres- Against this background and taking sures and threatened a cutback in spend- special account of the sluggish monetary ing as higher oil prices eroded disposable growth in the closing months of the year, incomes. Business and consumer confi- the FOMC moved in a series of steps dence deteriorated sharply, although to ease conditions in reserve markets overall spending and production held up appreciably further. In early December, for a time. An unsettled political and the Board acted to eliminate the 3 percent military situation in the Middle East and reserve requirement on nonpersonal time increased volatility in financial markets deposits and net Eurocurrency liabilities added to the already considerable uncer- partly to bolster lending incentives for tainties that surrounded the economic depository institutions. Financial condioutlook. Under these conditions, mone- tions and developments in the economy tary policy was directed in late summer also led the Board on December 18 to and early fall at maintaining a steady approve a reduction in the discount rate course and providing a sense of stability from 7 percent to 6V2 percent. The until a clearer picture emerged of the reduction also served in part to realign balance of risks between greater inflation the basic discount rate with market and a weakening economy. interest rates, which had declined In mid-August, one Reserve Bank considerably. submitted a request to lower the basic discount rate by Vi percentage point; that Structure of Discount Rates request was periodically renewed, and starting in late October several other The basic discount rate is the rate charged Reserve Banks submitted similar re- on loans to depository institutions for quests. Near the end of October, the short-term adjustment credit and for FOMC acted to ease pressures on reserve credit extended under the seasonal proconditions in light of accumulating indi- gram; under the latter program, loans cations of a weakening economy and a may be provided for periods longer than congressional budget agreement that those permitted under adjustment credit called for a major degree of fiscal restraint to assist smaller institutions in meeting Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

82 77th Annual Report, 1990 regular needs arising from certain sea- 1973, changes in statutes, regulations, sonal movements in their deposits and and financial markets had tended to loans. broaden the access of small banks to A higher, flexible rate may be charged alternative sources of funding. In these on extended-credit loans (for other than circumstances, the Board concluded that seasonal purposes) to depository institu- a market-related rate would be appropritions that are under sustained liquidity ate for the longer-term credit offered pressure and are not able to obtain funds under the seasonal program. The Board on reasonable terms from other sources. decided to delay the effective date of the The flexibler ate is somewhat higher than change to give banks more opportunity to the market rates to which it is linked, but adjust their funding patterns in a period it is always at least 50 basis points above when some banks might be subject to the basic discount rate. The flexible rate tightened availability of funds. is adjusted periodically, subject to Board approval. The firstt hirty days of borrowing on extended credit may be at the basic Board Votes rate, but further borrowings ordinarily are charged the flexibler ate. The highest Under the provisions of the Federal rate applicable to any credit extended to Reserve Act, the boards of directors of depository institutions will be assessed the Reserve Banks are required to estabon exceptionally large adjustment-credit lish rates on loans to depository instituloans that arise from computer break- tions at least every fourteen days and to downs or other operating problems, submit such rates to the Board of Goverunless the difficulty clearly is beyond the nors for review and determination. Rereasonable control of the borrowing serve Bank actions on the discount rate institution; under the current structure, include requests to renew the formula for that rate is the flexible rate. calculating the flexible rate on extended credit. The votes of the Board of Gover- At the end of 1990 the structure of nors listed below involved changes in the discount rates was as follows: a basic rate basic discount rate. Votes relating to the of 6V2 percent for short-term adjustreestablishment of existing rates or the ment credit and for credit under the updating of market-related rates under seasonal program and a flexible rate of the extended credit program are not 8.05 percent. During 1990 the flexible shown. All votes taken during 1990 were rate ranged from a high of 8.90 percent to unanimous. a low of 8.05 percent. Votes on the Basic Discount Rate July 9, 1990. The Board disapproved Change in Seasonal Credit Program an action taken on June 28 by the directors of the Federal Reserve Bank of Cleveland On November 7, 1990, the Board modito raise the basic discount rate from fied its seasonal credit program by replac- 7 percent to IVi percent. ing the basic discount rate charged on seasonal borrowing with a market-related Votes for this action: Messrs. Greenspan, rate, effective January 9,1992. The new Angell, Kelley, and Mullins. Votes against rate will be tied to the level of the federal this action: None. funds rate and the rate in the secondary market for ninety-day certificates of de- July 11,1990. The Board disapproved posit. Since the program's inception in an action taken on June 28 by the directors Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 83 of the Federal Reserve Bank of Dallas to lower the basic discount rate from 7 percent to 6V2 percent. Votes for this action: Messrs. Greenspan, Angell, Kelley, and Mullins. Votes against this action: None. December 18,1990. Effective December 19,1990, the board approved actions taken by the directors of all the Reserve Banks to reduce the basic discount rate from 7 percent to 6V2 percent. Votes for this action: Mr. Greenspan, Ms. Seger, and Messrs. Angell, Kelley, LaWare, and Mullins. Votes against this action: None.1 Votes on the Seasonal Credit Program November 7, 7990. Effective January 9,1992, the Board approved the charging of a market-related rate of interest instead of the basic discount rate on borrowings under the seasonal credit program. Votes for this action: Mr. Greenspan, Ms. Seger, and Messrs. Angell, Kelley, LaWare, and Mullins. Votes against this action: None.1 • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

85 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 1990 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 1990, 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 r6sum6 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 eff ect at the beginning rather than on data as they may have been of 1990. 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 Open recorded. The fact that a decision in Market Operations favor of a general policy was by a large majority, or even that it was by unani- In Effect January 1, 1990 mous vote, does not necessarily mean that all members of the Committee were 1. The Federal Open Market Committee equally agreed as to the reasons for the authorizes and directs the Federal Reserve particular decision or as to the precise Bank of New York, to the extent necessary to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

86 77th Annual Report, 1990 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 dealers of open market operations, while assisting in and foreign accounts maintained at the Fed- the provision of short-term investments for eral Reserve Bank of New York, on a cash, foreign and international accounts maintained regular, or deferred delivery basis, for the at the Federal Reserve Bank of New York, the account of the Federal Reserve Bank of New Federal Open Market Committee authorizes York at market discount rates, prime bankers and directs the Federal Reserve Bank of New acceptances with maturities of up to nine York (a) for System Open Market Account, to months at the time of acceptance that (1) arise sell U.S. Government securities to such forout of the current shipment of goods between eign and international accounts on the bases countries or within the United States, or (2) set forth in paragraph l(a) under agreements arise out of the storage within the United providing for the resale by such accounts of States of goods under contract of sale or those securities within 15 calendar days on 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 mat 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 accounts by, any agency of the United States, and maintained at the Bank. Transactions underprime bankers acceptances of the types autho- taken with such accounts under the provisions rized for purchase under l(b) above, from of this paragraph may provide for a service dealers for the account of the Federal Reserve fee when appropriate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 87 Domestic Policy Directive above the lower bound of the Committee's annual range. In Effect January 1, 19901 The Federal Open Market Committee seeks monetary and financial conditions that will The information reviewed at this meeting foster price stability, promote growth in suggests that economic activity is expanding output on a sustainable basis, and contribute slowly in the current quarter. Total nonfarm to an improved pattern of international transpayroll employment has increased at a re- actions. In furtherance of these objectives, duced pace on average over the past several the Committee at its meeting in July reafmonths, with declines continuing in the firmed the ranges it had established in Februmanufacturing sector. The civilian unemploy- ary for growth of M2 and M3 of 3 to 7 percent ment rate edged up to 5.4 percent in Novem- and 3 Vi to 7 xh percent, respectively, measured ber. Industrial production rose slightly in from the fourth quarter of 1988 to the fourth November after a decline in October resulting quarter of 1989. The monitoring range for from strike activity and other disruptions. growth of total domestic nonfinancial debt Nominal retail sales excluding motor vehicles also was maintained at 6 Vi to 10 Vi percent for strengthened in November, but continued the year. For 1990, on a tentative basis, the weak sales of vehicles held total retail sales Committee agreed in July to use the same for the month to a level that was little changed ranges as in 1989 for growth in each of the from the third-quarter average. Housing starts monetary aggregates and debt, measured from fell in November but for the October-Novem- the fourth quarter of 1989 to the fourth quarter ber period were up somewhat on average of 1990. The behavior of the monetary from their third-quarter level. Indicators of aggregates will continue to be evaluated in the business capital spending suggest a weakening light of movements in their velocities, develin expenditures after a substantial increase opments in the economy and financial marearlier in the year. The preliminary data kets , and progress toward price level stability. indicate that the nominal U.S. merchandise In the implementation of policy for the trade deficit widened appreciably in October immediate future, the Committee seeks to from an upward revised September rate. decrease slightly the existing degree of pres- Broad measures of inflation suggest that prices sure on reserve positions. Taking account of have risen more slowly on balance since progress toward price stability, the strength midyear, partly reflecting sharp reductions in of the business expansion, the behavior of the energy prices, but the latest data on labor monetary aggregates, and developments in compensation suggest no significant change foreign exchange and domestic financial in prevailing trends. markets, slightly greater reserve restraint or Interest rates have changed little on balance slightly lesser reserve restraint would be since the Committee meeting on November acceptable in the intermeeting period. The 14. In foreign exchange markets, the trade- contemplated reserve conditions are expected weighted value of the dollar in terms of the to be consistent with growth of M2 and M3 other G-10 currencies declined substantially over the period from November through over the intermeeting period, with a particu- March at annual rates of about %Vi and 5Vi larly pronounced depreciation against the percent respectively. The Chairman may call German mark and related European cur- for Committee consultation if it appears to the rencies in the last week of the period. Manager for Domestic Operations that re- M2 continued to grow fairly briskly in serve conditions during the period before the November, largely reflecting strength in its next meeting are likely to be associated with a retail deposit components; M2 has expanded federal funds rate persistently outside a range this year at a pace near the midpoint of the of 6 to 10 percent. Committee's annual range. Growth of M3 picked up in November but has remained more restrained than that of M2, as assets of Authorization for Foreign thrift institutions and their associated funding Currency Operations needs apparently continued to contract; for the year to date, M3 has grown at a rate a little In Effect January 1, 1990 1. Adopted by the Committee at its meeting on 1. The Federal Open Market Committee Dec.18-19, 1989. authorizes and directs the Federal Reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

88 77th Annual Report, 1990 Bank of New York, for System Open Market 2. The Federal Open Market Committee Account, to the extent necessary to carry out directs the Federal Reserve Bank of New the Committee's foreign currency directive York to maintain reciprocal currency arrangeand express authorizations by the Committee ments ("swap" arrangements) for the System pursuant thereto, and in conformity with such Open Market Account for periods up to a procedural instructions as the Committee may maximum of 12 months with the following issue from time to time: foreign banks, which are among those desig- A. To purchase and sell the following nated by the Board of Governors of the Fedforeign currencies in the form of cable eral Reserve System under Section 214.5 of transfers through spot or forward transactions Regulation N, Relations with Foreign Banks on the open market at home and abroad, and Bankers, and with the approval of the including transactions with the U. S. Treasury, Committee to renew such arrangements on with the U.S. Exchange Stabilization Fund maturity: established by Section 10 of the Gold Reserve Act of 1934, with foreign monetary authori- Amount ties, with the Bank for International Settle- Foreign bank (millions of ments, and with other international financial dollars equivalent) institutions: Austrian National Bank 250 National Bank of Belgium 1,000 Austrian schillings Italian lire Bank of Canada 2,000 Belgian francs Japanese yen National Bank of Denmark 250 Canadian dollars Mexican pesos Bank of England 3,000 Danish kroner Netherlands guilders Bank of France 2,000 Pounds sterling Norwegian kroner German Federal Bank 6,000 Bank of Italy 3,000 French francs Swedish kronor Bank of Japan 5,000 German marks Swiss francs Bank of Mexico Regular 700 Special 125* B. To hold balances of, and to have Netherlands Bank 500 Bank of Norway 250 outstanding forward contracts to receive or to Bank of Sweden 300 deliver, the foreign currencies listed in para- Swiss National Bank 4,000 graph A above. Bank for International Settlements Dollars against Swiss francs 600 C. To draw foreign currencies and to Dollars against authorized European permit foreign banks to draw dollars under currencies other than Swiss francs 1,250 the reciprocal currency arrangements listed in paragraph 2 below, provided that drawings *ExpiredFeb. 15,1990. by either party to any such arrangement shall Any changes in the terms of existing swap be fully liquidated within 12 months after any arrangements, and the proposed terms of any amount outstanding at that time was first new arrangements that may be authorized, drawn, unless the Committee, because of shall be referred for review and approval to exceptional circumstances, specifically authothe Committee. rizes a delay. 3. All transactions in foreign currencies D. To maintain an overall open position undertaken under paragraph 1 (A) above shall, in all foreign currencies not exceeding $21.0 unless otherwise expressly authorized by the billion. For this purpose, the overall open Committee, be at prevailing market rates. For position in all foreign currencies is defined as the purpose of providing an investment return the sum (disregarding signs) of net positions on System holdings of foreign currencies, or in individual currencies. The net position in a for the purpose of adjusting interest rates paid single foreign currency is defined as holdings or received in connection with swap drawings, of balances in that currency, plus outstanding transactions with foreign central banks may contracts for future receipt, minus outstanding be undertaken at non-market exchange rates. contracts for future delivery of that currency, 4. It shall be the normal practice to arrange i.e., as the sum of these elements with due with foreign central banks for the coordination regard to sign.2 of foreign currency transactions. In making operating arrangements with foreign central banks on System holdings of foreign cur- 2. Adopted by the Committee at its meeting on rencies, the Federal Reserve Bank of New Dec. 18-19,1989. York shall not commit itself to maintain any Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 89 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 Section214.5 of Regulation tion on System foreign currency operations N shall be referred for review and approval to to appropriate 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 paragraph investments shall be in liquid form, and 3 G(l) of the Board of Governors' Statement generally have no more than 12 months of Procedure with Respect to Foreign Relaremaining to maturity. When appropriate in tionships of Federal Reserve Banks dated connection with arrangements to provide 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. In Effect January 1, 1990 6. All operations undertaken pursuant to the preceding paragraphs shall be reported 1. System operations in foreign currencies promptly to the Foreign Currency Subshall generally be directed at countering committee and the Committee. The Foreign disorderly market conditions, provided that Currency Subcommittee consists of the market exchange rates for the U.S. dollar Chairman and Vice Chairman of the reflect actions and behavior consistent with Committee, the Vice Chairman of the Board the IMF Article IV, Section 1. of Governors, and such other member of the 2. To achieve this end the System shall: Board as the Chairman may designate (or in A. Undertake spot and forward purthe absence of members of the Board serving chases and sales of foreign exchange. on the Subcommittee, other Board Members B. Maintain reciprocal currency designated by the Chairman as alternates, ("swap") arrangements with selected foreign and in the absence of the Vice Chairman of central banks and with the Bank for Internathe Committee, his alternate). Meetings of tional Settlements. the Subcommittee shall be called at the C. Cooperate in other respects with request of any member, or at the request of central banks of other countries and with the Manager for Foreign Operations, for the international monetary institutions. purposes of reviewing recent or con- 3. Transactions may also be undertaken: templated operations and of consulting with A. To adjust System balances in light of the Manager on other matters relating to his probable future needs for currencies. responsibilities. At the request of any B. To provide means for meeting System member of the Subcommittee, questions and Treasury commitments in particular curarising from such reviews and consultations rencies, and to facilitate operations of the shall be referred for determination to the Exchange Stabilization Fund. Federal Open Market Committee. C. For such other purposes as may be 7. The Chairman is authorized: expressly authorized by die Committee. A. With the approval of the Committee, 4. System foreign currency operations to enter into any needed agreement or under- shall be conducted: standing with the Secretary of the Treasury A. In close and continuous consultaabout the division of responsibility for foreign tion and cooperation with the United States currency operations between the System and Treasury; the Treasury; B. In cooperation, as appropriate, with B. To keep the Secretary of the Treasury foreign monetary authorities; and fully advised concerning System foreign cur- C. In a manner consistent with the rency operations, and to consult with the obligations of the United States in the Interna- Secretary on policy matters relating to foreign tional Monetary Fund regarding exchange currency operations; arrangements under the IMF Article IV. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

90 77th Annual Report, 1990 Meeting Held on quarter, although recent orders data February 6-7,1990 suggested some underlying support for manufacturing output over the near term. 1. Domestic Policy Directive Total industrial capacity utilization remained at a relatively high level in the The information reviewed at this meeting fourth quarter but was down somewhat suggested continued but sluggish expan- from its level a year earlier. sion in overall economic activity, with Adjusted for inflation, consumer conditions uneven across sectors. Indus- spending was little changed in the fourth trial activity remained weak, partly be- quarter. Strong gains in spending for cause of the depressing effects of an services offset declines in purchases of inventory correction on manufacturing consumer goods, especially new cars and output, while the service-producing sec- light trucks. Although some of the tor of the economy continued to grow strength in the services category reflected moderately. Aggregate price measures temporarily high energy-related expendihad increased more slowly over most of tures, spending for medical and transporthe second half of 1989, but unusually tation services apparently remained cold weather in December put temporary strong throughout the fourth quarter. upward pressure on food and energy Near the end of the year, consumers prices. The latest data on labor compen- responded positively to incentive prosation suggested no significant change in grams introduced by automakers to reprevailing trends. duce bloated inventories, and higher sales Total nonfarm payroll employment of domestically produced cars carried increased substantially in January after over to January. Residential construction growing at a reduced pace on average in in the fourth quarter was little changed previous months. Employment surged in from its third-quarter level, partly bethe service-producing sector, and unusu- cause December's unusually cold weather ally warm weather brought a rebound in depressed single-family housing starts in hiring in the construction industry. These that month. Multifamily starts remained increases more than offset a large decline at a low level as vacancy rates for such in factory jobs associated with sizable units moved still higher. short-term layoffs in the motor vehicle Business capital spending, adjusted for and related industries. The civilian unem- inflation, declined in the fourth quarter ployment rate remained at the 5.3 percent because of strike activity in the aircraft level that had prevailed over most of industry and sharply lower outlays for 1989. motor vehicles. Spending for equipment Partial data for January indicated that other than motor vehicles and aircraft industrial production fell sharply. Auto- rose; sizable increases were registered mobile producers cut back temporarily for computers and communications on assemblies to help reduce bulging equipment, and moderate gains were inventories of unsold vehicles, and the evident for a wide variety of heavy January thaw in the weather apparently machinery. A pickup toward the end of brought a reduction in the generation of 1989 in new orders for equipment other electricity that more than reversed a than aircraft, and the return to work of December surge. Abstracting from a striking aircraft workers, pointed to some number of transitory factors affecting improvement in equipment spending in production in recent months, industrial the current quarter. Nonresidential conactivity had changed little since the third struction activity apparently weakened a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 91 little in the fourth quarter, partly reflect- substantially further in January. Among ing the persisting high vacancy rates for nonfood, non-energy categories, disoffice and other commercial space. Man- counting of apparel and home furnishings ufacturers' inventories fell in December was more than offset by a sharp rise in after moderate increases in the two prices of new cars and by another month previous months; for the fourth quarter of sizable price increases for services. as a whole, increases in factory stocks At its meeting on December 18-19, were well below those for previous 1989, the Committee adopted a directive quarters in 1989. By contrast, nonauto that called for a slight easing in the degree retail stockbuilding accelerated late in of pressure on reserve positions but that the year, and there were reports that provided for giving equal weight to inventory-sales ratios at general mer- subsequent developments that might rechandisers were higher than desired. quire some easing or tightening during The nominal U.S. merchandise trade the intermeeting period. Accordingly, deficit rose slightly in November from a the Committee agreed that slightly greater revised October level. For the two months or slightly lesser reserve restraint would together, the deficit was up substantially be acceptable during the intermeeting from the averages for both the third period, depending on progress toward quarter and the first nine months of 1989. price stability, the strength of the business Total exports for the two-month period expansion, the behavior of the monetary were little changed from their third- aggregates, and developments in foreign quarter level as a reduction in exports of exchange and domestic financial markets. aircraft, resulting from strike activity, The contemplated reserve conditions offset moderate increases in a broad array were expected to be consistent with of other products. Total imports in- growth of M2 and M3 over the fourcreased rapidly in October-November, month period from November 1989 to with imports of capital goods being March 1990 at annual rates of about SV2 especially strong. Indicators of eco- percent and 5lA percent respectively.1 nomic activity in major foreign industrial countries were mixed during the fourth quarter of 1989. Growth continued strong 1. These growth rates and all subsequent data on in Japan, and most indicators pointed to the monetary aggregates reflect annual benchmarks and seasonal factors as published on February 8, renewed strength for Germany, Italy, 1990. and France. By contrast, growth was The monetary aggregates are defined as follows: sluggish in the United Kingdom and Ml comprises demand deposits at commercial Canada. banks and thrift institutions, currency in circulation, travelers checks of nonbank issuers, negotiable Producer prices for finished goods order of withdrawal (NOW) and automatic transfer jumped in December, largely reflecting service (ATS) accounts at banks and thrift instituhigher prices for energy products, most tions, and credit union share draft accounts. M2 notably for heating oil. Abstracting from contains Ml and savings and small-denomination food and energy items, producer prices time deposits (including money market deposit accounts (MMDAs) at all depository institutions, rose faster in December than in Novemovernight repurchase agreements (RPs) at commerber, but the rate of increase in the fourth cial banks, overnight Eurodollars held at foreign quarter as a whole remained at the branches of U. S. banks by U. S. residents other than reduced third-quarter pace. At the con- banks, and money market mutual fund shares other than those restricted to institutions). M3 is M2 plus sumer level, prices rose somewhat more large-denomination time deposits at all depository rapidly toward the end of 1989, and food institutions, large-denomination term RPs at comand energy prices apparently increased mercial banks and savings and loan associations, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

92 77th Annual Report, 1990 Immediately after the Committee meet- In foreign exchange markets, the tradeing, open market operations were di- weighted value of the dollar in terms of rected toward implementing the slight the other G-10 currencies declined fureasing in the degree of pressure on ther over the intermeeting period, as reserve positions called for by the Com- monetary conditions abroad tightened mittee. Reserve conditions then remained somewhat on average while those in the essentially unchanged over the rest of the United States eased slightly. The dollar's intermeeting period. Adjustment plus movements against individual currencies seasonal borrowing averaged a little more were mixed; most of its depreciation than $300 million for the intermeeting occurredagainsttheGermanmark, which period; the volume was boosted by continued to be buoyed by developments reserve shortfalls, borrowing by large in Eastern Europe, and against related banks over the long holiday weekends, European currencies. On net, the U.S. and, in the latter part of the interval, dollar remained relatively firm against borrowing by a sizable bank whose the yen and the Canadian dollar; the latter normal access to liquidity had been declined sharply as Canadian short-term impaired. The federal ftinds rate declined interest rates edged lower amid signs of from about Wi percent at the time of the slow growth in the Canadian economy December meeting to around 8 V4 percentand a consequent easing of inflation shortly thereafter; except for some firm- pressures. ing in the last week of 1989 owing to Growth of M2, measured on a benchreserve shortfalls and year-end pressures, marked and seasonally revised basis, the funds rate remained in the vicinity of remained relatively strong in the fourth that lower level. Other private short-term quarter of 1989; for the year, this aggremarket rates also declined over the gate expanded at a rate a little below the period, including a Vi percentage point middle of the Committee's annual range. drop in the prime rate to 10 percent, Partly as a result of further contraction in while Treasury bill rates increased the assets and associated funding needs somewhat. of thrift institutions, M3 grew more Yields on intermediate- and long-term slowly in the fourth quarter and, for the debt instruments rose considerably over year, expanded at a rate just below the the intermeeting period. Some stronger- lower bound of its annual range. In than-anticipated economic data and rising January, both of the broader aggregates food and energy prices were interpreted increased at slower rates. A sharp drop in in the financial markets as pointing away transactions deposits damped expansion from recession and as suggesting little if of M2, even though retail-type savings any moderation in underlying inflation deposits remained strong and money trends. Increases in interest rates abroad market funds evidently benefited from probably also had an influence on U.S. funds flowing out of weakening stock and interest rates. Stock prices approached bond markets. Growth of M3 in January new highs at the start of the year but have slowed by less than that of M2. fallen substantially since then. The staff projection prepared for this meeting suggested that the economy was likely to expand relatively slowly over the next several quarters. In the near institution-only money market mutual funds, and term, production adjustments to eliminate term Eurodollars held by U.S. residents in Canada excess inventories, most notably in the and the United Kingdom and at foreign branches of U.S. banks elsewhere. motor vehicles industry, were expected Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 93 to depress manufacturing activity and profit margins, heavy debt burdens, and overall growth; some pickup in the problems in certain sectors of the finanexpansion was anticipated after the inven- cial markets that were contributing to tory correction was completed, but final greater caution on the part of lenders and sales were projected to continue growing a reduced availability of credit to some at a relatively sluggish pace. Homebuild- borrowers. With regard to the outlook ing might rebound somewhat in the near for inflation, members remained generterm after being disrupted by December's ally optimistic that moderating pressures cold weather, but prevailing interest rates on labor and other resources would lead and possible cutbacks in construction in time to a lower rate of inflation. Howlending by thrift institutions likely would ever, most members saw little prospect restrain residential construction activity that significant progress, if any, would be throughout the year. The projection made in reducing the underlying rate of assumed that fiscal policy would be inflation in the quarters immediately moderately restrictive and that net ex- ahead. Indeed, in part because of tempoports would make little contribution to rary pressures in the food and energy growth of domestic production in 1990. sectors, key measures of inflation might The expansion of consumer demand well register larger increases in the near would be damped by slow gains in term before turning down later. employment and associated limited In keeping with the usual practice at growth in real disposable incomes. With meetings when the Committee establishes pressures on labor and other production its longer-run ranges for growth of the resources expected to ease only gradu- monetary and debt aggregates, the memally, little improvement was anticipated bers of the Committee and the Federal in the underlying trend of inflation over Reserve Bank presidents not currently the next several quarters. serving as members had prepared projec- In their discussion of the economic tions of economic activity, the rate of situation and outlook, the Committee unemployment, and inflation for the year members generally agreed that continu- 1990. In making these forecasts, the ing growth in economic activity remained members took account of the Committee's a reasonable expectation for the year policy of continuing restraint on demand ahead. Several observed that, on the to resist any increase in inflation preswhole, recent indicators of business sures and to foster price stability over conditions provided some assurance that time. For the period from the fourth the expansion was no longer weakening quarter of 1989 to the fourth quarter of and indeed that a modest acceleration 1990, the forecasts for growth of real might be under way from the consider- GNP had a central tendency of 1% to ably reduced growth experienced in the 2 percent, a pace close to that experienced fourth quarter. The members acknowl- in 1989 excluding the direct effects of the edged that there were considerable risks, rebound in farm output after the drought stemming mainly from the financial side, in 1988. Estimates of the civilian rate of of a weaker-than-projected expansion, unemployment in the fourth quarter of and some did not rule out the possibility 1990 were concentrated in a range ofSVi of a downturn. In the latter connection, to 534 percent. The associated pressures several commented that they had ob- on prices resulted in projected increases served a sense of unease and fragility in in the consumer price index centered on the business and financial communities rates of 4 to 4Vi percent for the year, arising from such factors as declining compared with a rise of 4V2 percent in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

94 77th Annual Report, 1990 1989. Forecasts for growth of nominal more generally that depressed profits and GNP had a central tendency of 5^2 to cash flows could limit gains in business 6V2 percent. The forecasts assumed that investment. Concerning the outlook for changes in the foreign exchange value of residential construction, conditions in the dollar would not be of sufficient local housing markets varied markedly magnitude to have a significant effect on and the prospects for the nation were the economy or prices during 1990. difficult to assess. Negative developments In the Committee's discussion of devel- included higher mortgage interest rates, opments bearing on the economic out- a reduced availability of financing for look, the members emphasized that de- many developers, and the overhang of spite indications of continuing growth in large inventories of housing units held by overall business activity, there were the Resolution Trust Corporation (RTC). obvious areas of weakness in the econ- Nonetheless, housing demand was holdomy, notably in manufacturing across ing up in many areas and booming in a much of the nation and in construction in few, and on balance most members many localities. Business sentiment ap- expected little change this year in overall peared to have deteriorated in some areas, expenditures for residential construction. perhaps more than was justified by actual A number commented that the prospects developments. While local business con- for exports were relatively bright; forditions were clearly uneven, business eign demand was reported to be robust activity was generally characterized as for many types of goods, and overall growing on an overall basis in the various exports would be given some impetus regions, including recent evidence of a over time by the depreciation of the dollar modest pickup in some previously de- over the past several months. pressed parts of the country. Turning to the outlook for inflation, With regard to individual sectors of members noted that broad measures of the economy, the outlook for retail sales labor compensation did not suggest any was clouded to some extent by the lessening of pressures. Unit labor costs uncertain prospects for motor vehicles appeared to be rising at a faster pace and the financial problems being experi- recently than the underlying rate of enced by some major retailers; nonethe- inflation, squeezing profit margins. Comless, in the context of expected further modity prices displayed mixed changes gains in disposable incomes, many mem- but generally remained on a high plateau. bers expected overall consumer spending Business contacts and broader surveys to be relatively well maintained. Business indicated a widespread expectation that inventories probably were falling in the the current rate of inflation would concurrent quarter, largely reflecting sharp tinue. Moreover, with higher social declines in stocks of motor vehicles, but security taxes and a rising minimum wage once the correction in that industry was adding to labor costs and earlier increases completed, some renewed increases in in producer food and energy costs not yet overall inventory investment were antic- fully transmitted to retail prices, some ipated in line with expanding sales. measures of inflation were expected to Current indicators suggested that busi- show sharper increases over the near ness fixed investment might be reason- term. On the other hand, reports from a ably well maintained, but it also was number of business contacts indicated noted that overbuilding of commercial that input prices, especially for raw real estate in many areas would restrain materials, had stabilized or declined in overall nonresidential construction and recent months. More generally, a number Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 95 of members commented that continued end of the tentative range on the basis of limited growth in business activity at a the central tendency of the members' time of uncertainties and concerns asso- forecasts of nominal GNP. ciated with various financial problems Given this outlook, an unchanged and declining real estate values in many range for M2 still left considerable areas should contribute to some restraint leeway for the Committee to embark on a in overall inflationary behavior. more aggressive policy to restrain infla- Against the background of the mem- tion, should developments during the bers' views on the economic outlook and year suggest an intensification of inflain keeping with the requirements of the tionary pressures or provide an opportu- Full Employment and Balanced Growth nity to tilt the implementation of policy Act of 1978 (the Humphrey-Hawkins toward greater restraint and faster Act), the Committee reviewed the ranges progress against inflation without impairthat it had established on a tentative basis ing the forward momentum of the econin July 1989 for growth of the monetary omy. Thus, although the Committee and debt aggregates in 1990. The tenta- recognized that over time lower ranges tive ranges, which were unchanged from and slower M2 growth would be compatthose for 1989, included expansion of 3 ible with price stability, retention of the to 7 percent for M2 and 3 Vi to 7 lh percent current range did not signal a diminished for M3, measured from the fourth quarter determination to move toward the objecof 1989 to the fourth quarter of 1990. The tive of price stability. monitoring range for growth of total Preferences for slightly higher or domestic nonfinancial debt had been set somewhat lower ranges for M2 also were at 6^2 to 10V2 percent, also unchanged expressed. The arguments in favor of a from 1989. higher range focused on the risks of a With regard to M2, on which much of weaker economy than was anticipated the discussion was focused, a majority currently and the related desirability of of the members concluded that retention more maneuvering room for an easing of of the tentative range of 3 to 7 percent short-run policy if such were needed to would best assure the flexibility that help avert a cumulative deterioration in the Committee was likely to need to economic activity. In those circumimplement its policy objectives during stances, faster monetary growth would the year. A staff analysis prepared for not be inconsistent with the Committee's this meeting indicated that, were interest long-term commitment to price stability. rates to remain near recent levels, a Other members believed that a somewhat somewhat higher rate of M2 growth reduced range would allow adequate than had occurred in any of the past growth in M2 to sustain moderate expanthree years was likely to be consistent sion in economic activity and would with some reduction in the expansion of provide a desirable signal of the System's nominal GNP. According to this commitment to an anti-inflationary polanalysis, the lagged effects of earlier icy. In this connection, the credibility of declines in market interest rates would the System's anti-inflationary policy was continue to boost M2 growth in the first seen as an important channel for reducing part of 1990, and the velocity of M2 was inflationary expectations directly and likely to fall for the year as a whole. To thereby lessening the economic costs and the extent that the projected weakness in time needed to achieve price stability. M2 velocity turned out to be correct, it These members expressed concern that implied M2 growth toward the upper growth around the upper end of a 3 to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

96 77th Annual Report, 1990 7 percent range might well preclude any borrowers and high debt servicing progress in reducing inflation this year obligations. and might make it more difficult to A few members indicated a preference achieve such progress later. For some of for retaining the somewhat higher ranges these members, however, a 3 to 7 percent for M3 and debt that had been adopted on range would be acceptable if its upper a tentative basis for this year. In their limit was viewed as a firm constraint view, lowering those ranges would tend on actual growth and if a clear explanation to send potentially confusing signals, was made of the Committee's commit- raising questions as to why the M2 range ment to achieve price stability over was not reduced also. Also, disparate time. adjustments in the ranges for the various Turning to the ranges for M3 and debt, aggregates could foster an unwarranted most of the members indicated that they impression of the precision with which favored or could accept reductions from the Committee felt it could evaluate the the tentative ranges that had been adopted ranges. in July 1989 for this year. Some reduction The members generally agreed that in the range for M3 was thought to be setting 1990 target ranges for M2 and consistent with an unchanged range for particularly for M3 was rendered more M2 for technical reasons associated with difficult by uncertainty about developthe restructuring of the thrift industry and ments affecting thrift institutions, esperelated shrinkage in thrift institution cially given the relatively limited basis in balance sheets. Declines in thrift institu- past experience for gauging the likely tion assets and associated funding needs, impact of such developments. The estabincluding liabilities in M3, now seemed lishment of an appropriate range for the likely to be larger in 1990 than had been growth of nonfinancial debt also was anticipated last summer, reflecting con- complicated by uncertainty about the tinued efforts of solvent institutions to extent to which Treasury borrowing meet capital standards as well as the would be used to carry the assets of failed closing of insolvent institutions. Beyond thrift institutions as opposed to funding that, while a reduction in the M3 range, from financial-sector sources through the especially if it was limited, might have RTC. With these questions adding to the little implication for policy, many mem- usual uncertainty about the relationship bers believed that the Committee should of movements in the aggregates to broad take advantage of every opportunity to measures of economic performance, the reduce its ranges toward levels that were Committee decided to retain the 4 perconsistent with price stability. With centage point width of the ranges. It also regard to the monitoring range for total agreed that the implementation of policy domestic nonfinancial debt, the members should continue to take into account, in expected the expansion of such debt to addition to monetary growth and its moderate for a fourth year in 1990, in velocity, indications of inflationary preslarge measure because of anticipated sures in the economy, the strength of reductions in debt creation associated business activity, and developments in with corporate merger and acquisition domestic and international financial activities but also because of some prob- markets. able ebbing in the growth of household At the conclusion of the Committee's debt. The prospect of slower growth of discussion, a majority of the members debt was welcome, given concerns about indicated that they favored or could strains associated with highly leveraged accept the M2 range for 1990 that had Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 97 been established on a tentative basis in Ms. Seger dissented because she be- July 1989 and reductions of one percent- lieved that the M2 range should be raised age point and Wi percentage points to at least 3 Vi to 7 Vi percent. In her view, respectively in the tentative ranges for the considerable downside risks to the M3 and nonfinancial debt. Accordingly, expansion called for some added room to the Committee approved the following accommodate the possible need for a paragraph relating to its 1990 ranges for more stimulative policy and somewhat inclusion in the domestic policy directive: faster M2 growth than was contemplated by an unchanged range. In particular, a The Federal Open Market Committee seeks shortfall in aggregate demands during monetary and financial conditions that will the first half of the year might well require foster price stability, promote growth in output on a sustainable basis, and contribute some easing of policy aimed at countering to an improved pattern of international trans- developing weakness in the economy. In actions. In furtherance of these objectives, such circumstances, M2 growth somethe Committee at this meeting established what above 7 percent would not be ranges for growth of M2 and M3 of 3 to inconsistent with the Committee's anti- 7 percent and 2Vi to 6*/2 percent respectively, inflation objective. She could accept measured from the fourth quarter of 1989 to the fourth quarter of 1990. The monitoring unchanged ranges for growth of M3 and range for growth of total domestic nonfinan- nonfinancial debt, given the outlook for cial debt was set at 5 to 9 percent for the year. somewhat slower expansion of both The behavior of the monetary aggregates will aggregates in relation to M2 than the continue to be evaluated in the light of progess Committee had anticipated in July 1989. toward price stability, movements in their velocities, and developments in the economy Turning to policy implementation for and financial markets. the intermeeting period ahead, a majority of the members favored steady reserve Votes for this action: Messrs. Greenspan, Corrigan, Angell, Boehne, Boykin, conditions. Given indications of some Johnson, Kelley, andLaWare. Votes against pickup in activity from the latter part of this action: Mr. Hoskins, Ms. Seger, and 1989, such a policy offered the best Mr. Stern. prospects at this point of reconciling the Committee's objective of acceptable and Messrs. Hoskins and Stern dissented sustained economic growth with that of because they wanted a lower range for some reduction over time in inflationary M2. They were concerned that growth pressures on labor and other resources. around the upper end of a 3 to 7 percent range would not be compatible with A tightening of policy might have some progress in reducing the rate of inflation advantages in terms of moderating monthis year. An upper limit of 6 percent etary growth and improving inflationary would be preferable and would provide expectations, but in this view such a adequate room in their view for policy to policy would incur too much risk of foster sustained economic expansion. creating financial conditions that could Mr. Hoskins also stressed the desirability lead to a weaker economy. Conversely, of a predictable and credible monetary significantly lower interest rates could policy, which he believed should include have inflationary consequences in an persistent reductions in the ranges to economy that already was operating at levels that would be consistent with stable relatively high employment levels, partly prices. The favorable effects of such a through their effects on the dollar in the policy on inflationary expectations would foreign exchange markets. Conditions in tend to lessen the costs and also accelerate the economy and in financial markets, the achievement of price stability. both in the United States and abroad, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

98 77th Annual Report, 1990 suggested that monetary policy needed to adjustment plus seasonal borrowing convey a sense of stability. would be associated with a given degree Other members acknowledged that of reserve restraint and a given federal adjustments in monetary policy needed funds rate. It was understood that some to be made with a special degree of increase in the borrowing assumption caution in current circumstances, but on would be made at the start of the interbalance they assessed the risks and the meeting period and that further adjustrelated advantages and disadvantages of ments might be made later during the a change in policy somewhat differently. period, subject to the Chairman's review. In one view, the risks of a recession In keeping with the usual practice, perargued for a prompt adjustment toward sisting borrowings by troubled deposisomewhat less monetary restraint, espe- tory institutions that had not been classicially given the need to bolster relatively fied as extended credit would be treated interest-sensitive sectors of the economy as nonborrowed reserves in setting target such as housing and motor vehicles. A growth paths for reserves. More generdiffering view focused on the desirability ally, in light of the uncertainties that were of a somewhat tighter policy at this involved, the Manager would continue to juncture, particularly in light of the exercise flexibility in his approach to the outlook for relatively little progress borrowing assumption. against inflation as the business expansion At the conclusion of the Committee's tended to strengthen. One member gave discussion, a majority of the members special emphasis to the desirability of indicated that they favored or could limiting M2 growth to a path closer to the accept a directive that called for an middle of the Committee's range for 1990 unchanged degree of pressure on reserve to help assure that progress would be positions. Some firming or some easing made this year in moderating inflationary of reserve conditions would be acceptable pressures. during the intermeeting period depending In the Committee's consideration of on progress toward price stability, the possible adjustments to the degree of strength of the business expansion, the reserve pressure during the intermeeting behavior of the monetary aggregates, period, a majority of the members sup- and developments in foreign exchange ported a directive that did not contain any and domestic financial markets. The bias toward tightening or easing. They reserve conditions contemplated by the felt that a symmetric instruction was Committee were expected to be consisconsistent at this point with their general tent with growth of M2 and M3 at annual preference for a stable policy and that an rates of around 7 and 3 Vi percent respecintermeeting adjustment should be made tively over the three-month period from only in the event of particularly conclu- December to March. The members sive economic or financial evidence, agreed that the intermeeting range for the including a substantial deviation in mon- federal funds rate, which provides one etary growth from current expectations. mechanism for initiating consultation of One member who preferred a slightly the Committee when its boundaries are tighter policy indicated that an unchanged persistently exceeded, should be left policy that was biased toward restraint unchanged at 6 to 10 percent. would be acceptable. At the conclusion of the Committee's Members noted that seasonal borrow- meeting, the following domestic policy ing was likely to turn up from its January directive was issued to the Federal Relows so that some increase in the total of serve Bank of New York: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 99 The information reviewed at this meeting tee's annual range, and M3 grew at a rate suggests that economic activity is continuing slightly below the lower bound of its annual to expand despite weakness in the industrial range. sector. Total nonfarm payroll employment The Federal Open Market Committee seeks increased substantially in January after grow- monetary and financial conditions that will ing at a reduced pace on average in previous foster price stability, promote growth in months; a surge in the service-producing output on a sustainable basis, and contribute sector and a weather-related rebound in to an improved pattern of international transconstruction were only partly offset by a large actions. In furtherance of these objectives, decline in the manufacturing sector. The the Committee at this meeting established civilian unemployment rate was unchanged at ranges for growth of M2 and M3 of 3 to 5.3 percent. Partial data suggest that industrial 7 percent and 2XA to 6V2 percent respectively, production in January was appreciably below measured from the fourth quarter of 1989 to its average in the fourth quarter. Adjusted for the fourth quarter of 1990. The monitoring inflation, strong gains in consumer spending range for growth of total domestic nonfinanon services in the fourth quarter offset declines cial debt was set at 5 to 9 percent for the year. in consumer purchases of goods, especially The behavior of the monetary aggregates will motor vehicles. Unusually cold weather continue to be evaluated in the light of depressed housing starts appreciably in De- progress toward price level stability, movecember, and residential construction in the ments in their velocities, and developments in fourth quarter was little changed from its the economy andf inancial markets. third-quarter level. Business capital spending, In the implementation of policy for the adjusted for inflation, declined in the fourth immediate future, the Committee seeks to quarter as a result of lower expenditures on maintain the existing degree of pressure on motor vehicles and strike activity in the reserve positions. Taking account of progress aircraft industry; spending on other types of toward price stability, the strength of the capital goods was strong, however, and new business expansion, the behavior of the orders for equipment picked up toward the monetary aggregates, and developments in end of the year. The nominal U.S. merchanforeign exchange and domestic financial dise trade deficit widened in October-Novemmarkets, slightly greater reserve restraint or ber from the third-quarter rate. Consumer slightly lesser reserve restraint would be prices had risen somewhat more rapidly acceptable in the intermeeting period. The toward the end of 1989, and prices of food and contemplated reserve conditions are expected energy apparently increased substantially to be consistent with growth of M2 and M3 further in January. The latest data on labor over the period from December through compensation suggest no significant change March at annual rates of about 7 and 3 Vi perin prevailing trends. cent respectively. The Chairman may call for Interest rates have risen in intermediate- Committee consultation if it appears to the and long-term debt markets since the Commit- Manager for Domestic Operations that retee meeting on December 18-19; in short- serve conditions during the period before the term markets, the federal funds rate has next meeting are likely to be associated with a declined, and other short-term rates show federal funds rate persistently outside a range mixed changes over the period. In foreign of 6 to 10 percent. exchange markets, the trade-weighted value of the dollar in terms of the other G-10 Votes for the paragraph on short-term currencies declined further over the intermeet- policy implementation: Messrs. Greenspan, ing period; most of the depreciation was Corrigan, Angell, Boehne, Johnson, against the German mark and related Euro- Kelley, LaWare, and Stern. Votes against pean currencies, and there was little change this action: Messrs. Boykin and Hoskins against the yen. and Ms. Seger. Growth of M2 slowed in January, almost entirely reflecting a drop in transaction de- While taking account of the various posits. Growth of M3 also slowed in January elements of weakness and fragility in the as assets of thrift institutions and their associeconomy, Mr. Boykin dissented because ated funding needs apparently continued to contract. For the year 1989, M2 expanded at a he preferred a policy directive tilted rate a little below the middle of the Commit- toward increased reserve pressures Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

100 77th Annual Report, 1990 should economic and financial conditions rency directive, and the procedural inwarrant. This view was based on his structions with respect to foreign curconcerns regarding the lagged effects of rency operations in the forms in which policy actions and the risks of delaying they were currently outstanding. decisions until there was full confirmation of inflationary pressures. In this Votes for this action: Messrs. Greenspan, context, Mr. Boykin expressed his pref- Corrigan, Angell, Boehne, Boykin, erence for dealing promptly with inflation Hoskins, Johnson, Kelley, LaWare, Ms. if the Committee wished to make progress Seger and Mr. Stern. Votes against this toward its long-stated goal of lowering action: None. the rate of inflation. Mr. Hoskins dissented because he 3. Authorization for Domestic preferred some firmingo f reserve condi- Open Market Operations tions. He recognized that there was some financial fragility in the economy, but he On the recommendation of the Manager believed that underlying inflation pres- for Domestic Operations, the Committee sures were relatively strong and that the amended paragraph 1 (a) of the authorizabalance of risks pointed to a need for tion for domestic open market operations greater monetary restraint to curb such to raise from $6 billion to $8 billion the inflation. He emphasized the desirability limit on intermeeting changes in System of tightening monetary policy gradually account holdings of U.S. government to reduce monetary growth to a pace and federal agency securities. The incloser to the midpoint of the Committee's crease was the first permanent change in range for the year. the limit since March 1985 when it was Ms. Seger's dissent reflected a prefer- raised from $4 billion to $6 billion. The ence for some easing of reserve condi- Manager indicated that temporary intions at this point. In her view, even a creases had been authorized more frelimited decline in interest rates would quently in recent years and that the provide timely assistance to relatively existing limit also was approached more weak, interest-sensitive sectors of the often during intermeeting intervals when economy such as housing and motor no temporary increase was requested. A vehicles and would tend to sustain the permanent increase to $8 billion would expansion itself without adding to infla- reduce the number of occasions requiring tion risks in the economy. special Committee action, while still calling needs for particularly large changes to the Committee's attention. 2. Review of Continuing The Committee concurred in the Manag- Authorizations er's view that a $2 billion increase would The Committee followed its customary be appropriate. practice of reviewing all of its continuing Accordingly, effective February 6, authorizations and directives at this first 1990, paragraph l(a) of the authorization regular meeting of the Federal Open for domestic open market operations was Market Committee following the election amended to read as follows: of new members from the Federal Reserve Banks to serve for the year begin- 1. The Federal Open Market Committee ning January 1, 1990. The Committee authorizes and directs the Federal Reserve reaffirmed the authorization for foreign Bank of New York, to the extent necessary currency operations, the foreign cur- to carry out the most recent domestic policy Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 101 directive adopted at a meeting of the indicated previously, and robust employ- Committee: ment growth in January and February (a) To buy or sell U.S. Government suggested that output, especially in the securities, including securities of the Federal service-producing sector, was being well Financing Bank, and securities that are direct maintained. Despite a rebound in the obligations of, or fully guaranteed as to motor vehicles industry, manufacturing principal and interest by, any agency of the activity remained sluggish. Consumer United States in the open market, from or to securities dealers and foreign and interna- prices rose more rapidly over January tional accounts maintained at the Federal and February, only partly as a result of Reserve Bank of New York, on a cash, increases in the prices of food and energy regular, or deferred delivery basis, for the items; wage data pointed to no significant System Open Market Account at market change in prevailing trends. prices, and, for such Account, to exchange maturing U.S. Government and Federal Total nonfarm payroll employment agency securities with the Treasury or the increased sharply in the first two months individual agencies or to allow them to mature of the year after growing at a reduced without replacement; provided that the aggrepace on average in previous months. gate amount of U.S. Government and Federal Employment in construction jumped, agency securities held in such Account (including forward commitments) at the close of apparently as a result of unusually good business on the day of a meeting of the weather, and job gains in the services Committee at which action is taken with industries continued strong, notably in respect to a domestic policy directive shall not health services. In the manufacturing be increased or decreased by more than $8.0 sector, employment was down on balance billion during the period commencing with the opening of business on the day following over the January-February period despite such meeting and ending with the close of the return to work in February of auto business on the day of the next such meeting; workers laid off at the start of the year; job losses were evident in a number of Votes for this action: Messrs. Greenspan, industries, including electrical equip- Corrigan, Angell, Boehne, Boykin, ment, machinery, and lumber. The civil- Hoskins, Johnson, Kelley, and La Ware, ian unemployment rate remained at Ms. Seger, and Mr. Stern. Votes against this action: None. 5.3 percent in both January and February. In February, industrial production retraced more than half of a sharp January Meeting Held on decline, reflecting a swing in the produc- March 27,1990 tion of motor vehicles. Abstracting from a variety of transitory influences associ- 1. Domestic Policy Directive ated with unusual winter weather, a strike The information reviewed at this meeting in the aircraft industry late last year, and suggested some pickup in the expansion an inventory correction in the motor of economic activity from the upward- vehicles sector, industrial production had revised but still sluggish pace now indi- been flat on balance since last autumn. In cated for the fourth quarter. Although the February, total industrial capacity utilistrengthening reflected, at least in part, zation partially recovered from a substanfavorable weather and a rebound from tial January decline but remained below strike-related disturbances late in 1989, the high level of a year earlier. underlying demands appeared to be con- Real personal consumption expenditinuing to expand at a moderate pace. tures, abstracting from swings in spend- Revised data signaled more momentum ing for motor vehicles and energy-related in final sales near year-end than had been items, were about flat in January after Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

102 77th Annual Report, 1990 expanding at a relatively slow pace in the for declines in inventories in December two previous months. Outlays for goods and January. other than fuel oil and motor vehicles had The nominal U.S. merchandise trade been weak while expenditures for ser- deficit widened in January from a sharply vices had remained strong. Total retail lower December rate, as the value of sales rose on balance in January and imports rose more than that of exports. February, but adjusted for recent in- Nevertheless, the deficit remained essencreases in prices, sales in February tially unchanged from the fourth-quarter probably were little changed from the average. Much of the sharp increase in fourth-quarter average. Unusually mild the value of imports in January reflected a weather contributed to a higher level of jump in imports of oil; however, imports housing starts in January and February. of consumer goods, foods, and industrial Single-family construction was strong in supplies also rose strongly. Exports both months; in the multifamily sector, increased substantially in January to a starts fell sharply in February but aver- level well above their fourth-quarter aged somewhat above the fourth-quarter average. Indicators of economic activity pace over the two months. in the major foreign industrial countries Business capital spending, adjusted for generally suggested strength in the contiinflation, appeared to have turned up nental European economies, notably after a decline in the fourth quarter. France, Germany, and Italy. Among Shipments of nondefense capital goods other industrial countries, growth had rose sharply in February following a slowed in Japan and had remained slugsizable advance in January associated gish in the United Kingdom and Canada. with a rebound in shipments of aircraft to Producer prices for finished goods domestic firms after the strike late in the were unchanged in February, as energy fourth quarter. The February increase prices partially retraced their sharp rise reflected greater purchases of communi- in January and food prices rose more cations equipment and many types of slowly. At the consumer level, prices industrial machinery, as well as a further rose less rapidly in February than in rise in shipments of aircraft. New orders January, but the increases in both months for nondefense capital goods, excluding were substantial and the pickup from aircraft, rose in February and were 1989 was only partly the result of inconsiderably above their fourth-quarter creases in prices of food and energy level. Nonresidential construction activ- items. Among other goods and services, ity rebounded in January from a substan- several components posted sizable intial December decline, as the weather creases. Average hourly earnings fluctuturned unseasonably warm; however, ated considerably in January and Februdata on construction contracts and build- ary, owing to shifts in employment status ing permits continued to suggest a soft among manufacturing and construction outlook for coming months. Manufactur- workers, but the year-over-year increase ers' inventories rose in January, largely remained in the range evident since late because of increases in stocks of work-in- 1988. process in the transportation equipment At its meeting on February 6-7,1990, sector. Outside of transportation equip- the Committee had adopted a directive ment, the inventory-to-shipments ratio that called for maintaining the existing had changed little on balance since mid- degree of pressure on reserve positions 1988. At the retail level, reductions in and that provided for giving equal weight auto dealers' stocks more than accounted to developments that might require an Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 103 adjustment in either direction during the the other G-10 currencies rose over the intermeeting period. The Committee had intermeeting period. The dollar's appreagreed that some firming or some easing ciation occurred at a time when shortin reserve conditions would be equally and long-term interest rates abroad were acceptable during the intermeeting increasing relative to interest rates in the period, depending on progress toward United States. Much of the rise of the price stability, the strength of the business dollar was against the yen and the pound expansion, the behavior of the monetary sterling, but the dollar also gained relative aggregates, and developments in foreign to the mark. The strength of the dollar exchange and domestic financial markets. apparently owed in part to perceptions The contemplated reserve conditions that the U. S. economy might be strengthwere expected to be consistent with ening and to market concerns regarding growth of M2 and M3 over the period various political and financial difficulties from December through March at an- in key foreign countries. nual rates of about 7 and 2>Vi percent Growth of M2 rose in February from a respectively. reduced January pace, reflecting strength Reserve conditions had remained es- in transaction and other liquid accounts; sentially unchanged over the period since partial data suggested some moderation the February meeting. Excluding some in March. On balance, the expansion of special-situation borrowing early in the M2 had been damped somewhat in early intermeeting period that was related to 1990 by the rise in opportunity costs of liquidity pressures at one sizable bank, holding M2 instruments, as offering rates adjustment plus seasonal borrowing had on retail deposits, especially at shorter averaged about $160 million in the three maturities, had not been adjusted upward full reserve maintenance periods since in line with the rise in market rates. the meeting. The federal funds rate held Growth of M3 also picked up in February steady at about 814 percent over the but remained below that of M2. The period, but other short- and intermediate- expansion of this aggregate continued to term interest rates edged higher, appar- be curbed by the apparent ongoing conently reflecting the interpretation by traction in the assets and associated financial markets of incoming economic funding needs of thrift institutions. data as pointing, on balance, to some The staff projection prepared for this firming of economic activity and to meeting suggested that the economy was persisting price pressures. Treasury bond likely to expand at a somewhat faster yields fluctuated over a fairly wide range, pace over the next several quarters than falling slightly on balance over the pe- in the fourth quarter of 1989. Consumer riod, while major indexes of stock prices demand was expected to pick up substanrose somewhat. The collapse of a major tially from the fourth-quarter pace but to securities firm had little effect on grow at a more moderate rate later. investment-grade financial markets, but Business capital spending was likely to the failure, along with potential sales of increase, though the rise could be limited low-rated bonds by some large institu- by further downward pressure on profit tional holders, contributed to a further margins associated with relatively slugwidening of the yield spread between gish growth of final demands. Greater noninvestment-grade instruments and caution on the part of lenders might tend other long-term securities. to restrain spending, especially for com- In foreign exchange markets, the trade- mercial real estate, and some of the recent weighted value of the dollar in terms of weather-related boost to nonresidential Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

104 77th Annual Report, 1990 construction activity and homebuilding economy seemed to be on a course that was expected to be reversed in coming should prove consistent with reduced months. Net exports were projected to inflationary pressures over time, given make little contribution to growth of appropriate fiscal and monetary policies, domestic production over the rest of the recent developments suggested that little year. The projection assumed moderate or no progress toward lower inflation restraint on expenditures at all levels of was likely to be made during the quarters government. On balance, the need to immediately ahead. contain inflation might involve some Members reported that business condiadditional pressures in financial markets. tions remained uneven in different sectors Price pressures were expected to ease of the economy and in different parts of only gradually, and little improvement the country, depending on the mix of was anticipated in the underlying trend of local industries, but overall activity inflation over the projection horizon. appeared to be growing at least modestly In the Committee's discussion of the in most if not all regions. Further expaneconomic situation and outlook, mem- sion for the nation as a whole was likely bers observed that the latest information, to be sustained mainly by consumer including recent revisions to data released expenditures, though growth in the latter earlier, suggested a somewhat stronger might well moderate somewhat over the economic performance than had been quarters ahead in conjunction with reapparent at the time of the February duced gains in disposable incomes. In meeting. The employment statistics for addition, the agricultural and energy January and February exhibited particu- sectors of the economy, which appeared lar strength, but members cautioned that to have strengthened in some regions, the latter had to be weighed against could provide important support to the indications of relatively restrained growth overall expansion in business activity. in overall spending. Several commented Foreign trade was characterized by some that it was more difficult than usual to members as the area of greatest uncerdiscern underlying economic trends be- tainty in the business outlook. Foreign cause of the temporary effects of unusual demand was helping to maintain producweather conditions and other special tion in a number of industries that were factors in recent months. Developments experiencing reduced domestic demand, on the financial side, including the possi- and some improvement in the overall bility of reduced credit availability, trade balance was anticipated in response constituted a risk to the continuing expan- to the earlier depreciation of the dollar sion. On balance, however, the members and to stronger economic growth in a viewed sustained growth in business number of foreign countries. Business activity as a reasonable expectation for fixed investment could continue to be the next several quarters. With regard to inhibited by weak profit margins and an the outlook for inflation, they recognized excess of commercial space in many parts that much of the recent surge in key of the country, though members reported measures of inflation could be attributed that substantial commercial building to transitory, weather-related factors that activity remained under way in several had resulted in sharp increases in the regions. Residential construction had prices of food and energy, but they also been relatively vigorous in recent months, expressed a great deal of concern about reflecting exceptionally favorable the apparent lack of improvement in weather conditions in many parts of the underlying inflation trends. While the country; however, current mortgage rates Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 105 together with financing difficulties being Turning to the outlook for prices and experienced by some builders and de- wages, members commented that, while pressed housing markets in many areas increases in key measures of inflation were seen as pointing to weaker housing were likely to moderate after their recent activity over the quarters ahead. With spurt, the prospects for inflation remained regard to the government sector, growth the most disturbing aspect of the ecoin federal spending for goods and ser- nomic outlook. Apart from what apvices was projected to be relatively peared to be transitory hikes in food and restrained; in addition, many state and energy costs in late 1989 and early 1990, local governments were experiencing a number of other prices had increased budgetary problems that were likely to somewhat more rapidly than earlier, and lead them to curb spending or to raise that development tended to underscore taxes. the deeply embedded nature of the current Financial developments introduced a inflation problem. Despite relatively tight degree of uncertainty into the current conditions in labor markets, the trend in economic situation; on the whole, they labor compensation costs did not appear were likely to exert some restraining to be worsening, but some members influence on overall economic activity, expressed concern that wage pressures though it was difficult to judge their might increase if inflation did not recede quantitative significance. Interest rates from its recent pace. On the other hand, had increased noticeably since year-end; the intensity of competition in many this rise probably reflected growing markets made it difficult or impossible concerns about inflation in conjunction for affected businesses to pass on cost with a stronger near-term outlook for the increases in the form of higher prices, economy, but higher interest rates likely and the addition of new plant capacity would damp demand, especially in con- would heighten competition in a number struction and other interest-sensitive of industries. On balance, little or no sectors. In addition, members had heard progress in reducing inflation appeared numerous reports of reduced availability to be in prospect for the quarters immeof credit to smaller businesses, notably diately ahead, but if recent developments home builders. Credit terms also were did not lead to a worsening of inflationary reported to have been tightened by some expectations, a decline in cost pressures lenders on new auto loans and home and the underlying rate of inflation still equity loans. However, outside of lending appeared likely for the longer run in the for corporate restructuring purposes and context of sustained, moderate growth in certain real estate transactions, it was economic activity. difficult to find firm indications of greater In the Committee's discussion of policy credit rationing in aggregate financial for the intermeeting period ahead, most statistics. Some tightening of credit stanof the members indicated a preference dards probably was a desirable developfor maintaining an unchanged degree of ment in terms of correcting for past pressure on reserve positions. While excesses and adjusting to a more moderrecent economic information could be ate pace of business activity, but a number interpreted as pointing to a reduced risk of members expressed concern that sigof a recession and to greater or at least nificant further restraint on credit availmore deeply embedded inflationary presability, should it occur, could have adsures than were foreseen earlier, these verse consequences for the overall members concluded that it would be economy. premature to tighten reserve conditions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

106 77th Annual Report, 1990 on the basis of a few months of data, in conjunction with large seasonal tax particularly in light of the special factors payments. Additional uncertainty related at work that made it difficult to assess to the possibility of a major increase underlying trends. Some of these mem- in expenditures by the Resolution Trust bers also noted that various develop- Corporation, associated with resolving ments, including the rise in most interest the affairs of intervened thrift institutions, rates since the beginning of the year, the that would tend to depress monetary more recent strength of the dollar in growth, especially M3, by substituting in foreign exchange markets, indications of effect Treasury financing for monetary some slowing in monetary growth, and liabilities. Apart from such special facthe apparent tightening of credit stan- tors, monetary growth could be expected dards could be viewed as having the same to moderate somewhat in lagged response effects on the economy as a modest to the earlier updrift in interest rates and firming of reserve conditions. Because a less rapid expansion of nominal GNP. A firming of policy would be unexpected, it number of members commented that M2 could prove unsettling in the foreign growth at a rate somewhat below the pace exchange markets and in financial mar- that had prevailed on average since midkets more generally. On balance, in light 1989 and more comfortably within the of the uncertainties that were involved, Committee's range for the year would be these members preferred to maintain a a welcome development; such growth steady policy course for now, subject to a would enhance the prospects of reconcilcarefiil evaluation during the intermeet- ing the objectives of sustained economic ing period of developments that might expansion with the need for progress in signal some intensification of inflationary bringing inflation under control. pressures. A few members, who were In regard to possible intermeeting particularly concerned about the outlook adjustments in the degree of reserve for inflation, preferred an immediate pressure, a majority of the members move to somewhat tighter reserve condi- indicated that they preferred a directive tions, especially if the directive for this that did not bias prospective operations meeting did not include a presumption toward tightening or easing. Many of that any intermeeting adjustments were these members agreed that the risks of a more likely to be in the direction of some recession appeared to have receded and tightening. In their view, the risks to the that intermeeting developments should expansion of some modest firming were be watched with special attention to minimal under current conditions, and potential developments that might signal those risks needed to be accepted to place an intensification of inflationary presmonetary policy more firmly on an anti- sures. Nonetheless, because of the coninflationary course consistent with the siderable uncertainty surrounding the Committee's objectives. near-term outlook, they did not want to During the Committee's discussion, include a presumption in the directive members referred to a staff analysis that about the likely direction of any adjustpointed to some reduction in the expan- ment. In addition, adoption of a directive sion of M2 over the months ahead on the tilted toward some firming could be assumption of an unchanged degree of viewed as having greater policy implicareserve pressures. It was recognized that tions than usual because it would reprethe rate of M2 growth could fluctuate sent a change from recent directives and over a relatively wide range during the from the thrust of policy since the spring second quarter, as balances were adjusted of 1989. It also would be inconsistent Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 107 with the preference of a number of issued to the Federal Reserve Bank of members for making any intermeeting New York: adjustment toward tightening at this stage only on the basis of relatively conclusive The information reviewed at this meeting economic, financial, or money supply suggests some pickup in the expansion of developments. Other members indicated economic activity from the sluggish rate in the that their concerns about the prospects fourth quarter. Total nonfarm payroll employment increased sharply in January and Februfor inflation inclined them to favor a ary after growing at a reduced pace on average directive that was tilted toward possible in previous months; a surge in the servicefirming during the intermeeting period. producing sector and a weather-related re- It was noted in this connection that even bound in construction were only partly offset in the absence of any firming during the by a net decline in manufacturing. The civilian unemployment rate remained at 5.3 percent. period ahead, the subsequent release of In February, production in the manufacturing such a directive would underscore the sector retraced its large January decline, Committee's readiness to take prompt reflecting a swing in the production of motor and appropriate steps to bring inflation vehicles. Consumer spending has been afunder control. fected in recent months by fluctuations in expenditures for motor vehicles and energy- At the conclusion of the Committee's related items but on balance has expanded at a discussion, all but two of the members relatively slow pace; outlays for goods have indicated that they preferred or could been weak while expenditures for services accept a directive that called for haveremainedstrong. Unusually mild weather maintaining the current degree of contributed to a higher level of housing starts pressure on reserve positions and that in January and February. Business capital spending, adjusted for inflation, appears to did not include any presumption about have turned up after a decline in the fourth the likely direction of any intermeeting quarter, reflecting a pickup in expenditures on adjustments in policy. Accordingly, motor vehicles and aircraft. The nominal slightly greater or slightly lesser reserve U.S. merchandise trade deficit widened in restraint would be appropriate during January from its low December rate but remained at roughly its fourth-quarter averthe period ahead depending on progress age. Consumer prices rose more rapidly over toward price stability, the strength of January and February, only partly as a result the business expansion, the behavior of increases in prices of food and energy. of the monetary aggregates, and Most short- and intermediate-term interest developments in foreign exchange and rates have risen a little since the Committee domestic financial markets. The meeting on February 6-7; rates in long-term debt markets show mixed changes over the unchanged reserve conditions conperiod. In foreign exchange markets, the templated at this meeting were expected trade-weighted value of the dollar in terms of to be consistent with growth of M2 and the other G-10 currencies rose over the M3 at annual rates of about 6 percent intermeeting period; much of the appreciation and 4 percent respectively over the of the dollar was against the yen. three-month period from March through Growth of M2 and M3 picked up considerably in February, reflecting strength in trans- June. The intermeeting range for the action and other liquid accounts; partial data federal funds rate, which provides one for March suggested some slowing from the mechanism for initiating consultation February pace. of the Committee when its boundaries The Federal Open Market Committee seeks are persistently exceeded, was left monetary and financial conditions that will unchanged at 6 to 10 percent. foster price stability, promote growth in output on a sustainable basis, and contribute At the conclusion of the meeting, the to an improved pattern of international transfollowing domestic policy directive was actions. In furtherance of these objectives, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 77th Annual Report, 1990 the Committee at its meeting in February eral Reserve in pursuing its goal of price established ranges for growth of M2 and M3 stability. of 3 to 7 percent and 2Vi to 6Vi percent Mr. Hoskins dissented because he respectively, measured from the fourth quarpreferred an immediate firming of reter of 1989 to the fourth quarter of 1990. The monitoring range for growth of total domestic serve conditions. In his view, inflation nonfinancial debt was set at 5 to 9 percent for pressures remained relatively strong and the year. The behavior of the monetary suggested that greater monetary restraint aggregates will continue to be evaluated in the was necessary to facilitate progress tolight of progress toward price level stability, ward the Committee's long-term goal of movements in their velocities, and developprice stability. He was concerned that ments in the economy and financial markets. In the implementation of policy for the any delay in tightening policy might lead immediate future, the Committee seeks to to the need for more aggressive actions maintain the existing degree of pressure on later. reserve positions. Taking account of progress toward price stability, the strength of the business expansion, the behavior of the monetary aggregates, and developments in foreign exchange and domestic financial 2. Authorization for Domestic markets, slightly greater reserve restraint or Open Market Operations slightly lesser reserve restraint would be acceptable in the intermeeting period. The The Committee approved a temporary contemplated reserve conditions are expected increase of $4 billion, to a level of to be consistent with growth of M2 and M3 $12 billion, in the limit between over the period from March through June at Committee meetings on changes in annual rates of about 6 and 4 percent respectively. The Chairman may call for Committee System Account holdings of U.S. consultation if it appears to the Manager for government and federal agency se- Domestic Operations that reserve conditions curities. The increase amended paraduring the period before the next meeting are graph l(a) of the Authorization for likely to be associated with a federal ftinds Domestic Open Market Operations and rate persistently outside a range of 6 to 10 percent. was effective for the intermeeting period ending with the close of business on May 15, 1990. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Boehne, Johnson, Kelley, and LaWare, Ms. Seger, and Mr. Votes for this action: Messrs. Greenspan, Stern. Votes against this action: Messrs. Corrigan, Angell, Boehne, Boykin, Boy kin and Hoskins. Hoskins, Johnson, Kelley, and LaWare, Ms. Seger, and Mr. Stern. Votes against this action: None. Mr. Boykin dissented because he felt that the risks were on the side of accelerating inflation, and he therefore preferred This action was taken on the recommena policy directive tilted toward increased dation of the Manager for Domestic reserve pressures should there be indica- Operations. The Manager had advised tions of greater-than-anticipated strength that the current leeway of $8 billion for in economic activity during the intermeet- changes in System Account holdings ing period. He stated that an asymmetric might not be sufficient over the intermeetdirective leaning toward firmer reserve ing period because of a large projected pressures would convey important and rise in Treasury balances at the Federal stabilizing information to the financial Reserve Banks after the tax payment date markets about the seriousness of the Fed- in mid-April. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 109 3. Authorization for Foreign markets in association with Treasury Currency Operations transactions can serve a useful purpose. Such operations can contribute to national At this meeting, the Committee reviewed economic objectives under certain cirits operations in the foreign currency cumstances, and the System should conmarkets. Transactions for the System tinue to participate in the formulation of Open Market Account in those markets exchange rate policy. However, they also are carried out within the general frame- felt that the cumulative amount of foreign work of policy on exchange rates estab- currency operations for the System Aclished by the U.S. Treasury in consulta- count might have been more limited than tion with the Federal Reserve and are had been the case over the past year. implemented at the Federal Reserve Bank At the conclusion of this discussion, of New York, typically in conjunction the Committee approved an increase from with similar transactions for the U.S. $21 billion to $25 billion in the limit on Treasury's Exchange Stabilization Fund holdings of foreign currencies that is (ESF). Members commented that such specified in paragraph l.D of the Comoperations at times can serve a useful mittee's Authorization for Foreign Curpurpose, especially in helping to avert or rency Operations. That limit applies to to correct disorderly conditions in the the overall open position in all foreign foreign exchange markets. At the same currencies held in the System Open time, many expressed strong skepticism Market Account and is based on historical that intervention operations can by them- acquisition costs. The limit had been selves have a lasting effect on the value of increased in steps from $12 billion in the dollar in foreign currency markets, May 1989 to $21 billion in December given that the effects of these operations 1989. While purchases of foreign curon bank reserves are routinely sterilized. rencies had been relatively limited in However, some argued that even steril- recent months, such purchases in combiized intervention can, in some circum- nation with accruing interest on holdings stances, have desired effects on exchange had raised the total to nearly $21 billion at rates, especially if carried out in conceit the time of the meeting. with parallel operations by the monetary authorities of other nations or if such Votes for this action: Messrs. Greenspan, operations signal adjustments to fiscal or Corrigan, Boehne, Boykin, Johnson, and monetary policies. Kelley, Ms. Seger, and Mr. Stern. Votes Over the past year, very large pur- against these actions: Messrs. Angell, Hoskins, and LaWare. chases of foreign currencies had raised System Account holdings to historically high levels, although relative to U.S. Messrs. Angell, Hoskins, and LaWare imports such holdings were still moderate dissented because they did not want to compared with those of other countries. provide System funding for additional Some members expressed concern that intervention in the foreign exchange the increased System Account holdings markets. They were uncomfortable with carried the risk of sizable losses if the the large holdings of foreign currencies dollar were to strengthen substantially. now in the System Account and felt that While recognizing the potential diffi- aggressive intervention policies could culties that were involved, a majority of lead to sizable additional increases in the members agreed that continued Sys- such holdings. Messrs. Angell and tem operations in the foreign exchange Hoskins expressed concern that the inter- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 77th Annual Report, 1990 vention carried out over the past year had At this meeting, the Committee agreed undermined the credibility of the Sys- to accommodate any further Treasury tem's monetary policy by contributing to and ESF requests for financing under uncertainty concerning the System's pri- the warehousing facility up to a limit of ority toward achieving price level stabil- $15 billion. ity. Mr. Hoskins also believed that intervention was ineffective unless ac- Votes for this action: Messrs. Greenspan, Corrigan, Boehne, Boy kin, Johnson, and companied by changes in monetary pol- Kelley, Ms. Seger, and Mr. Stern. Votes icy that would be inconsistent with price against these actions: Messrs. Angell, stability objectives. Mr. LaWare felt that Hoskins, and LaWare. massive and frequent operations tended to reduce the effectiveness of intervention Messrs. Angell, Hoskins, and LaWare when the latter might otherwise prove indicated that in light of the significant useful in countering disorderly conditions policy issues raised by the duration and in the exchange markets. scale of the intervention activity, they were unable to concur, as a matter of policy, with the Committee's decisions to increase further the authorization for 4. Agreement to "Warehouse" warehousing foreign currencies. Messrs. Foreign Currencies Angell and Hoskins also were concerned On September 19, 1989, the Committee that substantial increases in the authohad approved an increase from $5.0 bil- rized limits on holdings of foreign curlion to $10.0 billion in the amount of rencies by the Federal Reserve System eligible foreign currencies that the Sys- for the U.S. Treasury and the ESF under tem was prepared to "warehouse" for the the warehousing authority were inappro- Treasury and the ESF. Currently, a total priate in the absence of a definitive of $9.0 billion of such currencies was indication of congressional intent in this being warehoused for the ESF. The area. The transactions in question, which purpose of the facility is to supplement as are repurchase agreements that have the needed the resources of the Treasury and characteristics of a loan to the Treasury, the ESF for financing their purchases of could be viewed as avoiding the congresforeign currencies. Warehousing in- sional appropriations process called for volves spot purchases of foreign cur- under the Constitution. rencies from the Treasury or the ESF and simultaneous forward sales of the same currencies at the same exchange rates to Meeting Held on the Treasury or the ESF. Under a long- May 15,1990 standing interpretation by the Committee and its General Counsel, warehousing Domestic Policy Directive transactions are open market operations in foreign currencies that are authorized The information reviewed at this meeting under the Federal Reserve Act. Ware- suggested that economic activity was housing is included under paragraphs continuing to expand at a moderate pace. 1 .A and 1 .B of the Committee's Authori- The service-producing sector remained zation for Foreign Currency Operations the mainstay for growth in income and and its use is referenced under paragraph employment; manufacturing was still 3.B of the Committee's Foreign Cur- sluggish, and construction activity was rency Directive. slipping after the weather-related bulge Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 111 earlier in the year. Some broad measures Real personal consumption expendiof prices reflected a partial unwinding of tures edged lower in March, reversing a the earlier surge in prices of food and small net rise in the two previous months. energy; however, underlying trends in Spending for goods was weak on balance consumer prices and labor costs sug- over the three-month period, especially gested no weakening in inflationary for food and apparel items; outlays for pressures. services continued to be robust, with Total nonfarm payroll employment notably strong gains for spending on increased more slowly in March and medical care. Retail sales fell in April as April after sharp weather-related ad- a result of reduced purchases of motor vances earlier in the year; job growth vehicles, but upward revisions to data for thus far in 1990 had averaged a little the two previous months suggested a above that in the second half of last year, little more strength in consumption in the in part because of the hiring of first quarter than had been indicated temporary workers for the census. In the previously. Housing starts fell sharply in private sector, nonfarm employment fell March after surging earlier in the year. in both March and April, partly owing to The March decline likely reflected the an unwinding of an earlier surge in effect of higher mortgage interest rates construction jobs during unseasonably along with some payback for unusually mild winter weather. Job losses also strong housing construction activity in were widespread in manufacturing; and, the two previous months of atypically with the notable exception of health ser- mild winter weather. vices, hiring in the services industries Business capital spending strengthened weakened considerably from the strong in the first quarter of 1990 from a pace of 1989 and early 1990. In April, temporarily depressed fourth-quarter the civilian unemployment rate edged up level. Outlays for nondefense capital to 5.4 percent. goods rose sharply, partly as a result of a Industrial production declined in April, rebound in shipments of aircraft to domesreflecting a cutback in the manufacture of tic firms after a strike late in the fourth motor vehicles that was intended to bring quarter. Spending for informationinventories of new cars into better balance processing equipment, notably computwith sales. Industrial activity had been ers, also increased while acquisitions of buffeted by a variety of transitory influ- industrial equipment continued to lanences in previous months, including guish. New orders for business equipstrike activity in the aircraft industry, ment other than aircraft advanced at a inventory adjustments in the motor vehi- slower pace in the first quarter. Favorable cle industry, and unusual winter weather weather aided nonresidential construcpatterns that had affected the energy tion activity in January and February; output of utilities; nevertheless, produc- however, the pace of construction activity tion in April was about unchanged from fell off in March, and construction perthe levels of last December and a year mits and contracts continued to trend earlier. Total industrial capacity utiliza- down. Manufacturing inventories were tion slipped in April after a small rise in reduced considerably in February and March; operating rates in manufacturing March as factory shipments rebounded; had trended down over the twelve months declines were widespread among producending in April as capacity increased ers of durable goods, primary metals, while production remained about fabricated metal products, nonelectrical unchanged. machinery, and motor vehicles. For most Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

112 77th Annual Report, 1990 industries, the inventory-to-shipments earlier period; wage increases remained ratio was lower in March than at year- fairly stable, but the cost of benefits end. At the retail level, many types of jumped, only partly because of the Januestablishments, including auto dealers, ary hike in social security taxes. Average retail apparel, and general merchandise hourly earnings increased a little more stores had trimmed their inventories slowly in April, partly reflecting a sharp substantially. drop in employment in the relatively The nominal U.S. merchandise trade high-wage construction industry. deficit narrowed in February as imports At its meeting on March 27, 1990, the declined sharply and exports were little Committee adopted a directive that called changed from January levels. For the for maintaining the existing degree of January-February period, exports were pressure on reserve positions and that did moderately higher than in the fourth not include any presumption regarding quarter, led by a rebound in shipments of the likely direction of any intermeeting aircraft. Over the same time period, the adjustments in policy. The Committee value of imports fell; a sizable decline in agreed that some firming or easing in non-oil imports that was widespread reserve conditions would be appropriate across commodity categories outweighed during the intermeeting period depending higher imports of oil associated with the on progress toward price stability, the rebuilding of stocks depleted during the strength of the business expansion, the unusually cold weather in December. behavior of the monetary aggregates, Indicators of economic activity in the and developments in foreign exchange major foreign industrial nations sug- and domestic financial markets. With gested a continuation of moderate growth unchanged reserve conditions, M2 and in real economic activity in most major M3 were expected to grow at annual rates West European countries and Japan. of about 6 and 4 percent respectively over Declines in industrial production in the the period from March through June. United Kingdom and Canada appeared to Open market operations in the interval be signaling some slowing of economic since the March 27 meeting had been growth in these countries. directed at keeping reserve conditions Producer prices for finished goods essentially unchanged. Adjustment plus dropped somewhat further in April, seasonal borrowing levels moved up to reflecting additional unwinding of the about $300 million by the end of the earlier surge in prices of food and energy. intermeeting period from the $150 mil- Producer prices for items other than food lion range prevailing initially, reflecting and energy had increased through April a normal rise in seasonal borrowing. The at a slower rate than in 1989. By contrast, federal funds rate remained in the vicinity consumer prices continued to rise in of 8 lA percent over the period, although March at a faster pace than in 1989. funds generally had traded a little below Weather-related jumps in prices of food this level since late April as shortfalls in and energy accounted for much of the federal tax receipts tended to keep nonpickup in consumer price inflation in the borrowed reserves at higher-thanfirst quarter, but prices for a wide range expected levels. Responding to shifting of other goods and services also increased sentiment regarding the strength of the more rapidly. Labor compensation, as economy, inflation prospects, and the measured by the employment cost index, likelihood of a near-term tightening of rose at a faster rate over the twelve monetary policy, other market interest months ended in March than in the year- rates initially rose in the intermeeting Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 113 period and then fell sharply. Short-term the balance of the year. Consumer derates declined a little on balance over the mand, especially for services, was experiod while rates in long-term debt pected to be a major source of support for markets were somewhat higher. continued growth of the economy. Busi- In foreign exchange markets, the trade- ness capital spending was projected to weighted value of the dollar in terms of increase further in 1990, but the extent of the other G-10 currencies declined con- the rise could be limited somewhat by siderably over the intermeeting period. low profit margins associated with rela- Much of the decline occurred following tively slow growth in final demands and the release in early May of weaker-than- lower levels of capacity utilization. Nonexpected U.S. employment data for April residential construction activity was exand the related drop in U.S. interest pected to be held down by the overbuilt rates. Foreign interest rates showed condition of many commercial real estate mixed movements over the intermeeting markets around the country along with period; the Japanese stock market re- greater caution on the part of lenders. bounded substantially from its low in Homebuilding was projected to be early April. The dollar was weak against damped by the somewhat higher mortthe German mark, which strengthened gage rates now in place. Net exports of against most currencies as developments goods and services were expected to appeared to relieve some concerns about increase only modestly in real terms over the outlook for inflation in Germany. the rest of the year. The projection Very late in the intermeeting period the assumed moderate restraint on expendidollar weakened against the yen as well. tures at all levels of government. Price Growth of M2 slowed further in April; inflation was expected to ease substanthe expansion of this aggregate was tially in the months ahead, following the damped by the sizable opportunity costs bulge earlier in the year; but little imof holding retail deposits as interest rates provement was anticipated in the underoffered on these accounts continued to lying trend of inflation over the next lag behind earlier increases in market several quarters, and reductions in price rates. At thrift institutions, conservative pressures might ultimately involve some rate-setting reflected the ongoing contrac- additional pressures in financial markets. tion of their funding needs during a period In the Committee's discussion of the of asset reduction. Banks also held down economic situation and outlook, memtheir deposit rates, as inflows of retail bers generally agreed that the current deposits were proving sufficient to fund information on business conditions credit expansion. The apparently steeper pointed on balance to relatively moderate contraction of thrift assets, along with but sustained economic expansion. Final slow credit expansion at banks, held demands appeared to be expanding furdown overall needs for funds at deposi- ther, though not rapidly, and available tory institutions and resulted in relatively information suggested that business inweak M3 growth in April. Expansion of ventories were quite lean. Fiscal policy M2 and M3 through April was a little was an important source of uncertainty in above the midpoint and around the lower the outlook, though there was some basis end respectively of the ranges established for optimism in light of the discussions by the Committee for 1990. on deficit reductions that were just getting under way between the Administration The staff projection prepared for this and the Congress. Credit conditions meeting suggested that the economy was constituted another major area of uncerlikely to expand at a moderate pace over Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

116 77th Annual Report, 1990 members believed it was premature to reserve conditions, the Committee conreach a firm conclusion on this issue. tinued to give primary weight to those Moreover, despite its slowing in recent bearing on the inflation outlook. Accordmonths, growth of M2 for the year to date ingly, slightly more or slightly less was close to the midpoint of the Commit- pressure on reserve positions would be tee's range, reflecting relatively robust appropriate during the period ahead expansion in late 1989 and early 1990. depending on progress toward price With respect to possible adjustments stability, the strength of the business in the degree of reserve pressure during expansion, the behavior of the monetary the period before the next Committee aggregates, and developments in foreign meeting in early July, a majority of the exchange and domestic financial markets. members expressed a preference for a The maintenance of steady reserve condirective that did not bias prospective ditions was expected to be consistent operations toward tightening or easing with somewhat slower monetary expanbut made an intermeeting adjustment, if sion in the current quarter than the any, equally likely in either direction, members had anticipated at the time of depending on economic and financial the March meeting, including growth of developments and the behavior of the M2 and M3 at annual rates of about 4 and monetary aggregates. Other members 3 percent respectively over the threepreferred a directive that was tilted month period ending in June. The intertoward possible tightening, given their meeting range for the federal funds rate, desire to respond promptly to any indica- which provides one mechanism for inititions of greater inflationary pressures ating consultation of the Committee when and their judgment that in the current its boundaries are persistently exceeded, inflationary environment the next policy was left unchanged at 6 to 10 percent. move was likely to be in the tightening At the conclusion of the meeting, the direction. Some of these members com- following domestic policy directive was mented that such a bias in the directive issued to the Federal Reserve Bank of would tend, as it became known, to New York: enhance the credibility of the System's anti-inflationary policy and help to make The information reviewed at this meeting that policy more effective over time. suggests that economic activity is continuing to expand moderately. Total nonfarm payroll However, given the risks to the economy employment increased more slowly in March and the uncertainties in the outlook, these and April after sharp advances earlier in the members also could accept a symmetric year; its average growth thus far this year has directive with regard to intermeeting been above that in the second half of 1989, in adjustments. part because of the hiring of temporary At the conclusion of the Committee's workers for the census. In April, the civilian unemployment rate moved up to 5.4 percent. discussion, all except one member indi- Industrial production declined in April, recated that they preferred or could accept flecting what appears to be a temporary a directive that called for maintaining the cutback in the manufacture of motor vehicles. existing degree of pressure on reserve Consumer spending has been sluggish on positions and that did not include any balance in recent months; outlays for goods presumption about the likely direction of have been weak while expenditures for services have remained strong. Business spendadjustments in policy, if any, during the ing for equipment has been rising, but intermeeting period. With regard to the construction activity, both residential and factors that were important in considering nonresidential, appears to have weakened the need for any intermeeting changes in after a temporary boost early in the year. The Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 117 nominal U.S. merchandise trade deficit nar- tively. The Chairman may call for Committee rowed somewhat in January and February consultation if it appears to the Manager for from its average rate in the fourth quarter. Domestic Operations that reserve conditions Consumer prices continued to rise at a faster during the period before the next meeting are pace in March than in 1989; producer prices likely to be associated with a federal funds were down somewhat further in April, reflect- rate persistently outside a range of 6 to ing additional unwinding of the earlier surge 10 percent. in prices of food and energy. The latest data on employment costs suggest some deteriora- Votes for this action: Messrs. Greenspan, tion in underlying trends. Corrigan, Angell, Boehne, Boykin, Short-term interest rates have declined a Johnson, Kelley, and LaWare, Ms. Seger, little on balance since the Committee meeting and Mr. Stern. Vote against this action: Mr. on March 27, while rates in long-term debt Hoskins. markets have risen slightly over the period. In foreign exchange markets, the trade-weighted Mr. Hoskins dissented because he value of the dollar in terms of the other G-10 preferred a tightening of reserve condicurrencies declined considerably over the tions to help assure that progress would intermeeting period. Growth of M2 slowed in April and that of be made toward a reduced rate of inflation M3 remained relatively weak. Through April, and the Committee's ultimate objective expansion of M2 and M3 was a little above the of price stability. Although price presmidpoint and around the lower end, respec- sures appeared to be receding from the tively, of the ranges established by the pace of early in the year, inflation re- Committee for 1990. mained too high. He recognized that M2 The Federal Open Market Committee seeks monetary and financial conditions that will growth had slowed and there were potenfoster price stability, promote growth in tial financial developments that might output on a sustainable basis, and contribute have adverse consequences for the expanto an improved pattern of international transsion, but he believed that growth of M2 in actions. In furtherance of these objectives, the bottom half of the 1990 target range the Committee at its meeting in February established ranges for growth of M2 and would be desirable in order to achieve a M3 of 3 to 7 percent and 2Vi to &/i percent gradual reduction in inflation in 1991 and respectively, measured from the fourth quar- thereafter. Moreover, a timely move ter of 1989 to the fourth quarter of 1990. The toward greater monetary restraint would monitoring range for growth of total domestic enhance the credibility and effectiveness nonfinancial debt was set at 5 to 9 percent of monetary policy in countering the for the year. The behavior of the monetary aggregates will continue to be evaluated in the persisting strength of inflationary light of progress toward price level stability, pressures. movements in their velocities, and developments in the economy and financial markets. In the implementation of policy for the Meeting Held on immediate future, the Committee seeks to July 2-3,1990 maintain the existing degree of pressure on reserve positions. Taking account of progress toward price stability, the strength of the Domestic Policy Directive business expansion, the behavior of the monetary aggregates, and developments in The information reviewed at this meeting foreign exchange and domestic financial suggested that economic activity was markets, slightly greater reserve restraint or continuing to expand but at a relatively slightly lesser reserve restraint would be slow pace. Final demands seemed slugacceptable in the intermeeting period. The gish; while exports had increased further, contemplated reserve conditions are expected to be consistent with growth of M2 and M3 consumer expenditures had been flat and over the period from March through June at notable weakness was evident in new annual rates of about 4 and 3 percent respec- housing and nonresidential structures. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 77th Annual Report, 1990 Overall increases in business inventories in manufacturing, operating rates had appeared to have been moderate, even changed little on balance this year as though the production of goods had gains in factory output had about matched picked up. The unemployment rate had the expansion of capacity. remained in a relatively low range despite Real personal consumption expendilimited growth in employment. An un- tures in April and May were little changed winding in recent months of the earlier on balance from their level in the first jump in the prices of food and energy had quarter. Expenditures for non-energy serdamped the rise in producer and con- vices rose more slowly in May, extending sumer prices, but the latest data on wages the pattern of smaller increases that had suggested continued pressure on costs. been registered on balance this year. Total nonfarm payroll employment Outlays for motor vehicles declined, and rose moderately in May after a small spending for goods other than motor decline in April. Job gains in services vehicles fell for the third straight month. were muted over the two months, follow- Housing starts were about unchanged in ing strong increases earlier; factory May after a substantial decline in April. employment continued to ebb; and con- The average level of starts in the Aprilstruction payrolls, after surging during May period was substantially below the unseasonably mild winter weather, first-quarter pace. This recent drop in slipped below their level of last fall. starts evidently reflected in part a retrac- Nonfarm payroll employment had grown ing of the earlier surge in residential relatively slowly on average since Febru- construction associated with mild winter ary, and hiring by the Census Bureau had weather, but higher mortgage rates and accounted for all of the increase. Despite some tightening of credit availability to the sluggish expansion of employment in builders also appeared to exert a conrecent months, the civilian unemploy- straining effect. ment rate was 5.3 percent in May and had Business capital spending appeared to remained near that level for more than a have slackened in recent months. After a year. pickup in the first quarter that was paced Industrial production increased sub- by strong purchases of office and computstantially in May, largely reflecting a ing equipment, outlays for nondefense rebound in the manufacture of motor capital goods slowed in April and May, vehicles, and the April level of activity with notable weakness evident in purwas revised upward. Production of con- chases of nonelectrical equipment. Other sumer goods had been relatively sluggish than for aircraft and computers, new thus far in 1990; however, output of orders for nondefense capital goods had business equipment had firmed as notable advanced little on balance this year. gains were recorded in the production Following the sizable gain earlier in the of aircraft and information-processing year associated with unseasonably mild equipment, and the output of other busi- weather, nonresidential construction acness equipment retraced a decline that tivity slowed on average in March and had occurred in the second half of last April. Construction of office and other year. Recent data on orders for durable commercial buildings was especially goods appeared to be consistent with a weak in the March-April period, and further modest rise in manufacturing permits and other indicators of future activity in coming months. Total indus- activity suggested continued softness. At trial capacity utilization edged higher in manufacturing and trade establishments, May to nearly its level at the end of 1989; inventories increased somewhat in April Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 119 after a decline in the first quarter asso- non-energy goods were little changed ciated with a sharp paring of stocks while prices of non-energy services rose of automobiles. In the manufacturing less rapidly than earlier in the year. and wholesale sectors, inventory-to- Average hourly earnings rose further in shipments ratios were down in April May, with large increases recorded in from year-end levels and were around the construction and in overtime in manufacmiddle of the ranges prevailing in 1989. turing. The latest data on total employer Among retailers of goods other than costs for compensation indicated that automobiles, recent increases in invento- labor costs had increased more rapidly in ries in conjunction with sluggish con- the twelve months ended in March than in sumer spending had led to a reversal of an the year-earlier period. earlier decline in inventory-sales ratios. At its meeting on May 15, 1990, the The nominal U.S. merchandise trade Committee adopted a directive that called deficit narrowed further in April from its for maintaining the existing degree of reduced average rate for the first quarter. pressure on reserve positions and that did Both imports and exports fell, partly as a not include any presumption regarding result of less trade in automotive products the likely direction of any intermeeting with Canada. The value of oil imports policy adjustments. In considering the also declined in April as oil prices moved possible need for such adjustments, the lower and the volume of imports slack- Committee agreed that primary weight ened after surging earlier in the year. In would continue to be given to develop- April, the value of exports retraced part ments bearing on the inflation outlook; of its sharp March rise but nonetheless accordingly, the directive indicated that remained at a higher rate than in the first slightly more or less pressure on reserve quarter. Measures of economic activity positions would be appropriate during in the major foreign industrial nations the period ahead depending on progress indicated some pickup in growth in the toward price stability, the strength of the first quarter. Expansion was especially business expansion, the behavior of the strong in Germany and Japan, but prelim- monetary aggregates, and developments inary data for these two countries for the in foreign exchange and domestic finanearly part of the second quarter suggested cial markets. Unchanged reserve condia return to more moderate growth. Infla- tions were expected to be consistent with tion in the foreign industrial countries somewhat slower monetary expansion in remained little changed on average the second quarter than had been anticirecently. pated at the time of the March meeting, Producer prices of finishedg oods were including growth of M2 and M3 at annual unchanged on balance over April and rates of about 4 and 3 percent respectively May as energy prices declined and food over the period from March through prices registered no net change. The rate June. of increase for goods other than food and Open market operations in the interval energy items was held down by manufac- since the May 15 meeting were directed turers' discounts for motor vehicles. at maintaining unchanged reserve condi- Partly because of declines in food and tions. Adjustment plus seasonal borrowenergy prices, consumer prices rose more ing averaged nearly $600 million over slowly in April and May; however, the the three complete reserve maintenance average rate of increase thus far this year periods in the intermeeting interval, well remained above the 1989 pace. Over the above the level registered in the mainte- April-May period, prices of nonfood, nance period that ended just after the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 77th Annual Report, 1990 May meeting. Much of the sharp rise in spending was projected to strengthen a borrowing reflected the continued up- little; however, the extent of the bounceswing in seasonal borrowing, for which back would be constrained by low profit several technical adjustments were made margins associated with relatively slow to assumed levels of borrowing, and a growth in final demands and reduced funding need at a large bank experiencing levels of capacity utilization along with a temporary operational problem over a weakness in nonresidential construction long holiday weekend. The federal funds activity arising from the overbuilt condirate stayed close to %lA percent over the tion of many commercial real estate intermeeting period, and other short- markets around the country and greater term market rates changed little from caution on the part of lenders. The pace their mid-May levels. In long-term debt of homebuilding was expected to remain markets, interest rates declined some- low, damped by slow growth in housewhat on balance as markets responded to hold incomes and relatively high borrowevidence of some slowing in the econ- ing costs. Exports of goods and services omy and to indications that the chances were projected to increase substantially for substantial reductions in federal but to be accompanied by an acceleration budget deficits had improved. These of imports. Moderate restraint on expenfactors also contributed to a decline on ditures at all levels of government was balance over the intermeeting interval in assumed. Price inflation was expected to the trade-weighted value of the dollar in ease somewhat further, following the terms of the other G-10 currencies. bulge earlier in the year, but little im- Both M2 and M3 declined in May; provement was anticipated in the underavailable data suggested a partial rebound lying trend of inflation. in June for M2 and little change in M3. In the Committee's discussion of the The continuing contraction of deposits at economic situation and outlook, the thrift institutions that was resulting from members generally saw sustained but the restructuring of the thrift industry subdued growth in economic activity as a was one of the factors damping the reasonable expectation for the next sevgrowth of M2 and especially of M3. eral quarters. While business conditions Through June, expansion of M2 was were relatively depressed in some sectors estimated to be in the lower portion of its of the economy and parts of the country, range for 1990, and growth of M3 business activity was better maintained somewhat below its range for the year. in other areas, and the economy as a Growth of total domestic nonfinancial whole gave no current indications of debt appeared to have been at the mid- slipping into a recession. Many members point of its monitoring range. commented, however, that the risks The staff projection prepared for this appeared to be weighted in the direction meeting suggested that the economy of a weaker-than-projected economic would expand over the remainder of 1990 performance, especially in the context of at around the rate estimated for the first changing conditions in credit markets half of the year and at a slightly faster stemming from the financial difficulties pace in 1991. Consumer demand was of many borrowers and lending instituprojected to pick up a bit after a weak tions. With regard to the outlook for second quarter, with spending on ser- inflation, increases in key price measures vices expected to continue increasing had moderated since earlier in the year, but there was little evidence of significant moderately and outlays for goods to change in the trend rate of inflation. rebound somewhat. Business capital Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 121 Nonetheless, the members generally of exports, none appeared likely to remained confident that some progress provide appreciable impetus to the expanwould begin to be made in reducing the sion over the forecast period. Retail sales underlying rate of inflation during the were weak in many parts of the country; period ahead, given their expectations of and there were indications of some diminished pressures on labor and capital decline in consumer confidence that resources. Some also emphasized that seemed to be associated with concerns the moderate rate of money growth about weakening real estate values in experienced this year, and indeed for an many parts of the country, reduced extended period, was indicative of a employment opportunities, and persistent sustained period of monetary restraint reports of financial problems in the econthat eventually should produce a lower omy. In the circumstances, growth in rate of inflation. consumer spending was expected to In conformance with the usual practice remain relatively sluggish, and while at meetings when the Committee consid- retail sales might well pick up from their ers its long-run objectives for growth of recently depressed levels, there was the monetary and debt aggregates, the considerable uncertainty regarding the members of the Committee and the Fed- outlook for expenditures for motor vehieral Reserve Bank presidents not cur- cles and other consumer durables. Conrently serving as members provided struction activity was being inhibited in individual projections of growth in real many areas by an overhang of excess and nominal GNP, the rate of unemploy- capacity, notably in commercial real ment, and the rate of inflation for 1990 estate but also in housing, and to some and 1991. These forecasts took account extent by the difficulties being experiof the Committee's policy of continuing enced by builders in securing financing. moderate restraint on aggregate demand Some members expressed concern that to constrain inflationary pressures over building activity might weaken further, time. With regard to growth of real GNP, and in any event this sector of the econthe projections had central tendencies of omy was believed likely to remain de- IV2 to 2 percent for 1990 as a whole and pressed over the forecast horizon. At the VA to 2Vi percent for 1991. Forecasts of same time, the outlook for spending on nominal GNP converged on growth rates capital equipment appeared to be someof 5Vi to 62/2 percent for 1990 and 5lA to what more promising, at least for the 6 Vi percent for 1991. With output expand- near term, judging from the recent pattern ing below potential, the members antici- of new orders, order backlogs, and pated that unemployment would edge up reports from industry contacts. In addito rates centering around 5Vi to 5% per- tion, business inventories appeared to be cent in the fourth quarter of 1990 and 5 Vi at acceptable levels in most industries to 6 percent in the fourth quarter of 1991. and, unlike the experience in earlier Some easing of pressures on resources business cycles, seemed to be providing would help to damp inflation slightly by an element of stability in a period of 1991. For the consumer price index, the adjustments in major industries such as projections had central tendencies of AVi motor vehicles and construction. In the to 5 percent for 1990 and 33A to 4Vi per- view of many members, the outlook was cent for 1991. favorable for further sizable increases in Turning to the prospects for individual exports that would help to support U.S. sectors of the economy, members com- production and employment. On balance, mented that, with the possible exception however, final demands, including de- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 77th Annual Report, 1990 mands from abroad, appeared likely to prices, and some evidence that wage support only sluggish gains in the goods- inflation was no longer worsening. Of producing sectors of the economy, and particular significance in the view of the service industries were likely to some members was the relatively recontinue to account for much of the strained monetary growth over the last anticipated increases in output and few years associated with a policy that employment. had been resisting inflation. This policy There also was discussion of two was likely to damp inflation over time; special factors that added to the uncertain- moreover, as the public's perceptions of ties bearing on the economic outlook. the System's anti-inflationary stance be- One related to the unknown timing and came more firmly held, progress in extent of a possible reduction in the fed- reducing inflation would tend to accelereral budget deficit that the members ate. On the unfavorable side, persisting hoped would emerge from current discus- inflation pressures in many service indussions between congressional and Admin- tries and relatively tight labor markets in istration officials. Another was the uncer- some areas remained a source of concern. tain degree to which lenders had cut back Moreover, as evidenced by recent inon the availability of credit to creditwor- creases in the prices of motor vehicles thy borrowers. The members continued despite weak sales, inflation psycholto hear numerous reports that some ogy still was a serious problem in at businesses were finding it more difficult least some segments of the business to obtain credit from banks, notably community. builders in many areas but also other In keeping with the requirements of businesses, including auto dealers, in the Full Employment and Balanced some parts of the country. On the basis of Growth Act of 1978 (the Humphreystill fragmentary information, reduced Hawkins Act), the Committee at this credit availability appeared to have had meeting reviewed the ranges for growth some, but quite limited, effects on the in the monetary and debt aggregates that economy. However, a tightening of credit it had established in February for 1990 standards could affect credit flows and and decided on tentative ranges for spending with a lag; and, in addition, growth of those aggregates in 1991. The there was some concern that the trend to current ranges for the period from the greater restraint in the provision of credit fourth quarter of 1989 to the fourth might continue. quarter of 1990 included expansion of 3 With regard to the outlook for prices to 7 percent for M2 and 2 Vi to 6 Vi percent and wages, the apparent lack of progress for M3. The monitoring range for growth in reducing the underlying rate of infla- of total domestic nonfinancial debt had tion was a major source of disappoint- been set at 5 to 9 percent. ment, but the members continued to In its consideration of the ranges for anticipate some deceleration in the core 1990 and 1991, the Committee took rate of inflation during the year ahead. account of the much slower-than- Among the favorable portents were the anticipated expansion of M2 and M3 in impact of the softness in house prices on the first half of the year and the possible inflation attitudes, the still highly compet- implications for spending and prices. To itive conditions in many markets for a large extent, the weakness in monetary goods, the related emphasis on cost- growth was associated with a redirection cutting efforts by businesses to compen- of credit flows away from depository sate for their difficulty or inability to raise institutions to market channels, and total Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 123 borrowing by domestic nonfinancial sec- midyear, in part to avoid conveying an tors did not moderate appreciably in the impression of unwarranted precision— first half of 1990 from the pace of 1989. particularly if the adjustments were Much of the slower growth in lending by relatively small—or of changes being depository institutions in turn reflected made simply to reflect the actual data. A continued shrinkage of the savings and shortfall from the current ranges should loan industry—to an important extent be kept under careful scrutiny to judge because of a step-up in government whether policy was indeed tighter than assumption of thrift assets by the Resolu- intended or desired. If ultimately the tion Trust Corporation (RTC) and related Committee elected to tolerate a shortfall transfers of deposits and assets to com- from the current ranges, it would accept mercial banks. Expansion of commercial the useful discipline of explaining the bank credit had remained moderate, reasons for the deviations in its reports to reflecting pressures on bank capital posi- the Congress. Members also noted that tions and bank concerns about the credit the reasons for the shortfall in M2 were quality of borrowers. The members not entirely understood, and in the cirgenerally anticipated that these special cumstances a downward adjustment to factors would continue to depress the the range might not be appropriate in growth of M2 and M3 in the second half terms of furthering the Committee's basic of this year and in 1991, though perhaps objectives for the economy. Those who to a lesser extent next year. These factors favored a lower range for M2 observed were exerting their largest and most that, despite the uncertainties that were direct influence on M3, which includes involved, enough was known to suggest the bulk of bank and thrift funding that velocity had increased for technical sources, but also were affecting M2. reasons and that M2 growth lower than Such developments had few if any prece- previously contemplated would be condents, and there was substantial uncer- sistent with the Committee's objectives. tainty about their duration and effects on One member also indicated that a lower the economy. range would coincide with a continuing Against this background, most of the preference, first expressed in February, members were in favor of reaffirming the for a range that in this view appeared to ranges for M2 and nonfinancial debt for be more consistent with the Committee's 1990 that the Committee had established long-run, anti-inflation strategy. at its February meeting, while others With regard to the 1990 range for M3, indicated a preference for reducing the a majority of the members favored some range for M2. Members who preferred to reduction, though there were differences maintain the current ranges pointed out with regard to the precise amount. A that the expansion of these aggregates lower range was deemed to be warranted was within their respective ranges in the by the strong indications that M3 growth first half of the year, though toward the would fall below its current range for the lower end of the range in the case of M2. year to an important extent because of With regard to the latter, it was suggested continuing RTC activity in resolving that the 4-percentage-point width of the insolvent thrift institutions. While the current range should be enough to encom- Committee had anticipated some slowing pass likely and desirable outcomes for in M3 growth and had reduced the M3 the year. Several members also com- range in February, the shortfall in the mented that, as a general rule, they first half of the year was considerably preferred not to adjust current ranges at greater than expected. It represented Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 77th Annual Report, 1990 mostly a restructuring of credit flows Votes for this action: Messrs. Greenspan, rather than an overall reduction in credit Corrigan, Angell, Boehne, Boy kin, Hoskins, Kelley, La Ware, Mullins, and availability, though there were signs of Stern. Vote against this action: Ms. Seger. some tightening of credit terms. In the Absent and not voting: Mr. Johnson. circumstances, a lower range would be a technical adjustment and would not be Ms. Seger dissented because she indicative of added restraint in overall wanted to reaffirm the existing range for credit availability or an intention by the M3 as well as those for M2 and nonfinan- Committee to increase the degree of cial debt. In her view, the shortfall in M3 monetary restraint. A few members growth reflected not only technical facexpressed reservations about lowering tors, related in large part to the ongoing the M3 range, or at least lowering it restructuring of the savings and loan substantially, in part because a higher industry, but an undesirable tightening in range might be needed in later years the availability of credit. In the circumwhen special factors were no longer stances , she was concerned that tolerating depressing the growth of this aggregate. M3 growth at a rate near the lower end In this view, to avoid potential misinter- of the 1 to 5 percent range would be pretation of the Committee's policy, the associated with credit conditions that ranges should not be moved up and down presented too great a risk to the current to fit special circumstances; instead, economic expansion. they should be reduced steadily but Turning to the provisional ranges for gradually to levels that were consistent 1991, a majority of the members argued with the Committee's long-run objective for some reduction in the ranges for M2 of sustainable, noninflationary economic and nonfinancial debt, and most favored growth. a relatively low range for M3. Reductions At the conclusion of this discussion, in the ranges for M2 and debt would the Committee voted to reaffirm the 1990 serve to implement the Committee's ranges that it had established in February strategy of gradually lowering the ranges for growth of M2 and nonfinancial debt to levels that were consistent with its and to lower the 1990 range for M3 by long-run goals. Additionally, a lower Wi percentage points to 1 to 5 percent. range for M2 seemed appropriate in light The Committee approved the following of the prospect that the velocity of this statement for inclusion in its domestic aggregate, which like that of M3 had policy directive: risen to an unexpected extent this year, might rise somewhat further in 1991 in The Committee reaffirmed at this meeting conjunction with the ongoing restructurthe range it had established in February for ing of thrift institutions. In the view of M2 growth of 3 to 7 percent, measured from many members, a reduction in the range the fourth quarter of 1989 to the fourth quarter for M2 also was desirable because it of 1990. The Committee also retained the would underscore the Committee's commonitoring range of 5 to 9 percent for the year that it had set for growth of total domestic mitment to an anti-inflationary policy nonfinancial debt. With regard to M3, the and by potentially enhancing the credibil- Committee recognized that the ongoing re- ity of that policy possibly increase its structuring of thrift depository institutions effectiveness. Several members indicated had depressed its growth relative to spending that while a small reduction in the M2 and total credit more than anticipated. Taking range was acceptable, a greater reduction account of the unexpectedly strong M3 velocity, the Committee decided to reduce the 1990 might imply tolerance of slower monerange to 1 to 5 percent. tary growth than would be consistent Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 125 with sustained economic expansion. even for 1991 depending on economic, Moreover, the M2 range already had financial, and fiscal policy developments been reduced substantially over the past prior to the Committee's review of the several years and was getting close to the ranges early next year. level that might be desirable over the At the conclusion of this discussion, long run. the Committee approved provisional Some members preferred not to change ranges for 1991 that involved reductions the 1991 range for M2 at this meeting. of Vi percentage point for M2 and They did not disagree with the strategy of nonfinancial debt from the 1990 ranges gradually reducing the Committee's and no further change in the M3 range ranges over time, but they felt that current from the reduced 1990 range. The Comuncertainties warranted approaching any mittee voted to incorporate the following reduction with a special degree of cau- statement regarding the 1991 ranges in tion. There was a possibility of a major its domestic policy directive: shift in fiscal policy, and ongoing changes in financial flows were affecting the For 1991, the Committee agreed on provirelationship of the monetary aggregates sional ranges for monetary growth, measured to spending. By next February, the from the fourth quarter of 1990 to the fourth quarter of 1991, of 2Vi to 6Vi percent for M2 Committee was likely to be in a much and 1 to 5 percent for M3. The Committee better position to judge the implications tentatively set the associated monitoring range of these factors for the economy and for growth of total domestic nonfinancial debt appropriate money growth as well as to at4!/2 to 8V2 percent for 1991. The behavior of have in clearer focus the usual factors the monetary aggregates will continue to be evaluated in the light of progress toward price bearing on the outlook for economic level stability, movements in their velocities, activity and the financial system. and developments in the economy and finan- With regard to the range for M3, the cial markets. factors that were tending to depress M3 growth relative to income in 1990 could Votes for this action: Messrs. Greenspan, Corrigan, Angell, Boehne, Boykin, well persist through 1991. In these cir- Hoskins, Kelley, Mullins, and Stern. Votes cumstances, a majority of the members against this action: Ms. Seger and Mr. favored a range that was equal to or lower La Ware. Absent and not voting: Mr. than the revised range of 1 to 5 percent Johnson. for 1990. Members who expressed a preference for some further reduction Mr. La Ware dissented because he believed that a lower range was more preferred a somewhat lower range for likely to encompass the actual outcome M3 in 1991. He did not view such a range and was consistent with the monetary- as implying greater monetary restraint policy restraint signaled by the reductions next year but as warranted by technical favored by most members in the M2 and factors, notably the further shrinkage in debt ranges for 1991. Other members prospect for the savings and loan induspreferred not to adopt a range that would try, that pointed to a further rise in the accommodate essentially no growth in velocity of M3 and to little or no growth M3, even if technical factors suggested a in this aggregate in 1991. Moreover, he relatively high probability of such an believed that a further reduction in the outcome. In this view, such a range would M3 range for next year would be more be below the one likely to be warranted consistent with the lower ranges tentafor the longer term and would therefore tively adopted for M2 and nonfinanhave to be raised at some point, possibly cial debt. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 77th Annual Report, 1990 Ms. Seger dissented because she etary aggregates and the economy pointed wanted to retain this year's ranges, at to a significantly weaker outlook for ecoleast tentatively, for 1991. She was not nomic activity. opposed to gradual reductions in the The members who preferred not to ranges over time, and she would be bias the Committee's directive toward a prepared to make adjustments in Febru- slight reduction in the degree of reserve ary if intervening developments war- pressure believed that more evidence ranted. However, she continued to be- would be helpful to assess the perforlieve that the inevitable uncertainties in mance of the economy and the extent of assessing the economic outlook over an any inadvertent and inappropriate tightextended period of time argued for not ening in overall credit conditions. They changing the ranges at midyear but emphasized that the persistence of inflawaiting until February. Such uncertain- tionary pressures and the related need to ties loomed especially large at this time maintain the credibility of the System's because of the possibility of a major anti-inflationary policy warranted particadjustment in fiscal policy and the critical ular caution against any premature easing questions that remained concerning the or any policy move that might be interoutlook for credit conditions. preted as such. However, a number of In the Committee's discussion of policy these members acknowledged that they implementation for the weeks ahead, all too were concerned by the very sluggish of the members supported a proposal to monetary growth in recent months, at maintain unchanged conditions in reserve least to the extent that it could not be markets at least initially following this explained by technical factors and might meeting, and a majority favored a direc- therefore be signaling a weaker economy tive that could accommodate some slight or an inappropriately restrictive moneeasing of reserve conditions fairly soon tary policy. unless incoming indicators suggested According to a staff analysis prepared appreciably stronger monetary growth for this meeting, growth of M2 was likely and greater inflationary pressures than to resume over the third quarter, but only the members currently expected. The to a pace that would keep this aggregate degree of monetary restraint sought by near the lower end of the Committee's the Committee since late 1989 remained range for the year, assuming steady appropriate, but despite a steady policy money market conditions and an ecocourse, credit conditions appeared to nomic performance in line with the have tightened at least marginally in members' expectations. The expansion recent months. The evidence of such of M3 was projected to remain very tightening, while not conclusive, had sluggish as components of this aggregate become more persuasive and was a continued to respond to thrift industry source of increasing concern; the marked and related developments that had inhibslowing in monetary growth in the second ited their growth. quarter in particular suggested the possi- At the conclusion of the Committee's bility of more restraint than the Commit- discussion, all of the members indicated tee intended. Nonetheless, in the view of that they favored or could accept a nearly all the members, the persistence directive that called for maintaining the of inflation argued for caution and against existing degree of pressure on reserve any adjustment that would have the effect positions for at least a short period after of easing the overall thrust of policy this meeting. Subsequently, some slight unless incoming information on the mon- easing of reserve conditions could be Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 111 implemented unless incoming data on the Business capital spending appears to have monetary aggregates and the economy slackened a bit in the spring after a pickup earlier in the year. Residential construction evidenced greater strength; because of has fallen to a relatively low level in recent the minor firming that appeared to have months. The nominal U.S. merchandise trade occurred in general credit conditions, deficit narrowed in April from its average rate such easing in the availability of reserves in the first quarter. Partly reflecting an would in effect serve to maintain the unwinding of the earlier jump in prices of food and energy, consumer prices rose at a overall degree of monetary restraint that slower rate in April and May, while producer the Committee had sought to implement prices were unchanged over the two months. since late 1989. In keeping with this The latest data on wages suggest no improveapproach to policy, the directive provided ment in underlying trends. that slightly greater reserve restraint Short-term interest rates have changed little might be acceptable during the intermeet- on balance since the Committee meeting on May 15, while rates in long-term debt markets ing period or somewhat lesser restraint have declined somewhat over the intermeeting would be acceptable depending on period. The trade-weighted foreign exchange progress toward price stability, the value of the dollar in terms of the other G-10 strength of the business expansion, the currencies was somewhat higher over much behavior of the monetary aggregates, of the period but declined late in the period to a level slightly below that prevailing at the and developments in foreign exchange time of the May meeting. and domestic financial markets. The M2 and M3 declined in May; available data reserve conditions contemplated at this for June suggest a partial rebound in M2 and meeting were expected to be consistent little change in M3. Growth of M2 and with growth of M2 and M3 at annual especially of M3 has been damped by the continuing contraction of deposits of thrift rates of 3 and 1 percent respectively over institutions resulting from the restructuring of the three-month period from June to the thrift industry. Through June, expansion September. The intermeeting range for of M2 was estimated to be in the lower portion the federal funds rate, which provides of its range for 1990 and growth of M3 one mechanism for initiating consultation somewhat below its range for the year. of the Committee when its boundaries are Expansion of total domestic nonfinancial debt appears to have been at the midpoint of its persistently exceeded, was left unmonitoring range. changed at 6 to 10 percent. The Federal Open Market Committee seeks At the conclusion of the meeting, the monetary and financial conditions that will following domestic policy directive was foster price stability, promote growth in issued to the Federal Reserve Bank of output on a sustainable basis, and contribute to an improved pattern of international trans- New York: actions. In furtherance of these objectives the Committee reaffirmed at this meeting the The information reviewed at this meeting range it had established in February for M2 suggests that economic activity is continuing growth of 3 to 7 percent, measured from the to expand but at a relatively slow pace. Total fourth quarter of 1989 to the fourth quarter of nonfarm payroll employment has increased at 1990. The Committee also retained the mona much reduced rate in recent months. Never- itoring range of 5 to 9 percent for the year that theless, the civilian unemployment rate has it had set for growth of total domestic remained in a narrow range for an extended nonfinancial debt. With regard to M3, the period and was 5.3 percent in May. Industrial Committee recognized that the ongoing reproduction increased substantially in May, structuring of thrift depository institutions largely reflecting a rebound in the manufac- had depressed its growth relative to spending ture of motor vehicles. Consumer spending and total credit more than anticipated. Taking has been sluggish in recent months; outlays account of the unexpectedly strong M3 velocfor goods have declined while expenditures ity, the Committee decided to reduce the for services have increased at a slower pace. 1990 range to 1 to 5 percent. For 1991, the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 77th Annual Report, 1990 Committee agreed on provisional ranges for business capital spending appeared slugmonetary growth, measured from the fourth gish, and the demand for new housing quarter of 1990 to the fourth quarter of 1991, had weakened further. Labor demand of 2Vi to 6V2 percent for M2 and 1 to 5 percent had softened on balance since the spring for M3. The Committee tentatively set the associated monitoring range for growth of and the unemployment rate had risen total domestic nonflnancial debt at AVi to recently, but labor costs showed no sign 8^2 percent for 1991. The behavior of the of decelerating. Underlying trends in monetary aggregates will continue to be inflation appeared to be little changed. evaluated in the light of progress toward price Total nonfarm payroll employment level stability, movements in their velocities, and developments in the economy and finan- registered a large decline in July after cial markets. having risen considerably over the two In the implementation of policy for the previous months. Much of the July drop immediate future, the Committee seeks to resulted from layoffs of temporary census maintain the existing degree of pressure on workers; however, payrolls shrank in reserve positions. Taking account of progress manufacturing, construction, and busitoward price stability, the strength of the business expansion, the behavior of the ness services, and hiring remained slow monetary aggregates, and developments in elsewhere. The civilian unemployment foreign exchange and domestic financial rate rose to 5.5 percent in July, just above markets, slightly greater reserve restraint the narrow range that had prevailed for might or somewhat lesser reserve restraint an extended period. In contrast to the would be acceptable in the intermeeting period. The contemplated reserve conditions employment data, hours worked by proare expected to be consistent with growth of duction and nonsupervisory workers M2 and M3 over the period from June through edged up in July, and initial claims for September at annual rates of about 3 and unemployment insurance continued to 1 percent respectively. The Chairman may fluctuate narrowly around the average call for Committee consultation if it appears to the Manager for Domestic Operations that pace of the first half of the year. reserve conditions during the period before After rising appreciably in the second the next meeting are likely to be associated quarter, industrial production was unwith a federal funds rate persistently outside a changed in July. Output of goods other range of 6 to 10 percent. than motor vehicles rose at about the moderate pace evident thus far this year. Votes for the paragraph on short-run policy implementation: Messrs. Greenspan, Cor- Total industrial capacity utilization rerigan, Angell, Boehne, Boy kin, Hoskins, traced its June rise but remained some- Kelley, LaWare, and Mullins, Ms. Seger what above its level at the start of the and Mr. Stern. Votes against this action: year. The operating rate in manufacturing None. Absent and not voting: Mr. Johnson. also slipped in July, though it stayed in the narrow range that had prevailed this year after an appreciable reduction in Meeting Held on 1989. August 21,1990 After declining in earlier months, nominal retail sales rose considerably on Domestic Policy Directive balance over June and July. There were The information reviewed at this meeting substantial upward revisions to sales for suggested that economic activity was both May and June; nevertheless, for the continuing to expand at a relatively slow second quarter as a whole, gains in total pace. Growth in exports and some expan- personal consumption expenditures apsion in consumer spending were support- peared to have been relatively limited. In ing final demands. At the same time, July, housing starts fell for the sixth Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 129 straight month. Most of the decline was for the second quarter was substantially in multifamily units, but starts in the reduced from its first-quarter rate and single-family segment of the market was the lowest quarterly average since edged lower as sales of new homes 1983. Measures of economic activity for continued sluggish and inventories of the second quarter suggested that growth unsold homes remained relatively large. had remained robust in Japan and West Shipments of nondefense capital goods Germany but had slowed somewhat in rose sharply in June after a decline, on other major foreign industrial countries. balance, in April and May; most of the Measured inflation rates were unchanged gain in June reflected higher outlays for or had declined slightly in major indusaircraft and for office and computing trial nations other than the United Kingequipment. Over the past four quarters, dom, although the recent rise in oil prices, however, equipment outlays had changed among other factors, raised concerns little as increases in spending on comput- about renewed inflationary pressures. ers had been offset by reduced purchases Crude oil prices had risen sharply in of industrial equipment and motor vehi- spot markets in the weeks before the cles . A net decline in the nominal value of Committee meeting, largely in response orders for nondefense capital goods in to the Iraqi invasion of Kuwait. Available recent months pointed to sluggishness in aggregate measures of producer and equipment spending in the near term. consumer prices predated the increase in Nonresidential construction activity oil prices, and these data suggested strengthened in June, especially for office persisting price pressures outside the food buildings, but the downtrend in permits and energy categories. Producer prices and contracts for new construction sug- of finished goods were little changed on gested continued softness in this sector. balance in June and July as declines in the Business inventory investment had been prices of food and energy products offset moderate in the second quarter, and there a further rise in the prices of other was no general indication of inventory finished goods. Consumer prices rose imbalances in relation to sales. At manu- appreciably further in July, reflecting an facturing and wholesale establishments, acceleration in prices of nonfood, noninventories fell appreciably in June, and energy items. The latest data on total the ratio of inventories to shipments labor costs indicated that hourly compenedged lower. At the retail level, nonauto sation for private industry workers had stocks climbed somewhat further in June, increased more rapidly in the twelve but with recent gains in sales, inventory- months ended in June than in the yearsales ratios dropped back after wide- earlier period. spread increases in the two previous At its meeting on July 2-3, 1990, the months. Committee adopted a directive that called The nominal deficit in U.S. merchan- for maintaining the existing degree of dise trade narrowed sharply in June. The pressure on reserve positions for at least value of exports rose substantially from a short period after die meeting and that the May level, with most of the increase provided for some slight easing subseoccurring in civilian aircraft and parts, quently unless incoming data on the consumer goods, and agricultural prod- monetary aggregates and the economy ucts. The value of imports was down evidenced greater strength. Accordingly, somewhat; about half of the decrease slightly greater reserve restraint might be resulted from declines in the price and acceptable or somewhat lesser reserve quantity of oil imports. The trade deficit restraint would be acceptable during the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 77th Annual Report, 1990 intermeeting period, depending on interval, were off substantially on net progress toward price stability, the over the period. strength of the business expansion, the The trade-weighted foreign exchange behavior of the monetary aggregates, value of the dollar in terms of the other and developments in foreign exchange G-10 currencies declined considerably and domestic financial markets. In the over the intermeeting period. Tighter circumstances, M2 and M3 were ex- monetary conditions in Japan and West pected to grow at annual rates of about 3 Germany and some easing of short-term and 1 percent respectively over the period interest rates in the United States, along from June through September. with market perceptions that these diver- After the Committee meeting, open gent trends might continue, contributed market operations were directed initially to downward pressures on the dollar. The at maintaining unchanged reserve dollar declined more sharply against the conditions. Later, in mid-July, pressures German mark than the Japanese yen. on reserve positions were eased slightly Late in the intermeeting period, unceras restrictions on credit supplies at tainty associated with the Iraqi invasion banks, signaled in part by lagging money of Kuwait provided a short-lived boost growth, suggested that credit conditions for the dollar. were tighter than appropriate at a time M2 grew slowly in June and July, when the economy already was growing while M3 changed little; available data very slowly. Adjustment plus seasonal for August suggested that growth of both borrowing averaged about $500 million aggregates was rebounding. Growth of in the three reserve maintenance periods M2 and especially of M3 had been completed since the July meeting. In late damped by the continuing contraction of July and early August, technical deposits at thrift institutions resulting adjustments were made to assumed from the restructuring of the thrift induslevels of such borrowing to reflect the try. Through July, expansion of both M2 continued upswing in seasonal bor- and M3 was estimated to be in the lower rowing. The federal funds rate averaged portions of their respective ranges for about $lA percent at the time of the July 1990. Expansion of total domestic nonfimeeting but, after the easing of reserve nancial debt appeared to have been near conditions in mid-July, federal funds the midpoint of the Committee's monitortraded around the 8 percent level. Most ing range. other short-term interest rates had The staff projection prepared for this dropped somewhat since the July meeting recognized that the recent steep meeting, largely in reaction to easier rise in oil prices could have important reserve conditions but also to some adverse effects on economic activity and extent in reflection of expectations of inflation. It was not possible, though, to some further easing in light of additional determine with any confidence how oil indications of a relatively sluggish econ- prices might evolve over time, and this omy. Bond yields had remained was clouding further an already uncertain unchanged on balance through the end economic outlook. Under a variety of of July, but the invasion of Kuwait at the plausible assumptions about oil prices, beginning of August and the associated economic activity was likely to expand rise in energy prices propelled long- over the balance of the year, but at a term rates upward. Broad measures of weaker pace than had been forecast stock prices, some of which had reached earlier. The retarding effects of higher record highs earlier in the intermeeting energy prices on the growth of disposable Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 131 incomes were expected to damp con- and some regions of the country. At the sumer purchases of goods, notably con- same time, broad measures of prices and sumer durables, over the quarters imme- labor costs suggested that the underlying diately ahead. If the price of oil were to rate of inflation—abstracting from swings fall back somewhat next year, a strength- in food and energy costs—had not turned ening of disposable incomes would tend down despite slow monetary expansion to boost economic growth toward a pace and the apparent growth of the economy that was closer to the economy's long-run at a pace below potential over the past potential by the latter part of next year. If several quarters. For some members, oil prices were to stay at high levels, these data pointed to a relatively even however, the recovery in consumer balance, prior to the surge in oil prices, spending and economic growth would be between the risks of a weakening econdelayed for several quarters. In either omy and rising inflation. For others, a event, the staff anticipated considerable deterioration in consumer and business growth in exports over the next several attitudes even before the Iraqi invasion of quarters in conjunction with continuing Kuwait and the indications of continuing economic expansion in some major for- restrictions on credit availability at banks, eign industrial nations and the deprecia- among other factors, suggested that the tion that had already occurred in the risks had been tilted toward some potenforeign exchange value of the dollar. tial further weakening of the economy. Business capital spending was projected The steep rise in oil prices was exto remain relatively sluggish in the pected to have a retarding effect on ecoquarters ahead, though expenditures on nomic activity during the months improducers durable equipment could mediately ahead and to exacerbate strengthen were oil prices to drop back inflationary pressures. The increase in and retail sales to improve. Moderate oil prices also added greatly to the restraint in expenditures at all levels of uncertainties about the prospects for ecogovernment was assumed. The rise in oil nomic activity and inflation over time, prices was expected to boost price infla- because the outcomes would depend on tion to an appreciable degree for the next the response of consumers to reductions few quarters; the extent and duration of in real disposable incomes, the reaction these effects would depend on the future of businesses to potentially lower sales, behavior of oil prices, but the adverse and the extent of acceptance by workers effect on inflation expectations and on of declines in their real wages associated wage and price inflation over the longer with a higher price of oil. Nonetheless, in run would be limited by reduced pres- the absence of more pronounced or longsures on resources. lasting disturbances from events in the In its discussion of the economic Middle East, the members generally felt situation and outlook, the Committee that limited growth in economic activity focused on both the state of the economy remained a reasonable expectation, and before the increase in oil prices and the in the circumstances they would anticilikely consequences for real output and pate some decline in the rate of inflation, inflation of that rise. Available data, though progress was likely to occur only which pertained to business conditions after a nearer-term setback. prior to the invasion of Kuwait, pointed In their review of business conditions to continuing slow economic growth, in specific sectors of the economy and even though business activity was slip- regions of the country, members ping in various sectors of the economy observed that continuing expansion in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 77th Annual Report, 1990 consumer spending and further growth some others where previously it had been in net exports appeared likely to sustain relatively well maintained. Housing conat least limited expansion in overall eco- struction in the view of some members nomic activity. Revised data suggested might weaken somewhat further before it that total retail sales had been reasonably began to stabilize. With regard to the well maintained in recent months despite outlook for fiscal policy, members were mixed reports from different parts of the concerned that the prospects for a politicountry. However, as evidenced by cal compromise leading to a substantial surveys conducted immediately after the reduction in the federal budget deficit had Iraqi invasion of Kuwait, consumer deteriorated as a consequence of the sentiment could deteriorate rapidly. invasion of Kuwait. It might prove more Apparently, consumer attitudes already difficult to curb spending or to raise taxes had been adversely affected by the in a period of weak economic expansion softening in home prices and worsening or in conjunction with any surge in of employment prospects in many parts military expenditures. At the state and of the country; moreover, higher costs local level, by contrast, the worsening for energy were likely to limit any budgetary situation in many jurisdictions increase in discretionary spending. With seemed likely to induce spending curbs regard to the prospects for foreign trade, and higher taxes. a number of members expressed some In the course of the Committee's disoptimism that the nation's trade balance cussion, members commented on conwould continue to improve, given the tinuing indications of tightened credit outlook for further economic growth in standards. The results of a survey showed a number of major industrial countries. that credit availability had been reduced The report of a substantial decline in the since the spring, but some members trade deficit for the second quarter was sensed that lending institutions as a group viewed as an encouraging sign, and had not tightened credit terms further in contacts in many parts of the country recent weeks. Many lenders reported indicated that export demand was that they were making credit readily helping to sustain manufacturing activity available to good credit risks, and it was at many firms. Higher oil prices would clear that a sizable portion of the weakadversely affect foreign economies, but ness in lending could be attributed to many other countries had trimmed their reduced loan demand on the part of borenergy consumption considerably, and rowers, including consumers, rather than the reduction in oil supplies, if it to a curtailed supply of loans. Nonethepersisted, should not disrupt in a major less, contacts in many areas indicated way the upward momentum of their that some business borrowers, notably expansion. builders, were continuing to experience On the other hand, the prospects for serious problems in obtaining credit and business capital spending were less favor- that riskier borrowers were facing more able, at least in the absence of faster stringent standards at banks at a time growth in final demand than the members when markets for securities of less than now anticipated. Business sentiment investment grade had virtually disapseemed to have deteriorated in several peared. Members remained concerned parts of the country. Commercial con- about the exposure of many financial struction activity continued to be de- institutions and of heavily indebted busipressed by high vacancy rates in many ness firms and individuals to adverse areas and appeared to be softening in economic developments. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 133 Turning to the outlook for inflation, move to counter inflation might stall an the members continued to express disap- already weak economic expansion. In pointment over the lack of evidence of a these circumstances, the members generdecline in the core rate of inflation; of ally concluded that the Federal Reserve particular concern was the failure of could best contribute to the nation's ecoincreases in labor costs to moderate. By nomic goals by fostering a stable policy some measures, inflation could be judged environment. The prospective perforto have worsened marginally even before mance of the economy was very likely to the recent surge in oil prices. The future be dominated by events that were outside course of oil prices was highly uncertain, the Committee's control, including not but the recent rise in these prices would only developments in the Middle East but undoubtedly raise the measured inflation decisions to be made with regard to the rate in the period ahead. Moreover, the federal budget deficit. depreciation of the dollar over the course While acknowledging the current unof previous months would exert upward certainties and policy limitations that the pressures on prices. Whether these pres- Committee was facing, several members sures from oil prices and the dollar would underscored the need to avoid any paralbe translated into higher inflation rates ysis of policy as conditions evolved in the over longer periods of time would depend weeks and months ahead and circumnot only on their near-term pass-through stances permitted an effective policy into prices and wages but more fundamen- response. In the opinion of several memtally on their influence on inflation expec- bers, events appeared likely to unfold in a tations. In this regard, the slack that direction that would require an easing of seemed to be developing in resource policy at some point to counter weakening utilization, while regrettable in some tendencies in the economy that had been respects, would help to forestall a more in train before the oil price increase. The permanent increase in wage and price timing and circumstances of any such inflation. easing would have to be weighed care- In the Committee's discussion of policy fully, however, to avoid an unfavorable for the weeks ahead, members com- impact on inflationary attitudes and assomented that the heightened uncertainties ciated upward pressure on long-term and the prospectively less satisfactory interest rates, especially since the dollar performance of the economy stemming had been under downward pressure in the from events in the Middle East had foreign exchange markets. A number of greatly complicated the formulation of an other members viewed the risks to the effective monetary policy. Uncertainties economy as more evenly balanced. These about the developments in the Middle members saw a substantial risk of some East made it difficult to judge an appro- intensification in inflationary pressures, priate policy stance, and those uncertain- particularly in the context of higher ties had been reflected in unusually energy prices. The downward movement volatile financial markets. More funda- of the dollar since the fall of 1989, flat or mentally, with the surge in oil prices even mildly rising commodity prices, tending to weaken economic activity and the now upward sloping yield curve while also intensifying inflationary pres- argued for a relatively restrictive monesures, an easing in policy would incur the tary policy, pending further developrisk of overcompensating for potential ments. For the present, all the members weakness in the economy at the expense indicated that they could support a steady of greater inflation, while a tightening policy, given the current uncertainties Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 77th Annual Report, 1990 and the possibility of unsettlement in ening would be especially inappropriate foreign exchange and domestic financial in this view, given the current indications markets. of weaknesses in the economy and the In the course of the discussion, the vulnerability of many financial institumembers took account of a staff analysis, tions and heavily indebted borrowers to which suggested that, on the assumption higher interest costs. Other members of an unchanged degree of reserve re- acknowledged the threat of a deterioratstraint, growth in M2 and M3 was likely ing economy, but because they also saw a to pick up to some extent from the pace in considerable risk that underlying inflarecent months, in part because of a tionary pressures might worsen, they narrowing in the opportunity costs of preferred a symmetrical directive that holding assets included in those monetary gave equal weight to possible intermeetmeasures. Members noted that the very ing adjustments in either direction. A few recent strengthening of the monetary members would not rule out the possibilaggregates tended to reinforce the staff ity of some tightening, which might foster assessment and to diminish the case for some decline in long-term interest rates any near-term easing of reserve condi- by having quite beneficial effects on tions, though it also was recognized that inflation expectations and by reinforcing some of the strength represented a greater the public's perception of the Commitpreference for liquidity in an uncertain tee's commitment to its price-stability environment. Given the particular diffi- objective. culty of charting an appropriate course At the conclusion of the Committee's for monetary policy in current circum- discussion, all the members indicated stances, some members suggested that that they favored or could accept a the behavior of the monetary aggregates directive that called for maintaining needed to be monitored with special care unchanged conditions of reserve availand that greater-than-usual emphasis ability, at least initially, in the intermeetshould be given to fostering desired rates ing period ahead and that provided for of monetary growth. giving emphasis to potential develop- While all the members could support ments that might require some easing an unchanged policy stance for at least during the intermeeting period. Accordsome initial period after today's meeting, ingly, slightly greater reserve restraint their somewhat differing assessments of might be acceptable during the intermeetthe most likely course for monetary ing period, while some easing of reserve policy were associated with some differ- pressure would be acceptable, depending ences in their views with regard to the on progress toward price stability, the possible need to adjust reserve conditions strength of the business expansion, the later during the intermeeting period. A behavior of the monetary aggregates, majority indicated a preference for a and developments in foreign exchange directive that was tilted toward potential and domestic financial markets. The easing. Some of these members indicated reserve conditions contemplated by the that they had been leaning toward an Committee were expected to be consiseasing move prior to the events in the tent with somewhat faster near-term Middle East, and they now felt that growth in money than the members had reserve conditions should be eased anticipated earlier, including growth in promptly if conditions in domestic finan- M2 and M3 at annual rates of about 4 and cial and foreign exchange markets pro- 2Vi percent respectively over the threevided an appropriate opportunity. Tight- month period from June to September. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 135 The intermeeting range for the federal respective ranges for 1990. Expansion of funds rate, which provides one mecha- total domestic nonfinancial debt appears to have been near the midpoint of its monitoring nism for initiating consultation of the range. Committee when its boundaries are per- The Federal Open Market Committee seeks sistently exceeded, was left unchanged at monetary and financial conditions that will 6 to 10 percent. foster price stability, promote growth in At the conclusion of the meeting, the output on a sustainable basis, and contribute to an improved pattern of international transfollowing domestic policy directive was actions. In furtherance of these objectives, issued to the Federal Reserve Bank of the Committee at its meeting in July reaf- New York: firmed the range it had established in February for M2 growth of 3 to 7 percent, measured The information reviewed at this meeting from the fourth quarter of 1989 to the fourth suggests that economic activity is continuing quarter of 1990. The Committee in July also to expand at a relatively slow pace. After a retained the monitoring range of 5 to 9 percent sizable rise in May and June, total nonfarm for the year that it had set for growth of total payroll employment registered a large decline domestic nonfinancial debt. With regard to in July, much but not all of which reflected M3, the Committee recognized that the layoffs of temporary census workers. The ongoing restructuring of thrift depository civilian unemployment rate rose to 5.5 percent institutions had depressed its growth relative in July, just above the narrow range that had to spending and total credit more than anticiprevailed for an extended period. Industrial pated. Taking account of the unexpectedly production was unchanged in July after rising strong M3 velocity, the Committee decided in appreciably in the second quarter. Retail sales July to reduce the 1990 range to 1 to 5 percent. rose considerably on balance over June and For 1991, the Committee agreed on provi- July after declines in earlier months. Available sional ranges for monetary growth, measured indicators point to a sluggish trend in business from the fourth quarter of 1990 to the fourth capital spending. Residential construction quarter of 1991, of 2% to 6% percent for M2 weakened further in July. The nominal U.S. and 1 to 5 percent for M3. The Committee merchandise trade deficit narrowed sharply in tentatively set the associated monitoring range June; for the second quarter, the trade deficit for growth of total domestic nonfinancial debt was substantially reduced from its first- at 4Vfc to 8 lA percent for 1991. The behavior of quarter rate. Consumer prices rose apprecia- the monetary aggregates will continue to be bly further in June and July, while producer evaluated in the light of progress toward price prices were about unchanged over the two level stability, movements in their velocities, months. The latest data on labor costs suggest and developments in the economy and finanno improvement in underlying trends. Crude cial markets. oil prices have risen sharply over the last In the implementation of policy for the several weeks. immediate future, the Committee seeks to Short-term interest rates have fallen some- maintain the existing degree of pressure on what since the Committee meeting on July reserve positions. Taking account of progress 2-3, while rates in bond markets have risen toward price stability, the strength of the appreciably, as oil prices have increased. The business expansion, the behavior of the trade-weighted foreign exchange value of the monetary aggregates, and developments in dollar in terms of the other G-10 currencies foreign exchange and domestic financial declined considerably over the intermeeting markets, slightly greater reserve restraint period. might or somewhat lesser reserve restraint M2 grew slowly in June and July, while M3 would be acceptable in the intermeeting was little changed; available data for August period. The contemplated reserve conditions suggest a partial rebound in both aggregates. are expected to be consistent with growth of Growth of M2 and especially of M3 has been M2 and M3 over the period from June through damped by the continuing contraction of de- September at annual rates of about 4 and posits at thrift institutions resulting from the 2!/2 percent respectively. The Chairman may restructuring of the thrift industry. Through call for Committee consultation if it appears July, expansion of both M2 and M3 was to the Manager for Domestic Operations that estimated to be in the lower portions of their reserve conditions during the period before Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

136 77th Annual Report, 1990 the next meeting are likely to be associated consumer goods other than motor vehiwith a federal funds rate persistently outside a cles firmed a bit on balance after declining range of 6 to 10 percent. earlier in the year. Total industrial capacity utilization slipped in July and August. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Boehne, Boykin, In manufacturing, operating rates de- Hoskins, Kelley, LaWare, and Mullins, clined further in most industries and were Ms. Seger, and Mr. Stern. Votes against appreciably below year-earlier levels. this action: None. Consumer spending in real terms was up slightly on balance in July and August; however, averaged over the two months, Meeting Held on spending was significantly above the level October 2,1990 for the second quarter. Outlays for services rose in August at a pace well below Domestic Policy Directive that registered over the previous several The information reviewed at this meeting months. Spending for motor vehicles and suggested that economic activity had parts fell, but outlays for other consumer expanded at a slow pace in the third goods posted moderate increases. Major quarter. The available data provided only surveys of consumer attitudes indicated a limited evidence of a retarding effect of sharp deterioration in the confidence of the recent large increase in oil prices on consumers. Total private housing starts production and aggregate spending. Key declined for the seventh consecutive measures of inflation had been boosted month. Single-family starts slid further, by the rise in oil prices, but on the evidently in response to continued weakconsumer level the upward march in ness in sales of new homes. prices of items other than food and energy In August, shipments of nondefense also appeared to have quickened some- capital goods retraced part of a large what. Data on labor costs suggested no July decline. Average shipments for improvement in underlying trends. the July-August period were below Total nonfarm payroll employment their second-quarter level, which declined in July and August, largely suggested that overall equipment because of layoffs of temporary census spending remained in a relatively flat workers. Employment in the private trend. Shipments of office and comsector was little changed over the two puting equipment appeared to be months as widespread declines in jobs at somewhat weaker, while shipments of manufacturing and construction estab- aircraft in July were well above their lishments offset limited gains in the second-quarter average. New orders for service-producing sector. In the weeks nondefense capital goods changed little after the August employment survey, in July and August from their level in the initial claims for unemployment insur- second quarter, which pointed to ance moved into a slightly higher range continued sluggish equipment spending than had prevailed in the preceding few in coming months. Nonresidential months. The civilian unemployment rate construction put in place increased in edged up to 5.6 percent in August. June and July, but anecdotal information After showing strong gains over the and other indicators suggested a previous two months, industrial produc- downward trend in nonresidential tion was about flato n balance in July and building activity, reflecting the per- August. Output of construction supplies sistence of high vacancy rates for continued to fall, but production of commercial properties and the financial Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 137 pressures on builders and their lenders. as that recorded during the previous Manufacturing inventories rebounded in twelve months. July from a sizable June decline; the At its meeting on August 21, the stock-shipments ratio remained near the Committee adopted a directive that called lows of the current business expansion. for maintaining unchanged conditions of Wholesale and nonauto retail trade reserve availability, at least initially, in inventories expanded in July at a pace the intermeeting period ahead and that near the average rate of accumulation provided for giving emphasis to potential over the second quarter. developments that might require some The nominal U.S. merchandise trade easing later in the period. Accordingly, deficit widened sharply in July from the the directive indicated that slightly greater revised, unusually low rate in June. The reserve restraint might be acceptable value of exports more than retraced its during the intermeeting period, while sizable June pickup, with decreases some easing of reserve pressure would be widespread among major trade cate- acceptable, depending on progress togories that had risen in June. The value of ward price stability, the strength of the imports increased in July for a range of business expansion, the behavior of the commodities, but the total remained monetary aggregates, and developments below peak monthly rates reached earlier in foreign exchange and domestic finanin the year. Higher oil imports in July cial markets. The reserve conditions reflected a rise in the quantity of oil contemplated by the Committee were imported as prices paid edged lower that expected to be consistent with growth of month before turning up in August and M2 and M3 at annual rates of about 4 and September in response to developments 2Vi percent respectively over the threein the Middle East. month period from June to September. Markedly higher domestic oil prices With price pressures, even outside of in August contributed to substantial the energy sector, not abating and the increases that month in producer and economy continuing to advance, albeit consumer prices. Producer prices of slowly, open market operations during finished goods reflected a rapid pass- the intermeeting period were directed at through of the higher oil costs into maintaining unchanged reserve condiconsumer energy products. Prices of tions. In the three reserve maintenance non-energy, nonfood items rose in periods completed since the August meet- August at about the moderate average ing, adjustment plus seasonal borrowing monthly pace evident thus far this year. averaged about $800 million, an amount Consumer prices surged in August, inflated by circumstances that gave rise largely reflecting the higher oil prices. to sharply higher federal funds rates and Excluding food and energy items, unusually heavy adjustment credit extenconsumer inflation picked up in July and sions on the final day of each of these August from the second-quarter rate; maintenance periods. The federal funds the acceleration resulted from price rate generally remained near 8 percent advances for non-energy services as over the intermeeting period, but it edged prices of commodities flattened out in higher late in the period in the context of August after rising moderately in July. quarter-end pressures and more cautious Average hourly earnings rose in August reserve management policies at some at a little slower pace; however, over the banks. Treasury bill rates fell somewhat twelve months ended in August, hourly over the intermeeting period, apparently earnings increased at about the same rate reflecting heightened investor preference Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

138 77th Annual Report, 1990 for liquidity and safety, while rates on portion of its range. Expansion of total private market instruments changed little domestic nonfinancial debt appeared to on balance. In the bond markets, yields have been near the midpoint of its monion investment-grade securities edged toring range. down. Interest rates on lower-rated instru- The staff projection was prepared ments rose considerably, as higher oil against the background of unpredictable prices were seen as presaging a sluggish developments in the Middle East and the real economy and greater strains on substantial adverse effects of high oil issuers of such debt. In addition, yields prices on domestic inflation and ecoon subordinated debt obligations of some nomic activity. While it was recognized major banking organizations increased that a range of plausible assumptions sharply, reflecting growing investor con- could be made about the prospective cerns about the effects of softening real behavior of oil prices, the projection estate values and sluggish economic assumed no further major disruption to activity on the quality of bank loan oil supplies and an appreciable drop in oil portfolios. Broad indexes of stock prices prices in the first half of next year as moved lower over the period. production expanded worldwide to fill The trade-weighted foreign exchange the void left by Kuwait and Iraq. In the value of the dollar in terms of the other interim, the retarding effects of higher G-10 currencies declined slightly further energy costs would depress the growth of on balance from the low level reached at real disposable incomes and consumer the time of the August meeting. The spending. Weaker consumer demand dollar changed little against most major along with uncertainty about the outlook currencies, but it depreciated substan- would retard business capital spending. tially against the yen as monetary condi- Construction spending—both residential tions were tightened further in Japan in and nonresidential — was expected to response to continued strength in eco- continue to decline, reflecting the effects nomic activity and potential price pres- of softer housing prices, reduced credit sures in that country. Economic growth availability, and high vacancy rates for in the other G-10 countries slowed, on commercial structures. Under the circumaverage, in the second quarter, but recent stances, a mild downturn in overall ecoindicators suggested a rebound in some nomic activity was projected for the near of those countries. term. However, the staff continued to M2 expanded at an appreciably faster anticipate considerable growth in exports rate in August, and available data sug- over the next several quarters in conjuncgested continued strength in September. tion with further economic expansion in M3 also accelerated in August, but its several major foreign industrial nations growth appeared to have slowed some- and in response to the substantial deprewhat in September. More rapid expansion ciation that had occurred in the foreign of Ml and a surge in money market exchange value of the dollar. The impetus funds, as investors apparently switched from the external sector and a rebound in out of the stock and bond markets, consumer expenditures fostered by the contributed to the greater strength of the assumed drop in oil prices in coming broader aggregates over the two months. quarters would bring a resumption of Through September, expansion of M2 moderate economic growth. The projecwas estimated to be a little below the tion assumed that deficit reduction meamiddle of the Committee's range for the sures about in line with the proposal now year, and growth of M3 was in the lower before the Congress would be adopted. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 139 The outlook for inflation remained ary forces, but there was still some risk clouded by the very uncertain prospects that upward movements of oil and import for oil prices. The sizable decline in oil prices would intensify inflationary expecprices projected for next year along with tations, fostering increases in wages and the opening up of slack in resource other costs that would become more utilization would foster a lower rate of deeply embedded in the cost structure of consumerprice inflation, but the improve- the economy. ment would be limited by the lagged Many of the members observed that effects of the decline that had occurred in the recently negotiated federal budget the foreign exchange value of the dollar. proposal incorporated a significant de- In the Committee's discussion of the gree of fiscal restraint, a potentially economic situation and outlook, mem- workable enforcement mechanism, and a bers commented that despite weaknesses desirable multi-year commitment. Final in some sectors of the economy and parts enactment of a budget along the lines of of the country, overall economic activity the proposal would establish a sounder appeared to be continuing to expand, basis for a satisfactory performance of although at a relatively slow pace. Many the economy. However, the federal budof the members observed that, insofar as get deficit would still be extraordinarily could be judged on the basis of traditional large, and the commitment to enforce indicators, the available data did not point fiscal restraint measures in the future to cumulating weakness and the onset of a remained to be tested. recession. At the same time, however, In the course of the Committee's disthe risks of a recession were felt to have cussion, members focused considerable increased. These risks stemmed to an attention on developments in credit marimportant extent from developments in kets. The financial strains being experithe Middle East and the continuing enced currently by many lending institufinancial strains in the economy that were tions reflected especially the problems in adding to stringency in credit markets. the real estate sector, although the buildup Business and consumer confidence ap- in earlier years of debt owed by less peared to have deteriorated considerably, developed countries and the tenuous especially since early August. The mem- condition of some highly leveraged dobers generally agreed that some tendency mestic business firms tended to aggravate for economic growth to moderate and current difficulties. Efforts by banks and inflation to worsen for a time could not other lenders to protect or improve their be avoided as a result of oil price capital positions in the face of deterioratdevelopments. ing loan portfolios were reflected in Despite the relatively limited growth widespread signs of growing constraints of the economy and the apparent fragility on the availability of credit and increases of the expansion, the prospects for infla- in its cost, especially to less than prime tion were viewed with concern. To a borrowers that lack direct access to considerable extent, recent increases in securities markets. This pullback was not key measures of inflation reflected the limited to domestic lenders; foreign pass-through effects of the surge in oil institutions, which previously had been prices, but many of the members felt that quite aggressive suppliers of funds to the underlying rate of inflation also had U.S. credit markets, now seemed less worsened even apart from the effects of willing to fill the gap left by domestic higher oil prices. Reduced pressures on lenders. It was difficult to judge the extent resources would help to contain inflation- of the reduced availability of credit Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

140 77th Annual Report, 1990 because the weakness in loan growth also that real consumer outlays in July and reflected an apparently substantial cut- August were well above the secondback in the demand for credit. In the view quarter average. Nonetheless, there was of a number of members, the exposure of evidence that consumer sentiment had the economy to a severe downturn in worsened considerably in response to a business activity did not stem in present variety of developments including a circumstances from potential adjustments decline in the value of many consumer of the usual cyclical kind to overcapacity assets, especially homes in numerous and overproduction, including excessive parts of the country, the heavy debt inventories in relation to orders and sales, burdens of many consumers, declining but from the possible aggravation of the employment opportunities in a number of strains in financial markets, further re- areas, and more generally the reduced trenchment in lending by banks and purchasing power associated with rising others, and the increased difficulty of prices of energy. These developments many heavily indebted businesses and appeared likely to hold down consumer individuals to meet and service their debt spending for some period of time. With obligations in a sluggish economy. On regard to the outlook for business capital the positive side, the financial system and spending, commercial construction the economy continued to display a would continue to be curtailed by wideremarkable degree of resiliency, and in spread overbuilding and constraints on important respects many financial institur credit availability. More generally, busitions had improved their ability to resist ness concerns about a possible recession adverse developments by raising capital and sluggish consumer spending had and taking corrective measures, such as induced a cautious approach to planned adjusting their lending policies and loan investment spending, although many portfolios. producers of capital goods reported that In their review of developments in key their orders, including demand from sectors of the economy and parts of the abroad, were continuing to hold up. country, many of the members stressed Nonetheless, even in the oil industry the that a considerable divergence appeared sharp rise in oil prices had elicited a quite to have developed between available eco- limited investment response to date apnomic indicators, which suggested con- parently because of the uncertainties that tinued if only sluggish growth, and continued to surround the outlook for oil deteriorating business confidence. Such prices and the difficulty of obtaining business attitudes in association with skilled labor, at least in the short run. The adverse credit market conditions could outlook for housing construction also lead to efforts to curb inventories and cut was restrained by soft housing markets back on investments and thus trigger the and the difficulties that many builders recessionary conditions that underlay continued to experience in securing current concerns. While business activity construction loans. On the other hand, clearly seemed to have weakened in some business inventories generally appeared areas of the country, slow to moderate to be at or near desired levels, and while growth continued to characterize busi- business contacts around the country ness conditions in most parts of the pointed to increasingly cautious invennation. tory management policies, there was little The prospects for consumer spending evidence of any current or impending remained a key element in the outlook for cyclical inventory adjustments of the sort the economy. Available data indicated that had characterized past recessions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 141 Areas of current or potential strength in there was a significant risk of a much the economy included agricultural condi- weaker economy, partly as a consequence tions in many parts of the country and of some further tightening in the availabildemand for exports that continued to ity of credit since midsummer; in this buttress many industries. The substantial context, moreover, the budget proposal, decline in the foreign exchange value of if enacted, would provide a degree of the dollar over the past year and the fiscal restraint. Some of these members prospects for relatively strong economic emphasized that the stronger expansion growth in some major industrial countries of the monetary aggregates in recent pointed to further improvement in the months did not seem to reflect a healthier nation's exports, although some members intermediation process or a more accomquestioned the potential strength of fur- modative monetary policy, but rather ther expansion in some key foreign sizable increases in components of M2, countries. notably currency and money market With regard to the outlook for infla- funds, that under prevailing circumtion, several members commented that stances appeared to be related to uncerinflation appeared to have intensified even tainty about economic and financial prosapart from the direct effects of the higher pects and unsettlement in some foreign oil prices. There were reports of business countries. Growth in the core compoefforts to raise prices in markets where nents of M2 had remained sluggish, and demand was relatively vigorous, though in the view of these members that develit was unclear to what extent competitive opment tended to reinforce the conclusion forces would permit sizable increases in that the overall availability of credit had prices to be sustained. More generally, continued to tighten. In these circummembers expected the decline in the value stances, many of the members concluded of the dollar to be reflected over time in that some modest easing of reserve greater pressure on domestic prices. pressure would represent a stable mone- Under foreseeable circumstances and tary policy in the sense that such a move assuming no sharp movements in oil would serve to maintain the appropriate prices, whose course remained highly degree of overall credit restraint. In the uncertain, overall prices were likely to view of most members, any change in remain under upward pressure for some reserve pressures should be limited in time, but the members still anticipated light of the danger of leaning too far in eventual progress in reducing inflation as either direction in circumstances that continued sluggish demand was reflected were characterized by a sluggish econin diminished pressures on production omy and upward pressures on prices. It resources. A major concern in the interim was argued that the Committee should was that the rise in oil prices would not try to offset, indeed it could not avoid, become more firmly entrenched in the some tendency for economic growth to cost structure of the economy, thereby moderate and for inflation to intensify as making more difficult and delaying a result of the oil price developments. progress toward price stability. One member gave more weight to the In the Committee's discussion of pol- recessionary risks in the economy and icy, a majority of the members were in called for the prompt easing of reserve favor of easing reserve conditions at least conditions, preferably by more than a slightly during the intermeeting period modest amount, although an acceptable ahead. In their view, an easing move was compromise in this view would be a warranted in light of the indications that slight easing move at this meeting to be Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

142 77th Annual Report, 1990 followed by some further easing upon unintended effects of generating upward passage of the new budget. pressures on long-term interest rates and Members who favored some easing of adding to the downward pressures on the reserve conditions agreed that it would dollar in foreign exchange markets. In be desirable to hold such a move until support of this view, some members passage of the federal budget package expressed satisfaction that the overall was more certain. The reasons for the expansion of M2 for the year was well easing were not keyed to the enactment of within the Committee's target ranges and the new federal budget alone but more according to a staff forecast was likely to broadly to developments in credit mar- remain comfortably within that range kets and the economy, with the prospects through year-end. for fiscal restraint only one element in the The members also discussed whether outlook. Nonetheless, market partici- any further adjustments in policy should pants expected a monetary policy re- be contemplated for the intermeeting sponse to the fiscal policy actions, and a period in the event that a decision was change in monetary policy while the latter made to implement some modest easing were still under consideration might in the near term. A majority opinion create unnecessary uncertainty and un- emerged in favor of retaining a bias in the warranted reactions in financial markets. directive toward some further easing, but The easing could give rise to expectations any such move would need to take of a further move once the budget package account of the response to the initial was enacted. In the view of some mem- easing as well as developments in the bers, however, associating any easing economy and credit markets. move too closely with a fiscal policy At the conclusion of the Committee's action might set an undesirable precedent discussion, a majority of the members in terms of producing expectations of indicated that they favored or could similar monetary policy adjustments in accept a directive that called for maintainthe future. ing the existing degree of pressure on A number of members expressed reserve positions for at least a short period strong reservations about any easing of after this meeting. It was presumed that reserve conditions under prevailing cir- some slight easing would be implemented cumstances. In their view, even a modest later in the intermeeting period, assuming move toward ease would be undesirable passage of a federal budget resolution or at least premature in the weeks ahead. calling for a degree of fiscal restraint These members acknowledged the risks comparable to that now being negotiated of a weakening economy, but they be- and the absence of major unexpected lieved that policy should continue to focus economic or financial developments. on controlling inflation. In the absence of Subsequently, some slight further easing more evidence that economic activity of reserve conditions could be implemight deteriorate substantially, such a mented if such a move was deemed to be focus was likely to involve unchanged warranted by incoming data on economic reserve conditions for a time. In the and financial conditions in the context of prevailing circumstances, they were an already sluggish economy. On the concerned that any easing in the near other hand, the Committee did not rule term would worsen inflationary expecta- out the potential need for some slight tions by tending to erode the credibility firming should inflationary pressures of the System's anti-inflationary effort. appear to be intensifying. In keeping with Thus, such easing might well have the this policy, the directive provided that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 143 slightly greater reserve restraint might be private market instruments are little changed. acceptable during the intermeeting period In the bond markets, most rates have edged lower on balance over this period. The tradeor somewhat lesser reserve restraint weighted foreign exchange value of the dollar would be acceptable depending on in terms of the other G-10 currencies has progress toward price stability, the declined slightly further on balance from the strength of the business expansion, the low level reached at the time of the August behavior of the monetary aggregates, meeting. and developments in foreign exchange M2 and M3 expanded at appreciably faster rates in August; available data for September and domestic financial markets. The suggest continued strength in M2 and some intermeeting range for the federal funds slowing in the growth of M3. More rapid rate, which provides one mechanism for expansion of M1 and money market funds has initiating consultation of the Committee contributed to the greater strength in the when its boundaries are persistently broad aggregates over the two months. Through September, expansion of M2 was exceeded, was left unchanged at 6 to estimated to be a little below the middle of the 10 percent. Committee's range for the year and growth of At the conclusion of the meeting, the M3 in the lower portion of its range. Expanfollowing domestic policy directive was sion of total domestic nonfinancial debt appears to have been near the midpoint of its issued to the Federal Reserve Bank of monitoring range. New York: The Federal Open Market Committee seeks monetary and financial conditions that The information reviewed at this meeting will foster price stability, promote growth in suggests that economic activity expanded at a output on a sustainable basis, and contribute slow pace in the third quarter. The recent to an improved pattern of international large increase in oil prices has boosted key transactions. In furtherance of these measures of inflation and eroded real personal objectives, the Committee at its meeting in income; however, data available thus far July reaffirmed the range it had established in provide only limited evidence of a retarding February for M2 growth of 3 to 7 percent, effect on production and aggregate spending. measured from the fourth quarter of 1989 to Total nonfarm payroll employment declined the fourth quarter of 1990. The Committee in in July and August, reflecting layoffs of July also retained the monitoring range of temporary census workers; employment in 5 to 9 percent for the year that it had set the private sector changed little over the two for growth of total domestic nonfinancial months. The civilian unemployment rate debt. With regard to M3, the Committee edged up to 5.6 percent in August. Consumer recognized that the ongoing restructuring of spending appeared to be about unchanged in thrift depository institutions had depressed real terms over July and August but was at a its growth relative to spending and total level significantly above the average for the credit more than anticipated. Taking account second quarter. Advance indicators of busi- of the unexpectedly strong M3 velocity, the ness capital spending point to some softening Committee decided in July to reduce the in investment in coming months. Residential 1990 range to 1 to 5 percent. For 1991, the construction weakened further in August. The Committee agreed on provisional ranges for nominal U.S. merchandise trade deficit in- monetary growth, measured from the fourth creased sharply in July from the low rate in quarter of 1990 to the fourth quarter of June. Markedly higher oil prices contributed 1991, of 2Vi to 6Vi percent for M2 and 1 to to substantial increases in consumer and 5 percent for M3. The Committee tentatively producer prices in August; excluding energy set the associated monitoring range for and food items, consumer inflation has picked growth of total domestic nonfinancial debt at up from the second-quarter rate. Data on AVi to 8J/2 percent for 1991. The behavior of labor costs suggest no improvement in under- the monetary aggregates will continue to be lying trends. evaluated in the light of progress toward In short-term debt markets, Treasury bill price level stability, movements in their rates have fallen somewhat since the Commit- velocities, and developments in the economy tee meeting on August 21, while rates on and financial markets. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 77th Annual Report, 1990 In the implementation of policy for the policy seemed to be a response to shortimmediate future, the Committee seeks to run softening in the economy that was an maintain the existing degree of pressure on inevitable outcome of the disruption to reserve positions. Taking account of progress oil supplies. By paying close attention to toward price stability, the strength of the business expansion, the behavior of the those near-term developments, the Commonetary aggregates, and developments in mittee risked losing sight of its fundamenforeign exchange and domestic financial tal objective of controlling and ultimately markets, slightly greater reserve restraint bringing down inflation. Moreover, the might or somewhat lesser reserve restraint timing of the prospective easing was would be acceptable in the intermeeting period. The contemplated reserve conditions linked to fiscal policy actions, and such a are expected to be consistent with growth of linkage could establish an undesirable M2 and M3 over the period from September precedent that could limit the flexibility through December at annual rates of about 4 of monetary policy in the future. Mr. and 2 percent respectively. The Chairman Hoskins also questioned the adequacy of may call for Committee consultation if it appears to the Manager for Domestic Opera- the fiscal policy measures being considtions that reserve conditions during the period ered in the Congress and the desirability before the next meeting are likely to be of adjusting monetary policy in response associated with a federal funds rate persis- to the enactment of those measures. tently outside a range of 6 to 10 percent. Votes for this action: Messrs. Greenspan, Meeting Held on Corrigan, Boehne, Kelley, LaWare, Mull- November 13,1990 ins, and Stern. Votes against this action: Messrs. Angell, Boykin, and Hoskins and Domestic Policy Directive Ms. Seger. The information reviewed at this meeting Ms. Seger dissented because she fa- suggested that economic activity was vored an immediate easing of reserve weakening in the fourth quarter. A subconditions. In her view, such a move was stantial decline in real disposable income needed at this time in light of the spread- and falling consumer confidence pointed ing weakness in the economy, the grow- to some softening in consumer demand, ing difficulty being experienced by many and advance indicators of business capital borrowers in obtaining credit, and more spending signaled considerable sluggishgenerally the increasing fragility of the ness in investment expenditures. At the financial system. She also felt that enact- same time, businesses appeared to be ment of the deficit-reduction measures keeping a tight rein on their inventories, now under consideration would provide partly through recent sharp cuts in output. a desirable opportunity for some addi- Industrial production had turned down tional easing later during the intermeeting after rising moderately during the sumperiod. mer, and recent declines in nonfarm Messrs. Angell, Boykin, and Hoskins payroll employment and average workdissented because they were opposed to weeks indicated some emerging slack in the easing of reserve conditions contem- labor markets. Broad measures of prices plated by the majority. Not only was continued to be boosted by the surge in there a presumption of some easing in the energy prices, but the trend in labor costs near term, but the bias in the language of appeared to have improved slightly. the directive suggested the possibility of Total nonfarm payroll employment some further easing later in the intermeet- declined further in October. Job losses ing period. To a considerable extent, this were widespread across industries but Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 145 were particularly notable in the manufac- and the downward trend in construction turing and construction sectors. Employ- permits and contracts suggested that ment also contracted at wholesale and nonresidential building activity would retail trade establishments for the third remain sluggish. Manufacturing inventostraight month. In October, the civilian ries posted only modest increases over unemployment rate held steady at 5.7 per- the August-September period, and the cent while initial claims for unemploy- ratio of stocks to shipments edged lower. ment insurance rose steeply. At the retail level, non-auto inventories After rising moderately during the changed little on balance over July and summer, industrial production declined August, and inventory-sales ratios resubstantially in October. Part of the drop mained within the range that had prereflected a slower pace of motor-vehicle vailed for an extended period. assemblies; however, reductions in out- The nominal U.S. merchandise trade put were widespread in other industries deficit widened slightly in August from as well, especially in those producing the revised July rate; for the two months non-auto consumer goods and construc- combined, the deficit was substantially tion supplies. Total industrial capacity higher than its average rate for the second utilization fell in October after edging up quarter. In August, a sharp increase in on balance in the previous two quarters. the price of imported oil was only partly Consumer spending was estimated to offset by a decline in the quantity imhave leveled out in real terms over August ported; the value of non-oil imports was and September, when a surge in energy little changed from the elevated July prices caused a substantial drop in real level. Exports picked up somewhat in disposable income. Nevertheless, over August but remained within the range the third quarter as a whole, the pace of recorded in the first half of the year. The spending was substantially higher than in performance of the major foreign industhe previous quarter. Major surveys of trial economies had been mixed. In consumer attitudes continued to indicate Western Germany and Japan, the pace of a sharp deterioration in consumer confi- economic activity remained robust in the dence. Total private housing starts edged third quarter, and growth in France lower in September; sales of new and picked up after a weak second quarter. In existing homes continued to weaken, and Canada and the United Kingdom, by the vacancy rate for rental apartments contrast, economic activity appeared to persisted at a high level. be declining. Measures of consumer price Shipments of nondefense capital goods inflation had risen for almost all of the rose on balance over the August-Septem- major industrial countries, reflecting ber period; the gain resulted in part from mainly the effects of higher energy prices. increases for office and computing equip- Producer prices of finished goods rose ment. New orders for business equipment sharply in October, boosted for the third pointed to a considerable softening in consecutive month by the effects of higher spending for such goods in coming oil prices; food prices also advanced and months. Nonresidential construction ac- reversed their September decline. Protivity fell appreciably in August and ducer prices of non-energy, nonfood September, retracing the increases re- finished goods increased in September corded in the two previous months. and October at about the moderate aver- Persisting high vacancy rates for commer- age pace evident in previous months of cial properties in many areas, financial the year. At earlier stages of processing, pressures on builders and their lenders, the prices of metals and some raw mate- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 77th Annual Report, 1990 rials had fallen considerably, despite the expected to be consistent with growth of depreciation of the dollar on foreign M2 and M3 at annual rates of about 4 and exchange markets. Higher oil prices 2 percent respectively over the period continued to push up consumer prices, from September through December. which rose in September at the elevated After the Committee meeting, open August rate. Excluding energy and food market operations were directed initially items, consumer inflation slowed a little at maintaining unchanged reserve condiin September, but the rate of increase tions. In late October, against the backover the first nine months of the year was ground of a weakening economy and in appreciably above the pace during 1989. light of the conclusion of a budget The growth in total compensation costs agreement involving large reductions in for private industry workers decelerated the federal deficit over the next several in the third quarter, reflecting smaller years, pressures on reserve conditions gains in wages and salaries. Measured on were eased slightly. Over the course of a year-over-year basis, twelve-month the intermeeting period, several technical changes in total labor compensation had adjustments also were made to assumed fallen a bit below the rates recorded levels of adjustment plus seasonal borearlier in the year, when increases in rowing to reflect the declines in seasonal payroll taxes and the minimum wage borrowing activity that typically occur exerted their initial effect on labor costs. during the autumn. Adjustment plus Average annual earnings of production seasonal borrowing fell from about or nonsupervisory workers were un- $500 million in the reserve maintenance changed in October. period completed immediately after the At its meeting on October 2, the October meeting to an average of roughly Committee adopted a directive that called $250 million thus far in the maintenance for maintaining the existing degree of period ending the day after this meeting. pressure on reserve positions for at least In the context of more cautious reserve a short period after the meeting. It was management policies at some banks and presumed that some slight easing would some carryover of end-of-quarter presbe implemented later in the intermeeting sures, the federal funds rate generally period, assuming passage of a federal remained near %lA percent in the early budget resolution calling for a degree of part of the intermeeting period. Subsefiscal restraint comparable to that under quently, as end-of-quarter pressures reconsideration at the time of the meeting ceded, the funds rate edged down to and the absence of major unexpected 8 percent; late in the period, after the economic or financial developments. slight easing of reserve conditions, the After such an easing, the directive pro- funds rate slipped further to 13A percent vided that slightly greater reserve re- or a bit below. Most other market interest straint might be acceptable during the rates also declined over the intermeeting remainder of the intermeeting period or period; however, the reductions tended somewhat lesser reserve restraint would to be greater for Treasury than for private be acceptable depending on progress issues, reflecting increased demand for toward price stability, the strength of the high-grade assets by investors concerned business expansion, the behavior of the about credit quality. Yields on Treasury monetary aggregates, and developments bonds rose appreciably shortly after the in foreign exchange and domestic finan- October meeting when a budget accord cial markets. The reserve conditions initially failed to receive congressional contemplated by the Committee were approval; they more than retraced these Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 147 increases as prospects for fiscal restraint and the problems facing many financial grew brighter, clearer signs of a softer intermediaries. In the near term, higher economy emerged, and investors sought energy costs would damp real disposable higher-quality investments. income and consumer spending, and In foreign exchange markets, the trade- reduced credit availability would be weighted value of the dollar in terms of among the factors restraining outlays for the other G-10 currencies declined con- business equipment and spending for siderably further over the intermeeting residential and nonresidential construcperiod. The long budget stalemate, indi- tion. In these circumstances, a mild cations of additional weakness in the downturn in overall activity was pro- U.S. economy, concerns about the U.S. jected for the near term, but growth was financial system, and associated expecta- expected to resume during the first half of tions of an easing in U. S. monetary policy 1991, aided in part by the assumed contributed to the drop in the dollar. The decline in oil prices. The staff anticipated decline was intensified by signs that that exports would grow relatively rapmonetary policy remained restrictive in idly over the next several quarters in Japan and might tighten in Germany. association with continued expansion on In October, M2 grew only slightly average in the economies of major forafter two months of relatively rapid eign industrial nations and the increased expansion, while M3 was about un- international competitiveness of U.S. changed. The sluggishness of M2 in goods owing to the dollar's depreciation October owed partly to a contraction in over the past year. As business sales and its transactions and liquid savings com- orders improved, production could be ponents. The managed-liability compo- expected to pick up and business investnents of M3 also were weak, reflecting ment outlays to rise. The outlook for restrained asset growth at banks and inflation remained clouded by the uncerstepped-up thrift resolution activity tainties regarding oil prices, but given around the end of the quarter. Through the assumption of a sizable decline in the October, expansion of M2 was estimated latter and some increased slack in reto be somewhat below the middle of the source utilization, the staff projected a Committee's range for the year and slower rise in prices and labor costs. growth of M3 near the lower end of its In the Committee's discussion of the range. The expansion of total domestic economic situation and outlook, memnonfinancial debt appeared to have been bers focused on the growing indications near the midpoint of its monitoring range. of a softening economy. Some key mea- The staff projection was prepared sures of business conditions suggested a against the background of continuing decline in the economy, and business and uncertainties associated with the situation consumer sentiment appeared to have in the Persian Gulf region. The staff deteriorated appreciably; however, the continued to assume that no major further available data on recent developments disruption to world oil supplies would were still limited, particularly with reoccur and that oil prices would drop spect to consumer and business capital appreciably in the first half of next year. spending, and as a consequence were still The staff also assumed continuing con- inconclusive. Moreover, some developstraints on the supply of credit, reflected ments that typically can contribute to a in tighter terms and reduced availability, recession, such as a substantial buildup in in response to perceptions of increased inventories, did not seem to be a factor in credit risks in a relatively weak economy the current economic situation. Assuming Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

148 77th Annual Report, 1990 lower oil prices in the months ahead and difficulties, raising concerns that they given the outlook for further strength in might become less willing suppliers of exports stemming especially from the credit. For now, growth in credit and substantial decline that had occurred in related expansion in money were sluggish the foreign exchange value of the dollar, but did not seem to be collapsing. Nonea relatively mild downturn followed by a theless, members remained concerned limited rebound next year was viewed as that supplies of credit might prove inadea reasonable expectation. quate to the needs of many qualified Many of the members noted that, while borrowers, thereby deepening any downthe most likely outcome was a relatively turn and impeding a satisfactory rebound mild and brief downturn, there were risks in economic activity. of a more severe or prolonged contraction Members continued to report uneven in economic activity. The substantial conditions in different parts of the country decline that had occurred in business and and sectors of the economy, but signs of consumer confidence likely reflected not some weakening in business activity were only the course of events in the Middle increasing in most areas. Moreover, in East, but perhaps also uncertainty about keeping with broad survey results, condevelopments in that area and their tacts indicated that business and conimplications for oil prices. A cutback in sumer confidence had deteriorated in spending that more fully reflected these virtually all parts of the country, includattitudes could be greater than currently ing areas that were experiencing at least appeared to be under way. Another modest growth in overall business activsource of risks that also could be contrib- ity. At the same time, conditions were uting to the decline in confidence was the reported to be generally favorable in state of the financial system, including agriculture, export demands were growconcerns about the condition of many ing, and on the whole business inventofinancial institutions, a curtailed supply ries were indicated to be close to desired of credit to many borrowers, and more levels, at least given current levels of generally a widespread perception of demand. relatively fragile financial conditions. Members noted that the adverse effects Bank loan officers appeared to be reacting of sharply higher oil prices on disposable increasingly to what they perceived as incomes and consumer sentiment aprising credit risks in a softening econ- peared among other developments to omy; their incentives to restrict their have arrested the growth in real consumer lending were strengthened by concerns spending in recent months; retail sales, about the capital positions of their own notably of automobiles and other durabanks and the possibility that their insti- bles, were expected to remain weak and tutions could face a reduced availability possibly decline over the next several or higher cost of funds. To an important months, although the prospective inextent, banker attitudes were being influ- crease in federal excise taxes on certain enced by developments in the real estate luxury items might well boost sales of markets; further, or more widespread, such goods through year-end at the weakening in those markets would add to expense of sales early next year. Memproblem loans in bank portfolios and bers agreed that in the absence of further could foster further cutbacks in bank disturbances in oil markets, growth in lending activity more generally. Finan- real consumer spending could be excial institutions other than banks also pected to resume, especially if oil prices were experiencing funding and other were to decline; indeed, such growth was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 149 likely to provide a major impetus for inflation, given the strength of inflationsome strengthening in the economy next ary expectations. year. Net exports also appeared to be In the Committee's discussion of policy positioned to contribute to expanding for the intermeeting period ahead, all of business activity as a result of the substan- the members indicated that they favored tial declines that had occurred in the or could support a proposal calling for foreign exchange value of the dollar and some slight immediate easing of reserve sustained expansion in a number of major conditions; one member expressed a foreign industrial countries. Business preference for somewhat greater easing contacts reported that demands from while another saw advantages in delaying abroad were continuing to buttress man- the easing move. The growing signs of a ufacturing activity in many areas, al- softening economy, the related vulnerathough there were indications of some bility of many business and financial slippage in such demands from some firms to added financial strains, and the countries. The prospects for business increased reluctance of institutional lendinvestment remained less promising for a ers to accommodate less than prime number of reasons, including the uncer- business borrowers suggested that the tain outlook for sales and profits and the Committee should remain especially alert weakness in commercial construction during the weeks ahead to signals that associated with earlier overexpansion. some further easing was appropriate. The With regard to the outlook for fiscal lack of significant monetary growth over policy, the difficult and extended process the course of recent months also was seen of securing the recent budget agreement as pointing in the same direction. Howand the still massive deficits projected for ever, the weakness in the economy rethe nearer term appeared to have had an flected in part an external shock whose adverse effect at least temporarily on effects could not be entirely offset without attitudes, and perhaps as a consequence exacerbating a still substantial inflation, financial markets had not yet fully recog- and the dollar had been under considernized the appreciable degree of enforce- able downward pressure in the foreign able restraint that was built into that exchange markets. In this situation, any agreement. easing needed to be approached with Turning to the outlook for inflation, caution. While there were some differmembers referred to accumulating indi- ences in emphasis, the members agreed cations that the core rate of inflation, that a limited degree of easing at this excluding the discernible effects of the juncture would provide some insurance surge in energy prices, might have stabi- against a deep and prolonged recession lized. There were signs of diminished without incurring a substantial risk in wage pressures in the aggregate data, and current circumstances of fostering intenthe latter were confirmed by reports from sified inflationary pressures. several parts of the country. In the context In their discussion, members took of reduced pressures on productive re- account of a staff analysis that pointed to sources, it now seemed more likely that weaker monetary growth in the current the effects of higher oil and import prices quarter than had been anticipated at the would not be built into the general price time of the previous meeting. The slower and wage structure. Nonetheless, mem- expansion in M2 and M3 appeared to bers cautioned that an extended period reflect the tightening supply of credit probably would be needed before substan- through depository institutions and the tial progress was achieved in reducing associated damping of asset expansion Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 77th Annual Report, 1990 and funding needs at those institutions. In some slight further easing during the addition, slower projected growth in intermeeting period. Accordingly, nominal GNP in the current quarter slightly greater reserve restraint might be implied reduced demands for money and acceptable during the intermeeting period credit. Some members commented that or somewhat lesser reserve restraint the projected expansion of both M2 and would be acceptable depending on M3 within the Committee's ranges for the progress toward price stability, the year suggested that monetary policy on strength of the business expansion, the balance had been on an appropriate behavior of the monetary aggregates, course. However, the recent weakness in and developments in foreign exchange monetary growth was becoming a matter and domestic financial markets. of increasing concern and was an impor- At the conclusion of the meeting the tant consideration for some members in following domestic policy directive was their support of some easing of reserve issued to the Federal Reserve Bank of conditions. New York: In regard to possible intermeeting adjustments in the degree of reserve The information reviewed at this meeting pressure, most of the members indicated suggests a weakening in economic activity. Total nonfarm payroll employment declined a preference for retaining the current bias further in October, reflecting sizable job losses in the directive toward potential easing. in manufacturing and construction; the civil- In support of this view, it was noted that ian unemployment rate held steady at 5.7 perin prevailing circumstances an intermeet- cent. Industrial production declined sharply ing move, if any, was more likely to be in October after rising moderately during the summer. Consumer spending is estimated to toward some easing than the reverse. A have flattened out in real terms over August few members questioned, however, and September when a surge in energy prices whether such a bias was desirable in light caused a substantial drop in real disposable of the slight easing that the members income. Advance indicators of business already contemplated, especially since capital spending point to considerable softening in investment in coming months. Residenany additional move would represent the tial construction weakened further in the third third easing action by the Committee in a quarter. The nominal U.S. merchandise trade relatively short period. In the circum- deficit widened substantially in July-August stances, it was understood that a tilt from its average rate in the second quarter as toward ease in the directive would not imports strengthened. Markedly higher oil prices have boosted consumer and producer imply any commitment to a second easing prices in recent months. The latest data on action during the intermeeting period; in labor costs suggest some slight improvement particular, the potential desirability of from earlier trends. any additional easing would need to be Most interest rates have fallen somewhat assessed in the light of market reactions since the Committee meeting on October 2. In to the initial action, especially the behav- foreign exchange markets, the trade-weighted value of the dollar in terms of the other G-10 ior of the dollar in the foreign exchange currencies has declined considerably further markets. over the intermeeting period. At the conclusion of the Committee's In October, M2 grew only slightly after two discussion, all of the members indicated months of relatively rapid expansion, while their acceptance of a directive that called M3 was about unchanged. Through October, expansion of M2 was estimated to be somefor a slight reduction in the degree of what below the middle of the Committee's pressure on reserve positions. The direcrange for the year and growth of M3 near the tive also called for giving weight to lower end of its range. Expansion of total potential developments that might require domestic nonfinancial debt appears to have Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 151 been near the midpoint of its monitoring At this meeting, the Committee rerange. viewed its practice of including a sentence The Federal Open Market Committee seeks in the operational paragraph of the direcmonetary and financial conditions that will tive that referred to the possibility of a foster price stability, promote growth in output on a sustainable basis, and contribute Committee consultation to be called at to an improved pattern of international trans- the Chairman's discretion during an actions. In furtherance of these objectives, intermeeting period in the event that the the Committee at its meeting in July reaffederal funds rate fluctuated persistently firmed the range it had established in February outside a relatively wide range. That for M2 growth of 3 to 7 percent, measured from the fourth quarter of 1989 to the fourth range had been set at 4 percentage points quarter of 1990. The Committee in July also for many years and was a legacy of now retained the monitoring range of 5 to 9 percent outdated operating procedures that had for the year that it had set for growth of total been in place in the early 1980s. The domestic nonfinancial debt. With regard to members agreed that under current pro- M3, the Committee recognized that the ongoing restructuring of thrift depository cedures the directive sentence in question institutions had depressed its growth relative served no real purpose, at least in its to spending and total credit more than antici- present form, in terms of providing pated. Taking account of the unexpectedly guidance for holding intermeeting constrong M3 velocity, the Committee decided in sultations. Such consultations are based July to reduce the 1990 range to 1 to 5 percent. For 1991, the Committee agreed on provi- on understandings that vary over time, sional ranges for monetary growth, measured depending on surrounding circumfrom the fourth quarter of 1990 to the fourth stances. Accordingly, all of the members quarter of 1991, of 2Vi to 6V2 percent for M2 favored or found acceptable a proposal and 1 to 5 percent for M3. The Committee calling for deletion of the sentence. The tentatively set the associated monitoring range for growth of total domestic nonfinancial debt members noted that the deletion would 2X4Vi to 8V2 percent for 1991. The behavior ofhave no implications for the implethe monetary aggregates will continue to be mentation of monetary policy or for the evaluated in the light of progress toward price Committee's understandings or procelevel stability, movements in their velocities, dures with respect to what reserve marand developments in the economy and financial markets. ket, financial, or economic conditions would call for consultations between In the implementation of policy for the immediate future, the Committee seeks to meetings. decrease slightly the existing degree of pres- At the conclusion of this discussion, sure on reserve positions. Taking account of the members voted to delete the sentence progress toward price stability, the strength incorporating the federal funds range of the business expansion, the behavior of the monetary aggregates, and developments in from the operational paragraph. foreign exchange and domestic financial markets, slightly greater reserve restraint Votes for this action: Messrs. Greenspan, might or somewhat lesser reserve restraint Corrigan, Angell, Boehne, Boykin, would be acceptable in the intermeeting Hoskins, Kelley, LaWare, and Mullins, period. The contemplated reserve conditions Ms. Seger, and Mr. Stern. Votes against are expected to be consistent with growth of this action: None. both M2 and M3 over the period from September through December at annual rates Meeting Held on of about 1 to 2 percent. December 18,1990 Votes for this action: Messrs. Greenspan, Corrigan, Angell, Boehne, Boykin, 1. Domestic Policy Directive Hoskins, Kelley, LaWare, and Mullins, The information reviewed at this meeting Ms. Seger, and Mr. Stern. Votes against this action: None. suggested that economic activity had Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

152 77th Annual Report, 1990 fallen appreciably in recent months. A cated that consumer confidence remained depressed level of consumer confidence at depressed levels. In October, total and a decline in real disposable income private housing starts declined substanhad contributed to sluggish consumer tially further; almost all of the drop spending. In response to apparent weak- reflected additional weakness in starts of ness in final demands, businesses had multifamily units. Sales of both new and reduced production and employment; existing houses fell in September and these cutbacks were most evident in the October. motor vehicle and construction sectors, Shipments of nondefense capital goods but a broad range of other industries had edged lower in October after changing been affected to some degree. Consumer little on balance in previous months. A inflation had moderated recently, largely sizable drop in shipments of aircraft and as a result of some softening in oil prices. parts more than offset further increases in Despite the substantial increases in living the office and computing equipment catecosts this year, wage gains appeared to gory. New orders for nondefense capital have slowed somewhat in recent months. goods pointed to a considerable softening After a progressive weakening during in business equipment spending in comthe first three quarters of the year, total ing months. Nonresidential construction nonfarm payroll employment fell sharply activity fell for a third straight month, further in October and November. Job and permits and contracts for new conlosses were widespread across industries struction remained in a downtrend. Manin November but were especially pro- ufacturing inventories posted a small nounced in manufacturing and construc- increase in October, and the ratio of tion. In the service-producing sector, stocks to sales continued to edge down. which had generated most of the employ- At the retail level, non-auto inventories ment gains earlier in the year, the health rose moderately after two months of little industry was one of the few to post change; the inventory-to-sales ratio resignificant increases in jobs. The civilian mained within the range that had preunemployment rate rose to 5.9 percent in vailed for an extended period. November. Reflecting a sharper rise in the value of Industrial output declined markedly imports than in that of exports, the for a second straight month in November. nominal U.S. merchandise trade deficit Production cutbacks were broadly distrib- widened in October from its average rate uted across industries but were especially in the third quarter. After moderating pronounced in motor vehicles and parts, somewhat in September, non-oil imports non-auto consumer goods, and construc- surged in October; the value of oil tion supplies. Reflecting the sizable imports also rose as a sharp increase in decline in manufacturing production, the prices offset a small decline in volume. rate of capacity utilization in manufactur- Nonagricultural exports registered a ing dropped farther below the midyear sizable increase that more than offset a high. further drop in exports of agricultural In October and November, retail sales products. Economic growth in the major in real terms were below the downward foreign industrial countries was mixed in revised September level. Real disposable thethirdquarter. Growth remained strong incomes had been reduced by a decrease in Western Germany and appeared to in total hours worked and by the effects of have rebounded in France. Some slowing higher energy prices, and major surveys from the rapid rise early in the year of consumer attitudes in November indi- had occurred in Japan, while declines in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 153 economic activity were recorded in the market conditions sought by the Commit- United Kingdom and Canada. Some tee. Subsequently, in early December, in moderation in consumer price inflation light of further indications of a softening appeared to be in progress for the major economy and continuing weakness in the foreign economies, reflecting the nearly monetary aggregates, another slight eascompleted pass-through to the retail level ing in reserve pressures was carried out. of the earlier rise in oil prices. In addition, a number of technical adjust- In November, increases in producer ments were made to assumed levels of prices of finished goods moderated from adjustment plus seasonal borrowing to the rapid pace of previous months; the reflect the declines in seasonal borrowing prices of finished foods again advanced activity that typically occur late in the sharply, but declines in the prices of year. Adjustment plus seasonal borrowrefined petroleum products damped the ing fell from about $260 million for the overall rise in producer prices. Over reserve maintenance period that ended October and November, producer prices the day after the November meeting to a of non-energy, nonfood finished goods little over $100 million for the period increased at about the third-quarter rate, completed prior to this meeting. In the which in turn was somewhat below that early part of the intermeeting period, in in the first half of the year. The pace of the context of continued cautious reserve consumer inflation also slowed in management by banks and the settlement November, mostly as a result of a of the midquarter Treasury refunding, smaller rise in energy prices. Excluding the federal funds rate averaged near food and energy items, consumer prices 13A percent. Late in the period, after the rose in November at the more moderate slight additional easing of policy and as pace seen in the previous two months. concerns about a year-end squeeze on the Average hourly earnings of production availability of short-term ftinds abated or nonsupervisory workers were un- somewhat, the federal funds rate averchanged on balance over October and aged around 11A percent. Other market November; this represented a consider- interest rates also declined on balance able slowing from the increases recorded over the intermeeting period, in some in earlier months of the year. cases substantially, as markets responded At its meeting on November 13, the to mounting evidence that the economy Committee adopted a directive that called was slowing significantly and to the for a slight immediate reduction in the easing of monetary policy. Lower interest degree of pressure on reserve positions rates and optimism over a possible peaceand that also called for giving weight to ful resolution of the Persian Gulf situation potential developments that might re- contributed to a rise in broad stock market quire some slight further easing during indexes. the intermeeting period. The reserve The easing of concerns about year-end conditions contemplated by the Com- pressures appeared to have been helped mittee were expected to be consistent by the announcement by the Board of with growth of both M2 and M3 at Governors on December 4, 1990, of the annual rates of about 1 to 2 percent elimination of reserve requirements on over the period from September through nonpersonal time deposits and net Euro- December. currency liabilities. These reserve re- Following the meeting, open market quirements were phased down in two operations were directed toward imple- steps, with the second occurring in the menting the slight easing of reserve reserve maintenance period spanning Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 77th Annual Report, 1990 year-end. This action was not expected to The staff projection prepared for this affect underlying pressures on reserves meeting pointed to a mild farther decline or federal funds rates but was intended to in economic activity over the near term help counter the tightening by depository and an upturn before mid-1991. The institutions of credit terms for many types projection was prepared against the backof borrowers by providing those institu- ground of persisting uncertainties regardtions with added incentive to lend to ing the prospects for a peaceful resolution creditworthy borrowers. of the situation in the Persian Gulf region. In the foreign exchange markets, the The staff assumed that there would be no dollar fluctuated in value over the inter- major further disruption to world oil meeting period in response to changing supplies and that oil prices would drop perceptions regarding the Persian Gulf appreciably further in the first half of situation, the release of U.S. employment next year. The projection took into acdata for November, and the further easing count the constraints on the supply of of U.S. monetary policy. On balance credit and an expectation that such conover the period, the trade-weighted value straints would persist to some degree of the dollar rose slightly in terms of the through the year ahead. Consumer outother G-10 currencies. The dollar appre- lays were expected to continue to be ciated more against the yen and sterling; damped in the near term by the erosion of the recent decreases in oil prices along real disposable income associated with a with expectations of slowing or negative reduction in hours worked and the effects economic growth had sparked large of higher energy prices; in light of weak rallies in bond markets in Japan and the consumer demands, business equipment United Kingdom. The dollar increased spending was projected to be sluggish less against the mark, which was gener- and commercial construction to decline ally firm on the basis of continuing strong further, given the oversupply of currently economic growth in Western Germany available space. Economic growth was and heightened market expectations of expected to resume during the first half of further tightening of German monetary 1991 in association with the effects of the policy. assumed reduction in oil prices on con- M2 was about unchanged over October sumer spending and the support provided and November after growing at a rela- by further gains in exports. Subsequently, tively limited pace on balance in earlier as business sales and orders improved, months of the year, while M3 declined production and business investment outslightly in both months. The weakness in lays were expected to pick up. The M2, which persisted despite an earlier outlook for inflation remained clouded decline in opportunity costs, perhaps by the uncertainties regarding oil prices reflected very weak expansion of nominal but, based on the assumption of a substanincome in recent months as well as tial decline in oil prices and some added damped credit growth at depository slack in resource utilization, the staff institutions. From the fourth quarter of projected a slower rise in prices and labor 1989 through November, expansion of costs. M2 was estimated to be in the lower half In the Committee's discussion of the of the Committee's range for the year and economic situation and outlook, mem- M3 near the lower end of its range. bers commented that a relatively mild Expansion of total domestic nonfinancial and short recession remained a reasondebt appeared to have been near the able expectation, but they emphasized midpoint of its monitoring range. the risks of a more severe and prolonged Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 155 contraction in economic activity. Gener- business activity still appeared to be ally lean business inventories, favorable expanding. Business sentiment was negconditions for the further growth of ative in much of the nation, and business exports, and appreciable declines in oil contacts suggested that it was worsening prices from their recent peaks all prom- in many areas. Many state and local ised to buoy spending and activity over governments, notably in relatively decoming quarters. However, the key to a pressed areas, were facing severe budgetnear-term rebound in the economy was a ary problems and were curbing expendipickup in consumer spending. Even tures in response to lagging tax receipts under the assumption that the Persian and impaired access to financial markets. Gulf situation would be more settled and Consumer caution was widespread and oil prices lower, restoration of the degree was evidenced by reports of generally of confidence needed to induce a substan- soft retail sales thus far in the holiday tial upturn in spending was not assured. season. Some members commented, The financial difficulties of many bor- however, that while its timing remained rowers and financial intermediaries, es- uncertain, an improvement in consumer pecially banks, could continue to damage sentiment associated possibly with more confidence as well as to constrain further settled conditions in the Middle East and the availability of credit to many bor- an upturn in real disposable income rowers and contribute to additional de- would be likely to generate considerable clines of asset values in commercial and strengthening in deferred consumer real estate markets. In general, the econ- spending, particularly for motor vehiomy and financial markets were undergo- cles, and to foster a rebound in overall ing a process of adjustment to earlier economic activity. Other comments foexcesses in leveraging by borrowers and cused on the possibility that consumer speculative increases in asset prices; sentiment might well remain bearish and while the course and effects of that consumer spending restrained for an exadjustment were difficult to predict, there tended period, perhaps even in the conclearly had been an increase in the text of favorable developments in the downside risks to the economy as a result. Middle East, as consumers continued to With regard to the outlook for inflation, adjust to the adverse wealth effects of members saw growing indications that a weak housing markets, heavy debt loads, disinflationary process might be getting concerns about the well publicized diffiunder way, and some viewed recent price culties of many financial institutions, and and wage developments as consistent fears about their employment prospects. with an outlook for faster progress in Weak housing prices affected household reducing inflation than they had antici- spending especially by reducing perpated some months ago. ceived wealth, but also by eroding the Regional business developments con- margin of unborrowed equity available tinued to indicate uneven conditions to be liquified for spending on other ranging from modest further growth in goods and services. some parts of the country, including areas Many of the members stressed that that were benefiting from a relatively business investment spending was likely strong agricultural sector, to declining to remain relatively weak, particularly activity in an increasing number of the construction of office and other regions. Indications of softening eco- commercial facilities that were overbuilt nomic conditions were widespread, how- in many metropolitan areas. To date, the ever, even in regions where overall manufacture of capital goods appeared to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 77th Annual Report, 1990 have held up relatively well in key capital- Many business borrowers with less than producing sections of the country, though prime credit ratings continued to report the output of some types of capital problems in securing financing, even equipment had turned down. Statistical from their usual lenders, and those and anecdotal reports suggested that problems seemed to be increasing in at inventories generally remained under least some parts of the country in conjunctight control, even in relatively depressed tion with bank efforts to rebuild their industries and regions, and a pickup in capital positions and limit their lending overall demand was therefore likely to risks in a weak economy. At the same lead fairly promptly to stronger produc- time, there were indications of greater tion activity. efforts by banks in some areas to increase Members commented that, apart from their loans in order to improve their the key role of consumer spending, profits; moreover, many large banks current forecasts of a rebound in overall appeared to have made significant economic activity relied to an important progress in adjusting the pricing of their extent on expectations of appreciable loans to take better account of lending further growth in net exports over the risks; those efforts also could lead to next several quarters. The substantial improved profits and to a better availabildepreciation of the dollar in terms of ity of credit to many potential borrowers. other key currencies over the past year, The softness in real estate prices was especially since mid-1990, would encour- having a pronounced effect on inflationage exports and curb imports. Some ary sentiment, and against the backmembers noted, however, that economic ground of reduced pressures on producactivity in a number of major trading tion resources and an extended period of nations might be somewhat weaker than limited monetary growth most of the was anticipated earlier, thereby tending members believed that substantial to limit the growth in U.S. exports. That progress toward lower inflation was a view was reinforced by comments from likely prospect over the next several some domestic exporters who now saw quarters. Rising unemployment in some more limited export opportunities in the areas of the country was clearly reflected year ahead, at least to some countries. in downward adjustments to the wages of Turning to financial developments, some categories of workers. More genermembers commented that economic re- ally, the rise in broad wage measures covery would depend to an important appeared to have peaked in an atmosphere degree on the availability of credit. While of concern about reduced employment credit terms and conditions were not opportunities; it was noted in this connecprojected to tighten appreciably further, tion that current unemployment rates the possibility of such a development probably underestimated actual unemrepresented a risk to the economy that ployment, as discouraged potential workcould not be ruled out. A major source of ers abandoned efforts to secure employfinancial pressures was the decline in real ment. Members also commented that estate values in many areas and the competitive pressures, including compeinability of many heavily indebted bor- tition from foreign producers, remained rowers to service their real estate debts. strong in retail markets around the coun- The difficulties in the real estate sector try and also in markets for many producer and the related vulnerability of many goods. lending institutions obviously would be In the Committee's discussion of policy aggravated by a prolonged recession. for the intermeeting period ahead, all of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 157 the members indicated that they favored the constrained availability of credit from or could accept a directive calling for depository institutions and with lagging some slight easing in reserve conditions. income growth. In addition, other fac- Members noted that monetary policy had tors, such as perceptions of increased been eased in several steps over the risks in holding deposit balances in course of recent weeks; while substantial current financial circumstances, seemed additional easing might not be needed to be affecting monetary expansion. A under prevailing conditions, a limited staff projection prepared for this meeting further move would provide some added pointed to a pickup in M2 growth over insurance in cushioning the economy the months immediately ahead, reflecting against the possibility of a deepening in part a projected upturn in the expansion recession and an inadequate rebound in of nominal GNP and the lagged effects of the economy without imposing an unwar- the recent declines in market rates on ranted risk of stimulating inflation later. demands for money balances. Members The members favored a cautious ap- noted that for the year 1990 as a whole, proach to further policy moves in light of M2 would increase at a rate within the the appreciable easing in reserve condi- Committee's range, albeit in the lower tions that already had been implemented half of that range and that M2 growth had and the considerable decline that had now been within the Committee's ranges occurred in market interest rates. The consistently in recent years. While monstimulus provided by the recent easing etary policy might still be viewed as actions had not yet been felt in the econ- somewhat restrictive from the standpoint omy, and given the lags that were in- of monetary growth, members cited other volved, there was some risk of overdoing indicators such as the decline in interest the easing of policy at some point, with rates, the shape of the yield curve, and potential inflationary consequences once conditions in die commodity and foreign the economic recovery got under way. exchange markets as indicative of an Most of the members viewed such a risk adequate provision of liquidity and a as relatively remote and one that could be basically satisfactory policy in current dealt with, should the need arise, by a circumstances. Nonetheless, members future tightening of policy, although it stressed the need to maintain an appropriwas recognized that moves toward re- ate rate of monetary expansion, and they straint couldbe difficult. Persisting weak- generally concluded that the behavior of ness in the monetary aggregates tended to the monetary aggregates would need to reinforce the view that policy was not be monitored with special care in the moving in a way that would promote a period ahead for any indication that their resurgence in inflation. In evaluating the growth might be falling significantly behavior of the monetary aggregates, short of current expectations. members stressed the need for policy to During this discussion, members provide adequate liquidity in a period of noted the potential interactions between declining economic activity in order to open market policy and a possible, nearencourage economic recovery. term reduction in the discount rate. Most Growth of M2 had displayed an uneven of the Federal Reserve Banks had propattern but had tended to weaken over the posed a reduction of Vi percentage point course of the year, especially in recent in the discount rate, and in light of their months. The behavior of M2 was not concerns about the narrowing spread fully understood, but it appeared to be between the discount rate and shortassociated, at least in the past year, with term market rates, the members generally Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 77th Annual Report, 1990 favored Board approval of that reduction cial markets. The reserve conditions to implement an easing of conditions in contemplated by the Committee were money markets. Ordinarily, a reduction expected to be consistent with some in the discount rate would show through pickup in monetary growth, including fully in lower short-term market rates. expansion of M2 and M3 at annual rates However, because of their desire to ease of about 4 and 1 percent respectively over reserve conditions only slightly in the the four-month period from November to near term, the members generally March. supported a proposal to gear open mar- At the conclusion of the meeting, the ket operations toward allowing only following domestic policy directive was about one-half of the proposed cut in issued to the Federal Reserve Bank of the discount rate to be reflected im- New York: mediately in the money market. If the The information reviewed at this meeting discount rate were not reduced, the suggests appreciable weakening in economic Manager for Domestic Operations activity. Total nonfarm payroll employment would execute the slight easing of policy fell sharply further in November, reflecting through open market operations alone. widespread job losses that were especially With regard to any further adjustment in pronounced in manufacturing and construction; the civilian unemployment rate rose to the degree of reserve pressure later in 5.9 percent. Industrial output declined markthe intermeeting period, nearly all the edly in October and November, in part members expressed a preference for because of sizable cutbacks in the production retaining a bias in the directive toward of motor vehicles. Retail sales were weak in potential easing, especially given the real terms in October and November; real disposable income has been reduced not only recessionary tendencies in die economy, by a decrease in total hours worked but also by current fragilities in the financial systhe effects of higher energy prices. Advance tem, and the weakness in the monetary indicators of business capital spending point aggregates. to considerable softening in investment in coming months. Residential construction has At the conclusion of the Committee's declined substantially further in recent discussion, all of the members indicated months. The nominal U.S. merchandise trade that they could support a directive that deficit widened in October from its average called for some slight further easing in rate in the third quarter as non-oil imports the degree of pressure on reserve posi- rose more sharply than exports. Increases in tions and that also provided for giving consumer prices moderated in November largely as a result of a softening in oil prices. emphasis to potential developments that The latest data on labor costs suggest some might require some additional easing improvement from earlier trends. during the intermeeting period. It was Most interest rates have fallen appreciably recognized that open market operations since the Committee meeting on November initially might need to take account of a 13. In foreign exchange markets, the tradepossible reduction in the discount rate. weighted value of the dollar in terms of the other G-10 currencies rose slightly on balance Subsequent to the initial easing, slightly over the intermeeting period. greater reserve restraint might be accept- M2 was about unchanged on balance over able during the intermeeting period or October and November after several months somewhat lesser reserve restraint would of relatively limited expansion, while M3 be acceptable depending on progress declined slightly in both months. From the fourth quarter of 1989 through November, toward price stability, the strength of the expansion of M2 was estimated to be in the business expansion, the behavior of the lower half of the Committee's range for the monetary aggregates, and developments year and growth of M3 near the lower end of in foreign exchange and domestic finan- its range. Expansion of total domestic nonfi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 159 nancial debt appears to have been near the Ms. Seger, and Mr. Stern. Votes against midpoint of its monitoring range. this action: None. The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability, promote growth in 2. Authorization for Domestic output on a sustainable basis, and contribute Open Market Operations to an improved pattern of international transactions. In furtherance of these objectives, The Committee approved a temporary the Committee at its meeting in July reaf- increase of $6 billion, to a level of firmed the range it had established in February $14 billion, in the limit on changes for M2 growth of 3 to 7 percent, measured between Committee meetings in System from the fourth quarter of 1989 to the fourth Account holdings of U.S. government quarter of 1990. The Committee in July also retained the monitoring range of 5 to 9 percent and federal agency securities. The infor the year that it had set for growth of total crease amended paragraph l(a) of the domestic nonfinancial debt. With regard to Authorization for Domestic Open Market M3, the Committee recognized that the Operations and was effective for the ongoing restructuring of thrift depository institutions had depressed its growth relative intermeeting period ending with the close to spending and total credit more than antici- of business on February 6, 1991. pated. Taking account of the unexpectedly strong M3 velocity, the Committee decided in Votes for this action: Messrs. Greenspan, July to reduce the 1990 range to 1 to 5 percent. Corrigan, Angell, Boehne, Boykin, For 1991, the Committee agreed on provi- Hoskins, Kelley, LaWare, and Mullins, sional ranges for monetary growth, measured Ms. Seger, and Mr. Stern. Votes against from the fourth quarter of 1990 to the fourth this action: None. quarter of 1991, of 2Vi to 6Vi percent for M2 and 1 to 5 percent for M3. The Committee The Manager for Domestic Operations tentatively set the associated monitoring range advised the Committee that the current for growth of total domestic nonfinancial debt at^/z to 8V2 percent for 1991. The behavior of leeway of $8 billion for changes in the monetary aggregates will continue to be System Account holdings was not likely evaluated in the light of progress toward price to be sufficient to accommodate the level stability, movements in their velocities, potentially very large need to drain and developments in the economy and finanreserves over the intermeeting period cial markets. ahead. That need would reflect a bulge in In the implementation of policy for the available reserves stemming from the immediate future, the Committee seeks to decrease slightly the existing degree of pres- elimination of reserve requirements on sure on reserve positions, taking account of a nonpersonal time deposits and net Europossible change in the discount rate. Depend- currency liabilities combined with the ing upon progress toward price stability, effects of seasonal reductions in currency trends in economic activity, the behavior of in circulation and in required reserves the monetary aggregates, and developments over the intermeeting period. • in foreign exchange and domestic financial markets, slightly greater reserve restraint might or somewhat lesser reserve restraint would be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with growth of M2 and M3 over the period from November through March at annual rates of about 4 and 1 percent, respectively. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Boehne, Boykin, Hoskins, Kelley, LaWare, and Mullins, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

161 Consumer and Community Affairs The Home Mortgage Disclosure Act and The Board amended Regulation CC to the Community Reinvestment Act were reflect the permanent availability schedthe focus of significant activity in the ule that went into effect in September and Division of Consumer and Community extended for two years the schedules that Affairs during the year. More lending apply to deposits at nonproprietary autoinstitutions became subject to the report- mated teller machines. ing requirements of HMD A, and those The Board preempted inconsistent requirements also expanded the informa- state laws under Regulation Z and Regution that covered institutions must report lation B and exempted state-chartered about the loans and applications they institutions in Massachusetts from Regureceive for the purchase or improvement lation C. of homes. Regarding the CRA, evalua- The Board also issued a new pamphlet tions and ratings under the act became about mortgage discrimination and republic for examinations performed after vised its brochure regarding business Julyl. credit for women, minorities, and small This chapter presents the Board's ef- firms. forts under these laws to promote fair lending and detect illegal discrimination. Regulation Z (Truth in Lending): This chapter also presents the Board's Home Equity Lines of Credit implementation in 1990 of new statutory protections for consumers; reports on the In September the Board amended the examination of institutions for compli- Regulation Z rules on home equity lines ance with consumer laws—by the Fed- of credit in response to a lawsuit, by eral Reserve and other financial regula- Consumers Union, that challenged the tory agencies— and on the System's rules issued earlier.1 Under the amendhandling of consumer complaints; dis- ments, creditors may freeze the line of cusses the community affairs program of credit when the rate cap is reached if the the Board and Reserve Banks; details the contract specifically permits such action. activities of the Board's Consumer Advi- Previously, lenders could freeze the sory Council; and reports on testimony. credit line without a contractual clause; they continue to be required to state in the Truth in Lending disclosures the circum- Regulatory Matters stances in which they may suspend borrowing privileges on accounts. The Board amended the home equity The amendments also require lenders rules of Regulation Z to require, at the to include, at the time of the credit time of application, detailed disclosures application,detailed disclosures about about the repayment phase and to con- repayment plans. Previously, lenders tinue to allow creditors, under certain conditions, to suspend borrowing privileges on an account once the interest rate 1. The district court ruled in favor of the Board, on the account reaches the maximum and Consumers Union appealed the decision (see specified in the contract (the rate cap). the chapter on litigation). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

162 77th Annual Report, 1990 could delay giving these disclosures until commentary. The act and the regulation the repayment phase was about to begin. address access to deposits and, among other things, impose specific time periods within which depository institutions must Regulation Z: Preemptions make deposited funds available. One In July the Board preempted provisions amendment lengthened the time that of Wisconsin law that it found to be funds may be held when an exception to inconsistent with Regulation Z. The state the availability schedules applies. This provisions deal with disclosures for home action was taken because the checkequity plans and the acceleration of clearing process had not improved suffipayments on an outstanding balance when ciently before the permanent schedules a nonapplicant spouse terminates the took effect on September 1, 1990. credit plan. The exceptions give institutions more Regarding disclosures, the Board de- time to determine whether a check will be termined that a provision of Wisconsin paid, but they may be used only in special law employed a term appearing in federal cases (for example, for redeposited law, annual percentage rate, but used it to checks and deposits exceeding $5,000 in represent rates that in some circum- a day). Under the temporary schedule, stances differed from the rates that fed- institutions could add four extra days to eral law would specify. the three days allowed for local checks to Regarding accelerated payments, Wis- clear and to the seven days for nonlocal consin law gives a nonapplicant spouse checks. Starting September 1, institutions the right to terminate a credit plan, and may add five extra days to the two-day the Board concluded that valid reasons availability for local checks and six days exist for not preempting this right. The to the five-day availability for nonlocal Board determined, however, that a pro- checks set by the permanent schedule. vision permitting the creditor to require Thus, the availability periods for excepaccelerated payment of an outstanding tion items remain at seven and eleven balance once the nonapplicant spouse days, respectively. The Board also made terminates the plan is inconsistent with changes to the model forms, principally federal law. to reflect the shortened time periods of In October the Board published a the permanent schedule, but also to proposed determination that a New Mex- guide institutions in disclosing changes ico law requiring disclosures for certain in policy resulting from the permanent credit transactions is consistent with schedule. Regulation Z and is not preempted be- In December the Board issued interim cause a creditor can comply with the state amendments to implement a change to law without violating federal law. The the statute. For a two-year period, insti- Board also held that having a separate tutions may treat deposits at nonpropriremedy for violations of state law does etary automated teller machines as nonnot by itself contradict federal law. Final local checks under the permanent action is expected in early 1991. schedule (thus allowing an institution to delay availability until the fifth business day after the day of deposit). The amend- Regulation CC ments, signed into law in November, (Expedited Funds Availability) were retroactive to September 1, 1990. In May the Board adopted several amend- After public comment, the Board expects ments to Regulation CC and its official to issue a final rule in early 1991. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 163 Regulation C giving community groups and others (Home Mortgage Disclosure) access to a larger body of data about lending patterns than under the old On January 1,1990, new rules took effect system. In September the Board hosted a under the Board's Regulation C, which meeting of community-group represenimplements the Home Mortgage Disclo- tatives and other HMDA data users on sure Act (HMDA). Regulation C gener- how best to make the HMDA data ally applies to mortgage lenders located accessible to the public. in metropolitan areas if their assets exceed $10 million. Previously, lenders that made or pur- Regulation C: Exemptions chased mortgage and home improvement In August the Board granted an exemploans had to report the type of loan and tion from Regulation C for state-chartered the census-tract location of the home. financial institutions in Massachusetts. Amendments signed into law in 1989 The Board found that the Massachusetts expanded the information required to law is substantially similar to federal law include the race, sex, and income of the and has adequate provisions for state applicants and, for loans the lender sells, enforcement. The exemption means that the type of purchaser. These data will institutions will file their mortgage data help the Board and other regulatory with the state banking commission inagencies monitor the compliance of lendstead of submitting reports to both feders with fair lending laws. eral and state regulators. The state agency The first HMDA reports under the will send the data to the FFIEC for new rules are due on March 1, 1991; processing and aggregation. more than 15,000 reports are expected to In December the Board published a contain up to 10 million loan entries. proposed exemption for state-chartered During 1990, the Board and the other financial institutions in Connecticut. agencies that enforce HMDA made extensive preparations for collecting and tabulating the data that will be Regulation B (Equal Credit submitted. The Federal Financial Insti- Opportunity): Preemption tutions Examination Council (FFIEC) published samples of the tables that will In July the Board preempted certain constitute the new disclosure statements provisions of Ohio law. The Board for individual financial institutions as determined that the provisions were well as the aggregate reports for each contrary to Regulation B and the Equal metropolitan statistical area. The FFIEC Credit Opportunity Act because they updated its "Guide to HMDA Report- could be construed, first, to prohibit ing: Getting it Right!" to help lenders favorable treatment of persons age 62 or understand and comply with the new older and, second, to allow age discrimamendments taking effect in 1990. The ination in real estate transactions. Moreagencies published technical standards over, Ohio law permitted special credit and took other steps to encourage programs that take age into account only electronic filing. if they were sponsored by a government Besides making available the HMDA agency; federal law permits such prodisclosure statements for each insti- grams to be offered by both the public and tution, the FFIEC will make edited raw private sectors if the programs meet data available to the public, thereby certain criteria. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

164 77th Annual Report, 1990 Consumer Brochures banking practices. The Board assesses the CRA performance of state member In September the Board issued a new banks during regular compliance examibrochure entitled, "Home Mortgages: nations and takes the CRA record into Understanding the Process and Your account, along with other factors, when Rights." The brochure describes how to acting on applications from state member shop for a mortgage and what to look for, banks and bank holding companies. outlines the application process, and tells The Federal Reserve System maintains potential homebuyers how to register a three-faceted program for enforcing complaints in cases of discriminatory and fostering better bank performance treatment. The brochure also lists potenunder the CRA: (1) examinations of tially discriminatory practices and outinstitutions to assess compliance, (2) lines some of the laws that protect dissemination of information on commuconsumers. nity development techniques to bankers In September the Board issued a reand the public through community affairs vised version of its brochure entitled "A offices at the Reserve Banks, and (3) Guide to Business Credit for Women, CRA analyses in processing applications Minorities, and Small Businesses," which from banks and bank holding companies. explains the commercial credit process Federal Reserve examiners review and gives guidance on how to prepare the performance in fair lending, community necessary documents for loan applicarevitalization, and other areas relevant to tion. The guide points out the responsiassessing CRA compliance. During the bilities of lenders and borrowers and 1990 reporting period (July 1, 1989, suggests some sources for assistance and through June 30, 1990), they examined recourse if an application is denied. 649 state member banks and, when appropriate, suggested ways to improve CRA performance. Interpretations During calendar year 1990, adverse In 1990 the Board continued to offer legal CRA ratings were at issue in forty-two interpretations and guidance on Regula- bank and bank holding company application B (Equal Credit Opportunity), Reg- tions , the same number as in 1989; twenty ulation E (Electronic Fund Transfers), such applications posed CRA issues in and Regulation Z (Truth in Lending) 1988. The number of applications prothrough official staff commentaries. Pub- tested because of CRA performance rose lished by April 1 of each year, these from sixteen in 1989 to twenty-seven in commentaries help financial institutions 1990. At year-end, seventeen of the and others apply the regulations to spe- protested applications had been apcific situations. proved, four were returned to the applicant or withdrawn, and six were still pending. Community Reinvestment Act The Community Reinvestment Act Community Affairs (CRA) requires the Board to encourage financial institutions under its jurisdiction Implementation of amendments to the to help meet the credit needs of their CRA that require public disclosure of entire communities, including low- and CRA ratings and evaluations significantly moderate-income neighborhoods, in a increased the activities of the Federal manner consistent with safe and sound Reserve's Community Affairs program Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 165 during 1990. Members of the Community bers also participated in training Federal Affairs staff at the Board and Federal Reserve commercial examiners to ac- Reserve Banks continued to focus atten- quaint them with the key concepts of tion on community development lending community development lending and the through training, education, and the objectives of the CRA. dissemination of information to financial Banks are increasingly interested in institutions, community advocates, and the relationship of community develgovernment representatives. opment finance activities to their CRA New procedures developed by the performance. Members of the Com- FFIEC for disclosing CRA ratings and munity Affairs staff responded to numerevaluations of banks increased the inter- ous requests from banks and holding est in CRA among community groups, companies for information about particicivil rights organizations, and consumer pation in local housing programs and in advocates as well as housing and small community and economic development business organizations and local govern- efforts. ment officials. As a result, Community Some Reserve Banks worked directly Affairs staff members at the Board and with banks and state banker associations Reserve Banks responded to a growing in helping to fashion finance programs number of inquiries and requests for and to train bankers in community develinformation regarding the CRA and the opment techniques. The Richmond Bank new public disclosure process. assisted bankers associations in its district To further educate the public and the in training sessions. The Boston Bank banking community on these topics, worked closely with the Massachusetts Reserve Banks sponsored 117 Commu- Bankers Association in its creation (in nity Affairs conferences and seminars. conjunction with the state government) The Reserve Banks' outreach programs of statewide lending programs for comoften focused on the new CRA proce- munity development. The San Francisco dures and their implications for banks, Bank supported efforts by banks to create supervisory agencies, and consumer and a statewide, multibank consortium that community groups. Members of the will finance low- and moderate-income Community Affairs staff at the Board and housing in California and other western the Reserve Banks spoke at 356 other states. conferences, seminars, and meetings The interest shown by bank holding hosted by banking, community, and other companies in forming community organizations on community develop- development corporations (CDCs) and ment or CRA topics. in other community development equity CRA training for consumer compli- investments also grew, judging by the ance examiners was a major priority for increase in their requests for informathe Federal Reserve's Community Affairs tion and assistance from the System's program during 1990. Expanding on Community Affairs staff. The Federal training efforts begun in 1989, Commu- Reserve authorized 13* bank holding nity Affairs staff members at the Board companies to make community developand at the Federal Reserve Banks of ment investments during 1990. Although Chicago and New York held five week- many new CDCs and investments continlong sessions on advanced CRA exami- ued to focus on low-income housing, a nation techniques. More than 125 exam- growing number of bank holding cominers representing the 12 Reserve Banks panies requested approval to establish or completed the course. Board staff mem- invest in CDCs that will undertake eco- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

166 77th Annual Report, 1990 nomic development and small business issued a pamphlet, "Community Reinassistance. vestment Act Performance Evaluations," to inform the public about the structure and scope of the written evaluations. At FFIEC Activities year-end, the agencies planned to make The Federal Financial Institutions Exam- public, at least quarterly, lists of the ination Council is an interagency body institutions whose CRA performance that prescribes uniform principles, stan- evaluations have become available. The dards, and report forms for the examina- FFIEC also adopted a policy for sharing tion off inanciali nstitutions by the federal community contact information among supervisory agencies. The member agen- the agencies. cies of the council include the Board, the Other FFIEC initiatives, described Office of the Comptroller of the Cur- earlier, were undertaken to accommodate rency (OCC), the Federal Deposit Insur- the 1989 amendments to the Home Mortance Corporation (FDIC), the Office gage Disclosure Act. of Thrift Supervision (OTS), and the The FFIEC revised examination National Credit Union Administration procedures to incorporate amendments (NCUA). to Regulation Z involving home equity During 1990 the FFIEC approved lines of credit and credit cards. It also several initiatives to implement amend- issued examination procedures for ments to the Community Reinvestment adjustable rate mortgages. At year-end, Act contained in the FIRREA legislation. all member agencies were reviewing the For examinations conducted after July 1, extent to which errors occur in lender 1990, financial institutions must disclose calculations of adjustments to variable to the public the written evaluation of rate mortgage loans and how such errors their CRA performance and the CRA should be treated. To support this effort, rating assigned under a new four-tiered Board staff members were assessing the rating system. extent of errors at state member banks In April the FFIEC issued guidelines and reviewing the legal authority under that included a uniform CRA rating the Truth in Lending Act for dealing system and uniform methods for dis- with such errors. closing the ratings and presenting the written evaluations. The evaluations will Compliance with Consumer state the examiner's conclusions and Regulations supporting facts for each assessment factor set out in the CRA regulations. Federal regulators annually report on the Interagency training sessions to familiar- extent to which the institutions they ize examiners with these new CRA supervise comply with consumer regulaprovisions and the guidelines for imple- tions. The most recent reporting period mentation were conducted in Atlanta, was July 1, 1989, to June 30, 1990. The San Francisco, Pittsburgh, and Dallas data indicate that compliance with the for more than 800 examiners from the Truth in Lending Act rose from 1989 Federal Reserve, the OCC, the FDIC, levels, while compliance with the Elecand the OTS. tronic Fund Transfer Act remained un- A joint temporary rule to implement changed. For the Equal Credit Opporthe new public disclosure requirements tunity Act and the Expedited Funds of the CRA was put in place by the Availability Act, compliance declined agencies effective July 1. The FFIEC from last year's levels. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 167 Truth in Lending Act advertising requirements of Regulation (Regulation Z) Z, focusing on real estate and automobile credit. Companies contacted through the The Board, the FDIC, the OCC, the FTC's monitoring program promptly OTS, and the NCU A reported that 37 per- brought their programs into compliance. cent of examined institutions were in full Three enforcement cases involved violacompliance with the regulation, up from tions in which annual percentage rates 30percentin 1989. The Board, the FDIC, had been understated. the OCC, and the NCU A all noted The FTC continued its enforcement improvements in compliance, while the program against improper telemarketing OTS reported a decline in the level of techniques and other frauds against compliance by savings associations. Data consumers involving credit card overgathered from the agencies that could charges. It brought actions in federal provide frequency ranges (the Board, the district court alleging violations of Truth OCC, and the NCUA) indicate that, in Lending requirements for prompt among the financial institutions that were notification of returns and crediting of not in full compliance, about half had refunds on credit card accounts. The between one and five violations. FTC filed consent agreements in two The five most frequent violations of telemarketing cases involving the un- Regulation Z were the failure to disclose authorized use of consumers' credit accurately the finance charge, the amount accounts. financed, the annual percentage rate, and Efforts to educate consumers and busithe number, amounts, and timing of nesses of their rights and responsibilities payments scheduled to repay the obliga- continued to be an integral part of the tion; and the failure to provide a separate FTC's enforcement activities. The FTC written itemization of the amount fi- issued a revised and expanded version of nanced or to disclose the consumer's right its manual, "How to Advertise Consumer to ask for an itemization. Credit," and published a brochure for The FDIC and the OTS each issued home buyers about various mortgage a cease-and-desist order involving vio- financing options. lations of Regulation Z. In addition, the The Department of Transportation OTS placed a savings association under reported a satisfactory level of complia supervisory agreement, in part for ance with Regulation Z by foreign and violations of Regulation Z, and fined domestic carriers. Consumer inquiries another savings association for violating investigated during the reporting period the provisions of a supervisory agree- resulted in no formal enforcement proment. Under the Interagency Enforce- ceedings for violations. ment Policy on Regulation Z, a total The Farm Credit Administration reof 408 institutions supervised by the ported a satisfactory level of compliance Board, the FDIC, the OCC, and the with Regulation Z among the institutions OTS made reimbursements to consum- it supervises. Examinations and enforceers that totaled $4.5 million on 52,344 ment activities produced formal enforceaccounts. This compares with roughly ment actions against sixteen institutions $8 million reimbursed on 87,447 ac- for violations of Truth in Lending; most counts in 1989. of them are now in substantial compli- The Federal Trade Commission (FTC) ance. Violations declined more than continued its program of seeking volun- 24 percent from the 1989 reporting tary compliance to enforce the credit- period. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 77th Annual Report, 1990 The Packers and Stockyards Adminis- practices in violation of ECOA and tration of the Department of Agriculture obtained consent decrees in two other received no complaints and initiated no cases. enforcement actions during the 1990 The Farm Credit Administration rereporting period. Individuals and firms it ported a satisfactory level of compliance regulates are believed by the agency to be with ECOA by the institutions it superin substantial compliance. vises. Its examination and enforcement activities led to formal enforcement actions against eight institutions for Equal Credit Opportunity Act violations of the act; most of them are (Regulation B) now in substantial compliance. Viola- The five financial regulatory agencies tions increased 13 percent from 1989. reported a decline in the level of compli- The other agencies that enforce ance with Regulation B, from 60 percent ECOA—the Department of Transportain 1989 to 57 percent for the 1990 tion, the Interstate Commerce Commisreporting period. The three agencies that sion, the Small Business Administration, could provide a breakdown of the viola- the Packers and Stockyards Administration frequency (the Board, the OCC, and tion of the Department of Agriculture, the NCUA), reported that 73 percent of and the Securities and Exchange Commisthe institutions that were not in full sion (SEC)—reported substantial complicompliance had between one and five ance among the entities they supervise. violations. The most frequent violations involved the failure to meet the following Electronic Fund Transfer Act requirements: (Regulation E) • Notify the applicant of action taken within 30 days after the creditor received The five financial regulatory agencies a completed application. reported that 84 percent of examined • Provide a written notice of adverse institutions were in full compliance with action that contains a statement of the Regulation E, the same percentage as last action taken, the name and address of the year. The following rules were the most creditor, the ECOA notice, and the name frequently violated: and address of the federal agency that • Provide, in a timely manner, written enforces compliance. disclosures outlining the terms and con- • Provide the specific reasons for ditions of the EFT service. adverse action, or a notice of the right to • Provide a monthly statement of EFT request the reasons. activity or a quarterly statement in the • Request information for monitoring absence of such activity. purposes about race or national origin • Adhere to procedures for promptly and sex on credit applications for the investigating and resolving alleged purchase or refinancing of a primary errors. dwelling, and note the information based • Maintain evidence of compliance on visual observation or surname if an with the regulation for two years. applicant chooses not to provide it. • Provide a periodic notice of the The FTC continued an investigatory procedures for resolving alleged errors. program in which testers pose as credit The other agencies that are responsible applicants to monitor compliance with for enforcing the Electronic Fund Trans- ECOA. The FTC filed complaints in fer Act - the FTC and the SEC - reported federal court in two cases that involved a satisfactory level of compliance. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 169 Expedited Funds Availability Act and thrift institutions offer ATM services (Regulation CC) to consumers, and about half of all households currently have ATM access The five financial regulatory agencies cards. The availability of ATM services reported that 80 percent of examined has been widened by the expansion of institutions were in full compliance with shared networks; the number of ATM Regulation CC. In 1989 (the first year in terminals participating in shared netwhich information was collected) the works increased from 85 percent in 1989 Board, the FDIC, and the OCC reported to 95 percent in 1990. The average that 90 percent of the institutions exammonthly number of ATM transactions ined were in full compliance. The three increased about 12 percent, from agencies that could provide a breakdown 437.4 million in 1989 to 474.9 million of the violation frequency (the Board, the in 1990. During the same period, the OCC, and the NCUA) reported that number of ATM terminals rose about 72 percent of the institutions that were 6 percent. not in full compliance had between one The number of point-of-sale (POS) and five violations. The most frequent systems is growing rapidly, but the violations involved the failure to meet the devices still account for only a small following requirements: fraction of EFT transactions. In 1990, • Provide next-day availability for the number of POS terminals rose 14 perrequired items. cent, to 53,300, and the average monthly • Disclose the availability policy folnumber of POS transactions rose 21 perlowed in most cases. cent, to 15.9 million. • Train employees adequately and Direct deposit is another widely used devise procedures to ensure compliance. EFT service. In the public sector, about • Post the availability policy at locahalf of all social security payments and tions where employees accept deposits. two-thirds of federal salary and retire- • Print an availability notice on dement payments are made by direct deposit slips printed with the customer's posit. Private-sector use is lower, but it name and account number. grew substantially during 1990. The 1990 paychecks of 17 percent of private-sector workers were deposited automatically Economic Effect of the Electronic into bank accounts, compared to 12 per- Fund Transfer Act cent the year before. In keeping with a statutory mandate, the The benefits to consumers from the Board monitors the effect of the Elec- Electronic Fund Transfer Act are difficult tronic Fund Transfer Act on the compli- to measure because they cannot be isoance costs and consumer benefits of EFT lated from consumer protections that services. The economic effect of the act would have been provided in the absence increased in 1990 as a result of continued of regulation. Examination reports suggrowth in availability and use of EFT gest no widespread violations of conservices. About two-thirds of the depos- sumer rights established by the act. In itory institutions in the United States 1990, about 84 percent of depository offer EFT services and are covered by the institutions examined by federal agencies act and Regulation E. were in full compliance with the act. Automated teller machines are the Statistics indicate that institutions not in most widely used EFT service in the full compliance generally had fewer than United States. Most of the nation's banks five violations. The most common viola- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 77th Annual Report, 1990 tion was the failure to provide initial Complaints about disclosure statements. State Member Banks Data from the Board's Consumer Complaint Control System provide no evi- The Board and Federal Reserve Banks dence of serious consumer problems with investigate complaints against state memelectronic transactions. In 1990, forty- ber banks and forward to appropriate five of the complaints processed involved enforcement agencies those that involve electronic transactions. The Federal Re- other creditors or businesses. In 1990 the serve System forwarded twenty-three, Board developed an on-line system for which did not involve state member tracking consumer complaints and inquirbanks, to other agencies for resolution. ies, to be implemented in 1991. The new Of the remaining twenty-two, none in- system will provide more complete and volved a violation of the regulation. up-to-date information about complaints, Because the industry practices that improve the Federal Reserve's ability to would have evolved in the absence of monitor consumer concerns, and imstatutory requirements are unknown, the prove its ability to identify trends and incremental costs associated with the act problems. are difficult to quantify. Cost estimates In 1990 the System received 2,003 from 1981 suggest that the ongoing complaints against state member banks, compliance cost of an electronic transac- nonmember banks, and other creditors tion at that time was not high enough to and businesses: 1,742 by mail, 255 by compromise the cost advantage of such telephone, and 6 in person (see the transactions over check-based transac- accompanying table). The Federal Retions. Since then, few changes have been serve investigated and resolved the 771 made in the regulation and transaction complaints against state member banks. volume has increased, allowing financial The Board also received 207 written institutions to exploit scale economies in inquiries concerning consumer credit and compliance costs. Thus, it is likely that banking policies and practices. In rethe regulation has less effect on EFT sponding, Board staff members gave costs now than it did in 1981. consumers brochures on the general Consumer Complaints Received by the Federal Reserve System, by Subject, 1990 Subject State b a m n e k m s ber le O n t d h e e r r s1 lotal Regulation B (Equal Credit Opportunity) 70 53 123 Regulation E (Electronic Fund Transfers) 22 23 45 Regulation M (Consumer Leasing) 6 6 12 Regulation Q (Interest on Deposits) 29 50 79 Regulation Z (Truth in Lending) 186 271 457 Regulation BB (Community Reinvestment).... 1 19 20 Regulation CC (Expedited Funds Availability). 10 22 32 Fair Credit Reporting Act 20 58 78 Fair Debt Collection Practices Act 6 17 23 Fair Housing Act 0 3 3 Municipal Securities Dealer Regulation 0 1 1 Transfer agents 0 1 1 Unregulated bank practices 421 597 1,018 Other2 0 111 111 Total. 771 1,232 2,003 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 111 issues plus explanations of laws, regula- if they had another problem with a bank; tions, and banking practices specific to and 70 percent found the resolution of their complaints or inquiries. their complaints acceptable. Board staff members regularly review A classification of the 771 complaints the System's handling of complaints by against state member banks according to sending follow-up questionnaires to bank function (see the corresponding complainants. In 1990,46 percent of the table) shows that 57 percent concerned complainants returned the question- loan functions, 9 percent alleged discrimnaires. Approximately 65 percent re- ination on a prohibited basis, and 48 perported that the explanations received cent concerned credit denial on nonprowere clear and understandable; 65 per- hibited bases (such as length of residency) cent were satisfied with the promptness and other unregulated lending practices in handling; 100 percent said they were (such as release or use of credit informatreated courteously by Federal Reserve tion) . About 25 percent involved disputes staff members; 95 percent said they about interest on deposits and general would contact the Federal Reserve again practices concerning deposit accounts. Consumer Complaints Received by the Federal Reserve System, by Function, Institution, and Resolution, 1990 Function Ty a p n e d o r f e s in o s lu ti t t i u o t n ion Total Loans Electronic Trust Deposits fund Other Discrimi- Other transfers services nation Complaints about state member banks, by type Insufficient information l 22 2 11 3 0 0 6 Information furnished to complainant2 91 13 55 8 1 3 11 Bank legally correct No accommodation 275 31 117 71 10 4 42 Accommodation made3 106 7 67 24 0 1 7 Clerical error, corrected 101 6 55 22 5 0 13 Factual dispute4 50 1 11 28 0 2 8 Bank violation, resolved5 6 12 3 0 0 0 Possible bank violation, unresolved6 5 0 2 2 0 0 1 Customer error 11 1 5 2 0 0 3 Pending, December 31 104 9 41 29 6 1 18 Total, state member banks .... 771 71 366 192 22 11 109 Percent 100 9 48 25 3 1 14 Complaints referred to other agencies7 1,232 75 565 226 23 8 335 Total 2,003 146 931 418 45 19 444 1. The stafFhas 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

172 77th Annual Report, 1990 Unregulated Practices to follow in CRA evaluations -FIRREA legislation requires CRA ratings and In 1990 the Board continued to monitor, evaluations to be made public for examiunder section 18(f) of the Federal Trade nations conducted after July 1, 1990. In Commission Act, complaints about bank- October the council's CRA committee ing practices that are not subject to made preliminary observations about the existing regulations to focus on those that CRA performance evaluations it had may be unfair or deceptive. Two catereviewed. gories each accounted for about 5 percent Electronic benefit transfers (EBT) of the 1,018 complaints: credit denial refers to the use of electronic means by based on credit history (56) and discrepgovernment agencies to disburse cash or ancies in deposit accounts (51). other benefits (such as food stamps) to Many of the complaints about credit recipients. In March the council's Deposdenials based on credit history indicated itory and Delivery Systems Committee that the applicant underestimated the briefed CAC members on the advantages importance lenders give to a poor credit of EBT over paper-based systems-in history or a lack of borrowing experience minimizing fraud, theft, and diversion of when considering the applicant's creditbenefits; increasing recipient satisfaction; worthiness. The complaints about diskeeping down administrative costs; and crepancies in deposit accounts usually providing uninterrupted benefits to recipinvolved cases in which consumers had ients without stable mailing addresses, noticed errors on their savings or checkincluding the homeless. ing account statements. At its June meeting the council unanimously adopted a resolution urging the Federal Reserve to pursue the develop- Consumer Advisory Council ment of EBT. In October the council The Consumer Advisory Council (C AC) received a first-hand report on a pilot met in March, June, and October to EBT program run by the state of Maryadvise the Board on its responsibilities land and a briefing by Board staff memunder the consumer credit protection laws bers on regulatory issues related to EBT. and to discuss other issues dealing with In June the council explored the probfinancial services to consumers. The lem of detecting unlawful discrimination council's thirty members come from in mortgage lending. Members raised the consumer and community-based organi- possible use of testers, in which teams of zations, financial institutions, academia, white and minority persons claiming and state government. Council meetings nearly identical family and financial are open to the public. characteristics would approach mort- In 1990 the council considered issues gage lenders to assess how they are related to CRA, electronic delivery of treated. In October the council adopted a government benefits, amendments to the resolution seeking information from the Home Mortgage Disclosure Act, discrim- Board on the possible scope and approxination in mortgage lending, expedited imate cost of a testing project. funds availability, and affordable A roundtable discussion among memhousing. bers of the council and the Board mem- A number of issues involved the public bers, known as the "Members Forum," disclosure of CRA ratings. In March gives council members the opportunity to members offered views on draft guide- offer their views on a variety of topics. lines issued by the FFIEC for examiners During 1990 the council discussed mat- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 173 ters such as how best to ensure that the gether with revisions of examination public understands the significance of the procedures. CRA rating, which is distinct from the The Board observed that the new safety and soundness rating of the institu- HMDA requirements should help to tion. Members also offered views on determine whether mortgage credit stanconsumer credit; on financial schemes dards are being fairly applied and to that defraud consumers, especially the evaluate a lender's efforts in the context elderly; on deposit insurance reform; on of the entire mortgage market. how best to encourage consumers to increase their saving rate; and on council Mortgage Lending Initiatives members' perceptions of the current availability of commercial and real estate The Board gave the following update on credit in their local markets. FFIEC initiatives previously brought to During the year, the council also the subcommittee's attention. The FFIEC considered the following issues: has continued to explore ways that lend- • Amendments to Regulation C ers can increase access to mortgages in • Proposed amendments to the Expe- low-income and minority neighbordited Funds Availability Act to retain the hoods. The agencies are looking at mortthree-day hold period for local checks gage review boards, in which groups of • The administration of the Afford- lenders and community representatives able Housing Disposition Program by the offer a second chance to applicants who Resolution Trust Corporation have been turned down for mortgages. • Proposals before the Congress to The agencies are also examining a Philaamend the Fair Credit Reporting Act, delphia mortgage plan in which a group which governs the use of consumers' of large banks have agreed not to reject a credit histories. mortgage applicant until a credit committee (representing the banks) reviews the application, possibly placing the loan Testimony and Legislative with another lender. Recommendations The Board also reported on two educa- The Board testified in May 1990 before a tional brochures. One will help potential Senate Banking subcommittee on the homebuyers learn more about the mort- Federal Reserve's progress in ensuring gage lending process and their right to equal access to home loans and stimulat- fair lending. The other, which the FFIEC ing private investment in low- and is developing, will advise mortgage moderate-income communities. The lenders about practices that could result, main points of the Board's testimony are unintentionally, in unfair lending patterns summarized below. or in the appearance of discrimination. The Board reported that new procedures will help the agencies trade infor- CRA and HMDA Revisions mation from CRA interviews with com- The Board noted the FFIEC's develop- munity contacts like consumer advocacy ment of interagency CRA guidelines to and housing organizations, local busihelp the agencies achieve uniformity in nesses, trade associations, realtors, and assigning ratings, preparing readily un- government offices. derstandable evaluations, and facilitating And finally, as a means of providing public access. Extensive training of HMDA information to institutions in a agency examiners was under way to- concise format, examination reports will Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

174 77th Annual Report, 1990 contain an executive summary that will showing how various tools available to allow a bank to compare its home lending lenders (like grants or subsidies to the patterns by race and income with the buyer, or changes in the interest rates lending record of all local lenders as a and underwriting criteria) can produce whole. The summary is being developed home loans that are both bankable and along with new computer applications to affordable to low- and moderate-income process the expanded HMD A data. The buyers. Federal Reserve is testing a preliminary The Boston Bank co-hosted, with the model. Boston Federal Home Loan Bank, a symposium for more than 300 members of the National Association of Affordable Federal Reserve Fair Lending Housing Lenders. Activities The San Francisco Bank helped launch The Board highlighted its efforts to the California Community Reinvestment address fair lending concerns. In May the Corporation (a lender consortium pooling Board sent letters to several hundred fair more than $100 million for long-term housing and civil rights groups and to financing of affordable housing developstate and local fair lending enforcement ment) and has been asked to help bankers authorities to explain the Federal Re- and community organizers in Hawaii and serve's role in protecting the legal rights Nevada with similar programs. of applicants. It asked for their help in The Chicago Bank convened a seminar identifying complainants that the Board for about 250 area bankers to share CRA might assist. policies and activities that have been The Board testified about its updated successful in the District. statistical analysis concerning possible The Philadelphia Bank is working on a racial discrimination by mortgage lenders video about CRA experiences. in Atlanta and Detroit. Data show disparities, with predominantly white middle- Recommendations income neighborhoods receiving more of Other Agencies home purchase loans per single family housing unit and minority middle-income The agencies that have enforcement neighborhoods receiving more home responsibilities under Regulations B, E, improvement loans. Although these data and Z made no recommendations in 1990 suggest problems in home lending, the for changes to the regulations or to the Board could not conclude definitively underlying statutes. • that discrimination was at work. The Board also testified about the online tracking system for consumer complaints, which it will implement in 1991. Reserve Bank Initiatives The Board testified about the work by Federal Reserve Banks to promote fair lending to low- and moderate-income communities. For example, the Atlanta Bank has developed a computer model Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

175 Litigation During 1990, the Board of Governors v. Continental Illinois Corp., 110 S. Ct. was named in twenty-seven pending 1249 (1990). lawsuits, compared with thirty-nine in In Independent Insurance Agents of 1989. Of the thirteen new lawsuits filed America, Inc. v. Board of Governors, in 1990, five raised questions under the No. 89-4030 (2nd Circuit, filed March Bank Holding Company Act, compared 9, 1989), petitioner sought review of a with eight in 1989. As of December 31, Board order dated March 3,1989, granted 1990, sixteen cases were pending, seven at the request of Merchants National of which involved questions under the Corporation, determining that the non- Bank Holding Company Act. banking prohibitions of the Bank Holding Company Act do not apply to activities of banks (75 Federal Reserve Bulletin 388). Bank Holding Companies— The Court of Appeals for the Second Antitrust Action Circuit upheld the Board's order on November 29, 1989 (890 F.2d 1275), In United States v. First Hawaiian, Inc., and the Supreme Court denied certiorari No. 90-00904 (D. Hawaii, filed Decemon October 1, 1990 (111 S. Ct. 44). A ber 28, 1990), the Department of Justice second case raising the identical issue is challenging the acquisition by First was dismissed by stipulation on Jan- Hawaiian, Inc., a Hawaiian bank holding uary 8, 1990 {Independent Insurance company, of First Interstate of Hawaii, Agents of America v. Board of Gov- Inc., under the antitrust laws. The Board ernors, No. 89-4046, 2nd Circuit, filed had approved the transaction on Novem- April 6, 1989). ber 30,1990 (77 Federal Reserve Bulletin In Synovus Financial Corporation v. 52 (1991)). The case is pending. Board of Governors, No. 89-1394 (D.C. Circuit, filed June 21, 1989), petitioner seeks review of a Board Bank Holding Company Actorder dated May 22, 1989, approving Review of Board Actions the application of SouthTrust Corpo- In Lewis v. Board of Governors, Nos. ration to acquire a national bank in 87-3455 and 87-3545 (1 lth Circuit, filed Georgia by relocating an Alabama na- June 25, August 3, 1987), petitioner tional bank subsidiary across state lines sought review of Board orders dated pursuant to 12 U.S.C. §30 (75 Fed- May 29,1987, and July 1,1987, approv- eral Reserve Bulletin 516). The case is ing applications of Chemical New York pending. Corporation and of Manufacturers Na- In Babcock and Brown Holdings, Inc. tional Corporation to expand activities of v. Board of Governors, No. 89-70518 trust company subsidiaries in Florida (73 (9th Circuit, filed November 22, 1989), Federal Reserve Bulletin 609 and 735). petitioners seek review of a Board order The cases were dismissed by stipulation dated October 25, 1989, in which the on July 3, 1990, following the Supreme Board requested the Federal Deposit Court's decision in a related case, Lewis Insurance Corporation to condition de- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

176 77th Annual Report, 1990 posit insurance for a proposed District the Financial Institutions Supervisory Act bank on Board approval of the acquisition and the Glass-Steagall Act. of control of the bank by Babcock and Brown Holdings, Inc., a brokerage firm. Financial Institutions The case is pending. Supervisory Act In Woodward v. Board of Governors, No. 90-3031 (11th Circuit, filed Jan- In MCorp v. Board of Governors, No. uary 16, 1990), and Kaimowitz v. Board 89-2816 (5th Circuit, filed May 2,1989), of Governors, No. 90-3067 (11th Cir- the Board appealed a preliminary injunccuit, filed January 23,1990), petitioners, tion entered by the district court enjoining raising issues under the Community pending and future enforcement actions Reinvestment Act, seek review of a Board against a bankrupt bank holding comorder dated December 22,1989, approv- pany (101 Bankr. 483, S.D. Texas 1989). ing an application by First Union Corpo- On May 15, 1990, the Court of Appeals ration to acquire Florida National Banks vacated the injunction in part and af- (76 Federal Reserve Bulletin 83). The firmed it in part (900 F.2d 852). On Woodward case was dismissed on the December 10, 1990, both parties filed Board's motion on June 26, 1990. The petitions for certiorari in the Supreme Kaimowitz case is pending. Court (Nos. 90-913 and 90-914). The In California Association of Life case is pending. A related case, MCorp v. Underwriters v. Board of Governors, No Board of Governors, No. CA3-88- 90-70123 (9th Circuit, filed March 15, 2693-F (N.D. Texas, filed October 28, 1990), petitioner sought review of a 1988), is stayed pending the outcome of Board order dated February 16, 1990, the Fifth Circuit appeal. approving the acquisition by Bank- In BankTEXAS Group, Inc. v. Board of America Corporation of a bank sub- Governors, No. CA-3-90-0236-R sidiary to engage in insurance activities (N.D. Texas, filed February 2, 1990), pursuant to state law (76 Federal Reserve plaintiff sought to enjoin the Board from Bulletin 244). The case was voluntarily enforcing a temporary order to cease dismissed on June 29, 1990. and desist, which required injection of In Citicorp v. Board of Governors, capital into the plaintiffs subsidiary No. 90-4124 (2nd Circuit, filed Oc- banks. The court granted a preliminary tober 4,1990), petitioner seeks review of injunction on June 5, 1990, in light of a Board order requiring Citicorp to the Fifth Circuit's decision in MCorp. terminate certain insurance activities On December 20, 1990, the parties subby a nonbank subsidiary of Citicorp's mitted an agreed order of dismissal after subsidiary bank in Delaware (76 Fed- settlement of the administrative action. eral Reserve Bulletin 977). The case is In Burke v. Board of Governors, No. pending. 90-9505 (10th Circuit, filed February 27, 1990), petitioners seek review of Board orders assessing civil money penalties and issuing orders of prohibition. The case is pending. Other Litigation Involving Challenges to Board Procedures In Stanley v. Board of Governors, No. and Regulations 90-3183 (7th Circuit, filed October 3, 1990), petitioners seek review of a Board In 1990, seven actions were commenced, order imposing civil money penalties. were pending, or were dismissed under The case is pending. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 111 Glass-Steagall Act case was dismissed by stipuation on June 25, 1990. In Securities Industry Association v. In White v. Board of Governors, No. Board of Governors, No. 89-1127 (D.C. 88-623 (D. Nevada, filed July 29,1988), Circuit, filed February 16, 1989), the the plaintiff alleges discriminatory pracpetitioner sought review of a Board order tices under the Age Discrimination in dated January 18,1989, which expanded Employment Act. The case is pending. the scope of securities that could be In Laufman v. State of California, No. underwritten and dealt in by bank holding CIVS-89-1755 (E.D. California, filed companies to include all types of debt and April 2,1990), plaintiff sought to require equity securities, subject to certain con- bank regulatory agencies, including the ditions (75 Federal Reserve Bulletin 192). Board, to examine or bring enforcement The Board's order was issued at the action against a bank. The case was request of J. P. Morgan & Co., The Chase dismissed on July 25, 1990. Manhattan Corporation, Bankers Trust In Consumers Union of U. S., Inc. v. New York Corporation, Citicorp, and Board of Governors, No. 90-5156 (D.C. Security Pacific Corporation. On April Circuit, filed May 2, 1990), appellant 10, 1990, the Court of Appeals upheld appeals a district court decision granting the Board's order (900 F.2d 360). summary judgment for the Board in In Securities Industry Association v. connection with a challenge to various Board of Governors, No. 89-1730 (D.C. amendments to Regulation Z implement- Circuit, filed November 29, 1989), the ing the Home Equity Loan Consumer petitioner sought review of a Board order Protection Act. The appeal is pending. dated October 30, 1989, approving an In May v. Board of Governors, No. application by Bankers Trust New York 90-1316 (D. District of Columbia, filed Corporation for its subsidiary to act as June5,1990), the plaintiff challenged the agent in the placement of all types of Board's response to his Freedom of securities and to buy and sell all types of Information Act and Privacy Act resecurities on the order of investors as a quests. The District Court granted the "riskless principal" (75 Federal Reserve Board's motion to dismiss on July 17, Bulletin 829). The case was dismissed by 1990; plaintiffs appeal (No. 90-5235) to stipulation. the D.C. Circuit is pending. In Kuhns v. Board of Governors, No. 90-1398 (D.C. Circuit, filed July 30, Other Actions 1990), petitioner seeks review of a Board order denying a request for attorney's In Cohen v. Board of Governors, No. fees under the Equal Access to Justice 88-1061 (D. New Jersey, filed March 7, Act. The case is pending. 1988), plaintiff sought to require disclo- In Rutledge v. Board of Governors, sure of documents under the Freedom of No. 90-7599 (1 lth Circuit, filed August Information Act. In Fidata Trust Com- 21, 1990), appellant appealed a district pany New York v. Board of Governors, court grant of summary judgment for the No. 88-4846 (D. New Jersey, filed Board in connection with his challenge to November 9, 1988), plaintiff sought to Board and Reserve Bank supervisory enjoin the Board from disclosing certain actions under a number of tort theories. documents involved in the Cohen case. The Court of Appeals summarily af- The Fidata case was dismissed by stipu- firmed the lower court on January 17, lation on January 30,1990, and the Cohen 1991. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 77th Annual Report, 1990 In Sibille v. Federal Reserve Bank of New York, et aL, No. 90-CIV-5898 (S.D. New York, filed September 12, 1990), plaintiff seeks review of a denial of a request made under the Freedom of Information Act. The case is pending. In State of Illinois v. Board of Governors, No. 90-C-6863 (N.D. Illinois, filed November 27,1990), the State of Illinois filed suit to prevent disclosure of state examination reports provided to the Board under a confidentiality agreement. The documents were the subject of a congressional subpoena. On December 28, 1990, the district court preliminarily enjoined disclosure of the reports. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

179 Legislation Enacted In 1990 the following legislation directly within two years of the enactment of the affecting the Federal Reserve or the act on the development of linked settleinstitutions it regulates was enacted. ment systems for securities, futures contracts, options, and related products. Market Reform Act of 1990 Public Law 101-432, the Market Reform Cranston-Gonzales National Act of 1990, was enacted on October 16, Affordable Housing Act 1990. The act gives the Securities and Exchange Commission (SEC) new pow- The Cranston-Gonzales National Afforders over the trading of securities, includ- able Housing Act, Public Law 101-647, ing the ability to halt trading in emergen- was enacted on November 28, 1990. cies and to require more extensive Although the provisions of the act prireporting. Section 5 of the act provides marily concern affordable housing and for improvements in the coordination of programs to increase home ownership, securities clearing. The SEC is given they also amend the Expedited Funds authority to adopt rules concerning the Availability Act. The amendments allow transfer and pledge of certificated and depository institutions to place holds of uncertificated securities, other than gov- four intervening days on deposits made at ernment securities under the Federal nonproprietary automated teller ma- Reserve's book-entry system, if it makes chines before November 28, 1992, when certain findings concerning the necessity the permanent schedule for these deand effects of a uniform federal rule. posits will take effect. Before adopting rules, the SEC is required to consider the recommendations of the Board, the Secretary of the Trea- Crime Control Act of 1990 sury, and the Advisory Committee created under this section. The Advisory The Crime Control Act of 1990, Public Committee will comprise members ap- Law 101 -647, was enacted on November pointed by the SEC, the Secretary of the 29, 1990. The act contains diverse mea- Treasury, and the Board. sures intended to address a variety of Under section 8 of the act, the Board, crime problems, including provisions in along with the SEC, the Commodity title I concerning money laundering. The Futures Trading Commission (CFTC), provisions require a representative of the and the Secretary of the Treasury, is Board, along with representatives of the required to make annual reports to the Treasury, the Bureau of Engraving and Congress on the coordination of regula- Printing, the Secret Service, and other tory actions concerning payment and agencies, to participate in a task force to market systems, as well as on the ade- study the feasibility of electronic scanquacy of margin levels and other issues ning of U.S. currency notes. relating to the integrity of the financial Title XXV contains the Comprehenmarkets. The SEC, the CFTC, and the sive Thrift and Bank Fraud Prosecution Board are also required to submit a report and Taxpayer Recovery Act of 1990. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

180 77th Annual Report, 1990 This title has several new provisions and victed of criminal offenses involving amendments to existing civil and criminal financial institutions to evade restitution laws that affect the manner in which the orders Federal Reserve and other federal finan- • Authorizes the Federal Deposit Incial institution supervisory agencies con- surance Corporation (FDIC) to prohibit duct their regulatory responsibilities, as or limit the payment of "golden parachute" well as the conduct of the Department of or indemnity payments made by deposi- Justice's criminal law enforcement duties tory institutions or their holding comrelating to financial institutions. panies to institution-affiliated parties Subtitle A of title XXV establishes or under certain circumstances. Subtitle B increases criminal penalties as follows: also prohibits the prepayment of salary or • Establishes penalties for concealing legal expenses of an institution-affiliated assets from a conservator, receiver, or party in contemplation of insolvency or liquidator of a financial institution, or for to prevent the proper application of the obstructing an examiner institution's assets. • Increases penalties for bank fraud • Adds civil and criminal forfeiture and embezzlement and for major bank provisions for fraud relating to the sale of crime cases assets by a depository institution under a • Extends the prohibition on partici- conservatorship or receivership pation in the affairs of an insured deposi- • Provides that persons convicted of tory institution by persons convicted of certain offenses relating to a depository certain criminal offenses to persons that institution or that are in default to the have entered a pretrial diversion or other depository institution may not purchase program, and establishes a minimum ten- assets of me institution from the receiver year prohibition for persons convicted of or conservator of the institution certain offenses. • Provides expedited procedures for Subtitle B of title XXV protects the appeals from orders in cases brought by assets of an insured depository institution the FDIC against a depository institufrom wrongful disposition as follows: tion's officers and directors • Authorizes the Federal Reserve and • Gives the FDIC or other federally other federal supervisory agencies of appointed conservator the authority to depository institutions to apply for judi- void certain transfers of assets made with cial restraining orders to prevent the intent to hinder, delay, or defraud the transfer of assets by persons subject to depository institution, the FDIC, a conadministrative enforcement actions that servator, or a federal depository institumay involve civil money penalties, money tion regulatory agency. damages, or restitution, and establishes Subtitle C of title XXV makes the the standards for the issuance of such following provisions for handling bankorders related cases: • Prevents holding companies of • Permits wiretaps in cases relating to depository institutions from using bank fraud and other financial institutionbankruptcy proceedings to evade capital related offenses commitments made to the Federal • Allows the Board or other federal Reserve or other federal depository banking agencies to obtain assistance institution regulators with regard to from foreign banking authorities and insured depository institutions. The maintain offices outside the United States provisions also prevent use of bank- in connection with an investigation, ruptcy proceedings by individuals con- examination, or enforcement action Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 181 • Permits the Board or other federal be open to the public unless the agency banking agencies to assist investigations determines that a public hearing would conducted by foreign banking authorities be contrary to the public interest pertaining to violations of foreign laws or • Requires that transcripts and docuregulations relating to banking or cur- mentary evidence from such hearings rency transactions will generally be made available to the • Provides a ten-year statute of limita- public unless disclosure is deemed to be tions for civil penalty actions brought in contrary to the public interest connection with certain criminal viola- • Requires each federal banking tions relating to depository institutions agency to report to the Congress quarterly • Clarifies the subpoena authority of regarding any determinations made not the FDIC and the Resolution Trust Cor- to publish any order or written agreement poration when they act as receiver or or not to hold a public hearing conservator. • Provides that federal banking agen- Subtitle D of title XXV requires the cies must retain for a minimum of six formation of a unit in the Department of years all formal and informal agreements, Justice to deal with fraud in financial statements, orders, and supporting docuinstitutions and establishes an interagency ments relating to administrative enforcetask force on financial institution fraud ment proceedings. comprising representatives of the Board, Subtitle F of title XXV establishes a the Department of Justice, the Depart- National Commission on Financial Instiment of the Treasury, and all other fed- tution Reform, Recovery, and Enforceeral banking agencies. ment to study the problems in the savings Subtitle E of title XXV expands report- and loan industry, to make recommening and recordkeeping requirements as dations on reforms needed to prevent follows: reoccurrences of such problems in the • Requires the Department of Justice banking industry, and to authorize approto maintain extensive records and to file priations relating to civil and crimreports with the Congress concerning inal proceedings involving financial civil and criminal investigations, prose- institutions. cutions; and enforcement and recovery Subtitle H, the Financial Institutions proceedings relating to criminal activities Anti-Fraud Enforcement Act of 1990, at financial institutions establishes a mechanism that would allow • Expands the requirements for public private individuals under some limited disclosure of formal enforcement actions. circumstances to bring actions on behalf Any written agreement or statement that of the government to collect civil penalmay be enforced by the agencies must be ties in cases involving violations of law disclosed, as must the modification or by financial institutions. Under this subtermination of such agreements, unless title, such individuals could receive public disclosure is determined to be rewards for successful actions involving contrary to the public interest. Disclosure the recovery of assets. Individuals could of final orders may be delayed if the also receive rewards when they provide agency finds that public disclosure would information that forms the basis of a threaten the safety and soundness of an criminal conviction. insured depository institution Subtitle I of title XXV clarifies the fact • Provides that all hearings on the that the Board has the same enforcement record concerning any notice of charges powers with regard to foreign financial issued by a federal banking agency will institutions, their branches, agencies, and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 77th Annual Report, 1990 associated persons doing business in the United States as it has with regard to domestic financial institutions and associated persons. This subtitle expands the definition of the termfinancial institution as it is used in numerous bank fraud provisions to include Federal Reserve Banks, Edge corporations, Agreement companies, and branches and agencies of foreign banks. The amendment also extends coverage of bank fraud statutes relating to theft, embezzlement, or misapplication of funds to holding companies of depository institutions. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

183 Banking Supervision and Regulation During 1990, the Federal Reserve ad- supervise federally insured depository dressed many critical supervisory and institutions. Also, the Board's supervipolicy issues. Early in the year, the Fed- sory staff joined with other Board staff eral Reserve received reports that, be- members to assist the Treasury in its cause of tightened lending standards, FIRREA-mandated study of the deposit bank credit was becoming difficult to insurance system. Finally, the Board's obtain in some areas of the country. The Staff Director of the Division of Banking Federal Reserve responded by conduct- Supervision and Regulation served as ing surveys to determine the nature and acting president and chief executive extent of these conditions and by meeting officer of the Oversight Board of the with banking groups to gain further Resolution Trust Corporation for several information and to encourage lenders to months early in the year. make sound loans. In the second half of The initial phase-in of the risk-based the year, conditions continued to tighten capital guidelines of the Basle Comwhile economic activity showed signs mittee on Banking Supervision occurred of slowing. The Federal Reserve, partly on December 31, 1990. The guidelines in response to these developments, acted had been adopted by the Federal to ease overall credit conditions by Reserve, the Federal Deposit Insurance increasing reserve availability, reducing Corporation, and the Office of the the discount rate, and lowering reserve Comptroller of the Currency in early requirements. 1989. Throughout 1990, banking or- The Federal Reserve continued to be ganizations took steps to achieve involved in implementing important ele- compliance with the interim standards ments of the Financial Institutions Re- specified for the phase-in date, with form, Recovery, and Enforcement Act of many endeavoring to be in compliance 1989 (FIRREA). As mandated by title XI with the more stringent standards set of FIRREA, the Board, along with other for December 31,1992. In August 1990, federal financial institution regulatory the Board announced that, over the reagencies, issued appraisal regulations for mainder of the year, organizations could real estate lending activities of state adhere either to the primary capital member banks and bank holding com- standard (to be phased out at year-end) or panies . The Board also participated in the to the interim risk-based capital standard start-up of the Appraisal Subcommittee (to be phased in at year-end). At the same of the Federal Financial Institutions time, the Board adopted a new capital Examination Council. Board staff mem- leverage standard that requires organizabers were assigned to serve temporarily tions generally to maintain a ratio of tier 1 on the subcommittee and on its staff, capital (as defined in the 1992 risk-based pending permanent appointments to these capital standard) to total assets of 3 perpositions. As required by section 1215 of cent plus 100 to 200 basis points. Only FIRREA, the Board submitted on August organizations in the strongest condition 9, 1990, the first of its annual reports to and with no significant plans for growth the Congress on capital and accounting are permitted to operate at the minimum standards used by federal agencies that level of 3 percent. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

184 77th Annual Report, 1990 During the year, the Board adopted introduced a revised rating system, inspection procedures for companies that closely paralleling the CAMEL system, underwrite and deal in equity securities for the international activities of U.S. in accordance with section 20 of the banks.1 Glass-Steagall Act. In September 1990, Board staff members contributed to the the Board, for the firstt ime, authorized a international attack on money laundering bank holding company to commence this by participating on the U.S. Department activity. of die Treasury's Financial Action Task In the international policy area, the Force, conducting seminars on U. S. bank Federal Reserve published for com- regulatory practices in this area for ments proposed revisions to Regulation delegations from several developing K (International Banking Operations). countries, and providing resources to The revisions include proposals to U.S. government task forces. improve the competitiveness of U.S. banks overseas; and they also deal with Scope of Supervisory the operations of foreign banks in the and Regulatory Responsibilities United States. Numerous comments were received and were being evaluated The Federal Reserve is the primary fedat year-end. Also, the Federal Reserve, eral supervisor and regulator of state in conjunction with the Basle Committee chartered commercial banks that are on Banking Supervision, continued to members of the Federal Reserve System consider whether further convergence and of all U.S. bank holding companies. of regulatory standards is possible in In its supervision of the general operathe area of market risk-particularly risk tions of these organizations, the Federal involving interest rates, foreign ex- Reserve primarily seeks to promote their change, and securities positions. safety and soundness and their compli- Members of the Federal Reserve staff ance with laws and regulations, including also attended joint meetings of securities the Bank Secrecy Act and consumer and and insurance supervisors held under civil rights laws.2 The following specialthe auspices of the Basle Committee. ized activities of these institutions are These joint meetings, the first such also reviewed: electronic data processwith insurance supervisors and the ing, fiduciary activities, government third such with securities supervisors, explored possible resolutions of common problems, such as the sharing 1. In the CAMEL rating system, examiners of prudential information among evaluate an institution's capital adequacy, asset supervisors. quality, management, earnings, and liquidity. 2. The Board's Division of Consumer and Members of the Federal Reserve's staff Community Affairs has the responsibility of coorcontinued to work closely with enforce- dinating the Federal Reserve's supervisory activities ment authorities and state bank supervi- with regard to the compliance of banking organizasory authorities to resolve several prob- tions with consumer and civil rights laws. To carry out this responsibility, institutions are examined by lems relating to offices of foreign banks specially trained Reserve Bank examiners. The in the United States. chapter of this REPORT covering consumer and The Federal Reserve also developed community affairs describes these regulatory reand distributed a new procedures manual sponsibilities. Compliance with other statutes and regulations, which is treated in this chapter, is the for examining merchant bank activities. responsibility of the Board's Division of Banking After consultation with state bank super- Supervision and Regulation and the Reserve Banks, visory authorities, the Federal Reserve whose examiners check for safety and soundness. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 185 securities dealing and brokering, munic- and agreement corporations and inspecipal securities dealing and clearing, and tions of bank holding companies and securities underwriting and dealing their subsidiaries entail (1) an appraisal through section 20 securities subsidiaries. of the quality of the institution's assets; The Federal Reserve also has respon- (2) an evaluation of management, includsibility for the supervision of (1) all Edge ing internal policies, operations, and and agreement corporations (organiza- procedures; (3) an assessment of the key tions chartered by the Federal Reserve financial factors of capital, earnings, Board to provide all segments of the U. S. asset and liability management, and economy with a means of financing liquidity; and (4) a review for compliance international trade, especially exporting), with applicable laws and regulations. (2) the international operations of state member banks and U.S. bank holding companies, and (3) the operations of foreign banking organizations in the State Member Banks United States. At the end of 1990, there were 1,014 state Through its administration of the Bank member banks, 33 fewer than in 1989. Holding Company Act, the Bank Merger These banks represented about 8 percent Act, and—for bank holding companies of all insured commercial banks and and state member banks—the Change in accounted for about 17 percent of their Bank Control Act, the Federal Reserve assets. exercises important regulatory influence The Federal Reserve in 1986 increased over the structure of the U.S. banking the frequency of scheduled examinations system. The Federal Reserve is also and inspections of state member banks responsible for regulating margin require- and bank holding companies. The guidements on securities transactions. The lines call for state member banks to be Federal Reserve coordinates its supervi- examined at least annually by either a sory activities with other federal and Reserve Bank or a state banking agency. state regulatory agencies and with the Large or troubled banks must be exambank regulatory agencies of other na- ined at least annually by a Reserve Bank. tions. Because of the reassignment in 1990 of bank examiners to address other emerging problems in the banking industry, Supervision for Safety scheduled examinations of 27 healthy, and Soundness well-managed banks were deferred into 1991. All other state member banks were To ensure the safety and soundness of examined at least once in 1990. Because banking organizations, the Federal Reof the requirement that some banks serve conducts on-site examinations and should be examined more than once, the inspections, off-site surveillance and Federal Reserve conducted 764 examinamonitoring, and enforcement and other tions (some of them jointly with state supervisory actions. agencies), and state agencies conducted 301 independent examinations. Also, Examinations and Inspections under policy guidelines, Reserve Bank The on-site review of operations is an officials held 307 meetings with direcintegral part of ensuring the safety and tors of either the largest state member soundness of financial institutions. Exam- banks or those that displayed significant inations of state member banks and Edge weaknesses. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

186 77th Annual Report, 1990 Bank Holding Companies Board's staff initiated and worked on, At year-end 1990, the number of bank 175 formal enforcement cases that holding companies totaled 6,425, 19 involved 382 separate actions, such as fewer than in 1989. These organizations written agreements, cease-and-desist control about 8,700 commercial banks, orders, removals, prohibitions, and civil which hold approximately 94 percent of money penalties, most dealing with the assets of all insured commercial banks unsafe or unsound banking practices and in the United States. violations of law. Of these, 50 cases Large bank holding companies and involving 72 actions were completed by smaller companies with significant non- year-end. The Board completed 21 civil bank assets are to be inspected annually money penalty actions and assessed, under the revised guidelines for fre- either by the issuance of consent orders quency and scope of examination. or after the completion of contested Medium-sized companies are inspected proceedings, a total of $3,119,000. By at least every three years. For the smallest year-end 1990, the Board had collected companies, those without nonbank as- $270,975, with most of the remainder of sets, inspections are conducted on a the assessments under review by the sample basis. appropriate courts of appeals or to be The inspection focuses on the opera- paid in accordance with agreed-upon tions of the parent holding company and payment schedules. The Board also its nonbank subsidiaries. In judging the ordered two insiders to pay restitution condition of subsidiary banks, Federal totaling $500,000 to their affiliated Reserve examiners consult the examina- banking organizations. tion reports of the federal and state A description of all formal superbanking authorities that have primary visory actions undertaken during the responsibility for the supervision of these year and the reasons for them are banks. Of the 2,173 inspections con- available to the public in the Board's ducted in 1990, Federal Reserve System yearly "Report on Formal Enforcement examiners made 2,080 on-site inspec- Actions." Also, all final enforcement tions, and state examiners inspected 93 orders issued by the Board of Goverbank holding companies, 28 more than in nors after August 9,1989, and all written 1989. Also, 161 off-site inspections were agreements executed after November 29, completed. Because members of the 1990, areavailable to the public. In 1990, examining staff were assigned to work the Federal Reserve Banks initiated 298 with other industry problems in 1990, informal enforcement actions and com- 53 bank holding company inspections pleted 220 of them through instruments were deferred until 1991. During 1990, such as memoranda of understanding Reserve Bank officials held 478 meetings with state member banks, bank holding with the boards of directors of bank companies, and foreign financial instituholding companies to discuss supervisory tions subject to the jurisdiction of the concerns. Federal Reserve. In 1990, the staff of the Division of Banking Supervision and Regulation Enforcement Actions, forwarded 181 criminal referrals to the Civil Money Penalties, Fraud Section of the Criminal Division and Significant Criminal Referrals of the Department of Justice for inclu- In 1990, the Federal Reserve Banks sion in its significant referral tracking recommended, and members of the system. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 187 Specialized Examinations of earnings; (4) a review for conflicts of interest; and (5) a review for compliance The Federal Reserve conducts special- with laws, regulations, and general fiduized examinations in the following ciary principles. areas of bank activity: electronic data During 1990, Federal Reserve System processing, fiduciary activities, gov- examiners conducted on-site trust examernment securities dealing and broker- inations of 169 state member banks and ing, municipal securities dealing and state member trust companies and 32 clearing, and securities underwriting and inspections of bank holding company dealing through section 20 securities subsidiaries engaged in fiduciary activisubsidiaries. ties. The institutions examined in 1990 held more than $1.7 trillion in fiduciary assets. Electronic Data Processing Under the Interagency EDP Examination Program, the Federal Reserve examines Government Securities Dealers the electronic data processing (EDP) and Brokers activities of state member banks, Edge The Board is responsible for examining and agreement corporations, and indethe activities of state member banks and pendent centers that provide EDP sersome foreign banks that are government vices to these institutions. In 1990, securities dealers and brokers for com- System examiners conducted 302 on-site pliance with the Government Securities EDP reviews. In addition, the Federal Act of 1986 and with the Treasury De- Reserve reviews reports of EDP examipartment's regulations. Forty-three state nations issued by other bank regulatory member banks, three state branches of agencies on organizations that provide foreign banks, and one state agency of a data processing services to state member foreign bank currently have on file with banks. the Board notices that they are government securities dealers or brokers that Fiduciary Activities are not otherwise exempt from Treasury The Federal Reserve System has super- Department regulations. visory responsibility for institutions that hold more than $4.1 trillion of discretionary and nondiscretionary assets in various Municipal Securities Dealers fiduciary capacities. This group of insti- and Clearing Agencies tutions includes 333 state chartered mem- The Securities Act Amendments of 1975 ber banks and trust companies and 153 made the Board responsible for supervistrust companies and investment advisory ing state member banks and bank holding companies that are subsidiaries of bank companies that act as municipal securities holding companies. dealers or as clearing agencies. Forty- On-site examinations are essential to four banks that act as municipal securities ensure the safety and soundness of finan- dealers and four clearing agencies that cial institutions that have fiduciary oper- act as custodians of securities involved in ations. The scope of these examinations transactions settled by bookkeeping enincludes (1) an evaluation of manage- tries are registered with the Board. In ment, policies, audit procedures, and 1990, the Board examined all four of the risk management; (2) an appraisal of the clearing agencies and twenty of the banks quality of trust assets; (3) an assessment that deal in municipal securities. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 77th Annual Report, 1990 Securities Subsidiaries and deal in ineligible securities. Specialof Bank Holding Companies ized inspection procedures have been Section 20 of the Banking Act of 1933, developed for use in reviewing the opercommonly known as the Glass-Steagall ations of these securities subsidiaries. Act, prohibits the affiliation of a member bank with a company that is "engaged Transfer Agents principally" in underwriting or dealing in Federal Reserve System examiners consecurities. The Board in 1987 approved ducted separate reviews of state member proposals by banking organizations to banks and bank holding companies that underwrite and deal on a limited basis in act as transfer agents. Transfer agents specified classes of bank "ineligible" countersign and monitor the issuance of securities (that is, commercial paper, securities, register their transfer, and municipal revenue bonds, conventional exchange or convert them. During 1990, residential mortgage-related securities, System examiners reviewed 80 of the and securitized consumer loans) in a 167 banks and bank holding companies manner consistent with the Glass-Steagall registered as transfer agents with the Act and the Bank Holding Company Act. Board. At that time, the Board limited revenues from these newly approved activities to no more than 5 percent of total revenues Surveillance and Monitoring for each securities subsidiary. In January 1989, the Board approved The Federal Reserve monitors the finanapplications by five U.S. bank holding cial condition of state member banks and companies to underwrite and deal in bank holding companies through a quarcorporate and sovereign debt and equity terly surveillance program to supplement securities, subject in each case to reviews the Federal Reserve's on-site examinaof managerial and operational infrastruc- tions . This program consists of automated ture and other conditions and require- screening systems that identify organizaments specified by the Board. Four of tions with poor or deteriorating financial these organizations subsequently re- profiles. Banking organizations submit ceived authorization to underwrite financial statements from which the and deal in corporate and sovereign screening systems compute numerous debt securities. In September 1989, the financial ratios. These ratios are then Board increased the revenue limit from analyzed by the staff members of the 5 percent to 10 percent. In 1990, the division and of the Reserve Banks to Board approved applications by five determine whether the organizations have foreign banking organizations to engage emerging problems that may require the in the expanded underwriting powers, commitment of examiner resources for and in September 1990, a bank hold- on-site examinations or other appropriate ing company received authorization supervisory responses. The Federal Reto commence underwriting of equity serve supplements the quarterly surveilsecurities. At year-end 1990, proposals lance programs with ad hoc screening by several other banking organizations to reports on specific areas of supervisory commence equity underwriting were concern. pending. To enhance the timeliness and quality Currently, thirty bank holding com- of the surveillance processes, the current panies have section 20 subsidiaries that system is being revised and will include have received authority to underwrite an early-warning model to continually Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 189 evaluate a banking organization's super- ducted with the cooperation of the supervisory rating based on the most current visory authorities of the countries in financial information available. which the examinations took place. Also, examiners conducted five reviews of the operations of overseas offices to evaluate International Activities compliance with corrective measures previously required. The Federal Reserve is responsible for supervising several international U. S. Activities of Foreign Banks activities. Foreign banks continue to be significant participants in the U.S. banking system. Edge and Agreement Corporations As of year-end 1990, 307 foreign banks Edge corporations are international bank- operated 497 state-licensed branches and ing organizations chartered by the Board agencies, of which 48 are insured by the to provide all segments of the U.S. econ- Federal Deposit Insurance Corporation. omy with a means of financing interna- At year-end, these foreign banks also tional trade, especially exports. An agree- operated 90 branches and agencies liment corporation is a company that enters censed by the Office of the Comptroller into an agreement with the Board not to of the Currency, of which 9 have FDIC exercise any power that is impermissible insurance. Foreign banks also directly for an Edge corporation. In 1990, the owned 18 Edge corporations and 10 Federal Reserve examined 100 Edge and commercial lending companies. In addiagreement corporations. tion, foreign banks held a 25 percent or more interest in 90 U.S. commercial Foreign-Office Operations banks. Altogether, foreign banks at yearof U.S. Banking Organizations end controlled approximately 22 percent The Federal Reserve examines the inter- of U.S. banking assets. national operations of state member The Federal Reserve has broad authorbanks, Edge corporations, and bank ity to supervise and regulate foreign holding companies, principally at the banks that engage in banking in the U.S. head offices of these organizations United States through branches, agenwhere the ultimate responsibility for their cies, commercial lending companies, foreign offices lies. The Federal Reserve Edge corporations, or banks. In exercisalso conducts on-site reviews of impor- ing this authority, the Federal Reserve tant foreign offices at least every three relies on examinations conducted by the years to supplement the results of the appropriate federal or state regulatory head-office examinations. In 1990, the agency. Although states have primary Federal Reserve examined seven foreign authority for examining state-licensed branches of state member banks and uninsured branches and agencies, the twenty-eight foreign subsidiaries of Edge Federal Reserve conducted or particicorporations and bank holding com- pated in the examination of 125 such panies. In 1990, the Federal Reserve, in offices during the past year. coordination with the Office of the Comptroller of the Currency, conducted extensive on-site examinations of U. S. banking Supervisory Policy organizations in the United Kingdom, Germany, Spain, Hong Kong, and Brazil. During 1990, the Board made many All the examinations abroad were con- changes to its supervisory policies to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 77th Annual Report, 1990 implement the requirements of FIRREA the appointment of a permanent staff. and to anticipate the phase-in of risk- The subcommittee was established purbased capital standards. The Board also suant to title XI of FIRREA to monitor took several steps to strengthen its exam- the overall implementation of real estate ination policies and procedures in view appraisal reform. Among the subcommitof conditions in the banking system. The tee's assigned tasks are to assure that the following sections summarize these procedures followed by state agencies to changes and review other activities initi- regulate real estate appraisals comply ated in 1990 to enhance the Board's with title XI and to coordinate the federal supervisory programs. agencies' regulatory activities related to appraisals. Also, Federal Reserve staff members were instrumental in the com- Contribution to Treasury Study pletion of the Appraisal Data Availability Study, a report mandated by title XI of As required by title X of FIRREA, the FIRREA. This study summarized and Federal Reserve provided consultation to evaluated the information on real estate the Department of the Treasury in contransactions that is available throughout nection with the study of the federal the country to assist in the conduct of real deposit insurance system mandated by property appraisals. the Congress. Federal Reserve staff members made significant contributions to the study by providing supporting materials and information on several Report on Capital and Reporting critical supervisory issues. The Trea- Standards sury's study was published in February As required by section 1215 of FIRREA, 1991. the Federal Reserve, together with the other federal banking agencies, is required to prepare an annual report to the Real Estate Appraisals Congress discussing any differences in As mandated by title XI of FIRREA, the capital and accounting standards used by Board and the other federal financial federal bank and thrift regulatory ageninstitutions regulatory agencies issued cies for federally insured depository real estate appraisal regulations. The institutions. The first annual report was regulations establish minimum appraisal delivered to the Congress on August 9, standards and require depository institu- 1990. tions and bank holding companies en- According to the report, the three fedgaged in real estate lending to use apprais- eral bank regulatory agencies-the Feders certified or licensed by the state. eral Reserve, the Federal Deposit Insur- The Board's regulations became effective ance Corporation (FDIC), and the Office onAugust9,1990. Examiners are review- of the Comptroller of the Currency ing financial institutions' appraisal poli- (OCC)—for several years have employed cies and procedures to ensure compliance. the same ratio of capital to total assets The Federal Reserve participated in (leverage ratio) in assessing the capital the start-up of the Appraisal Subcommit- adequacy of commercial banking organitee of the Federal Financial Institutions zations. More recently, the federal bank- Examination Council. Members of the ing agencies have adopted a common Board's staff have been assigned tempo- risk-based capital framework (see below) rarily to assist the subcommittee, pending based on the international Capital Accord Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 191 developed by the Basle Committee on helps to promote a level playing field for Banking Supervision. This risk-based U.S. banking organizations as they comframework includes a common definition pete with banks in other countries. of regulatory capital, a uniform system of risk weights and categories, and uniform minimum capital ratios. The Continuing International Efforts report also indicated that the accounting to Improve the Risk-Based Capital and reporting requirements applicable to Framework commercial banks are uniform among the three federal banking agencies. This When the Basle Committee on Banking annual reporting requirement provides a Supervision adopted the risk-based framework within which the depository capital standards in 1988, the committee institution regulatory agencies can ad- expected that further efforts would be dress any differences that exist between required to incorporate certain noncredit the accounting and capital standards risks into the risk-based framework. In applied to commercial banks and thrift this connection, the Federal Reserve institutions. participated in 1990 in various efforts under way at the international level to strengthen the capital positions of Risk-Based Capital Standards internationally active banking organiat Year-End 1990 zations. These efforts include incorporating into the risk-based capital frame- The risk-based capital standard provides work a capital charge for risks arising for a two-year phase-in period beginning from changes in interest rates (interest December 31, 1990. As of that date, rate risk exposure) and from changes in banking organizations were expected to maintain total capital equal to at least foreign exchange rates (foreign ex- 7.25 percent of risk-adjusted assets. change position risk). This minimum standard increases to 8.0 percent at year-end 1992. The riskbased capital standard was developed in Leverage Ratio cooperation with the FDIC and OCC, along with members of the Basle The Board issued a new capital-to-total Committee on Banking Supervision. assets (leverage) standard in 1990, estab- The standard had been reviewed and lishing a minimum ratio of tier 1 capital endorsed by the ten central bank to total assets. This leverage ratio regovernors of the G-10 countries and was placed the leverage standards that had adopted by all G-10 countries and been in place since the early 1980s, which Luxembourg in 1988. had specified the ratio of primary and The risk-based capital framework en- total capital to total assets. Organizations courages banking organizations to experiencing or anticipating significant strengthen their capital positions. The growth are expected to maintain capital standard offers the advantages of differ- ratios, including tangible tier 1 capital entiating, in a broad way, among the positions, well above the minimum levrelative riskiness of banking assets and els. Only institutions in strong financial taking into account off-balance-sheet condition, with the highest supervisory risks. Because of its acceptance by coun- ratings, and with no financial or operating tries with major international banking deficiencies are permitted to operate at or centers, the risk-based capital standard near the minimum supervisory level. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

192 77th Annual Report, 1990 Dividend Payments manner, these objectives will be accomplished without sacrificing the depth or In 1990, the Board adopted a revision to thoroughness of on-site examinations. regulations concerning the payment of dividends by state member banks. The revised rule brings the calculation of a Sale of Uninsured Obligations bank's dividend-paying capacity into on Retail Banking Premises better alignment with the institution's capital position. The rule also makes the The Federal Reserve reiterated its longtreatment of loan-loss allowances and standing policy prohibiting the sale on provisions for dividend payment pur- the retail banking premises of commerposes consistent with current regulatory cial banks of uninsured debt obligations reporting standards and generally ac- issued by bank holding companies, noncepted accounting principles (GAAP). bank affiliates, and state member banks. This prohibition applies to both long- and short-term debt obligations of a bank Highly Leveraged Transactions holding company and any nonbank affiliate as well as to uninsured debt securi- A common definition of highly leveraged ties issued by state member banks or transactions was issued by the Federal their subsidiaries. Commercial paper Reserve, the FDIC, and the OCC in and all other short-term and long-term 1989. In 1990, in response to questions debt securities, such as thrift notes and and comments received on the inter- subordinated debentures, are also subject agency definition of highly leveraged to this restriction. Examiners will evalutransactions (HLTs), the agencies pro- ate banking organizations for complivided interpretive guidelines for use in ance with the policy during on-site the supervision and examination of com- examinations. mercial banking organizations. These guidelines increased the original de minimis test, provided guidance in reviewing Funding and Liquidity past transactions, clarified the leverage of Bank Holding Companies test, and provided criteria for removing loans from HLT status. The Federal Reserve in 1990 reiterated and reinforced its policy on the funding and liquidity practices of bank holding Revised Examination companies. Under this policy, bank and Inspection Reports holding companies are expected to develop and maintain funding programs The Federal Reserve revised the formats that are consistent with their lending and of its examination and inspection report investment activities and that provide forms in 1990. The objectives of the adequate liquidity to the parent company revisions are to communicate more effec- and its nonbank subsidiaries. A bank tively examiners' findings and conclu- holding company's funding strategy sions to banking organizations' manage- should rely on capital and long-term ment and boards of directors and to sources of funds to support capital investimprove the timeliness of examination ments in subsidiaries and other long-term reports. By presenting narrative and assets. Further, bank holding companies financial information in a more concise are to avoid over-reliance or excessive Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 193 dependence on any single short-term or and the support provided by the holding potentially volatile source of funds in company to its subsidiary banks. developing and carrying out funding programs. Revisions to Bank Holding Company Reports Deposit Sweep Accounts The Board approved significant revisions The Federal Reserve provided guidance to the reporting requirements for bank in 1990 to examiners on the appropriate holding companies. To provide crucial use by bank holding companies of the supervisory information on capital adeproceeds obtained from overnight fundquacy, bank holding companies now must ing obligations, such as deposit sweep submit data on risk-based assets and the arrangements. Under these arrangecomponents of tier 1 and tier 2 capital, on ments, funds in customer accounts at exposure to highly leveraged transacsubsidiary banks are reinvested in overtions, and on the level of exposure to real night obligations, including commercial estate lending activities. paper, program notes, and master notes of the parent bank holding company. The Federal Reserve's supervisory policy Interest Rate Risk limits the parent's use of the proceeds of deposit sweep arrangements to short- The Federal Reserve issued supervisory term bank obligations, short-term U.S. guidelines and examination procedures government securities, or other highly for managing the interest rate risk of state liquid, readily marketable, investment- member banks. The guidelines seek to grade assets that can be disposed of with ensure that commercial banks monitor minimal loss. the interest rate sensitivity of assets and liabilities of state member banks and have adequate policies and systems in Reporting Requirements place for controlling these risks. for Section 20 Nonbank Subsidiaries The Board authorized in 1990 a new Staff Training report, "Financial Statements for a Bank Holding Company Engaged in Ineligible The training of System staff members Securities Underwriting and Dealing" emphasizes analytical and supervisory (FR Y-20). The purpose of the report is themes common to the four areas of to provide the Federal Reserve with supervision and regulation—examinafinancial information to determine that tions, inspections, applications, and surthe section 20 nonbank subsidiaries are veillance—and stresses the interdepennot engaged primarily in underwriting dence among these areas. During 1990, and dealing in ineligible securities. The the Federal Reserve conducted a variety report also permits the Federal Reserve of schools and seminars, and Federal to determine that the underwriting activ- Reserve staff members participated in ities are being conducted in a manner several courses offered by or cosponsored consistent with the orders issued by the with other agencies, as shown in the Board authorizing such activities. Fur- accompanying table. In 1990, the Fedther, the report enables the Federal eral Reserve trained 1,281 persons in Reserve to assess the capital adequacy of System schools, 1,117 in FFIEC schools, the consolidated bank holding company and 64 in other schools, for a total of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

194 77th Annual Report, 1990 2,462 students, including 133 represen- The Federal Reserve adopted for state tatives from foreign banks. member banks on the call report the The Federal Reserve System also risk-based capital reporting requirements provided scholarship assistance to the initiated by the FFIEC. An important states for training their examiners in feature of these reporting requirements is Federal Reserve and FFIEC schools. a simplified capital calculation that banks Through this program, 592 state examin- with less than $1 billion in total assets ers were trained: 197 in Federal Reserve will use to determine whether they have courses, 386 in FFIEC programs, and 9 adequate risk-based capital and are therein other courses. fore exempt from reporting more detailed information. The members of the FFIEC, includ- Federal Financial Institutions ing the Federal Reserve Board, unani- Examination Council mously approved a report to the Con- The Federal Reserve Board took the gress on the council's plans to conduct following actions in 1990 based on risk-management training for industry recommendations of the Federal Finan- executives and on the issue of develcial Institutions Examination Council oping a program for certification of (FFIEC).3 risk management analysts. This report was done in accordance with FIRREA requirements. 3. The FFIEC consists of representatives from The five agencies represented on the the Board of Governors of the Federal Reserve council issued an advance notice of System, the Federal Deposit Insurance Corpora- proposed rulemaking to address recourse tion, the Federal Home Loan Bank Board, the arrangements affecting regulatory capital National Credit Union Administration, and the Office of the Comptroller of the Currency. and reporting standards. Members of the Training Programs for Banking Supervision and Regulation, 1990 Number of sessions Agency and type of training Total Regional Schools or seminars conducted by the Federal Reserve Banking I 4 Banking II 7 Banking HI 4 Senior forum for current banking and regulatory issues .. 2 Risk-based capital and FIRREA 2 Cash flow, forecasting, and highly leveraged transactionsx 1 Effective writing for banking supervision staff 18 16 Credit analysis 9 7 Bank holding company applications 7 Bank holding company inspection 7 Basic entry-level trust 1 Consumer compliance 4 Seminar for senior supervisors of foreign central banks2 . 2 Other agencies conducting courses3 Federal Financial Institutions Examination Council . 110 Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency 16 Federal Bureau of Investigation4 5 1. One-time seminar. 4. Cosponsored by the Federal Reserve, Federal De- 2. Conducted jointly with the World Bank. One session posit Insurance Corporation, Office of Thrift Supervision, was held overseas. Office of the Comptroller of the Currency, and Resolution 3. Open to Federal Reserve employees. Trust Corporation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 195 Federal Reserve staff are participating in interstate banking activities of these fora detailed study of these matters. eign banks and for foreign banks that control a U.S. subsidiary commercial bank. Regulation of the U.S. Banking Structure Bank Holding Company Act The Board administers the Bank Holding Company Act, the Bank Merger Act, By law, a company must obtain the and the Change in Bank Control Act for Board's approval if it is to form a bank bank holding companies and state holding company by acquiring control of member banks. In doing so, the Federal one or more banks. Moreover, once Reserve acts on a variety of proposals formed, a bank holding company must that directly or indirectly affect the receive the Board's approval before structure of U.S. banking at the local, acquiring additional banks or nonbanking regional, and national levels. The Board companies. also has primary responsibility for In reviewing an application filed by a regulating the international operations bank holding company, the Board considof domestic banking organizations and ers such factors as the financial and the overall U.S. banking operations of managerial resources of the applicant, foreign banks, whether conducted the prospects of both the applicant and directly through a branch or agency or the firm to be acquired, the convenience indirectly through a subsidiary commer- and needs of the community to be served, cial lending company. In addition, the the potential public benefits, and the Board has established regulations for the competitive effects of the proposal. Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1990 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 Total1 Supervision and Reserve Banks Secretary Regulation Approved Denied Approved Denied Approved Approved Permitted Formation of holding company 21 2 I2 0 1 261 0 286 Merger of holding company 6 0 0 0 1 35 0 42 Retention of bank 00 0 0 0 00 0 Acquisition Bank 29 1 0 0 12 238 0 280 Nonbank 191 5 1443 0 69 249 126 784 Bank service corporation 00 0 0 0 00 0 Other 0 0 17 0 0 0 0 17 Total1 247 8 162 0 83 783 126 1,409 1. Includes applications related to the sale of failed thrift 3. Each of these actions represents the acquisition of a institutions by the Resolution Trust Corporation. savings association that was subsequently merged into an 2. This action was delegated by the Board to the Staff existing subsidiary of a bank holding company, as permitted Director of the Division of Banking Supervision and by the Financial Institutions Reform, Recovery, and Regulation and to the General Counsel of the Board for Enforcement Act of 1989. joint action. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

196 77th Annual Report, 1990 In 1990, the Federal Reserve acted on institutions regulatory agencies have 1,409 bank holding company and related adopted standard terminology for assessapplications. The Federal Reserve Sys- ing competitive factors in proposed mergtem approved 284 proposals to organize ers of banks to ensure consistency in a bank holding company and denied 2; administering the act. On behalf of the approved 279 bank acquisitions by exist- Board, the Reserve Banks submitted 771 ing bank holding companies and denied reports on competitive factors to the other 1; approved 779 requests by existing federal banking agencies in 1990. companies to acquire nonbank firms engaged in activities closely related to Change in Bank Control Act banking and denied 5; and approved 59 other applications. Data on these and The Change in Bank Control Act requires related bank holding company decisions persons seeking control of a bank or bank are shown in the accompanying table. holding company to obtain approval from the appropriate federal banking agency before the transaction occurs. Under the Bank Merger Act act, the Board is responsible for review- The Bank Merger Act requires that the ing changes in the control of state member appropriate federal banking agency act banks and of bank holding companies. In on all proposed mergers of insured so doing, the Board must review the depository institutions. If the institution financial condition, competence, experisurviving the merger is a state member ence, and integrity of the acquiring bank, the Federal Reserve has primary person; consider the effect on the finanjurisdiction. Before acting on a proposed cial condition of the bank or bank holding merger, the Federal Reserve considers company to be acquired; and determine factors relating to the financial and the effect on competition in any relevant managerial resources of the applicant, market. the future prospects of the existing and The appropriate federal banking agenproposed institutions, the convenience cies must publish notice of each proposed and needs of the community to be served, change in control and invite public comand the competitive effects of the pro- ment, particularly from persons located posal. The Board must also consider the in the markets served by die institution to views of certain other agencies on the be acquired. The federal banking agencompetitive factors involved in the trans- cies also must assess the qualifications of action. each person seeking control of a bank or During 1990, the Federal Reserve bank holding company. In each case, the System approved eighty-eight merger Board routinely makes such a determinaapplications. As required by law, each tion and verifies information contained in merger is described in this REPORT (in the proposal. table 16 of the Statistical Tables chapter). In 1990, the Federal Reserve System When the Office of the Comptroller of acted on 248 proposed changes in control the Currency, the Federal Deposit Insur- of state member banks and bank holding ance Corporation, or the Director of the companies. Late in the year, the Board Office of Thrift Supervision has jurisdic- amended RegulationY (Bank Holding tion over a merger, the Board comments Companies and Change in Bank Control) on the competitive factors to ensure to reduce the filing requirements for comparable enforcement of the antitrust individuals purchasing additional shares provisions of the act. The financial of a banking organization. The effect will Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 197 be to reduce materially the number of and the Reserve Banks by removing notices filed under the act, thereby reduc- routine cases from the Board's agenda. In ing the regulatory burden on individuals, 1990,88 percent of the applications were particularly those buying small quantities decided under delegated authority. Durof shares. ing the year, the Board increased the types of cases that may be acted on by the Public Notice of Board Decisions Reserve Banks under delegated authority without prior review, which should in- The Board announces each decision that crease the speed and efficiency with involves a bank holding company, bank which many proposals are processed in merger, change in control, or internathe future. tional banking proposal through orders or releases. Orders state the decision, along with the essential facts of the Board Policy Decisions application and the basis for the decision; and Developments announcements state only the decision. in Bank-Related Activities All orders and announcements are released immediately to the public and are During 1990, the Board permitted a bank subsequently reported in the Board's holding company to commence the underweekly H.2 statistical release and in writing of equity securities under authorthe monthly Federal Reserve Bulletin. ity granted in January 1989. The original The H.2 release also contains announce- approval had deferred commencement of ments of applications and notices re- equity underwriting activities until proper ceived by the System that have not yet managerial and operational infrastrucbeen acted on. tures were in place. At year-end 1990, the Board was considering whether to permit several other banking organiza- Timely Processing of Applications tions to commence equity underwriting The Federal Reserve maintains target activities as well. In 1990, the Board also dates and procedures for the processing approved several new financially related of applications. These target dates pro- nonbanking activities for individual bank mote efficiency at the Board and at the holding companies and had under consid- Reserve Banks and reduce the burden on eration other nonbanking proposals. applicants. The time allowed for a decision is sixty days; during 1990, about 95 percent of the decisions met this standard. Approval of Permissible Nonbanking Activities During 1990, the Board approved a Delegation of Applications proposal by a domestic bank holding The Board has delegated certain regula- company to engage in asset management, tory functions—including the authority servicing, and collection activities with to approve, but not to deny, certain types regard to assets of failed or troubled of applications - to the Reserve Banks, to financial institutions. The Board also the Staff Director of the Board's Division permitted several domestic and foreign of Banking Supervision and Regulation, organizations to engage in leasing transand to the Secretary of the Board. actions in a manner consistent with The delegation of responsibility for expanded national bank leasing powers applications permits staff members to authorized by the Competitive Equality work more efficiently at both the Board Banking Act of 1987. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

198 77th Annual Report, 1990 The Board, for the first time, also in bank premises that exceed 100 percent approved the following activities for of capital stock, and to add to their capital individual bank holding companies: bases from sales of subordinated debt. (1) acting as a tax refund agent in State member banks must also give six connection with a state's tax-free shop- months' notice of their intention to withping program for foreign visitors, and draw from membership in the Federal (2) acting as agent in the sale of variable- Reserve, although the Board may shorten and fixed-rate annuities. or eliminate the notice period in specific The Board approved proposals by cases. These matters are normally hanseveral foreign banks to engage in the dled by the Federal Reserve Banks under private placement of all types of securi- delegated authority. ties, an activity previously approved for large domestic banking organizations. Stock Repurchases by Bank Holding Companies Proposals to Engage A bank holding company sometimes in New Nonbanking Activities purchases its own shares from its share- During 1990, the Board requested public holders, which results in a decrease in comment on proposals to expand the list equity. When the company borrows the of generally permissible nonbanking money to buy its shares, its debt inactivities for bank holding companies. creases. Borrowing large amounts to The proposal included (1) combined purchase its own shares therefore may investment advisory and securities broundermine the financial condition of a kerage activities, (2) financial advisory bank holding company and its bank subactivities, and (3) higher residual value sidiaries. The Board's regulations require leasing activities. The Board also sought holding companies to give advance notice public comment on proposals to modify of repurchases that retire 10 percent or the Board's investment advisory policy more of their consolidated equity capital. statement and to modify the current The Board may object to stock repurlimitations on the securities underwriting chases by holding companies that fail to powers of bank holding companies to meet certain standards, including the permit certain joint marketing activities Board's capital guidelines. During 1990 and common management officials. the Federal Reserve reviewed 103 pro- At year-end, the Board had under posed stock repurchases by bank holding consideration a proposal to rescind a rule companies, all of which were acted on by that permits bank holding companies to the Reserve Banks on behalf of the Board. establish or acquire indirectly, through their state-chartered bank subsidiaries, nonbank operations subsidiaries engaged International Activities in activities that may be conducted by the of U.S. Banking Organizations parent bank. The Board has several statutory responsibilities in supervising the international operations of U.S. banking organiza- Applications tions . The Board must provide authorizaby State Member Banks tion and regulation of foreign branches of State member banks must obtain the member banks; of overseas investments permission of the Board to open new by member banks, Edge corporations, domestic branches, to make investments and bank holding companies; and of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 199 investments by bank holding companies which had 40 branches. The Board in export trading companies. In addition, requires each Edge corporation that is the Board is required to charter and engaged in banking to maintain a ratio of regulate Edge corporations and their equity to risk assets of at least 7 percent. investments. Foreign Investments Foreign Branches of Member Banks Under authority of the Federal Reserve Under provisions of the Federal Reserve Act and the Bank Holding Company Act, Act and of Regulation K (International U.S. banking organizations may engage Banking Operations), member banks in in activities overseas with the authorizamost cases must seek Board approval to tion of the Board. Significant investments establish branches in foreign countries. require prior review by the Board, al- In reviewing proposed foreign branches, though pursuant to Regulation K, most the Board considers the requirements of foreign investments may be made under the law, the condition of the bank, and the general-consent procedures that involve bank's experience in international busi- only after-the-fact notification to the ness. In 1990, the Board approved the Board. opening often foreign branches. By the end of 1990,126 member banks Export Trading Companies were operating 819 branches in foreign countries and overseas areas of the United In 1982, the Bank Export Services Act States; 99 national banks were operating amended section 4 of the Bank Holding 702 of these branches, and 27 state Company Act to permit bank holding member banks were operating the remain- companies, their subsidiary Edge or ing 117 branches. agreement corporations, and bankers' banks to invest in export trading companies, subject to certain limitations and Edge and Agreement Corporations after Board review. The purpose of this Under sections 25 and 25(a) of the Fed- amendment was to allow effective particeral Reserve Act, Edge and agreement ipation by bank holding companies in the corporations may engage in international financing and development of export banking and foreign financial transac- trading companies. The Export Trading tions. These corporations, which are Company Act Amendments of 1988 usually subsidiaries of member banks, provide additional flexibility for bank provide their owner organizations with holding companies engaging in export the following powers: (1) They may trading company activities. Since 1982, conduct a deposit and loan business in the Board has acted affirmatively on states other than that of the parent, notifications by forty-seven bank holding provided that the business is strictly companies to establish export trading related to international transactions; and companies. (2) they may make foreign investments that are broader than those of member Enforcement of banks because they can invest in foreign Other Laws and Regulations financial organizations, such as finance companies and leasing companies, as This section describes the Board's responwell as in foreign banks. By the end of sibilities for the enforcement of laws, 1990, there were 100 Edge corporations, rules, and regulations other than those Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 77th Annual Report, 1990 specifically related to bank safety and to cooperate and provide assistance to soundness and the integrity of the banking law enforcement agencies conducting structure. criminal investigations of financial institutions related to Bank Secrecy Act violations. Bank Secrecy Act When the Department of the Treasury The Federal Reserve has continued its adopted a regulation under the Bank program of monitoring the institutions it Secrecy Act that requires financial instisupervises for compliance with the re- tutions to record sales of monetary instruquirements of the Currency and Foreign ments for cash in amounts between Transactions Reporting Act (the Bank $3,000 and $ 10,000, the Federal Reserve Secrecy Act). The Bank Secrecy Act was established examination procedures to enacted primarily as a means of creating audit for compliance with the regulation. and maintaining records of various trans- The Federal Reserve has also undertaken actions that otherwise would not be a study to evaluate and update, if necesidentifiable. The records required by the sary, all examination procedures related Bank Secrecy Act provide useful data for to compliance with the Bank Secrecy aiding in the detection of unlawful activity Act. as well as determining the safety and soundness of financial institutions. Securities Regulation During 1990, the Federal Reserve continued its efforts to promote compli- Under the Securities Exchange Act of ance with the Bank Secrecy Act and to 1934, the Board is responsible for regusee that those who do not comply are lating credit in certain transactions involvprosecuted. The Federal Reserve en- ing the purchase or carrying of securities. hanced its training in this area by devel- The Board limits the amount of credit that oping, for new examiners, courses in may be provided by securities brokers activities related to the Bank Secrecy and dealers (Regulation T), by banks Act, money laundering, and fraud, as (Regulation U), and by other lenders well as refresher courses for seasoned (Regulation G). Regulation X extends examiners. The Federal Reserve also these credit limitations, or margin recontinued its practice of regularly ex- quirements, to certain borrowers and to amining financial institutions under its certain credit extensions, such as credit supervision for violations of the Bank obtained from foreign lenders by U.S. Secrecy Act and providing quarterly citizens. reports of violations discovered during Several regulatory agencies enforce such examinations to the Department of compliance with the securities credit the Treasury. regulations. The Securities and Exchange In January 1990, the Federal Reserve Commission, the National Association established a Systemwide committee to of Securities Dealers, and the national provide enhanced coordination and di- securities exchanges examine brokers rection for Federal Reserve activities and dealers for compliance with Regularelated to the Bank Secrecy Act and tion T. The federal banking agencies money laundering. The committee has examine banks under their respective been extremely successful in developing jurisdictions for compliance with Reguinnovative measures for addressing the lation U. The compliance of other lenders Federal Reserve's role in such activities. with Regulation G is examined by the Also, the Federal Reserve has continued Board, the National Credit Union Admin- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 201 istration, the Farm Credit Administra- all accounting be in U.S. dollars, (3) ease tion, or the Office of Thrift Supervision, restrictions on payment for foreign secuaccording to the jurisdiction involved. At rities to accommodate the settlement the end of 1990, there were 616 lenders practices of the market where the trade registered under Regulation G, of which occurs, and (4) allow a broker-dealer 344 came under the Board's supervision. subject to Regulation T to arrange for Of these 344, the Federal Reserve regu- credit on foreign securities. After the larly inspects 211 either biennially or effective date of the amendments, the triennially, according to the type of credit Board published the first "List of Foreign they extended. During 1990, Federal Margin Stocks" in August. Stocks on this Reserve examiners inspected 50 lenders list receive the same treatment as domesfor compliance with Regulation G. tic margin securities at broker-dealers In general, Regulations G and U im- subject to Regulation T. The list was pose credit limits on loans secured by revised in November and contained 276 publicly held securities when the purpose foreign stocks. Future revisions will be of the loan is to purchase or carry those or published in conjunction with the Board's other publicly held equity securities. "List of Marginable OTC Stocks." Regulation T limits the amount of credit In July the Board issued an interpretathat brokers and dealers may extend when tion on the applicability of Regulation T the credit is used to purchase or carry to unregistered securities sold and traded publicly held debt or equity securities. pursuant to the Securities and Exchange Collateral for such loans at brokers and Commission's new Rule 144A. The interdealers must be securities in one of the pretation clarifies that broker-dealers following categories: those traded on may purchase debt securities from an national securities exchanges, certain issuer for resale pursuant to rule 144A over-the-counter (OTC) stocks that the and may make markets in such securities Board designates as having characteris- under the investment banking service tics similar to those of stocks listed on exception to the arranging section in national exchanges, or bonds that meet Regulation T. certain requirements. Under section 8 of the Securities The staff of the Federal Reserve mon- Exchange Act, a nonmember domestic itors the market activity of all OTC stocks or foreign bank may lend to brokers or to determine which of them are subject to dealers posting registered securities as the Board's margin regulations. The collateral only if the bank has filed an Board publishes the resulting "List of agreement with the Board that it will Marginable OTC Stocks" quarterly. In comply with all the statutes, rules, and 1990, the list was revised in February, regulations applicable to member banks May, August, and November. The No- regarding credit on securities. The Board vember list contained 2,773 stocks. processed no new agreements in 1990. In March 1990, the Board adopted In 1990, the Securities Regulation amendments to Regulation T to accom- Section of the Board's Division of Bankmodate the increasing international inte- ing Supervision and Regulation issued gration of the securities markets. The fifty-six interpretations of the margin amendments (1) permit the eligibility of regulations. Those that presented sufficertain foreign equity and debt securities ciently important or novel issues were for margin at broker-dealers on the published in the Securities Credit Transsame basis as domestic margin securities, actions Handbook, which is part of the (2) eliminate the current requirement that Federal Reserve Regulatory Service. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 77th Annual Report, 1990 These interpretations serve as a guide to previous report of condition. The accommargin regulations. panying table summarizes this information beginning with the last quarter of 1989 and continuing through the first Financial Disclosure three quarters of 1990. by State Member Banks State member banks must disclose certain Federal Reserve Membership information of interest to investors, including financial reports and proxy At the end of 1990, 5,047 banks were statements, if they issue securities regis- members of the Federal Reserve System, tered under the Securities Exchange Act a decrease of 209 from the previous year. of 1934. By statute, the Board's financial Member banks operated 33,305 branches disclosure rules must be substantially on December 31,1990, a net increase of similar to those issued by the Securities 407 for the year. and Exchange Commission. At the end of Member banks accounted for 41 per- 1990, thirty-eight state member banks, cent of all commercial banks in the United most of which are small or medium sized, States and for 66 percent of all commerwere registered with the Board under the cial banking offices. • Securities Exchange Act. Loans to Executive Officers Under section 22(g) of the Federal Reserve Act, state member banks 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 Loans by State Member Banks to their Executive Officers, 1989-90 Range of interest Period Number Amount (dollars) rates charged (percent) October 1-December 31,1989 896 18,516,000 6.0-19.2 January 1-March 31,1990 840 16,826,000 6.0-21.0 April 1-June 30,1990 944 35,899,000 5.5-22.4 July 1-September 30,1990 781 20,060,000 5.5-21.0 SOURCE. Call Report data for the period. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

203 Regulatory Simplification In 1978 the Board of Governors estab- accommodate the practices of the market lished the Regulatory Improvement where the trade occurs Project in the Office of the Secretary. The • Allow broker-dealers subject to project's charge was to help minimizethe Regulation T to arrange with foreign burdens imposed by regulation. Reaf- persons to extend credit on foreign firming its commitment to regulatory securities. improvement, the Board in 1986 renamed the project the Regulatory Review Section and created a subcommittee of the Funds Transfers on Fedwire Board called the Regulatory Policy and In October the Board approved a compre- Planning Committee. The goals of the hensive revision to subpart B of Regulasection and the subcommittee are to tion J (Collection of Checks and Other ensure that the economic effect of regula- Items by Federal Reserve Banks and tion on small business is considered, to Funds Transfers through Fedwire) govafford interested parties the opportunity erning funds transfers through Fedwire. to participate in designing regulations The revision was designed to make and to comment on them, and to ensure Regulation J consistent with the new that regulations are written in simple and article 4A of the Uniform Commercial clear language. Staff members of the Code, which governs the rights, respon- Board continually review regulations for sibilities, and liabilities of parties to their adherence to these objectives. wholesale funds transfers. The revision, which became effective Foreign Securities Transactions on January 1, 1991, will provide a more comprehensive set of rules for funds In March the Board approved amendtransfers involving Federal Reserve ments to Regulation T (Credit by Brokers Banks, make subpart B consistent with and Dealers) to accommodate the settlestate laws applicable to funds transfers as ment and clearance of transactions in states adopt article 4A, and help ensure foreign securities and to permit marginthat, subject to their central banking ability of foreign securities at brokerresponsibilities, Federal Reserve Banks dealers. The amendments compete on an equitable basis with pri- • Permit foreign equity and debt secuvate providers of fiinds-transfer services. rities that meet prescribed criteria to be eligible for margin at broker-dealers on the same basis as margin securities Price Reductions on Credit Cards • Permit recognition and isolation of debt denominated in foreign currencies In November the Board approved an and allowed foreign securities denomi- amendment to Regulation Y (Bank Holdnated in that currency to be used as ing Companies and Change in Bank margin for the debt without conversion Control) to allow banks owned by bank into dollars holding companies to off6r a price reduc- • Ease restrictions on the payment tion on credit cards issued to their cusand settlement for foreign securities to tomers if the customer also obtains a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

204 77th Annual Report, 1990 traditional banking service from any The list of permissible activities simaffiliate of the credit card bank. The plifies applications by bank holding comchange permitted bank holding com- panies to form or acquire subsidiaries panies to consolidate their credit card engaging in the listed activities. • operations into card-issuing banks without losing the ability to offer price reductions to customers using products from the card-issuing bank's affiliates. Section 106 of the Bank Holding Company Act prohibits banks from offering reduced prices for credit on the condition of obtaining additional services from affiliates. Section 106, however, authorizes the Board to grant exemptions that are not contrary to the act's purpose of preventing anticompetitive practices; given the lack of economic evidence of anticompetitive effects, the Board acted under this authority in approving the amendment. Changes in Bank Control In November the Board approved an amendment to Regulation Y to reduce the filing requirements under the Change in Bank Control Act. With the amendment, a person who has received regulatory clearance to acquire 10 percent or more of the shares of a state member bank or bank holding company need not file additional notices for subsequent acquisitions resulting in ownership of up to 25 percent of the institution. Nonbanking Activities During 1990 the Board proposed for public comment the addition of three activities to the list of permitted activities under Regulation Y for nonbank subsidiaries of bank holding companies: (1) non-full-payout leasing, (2) financial advice to financial and nonfinancial institutions and to individuals with high net worth, and (3) investment advice combined with securities brokerage. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

205 Federal Reserve Banks The new Regional Delivery System for estimate of 400 (the net increase will be over-the-counter savings bonds, which even lower because of reductions in the the Federal Reserve began implementing number of staff members assigned to on behalf of the Department of the other savings bond activities). And cur- Treasury in 1989, expanded to nine Fed- rent automation together with technologeral Reserve Districts in 1990. Begun in ical innovations under investigation by Ohio in 1987 as a pilot project managed the System are likely to put the ultimate by the Pittsburgh Branch of the Cleveland savings to U.S. taxpayers from the RDS Federal Reserve Bank, the Regional even higher than the original estimate of Delivery System was, by the end of $18 million per year. 1990, fully implemented in Cleveland, According to the Treasury, sales of Richmond, St. Louis, and Kansas City savings bonds have not suffered under and partially implemented in Boston, the new delivery system, and the RDS New York, Philadelphia, Chicago, and has found widespread public acceptance. Minneapolis. For their part, financial institutions prefer The Federal Reserve Banks are the the new method because it frees them fiscal agents of the United States, and the from the burden of maintaining unissued largest component of their fiscal agency savings bond stock. services is savings bond processing. When completed in 1993, the Regional Other Developments in Federal Delivery System (RDS) will reduce the Reserve Services number of issuing agents for over-thecounter savings bonds from nearly 40,000 As mandated in the Monetary Control institutions to eleven Reserve Bank of- Act of 1980, the Federal Reserve System fices. And with full implementation of endeavors to recover all its costs of the RDS, the Treasury has estimated that providing services. In 1990, revenues annual savings to the taxpayer will be from all priced services were $885.7 milmore than $18 million. lion, and costs were $857.1 million, Under the RDS, depository institutions resulting in net revenue of $28.6 million receive applications from the public for and a recovery rate of 103.3 percent; in Series EE savings bonds and forward 1989 the System recovered 100.0 perthem to a regional Federal Reserve office, cent of its service costs.1 which then inscribes and delivers the bonds. With the encouragement of the Reserve Banks, some institutions in each of the nine participating Districts are 1. For the elements of revenues, costs, and net revenue, see the pro forma income statement at the sending their RDS applications in autoend of this chapter. mated form, and nearly one-third of all Revenues are the sum of income from services RDS volume is automated. and investment income. The progress of such automation to Costs are the sum of production expenses, imputed costs, earnings credits, imputed income date has meant that the RDS will require taxes, and the targeted return on equity. approximately 350 new positions at the Net revenue is net income less the targeted return Reserve Banks rather than the original on equity. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

206 77th Annual Report, 1990 Check Collection pected to be the initial areas of application for image technology. The operating and imputed costs of check collection by the Federal Reserve in 1990 were $526.1 million (see the pro Electronic Payments forma income statement for priced ser- As part of its strategic study of electronic vices, by service, at the end of this payments services in the 1990s, the Fedchapter). Check services for the year eral Reserve completed its pilot tests of generated $558.1 million in revenue and two alternative production processes, one a net of $ 13.8 million in other income and relying on distributed processing using expenses. Income from operations after fault-tolerant machines and the other imputed costs was $32.0 million. The relying on mainframe computers. The number of checks that the Federal Re- Federal Reserve has selected the alternaserve Banks handled increased 3.2 pertive that involves improving the existing cent, to 18.6 billion, from 1989. architecture to minimize operational risk In August the Board issued for public to the Federal Reserve and to depository comment a proposed change to the fee institutions; it will also provide flexible structure for shipping checks via the and cost-effective automation and com- Interdistrict Transportation System munications solutions for both the Fed- (ITS). The change would introduce a cap eral Reserve and depository institutions. on the cumulative amount of per-item The Federal Reserve continued to fees paid to ship checks from one Reserve expand its electronic network for delivery Bank office to another via ITS. In October of Federal Reserve services, and it introthe Board extended the comment period duced a product that offers a lower cost to January 1991. The proposed fee strucalternative for depository institutions ture was designed to better mirror the receiving low volumes of automated underlying costs of interdistrict check clearinghouse output. transportation. In November the Board issued for public comment modifications to the Automated Clearinghouse criteria for offering a tiered pricing structure for check collection. The Operating and imputed costs of providing changes would enable the Reserve Banks automated clearinghouse (ACH) serto set fees that more precisely reflect their vices in 1990 were $49.3 million; revecosts to collect checks drawn on paying nues were $52.7 million. The Reserve banks within a given collection zone. Banks processed 915.3 million commer- During 1990 the Federal Reserve cial transactions during the year, an continued to pursue processing and increase of 23.6 percent over 1989. technological innovations in the col- In December the Board published for lection of checks. Three districts public comment a proposal to require participated in a pilot program for depository institutions to originate or accepting intermingled deposits of receive commercial ACH transactions returned and forward collection checks. through the Federal Reserve Banks via In addition, the Federal Reserve contin- electronic connections. This proposal ues to investigate the use of digitized will allow the Federal Reserve to improve image technology in the check collection significantly its ACH service by increasprocess. Government check processing ing the speed of delivery of ACH payand returned check operations are ex- ments and reducing the risks associated Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 207 with ACH transactions. These improve- funds) to all depository institutions that ments could not be achieved if a portion do not have electronic access to Fedwire. of ACH endpoints continue to send and Such notice to off-line banks would receive ACH transactions via nonelec- promote efficiency in the payments mechtronic media. anism by providing timely information, Under the proposal, a per-transaction which permits prompt crediting of funds surcharge would be assessed on commer- to the account of the beneficiary. The cial ACH transactions originated or telephone notice service became effective received by depository institutions using January 1, 1991. nonelectronic ACH deposit or delivery In June the Board issued for comment alternatives beginning January 1, 1993. a comprehensive revision to subpart B of Beginning July 1, 1993, the Federal Regulation J, which governs funds trans- Reserve would provide only electronic fers through Fedwire, and in September commercial ACH services. ACH service the Board adopted it. The revision, which fees pertaining to physical input or output became effective January 1, 1991, made media, including paper, diskettes, or Regulation J consistent with the new magnetic tape, are expected to rise signif- article 4A of the Uniform Commercial icantly beginning in 1992 to further Code, which governs the rights, responencourage the transition to an all- sibilities, and liabilities of parties to electronic ACH. wholesale funds transfers. In October the Board approved a proposal for the Federal Reserve Bank of Wire Transfer of Funds San Francisco to provide net settlement and Net Settlement services to depository institutions that The number of wire transfers originated plan to participate in a national, multilatduring 1990 increased 3.2 percent eral ACH clearing arrangement. over 1989, to 62.6 million. The number By year-end 1990 all on-line deposiof net settlement entries in 1990 was tory institutions had converted their 800,000. Operating and imputed costs communication links for funds transfers totaled $67.9 million, and revenue was to the System's standard protocols. $78.6 million. In April the Board approved changes Currency and Coin to the Fedwire operating schedule to establish a uniform opening time of 8:30 In its currency and coin operations the a.m. eastern time for the funds transfer Federal Reserve continued to focus on service and to establish a uniform dead- the effectiveness of controls, efficiency in line of 6:00 p.m. eastern time for third- processing, and the maintenance of high party funds transfers. These changes quality in circulating currency. became effective August 1, 1990. The revenue from priced cash services In September the Board approved a was $14.3 million in 1990, and the cost proposal regarding telephone notice to was $13.8 million. In 1990, four Federal recipients of off-line Fedwire transfers. Reserve Districts provided transportation Issued for comment in April, the ap- of cash by armored carrier and three proved proposal requires that Reserve Districts provided wrapped coin to depos- Banks give same-day telephone notice of itory institutions. the receipt of incoming Fedwire third- In March the System found Recogniparty funds transfers (including non- tion Equipment, Inc., to be in default of value messages related to a transfer of the 1987 contract to provide equipment Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

208 77th Annual Report, 1990 for verification, counting, sorting, and as a Federal Reserve priced service; these destruction of currency. In November services incurred costs of $9.6 million the Board awarded a new contract to and earned revenue of $10.6 million in Giesecke and Devrient, Inc., to manufac- 1990. The Federal Reserve processed ture and maintain this equipment, which 2.6 million such transfers during the is expected to meet the System's needs for year, an increase of 0.7 percent over currency processing through the 1990s. 1989. Industry efforts, supported by the The Federal Reserve System continued Federal Reserve, to net securities transto work with the Departments of Treasury actions among participants in private and Justice and with others to deter the clearing and settlement arrangements counterfeiting and laundering of U.S. have resulted in smaller volumes to be currency. processed by the Federal Reserve. And, as noted at the outset of this chapter, the Reserve Banks continue the Definitive Securities implementation of the Regional Delivery and Noncash Collection System for over-the-counter savings The System received $15.9 million in bonds. revenue for definitive safekeeping and noncash collection services in 1990; the Float cost of these services was $14.8 million. The average number of definitive securi- Federal Reserve float decreased to a daily ties issues and deposits maintained in average of $431 million in 1990, comsafekeeping accounts at the Reserve pared with $588 million in 1989. The Banks decreased 25.4 percent in 1990, to costs of all Federal Reserve float associ- 82,000. The number of noncash collec- ated with priced services are recovered tion items processed decreased 10.3 per- each year. cent, to 2.9 million. With declining volumes, Reserve Examinations Banks continue to streamline and consolidate both definitive and noncash collec- The Board's Division of Reserve Bank tion operations. Further, the System is Operations and Payment Systems examdeveloping a long-range plan to guide the ines the twelve Reserve Banks and their Federal Reserve's involvement in the twenty-five Branches each year as redefinitive safekeeping service, and efforts quired by section 21 of the Federal to consolidate noncash collection process- Reserve Act. The results of the audits are ing across district lines have begun. reported to the management and directors of the respective Banks and to the Board of Governors. Also, to assess conform- Securities and Fiscal ance with the policies issued by the Fed- Agency Services eral Open Market Committee, the divi- The Federal Reserve provides book- sion annually audits the accounts and entry securities services for the debt holdings of the Federal Reserve Open issues of the federal government and of Market Account at the Federal Reserve certain federally sponsored agencies such Bank of New York and the foreign curas the Federal National Mortgage Asso- rency operations conducted by that Bank. ciation and the Federal Home Loan Mort- The division furnishes copies of these gage Corporation. Book-entry services reports to the Committee. The examinafor federal agency securities are treated tion procedures used by the division are Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 209 reviewed each year by a private firm of Payments to the U.S. Treasury in the certified public accountants. form of interest on Federal Reserve notes totaled $23,608 million, compared with $21,646 million in 1989. The payments Income and Expenses consist of all net income after the deduc- The accompanying table summarizes the tion of dividends and after the deduction income, expenses and distribution of net of the amount necessary to bring the earnings of the Federal Reserve Banks surplus of the Banks to the level of capital for 1990 and 1989. paid-in. Income was $23,477 million in In the Statistical Tables chapter of this 1990 and $22,249 million in 1989. REPORT, table 6 details income and Total expenses were $1,454 million expenses of each Federal Reserve Bank ($1,211 million in operating expenses, for 1990, and table 7 shows a condensed $139 million in earnings credits granted statement for each Bank for 1914-90. A to depository institutions, and $104 mil- detailed account of the assessments and lion in assessments for expenditures by expenditures of the Board of Governors the Board of Governors). The cost of appears in the next chapter. currency was $193 million. Income from financial services was $730 million. The profit and loss account showed a Holdings of Securities and Loans net addition of $2,201 million, primarily a result of gains from the revaluation of The table on the next page presents assets denominated in foreign currencies holdings, earnings, and average interest to market exchange rates. Statutory rates on securities and loans of the Feddividends to member banks totaled eral Reserve Banks for the years 1988-90. $141 million, $11 million more than in Average daily holdings of securities 1989. The rise reflected an increase in the and loans during 1990 were $237,444 capital and surplus of member banks and million, an increase of $3,995 million a consequent increase in the paid in from 1989. From 1989 to 1990 holdings capital stock of the Reserve Banks. of U.S. government securities increased Income, Expenses, and Distribution of Net Earnings of Federal Reserve Banks, 1990 and 1989l Thousands of dollars Item 1990 1989 Current income 23,476,604 22,249,276 Current expenses 1,349,726 1,332,161 Operating expenses2 1,211,029 1,184,253 Earnings credits granted 138,697 147,907 Current net income 22,126,878 20,917,115 Net addition to (deduction from) current net income 2,201,470 1,295,623 Cost of unreimbursed services to Treasury 102,142 41,009 Assessments by the Board of Governors 296,759 264,623 For expenditures of Board 103,752 89,580 For cost of currency 193,007 175,044 Net income before payments to Treasury 23,929,447 21,907,105 Dividends paid 140,758 129,885 Payments to Treasury (interest on Federal Reserve notes) . 23,608,398 21,646,417 Transferred to surplus 180,292 130,802 1. Details may not sum to totals because of rounding. pension costs of $60 million in 1990 and $47 million in 2. Operating expenses include a net periodic credit for 1989. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

210 77th Annual Report, 1990 $4,211 million, and loans decreased continued and the construction of a new $216 million. building for the Helena Branch was Also, during the period from 1989 to completed. Other on-going construction 1990, the average rate of interest de- projects include the renovation of the creased from 8.64 percent to 8.45 per- main lobby of the St. Louis Bank and the cent on holdings of U.S. government renovation of the main auditorium of the securities and decreased from 8.70 per- New York Bank. The upgrading of the cent to 7.88 percent on loans. mechanical and electrical systems of the Kansas City Bank was completed. Table 8, in the Statistical Tables chap- Volume of Operations ter of this REPORT, shows the cost and Table 9, in the Statistical Tables chapter book values of premises owned or occuof this REPORT, shows the volume of pied by the Federal Reserve Banks and operations in the principal departments Branches and of real estate acquired for of the Federal Reserve Banks for the future banking-house purposes. years 1987-90. Financial Statements Federal Reserve Bank Premises for Priced Services During 1990 the Board of Governors The tables on the following pages show authorized the construction of the new pro forma statements for priced services headquarters building for the Dallas for 1989, including a balance sheet, Bank. The construction of the new oper- income statements, and a breakdown of ations center for the New York Bank volumes. Securities and Loans of Federal Reserve Banks, 1988-90 Millions of dollars, except as noted U.S. Item and year Total government Loans securities * Average daily holdings2 1988 233,796 231,442 2,354 1989 233,449 232,312 1,137 1990 237,444 236,523 921 Earnings 1988 18,358 18,180 179 1989 20,163 20,065 99 1990 20,067 19,995 73 Average interest rate (percent) 1988 7.85 7.85 7.59 1989 8.64 8.64 8.70 1990 8.45 8.45 7.88 1. Includes federal agency obligations. 2. Based on holdings at opening of business. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 211 Pro forma balance sheet for priced services, December 31, 1990 and 19891 Millions of dollars Item 1990 1989 Short-term assets2 Imputed reserve requirement on clearing balances . 270.4 203.8 Investment in marketable securities 1,982.6 1,494.2 Receivables 60.4 58.2 Materials and supplies 6.2 6.4 Prepaid expenses 15.4 11.1 Items in process of collection 2,474.1 3,652.3 Total short-term assets 4,809.1 5,426.0 Long-term assets3 Premises 319.9 289.8 Furniture and equipment 158.0 123.9 Leases and leasehold improvements 18.3 6.2 Prepaid pension costs 71.1 52.1 Total long-term assets 567.3 427.1 Total assets 5,376.4 5,898.0 Short-term liabilities Clearing balances and balances arising from early credit of uncollected items 2,726.8 2,584.8 Deferred availability items 2,000.3 2,765.5 Short-term debt 82.0 75.7 Total short-term liabilities 4,809.1 5,426.0 Long-term liabilities Obligations under capital leases . 1.2 1.2 Long-term debt 157.4 133.2 Total long-term liabilities 158.6 134.4 Total liabilities 4,967.7 5,560.4 Equity 408.7 337.7 Total liabilities and equity4 5,376.4 5,898.0 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 mis asset account. Banks for priced services and (2) the share of suspense- 4. Under the matched-book capital structure for assets account and difference-account balances related to priced that are not "self-financing," short-term assets are financed services. Materials and supplies are the inventory value of with short-term debt. Long-term assets are financed with 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

212 77th Annual Report, 1990 Pro forma income statement for Federal Reserve priced services, calendar years 1990 and 1989l Millions of dollars Item 1990 1989 [ncome from services provided to depository institutions2 730.2 702.4 Production expenses3 597.1 599.4 Income from operations 133.1 103.1 Imputed costs4 Interest on float 33.2 50.8 Interest on debt 17.0 16.9 Sales taxes 8.0 7.6 FDIC insurance 5.0 63.2 1.6 76.9 Income from operations after imputed costs 70.0 26.2 Other income and expenses5 Investment income 155.5 163.4 Earnings credits 139.2 16.3 147.1 16.2 Income before income taxes 86.2 42.4 Imputed income taxes6 24.0 8.7 Net income 62.3 33.7 MEMO Targeted return on equity7 33.6 32.9 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 $1.7 million in 1990 and adjustments and direct charges are midweek closing float $1.4 million in 1989. 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 754.6 6. Calculated at the effective tax rate derived from the Unrecovered float 59.7 PSAF model. Float subject to recovery 694.9 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 87.2 firm, as derived from the PSAF model. As-of adjustments 323.1 Direct charges 99.6 Per-item fees 185.0 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 213 Pro forma income statement for Federal Reserve priced services, by service, 1990l 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 730.2 558.1 78.6 52.7 15.9 10.6 14.3 Operating expenses 597.1 471.1 63^ 47.0 13.8 13.7 Income from operations . 133.1 87.0 14.7 5.8 2.1 1.7 .6 Imputed costs2 63.2 55.0 4.0 2.3 1.0 .7 .1 Income from operations after imputed costs .. 70.0 32.0 10.7 3.5 1.1 1.0 .5 Other income and expenses, net3 16.3 13.8 1.1 .8 .2 .2 .2 Income before income taxes 86.2 45.8 11.8 4.2 1.3 1.1 .7 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 Activity in Federal Reserve priced services, calendar years 1990,1989, and 19881 Thousands of items, except as noted Percent change Service 1990 1989 1988 1990-89 1989-88 Fund transfers 62,559 60,645 56,334 3.2 7.7 Commercial ACH 915,257 740,623 602,406 23.6 22.9 Commercial checks 18,594,652 18,014,301 17,617,744 3.2 2.3 Securities transfers 2,555 2,536 2,236 .7 13.4 Definitive safekeeping 82 110 138 -25.4 -20.4 Noncash collection 2,854 3,180 3,337 -10.3 -4.7 Cash transportation 330 322 341 2.5 -5.6 1. Activity is defined as follows: for wire transfer of securities, number of basic transfers originated on line; for funds, the number of basic transactions originated; 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

214 77th Annual Report, 1990 Revenue and expenses of locally priced Federal Reserve services, by District, 19901 Millions of dollars Total Operating Float Total Net District cost cost revenue Commercial check collection Boston 40.4 32.4 1.6 34.0 6.4 New York... 70.3 56.6 3.6 60.2 10.1 Philadelphia . 25.4 32.3 2.0 34.3 -8.9 Cleveland ... 32.4 25.7 1.6 27.3 5.1 Richmond ... 54.7 43.5 2.5 46.0 8.7 Atlanta 71.6 59.2 2.6 61.8 9.8 Chicago 73.2 59.1 3.5 62.6 10.6 St. Louis .... 24.2 19.7 1.7 21.4 2.8 Minneapolis . 31.7 25.9 * 25.9 5.8 Kansas City.. 35.7 30.4 1.5 31.9 3.8 Dallas 38.5 32.7 2.2 34.9 3.6 San Francisco 59.9 52.1 2.8 54.9 5.0 System total. 558.1 469.6 25.6 495.2 62.8 Definitive safekeeping and noncash collection Boston .7 .6 .6 .1 New York... 2.6 2.3 > 2.3 .3 Philadelphia . 1.1 .9 .9 .2 Cleveland ... 1.8 1.3 .1 1.4 .4 Richmond ... .8 .8 .8 * Atlanta 2.1 1.9 1.9 .2 Chicago 2.5 2.0 2.0 .5 St. Louis .8 .7 .7 .1 Minneapolis . .8 .8 .8 * Kansas City.. 1.3 1.2 1.2 .1 Dallas 1.4 1.3 .1 1.4 * San Francisco • * * * * System total. 15.9 13.8 .2 14.0 1.9 Cash services Boston New York... Philadelphia . 1.8 1.7 Cleveland ... 1.8 1.8 Richmond ... .1 .1 Atlanta * * Chicago .5 .4 .1 St. Louis .... .1 .1 .0 Minneapolis . 3.0 2.5 .5 Kansas City.. .5 .5 * Dallas * San Francisco 6.5 .0 6.5 System total. 14.3 .7 13.6 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 *In absolute value, greater than zero and less than through the PSAF and the net income on clearing balances. $50,000. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

215 Board of Governors Financial Statements The financial statements of the Board independent public accountants, for 1990 were examined by Coopers & Lybrand, and 1989. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Governors of the Federal Reserve System We have audited the accompanying balance sheets of the Board of Governors of the Federal Reserve System (the Board) at December 31,1990 and 1989 and the related statements of revenues and expenses and fund balance and cash flows for the years 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 audits. We conducted our audit s in accordance with generally accepted auditing standards and the 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 audits provide 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 31,1990 and 1989, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Washington, D.C. February 8, 1991 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

216 77th Annual Report, 1990 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BALANCE SHEETS As of December 31, 1990 1989 ASSETS CURRENT ASSETS Cash $ 9,256,285 $ 6,911,025 Accounts receivable 1,146,044 830,753 Prepaid expenses and other assets 827,876 932,776 Total current assets 11,230,205 8,674,554 PROPERTY, BUILDINGS AND EQUIPMENT, Net (Note 3) 50,841,923 53,297,829 Total assets $62,072,128 $61,972,383 LIABILITIES AND FUND BALANCE CURRENT LIABILITIES Accounts payable $ 4,208,717 $ 4,860,780 Accrued payroll and related taxes 3,673,252 3,031,416 Accrued annual leave 4,760,513 4,338,262 Unearned revenues and other liabilities 1,042,167 903,140 Total current liabilities 13,684,649 13,133,598 COMMITMENTS (Note 5) FUNDBALANCE 48,387,479 48,838,785 Total liabilities and fund balance $62,072,128 $61,972,383 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 217 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF REVENUES AND EXPENSES AND FUND BALANCE For the years ended December 31, 1990 1989 BOARD OPERATING REVENUES Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $103,752,200 $ 89,579,700 Other revenues (Note 4) 4,217,225 4,474,753 Total operating revenues 107,969,425 94,054,453 BOARD OPERATING EXPENSES Salaries 69,562,505 61,281,560 Retirement and insurance contributions 9,529,726 8,269,511 Depreciation and net losses on disposals 5,968,909 7,432,273 Travel 3,466,251 3,345,743 Utilities 3,460,224 3,113,889 Postage and supplies 3,358,071 2,986,854 Contractual services and professional fees 3,048,327 3,281,235 Repairs and maintenance 2,709,196 2,787,101 Printing and binding 2,202,823 2,678,987 Software 2,125,800 2,599,191 Other expenses (Note 4) 2,988,899 2,772,246 Total operating expenses 108,420,731 100,548,590 BOARD OPERATING REVENUES (UNDER) EXPENSES (451,306) (6,494,137) ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES Assessments levied on Federal Reserve Banks for currency costs 193,006,998 174,313,207 Expenses for currency printing, issuance, retirement, and shipping 193,006,998 174,313,207 CURRENCY ASSESSMENTS (UNDER) OVER EXPENSES — — TOTAL REVENUES (UNDER) EXPENSES (451,306) (6,494,137) FUND BALANCE, Beginning of year 48,838,785 55,332,922 FUND BALANCE, End of year $ 48,387,479 $ 48,838,785 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

218 77th Annual Report, 1990 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash For the years ended December 31, 1990 1989 CASH FLOWS FROM OPERATING ACTIVITIES Board operating revenues (under) expenses $ (451,306) $(6,494,137) Adjustments to reconcile operating revenues (under) expenses to net cash provided by operating activities: Depreciation and net losses on disposals 5,968,909 7,432,273 Increase in accounts receivable, and prepaid expenses and other assets (210,391) (173,373) Increase in accrued annual leave 422,251 49,998 Increase in accounts payable, accrued payroll and related taxes, and unearned revenue and other liabilities 128,800 1,025,844 Net cash provided by operating activities 5,858,263 1,840,605 CASH FLOWS FROM INVESTING ACTTVITIES Proceeds from disposals of furniture and equipment 8,900 2,453,537 Capital expenditures (3,521,903) (4,695,963) Net cash used in investing activities (3,513,003) (2,242,426) NET INCREASE (DECREASE) IN CASH 2,345,260 (401,821) CASH BALANCE, Beginning of year 6,911,025 7,312,846 CASH BALANCE, End of year $ 9,256,285 $6,911,025 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 219 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM NOTES TO FINANCIAL STATEMENTS Board contributions to the Civil Service Plan directly match employee contributions. The Board's contributions (1) SIGNIFICANT ACCOUNTING POLICIES to the Civil Service Plan totaled $639,600 in 1990 and $585,600 in 1989. Board Operating Revenues and Expenses—Assessments made on the Federal Reserve Banks for Board operating Employees of the Board may also participate in the expenses and capital expenditures are calculated based on Federal Reserve System's Thrift Plan. Under the Thrift expected cash needs. These assessments, other operating Plan, members may contribute up to a fixed percentage of revenues, and operating expenses are recorded on the their salary. Board contributions are based upon a fixed accrual basis of accounting. percentage of each member's basic contribution and were $2,107,700 in 1990 and $1,751,100 in 1989. Issuance and Redemption of Federal Reserve Notes—The Board incurs expenses and assesses the Federal Reserve The Board also provides certain health benefits for Banks for the cost of printing, issuing, shipping and retired employees. The cost of providing the benefits is retiring Federal Reserve Notes. These assessments and recognized by expensing the insurance premiums which expenses are separately reported in the statements of were $367,300 in 1990 and $323,800 in 1989. revenues and expenses because they are not Board operating transactions. (3) PROPERTY, BUILDINGS AND EQUIPMENT Property, Buildings and Equipment—The Board's prop- The following is a summary of the components of the erty, buildings and equipment are stated at cost less Board's fixed assets, at cost, net of accumulated accumulated depreciation. Depreciation is calculated on a depreciation. straight-line basis over the estimated useful lives of the assets, which range from 3 to 10 years for furniture and As of December 31, equipment and from 10 to 50 years for building equipment 1990 1989 and structures. Upon the sale or other disposition of a Land and depreciable asset, the cost and related accumulated improvements . $ 1,301,314 $ 1,301,314 depreciation are removed from the accounts and any gain Buildings 63,573,336 63,556,144 Furniture and or loss is recognized. equipment 32,768,173 30,920,877 97,642,823 95,778,335 (2) RETIREMENT BENEFITS Less accumulated Substantially all of the Board's employees participate in depreciation .. 46,800,900 42,480,506 Total property, either the Retirement Plan for Employees of the Federal buildings and Reserve System or the Civil Service Plan. The System's equipment .... $ 50,841,923 $ 53,297,829 Plan is a multiemployer plan which covers employees of the Federal Reserve Banks, the Board, and the Plan Administrative Office. Employees of the Board who entered on duty before 1984 are covered by a contributory (4) OTHER REVENUES AND OTHER EXPENSES defined benefits program under the Plan. Employees of the The following are summaries of the components of Board who entered on duty after 1983 are covered by a Other Revenues and Other Expenses. non-contributory defined benefits program under the Plan. The Civil Service Plan is a defined contribution plan. For the years ended December 31, Contributions to the System's Plan are actuarially determined and funded by participating employers at 1990 1989 amounts prescribed by the Plan's administrator. No separate Other Revenues Data processing accounting is maintained of assets contributed by the revenue $2,002,546 $ 935,996 participating employers and net pension cost for the period Subscription is the required contribution for the period. As of January 1, revenue 1,681,241 1,736,244 1990, actuarial calculations showed that the fair value of Assistance the assets of the System's Plan exceeded the projected to Federal benefit obligations by 72 percent. Based on these calcula- agencies 332,658 551,000 tions and similar calculations performed for 1989, it was Miscellaneous 200,780 373,142 determined that employer funding contributions were not Contingency required for the years 1990 and 1989 and the Board was not Processing Center fees — 878,371 assessed a contribution for these years. Excess Plan assets Total other will continue to fund future years' contributions. revenues $4,217,225 $4,474,753 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 77th Annual Report, 1990 (4) OTHER REVENUES AND OTHER EXPENSES—Cont. Other Expenses Cafeteria operations, net $ 694,047 $ 654,051 Tuition, registrations and membership fees 615,534 524,934 Equipment and facility rentals 544,187 515,558 Subsidies and contributions 529,289 413,020 Miscellaneous 605,842 664,683 Total other expenses $2,988,899 $2,772,246 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 ten 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, 1990, are as follows: 1991 $ 529,300 1992 580,100 1993 527,900 1994 402,900 1995 353,900 $2,394,100 Rental expenses under these operating leases were $471,500 and $243,400 in 1990 and 1989, respectively. (6) FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL The Board is one of the five member agencies of the Federal Financial Institutions Examination Council (the "Council"). During 1990 and 1989, the Board paid $146,200 and $259,780, respectively, in assessments for operating expenses of the Council. These amounts are included in subsidies and contributions for 1990 and 1989. 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 $34,000 and $30,300 for 1990 and 1989, 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

222 77th Annual Report, 1990 1. Detailed Statement of Condition of All Federal Reserve Banks Combined, December 31, 1990l Thousands of dollars ASSETS Gold certificate account 11,058,359 Special drawing rights certificate account 10,018,000 Coin 535,132 Loans and securities Loans to depository institutions 189,549 Federal agency obligations Bought outright 6,341,556 Held under repurchase agreement 1,340,750 U.S. Treasury securities Bought outright Bills 112,519,895 Notes 91,406,519 Bonds 31,163,174 Total bought outright 235,089,588 Held under repurchase agreement 17,013,250 Total securities 252,102,838 Total loans and securities 259,974,693 Items in process of collection Transititems 5,185,181 Other items in process of collection 921,118 Total items in process of collection 6,106,299 Bankpremises Land 141,671 Buildings (including vaults) 666,467 Building machinery and equipment 186,496 Construction account 104,110 Total bank premises 957,073 Less depreciation allowance 227,082 729,991 Bank premises, net 871,662 Other assets Furniture and equipment 755,347 Less depreciation 425,079 Total furniture and equipment, net 330,268 Denominated in foreign currencies2 32,632,862 Interest accrued 3,111,078 Premium on securities 1,394,731 Due from Federal Deposit Insurance Corporation 484,966 Overdrafts 216,677 Prepaid expenses 276,746 Suspense account 355,637 Real estate acquired for banking-house purposes 16,751 Other 192,962 Total other assets 39,012,678 Total assets 327,576,823 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 223 1.—Continued LIABILITIES Federal Reserve Notes Outstanding (issued to Federal Reserve Banks) 304,829,370 Less held by Federal Reserve Banks 37,172,227 Total Federal Reserve notes, net 267,657,143 Deposits Depository institutions 38,657,562 U.S. Treasury, general account 8,960,212 Foreign, official accounts 368,799 Other deposits Officers' and certified checks 20,285 International organizations 79,736 Other3 141,792 Total other deposits 241,813 Deferred credit items 3,540,076 Other liabilities Discount on securities 2,915,740 Sundry items payable 52,788 Suspense account 31,564 All other 304,822 Total other liabilities 3,304,914 Total liabilities 322,730,519 CAPITAL ACCOUNTS Capital paidin 2,423,152 Surplus 2,423,152 Other capital accounts4 0 Total liabilities and capital accounts 327,576,823 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 $7,951.8 million was invested in 4. During the year, includes undistributed net income, securities issued by foreign governments, and the balance which is closed out on Dec. 31. was invested with foreign central banks and the Bank for International Settlements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

224 77th Annual Report, 1990 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1990 and 1989 Millions of Dollars1 Total Boston Item 1990 1989 1990 1989 ASSETS Gold certificate account 11,058 11,059 750 699 Special drawing rights certificate account 10,018 8,518 711 531 Coin 535 456 41 26 Loans To depository institutions 190 481 14 Other 0 0 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 6,342 6,525 426 406 Held under repurchase agreements 1,341 525 0 0 U.S. Treasury securities Bought outright2 235,090 226,775 15,794 14,112 Held under repurchase agreements 17,013 1,592 0 0 Total loans and securities 259,975 235,898 16,233 14,523 Items in process of collection 6,106 8,903 287 470 Bank premises 872 790 90 91 Other assets Denominated in foreign currencies3 32,633 31,333 1,207 1,097 All other 6,376 7,465 287 311 Interdistrict Settlement Account 0 0 1,909 2,705 Total assets 327,573 304,422 21,515 20,453 LIABILITIES Federal Reserve notes 267,657 241,739 18,879 17,166 Deposits Depository institutions 38,658 38,327 2,109 2,510 U.S. Treasury, general account 8,960 6,217 0 0 Foreign, official accounts 369 590 6 5 Other 242 1,298 3 52 Total deposits 48,228 46,430 2,118 2,567 Deferred credit items 3,540 7,773 132 376 3,301 3,994 192 178 Other liabilities and accrued dividends4 22,727 299,935 21,320 20,286 Total liabilities CAPITAL ACCOUNTS 2,423 2,243 97 83 Capital paid in 2,423 2,243 97 83 Surplus 0 0 0 0 Other capital accounts Total liabilities and capital accounts 327,573 304,423 21,515 20,453 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes outstanding (issued to Bank) 304,829 279,665 21,409 19,741 Less: Held by Bank 37,172 37,926 2,530 2,575 Federal Reserve notes, net 267,657 241,739 18,879 17,166 Collateral for Federal Reserve notes Gold certificate account 11,058 11,059 Special drawing right certificate account 10,018 8,518 Other eligible assets Q U.S. Treasury and federal agency securities 246,581 222^162 Total collateral 267,657 241,739 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 225 2.—Continued New York Philadelphia Cleveland Richmond 1990 1989 1990 1989 1990 1989 1990 1989 3,501 3,410 384 400 688 661 1,008 943 3,395 2,896 319 247 645 508 961 745 16 13 31 33 39 35 105 78 23 27 24 45 0 261 6 3 0 0 0 0 0 0 0 0 2,341 2,300 185 188 380 375 590 541 1,341 525 0 0 0 0 0 0 86,783 79,934 6,846 6,544 14,084 13,046 21,881 18,794 17,013 1,592 0 0 0 0 0 0 107,501 84,378 7,055 6,778 14,464 13,682 22,476 19,338 570 1,070 527 442 257 311 341 534 76 47 45 46 36 34 122 127 8,844 8,398 1,468 1,535 1,795 1,692 2,023 1,817 2,373 2,125 179 254 332 305 906 408 -1,044 -928 -702 862 1,077 1,214 -5,674 3,702 125,233 101,408 9,307 10,597 19,332 18,441 22,270 27,692 102,697 81,921 7,078 7,703 17,005 15,566 18,904 23,180 9,934 8,130 1,774 1,943 1,817 2,107 2,654 3,456 8,960 6,217 0 0 0 0 0 0 259 480 7 7 8 8 9 9 156 498 2 38 2 62 16 88 19,310 15,324 1,782 1,988 1,827 2,178 2,679 3,553 382 822 132 619 83 288 119 447 1,511 2,126 84 87 167 163 271 233 123,899 100,192 9,077 10,397 19,082 18,194 21,974 27,413 667 608 115 100 125 124 148 139 667 608 115 100 125 124 148 139 0 0 0 0 0 0 0 0 125,233 101,408 9,307 10,597 19,332 18,441 22,270 27,692 108,722 86,003 8,380 9,601 18,651 17,776 24,543 26,559 6,026 4,082 1,302 1,898 1,646 2,210 5,639 3,379 102,697 81,921 7,078 7,703 17,005 15,566 18,904 23,180 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

226 77th Annual Report, 1990 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1990 and 1989-Continued Millions of Dollars1 Atlanta Chicago Item 1990 1989 1990 1989 ASSETS Gold certificate account 465 508 1,377 1,361 Special drawing rights certificate account 303 330 1,336 1,100 Coin 54 46 33 36 Loans To depository institutions 12 27 20 10 Other 0 0 0 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 221 298 773 775 Held under repurchase agreements 0 0 0 0 U. S. Treasury securities Bought outright2 8,209 10,358 28,672 26,940 Held under repurchase agreements 0 0 0 0 Total loans and securities 8,443 10,682 29,465 27,725 Items in process of collection 581 763 759 851 Bank premises 58 59 110 110 Other assets Denominated in foreign currencies3 3,198 2,914 4,079 4,042 All other 336 241 759 612 Interdistrict Settlement Account 2,887 -3,167 2,974 1,787 Total assets 16,325 12,376 40,892 37,624 LIABILITIES Federal Reserve notes 11,768 7,315 36,047 32,241 Deposits Depository institutions 3,723 3,773 3,511 3,710 U.S. Treasury, general account 0 0 0 0 Foreign, official accounts 15 14 19 19 Other 3 73 31 189 Total deposits 3,740 3,860 3,560 3,918 Deferred credit items 226 630 343 561 100 132 342 343 Other liabilities and accrued dividends4 15,834 11,938 40,292 37,062 Total liabilities CAPITAL ACCOUNTS 246 219 300 281 Capital paid in 246 219 300 281 Surplus 0 0 0 0 Other capital accounts 16,325 12,376 40,892 37,624 Total liabilities and capital accounts FEDERAL RESERVE NOTE STATEMENT 15,085 11,148 39,007 35,397 Federal Reserve notes outstanding (issued to Bank) 3,317 3,833 2,960 3,156 Less: Held by Bank Federal Reserve notes, net 11,768 7,315 36,047 32,241 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 exchange commitments. Banks—and excludes securities sold and scheduled to be bought back under matched sale-purchase transactions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 227 2.—Continued St. Louis Minneapolis Kansas City Dallas San Francisco 1990 1989 1990 1989 1990 1989 1990 1989 1990 1989 346 370 203 198 422 494 585 613 1,329 1,402 307 290 172 153 334 362 463 433 1,072 922 36 30 13 12 33 30 44 39 89 77 28 53 6 9 10 15 23 28 25 0 0 0 0 0 0 0 0 0 0 0 184 201 101 110 207 261 226 274 706 796 0 0 0 0 0 0 0 0 0 0 6,817 6,982 3,755 3,818 7,672 9,069 8,391 9,528 26,185 27,652 0 0 0 0 0 0 0 0 0 0 7,028 7,235 3,862 3,936 7,890 9,345 8,640 9,829 26,917 28,447 280 387 365 434 478 1,478 977 754 685 1,409 28 23 33 27 54 52 72 25 149 150 881 877 979 1,003 1,273 1,285 2,480 2,350 4,405 4,324 146 153 107 85 168 202 224 1,736 559 1,032 183 -140 -189 -405 -926 -2,110 986 -1,511 -1,482 -2,008 9,235 9,226 5,546 5,444 9,725 11,138 14,472 14,268 33,722 35,756 7,507 7,420 3,929 4,147 7,799 8,052 11,481 11,166 24,563 25,863 1,410 1,201 1,028 686 1,202 1,316 1,757 1,949 7,741 7,547 0 0 0 0 0 0 0 0 0 0 4 4 5 5 6 6 11 11 20 21 1 31 6 31 9 44 7 62 7 129 1,415 1,236 1,039 721 1,217 1,367 1,775 2,022 7,768 7,697 105 360 395 390 430 1,428 746 617 448 1,235 80 87 46 52 95 115 100 121 313 357 9,108 9,103 5,408 5,309 9,540 10,962 14,102 13,927 33,092 33,152 64 61 69 67 93 64 61 69 67 93 0 0 0 0 0 9,235 9,226 5,546 5,444 9,725 9,163 9,009 4,698 5,003 9,910 1,656 1,589 769 857 2,111 7,507 7,420 3,929 4,147 7,799 oo oo 00 OO O 185 171 315 302 185 171 315 302 0 0 0 0 11,138 14,472 14,268 33,722 35,756 10,306 13,926 14,620 31,335 34,502 2,254 2,445 3,454 6,773 8,639 8,052 11,481 11,166 24,563 25,863 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

228 77th Annual Report, 1990 3. Federal Reserve Open Market Transactions, 1990l Millions of dollars Type of transaction Jan. Feb. Mar. Apr. U.S. TREASURY SECURITIES Outright transactions (excluding matched transactions) Treasury bills Gross purchases 423 Gross sales 1,489 Exchanges 15,960 Redemptions 1,000 Others within 1 year Gross purchases 0 Gross sales 0 Maturity shift 1,201 Exchanges -2,489 Redemptions 0 1 to 5 years Gross purchases 0 Gross sales 0 Maturity shift -1,163 Exchanges 2,373 5 to 10 years Gross purchases 0 Gross sales 0 Maturity shift -38 Exchanges 116 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 108 543 5,796 3,384 0 0 18,113 21,551 17,286 400 0 0 0 100 0 0 0 0 2,845 1,876 993 -5,418 0 -4,304 0 0 0 0 100 100 0 0 0 -1,713 1,876 -739 4,743 0 4,081 0 0 0 0 0 0 -451 0 -254 450 0 223 0 0 0 0 0 0 -681 0 0 226 0 0 423 108 743 5,896 1,489 3,384 0 0 1,000 400 0 0 127,729 116,220 99,104 97,970 121,411 120,637 97,128 98,643 16,185 0 8,050 6,409 17,777 0 6,627 7,832 -9,975 740 190 5,145 ooo 1,741 2,266 -525 10,500 ooo 0 0 0 740 ooo 0 0 78 1,966 2,595 1,457 3,104 509 -588 699 4,558 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 sum 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 229 3.—Continued May June July Aug. Sept. Oct. Nov. Dec. Total 3,365 1,732 287 4,264 631 933 6,658 0 24,739 0 0 0 68 0 0 0 2,350 7,291 22,894 16,279 16,159 21,912 19,041 19,271 25,981 16,939 231,386 0 0 0 0 0 0 0 3,000 4,400 0 50 0 0 0 0 325 0 475 0 0 0 0 0 0 0 0 0 4,387 1,314 1,321 3,235 1,010 1,934 3,531 1,991 25,638 -2,771 0 -3,577 -4,550 0 0 -4,315 0 -27,424 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 200 0 0 0 0 0 0 0 0 0 -3,607 -1,314 -1,234 -2,188 -1,010 -1,677 -3,258 -1,991 -21,770 2,521 0 3,577 4,200 0 0 3,915 0 25,410 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -530 0 -87 -697 0 -256 127 0 -2,186 0 0 0 0 0 0 0 0 789 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -250 0 0 -350 0 0 -400 0 -1,681 250 0 0 350 0 0 400 0 1,226 3,365 1,782 287 4,264 631 933 6,983 100 25,514 0 0 0 68 0 0 0 2,550 7,491 0 0 0 0 0 0 0 3,000 4,400 121,596 107,896 95,144 113,647 120,036 127,265 116,601 125,844 1,369,052 121,218 110,042 95,787 110,635 120,280 129,722 114,488 123,442 1,363,434 3,959 11,242 13,106 26,700 31,996 19,844 36,457 45,684 219,632 3,959 11,242 11,447 23,764 34,932 19,844 34,105 31,022 202,551 2,987 3,928 2,590 4,121 -2,060 3,390 7,222 6,808 25,086 ooo 2,314 2,314 0 2,987 ooo 0 0 0 0 33 37 3,221 4,697 7,130 3,221 4,137 5,944 0 527 1,149 3,928 3,117 5,270 ooo 0 0 34 7,394 5,913 8,580 5,913 -1,186 -34 -3,247 3,356 ooo 0 0 0 0 1 183 2,774 2,091 41,836 2,504 1,021 40,461 270 1,070 1,192 7,492 7,878 26,278 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

230 77th Annual Report, 1990 4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities, December 31,1988-90! Millions of dollars Increase or December 31 decrease (—) Description 1990 1989 1988 1990 1989 U.S. Treasury securities, total 252,103 228,367 238,422 23,736 -10,055 By term l-15days2 22,530 9,413 9,935 13,117 -522 16-90days 57,538 55,523 58,448 2,015 -2,925 91 days to 1 year 75,428 70,687 75,236 4,741 -4,549 1-5 years 58,749 53,509 55,326 5,240 -1,817 5-10years 13,121 12,529 12,568 592 -39 More than 10 years 24,736 26,706 26,909 -1,970 -203 By type of holding Held outright Treasury bills3 112,010 104,581 112,782 7,430 -8,201 Treasury notes 91,407 91,381 90,950 25 431 Treasury bonds 31,163 30,814 29,929 350 884 Held under RPs 17,013 1,592 4,760 15,421 -3,168 Federal agency obligations, total 6,342 6,525 6,966 -183 -442 By term l-15days2 200 153 170 47 -17 16-90 days 737 568 697 169 -129 91 days to 1 year 1,639 1,346 1,492 293 -146 1-5 years 2,555 3,198 3,419 -643 -221 5-10 years 1,022 1,071 1,000 -49 71 More than 10 years 188 188 189 0 -1 By type of holding Held outright Federal Farm Credit Banks 1,563 1,630 1,997 -67 -367 Federal Home Loan Banks 2,161 2,251 2,251 -90 0 Federal Home Loan Financing Corporation . 0 0 0 0 0 Federal Home Loan Mortgage Corporation . 0 0 0 0 0 Federal Intermediate Credit Banks 4 0 0 0 0 0 Federal Land Banks 108 130 130 -22 0 Federal Home Administration 0 0 35 0 -35 Federal National Mortgage Association 2,364 2,347 2,387 17 -40 Federal National Sinking Fund 0 0 0 0 0 Government National Mortgage Association participation certificates4 0 0 0 0 0 U.S. Postal Service 37 37 37 0 0 Washington Metropolitan Area Transit Authority 117 117 117 0 0 General Services Administration 12 13 14 -1 -1 Held under RPs 1,341 525 2,101 816 -1,576 1. Details may not sum 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 231 5. Number and Salaries of Officers and Employees of Federal Reserve Banks, December 31, 1990 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 152,000 58 5,122,400 1,259 266 43,305,054 1,584 48,579,454 New York 231,500 162 15,451,800 3,752 48 124,647,431 3,963 140,330,731 Philadelphia 167,500 55 4,393,800 1,211 159 36,327,403 1,426 40,888,703 Cleveland 163,500 63 4,509,200 1,336 71 35,415,957 1,471 40,088,657 Richmond 175,600 82 6,174,000 1,881 145 48,966,676 2,109 55,316,276 Atlanta 186,700 72 5,440,600 2,188 69 58,112,098 2,330 63,739,398 Chicago 200,000 95 7,363,500 2,428 35 70,469,923 2,559 78,033,423 St. Louis 170,500 49 3,473,500 1,096 90 28,855,514 1,236 32,499,514 Minneapolis 154,000 50 3,763,000 974 128 27,894,906 1,153 31,811,906 Kansas City 170,000 61 4,525,500 1,597 43 42,787,259 1,702 47,482,759 Dallas 161,000 60 4,569,200 1,579 47 43,670,048 1,687 48,400,248 San Francisco 195,700 103 8,568,470 2,467 52 75,459,052 2,623 84,223,222 Total 2,128,000 910 73,354,970 21,768 1,153 635,911,321 23,843 711,394,291 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

232 77th Annual Report, 1990 6. Income and Expenses of Federal Reserve Banks, 1990 Dollars Item1 Total Boston New York Philadelphia Cleveland CURRENT INCOME Loans 117,880,135 40,249,682 5,464,905 1,139,773 773,106 U.S. Treasury and federal agency securities 19,994,508,215 1,306,870,543 7,365,276,260 577,158,997 1,176,904,432 Foreign currencies 2,603,894,184 96,019,740 705,168,806 117,823,929 143,052,007 Priced services 730,186,109 49,907,873 101,758,531 34,801,129 43,460,030 Other 30,135,008 1,446,638 18,987,456 751,767 623,088 Total 23,476,603,651 1,494,494,476 8,196,655,958 731,675,595 1,364,812,663 CURRENT EXPENSES Salaries and other personnel expenses 735,493,281 47,515,067 146,498,114 40,195,918 42,434,690 Retirement and other benefits2 103,289,945 10,759,140 29,524,292 9,649,825 9,364,895 Fees 14,240,661 1,774,207 2,064,370 477,548 2,919,355 Travel 29,034,262 1,355,731 3,380,971 1,410,768 2,222,684 Software expenses 33,036,021 1,959,097 6,932,128 2,333,050 1,599,642 Postage and other shipping costs 83,469,068 4,698,513 10,697,727 4,749,278 5,682,049 Communications 10,515,853 888,668 2,331,254 562,665 565,649 Materials and supplies 53,429,530 3,034,794 9,089,781 3,088,159 3,077,771 Building expenses Taxes on real estate 22,430,224 4,169,506 3,817,714 1,761,760 1,324,457 Property depreciation 33,544,757 2,577,025 3,675,115 1,736,233 1,684,906 Utilities 25,485,512 2,034,009 3,512,892 2,726,802 1,729,422 Rent 22,029,168 591,891 15,137,216 45,162 390,890 Other 19,996,030 923,873 2,864,504 1,217,055 782,139 Equipment Purchases 6,266,935 259,909 3,315 276,083 178,209 Rentals 20,978,038 424,117 4,092,647 650,406 1,073,840 Depreciation , 84,412,879 6,198,427 16,868,964 4,107,162 5,938,152 Repairs and maintenance 51,197,499 3,115,571 7,995,893 2,141,221 3,540,608 Earnings-credit costs 138,696,901 9,265,041 14,357,035 12,304,551 10,432,184 Other 40,145,704 2,370,076 5,846,209 11,757,050 2,255,672 Shared costs, net3 0 (1,031,130) 374,458 2,285,312 608,389 Recoveries (35,204,879) (8,565,482) (3,990,803) (2,750,438) (3,293,745) Expenses capitalized4 (2,441,365) (171,964) (6,317) (39,324) (368,473) Total 1,490,046,024 94,146,066 285,067,479 100,686,246 94,143,385 Reimbursements (140,320,212) (5,973,230) (28,216,330) (16,768,465) (14,193,063) Net expenses 1,349,725,812 88,172,856 256,851,149 83,917,781 79,950,322 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 233 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 20,038,180 1,222,030 2,087,399 5,552,980 5,596,473 1,607,339 32,125,189 2,023,079 1,791,699,651 754,680,400 2,405,484,721 586,281,665 322,274,531 690,057,809 744,950,684 2,272,868,522 160,792,748 254,370,767 326,135,464 70,467,315 78,441,171 101,876,219 197,733,785 352,012,233 64,590,430 87,925,707 95,255,549 30,802,461 40,885,955 47,558,582 49,787,046 83,452,816 757,145 1,019,513 2,716,550 438,178 450,663 480,395 728,160 1,735,455 2,037,878,154 1,099,218,417 2,831,679,683 693,542,599 447,648,793 841,580,344 1,025,324,864 2,712,092,105 56,837,128 66,832,802 81,070,631 34,041,937 32,900,836 49,667,628 49,959,388 87,539,142 13,374,977 16,133,375 18,028,116 7,814,086 7,567,243 11,656,552 11,033,952 18,877,557 737,277 1,293,314 735,962 599,958 1,221,787 487,344 601,107 1,328,432 2,232,110 2,597,069 3,649,191 1,738,101 1,642,836 2,365,119 2,266,996 4,172,686 3,114,658 1,868,807 4,536,470 1,499,814 2,041,052 1,478,037 2,142,351 3,530,915 7,001,867 9,646,123 9,205,692 3,793,571 5,575,392 5,775,017 4,413,846 12,229,993 677,257 1,046,536 1,088,629 517,051 428,917 678,321 823,891 907,015 5,146,708 5,589,045 6,037,754 3,253,717 2,328,309 3,751,885 3,548,880 5,482,727 2,132,801 1,855,033 3,247,884 457,535 (512,222) 815,680 759,975 2,600,101 4,275,631 2,843,413 4,540,872 1,347,604 1,070,750 2,616,875 1,504,911 5,671,422 2,348,364 2,359,780 2,431,704 1,577,412 862,384 1,531,046 1,134,661 3,237,036 635,099 626,277 2,098,123 424,233 301,122 291,847 1,275,902 211,406 2,024,388 2,085,518 4,446,000 715,635 727,843 954,877 891,627 2,362,571 696,310 570,159 809,927 306,922 891,745 302,592 526,377 1,445,387 1,084,527 2,533,938 3,978,779 489,331 567,201 2,042,096 1,502,356 2,538,800 8,199,616 8,059,587 11,740,795 2,768,897 3,681,210 2,940,260 5,223,149 8,686,660 5,344,284 5,991,957 8,038,433 2,090,245 2,659,913 1,973,210 2,606,325 5,699,839 12,372,510 13,094,898 22,943,253 5,491,021 6,426,341 10,119,796 6,847,610 15,042,660 1,569,550 3,176,159 4,893,725 1,575,550 1,303,245 1,892,206 1,975,755 1,530,507 (3,729,457) 1,544,040 (6,878,249) 1,436,415 2,103,013 1,191,877 1,316,229 779,103 (4,007,755) (2,263,906) (2,709,274) (1,446,307) (795,238) (811,021) (798,616) (3,772,294) (262,789) (308,915) (272,671) (85,670) (40,330) (425,325) (350,692) (108,895) 121,805,061 147,175,009 183,661,746 70,407,058 72,953,349 101,295,919 99,205,980 179,992,770 (9,168,663) (10,572,072) (13,168,250) (8,149,074) (4,705,348) (9,037,973) (6,336,848) (14,030,896) 112,636,398 136,602,937 170,493,496 62,257,984 68,248,001 92,257,946 92,869,132 165,961,874 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

234 77th Annual Report, 1990 6. Income and Expenses of Federal Reserve Banks, 1990—Continued Dollars Item1 Total Boston New York Philadelphia Cleveland PROFIT AND LOSS Current net income 22,126,877,836 1,406,321,620 8,000,298,873 647,757,814 1,284,862,341 Additions to and deductions from current net income Profits on sales of U.S. Treasury and federal agency securities 62,929,318 4,232,357 23,246,076 1,832,900 3,772,191 Profit on foreign exchange transactions 2,139,391,108 79,157,471 579,774,990 96,272,600 117,666,511 Other additions 375,560 718 25,801 3,128 11,432 Total additions 2,202,695,985 83,390,545 603,046,867 98,108,628 121,450,134 Total deductions (1,225,589) (561) (541,196) (1,325) (1,712) Net additions to or deductions (-) from current net income 2,201,470,397 83,389,984 602,505,671 98,107,303 121,448,422 Cost of unreimbursed Treasury services 102,141,926 4,836,318 15,561,379 14,618,868 11,878,601 Assessments by Board Board expenditures5 103,752,200 3,832,500 28,184,700 4,531,200 5,676,400 Cost of currency 193,006,998 13,705,231 65,406,596 6,150,167 12,427,914 Net income before payment to U.S. Treasury 23,929,447,109 1,467,337,555 8,493,651,869 720,564,882 1,376,327,848 Dividends paid 140,757,879 5,235,308 38,420,160 6,268,895 7,488,534 Payments to U.S. Treasury (interest on Federal Reserve notes) 23,608,397,730 1,448,087,847 8,395,856,909 699,100,887 1,366,983,763 Transferred to surplus 180,291,500 14,014,400 59,374,800 15,195,100 1,855,550 Surplus, January 1 2,242,860,100 83,267,100 607,678,250 99,978,900 123,500,150 Surplus, December 31 2,423,151,600 97,281,500 667,053,050 115,174,000 125,355,700 1. Details may not sum 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- 4. Includes expenses for labor and materials temporarily Employers' Accounting for Pensions—is recorded in the capitalized and charged to activities when the products are Total column only and has not been distributed to each consumed. District. Accordingly, the sum of the Districts will not 5. For additional details, see the last four pages of the equal the Total column for this category or for Total net preceding section: Board of Governors, Financial Stateexpenses, and New York will not sum to current net ments. income. The effect of FASB 87 on the Reserve Banks was a reduction in expenses of $60,494,065. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 235 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 1,925,241,756 962,615,479 2,661,186,186 631,284,615 379,400,792 749,322,398 932,455,734 2,546,130,229 5,866,672 2,187,369 7,678,024 1,822,998 1,004,423 2,046,761 2,240,131 6,999,416 132,642,249 209,660,329 267,423,888 57,763,560 64,181,733 83,436,253 162,593,724 288,817,800 13,033 169,900 9,672 6,401 86,130 164 41,452 7,728 138,521,954 212,017,597 275,111,585 59,592,959 65,272,286 85,483,178 164,875,307 295,824,944 (16,064) (30,901) (24,716) (10,373) (82,569) (149,759) (2,421) (363,991) 138,505,890 211,986,696 275,086,868 59,582,586 65,189,717 85,333,420 164,872,886 295,460,953 6,766,915 7,439,483 10,162,026 4,674,951 3,893,281 6,853,796 4,278,286 11,178,022 6,446,700 10,157,200 12,908,700 2,834,800 3,094,200 4,051,400 7,937,300 14,097,100 18,507,249 5,840,582 25,741,345 5,923,963 3,311,034 6,428,486 8,914,997 20,649,434 2,032,026,782 1,151,164,911 2,887,460,983 677,433,487 434,291,993 817,322,136 1,076,198,037 2,795,666,626 8,693,667 14,123,790 17,329,763 3,772,407 4,061,449 5,407,333 11,027,264 18,929,309 2,014,703,415 1,110,356,270 2,850,606,670 671,682,930 429,101,544 807,648,854 1,050,998,473 2,763,270,166 8,629,700 26,684,850 19,524,550 1,978,150 1,129,000 4,265,950 14,172,300 13,467,150 139,430,700 218,822,250 280,506,350 61,582,150 67,382,400 88,237,400 170,564,500 301,909,950 148,060,400 245,507,100 300,030,900 63,560,300 68,511,400 92,503,350 184,736,800 315,377,100 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

236 77th Annual Report, 1990 7. Income and Expenses of Federal Reserve Banks, 1914-90l 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 10,769,5% 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 237 7.—Continued Payments to U.S. Treasury Transferred Transferred Dividends Interest on to surplus to surplus paid Franchise Under Federal Reserve (section 13b) (section 7) tax section 13b notes 217,463 1,742,775 6,804,186 1,134,234 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

238 77th Annual Report, 1990 7. Income and Expenses of Federal Reserve Banks ,1914-90 - Continued Dollars Assessments by Net additions Board of Governors Period, or Federal Current Net or Reserve Bank income expenses deductions (-) Board Costs expenditures of currency 1970. 3,877,218,444 276,571,876 11,441,829 21,227,800 23,573,710 1971 . 3,723,369,921 319,608,270 94,266,075 32,634,002 24,942,528 1972. 3,792,334,523 347,917,112 (49,615,790) 35,234,499 31,454,740 1973 . 5,016,769,328 416,879,377 (80,653,488) 44,411,700 33,826,299 1974 . 6,280,090,965 476,234,586 (78,487,237) 41,116,600 30,190,288 1975 . 6,257,936,784 514,358,633 (202,369,615) 33,577,201 37,130,081 1976 . 6,623,220,383 558,128,811 7,310,500 41,827,700 48,819,453 1977 . 6,891,317,498 568,851,419 (177,033,463) 47,366,100 55,008,163 1978 . 8,455,309,401 592,557,841 (633,123,486) 53,321,700 60,059,365 1979. 10,310,148,406 625,168,261 (151,148,220) 50,529,700 68,391,270 1980. 12,802,319,335 718,032,836 (115,385,855) 62,230,800 73,124,423 1981 . 15,508,349,653 814,190,392 (372,879,185) 63,162,700 82,924,013 1982 . 16,517,385,129 926,033,957 (68,833,150) 61,813,400 98,441,027 1983 . 16,068,362,117 1,023,678,474 (400,365,922) 71,551,000 152,135,488 1984 . 18,068,820,742 1,102,444,454 (412,943,156) 82,115,700 162,606,410 1985 . 18,131,982,786 1,127,744,490 1,301,624,294 77,377,700 173,738,745 1986 . 17,464,528,361 1,156,867,714 1,975,893,356 97,337,500 180,779,673 1987 . 17,633,011,623 1,146,910,699 1,796,593,9172 81,869,800 170,674,979 1988 . 19,526,431,297 1,205,960,134 (516,910,320) 84,410,500 164,244,653 1989. 22,249,275,725 1,332,160,712 1,295,622,583 89,579,700 175,043,736 1990. 23,476,603,651 1,349,725,812 2,201,470,397 103,752,200 193,006,998 Total, 1914-90 . 284,236,363,958 20,423,722,746 5,496,337,185 1,464,346,608 2,335,561,744 Aggregate/or each Bank, 1914-90 Boston 14,819,792,498 1,348,728,618 187,713,374 52,818,886 139,494,542 New York 85,066,294,030 4,033,851,718 1,482,746,976 380,879,986 617,769,128 Philadelphia 11,228,465,209 1,089,448,550 247,243,866 71,030,818 101,777,200 Cleveland 18,896,798,643 1,356,254,562 257,762,578 108,676,590 147,188,090 Richmond 22,574,814,791 1,613,537,792 312,713,511 77,874,176 218,917,796 Atlanta 12,094,473,444 1,794,720,302 515,239,405 113,352,460 133,585,728 Chicago 40,342,775,285 2,672,799,574 667,047,416 204,871,672 323,445,239 St. Louis 9,555,068,162 1,073,911,136 140,778,979 44,999,172 87,111,870 Minneapolis 5,160,526,333 953,155,521 173,170,964 43,744,015 40,766,714 Kansas City 12,066,279,870 1,309,632,616 224,704,610 62,084,409 108,804,008 Dallas 16,045,788,680 1,194,448,489 466,842,818 97,422,373 134,430,902 San Francisco... 36,385,287,014 2,139,623,275 820,372,683 206,592,051 282,270,527 Total 284,236,363,958 20,423,722,7464 5,496,337,185 1,464,346,608 2,335,561,744 1. Details may not add to totals because of rounding. capital of the Federal Deposit Insurance Corporation (1934) 2. For 1987 and subsequent years, includes the cost of 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 $2,551,844,799 transferred to surplus was $2,400,910,572 on Dec. 31,1990. 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 239 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 21,646,417,306 130,802,300 140,757,879 23,608,397,730 180,291,500 2,430,673,709 149,138,300 2,188,893 260,232,076,858 (3,657) 2,551,844,7993 98,977,610 7,111,395 280,843 13,245,968,994 135,411 107,376,325 659,326,690 68,006,262 369,116 80,220,302,070 (433,412) 704,309,621 129,276,071 5,558,901 722,406 9,929,448,907 290,661 129,504,222 190,320,129 4,842,447 82,930 17,193,399,680 (9,906) 138,589,493 125,553,280 6,200,189 172,493 20,681,716,898 (71,517) 153,940,208 174,102,814 8,950,561 79,264 10,123,604,008 5,491 250,773,640 332,448,031 25,313,526 151,045 37,121,127,568 11,682 315,359,654 76,116,890 2,755,629 7,464 8,335,226,905 (26,515) 68,700,928 68,911,904 5,202,900 55,615 4,143,832,049 64,874 72,388,613 100,634,045 6,939,100 64,213 10,596,634,663 (8,674) 96,643,300 152,351,555 560,049 102,083 14,737,191,458 55,337 189,014,278 322,654,689 7,697,341 101,421 33,903,623,656 (17,089) 325,244,517 2,430,673,709 149,138,300 2,188,893 260,232,076,858 (3,657) 2,551,844,799 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

240 77th Annual Report, 1990 8. Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks and Branches, December 31, 1990 * 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. 22,073,501 80,947,942 5,449,161 108,470,604 89,563,208 Annex.. 27,840 91,092 44,538 163,470 136,646 NEW YORK 3,436,277 66,104,026 21,735,584 91,275,887 72,142,664 Annex 447,863 1,136,219 745,855 2,359,936 747,628 Buffalo 887,844 2,728,294 2,465,047 6,081,185 3,202,065 PHILADELPHIA. 2,251,556 52,644,356 5,903,704 60,799,616 44,951,528 CLEVELAND. 1,074,281 10,555,784 7,164,337 18,794,403 13,061,875 1,224,363 Cincinnati 2,246,599 13,680,428 7,618,302 23,545,329 12,209,947 Pittsburgh 1,658,376 8,475,758 3,331,608 13,465,742 10,850,028 RICHMOND. 3,912,575 57,281,864 14,314,313 75,508,751 53,224,023 Annex 572,128 3,725,466 3,924,584 8,222,179 3,656,874 Baltimore 6,476,335 26,826,903 3,842,189 37,145,427 31,134,085 Charlotte 3,129,645 27,402,251 4,698,497 35,230,393 34,186,433 ATLANTA.. 1,209,360 12,273,853 4,319,451 17,802,664 14,196,241 13,071,576 Birmingham . 3,115,938 1,905,770 1,072,438 6,094,146 4,182,986 Jacksonville . 1,665,439 16,395,261 2,281,437 20,342,137 18,760,205 912,813 Miami 3,717,791 12,120,564 2,181,400 18,019,755 14,427,379 Nashville.... 592,342 1,474,678 1,434,027 3,501,048 1,468,518 New Orleans. 3,087,693 3,371,593 1,476,257 7,935,543 5,172,620 292,710 CHICAGO . 4,511,942 104,200,254 16,898,497 125,610,692 101,639,918 Annex 53,066 969,147 426,419 1,448,632 1,230,892 Detroit 797,734 4,361,309 4,102,944 9,261,987 7,214,914 ST. LOUIS . 700,378 13,352,013 5,298,206 19,350,597 16,653,007 Little Rock . 1,148,492 2,082,669 1,003,022 4,234,183 2,545,971 Louisville .. 700,075 3,469,379 1,131,238 5,300,692 3,215,547 Memphis ... 1,135,623 5,004,438 2,280,473 8,420,534 5,441,458 MINNEAPOLIS. 1,394,384 26,961,832 7,843,033 36,199,249 20,607,294 Helena 1,306,268 10,902,290 41,170 12,249,727 12,232,483 KANSAS CITY. 1,798,804 20,568,975 9,241,472 31,609,251 23,440,441 149,948 Denver 3,187,962 4,078,149 3,648,311 10,914,422 8,330,024 Oklahoma City.. 646,386 3,379,543 2,172,989 6,198,918 4,149,157 Omaha 6,534,583 10,987,009 1,401,083 18,922,675 17,641,804 1,100,000 DALLAS.... 32,795,882 25,554,433 3,737,706 62,088,020 59,896,413 El Paso 262,477 1,477,716 404,946 2,145,140 1,986,655 Houston 2,205,500 3,248,771 1,400,175 6,854,446 6,048,944 San Antonio . 482,284 2,609,708 1,409,162 4,501,154 3,619,224 SAN FRANCISCO. 15,541,937 68,266,726 17,402,808 101,211,472 81,836,313 Los Angeles 3,891,887 49,540,237 8,334,890 61,767,014 56,119,371 Portland 207,381 3,800,542 1,028,879 5,036,801 4,318,432 Salt Lake City 480,222 4,178,378 1,448,400 6,107,000 3,550,313 Seattle 274,772 2,442,008 1,836,988 4,553,768 2,668,707 Total 141,671,420 770,577,626 186,495,542 1,098,744,587 871,662,236 16,751,410 1. Details may not sum 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 241 9. Operations in Principal Departments of Federal Reserve Banks, 1987-90 Operation 1990 1989 1988 1987 Millions of pieces (except as noted) Loans (thousands) 15 22 22 25 Currency received and counted 19,462 19,857 17,580 16,881 Currency verified and destroyed 6,561 6,319 5,910 5,217 Coin received and counted 12,072 12,668 17,137 19,871 Checks handled U.S. government checks 547 541 547 568 Postal money orders 162 147 144 146 Allother 18,598 18,014 17,623 17,006 Issues, redemptions, and exchanges of U.S. Treasury and federal agency securities u 44 40 186 191 Transfer of funds 63 60 56 52 Food stamps redeemed 2,899 2,334 2,327 2,210 Millions of dollars Loans 194,538 229,358 537,952 151,323 Currency received and counted 252,430 246,598 195,647 216,151 Currency verified and destroyed 65,863 59,985 47,184 44,907 Coin received and counted 1,734 1,828 3,684 3,517 Checks handled U.S. government checks 623,008 635,064 608,307 610,678 Postal money orders 16,485 14,284 13,189 12,511 Allother 12,519,171 12,321,576 11,789,787 11,453,158 Issues, redemptions, and exchanges of U.S. Treasury and federal agency securities u 102,332,172 98,130,603 89,516,419 90,056,338 Transfer of funds 199,067,200 182,575,303 160,730,050 152,453,528 Food stamps redeemed 14,517 11,714 10,748 10,322 1. Before 1988, data included book-entry securities 3. Agents' savings bonds transactions, although extransfers both sent and received. After 1987, the data cluded after 1988, are small in dollar amounts. include only the transfers sent. 2. Agents' savings bonds transactions are not included after 1988. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

242 77th Annual Report, 1990 10. Federal Reserve Bank Interest Rates, December 31, 1990 Loans to depository institutions Bank Adjustment credit Extended credit2 and seasonal credit1 First 30 days After 30 days of borrowing3 of borrowing All Federal Reserve Banks.. 6.5 6.5 8.05 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. See section for loans to depository institutions may be charged on 201.3(b)(2) of Regulation A. adjustment credit loans of unusual size that result from a 3. For extended-credit loans outstanding more than 30 major operating problem at the borrower's facility. days, a flexible rate somewhat above rates on market Seasonal credit is available to help smaller depository sources of funds ordinarily will be charged, but in no case institutions meet regular, seasonal needs for funds that will the rate charged be less than the basic discount rate cannot be met through special industry lenders and that plus 50 basis points. The flexible rate is reestablished on arise from a combination of expected patterns of movement the first business day of each two-week reserve maintenance in their deposits and loans. period. At the discretion of the Federal Reserve Bank, the See section 201.3(b)(l) of Regulation A. time period for which the basic discount rate is applied may 2. Extended credit is available to depository institutions, be shortened. if similar assistance is not reasonably available from other Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 243 11. Reserve Requirements of Depository Institutionsl Depository institution requirements after implementation of the Type of deposit, and Monetary Control Act deposit interval2 Percent of deposits Effective date Net transaction accounts3-4 $0million-$41.1 million 3 12/18/90 More than $41.1 million 12 12/18/90 Nonpersonal time deposits5-6 0 12/27/90 Eurocurrency liabilities7 0 12/27/90 1. Reserve requirements in effect on Dec. 31, 1990. excess of three per month for the purpose of making Required reserves must be held in the form of deposits with payments to third persons or others. However, MMDAs Federal Reserve Banks or vault cash. Nonmember institu- and similar accounts subject to the rules that permit no tions may maintain reserve balances with a Federal Reserve more than six preauthorized, automatic, or other transfers Bank indirectly on a pass-through basis with certain per month, of which no more than three can be checks, are approved institutions. For previous reserve requirements, not transaction accounts (such accounts are savings see earlier editions of the Annual Report or the Federal deposits). Reserve Bulletin. Under provisions of the Monetary 4. The Monetary Control Act of 1980 requires that the Control Act, depository institutions include commercial amount of transaction accounts against which the 3 percent banks, mutual savings banks, savings and loan associations, reserve requirement applies be modified annually by credit unions, agencies and branches of foreign banks, and 80 percent of the percentage change in transaction accounts Edge corporations. held by all depository institutions, determined as of June 30 2. The Garn-St Germain Depository Institutions Act of each year. Effective Dec. 18,1990 for institutions reporting 1982 (Public Law 97-320) requires that $2 million of quarterly and Dec. 25, 1990 for institutions reporting reservable liabilities of each depository institution be weekly, the amount was increased from $40.4 million to subject to a zero percent reserve requirement. The Board is $41.1 million. to adjust the amount of reservable liabilities subject to this 5. The reserve requirements on nonpersonal time dezero percent reserve requirement each year for the posits with an original maturity of less than 1 xh years were succeeding calendar year by 80 percent of the percentage reduced from 3 percent to 1V4 percent on the maintenance increase in the total reservable liabilities of all depository period that began Dec. 13, 1990, and to zero for the institutions measured on an annual basis as of June 30. No maintenance period that began Dec. 27, 1990, for corresponding adjustment is to be made in the event of a institutions that report weekly. The reserve requirement on decrease. On Dec. 20, 1988, the exemption was raised nonpersonal time deposits with an original maturity of from $3.2 million to $3.4 million. In determing the reserve 1VS years or more has been zero since Oct. 6, 1983. requirements of depository institutions, the exemption 6. For institutions that report quarterly, the reserves on shall apply in the following order: (1) net NOW accounts nonpersonal time deposits with an original maturity of less (NOW accounts less allowable deductions); and (2) net than Vh years will be reduced from 3 percent to zero on other transaction accounts. The exemption applies only to Jan. 17,1991. accounts that would be subject to a 3 percent reserve 7. The reserve requirements on Euroccurency liabilities requirement. were reduced from 3 percent to zero in the same manner 3. Transaction accounts include all deposits on which and on the same dates as were the reserves on nonperthe account holder is permitted to make withdrawals by sonal time deposits with an original maturity of less than negotiable or transferable instruments, payment orders of 1 Vi years (see notes 5 and 6). withdrawal, and telephone and preauthorized transfers in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

244 77th Annual Report, 1990 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 June 6, 1988, 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 20 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 ofGovernors for the first time was the margin "customarily required" by the brokers and established in Regulation T the initial margin required dealers. for writing options on securities, setting it at 30 percent of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 245 13. Principal Assets and Liabilities and Number of Insured Commercial Banks, by Class of Bank, June 30,1990 and 1989l Asset and liability items shown in millions of dollars Member banks Nonmember Item Total banks Total National State June 30,1990 Loans and investments 2,397,535 1,764,200 1,430,081 334,119 633,335 Gross loans 1,850,521 1,387,190 1,134,705 252,485 463,331 Net loans 1,838,093 1,378,584 1,127,800 250,783 459,509 Investments 547,014 377,010 295,376 81,634 170,005 U.S. Treasury and federal agency securities 398,798 274,686 218,947 55,739 124,112 Other 148,216 102,323 76,429 25,895 45,893 Cash assets, total 208,095 161,116 129,473 31,643 46,979 Deposits, total 2,223,873 1,607,549 1,314,078 293,471 616,324 Interbank 48,283 41,506 31,007 10,500 6,777 Other transaction 590,923 435,685 352,317 83,368 155,238 Other nontransaction 1,789,730 1,272,269 1,050,083 222,186 517,461 Equity capital 211,833 150,801 119,348 31,453 61,032 Number of banks 12,436 5,065 4,049 1,016 7,371 June 30,1989 Loans and investments 2,259,724 1,670,985 1,356,609 314,376 588,740 Gross loans 1,757,586 1,327,599 1,088,040 239,559 429,987 Net loans 1,744,053 1,317,906 1,080,141 237,765 426,147 Investments 502,138 343,386 268,569 74,817 158,753 U.S. Treasury and federal agency securities 341,591 229,994 183,622 46,372 111,597 Other 160,548 113,392 84,948 28,445 47,156 Cash assets, total 216,074 167,913 134,291 33,622 48,161 Deposits, total 2,093,348 1,520,418 1,235,267 285,151 572,930 Interbank 52,657 45,449 33,420 12,029 7,208 Other demand 579,765 429,752 344,296 85,456 150,013 Other time and savings 1,650,352 1,176,123 967,596 208,527 474,229 Equity capital 202,278 146,044 113,650 32,395 56,234 Number of banks 12,876 5,305 4,269 1,036 7,571 1. All insured commercial banks in the United States. Details may not sum to totals because of rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

246 77th Annual Report, 1990 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-90, and Month-End 1990{ Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasury and cial Treafederal agency securities draw- sury Period Total o B u o t u ri g g h h t t r u c H e h n p e a d u l s e d r e r - Loans Float2 ot A he ll r3 R F a O e e s d s s t e h e e r t e r v s a r 4 e l Total s G to o c l k d 5 c r i e i c a i« g r n* a c t h g© t - i e f t - s s r i t c o e n a u u n n g r t c d 6 - - y 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 I960.... 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 foFro Fr nRoAteSs sEeRe l ast two pages of table. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 247 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 clearcir- cash Reserve ing lia- With Curc t u io la n - h in o g ld s7 - T su re r a y - F ei o g r n - Other co a u c n - ts4 bal- c b a i a p li n i t t d i a e l s 4 R F B e e a d s n e e r k r v a s e l r c e a o n n in c d y 9 qu R ir e e - d10 Ex- 4,951 288 51 96 25 118 0 0 1,636 0 1,585 51 5,091 385 51 73 28 208 0 0 1,890 0 1,822 68 5,325 218 57 5 18 298 0 0 1,781 0 0 0 4,403 214 96 12 15 285 0 0 1,753 0 1,654 99 4,530 225 11 3 26 276 0 0 1,934 0 0 0 4,757 213 38 4 19 275 0 0 1,898 0 1,884 14 4,760 211 51 19 20 258 0 0 2,220 0 2,161 59 4,817 203 16 8 21 272 0 0 2,212 0 2,256 -44 4,808 201 17 46 19 293 0 0 2,194 0 2.250 -56 4,716 208 18 5 21 301 0 0 2,487 0 2,424 63 4,686 202 23 6 21 348 0 0 2,389 0 2,430 -41 4,578 216 29 6 24 393 0 0 2,355 0 2,428 -73 4,603 211 19 6 22 375 0 0 2,471 0 2,375 96 5,360 222 54 79 31 354 0 0 1,961 0 1,994 -33 5,388 272 8 19 24 355 0 0 2,509 0 1,933 576 5,519 284 3 4 128 360 0 0 2,729 0 1,870 859 5,536 3,029 121 20 169 241 0 0 4,096 0 2,282 1,814 5,882 2,566 544 29 226 253 0 0 5,587 0 2,743 2,844 6,543 2,376 244 99 160 261 0 0 6,606 0 4,622 1,984 6,550 3,619 142 172 235 263 0 0 7,027 0 5,815 1,212 6,856 2,706 923 199 242 260 0 0 8,724 0 5,519 3,205 7,598 2,409 634 397 256 251 0 0 11,653 0 6,444 5,209 8,732 2,213 368 1,133 599 284 0 0 4,026 0 7,411 6,615 11,160 2,215 867 774 586 291 0 0 12,450 0 9,365 3,085 15,410 2,193 799 793 485 256 0 0 13,117 0 11,129 1,988 20,499 2,303 579 1,360 356 339 0 0 12,886 0 11,650 1,236 25,307 2,375 440 1,204 394 402 0 0 14,373 0 12,748 1,625 28,515 2,287 977 862 446 495 0 0 15,915 0 14,457 1,458 28,952 2,272 393 508 314 607 0 0 16,139 0 15,577 562 28,868 1,336 870 392 569 563 0 0 17,899 0 16,400 1,499 28,224 1,325 1,123 642 547 590 0 0 20,479 0 19,277 1,202 27,600 1,312 821 767 750 106 0 0 16,568 0 15,550 1,018 27,741 1,293 668 895 565 714 0 0 17,681 0 16,509 1,172 29,206 1,270 247 526 363 746 0 0 20,056 0 19,667 389 30,433 1,270 389 550 455 111 0 0 19,950 0 20,520 -570 30,781 761 346 423 493 839 0 0 20,160 0 19,397 763 30,509 796 563 490 441 907 0 0 18,876 0 18,618 258 31,158 767 394 402 554 925 0 0 19,005 0 18,903 102 31,790 775 441 322 426 901 0 0 19,059 0 19,089 -30 31,834 761 481 356 246 998 0 0 19,034 0 19,091 -57 32,193 683 358 272 391 1,122 0 0 18,504 0 18,574 -70 32,591 391 504 345 694 841 0 0 18,174 310 18,619 -135 32,869 377 485 217 533 941 0 0 17,081 2,544 18,988 637 33,918 422 465 279 320 1,044 0 0 17,387 2,544 18,988 96 35,338 380 597 247 393 1,007 0 0 17,454 3,262 20,071 645 37,692 361 880 171 291 1,065 0 0 17,049 4,099 20,677 471 39,619 612 820 229 321 1,036 0 0 18,086 4,151 21,663 574 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

248 77th Annual Report, 1990 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items — Year-End 1918-90, and Month-End 1990 ^Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasury and cial Treafederal agency securities draw- sury Period 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 n e g r h ti t f s - r o e u n t c - y Total ou B t o r u i g g h h t tn r c e h p a u s r e - assets4 ic a a c t - e st i a 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 1990 .... 242,643 239,499 3,144 313 1,727 0 40,011 284,697 11,058 10,018 20,368 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. 7. 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; set 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 Reserve liabilities and capital" are shown separately. based on close-of-business figures for the reserve period 5. For the period before Jan. 30, 1934, includes gold two weeks before the report date. held in Federal Reserve Banks and in circulation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 249 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- With Curhold- ac- bilities c t u io la n - ings7 T s r u e r a y - e F i o g r n - Other counts 4 ca a p n it d al4 R F B e e a d s n e e k r r v a s e l r c e a o n n i c d n y 9 qu R i e r - ed10 Ex- 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 ,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 32,044 981 72,497 317 2,542 251 ,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 ,090 0 0 2,968 26,052 8,036 35,197 -1.1031 93,717 460 10,393 352 ,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 ,256 0 0 4,275 31,152 10,538 42,694 -893 125,600 494 4,075 429 1,412 0 0 4,957 29,792 11,429 44,217 -2,835 136,829 441 3,062 411 617 0 0 4,671 27,456 13,654 40,558 675 144,774 443 4,301 505 781 0 117 5,261 25,111 15,576 42,145 -1,442 154,908 429 5,033 328 1,033 0 436 4,990 26,053 16,666 41,391 1,328 171,935 479 3,661 191 851 0 1,013 5,392 20,413 17,t821 39t,179 -9145 183,796 513 5,316 253 867 0 1,126 5,952 20,693 197,488 550 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 1,687 7,129 40,097 n1.a. ni.a. ni.a. 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 36,701 283,000 552 5,809 251 226 0 1,846 9,170 33,746 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 nonmemand scheduled to be bought back under matched sale- ber bank and foreign-agency and branch deposits at Fedpurchase transactions. eral 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. $172; Q3, $112; Q4, $84; 1974-Q1, $67; Q2, $58. The transition period ended with the second quarter of 1974. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

250 77th Annual Report, 1990 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items — Year-End 1918-90, and Month-End 1990^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 h l e l r3 R Fe e d se e r r v a e l Total stock5 c n 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 t n an g d 6 agree- countment 1990 Jan 222,417 221,432 985 412 978 0 39,455 263,262 11,059 8,518 19,666 Feb ... 215,796 215,796 0 1,428 1,059 0 39,284 257,567 11,059 8,518 19,734 Mar... 219,454 219,148 306 2,143 431 0 39,846 261,874 11,059 8,518 19,802 Apr ... 223,806 223,445 361 1,655 659 0 39,984 266,104 11,060 8,518 19,878 May... 224,529 224,344 185 1,304 720 0 40,085 266,638 11,063 8,518 19,951 June... 229,682 228,752 930 888 486 0 40,404 271,460 11,065 8,518 20,024 July... 231,647 230,592 1,055 768 674 0 39,840 272,927 11,065 8,518 20,093 Aug... 233,505 231,366 2,139 885 566 0 39,133 274,089 11,064 8,518 20,145 Sept... 236,501 233,704 2,797 664 752 0 40,785 279,366 11,064 8,518 20,196 Oct.... 235,638 234,588 1,050 411 704 0 41,568 278,321 11,061 8,566 20,261 Nov... 241,193 238,788 2,405 231 482 0 39,803 281,709 11,060 10,018 20,321 Dec ... 242,643 239,499 3,144 313 1,727 0 40,011 284,697 11,058 10,018 20,368 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 251 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 Curc t u io la n - h in o g ld s7 - T s r u e r a y - F ei o g r n - Other co a u c n - ts4 a b n a c l- es c b a i a p li n i t t d i a e l s 4 F R B e e a d s n e e k r r s v al e re a n n c d y qu R ir e e - d 10 Ex- 256,685 468 302 255 364 0 1,624 8,928 36,375 254,662 494 5,867 214 325 0 1,501 8,913 32,962 256,791 524 5,349 215 339 0 1,722 8,997 35,822 260,024 549 4,351 230 316 0 1,606 9,033 37,883 262,397 572 5,054 214 334 0 1,764 9,468 34,797 265,784 582 5,078 250 289 0 1,768 9,788 36,034 1 268,968 568 5,408 243 243 0 ,765 9,176 34,914 n.a 270,536 544 5,415 265 236 0 1,605 9,219 34,610 272,888 525 6,358 258 279 0 1,735 9,909 35,621 274,668 529 5,544 250 309 0 1,732 9,375 34,242 278,216 552 5,543 250 240 0 1,767 9,380 35,543 283,000 552 5,809 251 226 0 1,846 9,170 33,746 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

252 77th Annual Report, 1990 15. Changes in Number of Banking Offices in the United States, 1990l 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. 31,1989.. 13,387 13,011 5,253 4,179 1,074 7,498 260 376 Changes during 1990 New banks 196 194 84 64 20 92 18 2 Ceased banking operation -199 -191 -109 -99 -10 -65 -17 -8 Banks converted into branches -383 -374 -187 -154 -33 -187 0 -9 Other4 33 32 6 0 6 9 17 1 Net change -353 -339 -206-189 -17 -151 18 -14 Banks, Dec. 31,1990.. 13,034 12,672 5,047 3,990 1,057 7,347 278 362 Branches and additional offices, Dec. 31,1989 51,665 48,771 31,764 26,034 5,730 16,899 108 2,894 Changes during 1990 De novo 2,786 2,660 1,556 1,366 190 1,101 126 Banks converted into branches 383 373 225 195 30 148 0 10 Discontinued -729 -680 -490 -390 -100 -188 -2 -49 Sale of branch 0 58 26 45 -19 32 0 -58 Other4 42 60 223 146 77 -165 2 -18 Net change4 2,482 2,471 1,540 1,362 178 928 11 Branches and additional offices, Dec. 31,1990 54,147 51,242 33,304 27,396 5,908 17,827 111 2,905 1. Preliminary. Final data will be available in the Annual 3. As ot Dec. 31, 1988, includes noninsured national Statistical Digest, 1990, forthcoming. trust companies. 2. Includes stock savings banks, nondeposit trust com- 4. Includes interclass changes, panies, private banks, industrial banks, and nonbank banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 253 16. Mergers, Consolidations, Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1990 Ohio Citizens, Toledo, Ohio to acquire certain to the convenience and needs of the community are assets and liabilities of the Fremont Branch of consistent with approval. Diamond Savings and Loan, Findlay, Ohio SUMMARY REPORT BY THE ATTORNEY GENERAL Kent City State Bank, Kent City, Michigan to (1/16/90) acquire the assets and assume the liabilities of the The proposed transaction would not be significantly Coopersville branch of Ameribank Federal adverse to competition. Savings Bank, Muskegon, Michigan BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (1/19/90) (12/22/89) Ohio Citizens (Applicant) has assets of $1.1 billion The proposed transaction would not be significantly and the Fremont branch (Branch) has assets of adverse to competition. $ 10 million. Applicant and Branch do not operate in BASIS FOR APPROVAL BY THE FEDERAL RESERVE the same market. (3/2/90) The banking factors and considerations relating Kent City State Bank (Applicant) has assets of to the convenience and needs of the community are $64.8 million and Coopersville branch (Branch) consistent with approval. has assets of $4.9 million. Applicant and Branch operate in the same market. Manufacturers & Traders Trust Company, The banking factors and considerations relating Buffalo, New York, to merge with Monroe to the convenience and needs of the community are Savings Bank, FSB, Rochester, New York consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the Bank of Livingston, Livingston, Texas, to acquire competitive factors was dispensed with, as autho- the assets and assume the liabilities of Community rized by the Bank Merger Act, to permit the Federal State Bank of Onalaska, Onalaska, Texas Reserve System to act immediately to safeguard the SUMMARY REPORT BY THE ATTORNEY GENERAL depositors of Monroe Savings Bank, FSB. No report received. Request for report on the BASIS FOR APPROVAL BY THE FEDERAL RESERVE competitive factors was dispensed with, as autho- (1/29/90) rized by the Bank Merger Act, to permit the Federal Manufacturers & Traders Trust Company (Appli- Reserve System to act immediately to safeguard the cant) has assets of $4.0 billion and Monroe Savings depositors of Community State Bank. Bank (Bank) has assets of $546.5 million. The BASIS FOR APPROVAL BY THE FEDERAL RESERVE FDIC has recommended immediate action by the (3/5/90) Federal Reserve System to prevent the probable Bank of Livingston (Applicant) has assets of $19 failure of Bank. million and Community State Bank (Bank) has assets of $9.9 million. The FDIC has recommended immediate action by the Federal Reserve System to Iron & Glass Bank, Pittsburgh, Pennsylvania, to prevent the probable failure of Bank. acquire the assets and assume the liabilities of the South Park Township branch of Landmark Savings Association, Pittsburgh, Pennsylvania Crestar Bank, Richmond, Virginia to acquire the Shore Drive branch, Virginia Beach, and the SUMMARY REPORT BY THE ATTORNEY GENERAL Coliseum Crossing branch, Hampton, of Perpet- (2/2/90) ual Savings Bank, FSB, McLean, Virginia The proposed transaction would not be significantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (2/9/90) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be significantly (2/23/90) adverse to competition. Iron & Glass Bank (Applicant) has assets of $99.5 million and the South Park Township branch BASIS FOR APPROVAL BY THE FEDERAL RESERVE (Branch) has assets of $10.9 million. Applicant and (3/5/90) Branch operate in the same market. Crestar Bank (Applicant) has assets of $10.2 billion The banking factors and considerations relating and the Shore Drive and Coliseum Crossing Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

254 77th Annual Report, 1990 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1990—Continued branches (Branches) have assets of $36.6 million. Crestar Bank (Applicant) has assets of $10.2 billion Applicant and Branches operate in the same market. and the Virginia Beach branch (Branch) has assets The banking factors and considerations relating of $10.7 million. Applicant and Branch operate in to the convenience and needs of the community are the same market. consistent with approval. The banking factors and considerations relating to the convenience and needs of the community are Pacific Western Bank, San Jose, California, to consistent with approval. acquire the assets and assume the liabilities of eight branches of the Northern California Division of United Nebraska, North Platte, Nebraska, to Household Bank, FSB, Newport Beach, merge with North Platte Trust Company, North California Platte, Nebraska SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (1/25/90) (3/23/90) 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 (3/8/90) (5/7/90) Pacific Western Bank (Applicant) has assets of $ 1.1 United Nebraska Bank (Applicant) has assets of billion and the Northern California Division $51.2 million and North Platte Trust Company (Branches) has assets of $221.5 million. Applicant (Bank) has assets of $2.3 million. Applicant and and Branches operate in the same market. Bank operate in the same 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. Texas Bank, Weatherford, Texas, to merge with Consolidated Bank & Trust Company, Rich- Citizens National Bank, Weatherford, Texas mond, Virginia, to acquire the assets and assume the liabilities of Peoples Savings and Loan SUMMARY REPORT BY THE ATTORNEY GENERAL Association, Hampton, Virginia and Community No report received. Request for report on the Federal Savings and Loan, Newport News, competitive factors was dispensed with, as autho- Virginia rized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the SUMMARY REPORT BY THE ATTORNEY GENERAL depositors of Citizens National Bank. No report received. Request for report on the competitive factors was dispensed with, as autho- BASIS FOR APPROVAL BY THE FEDERAL RESERVE rized by the Bank Merger Act, to permit the Federal (3/9/90) Reserve System to act immediately to safeguard the Texas Bank (Applicant) has assets of $170.7 million depositors of the Peoples Savings & Loan Associaand Citizens National Bank (Bank) has assets of tion and Community Federal Savings and Loan. $18.6 million. The FDIC has recommended immediate action by the Federal Reserve System to BASIS FOR APPROVAL BY THE FEDERAL RESERVE prevent the probable failure of Bank. (5/18/90) Consolidated Bank & Trust Company (Applicant) Crestar Bank, Richmond, Virginia, to acquire has assets of $64 million and Peoples Savings and the assets and assume the liabilities of the Virginia Loan Association and Community Federal Savings Beach branch of Perpetual Savings Bank, and Loan (Thrifts) have assets of $31 million. The FSB, McLean, Virginia RTC has recommended immediate action by the Federal Reserve to prevent the probable failure of SUMMARY REPORT BY THE ATTORNEY GENERAL Thrifts. (4/13/90) The proposed transaction would not be significantly Marine Bank of Monticello (formerly Deland adverse to competition. State Bank), Deland, Illinois, to acquire the assets BASIS FOR APPROVAL BY THE FEDERAL RESERVE andassume the liabilities oftheMonticeMo, Illinois, (4/26/90) office of Citizens Federal Bank, Miami, Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 255 16.—Continued SUMMARY REPORT BY THE ATTORNEY GENERAL immediate action by the Federal Reserve System to (4/20/90) prevent the probable failure of Branch. The proposed transaction would not be significantly adverse to competition. Northern Neck State Bank, Warsaw, Virginia, BASIS FOR APPROVAL BY THE FEDERAL RESERVE to acquire the assets and assume the liabilities of the (5/25/90) Lappahannock branch of Perpetual Savings Deland State Bank (Applicant) has assets of Bank, FSB, Alexandria, Virginia $82.9 million and the Monticello branch (Branch) SUMMARY REPORT BY THE ATTORNEY GENERAL has assets of $19.2 million. Applicant and Branch (6/15/90) operate in the same market. The proposed transaction would not be significantly The banking factors and considerations relating adverse to competition. to the convenience and needs of the community are consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (6/19/90) Northern Neck State Bank (Applicant) has assets of $86.0 million and the Lappahannock branch Pacific Western Bank, San Jose, California, to (Branch) has assets of $12.3 million. Applicant and acquire the assets and assume the liabilities of Branch operate in the same market. Saratoga Federal Savings and Loan Association, San Jose, California The banking factors and considerations relating to the convenience and needs of the community are SUMMARY REPORT BY THE ATTORNEY GENERAL consistent with approval. No report received. Request for report on the competitive factors was dispensed with, as autho- Arkansas Bank & Trust Company, Hot Springs, rized by the Bank Merger Act, to permit the Federal Arkansas, to acquire the assets and assume the Reserve System to act immediately to safeguard the liabilities of Arkansas Trust Savings Bank (fordepositors of the Saratoga Federal Savings and merly Landmark Savings Bank, FSB), Hot Loan Association. Springs, Arkansas BASIS FOR APPROVAL BY THE FEDERAL RESERVE (6/1/90) SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the Pacific Western Bank (Applicant) has assets of competitive factors was dispensed with, as autho- $1.1 billion and Saratoga Federal Savings and Loan rized by the Bank Merger Act, to permit the Federal Association (Thrift) has assets of $92.1 million. Reserve System to act immediately to safeguard the The OTS has recommended immediate action by depositors of Landmark Savings Bank. the Federal Reserve System to prevent the probable failure of Thrift. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (6/22/90) Arkansas Bank & Trust Company (Applicant) has Mercantile Bank, Kansas City, Missouri, to assets of $294 million and Landmark Savings Bank acquire the assets and liabilities of the Blue Springs (Thrift) has assets of $173.8 million. The RTC has branch of Blue Valley Federal Savings & Loan recommended immediate action by the Federal Association, Kansas City, Missouri Reserve System to prevent the probable failure of Thrift. SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the competitive factors was dispensed with, as autho- First Exchange Bank of North St. Louis County, rized by the Bank Merger Act, to permit the Federal Florrisant, Missouri, to acquire the assets and Reserve System to act immediately to safeguard the assume the liabilities of Cass Federal Savings depositors of the Blue Valley Federal Savings & and Loan Association of St. Louis, Florrisant, Loan Association. Florrisant, Missouri BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (6/6/90) No report received. Request for report on the Mercantile Bank (Applicant) has assets of $490.6 competitive factors was dispensed with, as authomillion and Blue Springs branch (Branch) has assets rized by the Bank Merger Act, to permit the Federal of $696.5 million. The RTC has recommended Reserve System to act immediately to safeguard the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

256 77th Annual Report, 1990 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1990—Continued depositors of Cass Federal Savings and Loan SUMMARY REPORT BY THE ATTORNEY GENERAL Association of St. Louis. No report received. Request for report on the competitive factors was dispensed with, as autho- BASIS FOR APPROVAL BY THE FEDERAL RESERVE (6/22/90) rized by the Bank Merger Act, to permit the Federal First Exchange Bank of North St. Louis County Reserve System to act immediately to safeguard the (Applicant) has assets of $75.6 million and Cass depositors of American National Bank. Federal Savings and Loan Association (Thrift) has BASIS FOR APPROVAL BY THE FEDERAL RESERVE assets of $58.1 million. The RTC has recommended (7/12/90) immediate action by the Federal Reserve System to Sulphur Springs State Bank (Applicant) has assets prevent the probable failure of Thrift. of $135.7 million and American National Bank (Bank) has assets of $29.1 million. The OCC has Citizens Trust and Savings Bank, South Haven, recommended immediate action by the Federal Michigan, to acquire the assets and assume the Reserve System to prevent the probable failure of liabilities of the Allegan and Paw Paw branches of Bank. Fidelity Federal Savings and Loan Association, Kalamazoo, Michigan Albermarle Bank and Trust Company, d/b/a SUMMARY REPORT BY THE ATTORNEY GENERAL F&M Bank-Charlottesville, Charlottesville, Vir- (5/4/90) ginia, to merge with Peoples Bank of Central The proposed transaction would not be significantly Virginia, Lovingston, Virginia adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (6/22/90) (6/28/90) The proposed transaction would not be significantly Citizens Trust and Savings Bank (Applicant) has adverse to competition. assets of $141.2 million and the Allegan and Paw BASIS FOR APPROVAL BY THE FEDERAL RESERVE Paw branches (Branches) have assets of $25.8 (7/19/90) million. Applicant and Branches operate in the Albermarle Bank and Trust Company (Applicant) same market. has assets of $2.4 million and Peoples Bank of The banking factors and considerations relating Central Virginia (Bank) has assets of $35.6 million. to the convenience and needs of the community are Applicant and Bank do not operate in the same consistent with approval. market. The banking factors and considerations relating Valley Bank of Nevada, Las Vegas, Nevada, to to the convenience and needs of the community are acquire the Dayton Nevada branch of Comstock consistent with approval. Bank, Carson City, Nevada SUMMARY REPORT BY THE ATTORNEY GENERAL Signet Bank/Virginia, Richmond, Virginia, to (6/1/90) acquire the assets and assume the liabilities of the The proposed transaction would not be significantly First Colonial branch of Perpetual Savings Bank, adverse to competition. FSB, McLean, Virginia BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (7/2/90) (6/29/90) Valley Bank of Nevada (Applicant) has assets of The proposed transaction would not be significantly $2.8 billion and the Dayton branch (Branch) has adverse to competition. assets of $4.1 million. Applicant and Branch operate BASIS FOR APPROVAL BY THE FEDERAL RESERVE in the same market. (7/20/90) The banking factors and considerations relating Signet Bank/Virginia (Applicant) has assets of to the convenience and needs of the community are $8.8 billion and the First Colonial branch (Branch) consistent with approval. has assets of $8.5 million. Applicant and Branch operate in the same market. Sulphur Springs State Bank, Sulphur Springs, The banking factors and considerations relating Texas, to merge with American National Bank, to the convenience and needs of the community are Greenville, Texas consistent with approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 257 16.-Continued First Virginia Bank-Planters, Bridgewater, assets of $6 million. The RTC has recommended Virginia, to acquire the assets and assume the immediate action by the Federal Reserve System to liabilities of the Harrisonburg branch of CorEast prevent the probable failure of Branch. Savings Bank, FSB, Harrisonburg, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL Peoples Bank of Montross, Virginia, to acquire (8/17/90) the assets and assume the liabilities of a branch of The proposed transaction would not be significantly Newport News Savings Bank, Newport News, adverse to competition. Virginia BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (8/6/90) (8/17/90) First Virginia Bank-Planters (Applicant) has assets The proposed transaction would not be significantly of $79.2 million and the Harrisonburg branch adverse to competition. (Branch) has assets of $28.6 million. Applicant and BASIS FOR APPROVAL BY THE FEDERAL RESERVE Branch operate in the same market. (8/24/90) The banking factors and considerations relating Peoples Bank of Montross (Applicant) has assets of to the convenience and needs of the community are $43.8 million and the branch (Branch) has assets of consistent with approval. $8.7 million. Applicant and Branch do not operate in the same market. First City, Texas-Corpus Christi, Texas, to The banking factors and considerations relating merge with First National Bank of Corpus to the convenience and needs of the community are Christi, Corpus Christi, Texas consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the Centura Bank, Rocky Mount, North Carolina, competitive factors was dispensed with, as autho- to merge with Planters National Bank & Trust rized by the Bank Merger Act, to permit the Federal Company, Rocky Mount, North Carolina; Peo- Reserve System to act immediately to safeguard the ples Bank & Trust Company, Rocky Mount, depositors of First National Bank of Corpus Christi. North Carolina; and Peoples Bank Triad, Winston-Salem, North Carolina BASIS FOR APPROVAL BY THE FEDERAL RESERVE (8/24/90) SUMMARY REPORT BY THE ATTORNEY GENERAL First City, Texas, Corpus Christi (Applicant) has (8/17/90) assets of $583 million and First National Bank of The proposed transaction would not be significantly Corpus Christi (Bank) has assets of $116.6 million. adverse to competition. The OCC has recommended immediate action by BASIS FOR APPROVAL BY THE FEDERAL RESERVE the Federal Reserve System to prevent the probable (8/30/90) failure of Branch. Centura Bank (Applicant) will derive its assets from the banks (Banks) which have assets of Citizens First State Bank of Walnut, Walnut, $2.6 billion. Applicant and Banks operate in the Illinois, to acquire the assets and assume the same market. liabilities of the Princeton branch of Chillicothe The banking factors and considerations relating First Savings and Loan Association, Chillocothe, to the convenience and needs of the community are Illinois consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL AmSouth Bank of Tennessee, Columbia, Tennes- No report received. Request for report on the see, to merge with First Bank of Maury County, competitive factors was dispensed with, as autho- Columbia, Tennessee rized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the SUMMARY REPORT BY THE ATTORNEY GENERAL depositors of the Princeton branch. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (8/24/90) BASIS FOR APPROVAL BY THE FEDERAL RESERVE Citizens First State Bank (Applicant) has assets of (9/10/90) $28 million and the Princeton branch (Branch) has AmSouth Bank of Tennessee (Applicant) will derive Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

258 77th Annual Report, 1990 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1990—Continued its assets from First Bank of Maury County (Bank) SUMMARY REPORT BY THE ATTORNEY GENERAL which has assets of $5 million. Applicant and Bank (8/14/90) operate in the same market. The proposed transaction would not be significantly The banking factors and considerations relating adverse to competition. to the convenience and needs of the community are BASIS FOR APPROVAL BY THE FEDERAL RESERVE consistent with approval. (9/28/90) Chemical Bank (Applicant) has assets of $48.4 Valley Bank & Trust Company, Grand Forks, billion and the branch (Branch) has assets of North Dakota, to acquire the assets and assume $118.0 million. Applicant and Branch operate in the liabilities of New Grand Forks State Bank the same market. (formerly Midwest Federal Savings Bank of The banking factors and considerations relating Minot, Minot, North Dakota), Grand Forks, to the convenience and needs of the community are North Dakota consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL Comerica Bank-Detroit, Detroit, Michigan to No report received. Request for report on the acquire the assets and assume the liabilities of competitive factors was dispensed with, as authoeighteen Michigan branches of Empire Federal rized by the Bank Merger Act, to permit the Federal Bank of America, Buffalo, New York Reserve System to act immediately to safeguard the depositors of Midwest Federal Savings Bank of SUMMARY REPORT BY THE ATTORNEY GENERAL Minot. No report received. Request for report on the competitive factors was dispensed with, as autho- BASIS FOR APPROVAL BY THE FEDERAL RESERVE rized by the Bank Merger Act, to permit the Federal (9/20/90) Reserve System to act immediately to safeguard the Valley Bank & Trust Company (Applicant) has depositors of the 18 Michigan branches. assets of $82.5 million and Midwest Federal Savings Bank (Thrift) has assets of $497.8 million. BASIS FOR APPROVAL BY THE FEDERAL RESERVE The RTC has recommended immediate action by (9/28/90) the Federal Reserve System to prevent the probable Comerica Bank (Applicant) has assets of $9.7 failure of Thrift. billion and the 18 Michigan branches (Branches) have assets of $1.1 billion. The RTC has recommended immediate action by the Federal Reserve Bank of Forest, Forest, Mississippi to acquire the System to prevent the probable failure of Empire assets and assume the liabilities of Forest Bank Federal Savings Bank of America. for Savings, FSB (formerly Central Savings Bank), Jackson, Mississippi Crestar Bank, Richmond, Virginia to acquire the SUMMARY REPORT BY THE ATTORNEY GENERAL assets and assume the liabilities of Seasons Fed- No report received. Request for report on the eral Savings Bank, Richmond, Virginia competitive factors was dispensed with, as autho- SUMMARY REPORT BY THE ATTORNEY GENERAL rized by the Bank Merger Act, to permit the Federal No report received. Request for report on the Reserve System to act immediately to safeguard the competitive factors was dispensed with, as authodepositors of Central Savings Bank. rized by the Bank Merger Act, to permit the Federal BASIS FOR APPROVAL BY THE FEDERAL RESERVE Reserve System to act immediately to safeguard the (9/28/90) depositors of Seasons Federal Savings Bank. Bank of Forest (Applicant) has assets of $142 BASIS FOR APPROVAL BY THE FEDERAL RESERVE million and Central Savings Bank, FSB (Thrift) has (9/28/90) assets of $27.9 million. The RTC has recommended Crestar Bank (Applicant) has assets of $10.9 billion immediate action by the Federal Reserve System to and Seasons Federal Savings Bank (Thrift) has safeguard the depositors of Thrift. assets of $186.1 million. The RTC has recommended immediate action by the Federal Reserve Chemical Bank, New York, New York, to acquire System to prevent the probable failure of Thrift. the assets and assume the liabilities of a branch of The Greater New York Savings Bank, New York, UniSouth Banking Corporation, Columbus, New York Mississippi, to acquire the assets and assume the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 259 16.-Continued liabilities of the Tupelo and Fulton, Mississippi, The Peoples Bank, Pratt, Kansas, to acquire the branches of Eastover Bank for Savings, Jackson, assets and assume the liabilities of the Pratt branch Mississippi of Valley Savings, Hutchinson, Kansas SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (8/17/90) No report received. Request for report on the The proposed transaction would not be significantly competitive factor was dispensed with, as authoadverse to competition. rized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the BASIS FOR APPROVAL BY THE FEDERAL RESERVE depositors of Valley Savings. (10/2/90) UniSouth Banking Corporation (Applicant) has BASIS FOR APPROVAL BY THE FEDERAL RESERVE assets of $141.3 million and the Tupelo and Fulton (11/9/90) branches (Branches) have assets of $12 million. Peoples Bank (Applicant) has assets of $142.9 Applicant and Branches do not operate in the same million and the Pratt branch (Branch) has assets of market. $4.8 million. The RTC has recommended immedi- The banking factors and considerations relating ate action by the Federal Reserve System to prevent to the convenience and needs of the community are the probable failure of Valley Savings. consistent with approval. Crestar Bank, Richmond, Virginia, to merge Trust Company Bank, Atlanta, Georgia, to with Community Trust Bank, Portsmouth, acquire the assets and assume the liabilities of 18 Virginia Georgia branches of Anchor Savings Bank, SUMMARY REPORT BY THE ATTORNEY GENERAL Hewlett, New York (11/9/90) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be significantly (8/17/90) adverse to competition. The proposed transaction would not be significantly BASIS FOR APPROVAL BY THE FEDERAL RESERVE adverse to competition. (11/14/90) BASIS FOR APPROVAL BY THE FEDERAL RESERVE Crestar Bank (Applicant) has assets of $10.9 billion (10/22/90) and Community Trust Bank (Bank) has assets of Trust Company Bank (Applicant) has assets of $22 million. Applicant and Bank do not operate in $31.2 billion and the branches (Branches) have the same market. assets of $403 million. Applicant and Branches do The banking factors and considerations relating not operate in the same 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. State Bank of Croswell, Croswell, Michigan, to acquire the assets and assume the liabilities of the Banco de Ponce, Puerto Rico, to merge with Port Huron branch of First Federal State Bank Banco Popular, Hato Rey, Puerto Rico and Trust, Pontiac, Michigan SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (7/26/90) (10/26/90) 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 (11/5/90) (11/16/90) Banco de Ponce (Applicant) has assets of $2.9 State Bank of Croswell (Applicant) has assets of billion and Banco Popular (Bank) has assets of $5.8 $74.9 million and the Port Huron branch (Branch) billion. Applicant and Bank operate in the same has assets of $16.4 million. Applicant and Branch market. do not operate in the same 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. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

260 77th Annual Report, 1990 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1990—Continued The Ohio Bank, Findlay, Ohio, to merge with prevent the probable failure of First Federal Savings Citizens Community Bank, Mount Blanchard, Bank of Kansas. Ohio SUMMARY REPORT BY THE ATTORNEY GENERAL American Trust & Savings Bank, Dubuque, (9/26/90) Iowa, to acquire the assets and assume the liabilities The proposed transaction would not be significantly of the Dyersville branch of Midland Savings adverse to competition. Bank, FSB, Des Moines, Iowa BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (11/29/90) (10/10/90) The Ohio Bank (Applicant) has assets of $234.7 The proposed transaction would not be significantly million and Citizens Community Bank (Bank) has adverse to competition. assets of $23 million. Applicant and Bank do not BASIS FOR APPROVAL BY THE FEDERAL RESERVE operate in the same market. (12/14/90) The banking factors and considerations relating American Trust & Savings Bank (Applicant) has to the convenience and needs of the community are assets of $283.5 million and the Dyersville branch consistent with approval. (Branch) has assets of $11.8 million. Applicant and Branch do not operate in the same market. Bank of Lakeview, Lakeview, Michigan, to The banking factors and considerations relating acquire the assets and assume the liabilities of the to the convenience and needs of the community are Morley branch of Independent Bank-West consistent with approval. Michigan, Rockford, Illinois SUMMARY REPORT BY THE ATTORNEY GENERAL The Stock Exchange Bank, Caldwell, Kansas, to (11/20/90) acquire the assets and assume the liabilities of the The proposed transaction would not be significantly Caldwell branch of First Federal Savings Bank adverse to competition. of Kansas, Wellington, Kansas BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (11/30/90) No report received. Request for report on the Bank of Lakeview (Applicant) has assets of $62.1 competitive factors was dispensed with, as authomillion and the Morley branch (Branch) has assets rized by the Bank Merger Act, to permit the Federal of $2.3 million. Applicant and Branch do not Reserve System to act immediately to safeguard the operate in the same market. depositors of First Federal Savings Bank of Kansas. The banking factors and considerations relating BASIS FOR APPROVAL BY THE FEDERAL RESERVE to the convenience and needs of the community are (12/14/90) consistent with approval. The Stock Exchange Bank (Applicant) has assets of $24 million and the Caldwell branch (Branch) has American State Bank, Great Bend, Kansas, to assets of $3 million. The OTS has recommended acquire the assets and assume the liabilities of the immediate action to prevent the probable failure of Great Bend branch of First Federal Savings First Federal Savings Bank of Kansas. Bank of Kansas, Wellington, Kansas SUMMARY REPORT BY THE ATTORNEY GENERAL Mergers Approved Involving Wholly Owned No report received. Request for report on the Subsidiaries of the Same Bank Holding competitive factors was dispensed with, as autho- Company rized by the Bank Merger Act, to permit the Federal The following transactions involve banks that are Reserve System to act immediately to safeguard the subsidiaries of the same bank holding company. In depositors of First Federal Savings Bank of Kansas. each case, the summary report by the Attorney BASIS FOR APPROVAL BY THE FEDERAL RESERVE General indicates that the transaction would not (12/14/90) have a significantly adverse effect on competition American State Bank (Applicant) has assets of $ 106 because the proposed merger is essentially a million and the Great Bend branch (Branch) has corporate reorganization. The Board of Governors, assets of $56 million. The OTS has recommended the Federal Reserve Bank, or the Secretary of the immediate action by the Federal Reserve System to Board of Governors, whichever approved the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 261 16.-Continued application, determined that the competitive effects concerned, as well as the convenience and needs of of the proposed transaction, the financial and the community to be served were consistent with managerial resources and prospects of the banks approval. Assets Institutionl (millions Date of approval of dollars) First Illini Bank,Galesburg, Illinois 178 1/13/90 Merger Madison Park Bank, Peoria, Illinois 45 Abingdon Bank & Trust Company, Abingdon, Illinois 17 Community Bank & Trust Company, Canton, Illinois 37 First Virginia Bank, Damascus, Virginia 58 3/2/90 Merger First Virginia Bank, Cumberlands, Clintwood, Virginia 63 First Virginia Bank South Central, Lynchburg, Virginia 58 3/2/90 Merger First Virginia Bank South, Hurt, Virginia 94 United Jersey Bank/Commerical Trust, Jersey City, Jersey 1,000 3/19/90 Merger United Jersey Bank, Hackensack, New Jersey 5,300 Deland State Bank, Deland, Illinois 6 4/6/90 Merger National Bank of Monticello, Monticello, Virginia 77 First of America Bank-North Michigan, Traverse City, Michigan 286 5/10/90 Merger First of America Bank, Alpence, Michigan 120 Caliber Bank (formerly Business Bank), Phoenix, Arizona 47 6/1/90 Merger VOC Acquisition Bank, Phoenix, Arizona , 118 Trust Company Bank, Atlanta, Georgia 5,797 6/12/90 Merger Trust Company of Douglas County, Georgia 94 Bank of Commerce, Hamtramck, Michigan 430 6/16/90 Merger The State Bank of Fraser, Fraser, Michigan 137 Boatmen's Bank of Carthage, Carthage, Missouri 88 7/11/90 Merger Boatmen's National Bank of Neosho, Neosho, Missouri 57 First America Bank-No. Michigan, 278 7/19/90 Merger First America Bank-Manistee, Lewiston, Michigan 64 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

262 77th Annual Report, 1990 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1990-Continued Assets Date of Institutionl (millions approval of dollars) Crestar Bank, Richmond, Virginia 11,000 8/13/90 Merger The National Bank of Northern Virginia, Sterling, Virginia 24 Star Bank, Kenton County, Covington, Kentucky 256 9/10/90 Merger Star Bank, Northern Kentucky, Verona, Kentucky 30 North Shore Bank of Commerce, Duluth, Minnesota 67 10/11/90 Merger Airport State Bank of Duluth, Duluth, Minnesota 17 Trust Company Bank, Atlanta, Georgia 6,500 12/18/90 Merger Trust Company of Carroll County, Bowder, Georgia 74 Trust Company of Cobb County, N. A., Atlanta, Georgia 360 Trust Company of Henry County, N. A., McDonough, Georgia 109 Trust Company of Clayton County, Jonesboro, Georgia 132 Trust Company of Gwinnett, Lawrenceville, Georgia 248 Trust Company of Rockdale, Conyers, Georgia 197 Montana Bank of Billings, Billings, Montana 14 12/27/90 Merger Montana Bank of Baker, Baker, Montana 17 Montana Bank of Bozeman, N. A., Bozeman, Montana 38 Montana Bank of Butte, N. A., Butte, Montana 45 Montana Bank of Circle, Circle, Montana 17 Montana Bank of Forsyth, Forsyth, Montana 8 Montana Bank of Livington, Livingston, Montana 7 Montana Bank of South Missoula, Missoula, Montana 68 Montana Bank of Red Lodge, Red Lodge, Montana 19 Montana Bank of Roundup, N. A., Roundup, Montana 14 Montana Bank of Sidney, Sidney, Montana 28 Montana Bank of Mineral County, Superior, Montana 17 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 263 16.—Continued Mergers Approved Involving a Nonoperating surviving bank by the holding company, the merger Institution and 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, whichever approved the on competition; they merely facilitate the acquisiapplication, determined that the proposal would, in tion of the voting shares of a bank (or banks) by a itself, have no adverse competitive effects and that holding company. In such cases, the summary the financial factors and considerations relating to report by the Attorney General indicates that the the convenience and needs of the community were transaction will merely combine an existing bank 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 Bank, Cockeysville, Maryland 1/26/90 Merger Clifton Trust Bank, Cockeysville, Maryland 66 Metro Interim Bank, Atlanta, Georgia 1/26/90 Merger Metro Bank, Atlanta, Georgia 98 Citizens Interim Bank, Sandusky, Ohio 3/19/90 Merger Castalia Banking Company, Castalia, Ohio 46 Peoples Interim Bank, Inc., Mullens, West Virginia 3/21/90 Merger Peoples Bank of Mullens, 88 Clanton Interim Bank, Clanton, Alabama 8/17/90 Merger Peoples Savings Bank, Clanton, Alabama 78 Manufacturers & Traders Interim Bank, Buffalo, New York 9/28/90 Merger Manufacturers & Traders Trust Company, Buffalo, New York 4,296 Plaza Merger Company, Miami, Florida 12/19/90 Merger Plaza Bank of Miami, Miami, Florida 64 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

266 77th Annual Report, 1990 Board of Governors of the Federal Reserve System December 31,1990 Term expires ALAN GREENSPAN of New York, Chairman1 January31,1992 MARTHA R. SEGER of Michigan January 31,1998 WAYNE D. ANGELL of Kansas January 31,1994 EDWARD W. KELLEY, JR., of Texas January 31,2004 JOHN P. LAWARE of Massachusetts January 31,2002 DAVID W. MULLINS JR., of Missouri January 31,1996 VACANCY January 31,2000 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 Diane E. Werneke, Special Assistant to DTVTSTON T Board for Congressional Liaison LEGAL UIVISION J. Virgil Mattingly, Jr., General Counsel DIVISION OF MONETARY AFFAIRS Donald L. Kohn, Director &,„„„{ Oliver Ireknd Msociate David E. Lindsey, Deputy Director Counsel Brian F. Madigan, Assistant Director Riki R. Tigert, Associate General Counsel c Richard D. Porter, Assistant Director Scott G. Alvarez, Assistant General Counsel Normand R. V. Bernard, Special Assistant MaryEllen A. Brown, Assistant to the Board General Counsel to tne OFFICE OF STAFF DIRECTOR DIVISION OF RESEARCH FOR MANAGEMENT AND STATISTICS S. David Frost, Staff Director Michael J. Prell, Director William C. Schneider, Jr., Project Director Edward C. Ettin, Deputy Director Portia W. Thompson, Equal Employment Thomas D. Simpson, Associate Director Opportunity Programs Officer 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, Staff Director Peter A. Tinsley, Deputy Associate Director OFFICE OF THE EXECUTIVE Myron L. Kwast, Assistant Director DIRECTOR FOR INFORMATION Patrick M. Parkinson, Assistant Director RESOURCES MANAGEMENT Martha S. Scanlon, Assistant Director Allen E. Beutel, Executive Director Joyce K. Zickler, Assistant Director Stephen R. Malphrus, Deputy Executive Levon H. Garabedian, Assistant Director Director (Administration) Marianne M. Emerson, Assistant Director Edward T. Mulrenin, Assistant Director 1. The designation as Chairman expires on August 10, 1991, unless the services of this member of the Board shall Digitized hfaovre F teRrmAiSnaEteRd sooner. The designation of Vice Chairman had not been assigned as of Dec. 31,1990. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 267 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 DIVISION OF HUMAN Robert F. Gemmill, Staff Adviser RESOURCES MANAGEMENT Donald B. Adams, Assistant Director David L. Shannon, Director Dale W. Henderson, Assistant Director John R. Weis, Associate Director Peter Hooper, III, Assistant Director Anthony V. DiGioia, Assistant Director Karen H. Johnson, Assistant Director Joseph H. Hayes, Jr., Assistant Director Ralph W. Smith, Jr., Assistant Director Fred Horowitz, Assistant Director DIVISION OF FEDERAL RESERVE BANK OPERATIONS AND PAYMENT SYSTEMS DIVISION OF SUPPORT SERVICES ClydeH. Farnsworth, Jr., Director Robert E. Frazier, Director David L. Robinson, Deputy Director George M. Lopez, Assistant Director Bruce J. Summers, Deputy Director2 David L. Williams, Assistant Director Charles W. Bennett, Assistant Director Jack Dennis, Jr., Assistant Director OFFICE OF THE CONTROLLER Earl G. Hamilton, Assistant Director George E. Livingston, Controller John H. Parrish, Assistant Director Stephen J. Clark, Assistant Controller Louise L. Roseman, Assistant Director Darrell R. Pauley, Assistant Controller Florence M. Young, Assistant Director DIVISION OF HARDWARE DIVISION OF BANKING SUPERVISION AND SOFTWARE SYSTEMS AND REGULATION Bruce M. Beardsley, Director William Taylor, Staff Director Day W. Radebaugh, Assistant Director Don E. Kline, Associate Director Elizabeth B. Riggs, Assistant Director Frederick M. Struble, Associate Director William A. Ryback, Deputy Associate Director DIVISION OF APPLICATIONS Stephen C. Schemering, Deputy DEVELOPMENT AND STATISTICAL Associate Director SERVICES William R. Jones, Director Richard Spillenkothen, Deputy Robert J. Zemel, Associate Director Associate Director Pokyung Kim, Assistant Director Herbert A. Biern, Assistant Director Raymond H. Massey, Assistant Director Joe M. Cleaver, Assistant Director Richard C. Stevens, Assistant Director Roger T. Cole, Assistant Director James I. Garner, Assistant Director James D. Goetzinger, Assistant Director OFFICE OF THE INSPECTOR GENERAL Michael G. Martinson, Assistant Director Brent L. Bowen, Inspector General Robert S. Plotkin, Assistant Director Barry R. Snyder, Assistant Inspector Sidney M. Sussan, Assistant Director General Laura M. Homer, Securities Credit Officer 2. On loan from Federal Reserve Bank of Richmond. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

268 77th Annual Report, 1990 Federal Open Market Committee December 31,1990 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 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 EDWARD W. KELLEY, JR., Board of Governors JOHN P. LAWARE, Board of Governors DAVID W. MULLINS JR. , Board of Governors MARTHA R. SEGER, Board of Governors GARY H. STERN, President, Federal Reserve Bank of Minneapolis Alternate Members ROBERT B. BLACK, President, Federal Reserve Bank of Richmond ROBERT P. FORRESTAL, President, Federal Reserve Bank of Atlanta SILAS KEEHN, President, Federal Reserve Bank of Chicago ROBERT T. PARRY, President, Federal Reserve Bank of San Francisco JAMES H. OLTMAN, First Vice President, Federal Reserve Bank of New York Officers DONALD L. KOHN, RICHARD W. LANG, Secretary and Economist Associate Economist NORMAND R.V. BERNARD, DAVID E. LINDSEY, Assistant Secretary Associate Economist GARY P. GILLUM, LARRY J. PROMISEL, Deputy Assistant Secretary Associate Economist J. VIRGIL MATTINGLY, ARTHUR J. ROLNICK, General Counsel Associate Economist ERNEST T. PATRIKIS, HARVEY ROSENBLUM, Deputy General Counsel Associate Economist MICHAEL J. PRELL, CHARLES J. SIEGMAN, Economist Associate Economist EDWIN M. TRUMAN, THOMAS D. SIMPSON, Economist Associate Economist JOHN M. DAVIS, DAVID J. STOCKTON, 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 1990, 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 269 Federal Advisory Council December 31,1990 Members District 1 -IRA STEPANIAN, Chairman and Chief Executive Officer, Bank of Boston, Boston, Massachusetts District 2-WILLARD C. BUTCHER, Chairman and Chief Executive Officer, The Chase Manhattan Bank, N. A., New York, New York District 3-TERRENCE A. LARSEN, Chairman, President, and Chief Executive Officer, CoreStates Financial Corp., Philadelphia, Pennsylvania District 4-THOMAS H. O'BRIEN, Chairman, President, and Chief Executive Officer, PNC Financial Corp, Pittsburgh, Pennsylvania District 5 -FREDERICK DEANE, JR. , Chairman Emeritus and Chairman of the Executive Committee, Signet Banking Corporation, Richmond, Virginia District 6-Vacancy District 7-B. KENNETH WEST, Chairman and Chief Executive Officer, Harris Bankcorp, Inc. and Harris Trust and Savings Bank, Chicago, Illinois District 8-DAN W. MITCHELL, Chairman, Old National Bancorp and Old National Bank of Evansville, Evansville, Indiana 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 -RONALD G. STEINHART, Chairman and Chief Executive Officer, Team Bank, Dallas, Texas District 12-PAUL HAZEN, President and Chief Operating Officer, Wells Fargo and Co., San Francisco, California Officers THOMAS H. O'BRIEN, President PAUL HAZEN, Vice President HERBERT V. PROCHNOW, Secretary WILLIAM J. KORSVK, Associate Secretary Directors B. KENNETH WEST LLOYD P. JOHNSON The Federal Advisory Council met on Feb- the twelve Federal Reserve Districts, is ruary 1-2, May 3-4, September 6-7, and required by law to meet in Washington at least November 1-2, 1990. The Board of Gover- four times each year and is authorized by the nors met with the council on February 2, May Federal Reserve Act to consult with, and 4, September 7, and November 2,1990. 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

270 77th Annual Report, 1990 Consumer Advisory Council December 31,1990 Members GEORGE H. BRAASCH, Corporate Credit Counsel, Spiegel, Inc., Oak Brook, Illinois BETTY TOM CHU, Chairman and Chief Executive Officer, Trust Savings Bank, Arcadia, California CLIFF E. COOK, Vice President and Compliance Officer, Puget Sound National Bank, Tacoma, Washington JERRY D. CRAFT, Executive Vice President, First National Bank of Atlanta, Atlanta, Georgia DONALD C. DAY, President, New England Securities Corporation, Boston, Massachusetts R. B. DEAN, JR., Administrator, Community and Consumer Affairs, South Carolina National Bank, Columbia, South Carolina WILLIAM C. DUNKELBERG, Dean, School of Business and Professor of Economics, Temple University, Philadelphia, Pennsylvania JAMES FLETCHER, President and Director; South Shore Bank-Chicago, Chicago, Illinois GEORGE C. GALSTER, Professor of Economics, The College of Wooster, Wooster, Ohio E. THOMAS GARMAN, Professor of Consumer Studies, Virginia Polytechnic Institute and State University, Blacksburg, Virginia DEBORAH B. GOLDBERG, Reinvestment Specialist, Center for Community Change, Washington, D.C. MICHAEL M. GREENFIELD, Professor of Law, Washington University, St. Louis, Missouri ROBERT HESS, President, Wright Patman Congressional Federal Credit Union, Washington, D.C. BARBARA KAUFMAN, Co-Director, KCBS Call for Action, San Francisco, California KATHLEEN E. KEEST, Staff Attorney, National Consumer Law Center, Boston, Massachusetts A. J. KING, Chairman and Chief Executive Officer, Valley Bank of Kalispell, Kalispell, Montana COLLEEN D. MCCARTHY, Executive Director, Kansas City Neighborhood Alliance, Kansas City, Missouri MICHELLE S. MEIER, Counsel for Government Affairs, Consumers Union, Washington, D.C. LINDA K. PAGE, President and Chief Operating Officer, Star Bank Central, Columbus, Ohio BERNARD F. PARKER JR., Executive Director, Community Resource Projects, Detroit, Michigan SANDRA PHILLIPS, Executive Director, Pittsburgh Partnership for Neighborhood Development, Pittsburgh, Pennsylvania VINCENT P. 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 NANCY HARVEY STEORTS, President, Nancy Harvey Steorts and Associates, Dallas, Texas ALAN M. SILBERSTEIN, Executive Vice President, Chemical Bank, New York, New York RALPH E. SPURGIN, President and Chief Executive Officer, Limited Credit Services, Inc., Columbus, Ohio DAVID B. WARD, Of Counsel, Gebhardt and Kiefer, Clinton, New Jersey LAWRENCE WINTHROP, President, Consumer Credit Counseling Service of Oregon, Inc., Portland, Oregon Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 271 Consumer Advisory Council—Continued Officers WILLIAM E. ODOM, Chairman JAMES W. HEAD, Vice Chairman The Consumer Advisory Council met with financial industry, and representatives of members of the Board of Governors on consumer and community interests. It was March 29, June 28, and October 25, 1990. established pursuant to the 1976 amendments The council is composed of academics, state to the Equal Credit Opportunity Act to advise government officials, representatives of the the Board on consumer financial services. Thrift Institutions Advisory Council December 31,1990 Members CHARLOTTE CHAMBERLAIN, Vice Chairman, New America Saving, Los Angeles, California DAVID L. HATFIELD, President, Fidelity Federal Savings and Loan Association, Kalamazoo, Michigan LYNN W. HODGE, President and Chief Executive Officer, United Savings Bank Inc., Greenwood, South Carolina 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 ELLIOT K. KNUTSON, Chairman and Chief Execuive Officer, Washington Federal Savings and Loan Association, Seattle, Washington JOHN WM. LAISLE, President and Chief Executive Officer, MidFirst Bank SSB, Oklahoma City, Oklahoma PHILIP E. LAMB, Chairman and Chief Executive Officer, Springfield Institution for Savings, Springfield, Massachusetts 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 DONALD B. SHACKELFORD, President MARION O. SANDLER, Vice President The members of the Thrift Institutions Advi- unions, savings and loan associations, and sory Council met with the Board of Governors savings banks, consults with and advises the on February 27, May 8, September 18, and Board on issues pertaining to the thrift November 27, 1990. The council, which is industry and on various other matters within composed of representatives from credit the Board's jurisdiction. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

272 77th Annual Report, 1990 Officers of Federal Reserve Banks, Branches, and Offices December 31,1990* BANK, Chairman2 President Vice President Branch, ox facility Deputy Chairman First Vice President in charge of Branch BOSTON3 Richard N. Cooper Richard F. Syron Richard L. Taylor Robert W. Eisenmenger NEW YORK3.... Cyrus R. Vance E. Gerald Corrigan Ellen V. Futter James H. Oltman Buffalo Mary Ann Lambertsen James O. Aston PHILADELPHIA Peter A. Benoliel Edward G. Boehne Vacancy William H. Stone, Jr. CLEVELAND3.. Charles W. Parry W. Lee Hoskins John R. Miller William H. Hendricks Cincinnati Kate Ireland Charles A. Cerino4 Pittsburgh Robert P. Bozzone Harold J. Swart4 RICHMOND3 ... Hanne M. Merriman Robert P. Black Anne Marie Jimmie R. Whittemore Monhollon Baltimore John R. Hardesty, Jr. Robert D. McTeer, Jr.4 William E. Masters Albert D. Charlotte Tinkelenberg4 JohnG. Stoides4 Culpeper Larry L. Prince Robert P. Forrestal ATLANTA Edwin A. Huston Jack Guynn Donald E. Nelson A. G. Trammell Fred R. Herr4 Birmingham Lana Jane Lewis-Brent James D. Hawkins4 Jacksonville Robert D. Apelgren James T. Curry, III Miami Victoria B. Jackson Melvyn K. Purcell Nashville Andre M. Rubenstein Robert J. Musso New Orleans Marcus Alexis Silas Keehn CHICAGO3 Charles S. McNeer Daniel M. Doyle Phyllis E. Peters Roby L. Sloan4 Detroit H. Edwin Trusheim Thomas C. Melzer ST. LOUIS Robert H. Quenon James R. Bowen L. Dickson Flake Karl W. Ashman Little Rock Raymond M. Burse Howard Wells Louisville Katherine Hinds Raymond Laurence Memphis Smythe MINNEAPOLIS . Michael W. Wright Gary H. Stern Delbert W. Johnson Thomas E. Gainor Helena J. Frank Gardner John D. Johnson Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 273 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 Barbara B. Grogan Kent M. Scott Oklahoma City John R Snodgrass David J. France Omaha Herman Cain Harold L. Shewmaker DALLAS Bobby R. Inman Robert H. Boy kin Hugh G. Robinson William H. Wallace El Paso Donald G. Stevens Sammie C. Clay Houston Andrew L. Jefferson, Jr. Robert Smith III4 San Antonio Roger R. Thomas H. Robertson Hemminghaus SAN FRANCISCO Robert F. Erburu Robert T. Parry Carolyn S. Carl E. Powell Chambers Los Angeles Yvonne B. Burke Thomas C. Warren5 Portland William A. Hilliard Angelo S. Carella4 Salt Lake City Don M. Wheeler E. Ronald Liggett4 Seattle Bruce R. Kennedy 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 Robert P. Forrestal, President of the Federal Reserve Bank of Atlanta, served as The Chairmen of the Federal Reserve Banks Chairman of the Conference in 1990, and are organized into the Conference of Chair- Thomas C. Melzer, President of the Federal men, which meets to consider matters of Reserve Bank of St. Louis, served as its Vice common interest and to consult with, and Chairman. Christopher G. Brown, of the advise, the Board of Governors. Such meet- Federal Reserve Bank of Atlanta, served as its ings, attended also by the Deputy Chairmen, Secretary, and Frances E. Sibley, of the Fedwere held in Washington on May 30 and 31, eral Reserve Bank of St. Louis, served as its and on November 28 and 29, 1990. Assistant Secretary. The Executive Committee of the Conference of Chairmen during 1990 comprised Conference of First Cyrus R. Vance, Chairman; Peter A. Benoliel, Vice Chairman; and Bobby R. Inman, Vice Presidents member. The Conference of First Vice Presidents of On November 29, 1990, the Conference the Federal Reserve Banks was organized in elected its Executive Committee for 1991, 1969 to meet periodically for the consideration naming Peter A. Benoliel as Chairman, Hugh of operations and other matters. G. Robinson as Vice Chairman, and Larry L. On November 14, 1988, the Conference Prince as the third member. elected James R. Bo wen, First Vice President Conference of Presidents of the Federal Reserve Bank of St. Louis, as its Chairman for 1990, and Jimmie R. The presidents of the Federal Reserve Banks Monhollon, First Vice President of the Fedare organized into the Conference of Presi- eral Reserve Bank of Richmond, as its Vice dents, which meets periodically to consider Chairman. The Conference appointed Frances matters of common interest and to consult E. Sibley, of the Federal Reserve Bank of St. with, and advise, the Board of Governors. Louis, as its Secretary, and Marsha S. Shuler, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

274 77th Annual Report, 1990 of the Federal Reserve Bank of Richmond, as For the name of the chairman and deputy its Assistant Secretary. chairman of the board of directors of each Reserve Bank and of the chairman of each Directors Branch, see the preceding table, "Officers of Federal Reserve Banks, Branches, and The following list of directors of Federal Offices." 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 275 Term expires Dec. 31 DISTRICT 1-BOSTON Class A Richard D. Wardell President and Chief Executive Officer, National 1990 Iron Bank of Salisbury, Salisbury, Connecticut WilliamH. Chadwick Vice Chairman of the Board and Chief Operating 1991 Officer, Banknorth Group, Inc., Burlington, Vermont Terrence Murray Chairman of the Board, President, and Chief 1992 Executive Officer, Fleet/Norstar Financial Group, Inc., Providence, Rhode Island Class B Stephen R. Levy Chairman of the Board and Chief Executive 1990 Officer, Bolt Beranek and Newman, Inc., Cambridge, Massachusetts Edward H. Ladd Chairman and Chief Executive Officer, Standish, 1991 Ayer and Wood, Inc., Boston, Massachusetts Joan T. Bok Chairman of the Board, New England Electric 1992 System, Westborough, Massachusetts Class C Richard L. Taylor President, Taylor Properties, Inc., Boston, 1990 Massachusetts Dr. Jerome H. Grossman .... Chairman of the Board and Chief Executive 1991 Officer, New England Medical Center, Inc., Boston, Massachusetts Richard N. Cooper Maurits C. Boas Professor of International 1992 Economics, Harvard University, Cambridge, Massachusetts DISTRICT 2-NEW YORK Class A J. Kirby Fowler President and Chief Executive Officer, The 1990 Flemington National Bank and Trust Company, Flemington, New Jersey JohnF. McGillicuddy Chairman of the Board and Chief Executive 1991 Officer, Manufacturers Hanover Trust Company, New York, New York Victor J. Riley, Jr Chairman of the Board, President, and Chief 1992 Executive Officer, KeyCorp, Albany, New York Class B John F. Welch, Jr Chairman of the Board and Chief Executive 1990 Officer, GE, Fairfield, Connecticut Richard L. Gelb Chairman of the Board and Chief Executive 1991 Officer, Bristol-Myers Squibb Company, New York, New York Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

276 77th Annual Report, 1990 Term expires Dec. 31 DISTRICT 2, Class B-Continued John A. Georges Chairman of the Board and Chief Executive 1992 Officer, International Paper, Purchase, New York Class C Ellen V. Futter President, Barnard College, New York, New York 1990 Maurice R. Greenberg Chairman, American International Group, Inc., 1991 New York, New York Cyrus R. Vance Presiding Partner, Simpson Thacher & Bartlett, 1992 New York, New York BUFFALO BRANCH Appointed by the Federal Reserve Bank 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 RobertG. Wilmers Chairman of the Board and Chief Executive 1991 Officer, Manufacturers and Traders Trust Company, Buffalo, New York Wilbur F. Beh President and Chief Executive Officer, 1992 FNB Rochester Corp., Rochester, New York Appointed by the Board of Governors 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 of The Quaker Oats Company, East Aurora, New York Herbert L. Washington HLW Fast Track, Inc., Rochester, New York 1992 DISTRICT 3-PHILADELPHIA Class A Constantinos I. Costalas Chairman of the Board, President, and Chief 1990 Executive Officer, Glendale National Bank of New Jersey, Voorhees, New Jersey H. BernardLynch President and Chief Executive Officer, The First 1991 National Bank of Wyoming, Wyoming, Delaware Samuel A. McCullough Chairman of the Board and Chief Executive 1992 Officer, Meridian Bancorp, Inc., Reading, Pennsylvania Class B Charles F. Seymour Chairman of the Board, Jackson-Cross Company, 1990 Philadelphia, Pennsylvania Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 277 Term expires Dec. 31 DISTRICT 3, Class B-Continued Nicholas Riso Executive Vice President, AHOLD, U.S.A., 1991 Harrisburg, Pennsylvania David W. Huggins President, RMS Technologies, Inc., 1992 Marlton, New Jersey Class C Jane G. Pepper President, The Pennsylvania Horticultural 1990 Society, Philadelphia, Pennsylvania Vacandy 1991 Peter A. Benoliel Chairman of the Board, Quaker Chemical 1992 Corporation, Conshohocken, Pennsylvania DISTRICT 4 - CLEVELAND Class A William H. May Chairman of the Board and President, First 1990 National Bank of Nelsonville, Nelsonville, Ohio William T. McConnell President, The Park National Bank, 1991 Newark, Ohio Frank Wobst Chairman of the Board and Chief Executive 1992 Officer, Huntington Bancshares Incorporated, Columbus, Ohio Class B 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 Laban P. Jackson, Jr Chairman of the Board, Clearcreek Properties, 1992 Lexington, Kentucky Class C Robert D. Storey Partner, Burke, Haber & Berick, 1990 Cleveland, Ohio JohnR. Miller Former President and Chief Operating Officer, 1991 The Standard Oil Company (Ohio), Cleveland, Ohio Charles W. Parry Retired Chairman and Chief Executive Officer, 1992 Aluminum Company of America, Pittsburgh, Pennsylvania CINCINNATI BRANCH Appointed by the Federal Reserve Bank Jack W. Buchanan President, Sphar & 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

278 77th Annual Report, 1990 Term expires Dec. 31 DISTRICT 4-CINCINNATI BRANCH Appointed by the Federal Reserve Bank—Continued AllenL. Davis President and Chief Executive Officer, 1991 The Provident Bank, Cincinnati, Ohio Clay Parker Davis President and Chief Executive Officer, Citizens 1992 National Bank, Somerset, Kentucky Appointed by the Board of Governors Marvin Rosenberg Partner, Towne Properties, Ltd., Cincinnati, 1990 Ohio Kate Ireland National Chairman of the Board, Frontier 1991 Nursing Service, Wendover, Kentucky Eleanor Hicks Advisor for International Liaison Protocol and 1992 Services, and Associate Professor of Political Science, University of Cincinnati, Cincinnati, Ohio PITTSBURGH BRANCH Appointed by the Federal Reserve Bank George A. Davidson, Jr Chairman of the Board and Chief Executive 1990 Officer, Consolidated Natural Gas Company, Pittsburgh, Pennsylvania StephenC. 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 William F. Roemer President and Chief Executive Officer, 1992 Integra Financial Corporation, Pittsburgh, Pennsylvania Appointed by the Board of Governors Milton A. Washington President and Chief Executive Officer, 1990 Allegheny Housing Rehabilitation Corporation, Pittsburgh, Pennsylvania Jack B. Piatt Chairman of the Board and President, Millcraft 1991 Industries, Inc., Washington, Pennsylvania Robert P. Bozzone President and Chief Operating Officer, 1992 Allegheny Ludlum Corporation, Pittsburgh, Pennsylvania DISTRICT 5 - RICHMOND Class A John F. McNair III Director, Wachovia Bank & Trust Company, 1990 N.A. and 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 279 Term expires Dec. 31 DISTRICT 5, Class A - Continued A. Pierce Stone Chairman, President, and Chief Executive 1992 Officer, Virginia Community Bank, Louisa, Virginia Class B JackC. Smith Chairman ofthe Board and Chief Executive 1990 Officer, K-VA-T Food Stores, Inc., Grundy, Virginia Edward H. Covell President, The Covell Company, Easton, 1991 Maryland R. E. Atkinson, Jr Chairman, Dilmar Oil Company, Inc., 1992 Florence, South Carolina Class C Hanne Merriman Retail Business Consultant, Washington, D.C. 1990 Anne Marie Whittemore Partner, McGuire, Woods, Battle & Boothe, 1991 Richmond, Virginia Henry J. Faison President, Faison Associates, Charlotte, 1992 North Carolina BALTIMORE BRANCH Appointed by the Federal Reserve Bank Raymond V. Haysbert, Sr. .. .President and Chief Executive Officer, Parks 1990 Sausage Company, Baltimore, Maryland H. Grant Hathaway Chairman ofthe Board, Maryland National Bank, 1991 Baltimore, Maryland Joseph W. Mosmiller Chairman ofthe Board, Loyola Federal Savings 1991 and Loan Association, Baltimore, Maryland Richard M. Adams Chairman and Chief Executive Officer, United 1992 Bankshares, Inc., Parkersburg, West Virginia Appointed by the Board of Governors GloriaL. Johnson Deputy Director of Administration, The 1990 Baltimore Museum of Art, Baltimore, Maryland Thomas R. Shelton President, Case Foods, Inc., Salisbury, Maryland 1991 John R. Hardesty, Jr President, Preston Energy, Inc., Kingwood, 1992 West Virginia CHARLOTTE BRANCH Appointed by the Federal Reserve Bank James M. Culberson, Jr Chairman and President, The First National 1990 Bank of Randolph County, Asheboro, North Carolina Crandall C. Bowles President, Hie Springs Company, Lancaster, 1991 South Carolina Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

280 77th Annual Report, 1990 Term expires Dec. 31 DISTRICT 5, CHARLOTTE BRANCH Appointed by the Federal Reserve Branch—Continued James G. Lindley Chairman, President, and Chief Executive 1991 Officer, South Carolina National Corporation and The South Carolina National Bank, Columbia, South Carolina David B. Jordan President, Chief Executive Officer and Director, 1992 Omni Capital Group, Inc. and Home Federal Savings Bank, Salisbury, North Carolina Appointed by the Board of Governors William E. Masters President, Perception, Inc., Easley, 1990 South Carolina Harold D. Kingsmore President and Chief Operating Officer, 1991 Graniteville Company, Graniteville, South Carolina Anne M. Allen President, Anne Allen & Associates, Greensboro, 1992 North Carolina DISTRICT 6-ATLANTA Class A E. B. Robinson, Jr Chairman of the Board and Chief Executive 1990 Officer, Deposit Guaranty National Bank and Deposit Guaranty Corporation, Jackson, Mississippi Virgil H. Moore, Jr Chairman of the Board and Chief Executive 1991 Officer, First Farmers and Merchants National Bank, Columbia, Tennessee W. H. Swain Chairman of the Board, First National Bank, 1992 Oneida, Tennessee Class B GaryJ. Chouest President and Chief Executive Officer, Edison 1990 ChouestOffshore, Inc., Galliano, Louisiana Saundra H. Gray Co-Owner, Gemini Springs Farm, DeBary, 1991 Florida J. Thomas Holton Chairman of the Board and President, Sherman 1992 International Corporation, Birmingham, Alabama Class C Edwin A. Huston Senior Executive Vice President-Finance, 1990 Ryder System, Inc., Miami, Florida Larry L. Prince Chairman and Chief Executive Officer, Genuine 1991 Parts Company, Atlanta, Georgia Leo Benatar Chairman of the Board and President, Engraph, 1992 Inc., Atlanta, Georgia Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 281 Term expires Dec. 31 DISTRICT 6-Continued BIRMINGHAM BRANCH Appointed by the Federal Reserve Bank Harry B. Brock, Jr Chairman of the Board and Chief Executive 1990 Officer, Central Bank of the South, Birmingham, Alabama Shelton E. Allred Chairman of the Board, President, and Chief 1991 Executive Officer, Frit Industries, Inc., Ozark, Alabama William F. Childress President, First American Federal Savings and 1991 Loan Association, Huntsville, Alabama Robert M. Barrett Chairman and President, The First National 1992 Bank, Wetumpka, Alabama Appointed by the Board of Governors A. G. Trammell President, Alabama Labor Council, AFL-CIO, 1990 Birmingham, Alabama Roy D. Terry President and Chief Executive Officer, Terry 1991 Manufacturing Company, Inc., Roanoke, Alabama Nelda P. Stephenson President, Nelda Stephenson Chevrolet, Inc., 1992 Florence, Alabama JACKSONVILLE BRANCH Appointed by the Federal Reserve Bank HughH. Jones, Jr Chairman of the Board and Chief Executive 1990 Officer, 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 Chairman, President and Chief Executive 1991 Officer, Design Containers, Inc., Jacksonville, Florida Merle L. Graser Chairman and Chief Executive Officer, First 1992 National Bank of Venice, Venice, Florida Appointed by the Board of Governors Joan Dial Ruffier General Partner, Sunshine Cafes, and Vice 1990 President, Vista Landscaping, Orlando, Florida Hugh M. Brown President and Chief Executive Officer, BAMSI, 1991 Inc., Titusville, Florida Lana Jane Lewis-Brent Vice Chairman of the Board, President, and 1992 Chief Executive Officer, Sunshine Jr. Stores, Inc., Panama City, Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

282 77th Annual Report, 1990 Term expires Dec. 31 DISTRICT 6-Continued MIAMI BRANCH Appointed by the Federal Reserve Bank RobertM. Taylor Chairman of the Board and Chief Executive 1990 Officer, The Mariner Group, Inc., Fort Myers, Florida Frederick A. Teed President and Chief Executive Officer, 1990 Community Savings, F. A., North Palm Beach, Florida RobertoG. Blanco Vice Chairman of the Board and Chief Financial 1991 Officer, Republic National Bank of Miami, Miami, Florida A. Gordon Oliver Chairman, President and Chief Executive 1992 Officer, Citizens and Southern National Bank of Florida, Fort Lauderdale, Florida Appointed by the Board of Governors Robert D. Apelgren President, Apelgren Corporation, Pahokee, 1990 Florida Dorothy C. Weaver Executive Vice President, Intercap Investments, 1991 Inc., Coral Gables, Florida Jose L. Saumat President, Greater Miami Trading, Inc., 1992 Miami, Florida NASHVILLE BRANCH Appointed by the Federal Reserve Bank Vincent K. Hickam President and Chief Executive Officer, Executive 1990 Park National Bank, Kingsport, Tennessee William Baxter Lee HI Chairman of the Board and President, Southeast 1991 Services Corporation, Knoxville, Tennessee Edwin W. Moats, Jr Chairman of the Board and Chief Executive 1991 Officer, Metropolitan Federal Savings and Loan Association, Nashville, Tennessee James A. Rainey Chairman of the Board, Sovran Financial 1992 Corporation/Central South, Nashville, Tennessee Appointed by the Board of Governors 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 Harold A. Black Professor and Head, Department of Finance, 1992 College of Business Administration, University of Tennessee, Knoxville, Tennessee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 283 Term expires Dec. 31 DISTRICT 6-Continued NEW ORLEANS BRANCH Appointed by the Federal Reserve Bank 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 Earl W. Lundy Chairman of the Board and Chief Executive 1992 Officer, First National Bank of Vicksburg, Vicksburg, Mississippi Appointed by the Board of Governors Victor Bussie President, Louisiana AFL-CIO, Baton Rouge, 1990 Louisiana AndreM. Rubenstein Chairman ofthe Board and Chief Executive 1991 Officer, Rubenstein Brothers, Inc., New Orleans, Louisiana James A. Hefner President, Jackson State University, Jackson, 1992 Mississippi DISTRICT 7-CHICAGO Class A Barry F. Sullivan Chairman ofthe 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 B. F. Backlund Chairman ofthe Board and Chief Executive 1992 Officer, Bartonville Bank, Bartonville, Illinois Class B Edward D. Powers Chief Executive Officer, Fire Brick Engineers, 1990 Milwaukee, Wisconsin Max J. Naylor President, Naylor Farms, Inc., Jefferson, Iowa 1991 Paul J. Schierl Financial Consultant, Green Bay, Wisconsin 1992 Class C Marcus Alexis Visiting Professor, Department of Economics, 1990 Northwestern University, Evanston, Illinois Charles S. McNeer Chairman of the Board and Chief Executive 1991 Officer, Wisconsin Energy Corporation, Milwaukee, Wisconsin Richard G. Cline Chairman ofthe Board, President, and Chief 1992 Executive Officer, NICOR, Inc., Naperville, Illinois Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

284 77th Annual Report, 1990 Term expires Dec. 31 DISTRICT 7-Continued DETROIT BRANCH Appointed by the Federal Reserve Bank James A. Aliber Retired Chairman of the Board and Chief 1990 Executive Officer, First Federal of Michigan, Detroit, Michigan Frederik G. H. Meijer Chairman of the Executive Committee, Meijer, 1990 Incorporated, Grand Rapids, Michigan Robert J. Mylod Chairman of the Board, President, and Chief 1991 Executive Officer, Michigan National Corporation, Farmington Hills, Michigan Norman F. Rodgers President and Chief Executive Officer, Hillsdale 1992 County National Bank, Hillsdale, Michigan Appointed by the Board of Governors Beverly Beltaire President, P R Associates, Inc., Detroit, 1990 Michigan Phyllis E. Peters Director, Professional Standards Review, 1991 Deloitte & Touche, Detroit, Michigan J. Michael Moore Chairman of the Board and Chief Executive 1992 Officer, Invetech Company, Detroit, Michigan DISTRICT 8-ST. LOUIS Class A 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 W. E. Ayres Chairman of the Board and Chief Executive 1992 Officer, Simmons First National Bank of Pine Bluff, Pine Bluff, Arkansas Class B Roger W. Schipke President, Ryland Company, Columbia, 1990 Maryland Thomas F. McLarty m Chairman of the Board and Chief Executive 1991 Officer, Arkla, Inc., Little Rock, Arkansas Frank M. Mitchener, Jr President, Mitchener Farms, Inc., Sumner, 1992 Mississippi Class C Janet McAfee Weakley President, Janet McAfee, Inc., Clayton, Missouri 1990 Robert H. Quenon Chairman, Peabody Holding Company, Inc., 1991 St. Louis, Missouri H. Edwin Trusheim Chairman of the Board and Chief Executive 1992 Officer, General American Life Insurance Company, St. Louis, Missouri Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 285 Term expires Dec. 31 DISTRICT 8-Continued LITTLE ROCK BRANCH Appointed by the Federal Reserve Bank 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 Patricia M. Townsend President, Townsend Company, Stuttgart, 1992 Arkansas Appointed by the Board of Governors William E. Love President, Sound-Craft Systems, Inc., Morrilton, 1990 Arkansas James R. Rodgers Airport Manager, Little Rock Regional Airport, 1991 Little Rock, Arkansas L. Dickson Flake President, Barnes, Quinn, Flake & Anderson, 1992 Inc., Little Rock, Arkansas LOUISVILLE BRANCH Appointed by the Federal Reserve Bank Irving W. Bailey II Chairman of the Board, President, and Chief 1990 Executive Officer, Capital Holding Corporation, Louisville, Kentucky Wayne G. Overall, Jr President, First Federal Savings Bank, 1990 Elizabethtown, Kentucky Douglas M. Lester Chairman of the Board, President, and Chief 1991 Executive Officer, Trans Financial Bancorp, Inc., Bowling Green, Kentucky Morton Boyd Chairman, President and CEO, First Kentucky 1992 National Corporation, Louisville, Kentucky Appointed by the Board of Governors Raymond M. Burse Partner, Wyatt, Tarrant and Combs, 1990 Louisville, Kentucky Lois H. Gray Chairman of the Board, James N. Gray 1991 Construction Company, Inc., Glasgow, Kentucky Daniel L. Ash President and Plant Manager (Retired), Rohm 1992 and Haas Kentucky Incorporated, Louisville, Kentucky Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

286 77th Annual Report, 1990 Term expires Dec. 31 DISTRICT 8-Continued MEMPHIS BRANCH Appointed by the Federal Reserve Bank 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 of the Board and Chief Executive 1991 Officer, Jackson National Bank and Volunteer Bancshares, Inc., Jackson, Tennessee Michael J. Hennessey President, Munro & Company, Inc., Wynne, 1992 Arkansas Appointed by the Board of Governors Seymour B. Johnson Owner, Kay Planting Company, Indianola, 1990 Mississippi Katherine Hinds Smythe President, Memorial Park, Inc., Memphis, 1991 Tennessee Sandra B. Sanderson-Chesnut President and Chief Executive Officer, Sanderson 1992 Plumbing Products, Inc., Columbus, Mississippi DISTRICT 9-MINNEAPOLIS Class A 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 Rodney W. Fouberg Chairman of the Board, Farmers and Merchants 1992 Bank and Trust Co., Aberdeen, South Dakota Class B 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 Bruce C. Adams Partner, Triple Adams Farms, Minot, 1992 North Dakota Class C Delbert W. Johnson President and Chief Executive Officer, Pioneer 1990 Metal Finishing, Minneapolis, Minnesota Michael W. Wright Chairman of the Board, Chief Executive Officer, 1991 and President, Super Valu Stores, Inc., Minneapolis, Minnesota Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 287 Term expires Dec. 31 DISTRICT 9, Class C-Continued Gerald A. Rauenhorst Chairman of the Board and Chief Executive 1992 Officer, Opus Corporation, Minneapolis, Minnesota HELENA BRANCH Appointed by the Federal Reserve Bank Noble E. Vosburg President and Chief Executive Officer, Pacific 1990 Hide and Fur Corporation, Great Falls, Montana Robert H. Waller President and Chief Executive Officer, First 1990 Interstate Bank of Billings, N. A., Billings, Montana Beverly D. Harris President, Empire Federal Savings and Loan 1991 Association, Livingston, Montana Appointed by the Board of Governors J. Frank Gardner President, Montana Resources, Inc., Butte, 1990 Montana James E. Jenks Jenks Farms, Hogeland, Montana 1991 DISTRICT 10-KANSAS CITY Class A Roger L. Reisher Co-Chairman of the Board, FirstBank of 1990 Westland, N.A., Lakewood, Colorado RobertL. Hollis Chairman of the Board and Chief Executive 1991 Officer, First National Bank and Trust Co., Okmulgee, Oklahoma Harold L. Gerhart, Jr Chairman and Chief Executive Officer, First 1992 National Bank, Newman Grove, Nebraska Class B S. Dean Evans, Sr Partner, Evans Grain Company, Salina, Kansas 1990 Frank J. Yaklich, Jr President, CF & I Steel Corporation, Pueblo, 1991 Colorado Frank A. McPherson Chairman of the Board and Chief Executive 1992 Officer, Kerr-McGee Corporation, Oklahoma City, Oklahoma Class C Thomas E. Rodriguez President and General Manager, Thomas E. 1990 Rodriguez & Associates, PC, Aurora, Colorado Burton A. Dole, Jr Chairman of the Board and President, 1991 Puritan-Bennett Corporation, Overland Park, Kansas Fred W. Lyons, Jr President, Marion Merrell Dow Inc., 1992 Kansas City, Missouri Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

288 77th Annual Report, 1990 Term expires Dec. 31 DISTRICT 10-Continued DENVER BRANCH Appointed by the Federal Reserve Bank Junius F. Baxter Denver, Colorado 1990 Norman R. Corzine President and Chief Executive Officer, First 1991 National Bank in Albuquerque, Albuquerque, New Mexico W. Richard Scarlett III Chairman of the Board and Chief Executive 1991 Officer, Jackson State Bank, Jackson Hole, Wyoming Henry A. True III Partner, True Companies, Casper, Wyoming 1992 Appointed by the Board of Governors Gilbert Sanchez President, New Mexico Highlands University, 1990 Las Vegas, New Mexico Barbara B. Grogan President, Western Industrial Contractors, Inc., 1991 Denver, Colorado Sandra K. Woods Vice President, Corporate Real Estate, Adolph 1992 Coors Company, Golden, Colorado OKLAHOMA CITY BRANCH Appointed by the Federal Reserve Bank W. DeanHidy Chairman of the Board and Chief Executive 1990 Officer, Triad Bank, N.A., Tulsa, Oklahoma John Wm. Laisle President, MidFirst Bank, SSB, Oklahoma City, 1990 Oklahoma C. Kendric Fergeson Chairman of the Board and Chief Executive 1991 Officer, The National Bank of Commerce, Altus, Oklahoma Appointed by the Board of Governors John F. Snodgrass President and Trustee, The Samuel Roberts 1990 Noble Foundation, Inc., Ardmore, Oklahoma Ernest L. Holloway President, Langston University, Langston, 1991 Oklahoma OMAHA BRANCH Appointed by the Federal Reserve Bank John R. Cochran President and Chief Executive Officer, Norwest 1990 Bank Nebraska, N.A., Omaha, Nebraska Sheila Griffin Associate Director for Audience and Program 1991 Development, Lied Center for Performing Arts, University of Nebraska-Lincoln, Lincoln, Nebraska John T. Selzer Chairman of the Board and Chief Executive 1991 Officer, FirsTier Bank, N.A., Scottsbluff, Nebraska Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 289 Term expires Dec. 31 DISTRICT 10, OMAHA BRANCH-Continued Appointed by the Board of Governors Herman Cain President and Chief Executive Officer, 1990 Godfather's Pizza, Inc., Omaha, Nebraska Leroy William Thorn President, T-L Irrigation Company, Hastings, 1991 Nebraska DISTRICT 11-DALLAS Class A T. C. Frost Chairman of the Board, Frost National Bank, 1990 San Antonio, Texas Charles T. Doyle Chairman of the Board and Chief Executive 1991 Officer, Gulf National Bank, Texas City, Texas Robert G. Greer Chairman of the Board, Tanglewood Bank, 1992 N.A., Houston, Texas Class B Robert L. Pfluger Rancher, San Angelo, Texas 1990 Peyton Yates President, Yates Drilling Company, Artesia, 1991 New Mexico Gary E. Wood President, Texas Research League, Austin, 1992 Texas Class C Bobby R. Inman Austin, Texas 1990 Hugh G. Robinson Chairman of the Board and Chief Executive 1991 Officer, The Tetra Group, Inc., Dallas, Texas LeoE. Linbeck, Jr Chairman of the Board and Chief Executive 1992 Officer, Linbeck Construction Corporation, Houston, Texas EL PASO BRANCH Appointed by the Federal Reserve Bank Henry B. Ellis President and Chief Credit Officer, MBank 1990 El Paso, N. A., El Paso, Texas Ethel Ortega Olson Owner, NAMBE of Ruidoso, Ruidoso, 1990 New Mexico Humberto F. Sambrano President, SamCorp General Contractors, 1991 El Paso, Texas Wayne Merritt Claydesta National Bank, Midland, Texas 1992 Appointed by the Board of Governors 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 W. Thomas Beard m President, Leoncita Cattle Company, Alpine, 1992 Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

290 77th Annual Report, 1990 Term expires Dec. 31 DISTRICT 11 -Continued HOUSTON BRANCH Appointed by the Federal Reserve Bank Clive Runnells President and Director, Runnells Cattle 1990 Company, Bay City, Texas David E. Sheffield Financial Consultant, Victoria, Texas 1990 Jeff Austin, Jr President, First National Bank of Jacksonville, 1991 Jacksonville, Texas Jenard M. Gross President, Gross Builders, Inc., Houston, 1992 Texas Appointed by the Board of Governors 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 Judy Ley Allen Partner and Administrator, Allen Investments, 1992 Houston, Texas SAN ANTONIO BRANCH Appointed by the Federal Reserve Bank Javier Garza Executive Vice President, The Laredo National 1990 Bank, Laredo, Texas Sam R. Sparks President, Sam R. Sparks, Inc., Santa Rosa, 1990 Texas Jane Flato Smith Investor and Rancher, San Antonio, Texas 1991 Gregory W. Crane Chairman of the Board, President, and Chief 1992 Executive Officer, Broadway National Bank, San Antonio, Texas Appointed by the Board of Governors Erich Wendl President, Maverick Markets, Inc., 1990 Corpus Christi, Texas Roger R. Hemminghaus Chairman of the Board, President, and Chief 1991 Executive Officer, Diamond Shamrock, Inc., San Antonio, Texas Lawrence E. Jenkins Vice President (Retired), Austin Division, 1992 Lockheed Missiles and Space Co., Austin, Texas DISTRICT 12-SAN FRANCISCO Class A 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 291 Term expires Dec. 31 DISTRICT 12, Class A -Continued Warren K. K. Luke President and Director, Hawaii National 1992 Bancshares, Inc., and Vice Chairman of the Board, Hawaii National Bank, Honolulu, Hawaii Class B 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 James A. Vohs Chairman of the Board, President, and Chief 1992 Executive Officer, Kaiser Foundation Health Plan, Inc., and Kaiser Foundation Hospitals, Oakland, California Class C Cordell W. Hull Executive Vice President and Director, Bechtel 1990 Group, Inc., San Francisco, California CarolynS. Chambers President and Chief Executive Officer, Chambers 1991 Communications Corp., Eugene, Oregon Robert F. Erburu Chairman of the Board and Chief Executive 1992 Officer, The Times Mirror Company, Los Angeles, California Los ANGELES BRANCH Appointed by the Federal Reserve Bank Ross M. Blakely Chairman of the Executive Committee of the 1990 Board, Coast Savings and Loan, Los Angeles, California David R. Lovejoy Vice Chairman of the Board, Security Pacific 1991 National Bank, Los Angeles, California Ignacio E. Lozano, Jr Editor-in-Chief, La Opinion, Los Angeles, 1991 California Fred D. Jensen Chairman of the Board, President, and Chief 1992 Executive Officer, National Bank of Long Beach, Long Beach, California Appointed by the Board of Governors Richard C. Seaver Chairman, Hydril Company, Los Angeles, 1990 California Harry W. Todd Managing Partner, Carlisle Enterprises, L.P., 1991 Coronado, California Yvonne Brathwaite Burke ... .Partner, Jones, Day, Reavis & Pogue, 1992 Los Angeles, California Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

292 77th Annual Report, 1990 Term expires Dec. 31 DISTRICT 12-Continued PORTLAND BRANCH Appointed by the Federal Reserve Bank Stephen G. Kimball President and Chief Executive Officer, Baker 1990 Boyer Bancorp, Walla Walla, Washington G. Dale Weight Dean, George H. Atkinson Graduate School of 1990 Management, Willamette University, Salem, Oregon StuartH. Compton Chairman of the Board and Chief Executive 1991 Officer, Pioneer Trust Bank, N.A., Salem, Oregon E. Kay Stepp President, Portland General Electric, Portland, 1992 Oregon Appointed by the Board of Governors Sandra A. Suran President, The Suran Group, Portland, Oregon 1990 William A. Hilliard Editor, The Oregonian, Portland, Oregon 1991 Wayne E. Phillips, Jr Vice President, Phillips Ranch, Inc., Baker, 1992 Oregon SALT LAKE CITY BRANCH Appointed by the Federal Reserve Bank Curtis H. Eaton Vice President; Manager, Community Banking 1990 Area; and Member of the Board of Directors, First Security Bank of Idaho, N. A., Twin Falls, Idaho Virginia P. Kelson Partner, Ralston & Associates, Salt Lake City, 1990 Utah Gerald R. Christensen President and Chairman, First Federal Savings 1991 Bank, Salt Lake City, Utah Ronald S. Hanson President, Zions First National Bank, 1992 Salt Lake City, Utah Appointed by the Board of Governors Don M. Wheeler President, Wheeler Machinery Company, 1990 Salt Lake City, Utah D. N. Rose President and Chief Executive Officer, Mountain 1991 Fuel Supply Company, Salt Lake City, Utah Gary G. Michael Vice Chairman, Chief Financial and Corporate 1992 Development Officer, Albertson's, Inc., Boise, Idaho SEATTLE BRANCH Appointed by the Federal Reserve Bank B. R. Beeksma Chairman of the Board, InterWest Savings Bank, 1990 Oak Harbor, Washington Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 293 Term expires Dec. 31 DISTRICT 12, SEATTLE BRANCH Appointed by the Federal Reserve Bank—Continued Gerry B. Cameron President and Chief Operating Officer, U.S. Bank 1990 of Washington, N.A., Seattle, Washington Robert P. Gray President, National Bank of Alaska, Anchorage, 1991 Alaska H. H. Larison President, Columbia Paint & Coatings, Spokane, 1992 Washington Appointed by the Board of Governors George F. Russell, Jr Chairman, President and Chief Executive 1990 Officer, Frank Russell Company, Tacoma, Washington Bruce R. Kennedy Chairman and Chief Executive Officer, Alaska 1991 Air Group, Inc., Seattle, Washington Judith M. Runstad Co-Managing Partner, Foster Pepper and 1992 Shefelman, 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

297 Index Accounting standards, 190 Bank Merger Act, regulation and Acquisitions approved (See also bank compliance, 196 holding companies), 253-63 Bank mergers and consolidations, 253 Affordable Housing Disposition Program, Bank Secrecy Act, 184,200 173 Bankers acceptances, Federal Reserve Agriculture, price developments in 1990,15 Banks, holdings, 224 Agriculture, U.S. Department of, Packers Banking Act of 1933 (See also and Stockyards Administration, 168 Glass-SteagallAct), 188 Assets and liabilities Banking activities, 204 Banks, by class, 245 Banking offices, changes in number, 252 Board of Governors, 216 Banking premises, policy on sale of retail Federal Reserve Banks, 224 banks, 192 Automated clearinghouse, fees for services, Banking supervision and regulation by the 206 Federal Reserve System, 183 Basle Committee, Banking Regulations and Supervisory Practices, 183,184,191 Bank Holding Company Act of 1956 (See Board of Governors (See also Federal also Regulations: Y) Reserve System) Examinations, 188 Financial statements, 215 Regulation and compliance, 195 Litigation, 175 Bank holding companies (See also Members and officers, 266 Regulations: Y) Regulatory simplification, 203 Acquisitions approved, 253-63 Salaries, 231 Applications by, processing and notice of Testimony Board decisions, 195 Community Reinvestment Act, 173 Bank Merger Act, 196 Fair lending, 174 Board actions, review, 175 Home Mortgage Disclosure Act, 173 Change in Bank Control Act, 196 Mortgage lending initiatives, 173 Delegation of applications, 197 Reserve Bank promotion of fair lending Deposit sweep accounts, 193 practices, 174 Enforcement, 186 Bonds, savings (See also Treasury Examinations, 186 securities), 205,208 Examinations, inspection, and regulation, Brady, Nicholas R, Secretary of the 185 Treasury, 29 Surveillance and monitoring, 188 Branch banks, foreign branches of U.S. Transfer agents, 188 banking organizations, 189,199 Financial Statements for a Bank Holding Bureau of Engraving and Printing, 179 Company Engaged in Ineligible Bush, George, President of the United Securities Underwriting and States, 29 Dealing, new report form, 193 Funding and liquidity policy, 192 International activities, 189,198 California Community Reinvestment Litigation, 175 Corporation, 174 Mergers approved, 253-63 CAMEL rating system, 184 Reporting requirements, revisions, 193 Capital accounts Stock repurchases, 198 Banks, by class, 240 Bank Insurance Fund, 23 Federal Reserve Banks, 223,224,226 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

298 77th Annual Report, 1990 Chairmen, presidents, and vice presidents of Crime Control Act of 1990, 179 Federal Reserve Banks Conferences, 273 Debt aggregates, 20 List, 272 Definitive securities, 208 Salaries of presidents, 231 Deposit insurance, study by Treasury Change in Bank Control Act, 204 Department, 190 Check clearing and collection Deposit sweep accounts, 193 Fees for Federal Reserve services, 206 Depository institutions, reserves and related Float, 208 items, 20,246 Volume of operations, 210,241 Deposits Clearing House Interbank Payments System Banks, by class, 245 (CHIPS), 79 Federal Reserve Banks, 224,246 Commercial banks (See also Insured Directors, Federal Reserve Banks and commercial banks), banking offices, Branches, list, 274 changes in number, 252 Dividend payments to state member banks, Commodity Credit Corporation, 11, 30 192 Commodity Futures Trading Commission, Dividends, FederalReserveBanks,234,236 Market Reform Act of 1990, Drexel Burnham Lambert, 65 responsibilities under, 179 Community Affairs program, 164 Earnings of Federal Reserve Banks (See Community Development Corporations, also Federal Reserve Banks, income 165 and expenses), 232 Community Reinvestment Act of 1977 Economy in 1989 Compliance, 164 Business, 40 Consumer affairs, 161 External, 42 Disclosure of ratings, 164 Government, 41 Regulation BB, amendment to implement Household, 39 changes in, 77 Labor markets, 43 Seminar for Chicago District bankers, Price developments, 44 174 Economy in 1990 Testimony, 173 Business, 8, 58 Video from Philadelphia Reserve Bank, External, 59 174 Government, 10,59 Comprehensive Thrift and Bank Fraud Household, 6,56 Prosecution and Taxpayer Recovery Labor markets, 12, 61 Act of 1990,179 Price developments, 14,62 Comptroller of the Currency, Office of, 166, Electronic benefits transfers, 172 183,189,196 Electronic Fund Transfer Act Condition statements of Federal Reserve Compliance with, 168 Banks, 222 Economic effect of, 169 Conferences of chairmen, presidents, and Enterprise for the Americas initiative, 29 vice presidents of Federal Reserve Equal Credit Opportunity Act, compliance Banks, 273 with, 168 Congressional Budget Office, 23 Examinations, inspections, regulation, and Consumer Advisory Council, 172,270 audits Consumer and community affairs, 161 Bank holding companies, 185 Consumers Union, lawsuit regarding Compliance with consumer regulations, Regulation Z, 161 166 Council of Economic Advisers, 38 Enforcement actions, civil money Cranston-Gonzales National Affordable penalties, 186 Housing Act, 78, 179 Federal Reserve Banks, 208 Credit cards, price reductions on, 203 Inspection reports revised, 192 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 299 Examinations, inspections, regulation, and Federal Financial Institutions Examination audits—Continued Council—Continued International activities, 189 Training courses, 194 Specialized Federal Home Loan Mortgage Corporation, Electronic data processing, 187 208 Fiduciary activities, 187 Federal National Mortgage Association, 208 Government securities dealers, 187 Federal Open Market Committee Municipal securities dealers and Meetings, 90,101,110,117,128,136, clearing agencies, 187 144,151 Securities subsidiaries of bank holding Members and officers, list, 268 companies, 188 Policy actions, 3, 85 Transfer agents, 188 Federal Reserve Banks State member banks, 185 Assessments for expenses of Board of Surveillance and monitoring, 188 Governors, 234,236 Exchange Stabilization Fund, 33 Bank premises, 222, 224, 240 Expedited Funds Availability Act of 1988 Banks Amendments proposed by the Consumer Atlanta, 174 Advisory Council, 173 Boston, 165,174 Board report to the Congress, 79 Chicago, 165,174 Compliance with, 169 Kansas City, 210 Cranston-Gonzales Housing Act, Minneapolis, Helena Branch, 210 amendments to, 179 New York, 165,208,210 Deposits at nonproprietary teller Philadelphia, 174 machines, 78,162,179 Richmond, 165 Export Trading Company Act Amendments San Francisco, 165,174 of 1988,199 St. Louis, 210 Export-Import Bank, 30 Branches Bank premises, 210,240 Directors, list, 274 Fair Credit Reporting Act, 173 Vice presidents in charge, 272 Fair lending initiatives, testimony, 174 Capital accounts, 223, 224 Farm Credit Administration, 167, 168, 201 Chairmen and deputy chairmen, 272 Federal Advisory Council, 269 Check clearing and collection, 206 Federal agency securities Condition statement, 222 Federal Reserve Bank holdings and Conferences of chairmen, presidents, and earnings, 224, 246 vice presidents, 273 Federal Reserve open market Deposits, 223, 224 transactions, 1989,228 Directors, list, 274 Repurchase agreements, 223,224,228, Dividends paid, 234, 237, 239 230 Examination or audit, 208 Federal Deposit Insurance Corporation, Income and expenses, 209 166,180,183,189,196 Interest rates, 80,242 Federal deposit insurance, study by Loans and securities, 222,224,230,232, Treasury Department, 190 246,248, 250 Federal Financial Institutions Examination Officers and employees, number and Council salaries, 231 Activities, 166 Operations, volume, 241 Appraisal Subcommittee, 183,190 Payments to the U.S. Treasury, 237,239 Forms and guidelines for lender reports Premises, 210 under the Home Mortgage Presidents and first vice presidents, 231, Disclosure Act, 163 272 Procedures for disclosing CRA ratings, Priced services 165 Developments, 205 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

300 77th Annual Report, 1990 Federal Reserve Banks—Continued General Accounting Office, 23 Price services—Continued Giesecke and Devrient, Inc., 208 Financial statements, 210 Glass-Steagall Act Pro forma balance sheet, 211 Challenges to Board regulations, 177 Pro forma income statement, 212 Securities subsidiaries of bank holding Tables, 246 companies, 188 Promotion of fair lending practices, 174 Gold certificate accounts of Reserve Banks Securities and loan holdings, 209 and gold stock, 224,248,250 Training, 193 Government Securities Act of 1986,187 Federal Reserve notes Gramm-Rudman-Hollings (Balanced Condition statement data, 224 Budget and Emergency Deficit Control Cost of issuance and redemption, 219, Act of 1985), 10 234 Federal Reserve System (See also Board of Highly leveraged transactions, definition, Governors) 192 Map, 304, 305 Home Mortgage Disclosure Act, 161 Training, 193 Reporting requirements expanded, 163 Federal Trade Commission, 167,168 Testimony, 173 Fedwire (See also Electronic Fund Transfer Act), 203 Income and expenses Fees, Federal Reserve services to depository Board of Governors, 217 institutions Federal Reserve Banks, 209,232 Automated clearinghouse, 206 Insured commercial banks (See also Check clearing and collection, 206 Commercial banks) Currency and coin, 207 Assets and liabilities, by class of bank, Electronic payments, 206 245 Pricing of, 210, 232, 205 Banking offices, changes in number, 252 Securities, 208 Number, by class of bank, 245 Wire transfer of funds, 207 Interagency Enforcement Policy, 167 Financial Institutions Anti-Fraud Interdistrict Transportation System, 206 Enforcement Act of 1990,181 Interest rates, Federal Reserve Banks Financial Institutions Reform, Recovery, Discount rates, 1990, 80, 83 and Enforcement Act of 1989 Examination procedures for managing Amendment to the Community risk, 193 Reinvestment Act, 78 Seasonal credit program, modification, Bank supervision and regulation, 183 82,83 Monetary policy, 8, 35, 57 Table, 242 Treasury Department study of federal International banking activities, 198 deposit insurance, 190 International developments, review of 1990, Financial Institutions Supervisory Act, 27 challenges to Board regulations, 176 International transactions, 31 Financial institutions, condition in 1990,23 Interpretations of regulations, 164 Float (See also Check clearing and Interstate Commerce Commission, 168 collection), 208 Investments Foreign currencies Federal Reserve Banks, 222, 224 Authorization and directive for operations State member banks, 245 in, and review of documents, 33 Iraq (See Kuwait) Federal Reserve income on, 232 Foreign economies, 28 Justice, U.S. Department of, 175,181,208 Garn-St Germain Depository Institutions Kuwait, invasion of, by Iraq, 5,11,14,18, Act of 1982, 73 23 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 301 Legislation enacted (See also specific act), National Credit Union Administration, 166, 179 200 Legislative recommendations, other Nonmember depository institutions agencies with enforcement Assets and liabilities, 245 responsibilities, 174 Banking offices, changes in number, 252 Litigation Number, 245 Bank holding companies, 175 Board procedures and regulations, Office of Thrift Supervision, 166,196 challenges to, 176 Officers of Federal Reserve Banks, Loans Branches, and Offices, 272 Banks, by class, 245 Oil, price developments in 1990,14 Federal Reserve Banks Operation Desert Shield (See Kuwait) Depository institutions, 222, 224, 232, Over-the-counter marginable stocks, 201 248,250 Over-the-counter savings bonds (See also Holdings and income, 222, 224, 248, Treasury securities), 205, 208 250 Interest rates, 242 Payment system, revised statement on risk, Volume of operations, 241 79 Policy actions Board of Governors Margin requirements, 244 Discount rates at Federal Reserve Market Reform Act of 1990, 179 Banks, 80 Massachusetts Bankers Association, 165 Regulations, 73 Member banks (See also Depository Statements and other actions, 79 institutions and National banks) Federal Open Market Committee (See Assets, liabilities, and capital accounts, also System Open Market Account), 245 85 Banking offices, changes in number, 252 Priced services, Federal Reserve, 205,232 Number, 245 Profit and loss, Federal Reserve Banks, 234 Reserve requirements, 243 Publications Surveillance and monitoring, 188 "A Guide to Business Credit for Women, Mergers approved (See also Bank holding Minorities, and Small Businesses," companies), 253-63 revised brochure, 164 Monetary policy "Home Mortgages: Understanding the Aggregates, 21 Process and Your Rights," brochure, Condition of financial institutions, 23 164 Credit markets, 24 Securities Credit Transactions Handbook, Financial markets relative to, 17 201 Implementation, 17 Reports to the Congress, 35 Real estate, appraisal regulations issued, Review of 1989,45 190 Review of 1990, 5 Recognition Equipment, Inc., 207 Mortgage lending initiatives, testimony, 173 Regional Delivery System for savings Mutual savings banks, 252 bonds, 205,208 Regulation of banking organizations National Association of Securities Change in Bank Control Act, 196 Dealers, 200 Delegation of applications, 197 National banks (See also Member banks) Public notice of board decisions, 197 Assets, liabilities, and capital accounts, 243 State member bank applications, 198 Banking offices, changes in number, 252 Timely processing of applications, 197 National Commission on Financial Regulations Institution Reform, Recovery, and B, Equal Credit Opportunity Enforcement, 181 Compliance with, 168 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

302 77th Annual Report, 1990 Regulations - Continued Regulations—Continued B, Equal Credit Opportunity—Continued K, International Banking Operations Ohio law, preemption of provision, 163 Proposed revisions, 184 BB, Community Reinvestment T, Credit by Brokers and Dealers Amendment to implement changes in Amendment regarding transactions and the Community Reinvestment Act, margin credit involving foreign 77 securities, 75 Y, Bank Holding Companies and Change C, Home Mortgage Disclosure in Bank Control Amenmdments considered by the Amendment to adopt guidelines and Consumer Advisory Council, 173 leverage constraint for risk-based Massachusetts, exemption for capital standards, 75 state-chartered financial Amendment to adopt real estate institutions, 163 appraisal standards, 74 Reporting requirements expanded, 163 Amendment to permit banks to offer CC, Availability of Funds and Collection reduced-rate credit cards, 76 of Checks Amendment to reduce filing Amendment to implement changes to requirements under the Change in Expedited Funds Availability Act, Bank Control Act, 76 78 Changes, 204 Compliance with, 169 Z, Truth in Lending Extension of exceptions to permanent Amendment relating to home equity schedule, 162 lines of credit, 77 D, Reserve Requirements of Depository Compliance with, 167 Institutions Errors in adjustments to ARM rates, Amendment to eliminate reserve 166 requirements on certain items, 73 Examination procedures, 166 Amendment to increase the amount of Home equity lines of credit, transaction balances to which the amendment, 161 lower reserve requirement Interagency Enforcement Policy on, applies, 73 167 Garn-St Germain Depository New Mexico law, credit transactions, Institutions Act of 1982,73 162 Monetary Control Act of 1980, 73 Wisconsin law, preemption of E, Electronic Fund Transfer provisions, 162 Compliance with, 168 Regulatory Improvement Project, 203 H, Membership of State Banking Regulatory Policy and Planning Committee, Institutions in the Federal Reserve 203 System Regulatory Review Section, 203 Amendment regarding payment of Regulatory simplification, 203 dividends, 74 Reporting requirements, bank holding Amendment to adopt guidelines and companies, 193 leverage constraint for risk-based Reserve requirements of depository capital standards, 75 institutions, table, 243 Amendment to adopt real estate Reserves and related items, 20,246 appraisal standards, 74 Resolution Trust Corporation, 21,23,24, Financial Institutions Reform Recovery 26,41, 59, 64,66,68,173,181,183 and Enforcement Act of 1989, Risk-based capital, 183,191 requirements, 74 J, Collection of Checks and Other Items by Federal Reserve Banks and Funds Salaries Transfers through Fedwire Board of Governors, 217 Funds transfers on Fedwire, 75,203 Federal Reserve Banks, 231 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 303 Savings bonds (See also Treasury System Open Market Account—Continued securities), 205, 208 Domestic Policy Directive, 87,90,101, Secret Service, U.S., 179 110,117,128,136,144,151 Securities (See also specific types) Foreign currency directive, 89 Credit, 244 Foreign currency operations Definitive, 208 Agreement to "warehouse" foreign Over-the-counter, 201 currencies, 110 Regional Delivery System for savings Authorization for, 87,109 bonds, 205,208 Review of continuing authorizations, 100 Regulation, 200 Services, 208 Thrift Institutions Advisory Council, 271 Securities Act Amendments of 1975,188 Thrift Supervision, Office of, 201 Securities and Exchange Commission, 168, Training, 193 200 Transfer agents, 188 Securities and Exchange Commission, Transfers of funds (See also Fees and Market Reform Act of 1990, authority Regulations: E) under, 179 Federal Reserve operations, volume, 241 Securities Credit Transactions Handbook, Priced services, Federal Reserve, 232 201 Transportation, U.S. Department of, 167, Securities Exchange Act of 1934,200 168 Special drawing rights, 222, 224, 246, 248, Treasury securities 250 Bank holdings, by class of bank, 245 State member banks (See also Member Federal Reserve Banks banks) Holdings, 222,224, 230, 246,248, Application regulation, 198 250 Assets and liabilities, 245 Income, 232 Bank Merger Act, 196 Open market transactions, 228 Banking offices, changes in number, 252 Regional Delivery System for savings Banking premises, sale of retail, 192 bonds, 205,208 Board decisions, 197 Repurchase agreements Complaints against, 170 Tables, 222, 224, 228, 230, 246, 248, Dividend payments, 192 250 Examinations and inspections, 185 Savings bonds, 205, 208 Federal Reserve membership, 202 Treasury, U.S. Department of, 179, 181, Financial disclosure by, 202 190,200,205,208,209, 187 Interest rate risk, 193 Treasury, U.S. Department of, Financial Loans to executive officers, 202 Action Task Force, 184 Number, by class of bank, 245 Truth in Lending Act, compliance with, 167 Surveillance and monitoring, 188 Transfer agents, 188 U.S. banking structure, regulation, 195 Supervision Uniform Commercial Code, 75 Information supplied to Treasury Unregulated practices, complaints about, Department for study of federal 172 deposit insurance, 190 Policy, 189 Wire transfer of funds, fees for services, Safety and soundness, 185 203,207 . Scope, regulatory responsibilities, 184 System Open Market Account, authority to effect transactions in domestic operations and in foreign currencies Domestic Open Market Operations Authorization for, 85, 100, 108,159 FRB 1-12,500-0491 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

304 77th Annual Report, 1990 Maps of the Federal Reserve System 9 1 MINNEAPOLIS • ^2 BOS•TON 12 7 O BNEW YORK • SANFRANCISCO CHICAGO • CLEVELAND ~* •PHILADELPHIA 10 4 a. KANSAS CITY I1 H • ST. LOUIS RICHMOND 8 5 6. 11 • 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 305 2-B 4-D 5—E Baltimore Pittsburgh Charlotte • Cincinnati CLEVELAND RICHMOND 6"F • Nashville 7-G 8-H T Birmingham J Detroit • Jacksonville Memphis New Orleans Little ) MS y. Rock Miami ATLANTA CHICAGO ST. LOUIS 9-1 • Helena +s> M MINNEAPOLIS 10-J 12-L Omaha • Denver Oklahoma City KANSAS CITY 11-K Salt Lake City • Los Angeles SAN FRANCISCO Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis