Annual Report of the Federal Reserve Board, 1991

Report \O 1991 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, Mail Stop 138, Board of Governors of the Federal Reserve System, Washington, DC 20551. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Letter of Transmitted BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Washington, D.C., April 15, 1992 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-Eighth Annual Report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 1991. 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 1991 3 INTRODUCTION 7 THE ECONOMY IN 1991 8 The household sector 10 The business sector 12 The government sector 14 Labor markets 16 Price developments 19 MONETARY POLICY AND FINANCIAL MARKETS IN 1991 20 The implementation of monetary policy 23 Monetary and credit flows 31 INTERNATIONAL DEVELOPMENTS 32 Foreign economies 35 U.S. international transactions 38 Foreign currency operations 39 MONETARY POLICY REPORTS TO THE CONGRESS 39 Report on February 20, 1991 62 Report on July 16, 1991 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Part 2 Records, Operations, and Organization 87 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS 87 Regulation D (Reserve Requirements of Depository Institutions) 88 Regulation G (Securities Credit by Persons other than Banks, Brokers, or Dealers) and Regulation T (Credit by Brokers and Dealers) 88 Regulation G (Securities Credit by Persons other than Banks, Brokers, or Dealers) and Regulation U (Credit by Banks for the Purpose of Purchasing or Carrying Margin Stocks) 88 Regulation H (Membership of State Banking Institutions in the Federal Reserve System) and Regulation K (International Banking Operations) 89 Regulation H (Membership of State Banking Institutions in the Federal Reserve System) and Regulation Y (Bank Holding Companies and Change in Bank Control) 89 Regulation K (International Banking Operations) 90 Regulation P (Minimum Security Devices and Procedures for Federal Reserve Banks and State Member Banks) 90 Regulation BB (Community Reinvestment Act) 91 Regulation CC (Availability of Funds and Collection of Checks) 92 Policy statements and other actions 92 Rule regarding delegation of authority 92 1991 discount rates 97 RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE 97 Authorization for domestic open market operations 99 Domestic policy directive 100 Authorization for foreign currency operations 101 Foreign currency directive 102 Meeting held on February 5-6, 1991 113 Meeting held on March 26, 1991 120 Meeting held on May 14, 1991 128 Meeting held on July 2-3, 1991 138 Meeting held on August 20, 1991 147 Meeting held on October 1, 1991 154 Meeting held on November 5, 1991 163 Meeting held on December 17, 1991 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

173 CONSUMER AND COMMUNITY AFFAIRS 173 Regulatory matters 178 Community affairs 179 FFIEC activities 180 Compliance with consumer regulations 184 Economic effects of the Electronic Fund Transfer Act 185 Utility of the new HMDA data 187 Complaints about state member banks 187 Unregulated practices 188 Consumer Advisory Council 190 Testimony and legislative recommendations 191 Recommendations of other agencies 193 LITIGATION 193 Bank holding companies—antitrust action 193 Bank Holding Company Act—review of Board actions 194 Litigation under the Financial Institutions Supervisory Act 195 Other actions 197 LEGISLATION ENACTED 197 Federal Deposit Insurance Corporation Improvements Act of 1991 205 BANKING SUPERVISION AND REGULATION 206 Scope of responsibilities for supervision and regulation 212 Supervisory policy 217 Regulation of the U.S. banking structure 220 International activities of U.S. banking organizations 221 Enforcement of other laws and regulations 224 Federal Reserve membership 225 REGULATORY SIMPLIFICATION 225 Minimum security devices and procedures 225 International banking 226 Applications by bank holding companies to conduct nonbanking activities 227 FEDERAL RESERVE BANKS 227 Other developments in Federal Reserve services 230 Examinations 230 Income and expenses 231 Holdings of securities and loans 231 Volume of operations 231 Federal Reserve Bank premises 233 Financial statements for priced services Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

237 BOARD OF GOVERNORS FINANCIAL STATEMENTS 243 STATISTICAL TABLES 244 1. Detailed statement of condition of all Federal Reserve Banks combined, December 31, 1991 246 2. Statement of condition of each Federal Reserve Bank, December 31, 1991 and 1990 250 3. Federal Reserve open market transactions, 1991 252 4. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities, December 31, 1989-91 253 5. Number and salaries of officers and employees of Federal Reserve Banks, December 31, 1991 254 6. Income and expenses of Federal Reserve Banks, 1991 258 7. Income and expenses of Federal Reserve Banks, 1914-91 262 8. Acquisition costs and net book value of premises of Federal Reserve Banks and Branches, December 31, 1991 263 9. Operations in principal departments of Federal Reserve Banks, 1988-91 264 10. Federal Reserve Bank interest rates, December 31, 1991 265 11. Reserve requirements of depository institutions 266 12. Initial margin requirements under Regulations T, U, G, and X 267 13. Principal assets and liabilities and number of insured commercial banks, by class of bank, June 30, 1991 and 1990 268 14. Reserves of depository institutions, Federal Reserve Bank credit, and related items—year-end 1918-91, and month-end 1991 274 15. Changes in number of banking offices in the United States, 1991 275 16. Mergers, consolidations, and acquisitions of assets or assumptions of liabilities approved by the Board of Governors, 1991 289 FEDERAL RESERVE DIRECTORIES AND MEETINGS 290 Board of Governors of the Federal Reserve System 292 Federal Open Market Committee 293 Federal Advisory Council 294 Consumer Advisory Council 295 Thrift Institutions Advisory Council 296 Officers of Federal Reserve Banks, Branches, and Offices 297 Conferences of chairmen, presidents, and first vice presidents 298 Directors 319 INDEX 326 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 1991 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction The year 1991 started with the economy as did various measures of inflation in recession. Output fell sharply in the expectations. first quarter, and unemployment contin- At the start of 1991 the Federal Reued to climb. By early spring, activity serve already had moved to ease money had bottomed out, and for a few months market conditions in response to the recovery seemed to be taking hold in a weakening of the economy in the latter fashion roughly typical of that seen in part of 1990, and a further progressive the very early phases of previous post- easing took place during the first several war expansions. But as the year wore months of 1991. Then, with the stance on, the incipient recovery lost its mo- of policy seemingly conducive to supmentum. Consumer spending turned porting the upturn in activity that began down after mid-summer, and business in the spring, a more neutral money and household sentiment began to erode. market posture was maintained through Inventories at wholesale and retail trade the spring and early summer. establishments began to increase rela- The Federal Reserve resumed its eastive to sales, inducing a new outbreak of ing of money market conditions in the production adjustments and layoffs that second half of 1991 against the backcontinued through year-end. Growth of drop of flagging economic activity, dithe economy—as measured by its gross minishing inflationary pressures, and a domestic product—came almost to a weakening of the broader monetary standstill in the fourth quarter, and the aggregates—M2 and M3. The federal gain over the year as a whole was less funds rate fell from 5% percent in July than V2 percent. to 4 percent by year-end, and most other By contrast, the inflation picture short-term rates followed suit. The disbrightened considerably in 1991. After count rate also was reduced over this accelerating moderately in 1989 and period, from 5*/2 percent to 3Vi percent, 1990, the rate of price increase turned the lowest rate in nearly thirty years. down in the first half of 1991, and by the Long-term interest rates, which had end of the year an underlying trend to- failed to respond to declines in money ward disinflation seemed to have be- market rates in the early months of the come well-established in the labor and year, came down significantly in the latproduct markets. The consumer price ter part of 1991, partly in response to the index excluding food and energy— easing in inflationary expectations. a widely accepted measure of core The faltering of the recovery process inflation—rose 4.4 percent in 1991, in the second half of 1991 apparently after an increase of more than 5 per- resulted from the convergence of a varicent in 1990. Labor costs also slowed, ety of forces. Burdened by heavy debts and weak asset values—particularly in real estate—households and corporations NOTE. The discussion here and in the following restrained spending. In addition, finantwo chapters is adapted from Monetary Policy cial intermediaries, chastened by their Report to the Congress Pursuant to the Full Employment and Balanced Growth Act of 1978 negative experience with earlier loans, (Board of Governors, February 1992). became more hesitant to extend new Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78th Annual Report, 1991 credit; the resultant tightening of lend- new, lower-cost credit. Lower interest ing standards deepened the decline in rates also contributed to an increase in economic activity early in the year and stock prices, which induced firms to inhibited the subsequent recovery. In the boost equity issuance, pay down debt, government sector, where deficits re- and thereby strengthen their balance mained large at the federal level as well sheets. Through such adjustments, as in many state and local jurisdictions, households and businesses were becomefforts to curb spending and increase ing better positioned at year-end to berevenues constituted a further drag on gin providing more active support to the aggregate demand. economic recovery. In addition, finan- The sluggishness of spending in 1991 cial institutions had made considerable was accompanied by a striking slow- progress in strengthening their balance down in the growth of credit. The vol- sheets; this strengthening will augment ume of outstanding debt in the domestic the ability of these institutions to lend nonfinancial sector increased AlA per- and could reduce demands on the fedcent in 1991, roughly half the average eral safety net. pace of the three previous years. Exclud- At year-end the nation also had reaing federal government debt, which con- son to be guardedly optimistic about the tinued to climb briskly, the growth of ability of American firms to compete in nonfinancial sector debt over the year the world economy. The real exports of was 2J/2 percent, the smallest rise in goods and services registered another decades. Households, nonfinancial busi- solid gain in 1991 despite a further nesses, and state and local governments slowing in the growth of foreign indusall retrenched in order to buttress deteri- trial economies; the merchandise trade orating financialp ositions. deficit for the year was the smallest At the end of 1991, the speed with since 1983. Cost restraint in manufacturwhich the monetary easing might trans- ing, associated in part with rapid prolate effectively into increases in produc- ductivity gains, has enabled U.S. protion and employment was still a matter ducers to move more aggressively into of considerable uncertainty. The low foreign markets in recent years. That level of consumer confidence evident at cost restraint and productivity gain will year-end seemed likely to exert a nega- need to be maintained, of course, if tive influence on near-term activity. In domestic producers are to remain at the addition, severe structural problems still forefront of a rapidly changing world were evident in some sectors. Most no- economy. tably, the persistent overhang of vacant Our ability to compete in the world space in office and other commercial arena—and an improved economy more buildings appeared certain to inhibit new generally—also will require a shift over construction in that sector for some time toward higher rates of saving and time, and the budgetary constraints that investment. The rates of personal and had capped government spending in corporate saving have been extremely 1991 seemed likely to linger. low over the past decade; at the same At the same time, however, some time, rapid growth of the stock of fedstrong positive forces also were evident. eral debt has imposed heavy demands With interest rates down sharply in on the limited amount of saving that was 1991, households and businesses took available. The result has been a higher the opportunity to refinance mortgages level of real interest rates than there and to replace other existing debt with would have been otherwise. Growth of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction the real capital stock, upon which our future incomes depend, has thereby been stunted. A sustained reduction in the size of the federal budget deficit continues to be the most certain way to boost total saving and bring about an easing of the pressure on long-term rates. Monetary policy also can contribute positively to the long-run performance of the economy, by providing the noninflationary setting in which saving and investment are most likely to flourish. In that regard, it is encouraging that core inflation is slowing—at the end of 1991 it seemed headed for the lowest pace in a generation. Preserving that gain against inflation while helping to lift the economy solidly into sustained expansion is the challenge that monetary policy will have in 1992 and beyond. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1991 The year began with the U.S. economy sector continued to restrain credit availin the midst of recession. Activity had ability. Such influences undoubtedly contracted sharply after the jump in oil muted the stimulus that normally would prices that followed Iraq's invasion of have been forthcoming from the decline Kuwait in August 1990, and the weak- in interest rates. The fiscal restraint eviness continued into the first quarter of dent at all levels of government weighed 1991, bringing further reductions in pro- on aggregate demand in a way not typiduction and employment. By spring, cally observed in previous economic however, economic data indicated that cycles. Significant restructurings of the decline in activity had bottomed out. operations in a number of sectors had The rapid conclusion of the Persian Gulf the effect of retarding employment and war boosted consumer confidence, and income growth, at least in the short tangible support for an increase in run. And concerns about debt-servicing household spending was coming from burdens as well as about economic falling oil prices and the cumulative prospects made businesses and coneffects of declining interest rates. Con- sumers reluctant to borrow or increase struction of single-family homes had al- spending. ready turned up noticeably by April, and Despite their cautious planning, some consumer spending posted a moderate businesses experienced inventory backrise in the second quarter. Although ups over late summer and fall, necessibusinesses continued to liquidate inven- tating another round of production adtories at a fairly rapid pace, industrial justments. Industrial production edged production grew steadily from April down in the fourth quarter, and the through July, and payroll employment turned up. But the economic pickup that emerged in the spring failed to develop Real GDP momentum. The thrust to domestic de- Percentage change, annual rate mand initiated by the end of the Gulf war dissipated during the summer, and although growth of the economy was positive in the second half of 1991, it was much slower than the pace seen in the comparable phase of previous recoveries. The absence of a more robust recovery likely reflected the drag on aggregate demand from some longer-term economic and financial adjustments. For example, imbalances long evident in the commercial and multifamily construc- 1989 1990 1991 tion sectors damped enthusiasm for new The data are preliminary, seasonally adjusted, and projects, and difficulties in the financial come from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 78th Annual Report, 1991 growth of real gross domestic product incomes, real consumer spending rose came almost to a halt. In the labor mar- just Vi percent in 1991. After declining ket, layoffs increased once again, and early in the year, spending picked up the civilian unemployment rate rose, to in the spring and early summer; but 7.1 percent by year-end. thereafter, it weakened once more, re- Inflation slowed in 1991. Consumer strained by the failure of the recovery prices rose 3 percent over the year, only to take hold and households' concerns half the increase posted during 1990. In about their financial prospects and debt part, the slowing of inflation was a re- burdens. sult of the plunge in oil prices early in The weakness in consumer spending 1991; consumer energy prices fell over the year was particularly evident sharply in the first quarter and closed the for durable goods. Motor vehicle sales year IVi percent below their level at the in 1991, at 12V4 million units, were the end of 1990. Food price inflation also lowest since 1983, and outlays for other moderated considerably in 1991; in durable goods were down slightly over total, food prices were up only 2 percent the year, after a decline of 1 x/i percent in at retail, after three years of increases in 1990. Spending on nondurable goods excess of 5 percent. also declined in 1991; expenditures were Even apart from food and energy, in- down sharply in the fourth quarter, espeflation shifted to a downward trend in cially for apparel. The outlays for ser- 1991. To be sure, there were sizable vices continued to trend up at a pace increases in the CPI excluding food and similar to that of the two previous years; energy early in the year, as higher fed- however, growth of spending was much eral excise taxes and lagged effects of slower than in earlier years of the long the sharp rise in energy prices boosted expansion of the 1980s. prices for a variety of goods and ser- The sluggishness of consumer spendvices. But, with the subsequent reversal ing in 1991—particularly the steep dein oil prices and no further major tax cline in outlays for durable goods—was hikes, price pressures began to ease in likely related in part to the efforts of the spring. In the second half of 1991, households to strengthen their balance the CPI excluding food and energy rose less than 4 percent at an annual rate, a pace well below the 5 percent rate for 1990. Real Income and Consumption Labor cost pressures also diminished Percentage change, annual rate in 1991, although substantial increases Disposable personal income in health care expenses remained a prob- Personal consumption expenditures lem for employers. As measured by the employment cost index, nominal compensation per hour rose about AV2 percent over 1991, an increase somewhat less than those recorded in each of the three previous years. The Household Sector 1989 1990 1991 With household finances adversely The data are preliminary, seasonally adjusted, and affected by job losses and declining real come from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1991 sheets. Household debt burdens rose this heightened sense of anxiety among substantially during the 1980s, when households. consumers stepped up spending on Households' real outlays for residenmotor vehicles and other consumer tial investment declined in the first quardurables; often, these purchases were ter, then rose over the remainder of the financed with credit. In some parts of year. Impetus for this rise in spending the nation, this spending boom spread to came from a reduction in mortgage rates residential real estate as well; the associ- to their lowest levels since the 1970s. ated borrowing, which was often predi- Sales of new and existing single-family cated on expectations of rapidly rising homes rose over the year, with the family incomes, added further to the pickup in demand reportedly especially financing burdens of households. As in- pronounced from first-time buyers. With come growth weakened in 1990 and the strengthening in demand, the excess 1991, consumers struggled to meet the supply of unsold new homes diminished monthly obligations on their accumu- in 1991, and after dropping sharply in lated debt, and they apparently deferred January, housing starts staged a modersome discretionary spending in the ate recovery over the remainder of the process. year. The pace of single-family housing Renewed pessimism on the part of starts in the fourth quarter was up households also may have contributed 18 percent from a year earlier. to their reluctance to step up spending All told, however, single-family housover the latter part of 1991. Consumer ing construction in 1991 was below that confidence, which was quite low at the of 1990, and it was down sharply from beginning of the year, rose markedly the pace seen during the economic exupon the conclusion of the Gulf war. pansion of the 1980s. Moreover, despite However, as the anticipated recovery in the upturn in activity after January, the the economy failed to materialize and as single-family housing market remained announcements of layoffs resumed, con- softer than would have been expected fidence turned down again, falling espe- given the levels of mortgage rates and cially sharply toward the end of the year. Concerns about longer-run economic prospects seemed to be contributing to Private Housing Starts Millions of units, annual rate Personal Saving Percent of disposable income Single-family 0.5 1987 1989 1991 1987 1989 1991 The data are preliminary, seasonally adjusted, and The data are seasonally adjusted and are from the come from the Department of Commerce. Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

10 78th Annual Report, 1991 the rising number of consumers in their By the spring, inventories generally prime homebuying years. More than were better aligned with sales, and operlikely, this shortfall was a reflection of ating profits, while still low, had turned the restraint on demand exerted by weak up. As a result, the improvement in income growth and by concerns about aggregate demand in the second quarter employment prospects. However, con- was accompanied by an increase in busitinued lender caution about granting ness output, and industrial production loans for land acquisition and construc- rose, on average, 0.7 percent per month tion reportedly damped the construc- over the four-month period starting tion of single-family housing in some in April. Even so, businesses remained locales. relatively cautious, and inventory levels In the multifamily housing market, an continued to decline through midyear. excess supply of vacant units and re- In late summer, final demand slackstraints on credit availability continued ened, and after seven months of decline, to depress construction in 1991. Starts business inventories rose appreciably of multifamily units fell about 30 per- from September through December. cent over the year, and the annual total The rise in inventories was centered was the lowest since the 1950s. There in wholesale and retail trade, and were numerous reports of restrictive inventory-sales ratios in those sectors lending practices damping activity in moved into ranges that appeared undethis sector. But the more prominent fac- sirably high in light of carrying costs tor retarding new construction probably and expected sales. The efforts of retailwas the continued excess supply. With ers and wholesalers to restore better vacancy rates for rental units exception- inventory balance led, in turn, to cuts in ally high and rents soft, the economic manufacturing output toward the end of viability of new projects remained ques- the year. By December, factory productionable in many areas. Under these tion had dropped back almost to its level circumstances, activity in this segment of the market seemed unlikely to show appreciable improvement in the near term. Corporate Profits before Taxes Percent of gross domestic product The Business Sector At the start of 1991, businesses were striving to adjust to the cyclical contraction in demand for their products and to the surge in energy costs during the preceding half year. With profit margins down sharply and inventory imbalances emerging in a number of sectors, businesses reduced production and employment substantially between October 1990 and March 1991. Cutbacks were especially sharp in the motor vehicle 1987 1989 1991 sector over that period, although output Profits of nonfinancial corporations from domestic of most other types of goods and materi- operations, with adjustments for inventory valuation and capital consumption, divided by GDP of nonfinancial als turned down as well. corporate sector. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1991 11 of a year earlier, and the operating rate Outlays for industrial equipment in industry was back down to near the dropped sharply in 1991 as excess calows of the previous spring. pacity limited expansion in the manufac- Business investment in fixed capital turing sector, and business purchases of fell 7V2 percent in real terms over the motor vehicles also fell, on net. In addifour quarters of 1991. As is typical dur- tion, domestic orders for commercial ing recessions, spending was inhibited aircraft plunged after midyear, as a numby weak profits, a rise in excess capac- ber of domestic airlines trimmed investity, and uncertainty regarding the out- ment plans. Although the large backlog look for sales. However, investment out- of unfilled aircraft orders that still relays last year also were depressed by a mained at year-end seemed likely to susdesire of many businesses to reduce debt tain production and shipments for some burdens and by a continued oversupply time, the slackening of new orders sugof office and other commercial space. gests that the growth surge in this sector Real spending for equipment fell may have run its course. 4 percent over 1991; outlays plunged in Nonresidential construction plumthe first quarter and showed only limited meted nearly 15 percent in real terms improvement on net over the remainder over the four quarters of 1991. The conof the year. The main exception to the traction was broadly based. Spending pattern of weakness was investment for industrial structures fell during the spending for computers; driven by new course of the year as low rates of capacproduct introductions and by the sub- ity utilization curtailed plans for new stantial price cuts offered by computer factory construction; and petroleum manufacturers, these outlays rose, in real drilling activity dropped sharply in terms, at an annual rate of more than response to the decline in oil prices. But 40 percent in the second half of the year. the largest declines in outlays, by far, In contrast, business investment in other were those for office buildings and other types of equipment generally declined, commercial structures. Here, the fundaon balance, over the course of 1991. mental problem in 1991 continued to be Changes in Real Business Inventories Billions of 1987 dollars, annual rate Industrial Production Index, 1987 = 100 li 30 15 li i + 0 105 15 100 30 95 1989 1990 1991 Total nonfarm sector. The data are preliminary, seasonally adjusted, and come from the Department of Commerce. 1985 1987 1989 1991 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

12 78th Annual Report, 1991 the overhang of vacant space from an supervisory pressures would not unduly earlier period of extensive overbuilding; restrict real estate lending. For example, for example, despite steep cutbacks in the agencies addressed issues relating to new construction in recent years, the accounting and appraisal to make sure vacancy rate for office buildings nation- that illiquid real estate exposures were wide was still close to 20 percent at the being evaluated sensibly and conend of the 1991. sistently. And they issued guidance With vacancies remaining so high, the to examiners—and simultaneously prices of existing commercial properties to bankers—emphasizing that banks weakened; the loans against those prop- should not be criticized for renewing erties also lost value, a factor that con- loans to creditworthy borrowers whose tributed heavily to the substantial stress real estate collateral had fallen in that was evident in the financial sector value—even when the banks need to in 1991. Lenders, in turn, were reluctant build up capital or reduce loan concento finance acquisitions of commercial trations over time. However, with so properties; this lack of liquidity com- adverse a supply-demand imbalance in pounded the difficulties of adjustment the property market, lenders understandin the commercial real estate market. ably remained reluctant to bear the risks In the market for office buildings, all of real estate exposures. of the indicators of construction activity remained strikingly negative at The Government Sector the end of 1991. For other commercial structures—primarily shopping centers Budgetary pressures were widespread in and warehouses—the outlook seemed the government sector in 1991. At the slightly less downbeat, with the data on federal level, the unified budget deficit new contracts and building permits sug- increased to $269 billion in fiscal year gesting that the steepest declines may 1991, up $48 billion from the 1990 defhave already occurred. icit. In large part, the rise in the deficit Federal banking regulators took a was attributable to the slowdown in number of steps in 1991 to ensure that economic activity, which reduced tax receipts and added to outlays for income-support programs such as unemployment insurance and food stamps. Real Business Fixed Investment However, as in 1990, the fiscal 1991 Percentage change, annual rate deficit also was affected by special factors: A pickup in net outlays for deposit Producers' durable equipment i insurance added to the deficit, while 10 one-time contributions from our allies to f defray the costs of Operations Desert 1 Shield and Desert Storm reduced it. Ex- Structures cluding deposit insurance and these for- 10 eign contributions, the 1991 deficit totaled $246 billion. 20 On the revenue side, federal tax receipts rose just 2 percent in fiscal 1991, the smallest increase in many years. The 1989 1990 1991 slowing in receipts stemmed largely The data are preliminary, seasonally adjusted, and come from the Department of Commerce. from weak growth of nominal income; Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1991 13 indeed, personal income tax payments which are scored as negative outlays in in 1991, which accounted for nearly half the budget accounts, exceeded the outof total receipts, were about the same as lays made in 1991 for U.S. involvement in 1990 despite changes in tax pro- in the conflict; the excess will be applied visions that were projected to raise to the replacement of munitions in 1992 $16 billion in new revenues. and beyond. Excluding deposit insur- Meanwhile, federal spending rose ance and the contributions of allies, outnearly 6 percent in fiscal 1991. Part of lays rose about 9 percent in fiscal 1991. this increase resulted from the slightly Spending for health programs continued more rapid pace at which the Resolution to rise rapidly, elevated by large in- Trust Corporation resolved insolvent creases in health care costs and outlays thrift institutions. In contrast, outlays for medicaid. Among other outlays for were reduced in fiscal 1991 by allied entitlements, those for social security contributions to the Defense Coopera- and other income-support programs, tion Account. These contributions, which together account for one-third of total federal spending, rose more than 11 percent in fiscal 1991; the jump was related to substantial increases in the number of beneficiaries. Interest pay- Government Surpluses and Deficits ments on the federal debt also continued Billions of dollars to rise in fiscal 1991, but at a slower pace than in the previous fiscal year; the effect of a further big rise in the volume of federal debt outstanding was partially offset by declines in interest rates. Federal purchases of goods and services, the portion of federal spending that is included directly in GDP, fell 200 3V2 percent in real terms over the four quarters of 1991. Defense purchases jumped sharply early in the year to support operations in the Persian Gulf, but State and local government declined substantially over the remainder of the year as the effects of scheduled cuts in defense outlays were augmented by a dropoff in purchases for Desert Storm; on net, real defense purchases were down about AVi percent. In contrast, nondefense purchases changed little in 1991; increases in law enforcement, space exploration, and health research offset a drawdown in inven- 1985 1987 1989 1991 tories held by the Commodity Credit The data on the federal government are for fiscal years. Corporation. They are on a unified budget basis and are from the The fiscal position of state and local Department of the Treasury. The data on state and local governments are prelimi- governments, which had deteriorated nary. The are for operating and capital accounts on a sharply in 1990, remained poor in 1991. national income accounts basis and are from the Department of Commerce. The deficit in the combined operating Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 78th Annual Report, 1991 and capital accounts (excluding social pattern continued into 1991, with noninsurance funds) narrowed to $34 bil- farm payroll employment down sharply lion in the third quarter from a high of nearly $47 billion in the fourth quarter of 1990; the shrinkage represented the first major improvement since 1984, Labor Market Conditions when the state and local budget surplus Net change, millions of jobs, annual rate peaked. Even so, relative to GDP, the Private nonfarm payroll employment deficit remained quite high on a historical basis. The credit quality of state and local .illlhi, government debt continued to deteriorate last year. For example, one rating agency downgraded the general obligation debt of eight states. Most of these rating changes were the direct result of budgetary imbalances. The poor fiscal position of states and localities led to both severe restraints on spending and sizable tax hikes. Overall, Percent, quarterly average real purchases of goods and services by Civilian unemployment rate state and local governments edged down over the four quarters of 1991 after seven years of sustained increases. In nominal terms, total expenditures by these governments were up AV2 percent, only about one-half the average pace of previous years. Receipts rose an estimated 7 percent in 1991; numerous jurisdictions imposed a variety of new tax measures, and federal aid to state and local governments—especially for medicaid—increased substantially. Percentage change, Dec. to Dec. Nonetheless, many states and localities Employment cost index continued to report revenue shortfalls Total compensation and spending overruns, probably setting the stage for another round of budgetbalancing measures. Illlll Labor Markets Labor market conditions generally deteriorated in 1991, and the unemployment rate rose above 7 percent by the end of the year, the highest level since 1986. Employers had moved quickly to shed 1987 1989 1991 workers when the recession took hold The employment cost index is for private industry excluding farms and households. The data are from the during the second half of 1990, and this Department of Labor. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1991 15 over the first four months of the year. was especially wide when compared Economic conditions improved in the with experience during previous epispring, and labor demand turned up for sodes of rising unemployment. Increases a time. But the subsequent weakening in unemployment were broadly based in activity in the late summer led to a across regions, industries, and occuparenewed bout of layoffs that largely tions, and permanent layoffs appeared to retraced the job gains recorded during constitute an unusually large proportion the spring and summer. In December, of the rise in joblessness. payroll employment was 0.7 percent Nonetheless, the rise in the jobless below the level of a year earlier. rate was less than in most previous epi- The net job losses of 1991 were wide- sodes of increasing unemployment, in spread by industry and reflected both the large part because growth of the labor cyclical weakness in labor demand asso- force was unusually slow. The labor ciated with the recession and more fun- force participation rate at the end of damental efforts by many businesses to 1991 was about Vi percentage point restructure operations and permanently below its average during the first half reduce the size of their work force. Em- of 1990. This decline in participation ployment in manufacturing, which be- appeared to stem partly from cyclical gan to decline in 1989, fell about influences: The number of discouraged 450,000 in 1991; most of the losses were workers rose in 1991, and sizable in the durable goods sector. Construc- increases were reported in the number tion employment also fell in 1991; the of retirees, perhaps reflecting to some continued rapid contraction in commer- extent a spate of early retirement procial building more than offset gains grams. However, the weak labor force associated with the moderate recovery growth of recent years may also reprein residential housing demand. In the sent a downshift in the trend rate of finance, insurance, and real estate sector, increase in labor supply that—if not offefforts to restructure existing operations set by productivity gains—could transand to downsize workforce levels led to late into a reduction in the trend rate of job losses in 1991—a divergence from growth of the economy's potential. the pattern of continued hiring in that But at the same time, it also is possisector during most previous recessions. ble that the recent sluggishness in labor Employment in trade establishments force participation is a harbinger of also fell substantially over the year, more favorable longer-run developpushed down by the weakness in con- ments. In particular, the number of indisumer spending and the high degree of viduals who have left the labor force in financial distress among retailers. In order to attend school has risen sharply contrast, employment in services in- in recent years. Although that increase creased, on net, over the year, as steady may, to some degree, reflect declining gains in health services more than offset opportunity costs associated with poor sluggish hiring in the more cyclically job prospects, recognition of the longersensitive business and personal service term decline in relative wages among industries. lower-skilled workers may also have The unemployment rate at the end of played a role. As students reenter the 1991 was up nearly 2 percentage points labor force upon completion of their from its level of mid-1990, when the schooling, their increased skills should recession had not yet begun. The distri- boost labor productivity and potential bution of job losses over that interval output in future years. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

16 78th Annual Report, 1991 Efforts to increase labor productivity a rise of 6 percent in 1990. A sharp have also intensified in the business swing in energy prices accounted for a community. If the aforementioned plans major part of this deceleration. Howto reorganize corporate structures and to ever, the elements of a more fundamendownsize the labor force requirements tal diminution of inflation were in place: of existing operations are successful, the Labor cost increases moderated; expecpossible outcome is a significant im- tations of inflation eased; and upward provement in the productivity trend, pressures from import prices and indusmuch as occurred in the manufacturing trial raw material prices were virtually sector after the considerable compres- absent during the year. sion of manufacturing organizations in Energy prices dropped sharply in the early 1980s. 1991, mirroring the changes in oil prices With layoffs widespread and the un- over the year. The sequence of events in employment rate rising throughout the the Middle East caused the posted price year, the upward pressures on wages of West Texas Intermediate crude oil to that had intensified between 1987 and mid-1990 diminished somewhat in 1991. As measured by the employment cost index, the twelve-month rate of change in hourly compensation for pri- Prices vate nonfarm workers slowed from more Percentage change, Dec. to Dec. than 5 percent in the first half of 1990 to 4Vi percent by the end of 1991. The wage and salary component of hourly compensation, which rose 3 percent at an annual rate over the second half of 1991, exhibited the most deceleration. The rate of rise in employer costs for benefits also decelerated after mid-1990, but the increases continued to be much greater than those for wages alone. Expenses for health insurance continued to soar in 1991, despite considerable effort on the part of employers to control costs Consumer excluding food and energy by negotiating directly with providers and by increasing workers' share of health expenditures. Employer premiums for workers' compensation insurance also rose sharply last year, reflecting both a swelling in the number of claims and the rapid pace of inflation in medical care. Price Developments A significant slowing of inflation 1987 1989 1991 emerged in 1991. The consumer price Consumer prices are for all urban consumers. The data are seasonally adjusted and are from the Department of index rose 3 percent over the year, after Labor. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1991 17 fall from a peak of about $39 per barrel The consumer price index for items in October 1990 to less than $20 by other than food and energy rose AV2 per- February 1991; as a result, the CPI for cent in 1991, about 3A percentage point energy fell 30 percent at an annual rate less than in 1990. The index was in the first quarter. Oil prices subse- boosted early in 1991 by increases in quently held near the $20 level, but gas- federal excise taxes on cigarettes and oline prices firmed somewhat during the alcoholic beverages and by an increase summer as reduced imports and domes- in postal rates. Price increases in early tic refinery problems led to some tight- 1991 also were enlarged by the ness in inventories. However, these passthrough of the rise in energy prices forces were offset by declines in natural into a wide range of nonenergy goods gas and electricity rates, and energy and services. However, the subsequent prices changed little, on balance, in the decline in energy prices soon spread to second and third quarters. Some upward the nonenergy sector, and except for a price pressures surfaced again in the fall period in the summer when there was as crude oil prices moved up in response some bunching of price increases, the to concerns about oil supplies from the remainder of the year saw a significant Soviet Union. After October, however, easing of core inflation. oil prices retreated again; at year-end, Prices for nonenergy services decelerprices in the spot markets were down to ated considerably last year, rising less than $20 per barrel. 4Vi percent after an increase of 6 per- The CPI for food rose just 2 percent cent in 1990. Reflecting weak real estate over 1991, well below the increases of markets, rent increases slowed sharply, 5 to 5V2 percent observed in the three with both tenants' rent and owners' previous years. In part, the subdued pace equivalent rent up less than 4 percent of food price inflation reflected an over the year. The drop in interest rates increased supply of livestock products. in 1991 pushed down auto financing Beef production turned up last year in costs more than 7 percent. And, after a response to the strong prices that brief spurt early in the year, airfares prevailed in the preceding few years, receded as energy costs fell and as the and supplies of pork and poultry rose weak economy cut into demand; toward sharply; in response, meat and poultry year-end, however, airfares turned up prices fell about 2 percent over the year. again as hard-pressed carriers sought to The deceleration in food prices also ex- improve their finances. Elsewhere in the tended to food groups in which prices services category, the prices for medical are influenced more by the cost of non- care services rose 8 percent over the farm inputs than by supply conditions in year, and tuition costs and other school agriculture; for example, the increase in fees were up nearly 10 percent. 1991 in the price of food away from The CPI for commodities excluding home was the smallest since 1964. Else- food and energy rose 4 percent in 1991, where, there were large but temporary about Vi percentage point faster than in monthly hikes in prices for fruits and 1990. In large part, the more rapid rate vegetables; adverse weather conditions of inflation in this category was a result boosted these prices for a while in the of the aforementioned hike in excise first half of the year, and prices of some taxes. In addition, the prices of new and fresh vegetables jumped toward the end used cars rose more than in 1990, deof the year because of the whitefly infes- spite weak sales. By contrast, a slowing tation in California. in price increases was evident for a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

18 78th Annual Report, 1991 number of other goods, notably apparel and personal-care items. The easing of inflationary pressures at the factory level was even more striking than at the retail level. The producer price index for finished goods edged down in 1991 after three years of increases that averaged 5 percent per year. As was true at retail, falling prices for energy and food accounted for much of the overall deceleration. But even apart from food and energy, producer prices slowed to a 3 percent pace in 1991. Prices for intermediate materials excluding food and energy fell 3A percent over the year, reflecting declines in fuel and petroleum feedstock costs, an easing of wage pressures, and weak demand. The spot prices of industrial commodities declined gradually over most of 1991, after dropping sharply in the fourth quarter of 1990. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

19 Monetary Policy and Financial Markets in 1991 The principal objective of monetary pol- were somewhat hesitant to extend credit. icy in 1991 was to help lay the ground- The more circumspect attitude toward work for a sustainable expansion with- credit and spending on the part of borout sacrificing the progress against rowers and financial intermediaries was inflation that had already been set in manifest in the behavior of the aggremotion. The Federal Reserve eased gate debt of domestic nonfinancial money market conditions during the sectors, which grew at a rate near the year amid signs of continued sluggish bottom of the Federal Open Market economic activity, weak growth in the Committee's monitoring range despite broader monetary and credit aggregates, burgeoning U.S. Treasury borrowing. and diminishing inflationary pressures. Not only was overall credit growth sub- A more generous provision of reserves dued, but credit flows continued to be through open market operations, cou- rechanneled away from depository instipled with five separate reductions in the tutions, reflecting the more restrictive discount rate brought the federal funds lending standards at banks and thrift inrate and most other short-term interest stitutions as well as efforts by borrowers rates down about 3 percentage points to make greater use of longer-term debt over the course of the year. At year-end, and equity in order to strengthen their the discount rate stood at its lowest level balance sheets. Partly as a result, the in nearly thirty years, and the federal funds rate was down to 4 percent, its lowest sustained level since the 1960s. With the actions taken in 1991 building Short-Term Interest Rates on earlier easings, the federal funds rate Percent at year-end was also nearly 6 percentage points below its most recent peak, in the spring of 1989. The faltering of the economic recov- 14 ery in the second half of 1991 resulted in some measure from an unusually cautious approach to credit on the part of both borrowers and lenders. Efforts by debt-burdened households and businesses to pare debt in order to strengthen balance sheets that had been strained by the general slowdown in income and Treasury bills by declines in property values exerted Three-month further damping effects on credit demands and on aggregate spending. 1983 1985 1987 1989 1991 Faced with deteriorating asset values The data are monthly averages. and pressures on capital positions, de- The federal funds rate is from the Federal Reserve. pository institutions and other lenders The rate for three-month Treasury bills is the market rate on three-month issues on a coupon-equivalent basis maintained tighter lending standards and and is from the Department of the Treasury. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

20 78th Annual Report, 1991 monetary aggregates M2 and M3 also activity, abating price pressures, and finished the year near the bottoms of continuing credit restraint by banks and their target ranges. other financial intermediaries, a more To prevent these forces from stifling expansive open market posture was the recovery, the Federal Reserve eased adopted in conjunction with two Vi permoney market conditions aggressively centage point reductions in the discount in the latter part of the year. In light of rate. The easing engendered a decline of weak aggregate demand and reduced 125 basis points in the federal funds rate inflationary potential, long-term interest over the first four months of the year. rates—which had largely failed to re- Short-term Treasury rates generally folspond to monetary easings earlier in the lowed suit, and banks reduced the prime year—came down substantially toward rate, in three increments of 50 basis the end of 1991. This decline prompted points each, to 8V2 percent. a flood of mortgage refinancings and Long-term interest rates, by contrast, additional corporate and municipal were roughly unchanged on balance bond offerings, which helped reduce the over the first few months of the year. At financing burdens of nonfederal sectors. first, these rates fell somewhat in re- Lower interest rates also contributed to sponse to the continued downturn in a major stock market rally, which in- economic activity and declining energy duced firms to boost equity issuance and prices, especially in light of initial sucpay down debt, partially reversing the cesses in the Gulf war that ensured an trend of the 1980s toward increased unimpeded flow of oil. Success in the leverage that had severely stretched cor- initial phases of the war also prompted a porate balance sheets. brief dip in the exchange value of the On the whole, the nation made con- dollar, as safe-haven demands that had siderable progress in strengthening its been propping up the dollar's value in balance sheet in 1991. Less reliance on debt, greater use of equity, and lower financing costs have helped ease debtservicing burdens for many financially troubled households and corporations. Long-Term Interest Rates Although the trend toward deleveraging Percent exerted a restraining effect on aggregate spending in 1991, it should help, over time, to put consumers, firms, and financial intermediaries on a sounder financial footing and pave the way for healthy, sustainable economic growth. 10 The Implementation of Monetary Policy I I I I I I I I I 1983 1985 1987 1989 1991 The Federal Reserve eased money mar- The data are monthly averages. ket conditions several times in the first The rate for conventional mortgages is the weighted average for thirty-year fixed-rate mortgages with level few months of 1991, extending the payments at major financial institutions and is from the series of easing moves initiated in the Federal Home Loan Mortgage Corporation. latter stages of 1990. Against a back- The rate for U.S. government bonds is their market yield adjusted to thirty-year constant maturity by the drop of further declines in economic Treasury. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 21 the face of falling interest rates in the dence and on other evidence, particu- United States dissipated. larly from the housing industry, that an In March, bond yields drifted up on economic upturn was at hand. The imthe post-war rebound in consumer confi- proving outlook for recovery also con- Reserves, Money Stock, and Debt Aggregates Annual rate of change based on seasonally adjusted data unless otherwise noted, in percent' 1991 Item 1988 1989 1990 Year Ql Q2 Q3 Q4 Depository institution reserves2 Total 2.7 -.4 2.2 8.9 9.1 3.0 7.4 15.3 Nonborrowed 2.3 -.1 2.3 9.2 9.1 3.6 5.6 17.6 Required 2.6 -.1 1.8 9.5 4.5 8.9 7.9 15.5 Monetary base3 7.1 3.9 9.3 8.3 13.3 4.2 6.6 8.4 Concepts of money 4 Ml 4.3 .6 4.2 8.0 5.3 7.4 7.5 11.0 Currency and travelers checks . 8.1 4.6 11.1 8.0 13.2 3.8 6.4 7.7 Demand deposits -1.3 -2.9 -.6 3.4 -3.8 4.8 2.6 10.0 Other checkable deposits 7.6 1.0 3.5 12.4 7.0 12.8 12.9 15.0 M2 5.2 4.8 4.0 2.9 3.7 4.4 2.6 Non-Mi components 5.6 6.2 3.7 1.4 3.2 3.3 -1.1 .7 MMDAs, savings, and smalldenomimation time deposits 5.8 3.9 2.8 1.0 2.4 3.0 -.2 -1.0 General-purpose and broker-dealer money market mutual fund assets 8.2 30.6 11.2 4.4 16.9 7.5 -3.6 -3.2 Overnight RPs and Eurodollars (n.s.a.) -5.3 -8.5 3.4 -7.5 -41.8 -10.6 -14.6 40.3 M3 6.4 3.6 1.7 1.3 3.4 1.8 -1.2 1.2 Non-M2 components 10.8 -.9 -7.2 -5.5 2.0 -9.7 -9.8 -4.9 Large-denomination time deposits 11.7 4.3 -10.6 -11.7 -4.5 -10.6 -15.0 -18.9 Institution-only money market mutual fund assets .5 17.8 21.8 33.4 43.0 28.9 11.4 37.0 Term RPs (n.s.a.) 14.7 -13.3 -12.4 -21.6 -31.2 -27.8 -11.5 -23.6 Term Eurodollars (n.s.a.) 11.0 -23.2 -13.7 -9.9 6.3 -35.3 -2.5 -8.3 Domestic nonfinancial sector debt . 9.4 8.2 7.0 4.5 4.4 4.2 4.7 4.3 Federal 7.9 7.3 10.3 11.2 10.4 6.8 13.9 12.2 Nonfederal 9.9 8.5 6.1 2.4 2.6 3.4 1.9 1.7 1. Changes are calculated from the average amounts money market deposit accounts (MMDAs); savings and outstanding in each quarter. Annual changes are mea- small-denomination time deposits at all depository institusured from Q4 to Q4. tions (including retail repurchase agreements), from 2. Data on reserves and the monetary base incorporate which have been subtracted all individual retirement acadjustments for discontinuities associated with regulatory counts (IRAs) and Keogh accounts at commercial banks changes in reserve requirements. and thrift institutions; taxable and tax-exempt general- 3. The monetary base consists of total reserves plus purpose and broker-dealer money market mutual funds, the currency component of the money stock plus, for excluding IRAs and Keogh accounts; wholesale overinstitutions without required reserve balances, the excess night and continuing-contract repurchase agreements of current vault cash over the amount applied to satisfy (RPs) issued by commercial banks and thrift institutions current reserve requirements. net of money fund holdings; and overnight Eurodollars 4. Ml consists of currency in circulation excluding issued to U.S. residents by foreign branches of U.S. banks vault cash; travelers checks of nonbank issuers; demand worldwide net of money fund holdings. M3 is M2 plus deposits at all commercial banks other than those due to large-denomination time deposits at all depository institudepository institutions, the U.S. government, and foreign tions other than those due to money stock issuers; assets banks and official institutions, less cash items in the of institution-only money market mutual funds; wholeprocess of collection and Federal Reserve float; and other sale term RPs issued by commercial banks and thrift checkable deposits, which consist of negotiable orders of institutions net of money fund holdings; and term Eurowithdrawal and automatic transfer service accounts at dollars held by U.S. residents in Canada and the United depository institutions, credit union share draft accounts, Kingdom and at foreign branches of U.S. banks elsewhere and demand deposits at thrift institutions. M2 is Ml plus net of money fund holdings. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

22 78th Annual Report, 1991 tributed to a narrowing of risk premiums proach to spending and borrowing on on private securities, especially on the part of households and corporations, below-investment-grade issues; the pre- whose balance sheet problems were exmiums had reached high levels in Janu- acerbated by the stagnant economy. In ary. The debt and equity instruments of addition, credit standards at financial banks performed especially well over intermediaries remained restrictive, and this period, responding to lower short- spreads between loan and deposit rates term interest rates and the likelihood remained high by historical standards, that an economic rebound would help reinforcing households' inclinations to limit the deterioration in their loan port- pay down debt rather than to accumulate folios. The dollar's slide in foreign ex- assets. change markets was reversed by moder- To help ensure that these forces did ate official support for the dollar, better not imperil the recovery, the Federal prospects for a U.S. economic recovery, Reserve moved to ease money market a rise in U.S. long-term interest rates conditions further. Pressures on reserve relative to those abroad, and concerns positions were reduced slightly in Auabout an uncertain economic and politi- gust and again in September, with the cal situation overseas, especially in the latter move accompanied by a reduction Soviet Union. of 50 basis points in the discount rate. As evidence of a nascent economic With the economic climate remaining recovery cumulated through the remain- stagnant, price pressures subdued, and der of the spring and into early summer, the broader monetary aggregates still interest rates and the dollar continued to mired near the bottoms of their target firm, and quality spreads narrowed fur- ranges, the System's easing moves bether. Although the increases in rates dur- came more aggressive in the fourth ing this period were most pronounced at quarter, culminating in a reduction of the long end of the maturity spectrum, 1 percentage point in the discount rate short-term rates backed up a bit as well, on December 20. All told, these moves as prospects for additional monetary combined to drive the federal funds rate easings faded. Indeed, with the pace of down from 53/4 percent in July to 4 pereconomic activity apparently quicken- cent by year-end. Most other shorting, and with the broader monetary ag- term market interest rates declined by gregates near the middle of their target similar magnitudes, and the prime rate ranges, the Federal Reserve held money was reduced by 2 percentage points, to market conditions steady—the stimulus 6V2 percent. in train seemed sufficient to support an The decline in short-term interest upturn in aggregate spending. rates, in combination with flagging eco- As the summer passed, however, the nomic activity, prospects for lower inflastrength and durability of the recovery tion, and depressed credit demands, conappeared less assured. Aggregate spend- tributed to bringing long-term interest ing, production, and employment began rates down significantly in the latter part to falter, easing wage and price pres- of 1991. The rate for the thirty-year sures. In addition, the broader monetary Treasury bond dropped about 1 percentaggregates suddenly weakened dramati- age point over the second half of the cally, with M2 coming to a virtual stand- year, and mortgage interest rates tumstill and M3 actually declining in the bled to their lowest levels in many years. third quarter. The softness in the aggre- Declining interest rates prompted a spate gates was symptomatic of a warier ap- of mortgage refinancings, corporate and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 23 municipal bond offerings, and a major These changes were evident in the stock market rally, which propelled most behavior of the aggregate debt of nonindexes to record highs. Although mon- financial sectors, which expanded etary growth bounced back a bit in the 4 Vi percent in 1991, leaving this aggrefourth quarter, both M2 and M3 re- gate at the bottom of its monitoring mained near the lower ends of their re- range. Robust growth in federal governspective growth cones. The dollar, ment debt, owing to the economic which had begun to lose ground in for- downturn and to additional outlays for eign exchange markets in the summer— federal deposit insurance, masked an when the weakness in money and credit even weaker picture for nonfederal debt. raised the specter of additional easings Households, nonfinancial corporations, of U.S. monetary policy—depreciated and state and local governments accufurther in the fourth quarter as the eco- mulated debt at an anemic 2!/2 percent nomic situation deteriorated and as the rate in 1991, the slowest advance in pace of policy easings quickened. Ris- decades and smaller even than the sluging interest rates in Germany also put gish growth rate of nominal GDP. downward pressure on the foreign ex- The small rise in nonfederal debt change value of the dollar. velocity in 1991 ran counter to the pattern seen in the 1980s, when the accumulation of debt vastly outstripped Monetary and Credit Flows growth in nominal GDP. The rapid buildup of debt in the 1980s was likely a Patterns of credit usage and financial result of the deregulation of interest intermediation, which began to shift rates and the emergence of various even before the onset of the economic financial innovations; these changes downturn, continued to evolve in 1991, distorting traditional relationships between overall economic activity and the monetary and credit aggregates. Velocity of Domestic Nonfinancial Debt Ratio scale Nonfederal Total Domestic Nonfinancial Debt Trillions of dollars Actual 0.8 11.5 0.6 11.0 Range 10.5 1960 1970 1980 1990 1990 1991 The velocity of debt is the ratio of gross domestic The range was adopted by the FOMC for the period product, measured in current dollars, to the stock of debt. from 1990:4 to 1991:4. The data are quarterly averages. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

24 78th Annual Report, 1991 combined to lower the cost of borrow- took advantage of lower interest rates ing to households and businesses and to refinance higher-rate long-term bonds spawned a surge in leveraging activity. and to reduce uncertainty about their Greater debt burdens may also have future financing burdens by substibeen accumulated under the assumption tuting long-term debt for short-term that the growth of nominal income borrowing. would be sustained at the elevated pace Overall, the mixture of less debt, of the mid-1980s and that the prices of more equity, and lower interest rates had assets purchased with credit would con- a salubrious effect on the financial positinue to climb. tions of many firms. Indeed, the ratio of In recent years, however, asset values interest payments to cash flow for all and income growth have fallen short of nonfinancial firms declined in 1991, rethese expectations. In particular, de- versing some of the run-up seen in the pressed commercial and residential real late 1980s. In keeping with an improvestate values, coupled with slower in- ing financial picture and prospects of an come growth, have eroded the net worth economic rebound, quality spreads on of some borrowers and have severely corporate issues narrowed considerably strained the ability of highly leveraged from their peaks in early 1991, espehouseholds and corporations to service cially on below-investment-grade secudebt. These difficulties, in turn, have rities. In addition, downgradings of coraffected the strength of the financial in- porate bonds dropped sharply in the termediaries that extended the credit. In third and fourth quarters, although an effort to bolster depleted capital posi- they still ran higher than the pace of tions, reduce financing burdens, and upgrades. shore up weakened balance sheets, both Deleveraging was also evident in the borrowers and lenders have adopted a household sector in 1991. Consumer more chary attitude toward additional credit declined as households reined in credit. expenditures, curbed their accumulation The more cautious approach to lever- of financial assets, and pared existing age has interacted with the sluggish pace debt burdens. Households took advanof economic activity to restrain borrow- tage of declining interest rates, particuing across nearly all sectors of the econ- larly in the fourth quarter, by refinancing omy. Nonfinancial business sector debt, outstanding mortgages; they also substiheld in check by the decline in financing tuted home equity loans for installment needs associated with weak aggregate debt and other consumer credit that cardemand and by efforts of debt-laden ried higher financing costs and was no firms to restructure their balance sheets, longer tax deductible. By reducing their was virtually unchanged in 1991. net accumulation of debt and refinanc- Taking advantage of a buoyant stock ing a substantial volume of their remainmarket, particularly in the latter part of ing borrowings at lower rates, housethe year, corporations turned to equity holds were able to ease their financing financing; net equity issuance for the burdens; the ratio of scheduled debt payyear was positive for the first time since ments to disposable personal income 1983, and the ratio of the book value of turned down, reversing a little of the nonfinancial corporate debt to equity, sharp rise seen in that ratio in the 1980s. which had soared in the 1980s amid a Even so, loan delinquency rates rose flurry of corporate restructurings, actu- through much of 1991, albeit to levels ally turned down in 1991. Firms also not out of line with what was seen in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 25 previous cyclical downturns. On the credit standards of some lenders and the other side of the ledger, many house- closing and shrinkage of troubled thrift holds with net creditor positions saw institutions. Of these changes, the most their interest incomes decline last year. notable was a major rerouting of credit Faced with intensifying budgetary flows away from depository institutions. pressures and numerous downgradings, The decline in recent years in the imporstate and local governments also put tance of depository institutions, when only limited net demands on credit mar- measured by the credit they book relakets in 1991. The outstanding debt of tive to the total debt of nonfinancial this sector grew only 3 percent over the sectors, has been striking, and the trend year, the smallest increase in more than was extended in 1991. The thrift indusa decade. Gross issuance of municipal try continued to contract as the direct bonds was substantial, however, as result of Resolution Trust Corporation states and localities moved to refinance (RTC) resolutions as well as the redebt at lower rates. trenchment of marginally capitalized in- Efforts by borrowers to restructure stitutions. In addition, commercial banks balance sheets by substituting long-term cut back on their net credit extensions. debt and equity for short-term debt have The rise in bank credit over the year was affected the channels through which about 4 percent, not even enough to debt flows; these channels also have offset the continued runoff at thrift instibeen altered by the more restrictive tutions. Weakness was particularly evident in bank lending, which shrank lA percent last year; banks' holdings of government securities, by contrast, Changes in Debt of expanded at a rapid clip. the Domestic Nonfinancial Sector Although the shifting composition of and in Depository Credit bank asset flows in 1991 was reminis- Percent cent of patterns seen in previous periods Debt of languid economic activity, the magnitude of the downturn in loan growth was more pronounced than the usual experience. Apparently, loan growth was depressed not only by reduced credit demands but by a more restrained bank lending posture as well. Faced with deterioration in the quality of their assets, higher deposit insurance premiums, and more stringent requirements for capital, 1960 1970 1980 1990 banks retrenched, adopting a more cau- Domestic nonfinancial debt covers borrowing by tious attitude regarding credit extenhouseholds, farm businesses, nonfarm noncorporate busi- sions. Concerns about capital, especially nesses, corporate nonfinancial businesses, state and local in light of rising loan delinquency rates governments, and the federal government. Depository credit is the sum of credit market funds and mounting loan loss provisions, inadvanced by savings institutions and commercial banks. duced many banks to continue tighten- The percentage changes are four-quarter moving avering lending standards through the early ages. They are calculated by first subtracting the level at the end of the previous quarter from the level at the end of part of 1991 and to maintain fairly rea given quarter (flow) and dividing by the level at the end strictive standards over the balance of of the previous quarter. The quarterly percentage rates are then used in computing four-quarter moving averages. the year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

26 78th Annual Report, 1991 A more prudent approach to capitali- and bond markets to meet credit needs zation and lending decisions was, in the and to restructure balance sheets, reducmain, a positive development that ulti- ing their reliance on banks as well. Both mately will result in strengthened bal- banks and thrift institutions, however, ance sheets for the nation's depository have cut back on other types of lending institutions. Reflecting this improved that can be rechanneled less easily; these outlook, prices of outstanding bank debt types included construction and nonresiand equity increased markedly from dential real estate loans, loans to highly their lows in late 1990 and early 1991 leveraged and lower-rated borrowers, and outperformed broader market in- and loans to small and medium-sized dexes. Bank profits, benefitting from businesses. Other financial intermediarwide spreads between loan rates and ies, including life insurance companies, deposit rates, also showed improvement were afflicted by some of the same balrelative to the depressed levels of recent ance sheet problems plaguing deposiyears. However, profits remained low by tory institutions and also curbed their broader historical standards. lending to these sectors. As a result of Depository retrenchment appears to the pullback in credit supplies, these have had some restraining effects on borrowers faced somewhat more strinaggregate borrowing in 1991. Of course, gent borrowing terms than they would in some areas, much of the credit for- have otherwise. merly extended by banks and thrift insti- In 1991, as in 1990, the retrenchment tutions was supplanted by supplies from of banks and thrift institutions and the other intermediaries and by credit ad- associated redirection of credit flows vanced directly through securities mar- away from depository institutions had kets, at little if any additional cost to profound effects on the broad monetary borrowers. For example, growing mar- aggregates and their traditional relationkets for securitized loans largely filled ships with aggregate economic activity. the vacuum created by depository re- M3, which comprises most of the liabilstraint in the areas of residential mort- ities used by banks and thrift institutions gage and consumer lending. Similarly, many large businesses turned to stock Stock of M3 Trillions of dollars Velocity of M3 Ratio scale 4.1 1960 1970 1980 1990 1990 1991 The velocity of M3 is the ratio of gross domestic product, measured in current dollars, to the stock of M3. The range was adopted by the FOMC for the period The data are quarterly averages. 1990:4 to 1991:4. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 27 to fund credit expansion, was the aggre- and exhibited no inclination to alter their gate most affected by the reduced im- funding strategies in favor of large time portance of depository credit in funding deposits. spending. The velocity of M3, which The surge in issuance of Yankee CDs, declined through much of the 1980s, which totaled nearly $40 billion over the has more recently been on an uptrend first quarter, began to taper off a bit as that continued in 1991. M3 rose only the year progressed, revealing the under- \lA percent over the year, a rate of lying weakness in M3. After slowing growth that was well below that of nom- somewhat in the second quarter, this inal GDP and near the bottom of the M3 aggregate contracted at an annual rate of target range. 1 VA percent in the third quarter, reflect- In the first few months of the year, ing feeble loan demand in a tepid econ- M3 showed surprising strength, boosted omy as well as the restructuring of dein part by a firming of its M2 compo- pository institutions. The RTC played a nent, which benefited from declining in- direct role in damping M3 growth by terest rates. The most important single taking assets formerly held by thrift infactor contributing to strong M3 growth stitutions and funded with M3 deposits in the early part of 1991, however, was onto its own books and financing them the rebirth of the market for certificates with Treasury securities. Although M3 of deposit called Yankee CDs—large rebounded a bit in the fourth quarter, in time deposits issued by foreign banks in line with some firming of bank credit, the United States. After the 3 percent its growth remained subdued. reserve requirement against nonpersonal The effects of depository restructurtime deposits and net Euroborrowings ing on M2 remained imperfectly underwas lifted at the end of 1990, foreign stood at the end of 1991. In the past, the banks showed a distinct preference for velocity of M2 had tended to move in funding with such instruments rather tandem with changes in a simple meathan borrowing from their overseas affil- sure of the opportunity cost of holding iates or in the federal funds or RP mar- this aggregate—in tandem, that is, with kets. By contrast, domestic depository institutions were faced with high and rising U.S. deposit insurance premiums Stock of M2 Trillions of dollars 6.5% Velocity of M2 and Opportunity Cost of M2 Ratio scale Ratio scale 3.5 3.4 3.3 I I I I I I I I I I I I I 1979 1983 1987 1991 The velocity of M2 is the ratio of gross domestic i i i i i i i i i i i product, measured in current dollars, to the stock of M2. 1990 1991 The opportunity cost of M2 is a two-quarter moving average of the three-month Treasury bill rate less the The range was adopted by the FOMC for the period weighted average return on assets included in M2. from 1990:4 to 1991:4. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

28 78th Annual Report, 1991 changes in the returns on alternative sulting surge in transactions deposits. short-term investments relative to those But even so, the overall inflows to M2 available on assets included in M2. remained fairly weak, and the aggregate Typically, when the opportunity cost of ended the year only a little above the holding M2 declined as decreases in bottom of its target range. money market interest rates outpaced Although the unusual behavior of M2 drops in yields on deposits, holdings relative to income and opportunity costs of M2 would strengthen relative to is not fully understood, it surely was expenditures—and the velocity of M2 related to the restructuring of financial would drop. flows and to the downsizing of the bank- In recent years, however, this relation- ing system. With inflows of M2 deposits ship appears to have broken down, with apparently tending to be more than suffithe velocity of M2 holding up despite a cient to fund weak depository credit steep, persistent drop in this measure of growth, banks and thrift institutions its opportunity cost. The breakdown was seem to have pursued additional retail particularly evident in 1991, when M2 deposits less aggressively than in the expanded a bit less than nominal GDP past. Although rates offered on these despite a significant decline in measured deposits did not, until very late, fall opportunity costs. M2 finished the year unusually rapidly in response to declinnear the bottom of its target range; its ing market interest rates, depository inrise was much weaker than would have stitutions seem to have acted in other been expected on the basis of historical ways to reduce the cost of funds, includrelationships among income, interest ing adjustments in advertising and marrates, and the public's appetite for keting strategies that would not show up monetary assets. in traditional measures of opportunity In the early months of 1991, M2 costs. In addition, by keeping deposit growth accelerated somewhat from its rates low relative to loan rates, partly in lackluster pace of late 1990. Narrowing an attempt to bolster profit margins opportunity costs generated substantial while shrinking their balance sheets, depository institutions provided houseinflows to liquid deposits, particularly holds with a greater incentive to finance those in Ml, and these inflows more than offset continued runoffs in small CDs. Money growth also was temporarily boosted by strong foreign demands for U.S. currency as a safe haven Stock of Ml Billions of dollars during the crisis in the Persian Gulf. Through May, growth of M2 remained broadly consistent with changes in income and opportunity costs and left the 890 aggregate near the middle of its target range. M2 began to slow in June, however, 860 and it stalled in the third quarter despite expansion in nominal income and further declines in M2 opportunity costs. 830 Growth of M2 then resumed in the fourth quarter because of additional dei i I i i i i i i i i i i clines in opportunity costs and the re- 1990 1991 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 29 spending by holding down the accumu- market interest rates—a portion of these lation of M2 assets rather than by taking funds appear to have left the aggregate. on new debt. This incentive likely rein- The primary lure seems to have been the forced the impetus to borrowing re- stock and bond markets, which offered straint stemming from household con- higher returns, in part because of the cerns about their own balance sheets. steep upward slope of the yield curve. The slowdown in M2 growth, particu- Indeed, inflows to stock and bond mularly in the third quarter of 1991, also tual funds were robust throughout 1991, appears to have been related to the con- especially after midyear, when investors figuration of returns on financial assets. seemed particularly intent on reaching Yields on small time deposits and for higher yields by lengthening the money market mutual funds largely maturity of their portfolios. Depository tracked the downward path of market institutions, faced with weak loan deinterest rates, falling to their lowest lev- mand and pressures on capital positions, els since the deregulation of deposit seemed disinclined to compete aggresrates and prompting significant outflows sively for these funds by offering comfrom these components of M2. Although petitive rates on longer-term CDs. some of these funds shifted into the The rapid pace of activity by the Resliquid deposit components of M2— olution Trust Corporation also likely dewhose offering rates responded slowly, pressed M2 growth in the third quarter as they normally do, to the declines in of 1991, as it did throughout the year. The abrogation of existing retail CD contracts and the disruption of longstanding depositor relationships often at- Velocities of M2 and M1 tending resolutions of failed thrift insti- Ratio scale tutions may have encouraged investors M2 to reshape their portfolios, substituting nonmonetary financial assets for M2 2.0 deposits. Despite sluggish income growth, Ml expanded 8 percent in 1991, the swiftest advance since 1986. Unlike M2, this aggregate responded to declining market interest rates about as expected given historical relationships. Ml was boosted by large inflows to NOW accounts, whose offering rates responded very slowly, until the end of the year, to declining market interest rates. Falling rates also brought new life to demand deposits, as compensating balances to 4.0 pay for bank services surged. Demand deposits likely benefited as well from the pickup in mortgage refinancings, 1960 1970 1980 1990 because the proceeds from mortgage The velocity of the monetary aggregate is the ratio of prepayments are sometimes housed temgross domestic product, measured in current dollars, porarily in demand accounts. Rapid to the stock of the aggregate. The data are quarterly averages. growth in currency, derived in part from Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

30 78th Annual Report, 1991 continued strong foreign demands, also contributed to the strength in Ml, as well as in the monetary base, which increased SV4 percent last year. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

31 International Developments Economic growth in the major foreign up in Latin America. Mexico again enindustrial economies slowed further last joyed solid growth, at about 4 percent. year. From 1990 to 1991, real GDP in Growth in the newly industrialized the foreign G-10 countries on average economies of Southeast Asia remained increased about Wi percent (fourth strong or increased. quarter to fourth quarter, GNP weights), The U.S. current account was near compared with 2Vi percent in 1990.1 balance in 1991, reflecting $42 billion in Canada and the United Kingdom, both grants from foreign governments related important U.S. trading partners, began to the Persian Gulf war. Even apart from 1991 in recession. The recession contin- these unilateral transfers, however, the ued essentially unabated in the United U.S. trade and current account deficits Kingdom; in Canada, as in the United showed substantial reductions. U.S. mer- States, signs of a rebound appeared in chandise exports continued to grow the second quarter, but growth ceased strongly, as did exports of services. Net again during the second half. Growth in interest payments to foreigners on port- Japan and Germany was strong early in folio investments were restrained by the the year; in the second half, growth substantial further decline in U.S. interslowed sharply in Japan and was nega- est rates during the year. tive in Germany. The dollar appreciated, on balance, Economic growth among developing 23/4 percent in 1991 (December to Decountries was very uneven, with output declining in the Middle East and picking Exchange Value of the Dollar 1. The Group of 10 consists of Belgium, Canand Interest Rate Differential ada, France, Germany, Italy, Japan, the Nether- Percentage points Ratio scale, March 1973 = 100 lands, Sweden, the United Kingdom, and the United States plus Switzerland. 6 - Price-adjusted 4 - exchange value of the dollar Exchange Value of the Dollar against Selected Currencies Long-term * 80 December 1990= 100 real interest" 2 - rate differential U.S. minus foreign I I I II 1 1 t 1 t t 1 I 1 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. Japanese yen Canadian dollar The interest rate differential is the rate on long-term 90 U.S. government bonds minus the rate on comparable foreign securities, both adjusted for expected inflation estimated by a thirty-six-month moving average of actual con- 1991 sumer price inflation or by staff forecasts where needed. Foreign currency units per dollar. The data are monthly. The data are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

32 78th Annual Report, 1991 cember) against the trade-weighted foreign monetary authorities to reaverage of the foreign G-10 currencies. duce U.S. reserve balances of foreign Adjusted for changes in relative con- currencies. sumer price levels, the dollar's appreciation was somewhat less, as consumer Foreign Economies price inflation in the foreign G-10 countries exceeded that in the United States Economic growth in the major foreign by about 1 lA percentage points. industrial economies continued to slow The dollar rose steeply from mid- last year from the rapid rates posted in February through early July, particularly the late 1980s. To some extent, deceleragainst the German mark and its partner ation was an ongoing response to tighter currencies in the European Monetary monetary policies, introduced earlier, System. The dollar was buoyed by the allied victory in the war against Iraq and by expectations that the decline in oil prices and a resurgence of consumer confidence would lead to a quick U.S. GDP, Demand, and Prices economic recovery. Depressing the Percentage change from previous year mark were the disillusionment over the Gross domestic product heavy costs of German reunification, a Constant prices 6 perception that Bundesbank monetary /s,^^ Foreign G-10 policy was lagging the increase in infla- 4 tionary pressures in Germany, and the increasing turmoil in the Soviet Union. 2 After mid-year, however, the dollar United States""^ + / n reversed course as evidence accumu- / lated that the U.S. recovery was falter- I I I l i ing and as U.S. monetary policy eased. Total domestic demand The mark was strengthened by the Constant prices 6 Bundesbank's tightening of monetary policy and by the nonviolent breakup of 3 the Soviet Union following the failure N "••" + ,_ „ f\ of the August coup. By year-end the V / dollar had retraced nearly all of its ear- I t I i lier rise against the mark; and it more Consumer price index than retraced its rise against the yen, which was supported by Japan's growing trade and current account surpluses. Net intervention in the exchange markets by fifteen major foreign central banks amounted to sales of nearly $12 billion. U.S. monetary authorities 1987 1989 1991 purchased, net, about $750 million in Foreign data are weighted averages for the foreign the market; purchases in early February G-10 countries using 1987-89 GNP-based purchasingpower-parity weights, and are from foreign official to support the dollar exceeded sales in sources. March, May, and July to moderate the Data for the United States are from the Departments of dollar's rise. U.S. authorities purchased Commerce and Labor. For GDP and domestic demand, the data are quarterly; an additional $83/4 billion directly from for consumer prices, the data are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 33 which were designed to counter infla- while employment conditions appeared tionary pressures and bring economic to stabilize in eastern Germany. activity to more sustainable, noninfla- Money market conditions eased tionary levels. Declines in business con- during the past year in several key fidence, the need for households and countries—including Canada, Japan, businesses to reduce high levels of debt, and the United Kingdom—as slower and concerns about financial fragility in growth and lower inflation allowed ausome countries also negatively affected thorities to reduce short-term interest demand. Growth rates among the major rates. Japanese short-term rates declined industrial countries varied. Pronounced 225 basis points, and the official disrecessions in Canada and the United count rate was cut by a total of IV2 per- Kingdom that began in 1990 extended centage points after midyear, in three into 1991 with only tentative signs of increments. Short-term rates in the recovery after mid-year. Economic ac- United Kingdom fell about 300 basis tivity in Japan and Germany remained points during the year, while those in comparatively strong, although growth Canada dropped almost 450 basis slowed during the year in those coun- points, thereby narrowing the spread tries too. And the economic perfor- against comparable U.S. maturities. In mances of France and Italy were contrast, monetary conditions tightened sluggish. in Germany as authorities remained concerned about inflationary pressures (aris- Slower growth meant that output in ing in part from substantial expansion of most major industrial countries (with the budgetary expenditures for unification), possible exceptions of Germany and and German short-term interest rates Japan) was below potential by year-end. edged up during the year. Increases in Accordingly, inflation continued to official German interest rates (in Februmoderate during the year, with average ary, August, and December) tended to CPI inflation in the foreign G-10 countries subsiding by almost 3A percentage intensify exchange rate pressures against the currencies of Germany's EMS partpoint (Q4 to Q4), to near 4 percent. ner countries, thereby limiting their Particularly large reductions in inflation scope for easing monetary conditions. were evident in Canada and the United Growth of the major monetary aggre- Kingdom; France and Japan also experigates abroad generally slowed or reenced significant reductions. Lower oil mained sluggish. The chief exceptions prices and the weakening of the dollar to this pattern were in Germany and after midyear contributed to reduced up- Italy. ward pressure on prices abroad. Labor-market developments last year On average, long-term interest rates also reflected the general slowdown and abroad declined nearly 1 percentage differences in cyclical positions. Unem- point, reflecting slower economic ployment rates moved up more than growth, lower inflation, and in some 2 percentage points in the United King- cases, an easing of monetary policy. Pardom and Canada, while unemployment ticularly large declines occurred in Canrates remained high in France and Italy. ada and France, but even in Germany In contrast, labor-market conditions con- long-term rates eased, by more than tinued to be fairly tight in Japan despite 50 basis points. decelerating economic activity. The un- In 1991 the combined current account employment rate in western Germany surplus of the foreign G-10 countries fell almost 3A percentage point in 1991, narrowed by about $22 billion to a small Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

34 78th Annual Report, 1991 deficit. (About $12 billion of the change especially in the larger countries. was from net transfer payments related Mexico's growth was again about 4 perto the war against Iraq.) The narrowing cent, while output in Argentina and of the combined deficit occurred despite Brazil expanded somewhat, after dea $40 billion widening of Japan's cur- clines in 1990. rent account surplus. Slower growth of The combined current account surdomestic demand, reduced oil payments, plus of the newly industrializing econoand favorable price effects from earlier mies of Asia nearly halved in 1991, to strength of the yen contributed to the about $8 billion. The decline in the larger Japanese surplus. In contrast, the overall position was more than accombined German current account posi- counted for by a large increase in tion deteriorated by more than $65 bil- Korea's current account deficit. Korea's lion to a deficit of $20 billion, reflecting imports expanded rapidly, partly bethe effects of increased demand follow- cause of strong domestic demand, espeing unification and the relative strength cially investment. The surpluses of the of the western German economy. In- other economies increased slightly or creased German demand for imports were unchanged. contributed to moderate improvements Countries that had experienced debt in external positions for some of Germaproblems in the 1980s regained some ny's main trading partners. access to international capital markets. The combined current account posi- In particular, Mexico and Venezuela, tion of developing countries moved which had reduced their debt to comfrom near balance in 1990 to a deficit of mercial banks in 1990, were successful about $80 billion in 1991. The dramatic in issuing bonds internationally and atshift from surplus to deficit in the cur- tracting substantial equity investments rent account of oil exporters accounted in connection with their privatizations for most of the overall decline. How- of state-owned companies. These two ever, the slowdown in domestic demand countries, as well as Chile, provide in the industrial countries led to slower strong evidence that foreign and domesexport growth in many other developing tic investors are willing to provide recountries and a decline in their current sources again to formerly troubled debtaccount balances. Economic growth was ors once appropriate macroeconomic uneven across regions of the developing and structural policies have been impleworld in 1991; output fell in the Middle mented for a sustained period of time East, while activity picked up in the and the uncertainties related to the stock Western Hemisphere after declines in of external debt have been largely the previous year. resolved. The current account of the group of At the close of 1991, Brazil and Arfourteen heavily indebted developing gentina, both large debtors with substancountries shifted, from near balance in tial arrears to their foreign creditors, 1990 to a deficit of about $19 billion in were in the initial stages of negotiating 1991. Most of this shift occurred for the with their bank creditors on packages of oil exporting countries of the group, es- debt reduction. Argentina made substanpecially Mexico and Venezuela. Invest- tial strides toward economic stabilizament booms, however, also contributed tion in 1991, while Brazil was on the to higher imports in these two countries. verge of undertaking a stabilization pro- Economic activity in the heavily in- gram approved by the International debted countries picked up in 1991, Monetary Fund in February 1992. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 35 U.S. International Transactions rent account, and reduced the size of the current account deficit by $42 billion in The U.S. merchandise trade and current 1991. In addition, net receipts from seraccount deficits narrowed substantially vices expanded by $10 billion in 1991 in 1991. A $27 billion increase in merbecause of a strengthening of net rechandise exports and an $8 billion receipts in such areas as travel, royalties duction in merchandise imports yielded and license fees, and professional sera trade deficit of $74 billion for the year, vices. There was a small decline in net the smallest since 1983. The improvereceipts on U.S. direct investments ment in the current account balance was abroad and a marginal rise in net paysubstantially larger, primarily because ments of portfolio income to foreigners. of war-related contributions by foreign Merchandise exports rose 7 percent governments. These cash contributions during the four quarters of 1991, about to the United States were recorded as the same pace recorded in the preceding positive government grants in the unilatyear. Export prices (mainly of industrial eral transactions component of the cursupplies) declined slightly, while the quantity grew about 9 percent. Nearly two-thirds of the increase in the value and quantity of exports (Q4 to U.S. International Trade Q4) reflected strong growth in ship- Billions of dollars ments of capital goods; two-thirds of Balances f\ + that growth was to developing coun- - 0 tries. Despite sluggish overall economic Current account / \ / ' 50 growth in the economies of many U.S. trading partners, high levels of invest- 100 ment spending in key countries— >^^ ^p>" ^ Merchandise trade 150 especially in developing countries in Latin America and Asia—boosted U.S. 1 1 1 1 1 Ratio scale, billions of 1987 dollars exports of capital equipment. Among developing countries, the largest in- Merchandise trade 600 creases in capital goods exports were to Total imp2orts Mexico, Venezuela, Korea, and Saudi Z^ ^ ' 400 Arabia; among industrial countries, the largest increase was to Germany. Ship- ^^*-*0^^ Total exports ments of capital goods to both Canada . **—^ and the United Kingdom declined, rei i i i i flecting the recessions in those coun- Ratio scale, 1987= 100 tries. Exports of items other than capital GDP fixed-weight price index goods (accounting for nearly 60 percent 120 of total exports) grew more slowly. On Non-oil imports ^ —— . 110 average, economic activity in the major ^^ Total exports foreign industrial countries weakened as 100 the year wore on. Despite the substantial slowing i i i i i abroad, the quantity of U.S. exports 1987 1989 1991 grew appreciably over the four quar- The data are preliminary. They are quarterly, season- ters of 1991 because of the posially adjusted at annual rates, and come from the Department of Commerce. tive influence of past gains in the price Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

36 78th Annual Report, 1991 competitiveness of U.S. goods. This in- weak U.S. domestic demand. As the creased competitiveness reflects a com- likelihood of an economic recovery in bination of the large net depreciation of the United States increased, imports the dollar from 1985 to 1987 and in- turned up—especially for automotive creases in average foreign prices in local products, computers, and consumer currencies relative to U.S. export prices. goods—and continued strong into Merchandise imports declined 1 per- autumn. cent in value but rose 6 percent in After rebounding in the spring and quantity in 1991 (Q4 to Q4). All of the summer, U.S. consumer spending faldecrease in value resulted from the sharp tered, and retailers accumulated undrop in prices of imported oil from the desired inventories. As a result, U.S. inflated levels at the end of 1990 that import growth slowed in the fourth were associated with Iraq's invasion of quarter. Kuwait. The quantity of imports exclud- The quantity of oil imports, which ing oil grew about 5 percent in real had plunged after the surge in oil prices terms during 1991. The decline of im- in the fall of 1990, generally moved up ports early in the year was the result of through the third quarter as refiners U.S. International Transactionsl Billions of dollars, seasonally adjusted Quarter Year Transaction 1990 1991 1990 1991 Q4 Ql Q2 Q3 Q4 Merchandise trade, net -108 -73 -27 -18 -15 -21 -19 Exports 390 417 101 101 104 104 108 Imports 498 490 128 119 119 125 127 Services, net 26 36 8 7 9 9 10 Receipts 133 145 36 34 36 38 38 Payments 107 109 28 27 27 27 28 Investment income, net 12 9 6 5 2 2 * Direct investment, net 53 51 15 15 13 12 11 Portfolio investment, net ^1 -42 -9 -10 -11 -10 -11 Unilateral transfers, private and government, net -22 20 -9 17 7 -3 -1 Current account balance -92 -23 10 -12 -10 Private capital flows, net -5 -18 -20 -10 -9 5 -4 Bank-related capital, net (outflows, -) 15 -12 -7 2 -28 9 5 U.S. net purchases (-) of foreign securities -29 -46 -8 -9 -13 -13 -11 Foreign net purchases (+) of U.S. Treasury securities .. 1 17 -2 3 13 -2 2 Foreign net purchases of U.S. corporate bonds 16 26 6 4 8 8 7 Foreign net purchases of U.S. corporate stock -15 9 -5 2 7 2 -2 U.S. direct investment abroad -33 -29 -4 -12 -2 -7 -9 Foreign direct investment in United States 37 22 5 4 8 6 4 Other corporate capital flows, net -5 -4 -3 -3 1 n.a. 2 Foreign official assets in United States (increase, +) 21 20 -3 4 13 32 U.S. official reserve assets, net (increase, -) 6 -1 1 4 1 -2 U.S. government foreign credits and other claims, net 4 5 1 -1 3 -1 3 Total discrepancy -3 19 -9 9 -4 Seasonal adjustment discrepancy 64 * 2 4 * -6 -3 17 -13 9 2 Statistical discrepancy 64 1. Details may not sum to totals because of rounding. n.a. Not available. *In absolute value, greater than zero and less than SOURCE. Department of Commerce, Bureau of Eco- $500 million. nomic Analysis. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 37 moved to rebuild inventories. In the ing investments in the Euromarkets fourth quarter, the volume of oil imports rather than by drawing on their reserve turned down again, reflecting sluggish holdings in the United States, while still U.S. activity and unseasonably warm others financed their payments in local weather. currencies. Prices of non-oil imports declined In 1991 the net recorded private capislightly (Q4 to Q4), largely reflecting tal outflow was $18 billion, largely acworldwide declines in prices of primary counted for by a net outflow reported by commodities and the effect of the dol- banks. Several factors probably contriblar's appreciation on prices of finished uted to the bank outflow: the increase manufactures through the third quarter. in net demand for Euromarket funds to Non-oil import prices in the fourth quar- finance contributions to Desert Storm; ter of 1991, which rose 2 percent at an the elimination by the Federal Reserve annual rate, were especially influenced of certain reserve requirements in Deby a turnaround in prices of imported cember 1990, which was followed by capital and consumer goods, as well as increased issuance of large time deposby higher prices of automotive products its in the United States and reduced reliat the beginning of a new model year. ance on borrowing from abroad by some The sharp reduction in the recorded U.S. agencies and branches of foreign U.S. current account deficit in 1991 was banks; and weak overall growth of U.S. mirrored by changes in recorded capital bank credit in 1991. inflows and the statistical discrepancy. Securities transactions in 1991 re- The statistical discrepancy in the inter- flected the continued internationalizanational accounts, which jumped to tion of financial markets; although the $64 billion in 1990, declined to -$3 bil- net inflow was moderate, private forlion in 1991. There were no obvious eigners added substantially to their holdreasons why errors and omissions in the ings of U.S. stocks and bonds, while recording of current account transac- U.S. residents were net large-scale purtions would swell in 1990. The unusu- chasers of foreign stocks and bonds. ally large number of errors likely were Reflecting interest rate developments concentrated, instead, in the reporting of that encouraged shifting from short-term capital flows. Because of the question- to long-term financing, issues of foreign able data, we cannot draw any conclu- bonds in the United States and issues sions from comparisons of changes in of Eurobonds by U.S. corporations were the pattern of recorded capital flows be- strong. In addition, investment funds tween 1990 and 1991. located in the Caribbean were very ac- In 1991, inflows of official capital tive in the market for U.S. Treasury were matched in part by outflows of securities. private capital. Net foreign official in- Capital outflows associated with U.S. flows amounted to $21 billion despite direct investment abroad remained net intervention sales of dollars by the strong, as U.S. investors positioned G-10 countries and despite the draw- themselves to take advantage of EC down of reserves held in the United 1992 and participated in privatization of States by certain countries to finance previously state-owned enterprises in their transfers to the United States for countries such as Mexico and Vene- Operation Desert Storm. Some countries zuela. In contrast, foreign direct investfinanced their contributions to Desert ment in the United States remained Storm in part by borrowing and liquidat- far below recent peaks; foreign take- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

38 78th Annual Report, 1991 overs of U.S. businesses declined and U.S. authorities also undertook a sereinvested earnings were depressed by ries of direct transactions directly with the recession. foreign central banks to adjust U.S. reserve balances to prospective needs, in the process selling $5,748.5 million of Foreign Currency Operations marks and $3,000 million of yen. Of U.S. monetary authorities intervened in these totals, $3,529.1 million of marks foreign exchange markets on a moderate and $1,500 million of yen were for the scale in 1991. In early February, as the System account. dollar reached historic lows against the During the year the Exchange Stabili- German mark, U.S. authorities (the Fed- zation Fund repurchased $2,500 million eral Reserve and the Treasury's Ex- of marks warehoused with the System. change Stabilization Fund) sold German At year-end, $2,000 million remained marks worth $1,336 million to support outstanding on this facility. the dollar. By March the dollar had risen The System held $27,626 million of dramatically in occasionally unsettled foreign currencies at year-end, valued at markets. U.S. authorities cooperated current exchange rates. Of this amount, with foreign central banks to moderate $2,000 million was in currencies held these movements and purchased under the warehousing agreement. Sys- $370 million of marks and $30 million tem foreign currency holdings were of yen. In May, Sweden's announce- almost entirely in marks and yen. ment that it would peg its currency to The System realized $506 million in the ECU rather than to a basket of cur- profits on sales of foreign currency durrencies that included the dollar immedi- ing 1991. It recorded a translation loss ately led to a scramble for dollars to of $140 million on balances held at rebalance portfolios; to counter the re- year-end. There was no activity on the sulting disorder in the New York mar- Federal Reserve swap network during ket, U.S. authorities purchased $50 mil- the year. • lion of marks. In early July, with the dollar near its peak for the year, U.S. authorities purchased $100 million of marks in cooperation with European central banks. On net for the year, U.S. authorities sold $816 million of marks and purchased $30 million of yen. All of these market operations were split equally for the accounts of the System and the Treasury. System Profits and Losses on Foreign Currency Operations Millions of dollars Year Realized Translation 1988 610 -1,121 1989 0 1,204 1990 0 2,139 1991 506 -140 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

39 Monetary Policy Reports to the Congress Given below are reports submitted to considerable uncertainty that existed the Congress on February 20 and July regarding the course of fiscal policy. 16, 1991, pursuant to the Full Employ- Actual production and spending held ment and Balanced Growth Act of 1978. up for a time after the oil shock, but started to decline in early autumn. The production cuts reduced real incomes Report on February 20, 1991 still further and added to the cumulating forces of contraction, which included a continued shift toward greater caution Monetary Policy and the Economic by lenders. The economy thus fell into Outlook for 1991 recession in the latter part of 1990, and, When it reported to the Congress last given the further declines in employ- July, the Federal Reserve was anticipat- ment and production that were seen in ing that the economy would continue January, that recession clearly has conto grow in the second half of 1990. tinued into the early part of 1991. Although the first half had been far from The secondary wage-price pressures robust, with problems clearly evident that many had expected to see after the in some industries and regions, the oil shock have not been much in evieconomy still was expanding and was dence, probably because those pressures afflicted with neither the inventory im- have been countered by the softening of balances nor the escalating inflationary aggregate demand. The underlying rate pressures that had preceded past cyclical of increase in prices began to drop back downturns. Indeed, it seemed at midyear over the last few months of 1990. In that the goal of achieving a reduction addition, the rate of increase in nominal of inflation in the context of continued wages and benefits, which already had expansion might well be attainable. started to slow in the third quarter, de- But in August the economy was jolted celerated further in the fourth quarter. off course by the Iraqi invasion of These wage and price developments, Kuwait. The surge in oil prices that fol- coupled with the drop in oil prices since lowed the invasion gave additional im- mid-autumn, have given the Federal Repetus to inflation, and it also portended a serve greater latitude in recent months weakening of activity as the price in- to focus on steps that will aid in bringcreases cut sharply into domestic pur- ing about economic recovery without chasing power. Uncertainties about the jeopardizing continued progress toward course of the economy were heightened price stability. enormously, and household and busi- In fact, as it became clear that the ness sentiment plummeted almost over- inflationary spillover of the oil shock night, a response that perhaps grew in was being effectively contained, and that part out of memories of the difficult an appreciable economic contraction adjustments that had followed previous posed the greater risk, the Federal Reoil shocks in the 1970s. At the time of serve did ease policy markedly. Earlier the invasion, and on into the autumn, in the second half, policy already had sentiment also was being affected by the moved to a slightly more accommoda- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

40 78th Annual Report, 1991 tive stance, first in July, to offset the To a significant extent, however, overeffects on the economy of apparent re- all credit flows have been sustained by straint in private credit supplies, and sources outside depositories; thus, debt again in October, when prospective re- of the domestic nonfinancial sectors ductions in federal budget deficits en- grew 7 percent in 1990 and ended in the abled interest rates to decline. Over the middle of the FOMC's monitoring range balance of the year and into 1991, for this aggregate. The effective substimoney market rates were reduced sub- tution of non-depository credit for destantially further through open market pository credit made it possible to operations and two half-point decreases achieve a greater amount of nominal in the discount rate. In total, most short- income and expenditure growth for a term rates have fallen nearly 2 percent- given expansion of the money stock. age points since mid-1990, with most of One facet of this process was a shifting the decrease occurring during the last by the public out of assets that are infew months, and long-term rates are cluded in the monetary aggregates and about Vi percentage point lower than into holdings of Treasury issues and they were at midyear. Falling interest other securities. Velocity, the ratio of rates have contributed to an appreciable nominal GNP to the money stock, exdecline in the dollar since mid-1990. hibited surprising strength: M2 velocity The behavior of the monetary aggre- was about unchanged in 1990, even gates and credit was an important con- though declines in interest rates ordisideration in the Federal Reserve's deci- narily are associated with falling velocsions to ease policy over recent months. ity, and M3 velocity registered an un- M2 and M3 ended 1990 within the usually large increase. ranges set by the Federal Open Market Committee (FOMC), but they were in the lower parts of those ranges, and their Monetary Policy for 1991 expansion over the fourth quarter and In considering its plans for monetary into early 1991 has been quite sluggish. policy for 1991, the Federal Open Mar- The sluggishness of the aggregates dur- ket Committee focused on two objecing this period was worrisome because tives, consistent with the goals of the it suggested that the economy was Full Employment and Balanced Growth weaker than anticipated and because it Act: One was to foster an upturn in indicated the possibility of some unde- activity and thus higher levels of emsirable restraint on future spending ployment and real income; the other was through constricted credit intermedia- to contain and reduce inflation over time tion by depository institutions. In partic- to maximize the efficiency of resource ular, the thrift industry has been con- allocation and long-range growth and to tracting, and banks, concerned about the minimize the capricious and inequitable credit quality of borrowers and facing effects of inflation on the wealth of savpressures on capital positions, have be- ers. The translation of these objectives come increasingly reluctant to lend, into specific ranges for money and debt raising interest margins and tightening was complicated by the effects of the nonprice terms. To bolster lending incen- ongoing restructuring of credit flows. tives, the Federal Reserve in December Again this year, a number of insolvent eliminated the reserve requirements on thrift institutions are likely to be closed, nonpersonal time deposits and net Euro- with many of their assets ending up at currency liabilities. the Resolution Trust Corporation (RTC) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 41 or disbursed to a wide variety of inves- money market conditions over the past tors; at other thrift institutions and at few months. While acknowledging banks, restraints on lending may moder- some uncertainty about developing ate a bit, but growth in depository credit velocity relationships, Committee memis likely to continue to be constrained by bers stressed that M2 expansion noticepressures on capital positions. The re- ably above the lower end of the range channeling of credit outside depository likely would be needed to foster a satisinstitutions is expected to continue to factory performance of the economy in distort the relationship of money to in- 1991. come, buoying the velocities of both M2 The range of 1 to 5 percent for M3 andM3. was not reduced from that for 1990. Taking account of these effects, the That range was already at an unusually Committee decided that the ranges for low level in recognition of the acceler- 1991 that were chosen on a provisional ated pace of the restructuring of the basis last July remain appropriate for thrift industry. Credit growth in 1991 is achieving its objectives. The ranges for expected to be moderate and to occur M2 and debt are Vi percentage point largely outside depositories. Consebelow those for 1990—a further step to quently, total funding needs of depositoensuring that longer-run trends in money ries are expected to be damped, keeping and credit growth are moving toward the growth of M3 quite low and raising consistency with the achievement of its velocity further. price stability. At the same time, they The monitoring range for nonfinanallow for money and credit growth suffi- cial sector debt for 1991 was set at AVi cient to support a rebound in the econ- to SV2 percent. Federal borrowing is exomy this year; moreover, the ranges pected to be robust, owing in part to the should provide ample room for any pol- RTC, and also to the effect of the weak icy adjustment that may be required by economy on the federal budget deficit. unanticipated developments in the econ- By contrast, borrowing by domestic omy or the financial sector as the year nonfederal sectors is likely to be slow, progresses. though still consistent with a rebound The M2 range for 1991 is 2J/2 to in the economy. On the demand side of 6V2 percent. Growth in this aggregate is the credit market, households and busiexpected to strengthen from the sluggish nesses appear to be returning to sounder pace of recent months, partly in lagged financial practices, seeking a healthier response to the substantial easing of balance between debt and the income available to service it. At the same time, restraints on the supply of credit also Ranges for Growth of Monetary and Debt Aggregatesl may continue to play a role, with some private borrowers facing higher interest Percent rates and tighter nonprice terms on Aggregate 1989 1990 1991 credit, in part because of the stresses faced by many intermediaries. In that M2 3-7 3-7 21/2-61/2 M3 1-5 1-5 regard, the Federal Reserve is working Debt2 61/2-101/2 5-9 with other federal regulatory agencies to 1. Change from average for fourth quarter of preceed- ensure that bank supervisory practices, ing year to average for fourth quarter of year indicated. while prudent and fair, do not unduly Ranges for monetary aggregates are targets; range for impede the flow of funds to creditdebt is a monitoring range. 2. Domestic nonfinancial sector. worthy borrowers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

42 78th Annual Report, 1991 Economic Projections for 1991 the Board members and Reserve Bank The economic outlook is unusually diffi- presidents are more optimistic on avercult to assess at this time, owing not age than is the Administration with reonly to the obvious uncertainties associ- gard to the prospects for reduced inflaated with the war in the Gulf, but also to tion. The central tendency range for some unresolved problems in the econ- the CPI increase this year—3J/4 to 4 omy. However, the members of the percent—compares with an Administra- Board of Governors and the presidents tion projection of 4.3 percent. The Adof the Reserve Banks, all of whom par- ministration's forecast for nominal GNP ticipate in the discussions of the FOMC, is at the upper end of the FOMC central believe that the most likely outcome is tendency range and thus also would be that the economy will swing back into compatible with the FOMC's monetary expansion later this year. At the same ranges. time, they also anticipate that inflation In discussing their projections, the will be much lower in 1991 than it was Board members and Reserve Bank presin 1990. idents stressed that the war introduces a With regard to real gross national major imponderable into an outlook product, the central tendency of the that, even before, had been subject to FOMC participants' forecasts is for a considerable uncertainty. The demands gain over the four quarters of 1991 of 3A of the war on the economy are not fully to IV2 percent. This is in line with the clear at this point. Nor is it possible to projection of the Administration, which forecast with any precision how houseanticipates an output gain of 0.9 percent. hold and business confidence will re- With these GNP forecasts so similar, the spond to the course of events in the forecasts of unemployment also are Gulf. Among the significant unresolved about the same: The Committee's cen- economic and financial problems elsetral tendency projections fall in a range where in the economy are those in the of 6V2 to 7 percent in the fourth quarter real estate markets; commercial conof 1991, a range that brackets the Ad- struction, in particular, still is plagued ministration forecast. On the other hand, by a large overhang of vacant space that Economic Projections for 1991 FOMC members and Item MEMO other FRB presidents Administration 1990 actual Range Central tendency Percent change, fourth quarter to fourth quarter1 Nominal GNP 4.3 31/2-51/2 33/4-41/4 5.3 RealGNP .3 -V2-W2 3/4-l Vi .9 Consumer price index2 6.3 3-4V& 3V4-4 4.3 Average level, fourth quarter (percent) Unemployment rate 5.9 6V4-7V2 6V2-7 6.6 1. From average for fourth quarter of 1989 to average 3. Actual values and FOMC projections are for civilfor fourth quarter of 1990. ian labor force; Administration projection is for total 2. Actual values and FOMC projections are for all labor force, including armed forces residing in the United urban consumers (CPI-U); Administration projection is States. for urban wage earners and clerical workers (CPI-W). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 43 will severely limit new construction for As noted above, the Board members some time to come. On the financial and Reserve Bank presidents project a side, the overexuberance and loose lend- marked slowing of inflation in 1991. A ing practices of the 1980s have given key assumption underlying these foreway to large losses and extreme caution casts is that oil prices will hold in their among some lenders, who may not be recent range, at a much lower level than able or willing at present to shift quickly prevailed through the autumn of 1990. back toward more normal lending be- The pass-through of these lower oil havior. Because of these problems, the prices to consumers is expected to result Board members and Reserve Bank pres- in a sharp decline in retail energy prices. idents perceive that, in the near term, the In addition, increases in wages and benrisks to the economy may be skewed to efits seem likely to be more moderate the downside. this year, reducing the pressures of labor On the other hand, some of the poten- costs on profit margins and prices. To be tial underpinnings of recovery also are sure, there are some near-term negatives evident. For example, with the further in the inflation picture: Labor expenses decline in oil prices since the start of are being boosted by legislated increases 1991, much of the surge that followed in employers' contributions for social the Iraqi invasion of Kuwait now has security and by a further rise in the been retraced; in a reversal of the effects minimum wage, and prices are being seen earlier, this drop in oil prices is affected by a rise in postal rates and taking pressure off inflation, and it also increases in various excise taxes. All is augmenting real purchasing power, told, however, the coming year appears which will help to bolster spending. likely to be one in which overall price Also working in the direction of sup- increases will be considerably smaller porting spending is the decline in inter- than in 1990 and in which the downest rates since the spring of 1989. In ward tilt of the underlying inflation trend contrast to past business cycles, when should begin to stand out more clearly. declines in rates usually did not come until the economy was softening, this The Performance of the Economy decline began far in advance of the in 1990 peak in activity, and its effects on spending should begin to be felt, especially in When 1990 began, the economy was in sectors like housing, where affordability its eighth year of expansion, and it rehas been considerably enhanced over mained on a positive course into the the last year and a half. Meanwhile, the summer. During this period, problems prospects for exports, and for our were evident in some sectors of the overall trade and current account economy, notably construction, where balances, continue to look favorable, activity was being damped by the persisgiven the improved competitiveness of tence of high vacancy rates, and finance, U.S. producers. And, any pickup in where a significant number of institufinal demand, whether from domestic tions were encountering difficulties that buyers or from abroad, should trans- reduced their ability or willingness to late fairly quickly into increased pro- provide credit. Overall, however, production, in view of the success that duction and spending still were on a businesses seem to have had in prevent- course of expansion at midyear, and ing a buildup of inventories in recent while the rate of price increase had not months. yet started to abate, there were indica- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

44 78th Annual Report, 1991 tions that the groundwork for achieve- sure. The year-to-year rate of increase in ment of slower inflation was coming the CPI excluding food and energy— into place without major disruption to a rough indicator of basic inflation the economy. trends—maintained a gradual upward Then, in early August, the Iraqi inva- tilt through the first three quarters of sion of Kuwait set off a chain of events 1990, peaking at a rate of 5.5 percent in that gave further impetus to inflation August and September; a slight easing and tilted the economy from a path of of price pressures over the balance of slow growth to one of contraction. De- 1990 brought that rate back down to clines in output and employment were 5.2 percent by year-end. The year-towidespread during the remainder of year rate of increase in nominal labor 1990. Real gross national product fell at compensation, as measured by the eman annual rate of about 2 percent in the ployment cost index, also moved up in fourth quarter, and the gain over the four the first half of 1990; after midyear, quarters of the year amounted to only however, wage pressures moderated, 0.3 percent. The civilian unemployment and the rise in nominal compensation rate, which had held around 5V4 percent over the year ended up at 4.6 percent, through the first half of the year, moved slightly less than the increases recorded up steadily in the second half, to 6.1 per- in each of the two previous years. cent in December. In January of this Support for growth of real activity year, the rate edged up further, to continued to come from the external sec- 6.2 percent. The consumer price index tor in 1990, as real exports of goods and rose 6.1 percent from December of 1989 services rose 5 percent over the four to December of 1990, the largest annual quarters of the year; this gain, however, increase in nearly a decade. was considerably smaller than the in- A key link in the chain of events after creases seen in each of the four previous midyear was a surge in the price of years. Gross domestic purchases, the crude oil, from around $20 per barrel in broadest indicator of domestic demand, the spot markets in late July to more fell about lA percentage point, on net, than $40 per barrel in early October. over the four quarters of 1990; within That surge sent the prices of energy this category an increase in government products soaring, sapped household pur- purchases was more than offset by chasing power, and put further pressures weakness in consumption, homebuildon business profits, compounding the ing, and business fixed investment, and squeeze brought on by rising costs and a swing in inventories from moderate sluggish sales. Another, less tangible accumulation late in 1989 to decumulalink was the enormous uncertainty about tion in the fourth quarter of 1990. how, and when, tensions in the Mideast As was true during much of the long might be resolved. Symptomatic of that expansion of the 1980s, economic trends uncertainty, the various indicators of in 1990 varied appreciably across differhousehold and business sentiment re- ent regions of the country. The New mained low toward the end of 1990, England economy, which had been very even as oil prices dropped back part of strong through much of the 1980s, the way from their October peaks. slumped in 1990; by year-end, unem- While surging energy prices ac- ployment rates in that region had moved counted for much of the acceleration in well above the national average. By coninflation in 1990, they were by no means trast, the economies of many locales the only source of upward price pres- with heavy concentrations of manu- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 45 factoring—especially capital goods securities they held; these developments manufacturing—held up fairly well un- would seem to have called for a shift til the oil shock; the continued growth of toward reduced consumption out of curexports supported activity in those areas. rent income. But, while such forces may The farm economy was relatively strong well have been at work, they apparently again in 1990, although some indica- were outweighed by a tendency of tions of softening did show up in the households to dip into savings in the second half. Energy producers benefited short run when faced with a sudden from the climb in oil prices; exploration surge in expenses for energy. and drilling activity was restrained, Patterns of change in the various catehowever, by the great uncertainty re- gories of consumer spending were garding the future course of oil prices. mixed in 1990. Real outlays for services continued to trend up over the year, but at a slower pace than during most years The Household Sector of the expansion; on a quarterly basis, In midsummer, consumer spending still growth in these outlays was quite was on an uptrend, and it edged up a erratic, owing largely to weather-related little further after the oil shock, peaking volatility in gas and electric bills. Real in September. But with real incomes outlays for nondurables fell 2lA percent being dragged down by slumping em- over the course of the year, an unusually ployment and soaring energy prices, the large decline by historical standards. rise in spending eventually ran out of The drop presumably was brought on in steam. Real outlays fell at an annual rate large part by the downturn in real inof 3 percent in the fourth quarter; the come over the four quarters of 1990, the quarterly drop likely would have been first such decline since 1974. greater but for tax changes that caused The real outlays for consumer durasome households to make purchases in bles fell 3A percent over the four quaradvance of the turn of the year. ters of 1990; they had fallen about The declines in real income and \Vi percent in 1989. The drop in 1990 spending in the latter part of the year was accounted for by a second year of essentially reversed the moderate gains decline in the purchases of motor vehimade earlier. Over the year, after-tax cles. Outlays for the other durables— income was down about Vi percent in furniture, household equipment, and the real terms; real consumption spending like—were up about Vi percent on net was up over the four quarters of 1990, over the four quarters of 1990, after but only fractionally. The personal sav- having grown at a moderate pace in ing rate rose over the first half of the 1989. These patterns of change in year, but then dropped about 1 percent- spending seemed to reflect both macroage point in the last two quarters. This economic forces, notably the slower drop in the saving rate after midyear pace of real income growth after the was a little surprising from one perspec- start of 1989, and the normal workings tive, in that an unprecedented plunge in of household investment cycles. With consumer attitudes between July and regard to the latter, household spending October might have been expected to for cars, trucks, and other consumer dugenerate some increase in precautionary rables over the 1983-88 period were saving. Moreover, many households had almost 50 percent above the average for suffered losses of wealth because of de- the six best years of the 1970s. By 1989 creases in house prices or in the value of many households may have reached a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

46 78th Annual Report, 1991 point where they were in effect "stocked In some instances, new construction up" and therefore well positioned to activity was deterred in 1990 by the delay making new purchases if the tim- difficulty that prospective builders had ing currently did not seem right. in obtaining credit. Failures of thrift Spending for residential construction institutions severed established credit got a transitory boost from good weather relationships for some builders, and the in the first quarter of 1990, but then fell thrift institutions that survived moved sharply in each of the three subsequent toward more conservative lending poliquarters. Over the year as a whole, resi- cies, either out of choice or in response dential investment outlays declined to the more stringent capital require- 83/4 percent in real terms; they had ments and lending limits mandated by dropped 7 percent in 1989. the Financial Institutions Reform, Re- This slump in homebuilding reflected covery, and Enforcement Act. Banks a variety of influences, most of which also were cautious about extending appeared to enter on the demand side of credit to builders; with large volumes the equation. The downshifting of real of problem loans already on their income growth after the start of 1989 books, banks were very sensitive to the may have led households to view their poor conditions in many local housing longer-run prospects in a more cautious markets. light and to hold back from housing In contrast to builders, potential homeinvestments that they might otherwise buyers did not seem to have serious have undertaken. In addition, the un- problems in obtaining financing in 1990; winding in some regions of the country mortgage credit remained readily availof real estate booms seen in the 1980s able, and the spreads between mortgage tarnished the attractiveness of housing rates and the rates on other long-term as a longer-term investment. These neg- loans actually narrowed. For the most ative developments came at a time when part, consumer credit also appeared to housing demand already was being re- be readily available, as lenders exhibited strained by a much slower rate of only a mild tendency to tighten stangrowth of the adult population than was dards on this generally profitable line of seen in the 1970s and early 1980s. business. Builders cut back sharply on new construction in 1990. The annual starts of single-family units fell 11 percent from their 1989 level, and starts of The Business Sector multi-family units declined about The business sector began 1990 on a 20 percent, from an already low level. rather shaky note. Profits had declined However, these reductions in starts still during 1989, and overhangs of business were not large enough to balance the inventories had developed in the second market. The supply of unsold new half of that year in some markets, notahomes, measured relative to the pace of bly autos. In manufacturing, production sales, jumped sharply in the first part of growth had been restrained late in 1989, 1990 and then remained high over the and output dropped sharply in January rest of the year; the vacancy rate on of 1990, led by a steep cutback in auto multifamily rental units dipped tempo- assemblies. But conditions improved rarily in the spring, but later bounced over the next few months. Industrial back up to the high levels seen over production rose fairly briskly, in fact, most of the period after 1986. from January into midsummer, and the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 47 drop in business profits was halted for a were seen in the fourth quarter of 1990 time. accounted for all of that quarter's drop From August on, the business climate in real GNP. was dominated by the oil shock and its After registering relatively strong attendant uncertainties. After peaking in gains in each year from 1987 to 1989, September, industrial production plum- business outlays for fixed investment meted over the last three months of rose only 1 percent in real terms over 1990, and it closed out the year about the four quarters of 1990. Spending was V/i percent below the level of a year affected by the squeeze on profits, the earlier. The operating rate in industry easing of pressures on capacity, and also fell sharply over the latter part of the heightened uncertainties regarding the year, back to where it had been in the business outlook. These influences early 1987, before capacity pressures showed through most clearly in the outstarted developing in that year. With lays for equipment. Real spending for volume declining and costs on the rise, computers and other information procorporate profits undoubtedly went into cessing equipment rose 3 percent on net renewed decline in the fourth quarter over the four quarters of 1990; growth (the official data are not yet available); had averaged 15 percent per year over for 1990 as a whole, the share of profits the first seven years of the expansion. In in total GNP was the lowest of any year addition, outlays for industrial equipsince 1982. ment turned down in 1990, as the deteri- Serious overhangs of business inven- oration of profits and the falloff in opertories were not apparent when the oil ating rates took their toll. Business shock hit in August, and prompt produc- purchases of motor vehicles bounced tion adjustments that followed the shock around from quarter to quarter, but held forestalled stockbuilding in the ensuing in essentially the same range that they months. Indeed, real manufacturing and have been in for the past several years. trade inventories fell slightly on net be- By contrast, business outlays for airtween the end of July and the end of craft, which have been very strong in November. Under the circumstances, recent years, rose further in 1990. however, these reductions clearly were Nonresidential construction declined not great enough to get actual stocks 5 percent over the four quarters of 1990. down to desired levels. In wholesale and Weakness was concentrated mainly in retail trade, sales declined sharply from the outlays for offices and other com- July to November, and the constant- mercial structures, which together acdollar ratios of inventories to sales in count for about one-third of the total. these sectors moved up to levels that An excess supply of these structures dewere around the upper end of the ranges veloped in many cities during the buildseen over the past two or three years. ing boom of the mid-1980s, and despite The inventory-sales ratio in manufactur- sharp cutbacks in construction after ing also edged up on net between July 1985, vacancy rates remained high and November, and manufacturers con- through 1990. Reflecting this continued tinued to cut output through the end of imbalance—and the reluctance of credi- 1990 and into early 1991. Over 1990 as tors to finance new projects in this troua whole, the level of real business inven- bled sector of the economy—the indicatories declined about $3 billion, accord- tors of future activity, such as the data ing to preliminary estimates. The rapid on new contracts and building permits, reductions of nonfarm inventories that continued to have a decidedly negative Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

48 78th Annual Report, 1991 cast through the second half of 1990. 5 percent in 1990; this slowdown mainly Spending for industrial structures rose reflected the absence in 1990 of transiover the first three quarters of 1990, but tory factors that had led to the big jump fell sharply in the fourth quarter, and the in these receipts in 1989. On the expenindicators of future construction contin- diture side of the ledger, about one-third ued to weaken. As noted previously, in- of the increase of $108 billion in nomivestment in oil drilling remained sub- nal federal outlays in fiscal 1990 was dued in the second half of 1990, despite attributable to federal deposit insurance the rise in oil prices; in some instances, programs; the main portion of these outdrillers may have been hampered by lays went to honor obligations to holdshortages of experienced crews, but, ers of deposits in failed thrift institumore important, the uncertainty about tions. Spending also moved up rapidly whether prices would remain high in 1990 for entitlements. The outlays for enough to justify stepped-up investment medicare rose 15 percent, pushed up by prompted a cautious response. continued rapid inflation in health costs and an expansion in the number of beneficiaries. Outlays for social security and The Government Sector other income security programs, which In the government sector, budgetary together account for close to one-third pressures intensified in 1990. At the fed- of total federal spending, rose about eral level, the rate of growth of receipts IVi percent in fiscal 1990, a pickup from slowed to 4.1 percent in fiscal year the pace of recent years. Net interest 1990, less than half the rate of increase outlays, which now account for almost in the previous fiscal year and more than 15 percent of total spending, also contin- I percentage point below the rate of ued to climb rapidly. growth in nominal GNP. Meanwhile, Federal purchases of goods and serspending jumped 9.4 percent in fiscal vices, the portion of federal spending 1990, and the federal budget deficit in- that is included directly in GNP, increased to $220 billion, up $67 billion creased 5.5 percent in real terms over from the 1989 fiscal year and well above the four quarters of 1990. Excluding the target for 1990 that had been laid out changes in the inventories owned or in the Gramm-Rudman-Hollings legis- financed by the Commodity Credit Corlation. Finding a way to get back on poration, which tend to be very volatile, track toward deficit reduction occupied federal purchases of goods and services the Congress and the Administration increased 4.4 percent, on net, over the through much of 1990; an agreement year; nondefense purchases were up that was reached in October prescribed 3.6 percent and defense purchases, new targets and new procedures for the which had registered moderate declines five-year period starting in the 1991 in each of the three previous years, infiscal year. creased 4.7 percent in 1990. The rise in Part of the slowing of receipts in the defense purchases came mainly in the 1990 fiscal year stemmed from the fourth quarter of the year and apparently weakness in corporate profits; collec- reflected, in part, outlays associated with tions from that source fell almost Operation Desert Shield. $10 billion. In addition, the growth of The deficit in the combined operating tax receipts drawn from the incomes of and capital accounts of state and local individuals slowed appreciably, from governments (excluding social insur- II percent in 1989 to a bit less than ance funds) averaged $30 billion at an Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 49 annual rate over the first three quarters jump in the value of imports. In addiof 1990, and it appears to have widened tion, trade flows during the year were considerably further in the fourth quar- influenced to some extent by lagged ter as the recession cut into tax receipts. effects of the firming of dollar exchange State and local budgets first moved into rates that had taken place in the first half deficit in late 1986, and they have of 1989. The current account balance slipped further into the red in each suc- averaged $93 billion, at an annual rate, ceeding year. At the same time, con- during the first three quarters of 1990, cerns have intensified about the repay- down from a total of $110 billion in ment abilities of some state and local 1989; the improvement in this account governing units; as evidence of this, the was greater than that in the trade acdowngradings of state and local credit count owing to a strengthening of net ratings outnumbered upgradings by a receipts from service transactions, those wide margin in 1990. involving such things as travel, educa- In an effort to strengthen their fi- tion, and finance. nances, many state and local govern- Measured in terms of the other Group ments have raised taxes in recent years. of Ten (G-10) currencies, the foreign Reflecting those increases, total state exchange value of the U.S. dollar depreand local receipts moved up faster than ciated about 12 percent from December nominal GNP both in 1989 and through 1989 to December 1990. This depreciathe first three quarters of 1990. In addi- tion extended a decline that began in tion, spending has been scaled back mid-1989 and more than reversed the from planned levels in many cases. earlier appreciation. Adjusted for move- Overall, however, the efforts to control ments in relative consumer price levels, spending have collided with the grow- the dollar's decline in 1990 was slightly ing demands for services that state and less than it was in nominal terms, as local government traditionally have pro- inflation in the United States exceeded vided for such things as education, pub- somewhat the weighted average of inflalic protection, and health and income tion rates in the other G-10 countries. In support. Thus, while the growth of state real terms, the weighted-average dollar and local outlays has slowed from the in December 1990 was at about its low rate of rise seen earlier in the expansion, of 1980; the huge appreciation in averit nonetheless has been running above age exchange rates in the first half of the that of total GNP. The nominal rise in 1980s thus has been reversed. state and local purchases of goods and The decline in the dollar in 1990 was services over the four quarters of 1990 broadly based against the Japanese yen, was 7.9 percent; in real terms, purchases the German mark, and other European grew 2.5 percent over the year. currencies. The dollar also declined about 10 percent against the Singapore dollar, but it appreciated about 5 percent The External Sector against the currencies of South Korea The merchandise trade deficit narrowed and Taiwan, partially reversing declines from $115 billion in 1989 to a bit less of the preceding few years. The weakthan $110 billion in 1990, a degree of ness in the dollar against the G-10 curimprovement that was smaller than that rencies over the past year reflected priseen in either of the two preceding marily the influence of different trends years. A surge in the price of oil imports in interest rates in the United States in the second half of the year led to a and other major industrial countries. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

50 78th Annual Report, 1991 Whereas U.S. short-term interest rates quarters of 1990 was matched by a retrended down through the year and long- corded net capital inflow of $26 billion term rates were about unchanged over and a large positive statistical discrepthe year as a whole, foreign short-term ancy in the international accounts. Part rates rose by an average of about V2 per- of the statistical discrepancy may have centage point, and foreign long-term reflected increased holdings of U.S. currates rose by an average of about 1 rency by foreigners responding to the point. Official intervention in foreign ex- unsettled political conditions in many change markets was small in 1990. parts of the world. U.S. merchandise exports grew The recorded net inflow of capital IVi percent in real terms over the four was more than accounted for in net quarters of 1990, after rising about transactions reported by banks, which 12 percent in 1989. Merchandise ex- were mainly for the banks' own acports grew rapidly in the first quarter, counts. Transactions in securities boosted in part by a strong recovery of showed a net outflow, as foreigners reexports of aircraft after the Boeing strike duced their rate of net purchases of U.S. of late 1989 ended. Over the next two corporate and Treasury bonds and actuquarters, real exports changed little on ally made net sales of U.S. corporate net. Growth of activity in the major U.S. stocks, while the rate of U.S. net purexport markets slowed noticeably in the chases of foreign securities increased. middle of the year; outright recessions The recorded inflow of direct investdeveloped in Canada and the United ment from abroad dropped sharply from Kingdom. In the fourth quarter, export the rates recorded in 1988 and 1989; growth picked up again, probably foreign acquisitions in the United States largely in response to the gains in U.S. remained strong, but a much greater porprice competitiveness that took place tion were being financed here rather than during the year. Export prices rose mod- abroad. The flow of U.S. direct investerately during the year. ment abroad picked up, in part reflecting Merchandise imports excluding oil strong U.S. acquisitions abroad. Foreign grew only 2 percent in real terms during official assets in the United States in- 1990, less than half the pace recorded in creased $11 billion over the first three 1989. The deceleration in imports re- quarters of 1990, and U.S. official holdflected the net decline in total domestic ings of assets abroad declined slightly. demand in the United States during the year. The quantity of oil imports fluctuated during the year, but was up only Labor Markets slightly for the year as a whole. At an Payroll employment increased in each average rate of about 8.3 million barrels month in the first half of 1990 and fell in per day, oil imports accounted for each month of the second half. The deroughly half of total domestic consump- clines of July and August, however, retion of oil in 1990. The price of im- flected layoffs of federal workers who ported oil surged to an average level of had been hired temporarily to conduct nearly $30 per barrel in the fourth quar- the 1990 Census. In the private nonfarm ter, after having fluctuatedi n a range of sector, employment continued to edge $15 to $20 per barrel for nearly two up into August and did not turn down years. decisively until October. More than half The current account deficit of $93 bil- a million jobs were lost over the final lion at an annual rate over the first three three months of the year. Over the year Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 51 as a whole (December to December), markets in 1990 no doubt discouraged the number of jobs in the private non- some potential entrants from seeking farm sector increased about 250,000 on jobs, as typically happens during cyclinet, but much of that small gain was cal slowdowns in the economy. Still, the wiped out by the further drop in employ- drop in participation in 1990 left some ment in January of this year. questions regarding the future trend in Sectoral patterns of employment the growth of labor supply. A downshiftchange varied considerably in 1990. ing in the growth of labor supply, to the Employment in manufacturing fell about extent that it is not due solely to cyclical 585,000 from December of 1989 to De- factors, would tend to translate one-forcember of 1990; losses of factory jobs one into slower growth of potential outproceeded at a slow and fairly steady put over time unless there were at the pace through the first half, but then ac- same time an offsetting pickup in labor celerated after the onset of the oil shock. productivity, of which there has been The troubled construction sector shed little, if any, evidence of late. roughly one- quarter of a million jobs The flatness of the unemployment rate over the course of the year; after a through the first half of 1990 brought to weather-related jump early in the year, seven quarters the length of time during the declines went on almost without in- which the rate had held tightly around terruption through December. Employ- the 5lA percent mark and extended to ment in retail and wholesale trade was nearly three years the length of time down slightly on net over the course of during which the rate had been below 1990, as small gains through the first 6 percent. Not since the first half of the seven months of the year were more 1970s had the unemployment rate been than offset by sharp declines in the at such low levels for so long. This fourth quarter. The number of jobs in period of low unemployment, unfortuthe services industries increased in each nately, also was a period of sharply inmonth of 1990, but the rate of gain creased wage inflation. After rising slowed progressively over the year; about 3XA percent in both 1986 and health services was the only major area 1987, the employment cost index for in which hiring was going on with much compensation, which includes the cost vigor at year-end. of workers' benefits, as well as wages Growth in the supply of labor was and salaries, moved up about 43A perquite subdued in 1990. The civilian cent in both 1988 and 1989; and in the labor force increased only 0.5 percent first half of 1990, the year-to-year rate on a December-to-December basis, the of increase in this measure of compensasmallest annual gain in almost thirty tion rose still further, to 5lA percent. years. Part of the explanation for this Labor market tightness was not the slow labor force growth is that the only factor putting pressure on wages working-age population has not been and compensation between the end of growing very rapidly in recent years. In 1987 and the middle of 1990. The upaddition, the share of the working-age drift in inflation caused workers to press population that chose to participate in for nominal increases in wages and benthe work force declined in 1990, by efits that were big enough to keep real enough to cut labor force growth to incomes on a reasonably even keel, and about half of what it would have been with labor in short supply, businesses had the participation rate remained un- found it necessary to accede to hefty changed. The sluggishness of the labor increases to attract and keep workers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

52 78th Annual Report, 1991 The actions of government also added to basically reflected the effects of the oil cost pressures: A further rise in social shock in a situation in which underlying security taxes in 1990 added 0.2 percent inflation pressures already were well ento total compensation, and a boost in the trenched. Acceleration was especially minimum wage may have added another pronounced in those indexes, such as the 0.1 percent. CPI, that measure price change for A marked slowing of wage pressures goods and services purchased by doemerged in the second half of 1990, and mestic buyers, as the surge in oil import the year-to-year rate of increase in the prices had a particularly strong effect on employment cost index for compensa- these measures. By contrast, the GNP tion dropped back to 4.6 percent by the price measures, which cover goods and end of the year. Although workers' real services produced domestically, exhibincomes were battered by the surge in ited a less pronounced degree of accelerenergy prices during this period, at- ation this past year. tempts to regain those income losses The CPI for energy rose 18 percent appear to have been overwhelmed by from December of 1989 to December of the increase in labor market slack and 1990. Although the bulk of the 1990 rise associated concerns about job security. came after the start of August, intermit- The efforts of management to contain tent pressures had surfaced earlier in the costs in a time of declining profits prob- year. A severe bout of cold weather at ably also were a factor helping to limit the end of 1989 cut into the inventories wage increases during this period. of heating oil, disrupted operations at The performance of productivity was several refineries, and caused the prices subpar for a second successive year in of fuel oil and gasoline to soar. After 1990. Output per hour in the nonfarm January, fuel oil prices fell back, but business sector edged down 0.1 percent gasoline prices remained relatively firm over the four quarters of the year, after into the summer as still more supply having dropped 1.6 percent in 1989. interruptions prevented a rebuilding of More than likely, the behavior of pro- stocks. ductivity over this two-year period The August invasion of Kuwait set mainly reflected typical cyclical influ- off another round of steep price inences, namely the tendency of firms to creases. World oil production dropped adjust output faster than hours in re- temporarily after the invasion, and the sponse to a slowing of demand. Unit uncertainties associated with the tenlabor costs increased about AV2 percent sions in the Persian Gulf set off a scramover the four quarters of 1990, the larg- ble for inventories by refiners and others est annual rise since 1982. seeking to guard against a possible further disruption in supplies. The price of oil fluctuated widely in this period, but Price Developments generally maintained an upward trend All of the major price indexes—the con- into early October. By then, however, sumer price index, the producer price the losses of oil from Iraq and Kuwait index, and the GNP price indexes—rose were being fully offset by increased profaster in 1990 than they did in 1989. In duction from other countries, and degeneral, the increases seen in 1990 also mand was weakening. As a result, oil were the largest since those of the early prices turned down and held on a 1980s. In all of the measures, the pickup choppy downward pattern through the in the rate of price increase in 1990 end of the year, retracing about half of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 53 the runup that had occurred between 1989 led to a surge in the prices of August and early October. A further orange juice and fresh vegetables early steep drop came in mid-January of 1991, in 1990; toward the end of 1990, anwhen initial successes of the coalition other cold snap destroyed citrus crops in forces in the Gulf war seemed to signal California and boosted citrus prices. By a greatly diminished potential for dis- contrast, big wheat crops here and ruption of world supplies. abroad in 1990 caused wheat prices to The CPI for fuel oil also turned down plunge and led to some rebuilding of over the last two months of the year, but stocks; at retail, the CPI for cereals and gasoline prices again held firm, sup- bakery products slowed from an inported this time by a five cent per gallon crease of ll/z percent in 1989 to one of rise in the federal excise tax that took 41/2 percent in 1990. effect on December 1. Over the year, The CPI for nonenergy services, fuel oil prices increased about 30 per- which accounts for more than half of the cent at the consumer level, and gasoline total CPI, rose 6 percent during 1990, prices were up almost 37 percent. By after an increase of 5.3 percent in 1989. contrast, increases over the year in the The prices of medical services, which prices of the service fuels (natural gas have been rising rapidly for many years, and electricity) were quite small—in the were up 9.9 percent in 1990; they had range of Wi to 2 percent; reaction of increased 8.6 percent in the previous these prices to the oil shock apparently year. The cost of tuition, another catewas damped by ample supplies of natu- gory where pressures have been evident ral gas and coal, as well as the custom- in the CPI for some time, rose more than ary lags in adjusting rate structures at 8 percent in 1990, about the same as in retail. 1989. Elsewhere in the services sector, The consumer price index for food prices soared for public transportation rose 5.3 percent in 1990; this increase and lodging. Airlines, which were hit was about the same as those seen in hard by the surge in energy costs, raised 1988 and 1989. Over the preceding few their fares almost 23 percent over the years, food price increases had tended to year. Price increases for other forms of run more in the 3 to 4 percent range. To public transportation were in the 6 to a considerable degree, the continued 7 percent range, and the CPI for out-ofsharp increases in food prices in 1990 town lodging advanced nearly 16 perseemed to reflect underlying inflation cent over the year. Increases in the costs processes similar to those at work in of many publicly provided services— other sectors of the economy. In addi- such as water and sewerage maintetion, prices were affected by the chang- nance and refuse collection—also were ing supply conditions in agriculture. large in 1990; these increases probably Production of beef and pork declined in reflected the needs of municipalities to 1990, and their prices at retail increased raise revenue, as well as environmental 9 percent and 17 percent respectively imperatives in some instances. over the course of the year. Dairy pro- The CPI for commodities excluding duction, which had fallen in 1989, food and energy rose 3.4 percent in turned up in 1990; but with stocks ini- 1990, after increasing 2.7 percent in tially at low levels, the rise in produc- 1989. Within this category, tobacco tion did not have a damping effect on prices again registered a particularly prices at retail until relatively late in the large increase, about 11 percent over the year. The spell of cold weather late in course of the year. This increase partly Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

54 78th Annual Report, 1991 reflected the pass-through to consumers a weakening economy, sluggish money of a jump in manufacturers' prices; in growth, improved inflation prospects, addition, governments continued to view greater fiscal restraint, and indications excise taxes on tobacco products as an of tightening credit to private borrowers. attractive way to boost revenues. The In response to the System's actions and CPI for apparel was up 5 percent in to developments in economic activity 1990; apparel prices had changed little and prices, short-term interest rates, as over the course of 1989, and the 1990 of mid-February, were nearly 2 percentrise may therefore have been, in part, an age points below those prevailing at the effort to restore margins. New car prices time of the Board's July report to the continued to rise, even as sales declined; Congress, and long-term rates were by contrast, the prices of used cars were down about Vi percentage point. down a bit for a second year. The prices After an initial small cut in money of many household appliances fell in market rates in July, policy was held 1990, extending the gradual downward stable for a brief period, in light of the trends seen in previous years. sharp jump in world oil prices that oc- Apart from energy, increases in pro- curred in the wake of the Iraqi invasion ducer prices were comparatively moder- of Kuwait. This shock implied an uncerate in 1990. The producer price index tain combination of increased prices and for finished goods excluding food and reduced economic activity. The magnienergy rose 3.5 percent over the year, tude of the impact would depend on the about 3A percentage point less than in extent of the disruption in world oil either of the preceding two years. In markets, which could not be forecast manufacturing, the pressures from rising with precision. As it became clear in the wages and soaring energy costs were autumn that the risks of increased inflapartly damped by continued rapid gains tion were fading relative to the risks of a in productivity and softening demand. downturn in economic activity, the Fed- The prices of intermediate materials ex- eral Reserve moved aggressively, using cluding food and energy rose 1.9 per- a variety of instruments. Open market cent during 1990, the second year in a operations and a reduction of 1 percentrow in which increases for that category age point in the discount rate, taken in have been small; materials prices had two steps, have brought overnight rates increased sharply in 1987 and 1988. The down l3/4 percentage points since late spot prices of raw industrial commodi- October; in addition, reserve requireties moved up on net in the first half of ments were reduced in early December 1990, held firm through September, and to foster easier credit conditions. then fell rapidly in the fourth quarter as In the formulation of policy in 1990, the economy weakened; further declines the Federal Reserve continued to examin these prices have been evident in the ine a variety of information bearing on early part of 1991. developments relating to economic activity and prices. Over the year, certain developments in financial markets took Monetary and Financial on special significance for the economy Developments during 1990 and monetary policy. The cost and avail- Monetary policy has been progressively ability of credit was monitored in light eased since mid-1990, resuming the of indications that tightening credit suptrend begun in 1989. The Federal Re- plies were constraining output to a serve has acted against the backdrop of greater degree than was desirable. In Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 55 addition, considerable attention was paid slow appreciably. To a large extent, the to money stock movements, especially weakness in the aggregates was associin the latter part of 1990 and into 1991, ated with a redirection of credit flows when money growth virtually stalled. away from depository institutions, re- The Federal Reserve recognized that the lated mainly to the ongoing restructurrelation of the monetary aggregates to ing of the thrift industry but also to an broad measures of economic perfor- apparent decrease in the willingness or mance remained subject to considerable ability of banks to lend. For the most uncertainty, but the marked sluggishness part, the decline in depository credit was of money growth was seen as suggest- expected to be taken up by other lending both weak contemporaneous growth ers, with minimal impact on the overall of income and spending and the exist- cost and availability of credit. M3 velocence of constraints on the availability of ity in particular was expected to be credit through depository institutions boosted substantially in the process, and that could adversely affect spending in the FOMC at its July meeting reduced the future. the annual target range for this aggregate by Wi percentage points. By mid- The Implementation of Monetary Policy July, it was increasingly apparent that During the first half of 1990, the Federal the pullback by depositories was con- Reserve took no actions in reserve mar- stricting credit supplies to some classes kets designed to produce changes in of borrowers, and the Committee eased money market interest rates. Federal reserve conditions to bring down interfunds—overnight interbank loans of est rates slightly to offset the effects of immediately available funds—traded this tightening of credit conditions on an around the %lA percent level that had already soft economy. been established in December 1989, The invasion of Kuwait at the beginand other short-term rates were little ning of August fundamentally altered changed as well. Throughout this period the environment for monetary policy. economic activity continued to grow, World oil prices soared, and a considerthe unemployment rate held steady, and able measure of uncertainty was added there were no clear signs of abatement to the outlook for the economy, compliin inflation. cating the formulation of monetary pol- Yields on longer-term debt instru- icy. Business and consumer confidence ments rose considerably during the early plummeted, and the adverse effects of months of the year, restoring the yield high oil prices on the public's spending curve's usual upward tilt, which had plans, domestic economic activity, and been absent for much of 1989. This rise inflation soon became apparent. As volin long-term rates reflected a stronger atility in financial markets increased, economy than some had expected, in- heightened investor preference for licreased concerns about inflation, and quidity and safety was evident: Treasury higher foreign interest rates. As the sec- bill rates fell over August and Septemond quarter progressed, however, bond ber while private short-term rates rates began to recede, responding to a changed little; money market mutual shift in sentiment about the strength of funds experienced large inflows, boostthe economy and the likely path of mon- ing growth of the monetary aggregates etary policy. late in the summer as investors appar- Around that time, growth of the ently fled stock and bond markets; and broader monetary aggregates began to the ongoing decline in the foreign ex- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

56 78th Annual Report, 1991 change value of the dollar was halted for ening, the Federal Reserve took another a while by safe-haven demands. step to ease pressures on reserve In these circumstances, the benefits of conditions. any easing action taken to cushion the Late in the year, indications accumupossible effects on output in the near lated that inflationary pressures, apart term needed to be weighed against the from those closely connected to the potential for embedding higher energy surge in energy prices, were easing. As prices in the price level and, more im- the economy softened and wage presportant, into inflationary expectations, a sures also diminished, it seemed more reaction that ultimately would undercut likely that the effects of higher oil prices sustainable economic growth. Policy de- would not be built into ongoing inflation cisions were further complicated by the trends. Market interest rates declined fact that the military and political situa- across the maturity spectrum, although tion underlying the oil price shock was these declines were most pronounced so fluid; in fact, it clearly was a war-risk for government obligations owing to premium rather than a current shortage heightened concerns about credit qualof supply that was maintaining a higher ity, which drew investors toward highprice of crude oil. The possibility ex- grade assets. isted that any substantial moves in mon- Financial strains were experienced by etary policy might prove ill-advised as more and more lending institutions, as circumstances changed, and it appeared problems emerged in many real estate that the most constructive role monetary portfolios and as a growing number of policy might play, until the balance of risks was clarified, would be to foster a Growth of Money and Debt sense of stability in the very nervous Percent financial markets. Debt of As it was, financial markets had to domestic contend not only with the Gulf crisis Period Ml M2 M3 nonfinancial during the late summer and early fall, sector but also with uncertainties surrounding Annually, fourth the timing and extent of a reduction in quarter to fourth quarterl the federal budget deficit. Yields were 1980 7.4 8.9 9.5 9.4 buffeted whenever the odds of a mean- 1981 5.4 9.3 12.3 10.1 (2.52) ingful deficit-reduction package ap- 1982 8.8 9.1 9.9 9.1 peared to change. For example, Trea- 1983 10.4 12.2 9.8 11.1 1984 .. 5.4 8.0 10.7 14.2 sury bond rates fell appreciably when an 1985 12.0 8.7 7.6 13.1 initial budget accord was hammered out 1986 15.5 9.2 9.0 13.2 1987 6.3 4.3 5.8 9.7 and rose when the government was 1988 4.2 5.2 6.3 9.2 1989 .6 4.7 3.6 7.7 forced to shut down temporarily after 1990 4.2 3.9 1.8 6.9 the pact failed to win congressional ap- Quarterly proval. By the end of October, long- (annual rate)3 term rates had come down again, and a 1990:1 5.2 6.2 2.9 6.1 2 4.2 3.9 1.3 6.9 budget agreement involving a major de- 3 3.7 3.0 1.6 7.4 gree of fiscal restraint over a multi-year 4 3.4 2.2 1.3 6.4 horizon was successfully concluded. In 1. From average for fourth quarter of preceding year to light of the budget agreement, which average for fourth quarter of year indicated. promised greater and more durable fis- 2. Adjusted for shift to NOW accounts in 1981. 3. From average for preceding quarter to average for cal restraint, and with the economy weakquarter indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 57 highly leveraged firms ran into trouble. of ebbing inflation pressures. In total, Efforts by banks and other lenders to the federal funds rate has fallen about protect or improve their capital posi- 2 percentage points from its mid-1990 tions as their loan portfolios deteriorated level and about 3lA percentage points were reflected in widespread signs of from its most recent peak in mid-1989. cutbacks in the availability of credit and Under the impetus of the easing of increases in its cost, especially to less- monetary policy and the softening of the than-prime borrowers lacking access to economy, other short-term rates also fell securities markets. While much of the significantly below mid-1990 levels by tightening of lending standards was wel- mid-February. The drop in yields on come from the standpoint of safety and Treasury bills roughly paralleled that in soundness, it exerted a contractionary the federal funds rate. Banks reduced influence on the economy and was re- their prime rates in two Vi percentage flected in the slow growth in bank credit point steps in early 1991, but, as a conand the broad monetary aggregates. sequence of the tightening in credit sup- Against this backdrop, the Federal plies, prime rates remained higher than Reserve undertook additional actions usual relative to rates on federal funds designed to support the economy and to and other sources of funds. Rates on counter the tightening in credit terms. In commercial paper and CDs also fell less mid-November, the FOMC moved to than those on federal funds or Treasury lower money market rates through open bills, dropping about VA percentage market operations, and in early Decem- points from mid-1990 levels. This widber, the Board eliminated the 3 percent ening of yield spreads was additional reserve requirement on nonpersonal evidence of investor concern about pritime deposits and net Eurocurrency lia- vate credits, though these spreads generbilities. This action was taken in re- ally remained narrow relative to those sponse to the increased restraint on lend- seen in past economic downturns. Howing by commercial banks: Lower reserve ever, yields on private money market requirements reduce funding costs to de- instruments were under substantial uppository institutions, encouraging them ward pressure in the weeks leading up to to expand lending. Ultimately, the lower year-end when the prospect of publishfunding costs are passed through as a ing financial statements led banks to atcombination of lower rates for bor- tempt to hold down credit extension in rowers and higher rates offered to order to bolster capital ratios and led depositors. lenders generally to intensify their focus Following the reduction in reserve re- on asset quality. Spreads soared at times quirements, further actions were taken in this period; but the Federal Reserve in reserve markets to bring down short- injected large amounts of reserves, the term interest rates. These actions in- year-end passed without major dislocacluded additional steps toward a more tion, and yield spreads narrowed subaccommodative supply of nonborrowed stantially in January. reserves through open market opera- Rates on longer-term securities came tions and two reductions in the discount down considerably less from their levels rate—of a half point in December and of in mid-1990 than those on short-term a like amount in January. All of these paper. As of mid-February, the yield on moves were made in light of further the thirty-year Treasury bond had fallen declines in economic activity, sluggish about V2 percentage point since the midmoney and credit growth, and evidence dle of 1989, and those on private long- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

58 78th Annual Report, 1991 term issues were down slightly less. De- the slowdown of M2 growth emerged at clines in these yields may have been about the time that RTC activity picked limited in part by the increased uncer- up. The drop in depository credit, which tainty and volatility that followed the had its primary effect on the M3 aggreinvasion of Kuwait. Some major stock gate, also may have damped M2 by lessmarket indexes had reached record highs ening the need of commercial banks and in July, but the uncertain outlook both at thrift institutions to bid for retail deposhome and abroad after the invasion of its. One indication is the apparent cut- Kuwait and the slump in economic ac- back in advertising for these deposits tivity pushed stock prices significantly during the year. And, as a result of the lower in the ensuing months. Since the diminished need for retail deposits, dewar broke out in mid-January of this posit rates were held down relative to year, however, stock price indexes have returns available on market instruments. moved up sharply, with some indexes In addition, some high-rate contracts reaching new record highs in mid- were abrogated in the process of closing February. The foreign exchange value of failed thrift institutions, reducing the the dollar declined about 10 percent over attractiveness of these deposits; deposithe second half of 1990; the dollar tors who were dislodged from existing turned up early this year, but fell again relationships when thrift institutions in February. were closed may have reallocated their assets in other directions. Nevertheless, even taking account of Behavior of Money and Credit these factors affecting the relative attrac- M2 grew unexpectedly slowly in 1990, tiveness of yields on M2 assets, M2 about 4 percent for the year, well down growth remains much slower than seems in the lower half of the FOMC's range. explainable, indicating an underlying re- After a robust first quarter, M2 growth evaluation of, and shift away from, M2 weakened markedly over the balance of assets. One factor behind such a shift the year. The expansion of this aggre- may have been concerns generated by gate was well below what the historical the publicity about savings and loan failrelationships based on income and inter- ures and about credit quality problems est rates would suggest. The substantial at banks. To the extent that households declines in interest rates from their ear- moved assets to money market funds, lier levels would ordinarily be expected which grew rapidly in the second half of to offset to some extent the effects of the the year, M2 would not be affected; slowdown in nominal income in the sec- however, direct purchases of market inond half of the year. M2 velocity was struments would reduce M2. For examfairly stable through 1990, but historical ple, noncompetitive tenders at Treasury relationships suggest that velocity auctions have been unusually strong, should have fallen given the decline in suggesting a shift toward holding these interest rates. assets directly. In addition, households The shortfall of money growth, rela- may have chosen to deplete liquid assets tive to historical patterns, probably re- instead of increasing borrowing to mainflected the shifting of financial flows tain spending in the face of higher prices associated with the contraction of the for energy products and the sudden thrift industry and the increased reluc- plunge in real income; consumer credit tance or inability of commercial banks growth was especially slow in the fourth to expand their balance sheets. Indeed, quarter. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 59 The slowdown in M2 last year would tions resolved by the RTC, but, unlike in have been even more pronounced had it 1989, they did not use newly acquired not been for the rapid expansion of cur- deposits to expand their balance sheets. rency. At 11 percent, currency growth Significant loan losses in 1990 limited was more than twice its 1989 rate and the ability of banks to generate capital was at the most rapid yearly rate of the internally and raised the cost of external postwar period. The bulk of the pickup capital as investors reevaluated risks. At appears attributable to increased de- the same time, banks were facing the mands for U.S. currency outside our bor- prospect of new capital standards. Banks ders, however. Information on ship- used the deposits they acquired from ments overseas suggests that demands thrift institutions to pay down other liafor U.S. currency were particularly bilities, especially large time deposits, heavy in areas experiencing economic with the result that the shift of M2 deand political turmoil, especially Eastern posits from thrift institutions to banks Europe, Latin America, and, after the contributed to sharp declines in M3 Iraqi invasion of Kuwait, the Middle managed liabilities at banks. East. The faster growth of currency, Much of the difficulty in the banking along with the effects of lower market industry can be traced to problems with interest rates on incentives to hold trans- commercial real estate loans. Before actions balances, boosted Ml growth the mid-1980s, developers typically arfrom near zero in 1989 to 4 percent in ranged permanent financing for con- 1990. The monetary base grew SV2 per- struction and land development projects, cent over the year, also propelled by usually from institutional investors, bestrong currency growth. By contrast, the fore obtaining initial bank financing. But total reserves portion of the monetary during the period of rapidly rising real base was about unchanged, reflecting estate values in the latter 1980s, many little net growth in reservable liabilities; banks no longer required such pretransactions deposits increased slightly, arranged "takeouts," and when the real but declines were registered in nonper- estate market cracked, those banks sonal time deposits and net Eurodollar found themselves holding a substantial borrowing (abstracting from the effects volume of undercollateralized loans. At of the reserve requirement decrease at about the same time, there was a signifiyear-end). cant reevaluation of the prospects for M3 grew 13A percent in 1990, some- many of the highly leveraged transacwhat less than had been anticipated early tions (HLTs) that had been undertaken in the year. Roughly similar to the quar- in recent years; while bank losses attribterly pattern of M2, M3 growth fell off utable to HLTs have not yet been signifnoticeably after the first quarter and icant, the virtual disappearance of the ended the year somewhat above the market for new low-rated bonds has imlower bound of its target range. That plied that many HLT loans will not be range itself had been lowered at midyear repaid as promptly as hoped. Growing by Wi percentage points amid evidence uneasiness about banks' assets has conthat the drop in thrift assets was pro- tributed to increases in their cost of capceeding more rapidly than had been ex- ital and, for some banks, of wholesale pected and that credit flows were being funding. directed away from depository institu- Banks by and large are sound and tions. Banks acquired a substantial well capitalized, but concerns about amount of deposits from thrift institu- the strength of the industry intensified Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

60 78th Annual Report, 1991 Senior loan officer opinion survey, 1990-91l Percentage of banks reporting tighter standards for approving business loan applications Type of bank and size of customer firm May August October January Domestic bank Large n.a. 36 50 35 Middle 58 43 48 37 Small 54 34 41 32 U.S. branches and agencies of foreign banks n.a. 612 72 89 1. Survey of sixty large domestically chartered banks 2. For six-month period from February to August, and eighteen U.S. branches and agencies of foreign banks. n.a. Not available. Data are for three months ending with survey date. throughout 1990. The General Account- ties markets beginning in September, as ing Office and the Congressional Budget investors reevaluated the holdings of Office issued reports questioning the fi- commercial real estate and HLT loans in nancial health of some large banks and light of expectations of a weaker econexploring the implications of possible omy. Yield spreads widened signifidifficulties with those banks for the cantly. Furthermore, signs of mounting Bank Insurance Fund. Banks had to financial stress were not limited to the make large provisions for loan losses as financial sector last year. The number of delinquency and loss rates rose on most corporations reducing, omitting, or demajor categories of loans, but especially ferring dividends in the fourth quarter on real estate loans. By mid-September, was the highest in more than thirty rates on the subordinated debt obliga- years. A record dollar amount of corpotions of some major banking institutions rate bonds defaulted in 1990. Calculated had jumped appreciably as investors re- as a percentage of the par amount of evaluated the health of these organiza- noninvestment grade bonds outstanding, tions. Several major bank holding com- the default rate of 8.7 percent was the panies chose to redeem portions of their highest in twenty years and more than outstanding auction-rate preferred stock double the rate in 1989. While the numrather than pay sharply higher rates. ber of downgradings also reached a Spreads between bank and Treasury ob- record high, most of the downgradings ligations widened significantly, and bank were attributable to deteriorating condistock prices tumbled. These price move- tions affecting below-investment-grade ments began to be reversed subse- nonfinancial corporations and, notably, quently. Partly under the influence of financial institutions. lower interest rates, bank stock prices Not surprisingly, banks tightened have risen substantially in 1991, revers- standards and raised lending margins in ing much, though not all, of the declines response to the rising cost of funds, capsince the summer; spreads on subordi- ital shortages, and perceptions of greater nated and other bank obligations have risk of default. In the wake of HLT narrowed over the last few months, but disclosure guidelines, banks instituted remain well above their levels of last management-imposed caps on their exsummer. posure to HLTs. Banks with low capital Other financial institutions also have have cut back lending, while adequately encountered difficulty. Finance compa- capitalized banks—though maintaining nies and, to a lesser extent, insurance substantial credit growth—appeared to companies took a beating in the securi- be unwilling to step into the breach Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 61 and increase their lending pace. Survey tions probably reduced total credit to responses and other information on some extent, but by far less than one for lending terms suggest especially severe one. Both the secondary market in mortconstraints on credit for real estate de- gages and the securitization of consumer velopment and commercial mortgages, loans substituted to a large extent for but also some cutbacks for business bank and thrift intermediation in those lending more generally. Some of these sectors. Securitization alone is estimated business borrowers have limited alterna- to have removed more than $40 billion tive sources, and so the restriction of in consumer loans from bank balance credit by banks probably has reduced sheets during 1990 as banks pared their their access to funds. asset totals to improve capital ratios. As a result of the tightening of credit Overall, the markets for home mortstandards and lending terms, but also gages and consumer credit showed little owing importantly to the ebbing of bor- indication that supply conditions were a rowing demand as the economy turned significant factor restraining growth of down, the growth of bank assets slowed these types of credit. Spreads on both in 1990, especially in the fourth quarter. asset-backed and mortgage-backed se- Total loan growth fell to roughly half curities did widen a bit in the fourth its 1989 rate, with slowing evident in quarter, but remained well within historbusiness, real estate, and consumer ical ranges and appeared to have little lending. There was, however, a strong impact on the cost of funds to consumregional disparity in the slowdown ers. Sluggish expansion of both conof bank lending, a disparity that was sumer credit and residential mortgage visible in total bank loans as well as borrowing in 1990 seemed to reflect in each loan category. In the South- ebbing demands associated with slumpwest, bank loans continued their pre- ing markets for housing and consumer 1990 decline, while, in New England, durable goods. bank loans experienced a sharp turn- Business borrowing slackened further around at the beginning of 1990 from in 1990, reflecting developments on robust growth to outright decline. New both the demand and supply sides of the England banks were particularly aggres- market. Although credit needs to finance sive in selling loans into securities corporate restructuring diminished—as markets, which contributed to the over- indicated by the falloff in net equity all drop, as did loan write-offs. For the retirements to roughly half the pace of rest of the country, loans continued to the previous two years—the mismatch grow. between corporate capital expenditures The slowdown in bank credit growth and internal funds increased in the secin 1990 occurred despite a pickup in ond half of the year. A tightening of bank holdings of government securities credit availability for all but investmentearly in the year and the large transfers grade firms became increasingly eviof deposits from failed thrift institutions. dent. The pullback in lending to lower- Thrift credit shrank rapidly during the rated borrowers was not limited to year as the RTC resolved insolvent thrift domestic banks; it included U.S. offices institutions, acquiring the bulk of their of foreign banks, which previously had assets in the process, and as many viable been aggressive suppliers of funds to thrift institutions shed assets in an effort U.S. borrowers, as well as domestic nonto meet the new capital guidelines. The bank lenders such as insurance compacredit contraction at depository institu- nies. In addition, bond markets remained Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

62 78th Annual Report, 1991 unrecepfive to offerings of below- and the early part of this year. However, investment grade issues. the economy continued to weaken for a State and local governments reduced time, and in the spring, policy was eased new borrowing and retired sizable further, with the objective of ensuring a amounts of debt that had been advance- satisfactory recovery. refunded earlier, as pressures on munici- Recent evidence suggests that a pal credit ratings mounted in 1990. A pickup in activity probably is now under significant number of local housing way. Much of the uncertainty that had issues had their ratings downgraded in depressed business and consumer sentiresponse to the slipping credit quality of ment was removed by the successful several banks and insurance companies end of hostilities in the Persian Gulf. that provide credit enhancements. Also, The resulting increase in confidence, late in the year, certain municipalities combined with the boost to real purchasand some states found themselves pay- ing power provided by the retreat in oil ing substantially higher rates in light of prices, raised consumer spending on baltheir own financial difficulties. ance over the late winter and spring. Growth of the debt of all domestic These same factors, as well as lower nonfinancial sectors was boosted last mortgage rates, also have spurred a year by the federal government, which gradual recovery in the housing sector. borrowed in part to fund acquisitions of Reflecting the stimulus from housing thrift assets by the RTC. Borrowing for and consumer demand, along with the the RTC accounted for about Vi percent- continued growth in U.S. exports, indusage point of the 7 percent growth of trial production turned up in April and total debt in 1990. The growth of debt has advanced appreciably since then; in has slowed over recent years, but, even addition, labor demand showed signs of abstracting from the effects of RTC stabilizing during the spring. activity, remained well in excess of last As anticipated earlier this year, inflayear's expansion of nominal income. tion has slowed from its pace in 1990. Retail energy prices came down substantially during the first half of the year, Report on July 16, 1991 and the rise in consumer food prices moderated after several years of rela- Monetary Policy and the Economic tively large increases. More generally, Outlook for 1991 and 1992 the softness of labor and product mar- When the Federal Reserve presented its kets has attenuated price pressures for a most recent monetary policy report to range of goods and services. This downthe Congress, in February of this year, drift in "core" inflation was difficult to the economy was still in a downswing discern earlier in the year because of a that had been precipitated by Iraq's in- bunching of price increases in January vasion of Kuwait in August 1990 and and February; however, most of the sigthe associated spike in oil prices. To be nificant increases in those months either sure, several developments early in the did not continue or were reversed. year had created conditions that prom- The Federal Reserve's easing moves ised to help foster a turnaround in the over the first part of the year not only economy: Not only had oil prices re- were taken in light of the contraction of versed most of their earlier run-up, but economic activity and the progress in monetary policy had been eased sub- reducing inflationary pressures, but also stantially in the final months of 1990 were prompted by the continued slow Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 63 growth of the monetary aggregates early stock and bond markets, sometimes via in the year and continuing credit re- mutual funds. Growth of M3 was straint by banks and other intermediar- boosted early in the year by strong issuies. Reserve market conditions were ance of large time deposits by U.S. held steady after April, however, as evi- branches and agencies of foreign banks dence began to accumulate that the in response to a reduction in reserve economy was on track toward recovery. requirements around the end of 1990. In Reflecting the Federal Reserve's policy the second quarter, however, the expanactions and generally weak credit de- sion of M3 slowed as issuance of time mands, short-term interest rates declined deposits at foreign banks waned, and appreciably during the first half of the depository credit and associated funding year. Longer-term rates, which had needs contracted. Through June, both moved down markedly in the final M2 and M3 had grown at rates somemonths of 1990, were mixed over the what below the midpoint of their tarfirst half; with bond market participants geted annual growth ranges. focusing on signs of an emerging recov- Credit growth was slow in the first ery, Treasury bond yields rose a bit, half of the year. The federal governwhile rates on bonds issued by busi- ment's borrowing requirements were nesses fell as risk premiums narrowed held down by reduced activity by the sharply. In the stock market, share prices Resolution Trust Corporation (RTC) and have registered sizable increases since by contributions from foreign countries January, and broad indexes remain to cover the costs of Operation Desert within a few percent of the all-time Storm. Growth of private-sector debt highs set in the spring. Meanwhile, the was restrained by slack demand associvalue of the dollar has climbed substan- ated with the weakness of the economy tially on foreign exchange markets, sup- and by a reduced appetite for leveragported by the successful conclusion of ing. On the latter score, a lasting shift military operations in the Gulf, by ex- toward more conservative patterns of pectations of a recovery in the U.S. credit use would be a fundamentally economy, and by economic develop- healthy development; the excesses of ments in Germany and political difficul- the 1980s clearly left us with problems ties in the Soviet Union. in our financial sector that will take In response to Federal Reserve eas- some time to resolve. In part reflecting ings and associated declines in short- earlier credit losses, banks continued to term interest rates, growth of both M2 and M3 strengthened somewhat during Ranges for Growth of Monetary the first half of 1991 relative to the slow and Debt Aggregates1 pace of the second half of 1990. M2 Percent expanded more than nominal GNP, and thus its velocity fell, although not as Provisional Aggregate 1990 1991 range much as might have been expected confor 1992 sidering the decline in short-term interest rates. The continued muted response M2 3-7 21/2-61/2 21/2-61/2 M3 1-5 1-5 1-5 of M2 to the easings in short-term rates Debt2 5-9 41/2-81/2 41/2-81/2 probably reflected the ongoing rerouting 1. Change from average for fourth quarter of precedof credit outside of depositories and an ing year to average for fourth quarter of year indicated. effort on the part of savers to maintain Ranges for monetary aggregates are targets; range for debt is a monitoring range. yields on their assets by turning to the 2. Domestic nonfinancial sector. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

64 78th Annual Report, 1991 be cautious lenders through the first half velocity could weaken and faster M2 of 1991. However, private borrowers growth might be required. The Commitwho turned to securities markets found tee expects that the current annual readier access to capital as the economic growth range will permit it to deal with outlook brightened and risk premiums such velocity-altering disturbances in narrowed dramatically; financial inter- money supply and demand while it fosmediaries as well as nonfinancial firms ters financial conditions conducive to issued large volumes of equity and moderate economic growth and further longer-term debt, making significant progress toward price stability. progress in strengthening their balance The 1 to 5 percent target range for M3 sheets. adopted in February took into account an expected continued contraction in the thrift industry and associated redirection Monetary Objectives of credit flows away from depository for 1991 and 1992 institutions. The assets of thrift institu- At its meeting earlier this month, the tions are expected to shrink further in FOMC reaffirmed its previously estab- the second half of 1991, in large part lished ranges for money and credit for because of closures by the RTC. Issu- 1991. The target range for M2 had been ance of large time deposits by branches lowered in February to 2*/2 to 6V2 per- and agencies of foreign banks has modcent from the 3 to 7 percent range that erated, but domestic banks may have a had been in place for 1990. To date this greater appetite for funds during the secyear, M2 has grown at an annual rate of ond half as sound lending opportunities a little less than 4 percent, placing it increase with the projected improvewell within the target range for 1991 as ment in the economy. a whole. This, in effect, leaves the Com- Even though growth of the aggregate mittee some room to maneuver as events debt of domestic nonfinancial sectors at unfold in the coming months, while re- midyear was at the lower end of its maining within the annual range. The current 4V2 to 8V2 percent monitoring potential need for such maneuvering range, the Committee anticipates that room arises in part in connection with the debt measure will end the year well the significant uncertainties attending within that range. Stronger private credit the prospects for the velocity of M2. If, demands are expected to arise as the for example, the public's demand for economy grows, and federal borrowing M2 balances should be damped by will increase to finance stepped-up RTC moves among depository institutions to activity. However, debt growth is likely lower deposit rates (in response to ear- to continue to be damped by the shift in lier declines in market yields and to attitudes about leveraging. higher insurance premiums), then veloc- In setting provisional ranges for 1992, ity might tend to be stronger than other- the Committee chose to carry forward wise would be the case and less M2 the 1991 ranges for the monetary aggregrowth would be required to support a gates and for debt. Recognizing that the given rate of GNP increase. If, on the ranges had been reduced significantly other hand, institutions were to become over the past few years, the Committee more aggressive in bidding for loanable at this time believes that expansion of funds in the retail deposit market, and money and debt in 1992 within the curthus the public began to shift its port- rent ranges probably would be consisfolio back in favor of M2 assets, then tent with consolidating and extending Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 65 the gains toward lower inflation that quarter. The resulting swing in the pace have been made to date, and at the same of inventory investment is expected to time would provide sufficient liquidity boost domestic production considerably to support a sustainable expansion of over the rest of 1991. As typically oceconomic activity. The ranges will, of curs in the initial stage of a recovery, course, be reevaluated next February in much of this rise in output is expected to light of intervening economic and finan- reflect gains in the productivity of existcial events. The Committee will want to ing workers, rather than a marked update its assessment of the underlying pickup in employment. Thus, the Board tendencies in the economy as well as in members and the Bank presidents the relations between money and debt project only modest progress in reducexpansion and economic performance. ing unemployment over the second half Although the initial indications of of the year; the projected central tenmoney and credit ranges that are given dency for the civilian jobless rate in the in July always are tentative, flexibility fourth quarter is 63A to 7 percent. seems all the more warranted in the The pace of expansion may moderate current circumstances, with the econ- somewhat in 1992 as the initial impetus omy apparently at a cyclical turning from the inventory swing subsides and point and the financial system being buf- gains in production track the growth in feted by fundamental change. final demand more closely. The advance in real GNP expected for 1992, though subdued relative to that during the early Economic Projections for 1991 and 1992 part of most previous expansions, is an- The target ranges for the monetary ag- ticipated to reduce the margin of slack gregates and debt have been selected in the economy over the year. The cenwith the objective of supporting a sound tral tendency of the civilian unemployeconomic expansion accompanied by ment rate projected for the fourth quardeclining inflation—a pattern the Board ter of 1992 is 6lA to 6V2 percent, roughly members and Reserve Bank presidents V2 percentage point below the level exgenerally expect to prevail over the pected for the fourth quarter of this year. coming year and a half. Most forecast Several factors lie behind the expectathat real GNP will grow 3A to 1 percent tion of a relatively mild upswing in ecoover the four quarters of 1991; given the nomic activity. In real estate markets, decline during the first quarter, this cen- the persistent overhang of vacant space tral tendency range for 1991 as a whole for many types of buildings, along with implies an appreciable pickup in activity continued caution on the part of lenders, over the remainder of the year. The pro- will likely limit the amount of new conjections of growth in real GNP over the struction. In addition, fiscal policy will four quarters of 1992 have a central remain moderately restrictive because of tendency of 2lA to 3 percent. the federal budget agreement reached In appraising the near-term outlook, last fall and efforts by state and local the FOMC participants have placed con- units to correct serious imbalances in siderable weight on the apparent ab- their budgets; although this fiscal resence of inventory overhangs in most straint ultimately will strengthen the sectors. Accordingly, the recent firming U.S. economy by boosting domestic savof aggregate final demand is expected to ing and investment, its near-term effect bring a halt soon to the inventory draw- will be to hold down aggregate demand. downs that persisted into the second Further, with the personal saving rate Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

66 78th Annual Report, 1991 already at a low level and some house- In each of the prior three years, 1987holds saddled with heavy debt burdens, 89, the CPI rose about 4!/2 percent. consumer spending is projected to grow The common midpoint of the forecast at a relatively slow pace. Finally, the ranges for CPI increases in 1991 and appreciation of the dollar this year has 1992, 3x/2 percent, masks the downtrend offset some of the previous declines in in core inflation anticipated over the relative prices of U.S. goods in interna- next year and a half. In particular, most tional markets, thus limiting the contri- of the slowing of inflation observed thus bution that can be expected from the far this year has reflected the sharp drop external sector. in energy prices and a move toward By adopting policies intended to put smaller increases in food prices; excludthe economy on a path of moderate, ing food and energy, the deceleration in sustainable growth, the Board members the CPI so far has been relatively small. and Reserve Bank presidents believe However, with the tempering of laborthat it will be possible to achieve mean- cost increases now under way and the ingful progress in reducing inflation reduced pressure on plant utilization, over the remainder of this year and into core inflation is expected to recede sig- 1992. The central tendency of the pro- nificantly in coming quarters. As these jected rise in the total consumer price declines become widely perceived, exindex is 3x/4 to 33A percent over the four pectations of inflation should moderate, quarters of 1991 and 3 to 4 percent over reinforcing the tendencies toward decel- 1992, well below the 6VA percent rise eration. By reducing and ultimately recorded over the four quarters of 1990. eliminating the distortion to resource al- Economic Projections for 1991 and 1992 FOMC members and other FRB presidents Item Administration Range Central tendency 1991 Percent change, fourth quarter to fourth quarterl Nominal GNP . . 33/4-53/4 41/2-51/4 5.3 Real GNP V2-W2 3/4-l .9 Consumer price index2 3-4V2 31/4-33/4 4.3 Average level, fourth quarter (percent) Unemployment rate3 6V2-7 63/4-7 6.6 1992 Percent change, fourth quarter to fourth quarterl Nominal GNP 4-63/4 5V£-6V£ 7.5 Real GNP 2-31/2 2lAr-3 3.6 Consumer price index2 21/2-^1/4 3-4 3.9 Average level, fourth quarter (percent) Uunemployment rate3 6-63/4 6V4-6V2 6.5 1. From average for fourth quarter of preceding year to 3. FOMC projections are for civilian labor force; Adaverage for fourth quarter of year indicated. ministration projection is for total labor force, including 2. FOMC projections are for all urban consumers armed forces residing in the United States. (CPI-U); Administration projection is for urban wage earners and clerical workers (CPI-W). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 67 location stemming from ongoing, gener- economy, along with those for velocity, alized price increases, a monetary policy when it reconsiders the 1992 target aimed at achieving price stability over ranges next February. time will enhance the economy's potential for growth and thereby will raise Performance of the Economy standards of living. during the First Half of 1991 The Administration's economic projections for 1991, presented in the bud- Economic activity contracted appreciaget, differ from the projections of Fed- bly this past fall and winter. Although eral Reserve policymakers mainly with the economy had been sluggish during respect to expectations for the consumer the first half of 1990, real gross national price index. The Administration fore- product registered a further increase in cast, at 4.3 percent, is above the central the third quarter, and a substantial downtendency projected by the Federal Re- turn in activity began only after the serve; however, recent statements by jump in oil prices that followed Iraq's Administration officials suggest that this invasion of Kuwait. With consumer and number will be lowered in the mid- business confidence badly shaken and session update of the budget. The Ad- real income depressed by the higher oil ministration is somewhat more optimis- prices, employment and production detic than the FOMC participants about clined markedly starting in October; real prospects for real GNP growth in 1992; GNP fell at a 1.6 percent annual rate in in addition, the Administration antici- the fourth quarter. The civilian unempates an increase in consumer prices ployment rate, which had held around next year near the upper end of the the relatively low level of 5lA percent central tendency forecast by the Federal during the first half of 1990, rose stead- Reserve policymakers. This combina- ily over the second half, to just over tion of output and inflation places the 6 percent at year-end. Administration's forecast of nominal The downward momentum in activity GNP growth for 1992 somewhat above carried into the early part of 1991. Inthe range of projections by the FOMC dustrial production decreased through participants. Given the obvious limita- the first quarter, and the shrinkage of tions on anyone's ability to forecast the private-sector payrolls continued economic future, these differences cer- through April as firms moved aggrestainly cannot be said to be large—and sively to reduce inventories and trim the forecasts do have the important com- labor costs in response to the weakening mon feature of pointing to a relatively of final demand. However, much of the moderate recovery, with inflation re- negative impetus to activity was remaining below the average pace of the versed by the cumulative drop in oil past few years. And, in light of the un- prices that occurred between October certainties attending the behavior of the and February and by the boost in confivelocities of money and credit in the dence that accompanied the swift and current period of flux in patterns of in- successful conclusion of the Persian termediation, there appears to be no nec- Gulf war. These events, combined with essary inconsistency between the Ad- a considerable easing of monetary polministration's economic forecast and the icy, set the stage for a recovery, and a FOMC's ranges for money and debt for few sectors of the economy actually hit 1991 and 1992. The FOMC, of course, bottom quite early in the year. Notably, will be reviewing the prospects for the construction of single-family homes, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

68 78th Annual Report, 1991 which in past recessions turned up damped relative to that during earlier before the economy as a whole, reached contractions, as unusually slow growth its low point in January, as did real of the labor force held down the number consumer spending and real personal of job seekers; the unemployment rate income. in June of this year, 7 percent, was about Recently, further evidence has 3A percentage point below the average emerged to indicate that economic activ- jobless rate at the end of previous ity, in the aggregate, stabilized or began recessions. to move up during the second quarter of Consumer price inflation, which ex- 1991. Much of this evidence is to be ceeded 6 percent last year, slowed to a found in developments in the labor mar- 23/4 percent annual rate over the first ket. Initial claims for unemployment five months of 1991. Consumer energy insurance—an indicator of the pace of prices fell sharply early this year after job loss—have fallen from their high soaring during the second half of 1990. level in March; employment on nonfarm In addition, the rate of increase in food payrolls edged up, on balance, over May prices has retreated this year from the and June after ten months of decline; pace registered during the preceding and the length of the average workweek three years. increased noticeably in May and June. Apart from food and energy, price In addition, industrial production ad- increases were large early in the year vanced in April, May, and June, with the but have been more moderate in recent gains being propelled initially by in- months. In January and February, prices creased output of motor vehicles and were boosted by hikes in federal excise parts. Although these indicators are sub- taxes and postal rates and by the ject to revision and thus should be read passthrough of the energy price inwith considerable caution, the weight of creases in 1990 to a wide range of goods the available evidence points in the di- and services. With no further increases rection of economic recovery. in these federal charges and the reversal The magnitude and length of the re- of energy prices beginning to show cent recession still are not known with through to other items, the CPI excludcertainty, but the decline in real GNP ing food and energy rose much more appears to have been considerably slowly over the three months ended in smaller than the average decline during May. On balance, over the first five the previous post-World War II reces- months of 1991, this portion of the CPI sions; for the industrial sector alone, increased a bit more than 5 percent at an production dropped 5 percent between annual rate, about lh percentage point the peak in September 1990 and the low below the trend rate of increase as of point in March 1991, compared with an last summer. In part, the recent headway average falloff of nearly 10 percent dur- made on inflation reflects the reduction ing previous recessions. The recent con- in labor-cost pressures that accompatraction also seems to have been rela- nied the rise in unemployment. As meatively short by historical standards. sured by the employment cost index, Aggregate job losses, however, were compensation per hour increased at an close to the average in previous reces- average annual rate of 4V4 percent over sions, suggesting that firms cut payrolls the second half of 1990 and the first vigorously in light of the fairly shallow quarter of this year, compared with the drop in real activity. The resulting rise 5VA percent (annual rate) rise over the in the unemployment rate, though, was first half of 1990. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 69 The Household Sector motor vehicles had risen about 8 percent Consumer spending was an area of nota- from the depressed January level; sepable weakness last fall and early this year, rate data on unit sales of new cars and largely in response to a substantial de- light trucks suggest that further gains cline in real income; purchasing power were registered in June. was cut initially by the jump in oil During late 1990 and early this year, prices, but it continued to fall even after total consumer outlays fell more sharply oil prices were in retreat, reflecting the than they had in most previous postwar ongoing declines in employment. Real recessions. The steepness of the drop consumer outlays dropped sharply be- this time mainly reflects the unusual tween September and January; the weakness in several components of inmonthly pattern of spending was dis- come out of which the propensity to torted to a degree by tax changes that consume is high. Most important, nomicaused some households to shift pur- nal wages and salaries fell more during chases from early 1991 into late 1990. this recession than would have been ex- All told, real consumer spending fell at pected given the magnitude of the dea IV2 percent annual rate in the first cline in nominal GNP, as firms moved quarter, after a 3V2 percent (annual rate) aggressively to control costs by trimdecline in the fourth quarter of 1990. ming payrolls. In addition, because the However, in February, real income percentage of unemployed persons returned up and consumer confidence re- ceiving unemployment insurance benebounded late in the month with the end fits declined during the 1980s, total of the Gulf war; both developments bol- payments to job losers were less than stered consumer spending. As a result of during earlier downturns. The weakness the spending gains that began in Febru- in these components of nominal income ary, the average level of outlays in April was compounded, in real terms, by the and May stood considerably above the spurt in energy prices. first-quarter average. Although consumers cut back spend- Among the major components of con- ing, they cushioned some of the effect of sumer spending, outlays for motor vehi- weak income by reducing their savings. cles and other durable goods were cut After averaging about 5 percent over the back sharply as the recession unfolded. first half of 1990, the personal saving Indeed, between the third quarter of rate dropped to 4.2 percent in the third 1990 and the first quarter of this year, quarter and remained at that level real consumer outlays for motor vehi- through the first quarter of this year. The cles fell at a 23 percent annual rate; the decline in the saving rate occurred deresulting level of such outlays in the first spite some deterioration, on net, in quarter was the lowest recorded since wealth positions during the second half 1984. Substantial cuts also were made in of 1990, which reflected the softening of purchases of nondurable goods. In con- house prices and losses in the stock martrast, consumer outlays for services ket. The average level of the saving rate trended up at a pace only slightly below dropped another notch in the spring, to that registered during the first three about 33/4 percent. The bounceback in quarters of 1990. Since the January the stock market and the improvement trough in total consumer outlays, pur- in confidence may have contributed to chases of both durable and nondurable the decline in saving, but the explanagoods have turned up. In particular, as tion also could involve the reduction in of May, real consumer purchases of personal interest income associated with Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

70 78th Annual Report, 1991 the lowering of short-term interest rates family homes bottomed out in January between last fall and this spring. Histor- of this year and has staged a mild recovically, consumer spending has been ery since then, spurred by a firming of rather insensitive to movements in inter- demand. Several factors account for the est income, so that a decline in such pickup in demand, including the decline income causes the saving rate to fall in in home prices to more affordable levels the short run. That said, the saving rate in a number of markets, improved prosis now at the lowest level since late pects for employment and income, and 1987, and it would not be surprising if, some reduction in mortgage rates from in the near term, gains in consumer those prevailing in the middle of last spending lagged increases in income as year. Recent survey results show a more households worked to rebuild net worth. favorable attitude toward homebuying The recession placed some strains on among consumers than at any other time household finances, as indicated by the since 1988. Reflecting this shift in sentiincrease in delinquency rates for all ment, sales of existing homes have risen types of consumer loans during the first substantially from their low in January. quarter. By far the sharpest rise was for Although sales of new homes have been credit card debt; in fact, the first-quarter less impressive, the higher level prevaildelinquency rate was close to the high- ing since February has reduced considest on record. This jump partly reflects erably the inventory of unsold new the relaxation of credit standards by ma- homes relative to sales; in response, jor card issuers in recent years; at the home builders have boosted production same time, relatively low risk borrowers to satisfy consumer demand. Despite who have access to home equity lines of continued lender caution about granting credit evidently have reduced their reli- land-acquisition and construction loans, ance on credit cards. Because of the the quantity of financing available apresulting deterioration in the quality of pears sufficient, on balance, to support a the pool of credit card users, the rise in further recovery in this sector. delinquencies for this type of debt prob- In contrast, the market for multifamably overstates the degree of stress in ily housing has continued to weaken this the household sector as a whole. For year. Starts in May were at the lowest other types of consumer loans, the first- monthly level since the 1950s. Morequarter delinquency rates were not out over, even with the greatly reduced pace of line with those typically seen during of new construction in recent years, the recessions, despite the currently high vacancy rate for multifamily units has level of debt relative to disposable in- remained exceptionally high. Given curcome. Apparently, the rise in asset val- rent conditions in the market, both lendues during the 1980s left most house- ers and potential investors recognize that holds with sufficient wherewithal to the number of viable projects is quite cover the expanded level of debt. Thus, limited. although the recession has weakened the financial position of the household sector, the situation does not appear worse The Business Sector than that at the end of other downturns. During the latter part of 1990 and the Residential construction activity, first quarter of this year, the business which had been trending lower since sector experienced considerable stress. 1986, slumped further in the second half Demand for business output was deof 1990. However, the market for single- pressed both by the loss of domestic Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 71 purchasing power and by the enormous January. However, by May, the ratio had uncertainties created by the situation in retraced most of the run-up that began the Persian Gulf. In response to the with the onset of the recession, reflectslump in demand, industrial production ing the continued liquidation of stocks turned downward last October; it contin- and an upturn in sales. ued to fall through March. In most in- Inventories in most industries appear dustries, the combination of plummeting now to be reasonably well aligned with sales and rising energy prices caused sales, and output has begun to rise with profit margins, which were already slim, the expansion of final demand. After to shrink further during the second half reaching a trough in March, industrial of 1990. In the first quarter of 1991, production expanded over the next three before-tax profits from current opera- months at an annual rate of more than tions of U.S. corporations edged down 7 percent; although stronger output of from the low fourth-quarter level. motor vehicles and parts accounted for An unusual feature of the recent re- most of the increase early in the second cession was the speed with which pro- quarter, the gains in recent months ducers cut output to avoid a buildup of have been more widespread. Orders inventories. The promptness of this ad- for a range of manufactured goods justment likely reflected a combination firmed in April and May, pointing to a of factors. The downturn in final de- further pickup in production during the mand was widely anticipated, and some summer. producers cut output preemptively rather Business spending for fixed investthan risk being saddled with excessive ment was flat in real terms during the stocks. In addition, improved systems fourth quarter of last year and dropped for monitoring and controlling invento- sharply during the first quarter of this ries, which have been installed in recent year. Several factors worked to reduce years, enabled firms to react quickly to outlays, including the easing of pressigns of slowing demand. Further, the sures on capacity, the diminished level relatively heavy debt burdens in the cor- of cash flow, and the general atmoporate sector created substantial finan- sphere of uncertainty related to events in cial pressures for many firms and fo- the Persian Gulf. Real spending for cused attention on the need to cut costs. equipment plunged during the first quar- Accordingly, inventories were run off ter; measured in percentage terms, the at a rapid clip beginning late last sum- decline was the sharpest quarterly falloff mer. Automakers slashed production recorded in nearly eleven years. Reand inventories particularly aggres- flecting the difficulties in the manufacsively; domestic output of motor vehi- turing sector, real spending for industrial cles in the first quarter of 1991 was equipment dropped at an annual rate of nearly 30 percent below that in the third more than 20 percent, after smaller quarter of 1990. The resulting draw- declines during the preceding five quardown of inventories at auto dealers ac- ters. Real business outlays for motor counted for fully one-half of the total vehicles were cut at nearly a 35 percent liquidation of nonfarm stocks during the annual rate in the first quarter, sinkfourth quarter and the first quarter. De- ing to the lowest level since mid-1983. spite production cutbacks by the auto- Purchases of computers and other makers and other producers, the information-processing equipment also inventory-to-sales ratio for total manu- were scaled back during the first quarter, facturing and trade moved up through and outlays for aircraft edged down, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

72 78th Annual Report, 1991 after jumping 60 percent over the pre- $175 billion, compared with a $151 bilceding year. lion deficit during the same part of fiscal The pace of nonresidential construc- year 1990. The deficit during the current tion fell substantially during the fourth fiscal year has been boosted considquarter of 1990 and the first quarter of erably by the slowdown in economic 1991. The decline was broad-based, activity, and this cyclical increase has with the steepest contraction for office masked the fiscal restraint imposed by and other commercial buildings. Activ- last autumn's budget agreement. On the ity in this sector actually peaked in 1985 revenue side, federal tax receipts have and has trended lower since then in re- been held down by the anemic growth sponse to persistently high vacancy rates of nominal income since last fall; inand the removal of important tax bene- deed, personal income tax payments so fits. In the industrial sector, the rate of far this fiscal year are little changed plant construction has been damped by from the payments made during the the emergence of substantial excess same period a year earlier. The slowcapacity in a number of major indus- down in activity also has raised the deftries. Petroleum drilling activity, which icit by increasing outlays for incomemoved up a bit late last year, retreated support programs such as unemployduring the first quarter with the price ment insurance, food stamps, and Meddeclines for crude oil and natural gas; icaid. These effects of the contraction data on drilling rigs in use indicate a have been offset, to some degree, by the further weakening of activity during the easing of short-term interest rates, which second quarter. has restrained the growth of interest pay- Business spending for new equipment ments on the federal debt. typically does not turn up until several Although the deficit has increased months after the end of a recession, and during the current fiscal year, the inthe lag for construction outlays is often crease has been far smaller than that substantially longer. As yet, there is lit- projected roughly six months ago. At tle sign of a rebound in spending for that time, the Administration and the either equipment or nonresidential struc- Congressional Budget Office both estitures. Nonetheless, shipments of indus- mated that the deficit for fiscal year trial equipment and other nondefense 1991 would top $300 billion. Two decapital goods—a coincident indicator of velopments have caused the 1991 deficit equipment spending—have stabilized in to be lower than was expected, though recent months. Similarly, although va- neither one indicates any fundamental cancy rates for commercial buildings re- improvement in the budget situation. main high, the steepest declines in total First, cash contributions from our allies nonresidential construction activity may in Operation Desert Storm have exbe over; in April and May, the average ceeded the outlays made to date for U.S. level of activity was about unchanged involvement in the Persian Gulf. The from the first-quarter average, and the contributions not yet spent will be used downtrend in forward-looking indica- to pay for the replacement of munitions tors, such as construction contracts and into fiscal 1992 and beyond. Second, permits, has slowed considerably. federal outlays related to deposit insurance were well below expectations dur- The Government Sector ing the first quarter, mainly reflecting The federal budget deficit over the first the slow pace at which insolvent thrift eight months of fiscal year 1991 was institutions were resolved. The activities Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 73 of the RTC during that period appar- reflects an expansion of services largely ently were hindered, in part, by a lack of related to rapid growth in public school funding; legislation providing additional enrollments, prison populations, and funding was enacted in late March, and Medicaid expenses. the RTC has scheduled more rapid reso- During the past year, state and local lutions over the rest of the year. governments moved to address their Federal purchases of goods and ser- mounting fiscal difficulties. Many govvices, the part of federal spending that is ernments trimmed outlays relative to included directly in GNP, rose 5lA per- earlier trends. Between the first quarter cent in real terms over the four quarters of 1990 and the first quarter of 1991, of 1990. This increase reflected the real purchases by state and local governfourth-quarter rise in defense purchases ments rose only about 1 percent, well to support operations in the Persian below the 3x/2 percent annual rate of Gulf, as well as increases over the year increase averaged over 1985-89. Morein such nondefense programs as law en- over, last year several states instituted forcement, space exploration, and health broad-based hikes in personal income research. In the first quarter of 1991, and sales taxes. Looking ahead, state real defense purchases moved above the budgets for fiscal year 1992—which already high fourth-quarter level, while began on July 1 for all but four states— nondefense purchases fell somewhat on generally mandate significant further net, pushed down by sales of oil from cost-cutting from earlier plans. On balthe Strategic Petroleum Reserve. Over ance, these budgets point to a weak picthe rest of 1991, fiscal policy likely will ture for real state and local purchases be a restraining influence on the econ- over the current calendar year. Suppleomy because of the spending limits and menting this restraint on spending, many tax increases mandated by last fall's new budgets include a second wave of budget agreement. major tax increases. The fiscal position of state and local governments has remained extremely The External Sector weak in recent quarters. The deficit in Over the first half of 1991, the foreign operating and capital accounts (that is, exchange value of the dollar appreciated the deficit excluding social insurance about 15 percent, on balance, in terms of funds) stood above $40 billion at an the currencies of the other Group of Ten annual rate in both the fourth quarter of (G-10) countries. The net appreciation 1990 and the first quarter of 1991, after over this period reversed about twoholding at a $30 billion rate for a year. thirds of the decline in the dollar that The recent increase in the state and local had occurred between the middle of deficit reflects, for the most part, a cycli- 1989 and the end of 1990. cal shortfall in tax receipts. However, In early January, the dollar was this cyclical effect overlays structural boosted by investors seeking a safe imbalances that have been growing for haven against the backdrop of growing some time. Since mid-1986, when the tensions in the Persian Gulf. However, sector's accounts (excluding social in- once the Allied bombing campaign comsurance) were roughly in balance, out- menced and was perceived as going lays have risen from about 13x/2 percent well, part of the safe-haven demand for of nominal GNP to I4l/z percent while dollars evaporated, and the currency rerevenues have held fairly steady relative sumed its earlier decline. Between midto GNP. The rise in the spending share January and early February, the dollar Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

74 78th Annual Report, 1991 fell about 4 percent against the curren- cantly to the restraint on domestic cies of the other G-10 countries. During inflation. this period, U.S. monetary authorities Real merchandise imports declined in joined with foreign central banks to sup- the first quarter to a level about 5 perport the dollar. Subsequently, the dollar cent below that in the third quarter of surged through the end of March, 1990, with the drop largely reflecting largely reflecting the quick end of the the weakness in domestic demand. Imwar and the resulting expectation of an port volumes fell in the first quarter for a early rebound in the U.S. economy. The wide range of non-oil products, includsharp run-up prompted official sales of ing consumer goods, motor vehicles, dollars during March and April, mainly and industrial supplies. Preliminary data by European authorities. After dropping for April show some increase in non-oil back a bit, the value of the dollar rose imports, a pattern that is likely to conagain in June on the accumulation of tinue with the apparent firming of evidence suggesting that the U.S. reces- domestic activity. The quantity of oil sion had ended. imports—which plunged after the spurt On a bilateral basis, the dollar this in oil prices last summer and remained year has appreciated about 20 percent relatively low early this year—has against the German mark and by similar moved back up in recent months, reamounts against the European curren- flecting efforts to rebuild U.S. petroleum cies associated with the mark. The inventories. weakness of these currencies partly re- Merchandise exports continued to flects economic difficulties in Germany move higher through the spring, a factor and the spillover effects of the turmoil in that clearly tempered the output loss in the Soviet Union and Yugoslavia. In manufacturing after the oil shock last contrast, the dollar has appreciated year. In real terms, merchandise exports much less against the currencies of most rose at a 10 percent annual rate between of our other major trading partners. So the third quarter of 1990 and the first far this year, the dollar has risen less quarter of this year, led by increased than 5 percent, on balance, against the sales of computers, other capital goods, Japanese yen and has changed even less and industrial materials. Preliminary against the currencies of Canada, Korea, data indicate that merchandise exports Singapore, and Taiwan. rose again in April. The competitive po- The overall strengthening of the dol- sition of U.S. companies has benefited, lar this year has acted to restrain prices at least until quite recently, from the for non-oil imports. Over the first quar- substantial drop in the dollar over 1990 ter of 1991, these prices rose at a and the latter part of 1989. However, 2J/2 percent annual rate, less than half recessions in the economies of some of the rate of increase between June and our major trading partners, especially December of 1990; non-oil import Canada and the United Kingdom, have prices then fell during April and May, offset part of the stimulus to U.S. exmore than reversing the entire first- ports provided by the rapid economic quarter rise. The price of imported oil, growth in such countries as Germany, which surged between August and Octo- Japan, and Mexico. ber of last year, has since retraced most The merchandise trade deficit narof the rise induced by the Iraqi invasion rowed to $74 billion (at an annual rate) of Kuwait. Taken together, these two in the first quarter of 1991, compared developments have contributed signifi- with $111 billion in the fourth quarter of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 75 1990; the first-quarter deficit was the tive statistical discrepancy in the intersmallest since mid-1983. The current ac- national accounts. Nearly as large a discount actually recorded a $41 billion crepancy in the opposite direction was (annual rate) surplus in the first quarter, registered in the fourth quarter of last a sharp improvement over the $94 bil- year. These wide swings in the statistical lion deficit in the fourth quarter of 1990. discrepancy, along with the huge size of Most of this improvement reflected uni- the discrepancy for 1990 as a whole, lateral transfers associated with Opera- cast doubt on the accuracy of both the tion Desert Storm: The fourth-quarter capital account and current account data deficit was boosted by a grant from the used in the U.S. international accounts U.S. government to Egypt for the pur- and highlight the need to improve these pose of repaying outstanding loans, data. while cash payments to the United States from our coalition partners surged Labor Markets in the first quarter. Excluding these cash Labor demand appears to have stabicontributions and the special grant to lized after contracting sharply during the Egypt, the current account moved from latter part of 1990 and the early part of a deficit of $83 billion in the fourth this year. Employment on private nonquarter to a deficit of $50 billion in the farm payrolls peaked last June, edged first quarter. lower through September, and then fell A small net capital inflow was re- substantially in each month from Octocorded in the first quarter of 1991, as an ber through April. However, the most increase in foreign official holdings of recent data show that payrolls expanded reserve assets in the United States more slightly on balance over May and June, than offset a net outflow of private capi- and survey results suggest that firms intal. Within the private-sector accounts, tend to increase employment further in there was a substantial capital outflow in the third quarter. the first quarter associated with U.S. di- The cumulative decline in private rect investment abroad, the bulk of nonfarm employment through April was which was in the countries of the Euro- slightly more than IV2 million jobs, pean Community; at the same time, cap- roughly a 1.7 percent drop. Although ital inflows related to foreign direct in- that percentage decline is close to the vestment in the United States fell to a average in the other recessions after low level. Increasingly, multinational World War II, three industries had abfirms have raised funds in the United normally large job losses: construction; States to finance direct investment here retail and wholesale trade; and finance, and elsewhere, taking advantage of the insurance, and real estate. The steep delow U.S. interest rates relative to those cline in construction employment likely in other industrial nations. With regard reflected the unusually sharp falloff in to other private transactions, banks re- office and other commercial construcported a small net capital inflow in the tion, which compounded the normal first quarter, and net purchases of U.S. cyclical contraction in residential buildsecurities by private foreigners about ing. In the trade sector, employment was matched U.S. net purchases of foreign depressed by the sizable decline in consecurities. sumer spending and the high degree of The net capital inflow during the first financial distress among retailers, some quarter, when combined with the surplus of whom were burdened with heavy on current account, implies a large nega- debt-servicing costs as a result of lever- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76 78th Annual Report, 1991 aged buyouts. Employment in finance, months. Perhaps the earliest signal of insurance, and real estate—which con- this improvement was provided by the tinued to rise during past recessions— data on initial claims, which peaked at a edged lower this time, reflecting the weekly rate of 535,000 in March and shakeout in the financial sector and spill- then dropped back to about 470,000 in overs from the slump in real estate mar- April; the pace of weekly claims has kets. In contrast, the decline in manufac- since moved considerably lower. Emturing payrolls was somewhat smaller ployment on private nonfarm payrolls than in previous contractions, largely rose in May, the first increase since the because the drop in industrial produc- middle of 1990. Although part of this tion was relatively shallow. Employ- gain was reversed in June, firms continment in the services industries contin- ued to lengthen the average workweek ued to trend up during late 1990 and of their employees. This pattern of cauearly 1991, as it had in previous reces- tious hiring combined with an extension sions, supported entirely by gains in of the workweek is common in the early health services. stage of a recovery; given the expenses Although the size of the drop in pri- associated with hiring and firing, such a vate nonfarm payroll employment was strategy is a natural response to uncersimilar to that in previous contractions, tainty about the strength and duration of the decline in real GNP during the cur- the pickup in demand. A separate mearent episode was relatively small. This sure of employment, derived from a surcontrast confirms the widespread im- vey of households, also suggests that pression that firms shed workers to an labor demand has stabilized; the number unusual degree during the recent down- of persons reporting themselves as emturn. At the same time, the rise in ployed was about flat, on balance, over the civilian unemployment rate from the second quarter, after falling sharply 5.5 percent in July 1990 to 7 percent this over the three preceding quarters. Al- June was not particularly large relative though the civilian unemployment rate to the decline in real GNP. Apparently, did continue to inch up over the second an unusual proportion of people who quarter, this increase is not too surprislost jobs subsequently dropped out of ing, as the jobless rate often increases the labor force and thus were no longer during the first several months of a recounted as unemployed. In addition, the covery. With the brightening of employmuted rise in unemployment and labor- ment prospects, job seekers enter the force size during recent quarters may be labor force at an increasing rate, raising part of a longer-term deceleration in unemployment until hiring accelerates the rate at which women—especially enough to outstrip the growth in labor younger women—have entered the labor supply. market. For this latter group, there has The slack opened up in labor markets been a shift toward additional school since last summer has helped damp the attendance and toward staying at home rate of increase in labor costs, which to care for young children. By reducing had trended higher between the end of the number of new job seekers at a 1987 and the middle of 1990. As inditime when jobs were quite hard to cated by the employment cost index find, this shift held down the rate of (ECI), increases in compensation per unemployment. hour for private industry workers accel- A variety of indicators suggest that erated from 3VA percent during 1987 to labor demand has stabilized in recent about a 5lA percent annual rate during Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 77 the first half of 1990; this measure of Although productivity in manufacturing labor costs covers both wages and pay- turned down during the recession, the ments for worker benefits. The most re- continued cutting of factory jobs kept cent ECI data show that compensation the drop in output per hour relatively costs rose at an average annual rate of small by historical standards. AlA percent over the second half of 1990 and the first quarter of 1991, a full percentage point below the peak rate re- Price Developments corded early last year. Although this Inflation pressures have eased someslowing of labor-cost inflation was ap- what this year. Most of last year's spike parent in both wages and benefits, the in energy prices has been retraced, and latter component of compensation decel- the rate of increase in food prices has erated the most sharply, reflecting de- slowed. In addition, the margin of slack clines in nonproduction bonuses and in labor and product markets that pension contributions per hour of work. emerged during the recession is placing However, employer costs for insurance, downward pressure on price increases mainly for health insurance premiums, for other goods and services; this trend continued to rise at close to double-digit toward slower "core" inflation, howrates. ever, was obscured early in the year by a Output per hour in the nonfarm busi- number of price increases that either ness sector was essentially flat, on bal- were one-time events or have since been ance, over the year ended in the first reversed. quarter of 1991, after declining during The Iraqi invasion of Kuwait last Au- 1989 and the early part of 1990. This gust precipitated a sharp rise in oil prices pattern differed somewhat from the that carried through to early October. At usual cyclical experience. Typically, that point, the posted price of West productivity continues to rise until Texas Intermediate oil, the benchmark shortly before the business-cycle peak, for U.S. crude prices, reached nearly then turns down and falls sharply $40 per barrel, more than double the through the early part of the ensuing $16 price prevailing just three months recession. Productivity during this epi- earlier. Then, between October and Febsode declined well before the cyclical ruary, virtually all of this price spike peak last summer, as output growth unwound, chiefly as a result of two deslowed, and firms continued to hire at a velopments. Saudi Arabia and other oil relatively rapid pace. However, as de- producers boosted output to offset the mand softened at the peak, firms began embargo on Iraq and Kuwait, and the to trim payrolls, and this pruning contin- Allied forces demonstrated that they ued in an aggressive fashion through the could prevent significant disruptions to recession; as a result, output per hour supply. In addition, prices were damped was better maintained during the by the slowdown in economic activity in 1990-91 contraction than during previ- the United States and other industrial ous downturns. In manufacturing, where nations. After the end of hostilities in competitive pressures have been particu- February, OPEC sought to bolster prices larly intense, the process of cutting pay- by trimming production. This effort rolls began well before the onset of proved to be largely successful: The recession, and this early action allowed posted price of West Texas Intermediate productivity gains to remain robust over firmed to $20 per barrel in April and has the year leading up to the contraction. changed little on balance since then. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78 78th Annual Report, 1991 Energy prices for consumers have fol- creases over 1989 and 1990. The decellowed the movements in world oil prices eration in food prices this year would since last summer. The CPI for energy have been somewhat greater but for a peaked in November 1990 at a level 15 series of adverse weather developments percent above that in July and then fell that have raised prices for fresh fruits sharply through the first quarter of this and vegetables; given the short producyear. By April, the decline in crude oil tion cycles for many of these products, prices had been fully passed through to the recent price increases should be energy prices at the retail level. In May, reversed, at least in part, in coming consumer energy prices edged back up, months. mainly reflecting price increases for gas- The consumer price index for items oline, the largest component of the CPI other than food and energy rose sharply for energy. Gasoline demand this spring during January and February, but the apparently was stronger than refiners jumps in those months reflected a numhad expected, and inventories fell to ex- ber of one-time or transitory increases. ceptionally low levels. Along with the Higher federal excise taxes on cigarettes tight inventory situation, retail gasoline and alcoholic beverages went into effect, prices may have been boosted by the raising consumer prices for both items; mandatory switch to cleaner—and more these tax hikes supplemented the inexpensive—gasoline before the summer creases in sales and excise taxes that a driving season. However, as of early number of states have imposed over the June, gasoline inventories had moved past year. Postal rates also were raised back into the normal seasonal range, and 16 percent in February. Apparel prices survey data suggest that pump prices climbed at double-digit annual rates in softened during the second half of June both January and February, mainly beand into early July. cause of the earlier-than-usual introduc- Increases in consumer food prices this tion of spring clothing lines, which was year have slowed from the 5lA to not anticipated by the seasonal adjust- 5Vi percent range that prevailed over the ment factors used by the Bureau of preceding three years. During the first Labor Statistics. More generally, the five months of 1991, the CPI for food spurt in oil prices last fall spilled over rose at only a 3VA percent annual rate, through early 1991 to prices for a wide held down in large part by price declines range of non-energy goods and services; for dairy products and by roughly stable this pass-through occurred via higher prices on balance for meat, poultry, and shipping costs and price hikes for eggs. Following the typical pattern in petroleum-based components. However, agricultural cycles, prices for these live- each of these factors boosting inflation stock products have been damped by an proved to be short-lived. After the large expansion of supply that was itself increases in January and February, the spurred by the relatively high prices of CPI excluding food and energy rose at recent years. In addition, price increases just a 2lA percent annual rate between have been muted for many foods for February and May. Apparel prices dewhich labor and other nonfarm inputs clined over this period, and airfares— represent a large share of total cost. For which are quite sensitive to changes in example, the prices of food consumed oil prices—fell 10 percent (not an anaway from home rose at a 3lA percent nual rate). annual rate over the first five months of The uneven pace of inflation this year 1991, down from the 4l/i percent in- has tended to obscure trends in the gen- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 79 eral level of retail prices. Nonetheless, end of last year, open market operations, there is little doubt that the underlying in combination with two cuts of Vi perpace of inflation has moderated since centage point in the discount rate, have last year. The twelve-month change in reduced the federal funds rate from the CPI excluding food and energy— 7 percent to 53/4 percent—the lowest which held around 4Vi percent through- level in well over a decade. These out 1988, 1989, and the early part of moves followed a number of easings in 1990—moved up to about 5^2 percent the final months of 1990, including a in August 1990. By May of this year, the V2 point reduction in the discount rate in twelve-month change in this index had December, that already had brought the fallen back to 5.1 percent. This figure federal funds rate down about 1 percentslightly overstates the trend rate of infla- age point. As a consequence of these tion because it includes the increases in and earlier actions, the federal funds rate federal excise taxes and postal rates ear- has declined 4 percentage points from lier this year; in addition, the pass- its most recent peak in the spring of through of lower energy prices to non- 1989. energy items probably was not complete The policy easings this year were unas of May. Adjusting for both these fac- dertaken to foster a turnaround in the tors would put the twelve-month change economy and to help ensure a satisfacin the CPI excluding food and energy a tory expansion. They were prompted by bit below 5 percent. evidence that the economy was declin- Price developments at earlier stages ing further and that inflationary presof processing have been favorable this sures were abating; early in the year, year, reflecting the easing of capacity continuing weakness in the monetary pressures and price declines for petro- aggregates and further restraint on credit chemical products. The producer price availability, especially at banks, also index for finished goods excluding food were important indications of the need and energy rose at a 3Vi percent annual for additional policy easing. Policy acrate over the first six months of 1991, a tions led to a strengthening of money bit below the pace in 1990. Prices for growth over the first half from the slow intermediate materials excluding food pace of earlier quarters, and both M2 and energy fell about IV2 percent at an and M3 in June were in the middle annual rate between December and portions of their annual target ranges. June. Spot prices of raw industrial com- The debt aggregate, by contrast, exmodities plunged late last year with the panded at the lower end of its monitordownturn in economic activity, and ing range throughout the first half, held these prices moved down somewhat fur- down by sluggish spending and also by ther on balance over the first half of a cautious attitude toward additional 1991. debt by both borrowers and lenders. As the monetary aggregates accelerated and signs accumulated that the economy was Monetary and Financial bottoming out, the pace of policy eas- Developments during the First ings slowed, and the last such move was Half of 1991 made at the end of April. The progressive easing of money mar- Despite the drop in short-term interest ket conditions initiated last fall as the rates, long-term rates were mixed, on economy weakened continued through balance, over the first half of the year. In much of the first half of 1991. Since the the wake of the rapid conclusion of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80 78th Annual Report, 1991 Gulf war, expectations became wide- monetary aggregates were very weak in spread that there would be a strengthen- January, and while strengthening coning in aggregate demand, and this siderably in February and early March, tended to push yields on Treasury bonds remained on a moderate growth track, a little higher and contributed to an in- especially taking into consideration the crease in the foreign exchange value of lack of expansion late in 1990. the dollar. With the brighter outlook for Other short-term rates generally fell the economy, however, the risk entailed about a percentage point over this pein holding private obligations was seen riod. The commercial bank prime loan as considerably reduced, and yields on rate was reduced V2 percentage point in corporate bonds fell and stock prices early January in lagged response to earrose. However, substantial loan losses lier declines in short-term rates. The continued to afflict many financial inter- drop apparently had been delayed as mediaries, and these institutions main- banks attempted to hold down loan tained cautious attitudes toward extend- growth as 1990 drew to a close, bolstering new loans; the caution was reflected ing their capital positions in response to in wide spreads of lending rates over market concerns and the initial phase-in borrowing rates and more stringent non- of risk-based capital requirements. The price terms on credit. prime rate was reduced again after the cut in the discount rate in early Implementation of Monetary Policy February. The Federal Reserve adjusted policy in Longer-term rates also fell, on balthree separate steps during the first quar- ance, over the first two months of the ter of the year, extending the series of year, under the influence of monetary moves initiated during the final months easings and prospects for lower inflaof 1990. Amid signs of continuing steep tion, especially when it became clear declines in economic activity and abat- that the Gulf war would not interrupt oil ing inflation pressures, the Federal Re- supplies. Initial success in the Persian serve eased reserve provision through Gulf also led briefly to weakness of the open market operations in January and dollar in foreign exchange markets, as again in early March, leading to a de- safe-haven demands that had been cline in the federal funds rate of a quar- boosting its value since late 1990, in the ter point each time, and reduced the face of a substantial easing of U.S. mondiscount rate Vi percentage point on etary policy, evaporated. February 1, resulting in a similar-sized In March, however, long-term market decline in the federal funds rate.1 The rates began to firm, reflecting the rebound in consumer confidence and ini- 1. The federal funds rate came under some upward pressure during much of January, as re- and borrowed sporadically at the discount winduced levels of required reserve balances at Fed- dow. But with maintained balances still low relaeral Reserve Banks complicated commercial tive to clearing needs, the volatility of the federal banks' reserve management. Required reserves funds rate increased. As banks became more acwere low partly because of the effects of the cut in customed to operating with lower levels of rereserve requirements on nonpersonal deposits in quired reserves and as these reserves subsequently December and partly because of seasonal varia- rose for seasonal reasons, reserve management tions. For some banks, balances held in accounts problems eased, and the volatility of the federal at Reserve Banks threatened to fall below prudent funds rate diminished. The upward pressures on clearing levels. To avoid overnight overdrafts, the funds rate in January did not show through to banks markedly raised holdings of excess reserves other short-term rates. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 81 tial indications of a turnaround in the quality of their loan portfolios to be housing market, which were seen as limited as the anticipated economic pointing to a somewhat shorter and recovery materialized. Better prospects milder recession than many had previ- for a U.S. economic recovery about coously feared. Rate increases on private incided with a turn toward more pessiinstruments were muted, though, as risk mism about the economic outlook premiums began to shrink in response to abroad. As a result, the exchange value brightening prospects for a recovery. of the dollar reversed, and the dollar These gains extended even to below- began to appreciate sharply. investment-grade bonds, and growing In the wake of the successful Gulf optimism was reflected as well in a war and in view of initial signs that the strong stock market in February and System's earlier easing actions had beinto March. The debt and equity instru- gun to take hold, the FOMC concluded ments of banks generally outperformed at its meeting in late March that the risks broader indexes over this period, as the to the economy had become more market apparently expected banks' earn- evenly balanced. Accordingly, the Comings to be bolstered by lower short-term mittee decided to end the formal tilt interest rates and the deterioration in the toward ease that it had adopted in mid- 1990, when slowing money growth and tightening credit availability aroused Growth of Money and Debt concerns that financial conditions might Percent be placing greater-than-anticipated re- Debt of straint on economic activity. Under the domestic previous instructions, the FOMC's di- Period Ml M2 M3 nonfinancial rective to the domestic trading desk at sector the Federal Reserve Bank of New York had stipulated that possible adjustments Annually, fourth quarter to to reserve pressures between Committee fourth quarterx 1980 7.4 8.9 9.5 9.4 meetings would be more responsive to 1981 5.4 9.3 12.3 10.1 unanticipated signs of economic weak- (2.52) 1982 8.8 9.1 9.9 9.1 ness and abating price pressures than to 1983. 10.4 12.2 9.8 11.1 unexpected evidence of strength. The 1984 5.4 8.0 10.7 14.2 1985 12.0 8.7 7.6 13.1 directive issued at the March meeting 1986 15.5 9.2 9.0 13.2 1987 6.3 4.3 5.8 9.7 restored symmetry to these instructions 1988 4.2 5.2 6.3 9.2 concerning intermeeting adjustments. 1989 .6 4.7 3.6 7.7 1990 4.2 3.8 1.7 6.7 Interest rates generally declined during April, mainly at the short end, Semiannually (annual rate)3 reflecting market participants' disap- 1991:1 6.7 4.0 2.9 4.5e pointment that the response to earlier Quarterly monetary easings and to the rebound in (annual rate)4 1991 1 5.9 3.4 4.0 4.8 consumer confidence they had expected 2 7.4 4.6 1.8 4.2e had yet to show through in measures of 1. From average for fourth quarter of preceding year to economic activity. At the same time, average for fourth quarter of year indicated. with evidence also continuing to point 2. Adjusted for shift to NOW accounts in 1981. to a further abatement of inflation, par- 3. From average for fourth quarter of 1990 to average for second quarter of 1991. ticularly as reflected in wage behavior, 4. From average for preceding quarter to average for the Federal Reserve at the end of April quarter indicated. reduced the discount rate another V2 pere Partially estimated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

82 78th Annual Report, 1991 centage point, allowing about half that ity) was smaller than would have been amount to show through to money mar- expected on the basis of past relationket rates. As was the case in February, ships with income, interest rates, and this action was followed by a V2 percent- opportunity costs. This shortfall of M2 age point decline in the bank prime rate. growth from historical patterns followed Despite further monetary ease, the dol- an even greater discrepancy in 1990. lar continued to rally on foreign ex- The tepid response of M2 to declines change markets, in part boosted by polit- in interest rates may partly reflect reical developments abroad, particularly duced funding needs at depositories asin the Soviet Union, and potential eco- sociated with weak credit growth. As nomic difficulties in Germany. discussed below, commercial bank Market interest rates were little credit expanded sluggishly over the first changed until early June, when they rose half of 1991, and thrift institution balin response to the release of data on ance sheets continued to contract. In employment and retail sales for May these circumstances, depositories may that strongly suggested the trough of the well have been less aggressive in suprecession had been reached, or at least plying retail deposits; although rates on was close at hand. The ensuing rise in these deposits do not appear on the surinterest rates was particularly sharp at face to have fallen unusually rapidly, the long end of the Treasury market. As institutions may have acted in other signs of the recovery grew more distinct ways to reduce the cost of funds, includand interest rates firmed, the dollar ing adjusting advertising and marketing strengthened further, and by June it had strategies. On the demand side, growth retraced all its declines of late 1990 and in M2 appears to have been held down early 1991. On balance, Treasury bond early in the year by the public's conyields rose almost lA percentage point cerns about depository institutions; purover the first half of 1991, while yields chases of Treasury securities through on investment-grade corporates were noncompetitive tenders were especially down close to V2 percentage point. heavy in January. As the turnaround in the economy seemed in prospect, bank access to both deposit and capital mar- Monetary and Credit Flows kets improved greatly. Later, in the sec- Despite the continuing weakness in eco- ond quarter, a slowdown in M2 growth nomic activity, expansion of the mone- appeared to be partly related to the detary aggregates in the first half of 1991 veloping configuration of returns on aspicked up from the lackluster pace of sets. Maturing small time deposits could be rolled over only at much lower rates late 1990, and M2 and M3 grew at annual rates of 33/4 and 2lA percent respec- at the same time the steep upward slope of the yield curve seemed to offer an tively, from the fourth quarter of last opportunity to preserve high yields by year through June. M2 growth increased moving into capital market instruments. as policy actions reduced short-term For example, expansion of stock and market interest rates relative to returns bond mutual funds was quite strong over that could be earned on assets in this the second quarter. In addition, with reaggregate (a decline in the "opportunity turns on M2 assets falling steeply relacost" of holding M2). As a consetive to rates charged on loans, housequence, expansion of M2 exceeded the holds had a greater incentive to finance growth of nominal GNP. However, the spending by holding down the accumugrowth in M2 (and decline in its veloc- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 83 lation of M2 assets rather than by taking stitutions that had been able to fund on new debt. additional asset expansion through The decline in market interest rates reserve-free borrowing from their head also promoted a marked shift in the offices began to pay down these adcomposition of M2 toward its liquid vances with funds raised in the CD marhousehold deposit components—other ket. Some foreign banks also tapped the checkable deposits, money market de- CD market to advance funds to affiliates posit accounts, and savings deposits. As abroad and to pay down other nondeis typically the case, offering rates on posit liabilities. Domestic banks and these deposits adjusted very slowly to thrift institutions, in contrast, ran off the drop in market rates. As their oppor- large time deposits in the first quarter as tunity costs declined, these deposits ac- core deposit inflows were more than celerated, expanding at double-digit adequate to fund asset growth. The rates over the first half. Small time de- strength of M3 in the first quarter also posits, by contrast, contracted over the reflected strong growth of money marperiod as some of the proceeds of matur- ket mutual funds. The relative attractiveing instruments evidently were shifted ness of these funds tends to rise when into liquid components of M2 and de- market rates are falling, as fund owners positors hesitated to commit currently receive returns based on average portgenerated savings at available time de- folio yields, which decline only as fund posit rates. The strength in other check- holdings mature and must be replaced able deposits contributed to a strong with lower-yielding instruments. first-half advance in Ml. In the first M3 was about flat between March quarter, this aggregate also was boosted and June. Shifts of foreign bank liabiliby a surge in currency stemming from ties toward large time deposits slowed, rising demand abroad, particularly the large time deposits at domestic deposito- Middle East. Reflecting the strength in ries ran off more rapidly with a contraccurrency and in other checkable depos- tion of their credit, and money funds its, the monetary base expanded over the decelerated as their yields came into line first half at an 8V2 percent annual rate, with market rates. more than twice the pace of M2. Bank credit expanded very slowly Growth of M3 over the first half of during the first half of 1991 and was 1991 was concentrated in the early concentrated in acquisitions of securimonths of the year, when it received a ties, particularly Treasury and agency considerable boost from heavy issuance securities. As in 1990, the recent of large time deposits by U.S. branches strength in acquisitions of these securiand agencies of foreign banks. The issu- ties is due in part to their favorable ance of these "Yankee CDs" resulted treatment under risk-based capital refrom the reduction in December of the quirements. Mainly, however, it reflects reserve requirement on nonpersonal the impact on loan growth of weaker time deposits and net Eurocurrency de- spending by potential borrowers and posits from 3 percent to zero. Previ- continued lending restraint by banks. A ously, branches and agencies had been substantial proportion of bank lending able to borrow a limited volume of officers, citing heightened uncertainties funds from their head offices without about the economy and, in many cases, becoming subject to reserve require- weak capital positions, reported implements. With Yankee CDs apparently an menting still more restrictive lending inherently cheaper source of funds, in- policies in a Federal Reserve survey Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

84 78th Annual Report, 1991 conducted early in 1991. Evidence of have been adopting more cautious attitightening continued into May, although tudes toward additional debt. Busithe percentage of surveyed banks that nesses, for example, stepped up new reported additional tightening declined, equity issuance and greatly reduced the perhaps in part because of the more retirement of existing equity in corpofavorable market environment that had rate restructurings. These activities, todeveloped from earlier in the year and gether with the decline in financing that had allowed banks to issue large needs associated with falling inventories volumes of debt and equity. and fixed investment, held down growth The asset-quality problems that of business sector debt to a 2 percent dogged banks in 1990 continued to crop annual rate in the first half. With some up in the first half of 1991. Available consumers also attempting to reduce data on delinquency rates show further high debt loads, growth of consumer increases in the first quarter, for both credit was weak as well. Lower mortcommercial real estate and other busi- gage rates and stronger home sales ness credits and also for consumer loans. helped maintain growth of residential At midyear, when a number of large mortgages. States and municipalities, banks announced surprisingly large loan facing continuing downgrades and the losses and depressed profits, some of the need to cut back expenditures, put fairly gains that banks had made in debt and limited net demands on the credit marequity markets were reversed. kets in the first half of this year. Federal The contraction in depository credit government debt growth in the first was not fully reflected in the growth of quarter was held down by the slow pace total debt of nonfinancial sectors. As of RTC activity and the receipt of conoccurred last year, credit advanced tributions from foreign governments of through securities markets and by other payments related to the Gulf war; govintermediaries met an unusually high ernment debt issuance picked up sharply proportion of credit needs. Banks them- in the second quarter, however. • selves continued to sell consumer loans and mortgages into securities markets to hold down asset growth and to bolster capital ratios; through these sales, the cost and availability of funds to households has been largely insulated from the possible effects of bank restraint on credit. In addition, businesses turned to long-term securities markets to meet credit needs and to restructure balance sheets, reducing their reliance on banks as well. Overall, the debt of domestic nonfinancial sectors increased at about a AV2 percent annual rate over the first half of 1991. This was likely a bit above the rate of expansion of nominal GNP, though by considerably less than on average over the previous decade, as both borrowers and lenders apparently 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

87 Record of Policy Actions of the Board of Governors Regulation D (Reserve corporations and agreement corpora- Requirements of Depository tions, and U.S. agencies and branches of Institutions) foreign banks are subject to reserve requirements set by the Board. Ini- April 5, 1991—Amendments tially, the Board set reserve requirements at 3 percent of an institution's The Board approved certain technical first $25 million in transaction balances amendments to Regulation D, effective and at 12 percent of balances above that April 24, 1991. level. The act directs the Board to adjust annually the amount subject to the lower Votes for this action: Messrs. Greenspan, reserve requirement to reflect changes in Angell, Kelley, LaWare, and Mullins.1 transaction balances nationwide; by the beginning of 1991, that amount was The changes approved for Regulation $41.1 million. Recent increases in trans- D include a simpler definition of "sav- action balances warranted an increase ings deposit," amendments to the provi- of $1.1 million. The Board therefore sions governing reserve deficiencies, amended Regulation D to increase to and several clarifications, corrections, $42.2 million the amount of transaction and conforming changes. balances to which the lower reserve requirement applies. The Garn-St Germain Depository In- November 21, 1991—Amendments stitutions Act of 1982 established a zero The Board amended Regulation D to percent reserve requirement on the first increase the amount of transaction bal- $2 million of an institution's reservable ances to which the lower reserve re- liabilities. The act also provides for anquirement applies and to increase the nual adjustments to that exemption amount of reservable liabilities subject based on deposit growth nationwide; by to a zero percent reserve requirement. the beginning of 1991, that amount had been increased to $3.4 million. Recent Votes for these actions: Messrs. Green- growth in deposits warranted an increase span, Angell, Kelley, and LaWare. Absent to $3.6 million in the amount of deposits and not voting: Mr. Mullins.l subject to a zero percent reserve requirement, and the Board amended Regula- Under the Monetary Control Act of tion D accordingly. 1980, depository institutions, Edge Act The amendments are effective with the reserve computation period beginning December 24, 1991, for institutions that report weekly; and Decem- 1. Throughout this chapter, note 1 indicates that ber 17, 1991, for institutions that report two vacancies existed on the Board when the action was taken. quarterly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

88 78th Annual Report, 1991 Regulation G (Securities Credit by transfers between lenders of purpose Persons other than Banks, Brokers, loans secured by margin stock under or Dealers) and Regulation T certain conditions. (Credit by Brokers and Dealers) The Board issued an interpretation, effective October 11, 1991, of the appli- September 4, 1991—Amendments cability of the single-credit rule and of the restrictions on withdrawal of collat- The Board amended Regulations G and eral to the purchase of loan participa- T, effective October 11, 1991, to allow tions by lenders with other outstanding clearing agencies to accept deposits of purpose credit to the same borrower. margin securities in satisfaction of margin obligations. Votes for these actions: Messrs. Greenspan, Mullins, Angell, Kelley, and LaWare.l Votes for these actions: Messrs. Greenspan, Mullins, Angell, Kelley, and LaWare.l The amendments permit banks and lenders subject to Regulation G to trans- The amendments to Regulations G fer purpose loans secured by margin and T exclude from the limitations of stock on the same basis as transfers bethe margin rules any margin security tween two banks or two lenders subject deposited with clearing agencies reguto the same regulation. The amendments lated by the Commodity Futures Tradalso describe the terms under which the ing Commission (CFTC) or the Securitransfer of a loan that is in compliance ties and Exchange Commission (SEC), with the Board's margin regulations provided that those deposits are made in would be permitted. The interpretation connection with (1) the issuance, guardescribes the circumstances under which antee, or clearance of any security, inlenders or banks that acquire a loan by cluding options on a security, certifitransfer (for example, through the purcates of deposit, securities index, or chase of a loan participation) would not foreign currency; or (2) the guarantee of be required, under the single-credit rule, contracts for the purchase or sale of a to aggregate that loan with other purcommodity for future delivery or oppose credit from the same borrower. tions on such contracts. These amendments eliminate the need for clearing agencies to register or be regulated un- Regulation H (Membership of der the Board's regulations if those State Banking Institutions in the agencies comply with the rules of the Federal Reserve System) and CFTC or the SEC. Regulation K (International Banking Operations) Regulation G (Securities Credit by October 23, 1991—Interpretations Persons other than Banks, Brokers, or Dealers) and Regulation U The Board issued an interpretation of (Credit by Banks for the Purpose Regulation H, effective November 25, of Purchasing or Carrying Margin 1991, to require that state member banks Stocks) obtain Board approval before engaging in certain commodity swaps and other September 4, 1991—Amendments commodity- or equity-linked transacand Interpretations tions. The Board also issued a similar The Board amended Regulations G and interpretation concerning commodity U, effective October 11, 1991, to permit swaps under Regulation K applicable to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 89 the overseas activities of bank holding ber 8,1991, to implement modifications, companies and subsidiaries of Edge Act clarifications, and technical revisions to corporations. the risk-based capital guidelines. Votes for this action: Messrs. Greenspan, Votes for this action: Messrs. Greenspan, Mullins, Angell, Kelley, and La Ware.l Mullins, Angell, Kelley, and LaWare. * Recently, banking organizations have The modifications to the guidelines shown increased interest in engaging in concerned the treatment of certain assets commodity-linked transactions; that is, sold with recourse, the redemption of transactions in which a portion of the perpetual preferred stock, the treatment return is linked to the price of a particuof supervisory goodwill in the definition lar commodity, equity security, or an of capital, and the treatment of claims index of commodity or equity prices. on certain central banks. The Board's interpretations indicate that engaging in such activities generally would constitute a change in the general Regulation K (International character of a bank's business. The in- Banking Operations) terpretations require that state member banks seeking to begin or to continue March 27, 1991—Revision engaging in these activities obtain the The Board revised Regulation K to per- Board's approval. The Board's approval mit U.S. banking organizations to exis not required, however, if the transacpand the scope of their international tions are linked to commodities that activities. banks are permitted to hold directly, if the bank engages in the transactions on Votes for this action: Messrs. Greenspan, a perfectly matched basis, or if only the Kelley, LaWare, and Mullins. Votes interest portion of the contract is linked against this action: Mr. Angell.l to a commodity. It was expected that the approval pro- Besides making technical and clarifycess would be simple. It was intended ing changes, the Board also revised Regprimarily so that the Board could ensure ulation K to (1) expand the authority of that only well-capitalized institutions, institutions to underwrite and deal in with experienced management, sound equity securities abroad, (2) increase the operating procedures, and adequate dollar limits under which U.S. banking controls could engage in commodity- or organizations may make investments equity-linked transactions. abroad without first notifying the Board, (3) clarify the portfolio investment authority under which U.S. organizations Regulation H (Membership of may make limited equity investments in State Banking Institutions in the any type of company abroad, (4) permit Federal Reserve System) and Edge Act corporations to provide do- Regulation Y (Bank Holding mestic banking services to foreign per- Companies and Change in Bank sons and governments, (5) permit U.S. Control) banking organizations to engage in futures commission merchant activities August 21, 1991—Amendments and insurance underwriting, (6) change The Board approved amendments to the conditions under which organiza- Regulations H and Y, effective Novem- tions may make debt-for-equity swaps, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

90 78th Annual Report, 1991 (7) authorize exemptions from the stan- regulations. The revisions update and dards, on a case-by-case basis, for quali- simplify the rules, eliminate obsolete fying foreign banking organizations, and references and technical requirements, (8) require Edge Act corporations to and delete references to reports no maintain a risk-based capital level of at longer required. least 10 percent. Governor Angell dissented from this action because he thought that revisions Regulation BB (Community to Regulation K should be part of a Reinvestment Act) more general effort to reform the U.S. banking system. He believed that com- April 22, 1991—Amendments petitive equity would be achieved only when all banking organizations in the The Board amended Regulation BB, ef- United States operated under U.S. bankfective July 11,1991, to adopt final rules ing laws and not as branches of foreign regarding public access to Community companies, and when U.S. banks oper- Reinvestment Act (CRA) ratings. ated abroad through a separate entity isolated from the protection of the U.S. Votes for this action: Messrs. Greenspan, safety net. Angell, Kelley, LaWare, and Mullins.l The revisions were effective May 27, 1991, except for certain provisions deal- Provisions of the Financial Instituing with investment procedures and re- tions Reform, Recovery, and Enforcequirements abroad, which were effective ment Act of 1989 amended the CRA to immediately. provide for written evaluations of an institution's record of meeting the credit needs of the community it serves and to Regulation P (Minimum Security require that those evaluations include Devices and Procedures for Federal findings and conclusions for each of the Reserve Banks and State Member assessment factors specified for measur- Banks) ing CRA performance. The act requires that supervisory agencies replace the March 6, 1991—Revision current five-tiered numerical rating system with a four-tiered descriptive sys- The Board revised Regulation P, effectem for assessing CRA performance. It tive May 1,1991, to simplify and update also requires public disclosure of both it. the written evaluation and the rating assigned for any CRA examination begun Votes for this action: Ms. Seger and after July 1, 1990. In addition, the writ- Messrs. Angell, LaWare, and Mullins. Absent and not voting: Messrs. Greenspan ten evaluations must contain the instituand Kelley.2 tion's rating and a description of the basis for the rating. The Board revised Regulation P as Last year, the Board, along with the part of its ongoing effort to improve its other supervisory agencies, proposed a temporary rule to implement these requirements, effective July 1, 1990. Subsequently, the Board adopted the 2. Throughout this chapter, note 2 indicates that rule in final form with only minor one vacancy existed on the Board when the action was taken. modifications. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 91 Regulation CC (Availability of In December 1991 the Congress Funds and Collection of Checks) adopted an amendment to the act to make the special treatment of deposits at nonproprietary ATMs permanent (sec- February 19, 1991—Amendments tion 227 of the Federal Deposit Insurance Corporation Improvement Act of The Board adopted final amendments to 1991, enacted December 19, 1991). It Regulation CC to extend the availability was expected that in early 1992 the schedule for deposits at nonproprietary Board would propose for comment conautomated teller machines (ATMs) for a forming amendments to Regulation CC two-year period. and revisions to its commentary. Votes for these actions: Mr. Greenspan, Ms. Seger, and Messrs. Angell, Kelley, LaWare, and Mullins.2 Other Actions In January the Board issued for public The Board amended Regulation CC comment a proposed amendment to to conform the regulation to amend- Regulation CC to provide for same-day ments made to the Expedited Funds settlement for checks presented by Availability Act. The amendments ex- private-sector presenting banks. Under tended for two years the availability the proposal, if specified conditions are schedules for deposits at nonproprietary met, paying banks would be required to ATMs. The amendments to the act were settle for checks presented by privatesigned into law on November 28, 1990, sector presenting banks on the day of with a retroactive effective date of Sep- presentment without the imposition of tember 1, 1990. The Board adopted presentment fees. The proposal provided these conforming changes to Regulation for an 8:00 a.m. (local time of the pay- CC on an interim basis on December 5, ing bank) presentment deadline for 1990, and requested comment on the same-day settlement for checks preinterim rule pending adoption of a final sented by private-sector presenting rule. banks. The presenting bank must deliver The amendments provide that, from the checks to a location, designated by September 1, 1990, through November the paying bank, in the same check pro- 27, 1992, an institution may treat all cessing region as that designated by the deposits made by its customers at a non- routing number encoded on the check. proprietary ATM as if the deposits were In March the Board also requested comnonlocal checks under the permanent ment on proposed services that the Fedschedule (provide funds availability not eral Reserve Banks could offer in a later than the fifth business day after the same-day settlement environment. No banking day of deposit). Effective No- final action was taken on these proposvember 28, 1992, deposits of cash, als in 1991. "next-day" checks, and local checks at In September the Board issued its a nonproprietary ATM must be made final report to the Congress on the Expeavailable by the second business day dited Funds Availability Act and Reguafter the banking day of deposit, and lation CC. The report summarized acnonlocal checks deposited at a nonpro- tions and activities of the Federal prietary ATM must be made available Reserve that have been taken since the by the fifth business day after the bank- Board's March 1990 report. It summaing day of deposit. rized Board actions affecting Regulation Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

92 78th Annual Report, 1991 CC, described Federal Reserve initia- Rules Regarding Delegation of tives to improve the check collection Authority and return system, and highlighted available data on compliance by banks February 21, 1991—Amendment with the act and Regulation CC. The The Board amended its Delegation report also included legislative recom- Rules, effective February 28, 1991, to mendations to reduce bank risks of allow certain System officials to apcheck fraud resulting from provisions of prove certain types of mergers. the act and to facilitate compliance with the act's requirements. Votes for this action: Mr. Greenspan, Ms. Seger, and Messrs. Angell, Kelley, and LaWare. Absent and not voting: Mr. Mullins.2 Policy Statements and Other Actions The Board revised its rules to delegate to the Reserve Banks and to the November 21, 1991—Supervisory Staff Director of the Division of Bank- Policy on Securities Activities ing Supervision and Regulation, in consultation with the General Counsel, The Board, along with the other member authority to approve the merger of a agencies on the Federal Financial Insti- savings association owned by a bank tutions Examination Council, issued a holding company with a bank owned supervisory policy statement, effective by the same holding company, under February 10, 1992, regarding inappro- the conditions specified in the Oakar priate securities activities by depository amendment to the Financial Institutions institutions. Reform, Recovery, and Enforcement Act of 1989. Votes for this action: Messrs. Greenspan, Angell, Kelley, and LaWare. Absent and not voting: Mr. Mullins.l 1991 Discount Rates The policy statement revises a state- During 1991 the Board approved five ment adopted in 1988 by the Board, the reductions in the basic discount rate; Federal Deposit Insurance Corporation, these actions lowered the rate from and the Office of the Comptroller of the 6!/2 percent at the start of the year to Currency. The new statement provides V/i percent by year-end. None of the depository institutions with guidance in Federal Reserve Banks requested an inthree broad areas: (1) procedures to be crease in the basic rate during the year. used in selecting a securities dealer, The Board approved numerous changes, (2) trading activities and sales practices including increases and decreases, in the that are unsuitable when conducted in flexible rate on extended credit; that rate an investment portfolio, and (3) certain is adjusted on the basis of a marketmortgage securities with high risk that related formula. are not suitable investments for most The reasons for the Board's decisions institutions. In addition, the revised are reviewed below. The decisions were policy statement suggests several tests made in the context of the policy actions to help institutions identify those of the Federal Open Market Committee mortgage-backed securities with high (FOMC) and the related economic and risk. financial developments that are covered Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 93 in more detail elsewhere in this REPORT. the considerable easing in monetary pol- A listing of the Board's actions on the icy over previous months, and espebasic discount rate during 1991, includ- cially the boost to confidence associated ing the votes on those actions, follows with the rapid and successful complethis review. tion of the Persian Gulf war. Consumer spending and demand for single-family homes strengthened. Nonetheless, while an upturn in eco- Actions on the Basic Discount Rate nomic activity was widely viewed as a The Board approved two reductions in reasonable expectation, indications of the basic rate during the first four weakness persisted in the economy. months of 1991, maintained existing Moreover, by April, growth in the rates during the months that followed, broader monetary aggregates clearly had and approved three further reductions slowed. Against this background, an inin the period from mid-September to creasing number of Federal Reserve year-end. Banks proposed reductions of V2 percentage point in the basic discount rate, and on April 30 the Board approved January-April: Basic Rate Reduced such a decrease to a level of 5Vi percent. In the early months of the year, the The action was intended in part to reeconomy remained in a downswing that align the discount rate with short-term had begun during the summer of 1990. market interest rates, which had de- Monetary policy had been eased sub- clined considerably further since the restantially in the final months of 1990, duction in the discount rate on Feband the Board had approved a reduction ruary 1. in the basic discount rate from 7 percent to 6V2 percent on December 18. The reduction had served in part to realign May to August: No Changes the basic rate with market interest rates, From late spring to midsummer, signs which had declined considerably. of a moderate recovery in business ac- During January 1991 the Board de- tivity multiplied. Consumer spending ferred action on requests by six of the registered sizable gains, and expenditwelve Federal Reserve Banks to lower tures on residential construction continthe discount rate, but on February 1 the ued to rise. Data for industrial output Board approved a V2 percentage point and labor markets indicated that producreduction to a level of 6 percent. The tion was being stepped-up to meet decision was made in light of indica- emerging demands. Until late in this tions of further softening in economic period, no Federal Reserve Bank proactivity, continuing sluggish growth in posed any change in the discount rate. money and credit, and evidence that inflationary pressures were abating, including weakness in commodity prices. September to December: In the weeks that followed, a variety Further Reductions of developments appeared to have estab- As the summer progressed, however, lished the basis for a recovery in eco- the recovery appeared to lose momennomic activity; those developments in- tum. The growth of money and credit cluded the cumulative decline in oil weakened markedly during the summer prices since their October 1990 highs, months, and the cumulative expansion Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

94 78th Annual Report, 1991 of M2 and M3 dropped to the lowerends Structure of Discount Rates of the annual ranges set by the FOMC. In light of concerns about the ongoing The basic discount rate is the rate strength of the recovery and given fur- charged on loans to depository instituther indications that inflationary pres- tions for short-term adjustment credit sures were abating, the FOMC had and for credit extended under the seaeased reserve conditions slightly during sonal program; under the latter program, August. During the latter half of August loans may be provided for periods and early September, an increasing longer than those permitted under adnumber of Federal Reserve Banks sub- justment credit to assist smaller institumitted requests to lower the discount tions in meeting regular needs arising rate, and on September 13 the Board from certain seasonal movements in approved actions by seven Banks to their deposits and loans. The interest reduce the rate from 5V2 percent to rate charged on seasonal credit was 5 percent. scheduled to be replaced by a flexible, Subsequently, the incoming informa- market-related rate starting January 9, tion provided increasing evidence that 1992. the expansion in overall economic activ- A flexible rate may also be charged ity had stalled amid widespread in- on extended-credit loans (for other than dications of depressed business and seasonal purposes) to depository instituconsumer confidence. On November 6, tions that are under sustained liquidity against the background of continued pressure and are not able to obtain funds weak expansion in the money and credit on reasonable terms from other sources. aggregates and diminishing inflationary The flexible rate is somewhat higher pressures, the Board approved a further than the market rates to which it is Vi percentage point reduction in the dis- linked and is always at least 50 basis count rate. This action followed a deci- points above the basic discount rate. The sion by the FOMC to ease reserve con- rate is adjusted periodically, subject to ditions somewhat further and served in Board approval. The first thirty days of part to realign the discount rate with borrowing on extended credit may be at other short-term market rates. the basic rate, but further borrowings The FOMC implemented further eas- ordinarily are charged the flexible rate. ing actions during December through Exceptionally large adjustment-credit open market operations, and the dis- loans that arise from computer breakcount rate was reduced by a full percent- downs or other operating problems that age point on December 20, to a level clearly are not beyond the reasonable of 3V2 percent. These easing actions control of the borrowing institution are were taken on the basis of cumulating assessed the highest rate applicable to evidence, notably monetary and credit any credit extended to depository insticonditions as well as current economic tutions; under the current structure, that conditions, that pointed to receding in- rate is the flexible rate on extended, flationary pressures. The actions, to- nonseasonal credit. gether with the ongoing effects of earlier At the end of 1991 the structure of easing moves, were seen as likely to discount rates was as follows: a basic have a positive effect on financial mar- rate of 3V2 percent for short-term adjustkets and as possibly supplying adequate ment credit and for credit under the seamonetary stimulus to promote a resump- sonal program, and a flexible rate of tion of sustainable economic growth. 4.85 percent. During 1991 the flexible Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 95 rate ranged from a high of 7.65 percent directors of the Federal Reserve Banks to a low of 4.85 percent. of Boston, New York, Atlanta, Chicago, and Dallas to reduce the basic discount rate to 5V2 percent. Board Votes Votes for this action: Messrs. Greenspan, Under the provisions of the Federal Re- Kelley, LaWare, and Mullins. Vote against this action: Mr. Angell.l serve Act, the boards of directors of the Federal Reserve Banks are required to Mr. Angell dissented because he establish rates on loans to depository was concerned that a reduction in the institutions at least every fourteen days basic discount rate under current condiand to submit such rates to the Board of tions could have adverse repercussions Governors for review and determinaon long-term interest rates and thus tion. Federal Reserve Bank actions on on interest-sensitive sectors of the the discount rate include requests to reeconomy. new the formula for calculating the flex- The Board subsequently approved ible rate on extended credit. The votes similar actions taken by the directors of of the Board of Governors listed below the Federal Reserve Banks of Philadelinvolved changes in the basic discount phia, Richmond, Minneapolis, Kansas rate. Votes relating to the reestablish- City, and San Francisco, also effective ment of existing rates or for the updat- April 30; St. Louis, effective May 1; and ing of market-related rates under the Cleveland, effective May 2. extended credit program are not shown. Except as indicated in the listing be- September 13. Effective this date, the low, all votes taken during 1991 were Board approved actions taken by the unanimous. directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, At- Votes on the Basic Discount Rate lanta, Chicago, Minneapolis, and Dallas February 1. Effective this date, the to reduce the basic discount rate to Board approved actions taken by the 5 percent. directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Votes for this action: Messrs. Greenspan, Richmond, Chicago, Kansas City, and Mullins, Angell, and LaWare. Votes Dallas to reduce the basic discount rate against this action: None.1 Vi percentage point, to 6 percent. The Board subsequently approved Votes for this action: Mr. Greenspan, Ms. similar actions taken by the directors of Seger, and Messrs. Kelley, LaWare, and the Federal Reserve Banks of New Mullins. Votes against this action: None.2 York, Richmond, Kansas City, and San Francisco, also effective September 13; The Board subsequently approved and St. Louis, effective September 17. similar actions taken by the directors of the Federal Reserve Banks of Cleve- November 6. Effective this date, the land, Minneapolis, and San Francisco, Board approved actions taken by the also effective February 1; and St. Louis directors of the Federal Reserve Banks and Atlanta, effective February 4. of Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, and Min- April 30. Effective this date, the neapolis to reduce the basic discount Board approved actions taken by the rate to 4Vi percent. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

96 78th Annual Report, 1991 Votes for this action: Messrs. Greenspan, Mullins, Kelley, and LaWare. Vote against this action: Mr. Angell.1 Mr. Angell dissented because of his concern about the effect of the easing action on inflation expectations and consequently on long-term interest rates. In his view monetary policy needed to be implemented in a way that was not perceived as a shift from a focus on pricelevel stability to a focus on short-term economic growth. The Board subsequently approved similar actions taken by the directors of the Federal Reserve Banks of Richmond, Kansas City, Dallas, and San Francisco, also effective November 6; and St. Louis, effective November 7. December 19. Effective December 20 the Board approved actions taken by the directors of the Federal Reserve Banks of New York and Chicago to reduce the basic discount rate to 3V2 percent. Votes for this action: Messrs. Greenspan, Mullins, Kelley, LaWare, and Lindsey and Ms. Phillips. Vote against this action: Mr. Angell. Mr. Angell dissented because he believed that a steady policy course was desirable after an extended period of interest rate declines. He did not rule out the potential need for some easing later if warranted by the incoming information on the economy and a reversal of the recent pickup in monetary growth. The Board subsequently approved actions taken by the directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Kansas City, Dallas, and San Francisco, also effective December 20; Minneapolis, effective December 23; and St. Louis, effective, December 24. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

97 Record of Policy Actions of the Federal Open Market Committee The record of policy actions of the Fed- During 1991 the policy record for eral Open Market Committee is pre- each meeting was released a few days sented in the ANNUAL REPORT of the after the next regularly scheduled meet- Board of Governors pursuant to the re- ing and was subsequently published in quirements of section 10 of the Federal the Federal Reserve Bulletin. Reserve Act. That section provides that Policy directives of the Federal Open the Board shall keep a complete record Market Committee are issued to the Fedof the actions taken by the Board and by eral Reserve Bank of New York as the the Federal Open Market Committee on Bank selected by the Committee to exeall questions of policy relating to open cute transactions for the System Open market operations, that it shall record Market Account. In the area of domestic therein the votes taken in connection open market activities, the Federal Rewith the determination of open market serve Bank of New York operates under policies and the reasons underlying each two sets of instruction from the Open such action, and that it shall include in Market Committee: an Authorization for its annual report to the Congress a full Domestic Open Market Operations and account of such actions. a Domestic Policy Directive. (A new The pages that follow contain entries Domestic Policy Directive is adopted at relating to the policy actions at the meet- each regularly scheduled meeting.) In ings of the Federal Open Market Com- the foreign currency area, the Commitmittee held during the calendar year tee operates under an Authorization for 1991, including the votes on the policy Foreign Currency Operations and a Fordecisions made at those meetings as well eign Currency Directive. These four polas a resume of the basis for the deci- icy instruments are shown below in the sions. The summary descriptions of eco- form in which they were in effect at the nomic and financial conditions are based beginning of 1991. Changes in the inon the information that was available to struments during the year are reported in the Committee at the time of the meet- the records for the individual meetings. ings, rather than on data as they may have been revised later. Authorization for Domestic Open It will be noted from the record of Market Operations policy actions that in some cases the decisions were made by unanimous vote In Effect January 1, 1991 and that in other cases dissents were recorded. The fact that a decision in 1. The Federal Open Market Committee aufavor of a general policy was by a large thorizes and directs the Federal Reserve majority, or even that it was by unani- Bank of New York, to the extent necessary to cany out the most recent domestic policy mous vote, does not necessarily mean directive adopted at a meeting of the that all members of the Committee were Committee: equally agreed as to the reasons for the (a) To buy or sell U.S. Government sedecision. curities, including securities of the Federal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

98 78th Annual Report, 1991 Financing Bank, and securities that are direct fully guaranteed as to principal and interest obligations of, or fully guaranteed as to prin- by, any agency of the United States, and cipal and interest by, any agency of the prime bankers acceptances of the types au- United States in the open market, from or to thorized for purchase under l(b) above, from securities dealers and foreign and interna- dealers for the account of the Federal Retional accounts maintained at the Federal serve Bank of New York under agreements Reserve Bank of New York, on a cash, regu- for repurchase of such securities, obligalar, or deferred delivery basis, for the System tions, or acceptances in 15 calendar days or Open Market Account at market prices, and, less, at rates that, unless otherwise expressly for such Account, to exchange maturing U.S. authorized by the Committee, shall be deter- Government and Federal agency securities mined by competitive bidding, after applywith the Treasury or the individual agencies ing reasonable limitations on the volume of or to allow them to mature without replace- agreements with individual dealers; provided ment; provided that the aggregate amount of that in the event Government securities or U.S. Government and Federal agency securi- agency issues covered by any such agreeties held in such Account (including forward ment are not repurchased by the dealer purcommitments) at the close of business on the suant to the agreement or a renewal thereof, day of a meeting of the Committee at which they shall be sold in the market or transaction is taken with respect to a domestic ferred to the System Open Market Account; policy directive shall not be increased or and provided further that in the event bankdecreased by more than $8.0 billion during ers acceptances covered by any such agreethe period commencing with the opening of ment are not repurchased by the seller, they business on the day following such meeting shall continue to be held by the Federal and ending with the close of business on the Reserve Bank or shall be sold in the open day of the next such meeting;1 market. (b) When appropriate, to buy or sell in 2. In order to ensure the effective conduct the open market, from or to acceptance deal- of open market operations, the Federal Open ers and foreign accounts maintained at the Market Committee authorizes and directs the Federal Reserve Bank of New York, on a Federal Reserve Banks to lend U.S. Governcash, regular, or deferred delivery basis, for ment securities held in the System Open the account of the Federal Reserve Bank of Market Account to Government securities New York at market discount rates, prime dealers and to banks participating in Governbankers acceptances with maturities of up to ment securities clearing arrangements connine months at the time of acceptance that ducted through a Federal Reserve Bank, un- (1) arise out of the current shipment of goods der such instructions as the Committee may between countries or within the United specify from time to time. States, or (2) arise out of the storage within 3. In order to ensure the effective conduct the United States of goods under contract of of open market operations, while assisting in sale or expected to move into the channels of the provision of short-term investments for trade within a reasonable time and that are foreign and international accounts mainsecured throughout their life by a warehouse tained at the Federal Reserve Bank of New receipt or similar document conveying title York, the Federal Open Market Committee to the underlying goods; provided that the authorizes and directs the Federal Reserve aggregate amount of bankers acceptances Bank of New York (a) for System Open held at any one time shall not exceed Market Account, to sell U.S. Government $100 million; securities to such foreign and international (c) To buy U.S. Government securities, accounts on the bases set forth in paragraph obligations that are direct obligations of, or l(a) under agreements providing for the resale by such accounts of those securities within 15 calendar days on terms comparable to those available on such transactions in 1. At its meeting on Dec. 18, 1990, the Comthe market; and (b) for New York Bank mittee approved a temporary increase, to $14 bilaccount, when appropriate, to undertake with lion, in the limit on changes between Committee dealers, subject to the conditions imposed on meetings in System Account holdings of U.S. government and federal agency securities. The limit purchases and sales of securities in parareverted to its regular level of $8 billion at the graph l(c), repurchase agreements in U.S. close of business on Feb. 6,1991. Government and agency securities, and to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 99 arrange corresponding sale and repurchase lower half of the Committee's range for the agreements between its own account and year and growth of M3 near the lower end of foreign and international accounts main- its range. Expansion of total domestic nonfitained at the Bank. Transactions undertaken nancial debt appears to have been near the with such accounts under the provisions of midpoint of its monitoring range. this paragraph may provide for a service fee The Federal Open Market Committee when appropriate. seeks monetary and financial conditions that will foster price stability, promote growth in output on a sustainable basis, and contribute to an improved pattern of international trans- Domestic Policy Directive actions. In furtherance of these objectives, the Committee at its meeting in July reaf- In Effect January 1, 19912 firmed the range it had established in February for M2 growth of 3 to 7 percent, mea- The information reviewed at this meeting sured from the fourth quarter of 1989 to the suggests appreciable weakening in economic fourth quarter of 1990. The Committee in activity. Total nonfarm payroll employment July also retained the monitoring range of 5 fell sharply further in November, reflecting to 9 percent for the year that it had set for widespread job losses that were especially growth of total domestic nonfinancial debt. pronounced in manufacturing and construc- With regard to M3, the Committee recogtion; the civilian unemployment rate rose to nized that the ongoing restructuring of thrift 5.9 percent. Industrial output declined markdepository institutions had depressed its edly in October and November, in part begrowth relative to spending and total credit cause of sizable cutbacks in the production more than anticipated. Taking account of the of motor vehicles. Retail sales were weak in unexpectedly strong M3 velocity, the Comreal terms in October and November; real mittee decided in July to reduce the 1990 disposable income has been reduced not only range to 1 to 5 percent. For 1991, the Comby a decrease in total hours worked but also mittee agreed on provisional ranges for monby the effects of higher energy prices. Adetary growth, measured from the fourth quarvance indicators of business capital spending ter of 1990 to the fourth quarter of 1991, of point to considerable softening in investment 2Vi to 6V2 percent for M2 and 1 to 5 percent in coming months. Residential construction for M3. The Committee tentatively set the has declined substantially further in recent associated monitoring range for growth of months. The nominal U.S. merchandise trade total domestic nonfinancial debt at 4Vi to deficit widened in October from its average SV2 percent for 1991. The behavior of the rate in the third quarter as non-oil imports monetary aggregates will continue to be rose more sharply than exports. Increases in evaluated in the light of progress toward consumer prices moderated in November price level stability, movements in their velargely as a result of a softening in oil prices. locities, and developments in the economy The latest data on labor costs suggest some and financial markets. improvement from earlier trends. In the implementation of policy for the Most interest rates have fallen appreciably immediate future, the Committee seeks to since the Committee meeting on November decrease slightly the existing degree of pres- 13. In foreign exchange markets, the tradesure on reserve positions, taking account of a weighted value of the dollar in terms of the possible change in the discount rate. Dependother G-10 currencies rose slightly on baling upon progress toward price stability, ance over the intermeeting period. trends in economic activity, the behavior of M2 was about unchanged on balance over the monetary aggregates, and developments October and November after several months in foreign exchange and domestic financial of relatively limited expansion, while M3 markets, slightly greater reserve restraint declined slightly in both months. From the might or somewhat lesser reserve restraint fourth quarter of 1989 through November, would be acceptable in the intermeeting peexpansion of M2 was estimated to be in the riod. The contemplated reserve conditions are expected to be consistent with growth of M2 and M3 over the period from November 2. Adopted by the Committee at its meeting on through March at annual rates of about 4 and Dec. 18, 1990. 1 percent, respectively. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

100 78th Annual Report, 1991 Authorization for Foreign rency, plus outstanding contracts for future Currency Operations receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these elements with due regard to sign. In Effect January 1, 1991 2. The Federal Open Market Committee directs the Federal Reserve Bank of New 1. The Federal Open Market Committee au- York to maintain reciprocal currency arthorizes and directs the Federal Reserve rangements ("swap" arrangements) for the Bank of New York, for System Open Market System Open Market Account for periods up Account, to the extent necessary to carry out to a maximum of 12 months with the followthe Committee's foreign currency directive ing foreign banks, which are among those and express authorizations by the Committee designated by the Board of Governors of the pursuant thereto, and in conformity with Federal Reserve System under Section 214.5 such procedural instructions as the Commit- of Regulation N, Relations with Foreign tee may issue from time to time: Banks and Bankers, and with the approval of A. To purchase and sell the following the Committee to renew such arrangements foreign currencies in the form of cable trans- on maturity: fers through spot or forward transactions on the open market at home and abroad, including transactions with the U.S. Treasury, with Amount the U.S. Exchange Stabilization Fund estab- Foreign bank (millions of dollars equivalent) lished by Section 10 of the Gold Reserve Act of 1934, with foreign monetary authori- Austrian National Bank 250 ties, with the Bank for International Settle- National Bank of Belgium 1,000 ments, and with other international financial Bank of Canada 2,000 National Bank of Denmark 250 institutions: Bank of England 3,000 Bank of France 2,000 German Federal Bank 6,000 Austrian schillings Italian lire Bank of Italy 3,000 Belgian francs Japanese yen Bank of Japan 5,000 Canadian dollars Mexican pesos Bank of Mexico 700 Danish kroner Netherlands guilders Netherlands Bank 500 Pounds sterling Norwegian kroner Bank of Norway 250 French francs Swedish kronor Bank of Sweden 300 German marks Swiss francs Swiss National Bank 4,000 Bank for International Settlements Dollars against Swiss francs 600 Dollars against authorized European B. To hold balances of, and to have currencies other than Swiss francs 1,250 outstanding forward contracts to receive or to deliver, the foreign currencies listed in paragraph A above. Any changes in the terms of existing swap C. To draw foreign currencies and to arrangements, and the proposed terms of any permit foreign banks to draw dollars under new arrangements that may be authorized, the reciprocal currency arrangements listed shall be referred for review and approval to in paragraph 2 below, provided that draw- the Committee. ings by either party to any such arrangement 3. All transactions in foreign currencies shall be fully liquidated within 12 months undertaken under paragraph 1(A) above after any amount outstanding at that time shall, unless otherwise expressly authorized was first drawn, unless the Committee, be- by the Committee, be at prevailing market cause of exceptional circumstances, specifi- rates. For the purpose of providing an investcally authorizes a delay. ment return on System holdings of foreign D. To maintain an overall open posi- currencies, or for the purpose of adjusting tion in all foreign currencies not exceeding interest rates paid or received in connection $25.0 billion. For this purpose, the overall with swap drawings, transactions with foropen position in all foreign currencies is eign central banks may be undertaken at defined as the sum (disregarding signs) of non-market exchange rates. net positions in individual currencies. The 4. It shall be the normal practice to arnet position in a single foreign currency is range with foreign central banks for the coordefined as holdings of balances in that cur- dination of foreign currency transactions. In Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 101 making operating arrangements with foreign B. To keep the Secretary of the Treacentral banks on System holdings of foreign sury fully advised concerning System forcurrencies, the Federal Reserve Bank of New eign currency operations, and to consult with York shall not commit itself to maintain any the Secretary on policy matters relating to specific balance, unless authorized by the foreign currency operations; Federal Open Market Committee. Any agree- C. From time to time, to transmit apments or understandings concerning the ad- propriate reports and information to the Naministration of the accounts maintained by tional Advisory Council on International the Federal Reserve Bank of New York with Monetary and Financial Policies. the foreign banks designated by the Board of 8. Staff officers of the Committee are au- Governors under Section 214.5 of Regula- thorized to transmit pertinent information on tion N shall be referred for review and ap- System foreign currency operations to approproval to the Committee. priate officials of the Treasury Department. 5. Foreign currency holdings shall be in- 9. All Federal Reserve Banks shall particvested insofar as practicable, considering ipate in the foreign currency operations for needs for minimum working balances. Such System Account in accordance with parainvestments shall be in liquid form, and graph 3 G(l) of the Board of Governors' generally have no more than 12 months re- Statement of Procedure with Respect to Formaining to maturity. When appropriate in eign Relationships of Federal Reserve Banks connection with arrangements to provide in- dated January 1, 1944. vestment facilities for foreign currency holdings, U.S. Government securities may be purchased from foreign central banks under Foreign Currency Directive agreements for repurchase of such securities within 30 calendar days. 6. All operations undertaken pursuant to In Effect January 1, 1991 the preceding paragraphs shall be reported promptly to the Foreign Currency Sub- 1. System operations in foreign currencies committee and the Committee. The Foreign shall generally be directed at countering dis- Currency Subcommittee consists of the orderly market conditions, provided that Chairman and Vice Chairman of the Com- market exchange rates for the U.S. dollar mittee, the Vice Chairman of the Board of reflect actions and behavior consistent with Governors, and such other member of the the IMF Article IV, Section 1. Board as the Chairman may designate (or in 2. To achieve this end the System shall: the absence of members of the Board serving A. Undertake spot and forward puron the Subcommittee, other Board Members chases and sales of foreign exchange. designated by the Chairman as alternates, B. Maintain reciprocal currency and in the absence of the Vice Chairman of ("swap") arrangements with selected forthe Committee, his alternate). Meetings of eign central banks and with the Bank for the Subcommittee shall be called at the re- International Settlements. quest of any member, or at the request of the C. Cooperate in other respects with Manager for Foreign Operations, for the pur- central banks of other countries and with poses of reviewing recent or contemplated international monetary institutions. operations and of consulting with the Man- 3. Transactions may also be undertaken: ager on other matters relating to his responsi- A. To adjust System balances in light bilities. At the request of any member of the of probable future needs for currencies. Subcommittee, questions arising from such B. To provide means for meeting Sysreviews and consultations shall be referred tem and Treasury commitments in particular for determination to the Federal Open Mar- currencies, and to facilitate operations of the ket Committee. Exchange Stabilization Fund. 7. The Chairman is authorized: C. For such other purposes as may be A. With the approval of the Commit- expressly authorized by the Committee. tee, to enter into any needed agreement or 4. System foreign currency operations understanding with the Secretary of the Trea- shall be conducted: sury about the division of responsibility for A. In close and continuous consultaforeign currency operations between the Sys- tion and cooperation with the United States tem and the Treasury; Treasury; Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

102 78th Annual Report, 1991 B. In cooperation, as appropriate, with sizable portion of the reduction reflected foreign monetary authorities; and cutbacks in the production of motor C. In a manner consistent with the oblivehicles, but output also was down in gations of the United States in the Internamost other industries. Declines in protional Monetary Fund regarding exchange arrangements under the IMF Article IV. duction were especially large for computers, construction supplies, and a wide range of non-auto consumer durables. Meeting Held on Capacity utilization in manufacturing February 5-6, 1991 continued to fall in December; in most industries, operating rates were down substantially from their recent peaks and 1. Domestic Policy Directive from their longer-run averages. The information reviewed at this meet- Partly reflecting lackluster sales during suggested that economic activity had ing the holiday season, consumer spendweakened further. A persisting low level ing in real terms was soft in the fourth of consumer confidence, related partly quarter. Outlays for goods were considto the uncertainties surrounding the Per- erably below the levels seen earlier in sian Gulf situation, and reduced real dis- the year, and while spending for services posable incomes continued to depress rose further, the fourth-quarter gain was consumer demand; and business invest- well below that recorded in previous ment spending, especially for structures, quarters. Total private housing starts deremained in a downtrend. With busi- clined substantially further in the fourth nesses attempting to maintain tight con- quarter; sales of new homes remained trol over inventories as demand weak- weak through year-end, and home prices ened, industrial production and nonfarm continued to slip. payroll employment had declined Shipments of nondefense capital sharply. Broad measures of prices indi- goods were about unchanged in the cated some moderation of inflation to- fourth quarter. Aircraft purchases reward the end of 1990, largely as a result mained at the robust third-quarter level, of lower energy prices. The latest data while business outlays for motor vehisuggested some deceleration in wages cles dropped sharply after a third-quarter and overall labor costs. spike in fleet sales. Outside the transpor- Total nonfarm payroll employment tation sector, equipment spending adfell sharply in January, and a larger drop vanced appreciably, mainly reflecting than previously reported was now indi- strong increases in spending for computcated for December. The contraction in ers. New orders for business equipment employment in January was especially pointed to a softening in spending for heavy in the construction sector, only such goods in coming months. Available partly reflecting unseasonably wet data indicated that nonresidential conweather in some sections of the country, struction activity fell sharply in the and widespread job losses were reg- fourth quarter. In a period of weak sales, istered in manufacturing, notably in total manufacturing and trade inventodurable goods. The civilian unemploy- ries, measured on a constant-cost basis, ment rate edged higher in January to increased a little further on balance over 6.2 percent. October and November, and the ratio of Industrial output declined markedly stocks to sales rose only slightly, rein the fourth quarter, and partial data flecting strong efforts by businesses to suggested a further drop for January. A keep inventories in line with sales. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 103 In the October-November period, cated that, subsequent to the initial strong exports cushioned to some extent move, somewhat lesser reserve restraint the drop in production and output in the would be acceptable, or slightly greater United States; nonagricultural exports reserve restraint might be acceptable, were up substantially over the third- during the intermeeting period dependquarter average, with substantial in- ing on progress toward price stability, creases recorded in all major trade cate- the strength of the business expansion, gories except aircraft and computers. the behavior of the monetary aggre- Despite the strength in exports, the nom- gates, and developments in foreign exinal U.S. merchandise trade deficit for change and domestic financial markets. the two months combined was at a The Committee also noted that open higher rate than in the third quarter be- market operations might need to take cause of rising oil prices, which brought account of a possible reduction in the a sharp increase in the value of oil im- discount rate early in the intermeeting ports. Growth in most major foreign period. The contemplated reserve condiindustrial countries appeared to have tions were expected to be consistent slowed somewhat in the fourth quarter. with expansion of M2 and M3 over the In many of these countries, lower oil period from November through March prices late in the year had brought some at annual rates of about 4 and 1 percent moderation in consumer price inflation. respectively. In December, a sizable decline in pro- Immediately after the Committee ducer prices of finished goods more than meeting, the Board of Governors apoffset the November rise, as prices of proved a reduction in the discount rate both food and energy products moved from 7 to 6V2 percent; afterwards, open sharply lower. For other finished goods, market operations were directed at alproducer prices increased in the fourth lowing part of this decline to show quarter at about the moderate pace through to short-term interest rates more evident in the three previous quarters. generally. Another easing step was taken Lower oil prices and a slowing in food in early January in response to weak price increases also damped the rise in money growth and considerable softconsumer prices in December. Exclud- ness in the economy. Subsequently, on ing the food and energy components, February 1, the Board approved a furconsumer inflation was a little lower on ther reduction in the discount rate to balance in November and December 6 percent; this action was taken in rethan in earlier months of 1990. Total sponse to indications that economic accompensation costs of private industry tivity was slackening further, growth in workers rose more slowly in the fourth money and credit continued sluggish, quarter and also increased a bit less for and inflation pressures were abating. In the year than in 1989. this instance, open market operations At its meeting on December 18, the permitted the full reduction in the dis- Committee adopted a directive that count rate to be reflected in money called for an initial slight reduction in market rates. Adjustment plus seasonal the degree of pressure on reserve posi- borrowing fluctuated widely over the tions and for giving particular weight to intermeeting period; borrowing was well potential developments that might re- above expected levels during much of quire some further easing later in the the period as banks adapted to the intermeeting period. To reflect the tilt phase-out of the reserve requirement on toward further easing, the directive indi- nonpersonal time deposits and net Euro- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

104 78th Annual Report, 1991 currency liabilities; the phase-out re- the reduction the next day in the Federal duced required reserve balances to lev- Reserve's discount rate, the dollar els that at times proved to be insufficient dropped sharply. On balance, the dollar for the clearing needs of many banks. was down somewhat over the inter- The federal funds rate averaged meeting period. around 11A percent just before the De- Growth of M2 remained sluggish in cember meeting. Late in the intermeet- December and January, running at a ing period, after the two cuts in the pace below the path expected by the discount rate and the monetary easing Committee; expansion of M3 picked up through open market operations, the fed- in January from the very slow pace of eral funds rate averaged a little above previous months. The continuing weak- 6VA percent. Over the intermeeting ness in M2 despite an appreciable narperiod, however, the funds rate was un- rowing in opportunity costs appeared to usually volatile; key factors behind this reflect in part heightened concerns about volatility included the phase-out of the financial condition of many deposithe nontransaction reserve requirement, tory institutions in the wake of the closbalance-sheet adjustments undertaken ing of privately insured banks and credit near year-end, and some reserve projec- unions in Rhode Island and the failure tion misses near the ends of mainte- of the Bank of New England. For the nance periods. Other short-term interest year 1990, M2 and M3 grew at rates in rates also fell considerably over the inter- the lower portions of the Committee's meeting period; private money market ranges. Expansion of total domestic rates declined more than Treasury bill nonfinancial debt appeared to have been rates, reflecting a reduction in the pro- near the midpoint of its monitoring nounced risk premiums that had been range for the year. built into private short-term rates ahead The staff projection prepared for this of year-end. Yields in longer-term mar- meeting, which was assembled against kets were unchanged to down slightly, the background of the outbreak of hostiland broad indexes of stock prices rose ities in the Persian Gulf region, pointed appreciably on balance over the period. to some further decline in economic In foreign exchange markets, the activity in the near term. The length and trade-weighted value of the dollar in intensity of the war was a matter of terms of the other G-10 currencies ad- conjecture, but the projection was based vanced in the early part of the intermeet- on the assumption that the war would ing period as market participants sought end within the next few months and a safe haven for their funds in the face would have little further effect on world of diminishing prospects for a peaceful oil supplies and the level of oil prices. settlement in the Persian Gulf region. The projection also assumed that con- The dollar also was buoyed, especially straints on the supply of credit would against the German mark, by market persist to some degree through the rest perceptions that political conditions of the year. In the near term, concerns were deteriorating in the Soviet Union. emanating from the war, reduced credit The early successes of the Allied forces availability, and financial fragility were in the Gulf war brought a reduction in expected to continue to damp consumer safe-haven demands, and the dollar be- and business confidence and, by depresgan to decline in the latter half of Janu- sing private domestic demand, to push ary. After an increase in the German manufacturing activity still lower. Sub- Bundesbank's official lending rates and sequently, economic growth was ex- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 105 pected to resume in association with the growth of money over a period of years, support provided by further gains in they believed that considerable progress exports, the stimulative effects of sharp in reducing inflation was likely to be declines in oil prices and short-term made in the year ahead. interest rates, and some improvement in In conformance with the practice at consumer and business sentiment as the meetings when the Committee estabwar drew to a close. Increases in busi- lishes its long-run ranges for growth of ness orders and sales could be expected the money and debt aggregates, the to bring a prompt pickup in production, Committee members and the Federal given lean inventories, and with some Reserve Bank presidents not currently lag a rise in business spending for in- serving as members had prepared provestment goods other than commercial jections of economic activity, the unemstructures; severe problems of excess ployment rate, and inflation for the year supply were expected to inhibit any 1991. For the period from the fourth recovery in commercial construction quarter of 1990 to the fourth quarter of for an extended period. With oil prices 1991, the forecasts for growth of real lower and some added slack expected in GNP had a central tendency of 3A perresource utilization, the staff projected a cent to IV2 percent. These forecasts slowing in the pace of increases in prices assumed an upturn in economic activity and labor costs in coming quarters. later in the year and subsequent expan- In the Committee's review of eco- sion at a pace that was consistent with nomic developments, members com- continued progress toward price stabilmented that the outbreak of war in the ity. Estimates of the civilian rate of Persian Gulf region had heightened the unemployment in the fourth quarter of already substantial uncertainties bearing 1991 were concentrated in a range of on the outlook for the economy. A rela- 6x/2 percent to 7 percent. On the assumptively mild recession followed by a tion that oil prices would remain near moderate upturn in economic activity their recent levels and in the context of was still regarded as a reasonable expec- reduced pressures on resources, all of tation, assuming that the war would not the members expected a sizable decline be prolonged and that oil prices would in the rate of inflation from the pace in remain at substantially reduced levels. 1990; as measured by the consumer However, the risks clearly were on the price index, the central tendency of their downside, and a very sluggish recovery projections was in a range of 3VA peror indeed a deep and relatively long cent to 4 percent for the year, compared recession could not be ruled out. Busi- with an actual rise of 6V4 percent in ness and consumer confidence, a critical 1990. Forecasts of growth in nominal factor underlying the economic outlook, GNP had a central tendency of 33A peralready was quite negative and was sub- cent to 5VA percent. ject to further erosion stemming from In their comments about the prospects financial strains and credit constraints in for business activity, the members gave the domestic economy as well as from considerable attention to the uncertainunpredictable developments in the Mid- ties and concerns that were exerting a dle East. On the positive side, members depressing effect on business and consaw growing indications of some moder- sumer confidence. The rapidly evolving ation in underlying inflation pressures; situation in the Middle East undoubtand in light of the increasing slack in edly was contributing an element of caulabor and capital markets and the slower tion to spending plans, but the problems Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

106 78th Annual Report, 1991 of many financial institutions and the caution in terms of its implications for financial difficulties of heavily indebted future business activity, it suggested that business firms and individuals were add- many investors viewed the economic ing to the generally somber economic outlook with some degree of optimism. climate. Not only had financial prob- Turning to current and prospective lems affected attitudes, but constraints developments in different parts of the on the availability of credit to many country and sectors of the economy, borrowers with limited or no access to members reported further indications of alternative sources of financing were some softening in business conditions in having a retarding effect on business several regions, including areas where activity and could limit the vigor of the business activity previously had been expected expansion. Many financial relatively well maintained in compariproblems were the legacy of financial son with national trends. Much of the excesses of the past decade, notably weakness tended to be concentrated in those associated with the financing of manufacturing, primarily the production speculative real estate ventures and of motor vehicles and associated inputs highly leveraged restructurings of busi- and of other durable goods, and in conness firms. While some progress was struction. At the same time, however, being made in addressing such prob- there were indications that business conlems, a good deal of time undoubtedly ditions were no longer deteriorating in would be needed before many troubled some areas and might indeed be improvlending institutions again became im- ing somewhat with attendant gains in portant suppliers of new credit and local business confidence. The outbreak before many business firms were able to of war seemed to be having little effect access credit sufficient to support in- thus far on overall domestic manufacturcreases in spending. Such financial diffi- ing activity, though some firms were culties were likely to have continuing reported to have increased their produceffects on business and consumer atti- tion of defense-related goods. tudes and to constrain business activity The prospects for consumer spending to some extent even if there were a remained the key uncertainty in the outrelatively prompt end to the hostilities in look for overall economic activity. It the Middle East. Nonetheless, members was unclear at this point how consumers pointed to a number of promising devel- would respond to unfolding developopments bearing on the prospects for the ments in the Middle East. There were economy, notably the substantial de- widespread reports that retail sales had clines that had occurred in interest rates, dropped sharply after the outbreak of including key long-term rates, the sharp hostilities in mid-January, but that dedrop in oil prices, and the improved velopment seemed to represent at least competitive position of U.S. businesses in part a temporary reaction associated in world markets stemming from the with the diversion of attention to the depreciation of the dollar. Members also reporting of military events. Indeed, noted that despite the generally negative there were indications or at least expecsentiment in the business community tations among businessmen that conand among many consumers, the perfor- sumer behavior would return to a more mance of the stock market, including the normal pattern, though perhaps tending shares of banking organizations, had to the weak side, in the period ahead. been surprisingly strong; while such a For the present, however, consumer sendevelopment had to be interpreted with timent clearly remained depressed, and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 107 many anxious consumers seemed un- some domestic goods, notably agriculwilling, or at least reluctant, to make tural products. At the same time, many discretionary purchases. As a conse- manufacturing firms continued to report quence business contacts, such as those receptive export markets, and producin the motor vehicles industry, remained tion for such markets was helping to concerned about the outlook for sales at offset weakness in domestic demand. least for the nearer term. Over time, the However, a substantial further decline in end of hostilities in the Middle East the foreign exchange value of the dollar would improve consumer confidence, would not be a welcome development; and the drop in oil prices, if sustained, such a decline, should it occur, might would have a positive effect on con- well foster higher domestic bond yields sumer purchasing power. and could give rise to protectionist reac- A significant rebound in consumer tions abroad to the detriment of further spending was likely to be followed fairly gains in U.S. exports. promptly by increased production of With regard to the outlook for inflaconsumer goods, given generally lean tion, the members saw favorable prosbusiness inventories, and with some lag pects for considerable progress in the by greater output of producer equip- year ahead. There were growing indicament. At the same time, construction tions that the core rate of inflation would activity would probably remain de- trend down. Currently available statispressed in light of the high vacancy tics might not yet be fully capturing the rates in existing commercial structures extent of the underlying improvement in across the country and the weakness in inflation, though it already was clear residential real estate markets in many that some downward adjustment was areas. Construction expenditures by occurring in the crucial area of wages. state and local governments also ap- With regard to future prospects, several peared likely to be restrained, given the members stressed that the slowing in financial problems of many of these monetary growth over a period of years governments, but members noted that was likely to be reflected increasingly in some major public works projects had lower inflation. The slack in labor and been financed or were under way in a capital resources probably would have a few areas. restraining effect on underlying inflation Members continued to anticipate fur- pressures over the next several quarters. ther expansion in exports stemming im- Evidence of such a development inportantly from the nation's improved cluded indications of strong competition competitive position associated with in markets for a wide range of products the substantial decline in the foreign and reports of adjustments in the pricing exchange value of the dollar. Views policies of many business firms. The differed to some extent, however, with members recognized that the effects of regard to the strength and potential con- earlier declines in the dollar on the tribution of the export sector to domes- prices of imported goods and competing tic economic activity. Some members domestic products would tend to mainstressed that relatively depressed eco- tain some upward pressure on the overnomic conditions in a number of major all price level for a time; however, they foreign industrial nations were likely to assumed for the purpose of their forelimit U.S. exports to those countries. casts that there would not be any further Moreover, developments in the Middle change in the value of the dollar of a East already had curbed foreign sales of magnitude that would affect domestic Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 78th Annual Report, 1991 prices over the projection horizon and relation to that of nominal income, that oil prices would remain near recent allowing for the effects of movements in lower levels. interest rates, would persist during the Against the background of the mem- year ahead; a return to a more normal bers' views on the economic outlook pattern in this relationship would have a and in keeping with the requirements of substantial effect on the rate of M2 the Full Employment and Balanced growth that was consistent with a satis- Growth Act of 1978 (the Humphrey- factory economic performance. The Hawkins Act), the Committee reviewed Committee needed to be prepared to rethe ranges for growth of the monetary vise those ranges at midyear as interim and debt aggregates in 1991 that it had economic or financial developments established on a tentative basis in July might warrant. Members also noted the 1990. The tentative ranges included ex- risk that market participants might mispansion of 2Vi percent to 6V2 percent for interpret the implications of any changes M2 and 1 percent to 5 percent for M3, in the ranges for the conduct of monemeasured from the fourth quarter of tary policy during the year. Increasing 1990 to the fourth quarter of 1991. The the ranges could raise questions about monitoring range for growth of total do- the System's commitment to its antimestic nonfinancial debt had been set inflationary goals, while lowering them, provisionally at AV2 percent to 8V2 per- especially in the context of already weak cent for 1991. The ranges for M2 and money growth, could lead to concerns nonfinancial debt involved reductions of about the System's objective of foster- V2 percentage point from those that were ing an upturn in business activity. Morereaffirmed in July for the year 1990; the over, a reduction in the M2 range might M3 range for 1990 had been lowered by have to be reversed later if the behavior IV2 percentage points in July and no of money resumed a more normal patfurther reduction had been made in the tern in relation to income; such a revertentative M3 range for 1991. sal would interrupt the Committee's In the Committee's discussion of the practice of gradually reducing its growth ranges for 1991, which mainly focused ranges and could have adverse repercuson M2, most of the members indicated a sions on the credibility of the System's preference for affirming the ranges that anti-inflationary policy. Accordingly, had been established on a tentative basis most of the members concluded that the in July. Insofar as could be judged under tentative range for M2, which already present circumstances, the tentative incorporated a reduction from 1990, ranges offered in this view the best pros- represented an appropriately balanced pects of balancing and accommodating approach, based on current expectathe Committee's objectives of a prompt tions with regard to the behavior of recovery in business activity and con- velocity, to promoting the Committee's tinuing progress toward reducing infla- objectives. tion. Many of the members conceded Expressing a differing opinion, two that in light of the current uncertainties members indicated that they preferred a surrounding the relationship between somewhat higher range for M2, in part money growth and economic perfor- to provide a better signal of the Sysmance, somewhat higher or somewhat tem's determination to cushion the relower ranges also were defensible. For cession and foster a quick recovery in example, it was unclear to what extent business activity. The midpoint of the the relatively slow growth of M2 in higher range would call for some Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 109 make-up of the shortfall in M2 growth reductions, took into account the prosfrom the midpoints of the ranges estab- pect that federal borrowing was likely to lished for this aggregate in recent years. be robust in 1991, owing in part to bor- Moreover, growth of M2 at or near the rowing associated with outlays by the bottom of the tentative range would pose Resolution Trust Corporation but more an unacceptable risk of inadequate mon- generally to the likely weakness of fedetary stimulus that could fail to cushion eral revenues in a year of relatively slugpossible further deterioration in the gish economic activity. On the other economy. On the other hand, a prefer- hand, growth in borrowing by domestic ence was expressed for a somewhat nonfederal sectors was expected to modlower range to underline the System's erate. Demands for credit would be held commitment to price stability. The mid- down by limited expansion in domestic point of such a range would not imply a spending and the increased caution on change from the average growth of the part of both businesses and houserecent years, and the upper end would holds in taking on debt, while the terms trigger a prompter policy response and conditions set by many suppliers of should the recovery be stronger than credit would remain tight. anticipated with potential inflationary At the conclusion of the Committee's implications. discussion, all but one of the members With regard to M3, all of the mem- indicated that they favored or could bers favored adoption of the tentative accept the ranges for 1991 that the range that had been set provisionally in Committee had established on a tenta- July. While that range was unchanged tive basis at its meeting in July 1990. In from that for 1990, as revised at mid- keeping with the Committee's usual proyear, it incorporated a substantial reduc- cedures under the Humphrey-Hawkins tion from the M3 ranges of previous Act, the ranges would be reviewed at years. The members anticipated that midyear, or sooner if deemed necessary, growth of M3 would remain below that in light of the behavior of the aggregates of M2 as a consequence of the continu- and ongoing economic and financial ing restructuring of thrift depository in- developments. The Committee approved stitutions this year and the likelihood of the following paragraph for inclusion in restrained growth in bank credit. How- the domestic policy directive: ever, the effect on overall credit growth The Federal Open Market Committee seemed likely to be attenuated by the seeks monetary and financial conditions that continuing rechanneling of credit extenwill foster price stability, promote a resumpsions through financial markets or lend- tion of sustainable growth in output, and ers other than depository institutions. In contribute to an improved pattern of internathe circumstances, a relatively low tional transactions. In furtherance of these range for M3 was expected to prove objectives, the Committee at this meeting established ranges for growth of M2 and M3 consistent with the Committee's goals of 2V2 to 6V2 percent and 1 to 5 percent, for the economy. respectively, measured from the fourth quar- All of the members found acceptable ter of 1990 to the fourth quarter of 1991. The the monitoring range of AV2 percent to monitoring range for growth of total domes- 8V2 percent that the Committee had tic nonfinancial debt was set at AV2 to %Vi percent for the year. With regard to M3, established on a provisional basis for the Committee anticipated that the ongoing growth of total domestic nonfinancial restructuring of thrift depository institutions debt in 1991. That range, which repre- would continue to depress its growth relative sented a further step in a series of annual to spending and total credit. The behavior of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 78th Annual Report, 1991 the monetary aggregates will continue to be the monetary aggregates. A number of evaluated in the light of progress toward members also commented on the possiprice level stability, movements in their bility that further easing so soon after velocities, and developments in the economy the recent policy moves could result in and financial markets. undesirable downward pressure on the Votes for this action: Messrs. Greenspan, dollar in foreign exchange markets. In Corrigan, Angell, Black, Keehn, Kelley, these circumstances, while views dif- LaWare, Mullins, Parry, and Ms. Seger. fered with regard to the potential need Vote against this action: Mr. Forrestal. for further easing moves, the members agreed that for now it was desirable Mr. Forrestal dissented because he to pause and assess the course of the wanted to retain the 1990 range of 3 to economy and the effects of past policy 7 percent for M2 growth in 1991. He actions. was concerned that monetary growth in As they had at other recent meetings, 1990 was the lowest since monetary many of the members expressed contargeting began. Moreover, in the cur- cern about the very sluggish expanrent recessionary environment, the 3 sion of M2 and M3 over the past to 7 percent range with its somewhat several months. This weakness in higher minimum growth rate would pro- monetary growth in turn appeared to vide a better basis for conveying and be associated with the current conimplementing the Committee's goals of straints on the availability of credit from fostering a prompt upturn in economic depository institutions and the shortactivity and subsequent expansion at a falls in aggregate spending and income. sustained and acceptable pace. In addi- According to a staff analysis prepared tion, the midpoint of this range appeared for this meeting, a steady policy course to be consistent with continued progress was likely to be consistent with some toward price stability. acceleration in monetary growth over In the Committee's discussion of pol- the first quarter because earlier declines icy for the intermeeting period ahead, all in market interest rates had reduced the of the members endorsed a proposal to opportunity costs of holding deposit maintain unchanged conditions in re- accounts, and the staff assumed some serve markets, at least initially, follow- strengthening of aggregate spending ing this meeting. In reaching their deci- over the balance of the quarter. The sion, members took into account the incomplete data available thus far considerable easing of monetary policy for the latter part of January tended to that had been implemented in a series of support this staff analysis. The members steps over the course of recent months, recognized that the short-run behavior including the reduction in the discount of these monetary measures needed to rate and related decrease in money mar- be interpreted with caution and that ket interest rates within the last few easing reserve conditions too much days. The System's policy actions, in would incur the risk of stimulating a the context of a weakening economy sharp rebound in monetary growth and and moderating cost pressures, had in- in inflationary pressures once the ecoduced a considerable decline in interest nomic recovery had gathered some rates, but sufficient time had not yet momentum. Nonetheless, several memelapsed for the effects of the lower rates bers emphasized the desirability of to be felt in the economy or indeed to giving relatively high priority to achievany measurable extent in the growth of ing satisfactory rates of growth in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions \ \ 1 reserves and money, especially under reflect what would prove to be a shortprevailing economic and financial lived development. conditions. At the conclusion of the Committee's In the course of the Committee's con- discussion, all of the members indicated sideration of possible intermeeting that they favored a directive that called adjustments to the degree of reserve for maintaining the existing degree of pressure, most of the members ex- pressure on reserve positions. They also pressed a preference for continuing to noted their preference or acceptance of tilt the directive toward possible easing a directive that gave special weight during the weeks ahead. In this view, to potential developments that might the downside risks to the economy and require some easing during the interthe potential for inadequate monetary meeting period. Accordingly, the Comgrowth made it likely that any intermeet- mittee decided that slightly greater ing adjustment would be in the direction reserve restraint might be acceptable of easier reserve conditions. Several during the intermeeting period or somemembers also noted that the Committee what lesser reserve restraint would be needed to place a high premium on acceptable depending on progress toavoiding any tendency for the weakness ward price stability, the strength of the in the economy to cumulate because business expansion, the behavior of the they were more concerned about the monetary aggregates, and developments severe consequences of a potentially in foreign exchange and domestic finandeep and prolonged recession than those cial markets. The reserve conditions of a sharp rebound in the economy, contemplated at this meeting were especially given current financial strains expected to be consistent with some and fragilities in the economy. Accord- pickup in the growth of M2 and M3 to ingly, the Committee should be willing annual rates of around VA percent to to ease in response to evidence of addi- 4 percent over the three-month period tional weakness in the economy and from December to March. abatement of inflationary pressures; the At the conclusion of the meeting, the need for further easing might be sigfollowing domestic policy directive was naled in part by a continuing shortfall in issued to the Federal Reserve Bank of monetary growth. In following such a New York: policy, however, a number of members stressed that the Committee would The information reviewed at this meeting need to be prepared to tighten policy suggests further weakening in economic activity. Total nonfarm payroll employment fell promptly down the road in the event that sharply further in December and January, inflationary pressures should threaten reflecting widespread job losses that were to re-emerge. A few members, while especially pronounced in manufacturing and acknowledging the potential need for construction; the civilian unemployment rate some easing, preferred not to bias the rose to 6.2 percent in January. Industrial output declined markedly in the fourth quardirective in either direction. In this ter, in part because of sizable cutbacks in the view, there were considerable risks production of motor vehicles, and partial of overreacting to indications of a data suggest a further drop in January. Conweakening economy, particularly since sumer spending has remained soft. Advance conditions for a recovery in economic indicators of business capital spending point activity already appeared to be in place to considerable weakness in investment in coming months. Residential construction and weak data for the period at the start has declined substantially further in recent of the Persian Gulf war might well months. The nominal U.S. merchandise trade Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

112 78th Annual Report, 1991 deficit narrowed in November, as the value reserve positions. Depending upon progress of imports declined more than that of ex- toward price stability, trends in economic ports; the average deficit for October and activity, the behavior of the monetary aggre- November exceeded that for the third quar- gates, and developments in foreign exchange ter. Increases in consumer prices moderated and domestic financial markets, slightly and producer prices changed little in Novem- greater reserve restraint might or somewhat ber and December, largely as a result of a lesser reserve restraint would be acceptable softening in energy prices. The latest data in the intermeeting period. The contemplated suggest some further deceleration in wages reserve conditions are expected to be consisand overall labor costs. tent with growth of both M2 and M3 over Short-term interest rates have fallen con- the period from December through March at siderably since the Committee meeting on annual rates of about 3Vi to 4 percent. December 18, while rates in longer-term markets are unchanged to down slightly. The Votes for the paragraph on short-run pol- Board of Governors approved a reduction in icy implementation: Messrs. Greenspan, the discount rate from 7 to 6V2 percent on Corrigan, Angell, Black, Forrestal, Keehn, December 18 and a further reduction to Kelley, LaWare, Mullins, Parry, and Ms. 6 percent on February 1. In foreign exchange Seger. Votes against this action: None. markets, the trade-weighted value of the dollar in terms of the other G-10 currencies has 2. Agreement to "Warehouse" declined somewhat on balance over the inter- Foreign Currencies meeting period. Growth of M2 remained sluggish in De- At its meeting on March 27, 1990, the cember and January; expansion of M3 Committee approved an increase, if repicked up in January from the very slow quested by the Treasury, from $10 bilpace of recent months. For the year 1990, M2 and M3 expanded at rates in the lower lion to $15 billion in the amount of portions of the Committee's ranges for the eligible foreign currencies that the Sysyear. Expansion of total domestic nonfinan- tem would be prepared to "warehouse" cial debt appears to have been near the mid- for the Treasury and the Exchange Stapoint of its monitoring range for the year. bilization Fund (ESF). The purpose of The Federal Open Market Committee the warehousing facility is to suppleseeks monetary and financial conditions that will foster price stability, promote a resump- ment the resources of the Treasury and tion of sustainable growth in output, and the ESF for financing their purchases of contribute to an improved pattern of interna- foreign currencies. System holdings of tional transactions. In furtherance of these foreign currencies under the facility had objectives, the Committee at this meeting risen to $9.0 billion, based on acquisiestablished ranges for growth of M2 and M3 of 2Vi to 6V2 percent and 1 to 5 percent, tion costs, in March 1990, but subserespectively, measured from the fourth quar- quent ESF repayments had reduced the ter of 1990 to the fourth quarter of 1991. The total to $4.5 billion by November 1, monitoring range for growth of total domes- 1990. tic nonfinancial debt was set at AV2 to At this meeting, the Committee de- 8V2 percent for the year. With regard to M3, cided to reduce the limit to $10.0 bilthe Committee anticipated that the ongoing restructuring of thrift depository institutions lion. Such a limit would provide an adewould continue to depress its growth relative quate cushion of unused capacity and to spending and total credit. The behavior of thus maintain operational flexibility to the monetary aggregates will continue to be respond on short notice to unanticipated evaluated in the light of progress toward developments. price level stability, movements in their velocities, and developments in the economy and financial markets. Votes for this action: Messrs. Greenspan, In the implementation of policy for the Corrigan, Angell, Black, Forrestal, Keehn, immediate future, the Committee seeks to Kelley, LaWare, Mullins, Parry, and Ms. maintain the existing degree of pressure on Seger. Votes against this action: None. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 1 13 Meeting Held on were substantially below their 1989 March 26, 1991 highs. Shipments of nondefense capital Domestic Policy Directive goods increased in February, boosted by a sizable advance in shipments of air- The information reviewed at this meet- craft and parts; categories other than ing suggested that economic activity had aircraft were down. New orders for busiweakened further in the opening months ness equipment suggested that spending of the year. Production cutbacks were on such goods would change little in evident in a wide range of industries, coming months. Nonresidential conand private payrolls had fallen mark- struction put-in-place edged up in Januedly, especially in the goods-producing ary from a downward-revised level for sector. On the positive side, consumer December but remained below its weak confidence had rebounded sharply since average for the fourth quarter. Available the cease-fire in the Persian Gulf, retail data on contracts, permits, and office sales and housing starts had strength- vacancy rates pointed to considerable ened recently, and exports had contin- softness in nonresidential construction ued to expand. Broad measures of prices activity in coming months. Manufacturhad slowed or contracted in January and ing and trade inventories rose consider- February, but excluding energy and food ably in January after little net change in prices, increases in those measures were the fourth quarter. With shipments and higher than in previous months. Wage sales down sharply around the turn of increases had moderated over the past the year, the ratio of inventories to sales several months. in manufacturing and trade continued to rise in January. Total nonfarm payroll employment fell sharply further in February. The After declining considerably in previdecline was widespread across indus- ous months, retail sales turned up in tries but was particularly pronounced in February. Sales at general merchandise, the durable goods segment of manufac- apparel, and furniture outlets jumped in turing. Construction employment edged February after posting sizable declines up in February after a steep drop in over the preceding few months, and pur- January, when the weather was unusu- chases of automobiles and light trucks ally adverse. The only major industry to picked up from the very low sales pace post a notable job increase was health in January. Consumer sentiment apservices. The civilian unemployment peared to have rebounded sharply in rate rose to 6.5 percent in February. early March from the low levels reached Industrial output declined markedly after Iraq's invasion of Kuwait. In Febagain in February, with cutbacks evident ruary, housing starts more than retraced in a wide range of industries. Production a sharp January decline but were still at of motor vehicles and parts slackened a low level; in particular, multifamily after being about unchanged on balance construction activity remained very over the previous two months; output of weak. Available data and anecdotal other final products continued to fall in reports indicated that lower home prices February, with the exception of com- and mortgage rates were stimulating puter equipment, which advanced for a some consumer interest in purchasing second month. Capacity utilization in homes. most major industries fell further in Feb- The nominal U.S. merchandise trade ruary; in manufacturing, operating rates deficit increased slightly from Decem- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

114 78th Annual Report, 1991 ber to January but was considerably be- easing during the intermeeting period. low its average rate in the fourth quarter. To reflect the tilt toward easing, the The value of exports picked up in Janu- directive indicated that somewhat lesser ary from the strong fourth-quarter level; reserve restraint would be acceptable in the value of imports declined consid- the intermeeting period, or slightly erably, mostly reflecting a drop in the greater reserve restraint might be acceptprice of imported oil. Among the major able, depending upon progress toward foreign industrial countries, economic price stability, trends in economic activactivity in the fourth quarter of 1990 ity, the behavior of the monetary aggreexpanded more slowly in Germany and gates, and developments in foreign ex- Japan, though there had been some ten- change and domestic financial markets. tative indications of a pickup in growth The contemplated reserve conditions early this year in both countries. By were expected to be consistent with contrast, some weakening in activity growth of both M2 and M3 at annual apparently had occurred in several other rates of around 3J/2 to 4 percent over the major industrial countries. period from December through March. Among major components of broad After the Committee meeting, open measures of inflation for January and market operations initially were directed February, food prices rose more slowly at maintaining the existing degree of or declined on balance and energy prices pressure on reserve positions; subsefell substantially further; however, quently, in early March, in response to prices of items other than food and information suggesting that economic energy rose more rapidly than in preced- activity had continued to decline ing months. At the producer level, this through February, pressures on reserve pickup reflected in part large increases positions were eased slightly. Adjustin prices of motor vehicles. At the con- ment plus seasonal borrowing tended to sumer level, increases in federal excise run at appreciably higher levels than taxes on some items and an unusual expected over the intermeeting period; bunching of price increases at the begin- this seemed to reflect in part a greater ning of the year had boosted prices of willingness of banks to seek discountnonfood, non-energy goods and ser- window credit when conditions tightvices; as a result, the percent change ened in the federal funds market. In the in these prices over the twelve months early part of the intermeeting period, ended in February was considerably federal funds averaged a bit above above that for the previous twelve 6lA percent, but by the time of the months. Average hourly earnings of pro- March meeting the rate had dropped to duction or supervisory workers were lit- about 6 percent. The federal funds rate tle changed over January and February; was less volatile around its average for the twelve months ended in Febru- level; this evidently reflected not only ary, these earnings had increased at a the change in attitudes toward use of the slower pace than in the comparable window but also the greater experience year-earlier period. of banks in operating under the lower At its meeting on February 5-6, the reserve requirement ratios put in place Committee adopted a directive that late last year and the rebound of recalled for maintaining the existing de- quired reserve balances from their gree of pressure on reserve positions but seasonal low in February. for giving special weight to potential Other short-term interest rates had developments that might require some declined slightly since the Committee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 115 meeting on February 5-6; Treasury bill rowed accordingly. The strength in M3 rates dropped by less than rates on pri- reflected not only the faster growth of vate instruments. In longer-term mar- M2 but also in part the efforts of some kets, rates on Treasury bonds had risen depository institutions, in the wake of appreciably while rates on high-grade the elimination of the reserve requirebonds had changed little and those on ment on nontransaction accounts, to lower-rated debt had fallen substantially. replace federal funds and Eurodollar The narrowing in spreads of private over borrowings with funds raised through Treasury rates appeared to stem pri- domestic issuance of large certificates of marily from investor assessments of im- deposit. proved prospects for a recovery in U.S. The staff projection prepared for this economic activity and in business earn- meeting pointed to a turnaround in the ings and thus for reduced strains on economy in coming months. While furborrowers. Stock prices moved up con- ther declines in activity were likely in siderably on balance over the intermeet- the very near term, the rebound in busiing period. ness and consumer confidence follow- The trade-weighted value of the dol- ing the declaration of a cease-fire in the lar in terms of the other G-10 currencies Persian Gulf, the positive effects of increased very sharply over the inter- lower oil prices on household purchasmeeting period. In addition to optimism ing power and of earlier declines in inover the prospects for the U.S. economy terest rates on housing demand, and the in the aftermath of the Persian Gulf war, additional gains expected in exports there was a growing perception by mar- were likely to foster an upturn in the ket participants that economic activity economy before very long. Subsein the major trade partners of the United quently, increases in business orders and States was growing more slowly or sales could lead to a further pickup in declining and that in consequence inter- production, given generally lean invenest rate spreads were likely to move in tories and, with some lag, to a rise in favor of dollar assets. Political difficul- business spending for investment goods. ties in the Soviet Union also appeared to On the other hand, the reduced availabilaffect the German mark adversely. ity of credit and the effects of the over- At least partly in response to earlier hang of commercial structures on comdeclines in interest rates, growth of M2 mercial construction activity, along with and M3 strengthened substantially in a moderately restrictive fiscal policy, February, and partial data suggested ap- were expected to continue to exert some preciable further growth in March. Such restraint on domestic demand. Against growth, which was faster than the Com- the background of lower oil prices and mittee had anticipated, brought M2 up some added slack in resource utilization, to the middle portion of its annual range the staff projected a slowing in the pace and put M3 near the upper end of its of increases in prices and labor costs in range. Most of the acceleration in M2 coming quarters. reflected rapid expansion in its liquid In the Committee's discussion of the retail deposit instruments. Offering rates economic outlook, members saw imon these accounts had responded in typ- proving prospects for a recovery in busiically sluggish fashion to declines in ness activity some time in the months market interest rates in recent months, ahead, especially in light of the sharp and the opportunity costs associated rebound in consumer and business sentiwith holding such deposits had nar- ment since the cease-fire in the Persian Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

116 78th Annual Report, 1991 Gulf war. A variety of financial indica- their contacts indicated a sharp rebound tors, including the performance of the in business sentiment since the last stock and bond markets and the foreign Committee meeting, mirroring the exchange markets, along with faster marked increase of consumer confimonetary growth suggested both that an dence as the Persian Gulf war drew to a upturn in economic activity was widely successful close. The effects of this expected and that liquidity had been change in attitudes by both producers made available to support it. Thus far, and consumers were not yet evident in however, the surge in consumer confi- many statistical measures of economic dence was not accompanied by appre- activity, except perhaps in the housciable evidence of stronger economic ing sector and retail sales. Across the activity, though the February data in two nation, regional economic activity rekey areas, retail sales and housing starts, mained uneven; it was still declining in were positive after a period of substan- some areas, albeit with increasing signs tial weakness. In the view of many that it might be stabilizing, and appeared members, the anticipated upswing in to have bottomed out or strengthened a economic activity might be relatively little in other parts of the country. Manusluggish, at least in the early stages of facturing activity in particular remained the recovery. Consumers and businesses depressed in many areas, notably those probably would remain relatively cau- that were dominated by the production tious in the context of continuing con- of motor vehicles and related parts. cerns about employment opportunities Members commented that many busias well as heavy debt burdens and tight nesses, especially in the construction constraints on credit availability; in industry, were continuing to report diffiaddition, confidence was vulnerable to culties in obtaining financing, but both further difficulties in the financial sector. loan demand and the availability of Indeed, there was some risk that the financing showed signs of improvement recession could deepen considerably in some areas. further, but on balance the conditions In their review of developments in seemed to be in place for a turnaround key sectors of the economy, members in coming months. With regard to the emphasized that the timing and strength outlook for inflation, members ex- of the recovery would depend imporpressed disappointment about the lack tantly on how quickly and to what exof progress in reducing its underlying tent the rebound in consumer confidence rate; however, they remained optimistic was translated into increased consumer that reduced pressures in markets for spending. The performance of the conoutput as well as for key inputs, indica- sumer durables sector, notably autos, tions of some moderation in wage was a key element in the outlook; while increases, a firmer dollar, and weaker expenditures on durable goods did not commodity prices all pointed to some appear to have strengthened thus far, subsidence in inflation over coming developments that might help to stimuquarters. The slower average rate of late such spending included greater capmoney growth over the course of recent ital gains realized from sales of existing years suggested a monetary policy that homes and more demand for household had for some time been consistent with durables stemming from a possible a gradual diminution in inflation. pickup in the construction of new In their reports on developments homes. Members also reported that around the country, members noted that automobile dealers had become more Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions \ 1 7 optimistic in many areas. However, In the view of many members, the many members believed that consumer external sector of the economy was expenditures were likely to be restrained likely to make only a small contribution by a combination of negative factors to the domestic expansion in coming that included concerns about job secu- quarters. While continuing growth in rity and debt burdens. Moreover, the exports was helping to offset some of fiscal problems of state and local gov- the weakness in manufacturing, some ernments were tending to erode con- members referred to the possibility that sumer confidence in some parts of the further expansion in world demand for country, and associated fiscal restraint U.S. exports might be curtailed by measures would limit the growth in dis- slower growth abroad related to political posable incomes in those areas. uncertainties and economic develop- With regard to the outlook for busi- ments in several nations; a partial offset ness investment spending, stronger con- was the potential for large reconstrucsumer expenditures in coming months tion expenditures by Kuwait. The recent should induce more business spending appreciation of the dollar also would for inventories and, with some lag, for tend to inhibit net exports over time. new equipment, especially in light of the Turning to the outlook for inflation, a recent improvement in business confi- number of members emphasized that redence. On the negative side, if a recov- cent increases in producer and consumer ery in consumer spending failed to prices, excluding their food and energy materialize, the upturn in business confi- components, were a disturbing developdence might well reverse. Such a devel- ment even though transitory factors opment could foster a sharp drop in helped to account for much of those business capital appropriations that in increases. Concerns about inflation turn would deepen and extend the reces- seemed to be echoed in financial marsion. With regard to construction activ- kets, judging from the recent rise in ity, members commented that problems long-term interest rates. At the same of overcapacity were likely to limit new time, however, increases in labor comnonresidential construction for an ex- pensation had continued to trend down, tended period in many areas. On the with relatively high unemployment levother hand, signs of renewed buyer els contributing to much reduced presinterest in housing were widespread, and sures on wages in many local areas. In indeed developments in this sector of circumstances characterized by strong the economy were seen by some mem- competitive conditions in most indusbers as the most encouraging indication tries and thus widespread pressures on of a prospective economic recovery. prices and profit margins, many busi- Some concern was expressed regarding ness firms continued to seek ways to the possibility that persisting constraints limit their labor costs. In this connecon the availability of financing to home- tion, members observed that efforts to builders might continue to inhibit home- hold down employment levels were building activity, but given the expected likely to result in some further increases strengthening in the overall economy in unemployment even after a recovery and the already improving capital posi- got under way. The appreciation of the tions of many banking institutions, a dollar in recent months would tend with degree of optimism seemed warranted some lag to moderate inflation pressures that such financing might become more over coming quarters. On balance, the readily obtainable in the months ahead. members remained optimistic about the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 78th Annual Report, 1991 prospects for appreciable reductions in threatened progress toward price the core rate of inflation, given their stability. expectations of some continuing slack Many of the members commented in resource use and of monetary expan- that in current economic and financial sion at a pace within the Committee's circumstances the strengthening in M2 ranges for the year. growth in February and March was a In the Committee's discussion of welcome development following an expolicy for the intermeeting period ahead, tended period of limited expansion. The all of the members supported a proposal faster growth tended to support expectato maintain an unchanged degree of tions of a near-term recovery in ecopressure on reserve positions. The Sys- nomic activity. It also might be intem's policy actions over the course of dicative of some rebound of public recent months, including two reductions confidence in depository institutions. in the discount rate, represented substan- The growth of M2 for the year to date tial easing on a cumulative basis and was near the middle of the Committee's most probably had positioned monetary annual range, but if the most recent rate policy to contribute to a satisfactory re- of M2 growth was to continue for some covery in business activity. Changing time, this might signal the need to economic and financial conditions tighten reserve conditions to forestall a could, of course, lead to a reassessment, potential intensification of inflationary but for now a steady policy course pressures. However, according to a staff seemed indicated as the stimulative analysis prepared for this meeting, moneffects of earlier policy actions, the drop etary growth was likely to moderate in oil prices, and the rebound in confi- somewhat over the second quarter as the dence worked their way through the effects of earlier declines in market economy. Some members observed that interest rates on opportunity costs and the most likely direction of the next desired money holdings tended to policy move was not clear at this point dissipate. On the assumption of an unand that caution was needed before any changed degree of pressure on reserve action was taken. Prevailing uncertain- positions, the staff projected the cumulaties suggesting that further easing could tive expansion of M2 to be only slightly not be ruled out included the possibility above the midpoint of the Committee's that consumer spending would not range at midyear. strengthen materially and that business Members expressed a range of views capital spending would continue to regarding possible intermeeting adjustweaken. However, if the economy was ments to the degree of reserve pressures, indeed near its recession trough, addi- but a majority preferred—and all could tional easing would not be necessary accept—a directive that did not contain and such a move might add to infla- a bias toward tightening or easing. A tionary pressures later. On the other symmetric directive represented a hand, while a firming of policy clearly change from previous directives that had would be premature at this point, a num- been tilted toward easing since midber of members commented that the 1990, and it was consistent with an as- Committee should be alert to the poten- sessment that the risks to the economy tial need to tighten reserve conditions had shifted in recent weeks and were promptly if emerging economic and now more evenly balanced. Further definancial conditions, including the be- clines in economic activity would not be havior of the monetary aggregates, surprising—nor should they necessarily Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 119 be seen as calling for additional ease, the change in the discount rate had been given the lags in policy effects. Under intended to conform the latter to movecurrent circumstances, policy adjust- ments that had already occurred in the ments should be made only in the event federal funds rate. In general, however, of particularly conclusive evidence, both rates had tended to move together which might include a significant devia- over time, and appropriately so, as adtion in monetary growth from current justments to both policy instruments are expectations, that the recession might be made in the context of the same ecodeeper or the rebound less robust than nomic and financial developments. anticipated. Other members expressed a Members agreed that in general the preference for retaining a directive that existing practice should be continued, was biased toward possible easing. but that consultation among members Some of these members believed that, of the Committee would be particularly despite the improved prospects for a re- appropriate in circumstances in which covery, there were still marked risks of changes in the discount rate perhaps a prolonged recession and of a weak should not be permitted to show through upturn, and in these circumstances entirely to market rates, or in which the Committee should react relatively their showing through would result in promptly to indications that the econ- quite sizable changes in money market omy was not moving toward a turn- rates in the period between meetings. around. One member expressed a slight At the conclusion of the Committee's preference for biasing the directive discussion, all of the members indicated toward restraint. In this view, the possi- that they favored a directive that called bility of a continuing or even a deepen- for maintaining the existing degree of ing recession could not be ruled out, but pressure on reserve positions. The memthe greater risks were in the direction of bers also noted that they preferred or too much ease and of persisting or could accept a directive that did not increasing inflation; consequently, the include a presumption about the likely directive should envision any easing as direction of any intermeeting adjusta remote prospect. ments in policy. Accordingly, the Com- At this meeting, the interaction be- mittee decided that somewhat greater tween changes in the discount rate, as reserve restraint or somewhat lesser reapproved by the Board of Governors, serve restraint might be acceptable durand open market operations, as imple- ing the period ahead depending on mented under the current operating pro- progress toward price stability, trends in cedures and directives of the Commit- economic activity, the behavior of the tee, also was discussed. The principal monetary aggregates, and developments issue related to the extent to which in foreign exchange and domestic financhanges in the discount rate should show cial markets. The reserve conditions through to the federal funds rate that contemplated at this meeting were exwould be expected in the implementa- pected to be consistent with some reduction of open market operations. In recent tion in the growth of M2 and M3 from years, changes in the discount rate usu- their recent pace to annual rates of ally had been allowed to pass through around 5V2 and 3V2 percent respectively automatically to the federal funds rate; over the three-month period from March there had been some exceptions involv- through June. ing instances where only partial pass- At the conclusion of the meeting, the throughs had been permitted and where following domestic policy directive was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 78th Annual Report, 1991 issued to the Federal Reserve Bank of of 1991. The monitoring range for growth of New York: total domestic nonfinancial debt was set at AV2 to 8V2 percent for the year. With regard The information reviewed at this meeting to M3, the Committee anticipated that the suggests that economic activity weakened ongoing restructuring of thrift depository further in the opening months of 1991. In institutions would continue to depress its February, total nonfarm payroll employment growth relative to spending and total credit. fell sharply further, especially in manufactur- The behavior of the monetary aggregates ing, and the civilian unemployment rate rose will continue to be evaluated in the light of to 6.5 percent. Industrial output also declined progress toward price level stability, movemarkedly again in February, with cutbacks ments in their velocities, and developments evident in a wide range of industries. Ad- in the economy and financial markets. vance indicators point to further weakness in In the implementation of policy for the business fixed investment in coming months, immediate future, the Committee seeks to notably in nonresidential construction. On maintain the existing degree of pressure on the other hand, after declining considerably reserve positions. Depending upon progress in previous months, retail sales turned up in toward price stability, trends in economic February; consumer sentiment appears to activity, the behavior of the monetary aggrehave rebounded sharply in recent weeks. gates, and developments in foreign exchange Housing starts jumped in February, retracing and domestic financial markets, somewhat a sizable decline in January but remaining at greater reserve restraint or somewhat lesser a low level. The nominal U.S. merchandise reserve restraint might be acceptable in trade deficit increased somewhat in January the intermeeting period. The contemplated but was considerably below its average rate reserve conditions are expected to be conin the fourth quarter. Energy prices fell subsistent with growth of M2 and M3 over stantially further in January and February, the period from March through June at but prices of other consumer goods and serannual rates of about 5 V2 and 3V2 percent, vices rose more rapidly than in preceding respectively. months. Wage increases have moderated in recent months. Votes for this action: Messrs. Greenspan, Short-term interest rates have declined Corrigan, Angell, Black, Forrestal, Keehn, slightly since the Committee meeting on Kelley, LaWare, Mullins, and Parry. Votes February 5-6. In longer-term markets, rates against this action: None. on Treasury bonds have risen appreciably, owing at least in part to heightened expectations of a recovery in U.S. economic activity. Risk premiums on corporate debt instru- Meeting Held on ments have declined, and stock prices have May 14,1991 moved up considerably on balance. The trade-weighted value of the dollar in terms Domestic Policy Directive of the other G-10 currencies increased very sharply over the intermeeting period. Growth of M2 and M3 strengthened sub- The economic information reviewed at stantially in February, reflecting rapid expan- this meeting was mixed, but on balance sion in liquid retail deposits; partial data it suggested that business activity might suggest appreciable further growth in March. be in the process of stabilizing after The Federal Open Market Committee declining in the fourth and first quarters. seeks monetary and financial conditions that Retail sales were little changed in April, will foster price stability, promote a resumption of sustainable growth in output, and and housing markets apparently contribute to an improved pattern of interna- strengthened in many areas; however, tional transactions. In furtherance of these business fixed investment remained objectives, the Committee at its meeting in weak, and some liquidation of invento- February established ranges for growth of M2 and M3 of 2Vi to 6V2 percent and 1 to ries seemed to be continuing. Produc- 5 percent, respectively, measured from the tion held steady in April. Nonfarm payfourth quarter of 1990 to the fourth quarter roll employment continued to decline Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 1 21 but by much less than in previous tion in first-quarter expenditures for months. Broad measures of prices and nonresidential structures followed an wages pointed to moderating inflation even larger decline in the fourth quarter. pressures, although a number of special Forward-looking indicators of nonresifactors tended to obscure underlying dential construction suggested continuinflation trends. ing weakness. Nonfarm business inven- Total nonfarm payroll employment tories fell substantially further in the fell further in April, but the reduction first quarter, largely as a result of conwas substantially less than the declines tinuing liquidation of stocks of motor in the latter part of 1990 and the early vehicles. In March, housing starts lost months of 1991. The job losses included part of their sharp February gain. Howmuch smaller decreases in manufactur- ever, more recent anecdotal reports and ing and construction; employment in surveys of homebuilders suggested that wholesale and retail trade also contin- reduced mortgage rates were continuing ued to slide, and the loss more than to stimulate consumer interest in puroffset a further gain at service estab- chasing homes. lishments. The civilian unemployment Retail sales, which had risen substanrate declined somewhat in April to tially in February after sizable declines 6.6 percent. in previous months, were now indicated After dropping sharply from October to have increased somewhat further in through March, industrial production March and to have changed little in was about unchanged in April. An up- April. The improvement in retail sales turn in the production of motor vehicles was led by the durable goods category. provided an important boost to indus- Unit sales of motor vehicles rose in trial activity, and output of other con- March but subsequently softened again sumer durable goods also edged up. in April. After rebounding earlier, con- These gains offset further declines in sumer sentiment was reported to have the production of consumer nondurable declined slightly in April. goods and business equipment. Indus- Producer and consumer prices trial materials, while displaying a mixed changed little in March and April, partly pattern, continued to decline as a group. because of some additional reduction in Capacity utilization rates generally fell energy prices. Excluding their food and further in April, and operating rates for energy components, both producer and most industry groups were at their low- consumer prices were up considerably est point in the current recession. less in the latest two months than in Real business fixed investment fell previous months. Apparently reflecting sharply in the first quarter, with outlays an increase in the minimum wage, averfor both equipment and structures de- age hourly earnings rose at a faster rate creasing substantially. The plunge in in April than in earlier months of the expenditures for equipment included year. In the first quarter, hourly compenlarge declines in spending for comput- sation as measured by the employment ers, motor vehicles, and many types of cost index was boosted by special facindustrial equipment; in contrast, out- tors that included an increase in the lays for aircraft were markedly higher. wage bases for social security and medi- Recent data on orders received by do- care taxes. mestic manufacturers pointed to addi- The nominal U.S. merchandise trade tional cutbacks in spending for most deficit narrowed in February, and for types of equipment. The sizable reduc- January-February combined the deficit Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 78th Annual Report, 1991 was considerably below its average rate creases were made to assumed levels of in the fourth quarter. The improvement borrowing to reflect a normal upswing reflected a significant decline in the in seasonal credit. Federal funds traded average price of oil imports, a lower at an average rate just below 6 percent volume of non-oil imports, and further until late April; the rate was under expansion in the quantity of exports. In downward pressure at times from marthe first quarter, economic activity ap- ket expectations of some further easing peared to have continued to grow at a in monetary policy and from unanticisluggish pace in the major foreign indus- pated reserve surpluses. After the antrial nations as a group. nouncement of the reduction in the At its meeting on March 26, 1991, the discount rate on April 30, federal funds Committee adopted a directive that traded in a range around 53/4 percent. called for maintaining the existing Most short-term interest rates dedegree of pressure on reserve positions clined somewhat more than the federal and that contained no presumption funds rate over the intermeeting period, regarding the likely direction of possible apparently reflecting reactions to indicaintermeeting adjustments. Accordingly, tions of continued weakness in the econthe directive indicated that somewhat omy as well as the easing in reserve more or somewhat less pressure on conditions. Banks reduced their prime reserve positions might be appropriate rate from 9 to 8x/2 percent in early May during the intermeeting period depend- after the easing of monetary policy. In ing on progress toward price stability, long-term debt markets, yields on Treatrends in economic activity, the behavior sury bonds were little changed on balof the monetary aggregates, and devel- ance over the period as market particiopments in foreign exchange and do- pants appeared to focus increasingly on mestic financial markets. The contem- the prospects for very large Treasury plated reserve conditions were expected financing needs. In private-sector bond to be consistent with some reduction in markets, rates edged lower and risk the growth of M2 and M3 from acceler- premia fell further after declining ated rates in previous months to annual sharply in February and March. Major rates of about 5Vi and 3V2 percent stock price indexes retreated from respectively over the three-month pe- record levels reached during April but riod from March through June. still rose on balance over the period. For much of the period after the Com- Prices of bank debt and equities outmittee meeting, open market operations paced the broader indexes, in part bewere directed toward maintaining the cause bank earnings for the first quarter existing degree of pressure on reserve were not as poor as many investors had positions. On April 30, in response to feared. indications of continuing weakness in In foreign exchange markets, the dolthe economy and in the context of abat- lar tended to weaken in reaction to the ing inflation pressures, the discount rate easing of U.S. monetary policy in late was reduced from 6 to 5Vi percent and April and the release of data that failed part of this decline was allowed to show to confirm market expectations of a through to the federal funds rate. Adjust- quick recovery in U.S. economic activment plus seasonal borrowing averaged ity after the end of the Persian Gulf war. a bit above $150 million over the inter- However, some decline in short-term inmeeting period, close to expected levels. terest rates abroad and reactions to polit- During this period, two technical in- ical developments in Germany and the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 123 Soviet Union limited the downward inhibit the recovery were the effect of pressure on the dollar. On balance, the unoccupied nonresidential structures on dollar was little changed over the period construction activity, the absence of in terms of the other G-10 currencies, further significant impetus from net and at the time of this meeting it was exports, and the prospect of some conat a level well above its lows of mid- tinued constraint on the availability of February. credit. Federal fiscal policy was ex- After accelerating to a relatively rapid pected to remain moderately restrictive, pace in February and March, growth of and efforts by states and localities to M2 slowed appreciably in April. The cope with budgetary imbalances also slowing was somewhat greater than had promised to exert some restraint on dobeen anticipated and appeared to be re- mestic demand. Against the background lated in part to a relatively small buildup of some persisting slack in labor and in household deposit balances associ- product markets, the staff anticipated ated with a falloff in income tax pay- that the underlying rate of inflation ments. The expansion of M3, which would trend down in coming quarters. already had moderated in March, stalled In the Committee's discussion of the in April. Apart from the effect of economic situation and outlook, memreduced M2 growth, M3 was influenced bers commented that current business by a runoff of large time deposits associ- indicators continued to provide mixed ated with contracting credit at deposi- signals of the prospects for the economy tory institutions. For the year through but that a variety of developments ap- April, M2 expanded at a rate close to the peared to have laid the groundwork for midpoint of the Committee's annual a recovery. Indeed, in the view of a range; M3 grew at a pace in the upper number of members, the economy might half of the Committee's range, as the well be close to its recession trough. elimination of reserve requirements on Consumer spending, while disappointnontransaction accounts induced some ing to many business firms, appeared to foreign banks to shift funding into the have been better maintained in recent U.S. CD market. months than earlier reports had sug- The staff projection prepared for this gested, and demand for housing clearly meeting suggested that a recovery in had picked up across the nation. Overall economic activity was imminent and spending had exceeded production by a would be fully under way by the sum- considerable margin since the fall of mer months; the expansion was pro- 1990, and at some point the liquidation jected to continue through 1992. In the of inventories would end and a pickup context of moderate growth in consumer in production would be needed to satisfy spending, the recovery would be stimu- ongoing demand. On the financial side, lated by an upturn in homebuilding the stock market remained strong; and a swing in coming months from households and business firms were decumulation to accumulation of inven- making progress in rebuilding their tories. Capital expenditures were ex- balance sheets; and the overall condition pected to strengthen over time as sales of the banking system appeared to be trends improved. On balance, however, improving despite the continuing diffithe projection pointed to a recovery that culties of a number of individual instituwas less robust than most of those expe- tions. Negative factors included indicarienced in previous postwar cycles. tions of relatively depressed business Among the factors that would tend to sentiment; business capital spending Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 78th Annual Report, 1991 remained weak and members were con- including many major cities, and the cerned that additional retrenchment in imposition or the prospect of higher business expenditures could develop, taxes along with efforts to cut services possibly induced by further disappoint- were having an unsettling influence on ment over the level of consumer spend- business and consumer confidence in ing, that would deepen and prolong the many areas. More generally, fiscal derecession. Consumer confidence had velopments, including trends in federal receded after its surge at the end of the spending, were expected to have a re- Persian Gulf war. Consumer and busi- tarding effect on the nation's economy ness attitudes were seen as a critical over the balance of the year and in 1992. factor bearing on the prospective per- Many of the members observed that formance of the economy. the consumer sector might well remain Despite the uncertainties, the mem- relatively sluggish in the months ahead bers generally viewed a business recov- as consumer expenditures continued to ery in the months ahead as a reasonable be restrained by lagging growth in disexpectation. At the same time, while posable incomes and by concerns about acknowledging the unpredictability of employment prospects, debt burdens, the economy's momentum once the re- and the health of a number of financial covery got under way, many questioned institutions. With regard to the prospects the potential strength of the anticipated for business capital spending, members expansion. Their assessment of current continued to anticipate that significant conditions did not point to major sources strengthening would lag an improveof stimulus to the economy, aside per- ment in consumer spending. In this conhaps from residential housing. Some nection, some commented that unless members also observed that the rebuild- tangible evidence of stronger consumer ing of balance sheets, to the extent that spending began to emerge fairly soon, it continued, might temper the initial already gloomy business attitudes would strength of the recovery though it would be shaken further and could lead to an have obviously favorable implications additional cutback in business capital for the sustainability of the recovery expenditures. For now, the weakness in over time. With regard to inflation investment spending appeared to reflect trends, members commented that on the in large measure a stretching out of mawhole recent price and wage develop- jor capital projects rather than widements were encouraging and provided a spread cancellations. The large issuance firmer basis than earlier for projections of new equity and long-term debt by of appreciable progress in reducing the business firms was being used at this core rate of inflation over the next sev- point mainly to shore up balance sheets eral quarters. rather than to finance capital expendi- Reports from around the country indi- tures, but these activities implied that cated that business conditions were still business firms would be in an improved uneven. Economic activity appeared to position to finance more investment have weakened somewhat further in spending later in response to a pickup in some regions over the course of recent the demand for their products and an months but had changed little or shown ongoing need to modernize production modest gains in other parts of the na- facilities for competitive reasons. In any tion. Relatively weak economic condi- event, commercial construction activity tions had limited the tax revenues of was likely to remain depressed for an numerous state and local governments, extended period until a severe over- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 125 capacity in office space and other facili- affordability of houses. The availability ties in many parts of the country could of financing to many home builders be worked down. remained subject to some uncertainty, Several members commented that a but while lending institutions would turnaround in inventory investment probably apply stricter credit standards could play a significant role, as it had than in earlier years, the improving historically, in helping to generate a financial condition of these lenders business recovery. The members recog- should induce them in the context of nized that a good deal of uncertainty strengthening housing markets generally typically surrounded the outlook for in- to provide the financing that would be ventories, and it seemed especially diffi- needed to translate increased home sales cult to anticipate inventory behavior in into more home construction. the context of still evolving business With regard to the outlook for inflapolicies aimed at much tighter inventory tion, members indicated that they were controls. Nonetheless, the general liqui- encouraged by recent price and wage dation of inventories was not likely to developments. Some observed that persist, and its termination would at greater progress had been made in rethe minimum remove a major retarding cent months than they had anticipated influence on economic activity, should earlier, and many commented that more appreciable rebuilding of inventories fail progress in reducing the core rate of to materialize in the near term. Indeed, inflation was a likely prospect over the the reduction in auto dealer inventories next several quarters. In this connection, since late 1990 already had caused pro- members reported that competitive presduction schedules in the motor vehicles sures remained strong and that many industry to be raised substantially for business firms found it difficult to the second quarter despite still lagging sustain price increases. Moreover, the sales. A question obviously remained prices paid by business firms for raw regarding the prospective strength of the materials had tended to hold in a narrow buildup in business inventories once range, and many business contacts indithere were relatively firm indications of cated that they did not anticipate much a recovery in final demand from reces- change in such prices during the months sion levels. In one view, a pickup in ahead. More generally, the members inventory investment was likely to be a continued to express confidence that the key source of expansion in the economy. ongoing effects of earlier monetary A differing view suggested a relatively policy actions and reduced monetary limited role for inventories in buttress- growth over an extended period, toing an expansion in light of the now gether with the slack that had emerged widespread business practice of tighter in labor and product markets, would inventory management. result over time in a lasting downward Housing construction also was cited adjustment in the core rate of inflation. as a sector of the economy that might In addition, the appreciation of the dolmake a significant contribution to a re- lar in foreign exchange markets would bound in economic activity. Reports tend with some lag to exert a favorable from around the country already indi- restraining effect on prices. A number of cated a marked revival in buyer interest, members cautioned, however, that a sigabetted by reduced mortgage rates and nificant reduction in the core rate of lower home prices in many areas. Those inflation was not yet assured, and some developments had greatly enhanced the observed that the failure of long-term Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 78th Annual Report, 1991 bond yields to adjust more fully to re- when the economy might be close to cessionary economic conditions and to its recession trough. Steady progress the substantial cumulative decline in against inflation would foster lower inshort-term interest rates over the course terest rates in long-term debt markets of recent quarters might well be indica- and would thus provide an added degree tive of continued and still considerable of stimulus to the economy; conversely, inflationary expectations on the part of a resurgence in inflation would probably the public. induce a backup in long-term interest In the Committee's discussion of a rates, including mortgage rates, with addesirable policy for the intermeeting verse implications for housing markets period ahead, all of the members indi- and the economy. Against this backcated their support of a proposal to ground, the members concluded that a maintain an unchanged degree of pres- desirable policy was to take no action at sure on reserve positions. Most also pre- this time but to monitor carefully the ferred to retain the current instruction in ongoing effects of the System's earlier the directive that did not bias possible easing moves. intermeeting adjustments toward ease or In the course of the Committee's distoward restraint. Monetary policy ap- cussion, a number of members underpeared to be properly positioned at this scored the desirability of achieving point to help implement the Commit- monetary growth within the Committee's objectives in that it reflected an tee's ranges for the year. According to a appropriate balancing of the risks of an staff analysis prepared for this meeting, overly stimulative policy that would both M2 and M3 were likely to threaten progress against inflation ver- strengthen over the balance of the cursus the risks of a deepening recession or rent quarter after showing little or no an overly delayed recovery. A number growth in April. For the quarter as a of members commented that some fur- whole, expansion of both monetary ther deterioration in economic activity aggregates was expected to be below the could not be ruled out, and some empha- rates projected at the time of the March sized that the costs of a substantial short- meeting, but their cumulative growth fall in economic activity from current through midyear would still be in projections would be much greater than the middle portions of their respective those of a markedly faster expansion annual ranges. The members recognized than the members currently expected, that the economy was subject to events since present levels of slack in labor and beyond the Committee's control, but an other resource use would tend to limit appropriate rate of monetary expansion the price consequences of a period of at this stage would support the view that robust economic growth. However, the policy was positioned to help prevent System's earlier easing actions, includ- substantial further weakening in busiing the most recent reduction in the dis- ness activity on the one hand while count rate in late April and some associ- guarding against disappointing inflation ated easing in reserve conditions, had results later on the other. Subnormal provided a good deal of insurance monetary growth might be an indication against cumulative further weakening in that monetary policy was still too tight, business activity. Moreover, the Sys- perhaps because of the reluctance of detem's commitment to the goal of reduc- pository institutions and other lenders to ing inflation argued for a cautious ap- extend credit. In that regard, it might be proach to any further easing at a time especially useful in this period to scruti- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 127 nize the asset side of bank balance that they favored a directive that called sheets, notably the behavior of various for maintaining the existing degree of categories of loans, and other data on pressure on reserve positions. The memdebt trends in relation to typical cyclical bers also noted that they preferred or behavior for possible clues regarding could accept a directive that did not both the strength of credit demands and include a presumption about the likely business activity and changes in lending direction of any intermeeting adjustpractices and conditions. ments in policy. Accordingly, the Com- Turning to possible adjustments to the mittee decided that somewhat greater degree of reserve pressure during the reserve restraint or somewhat lesser intermeeting period, all of the members reserve restraint might be acceptable supported or could accept a symmetrical during the period ahead depending on directive in light of their current assess- progress toward price stability, trends in ments of the prospects for the economy economic activity, the behavior of the and the behavior of the monetary aggre- monetary aggregates, and developments gates. Some members emphasized that in foreign exchange and domestic finanthe marked uncertainties in the current cial markets. The reserve conditions economic situation underscored the need contemplated at this meeting were exfor a great deal of vigilance in apprais- pected to be consistent with growth of ing ongoing economic developments. M2 and M3 at annual rates of around Some indicated a slight preference for a 4 and 2 percent respectively over the directive that was tilted toward possible three-month period from March through easing. These members believed that the June. risks in the economy remained at least At the conclusion of the meeting, the marginally tilted toward a weaker than following domestic policy directive was projected economic performance and issued to the Federal Reserve Bank of that any policy adjustments in the inter- New York: meeting period were likely to be in the direction of some easing. Should the The information reviewed at this meeting incoming data suggest a substantial provides mixed signals regarding the course of economic activity, which had weakened shortfall from expectations, monetary appreciably further earlier in the year. Folpolicy in this view should be adjusted lowing sharp decreases in previous months, promptly toward ease. In the view of a total nonfarm payroll employment fell somemajority of the members, however, a what further in April; the civilian unemploysymmetrical directive was warranted ment rate edged down to 6.6 percent. Industrial output changed little in April after because the risks to the economy were declining markedly in earlier months. Retail reasonably well balanced at this point. sales were about unchanged in April and are While incoming data on business activ- now indicated to have risen somewhat in ity might remain relatively weak over March. Advance indicators continue to point the near term, a change in policy proba- to weakness in business fixed investment in coming months. Housing starts were down bly would not be called for so long as in March, partly offsetting a sizable advance such data did not suggest a further in February, but sales of new and existing cumulative decline in economic activity homes continued to rise. The nominal U.S. but tended to confirm already available merchandise trade deficit declined in Februanecdotal information and current Com- ary and its January-February rate was considerably below the average rate in the fourth mittee expectations. quarter. Producer and consumer prices were At the conclusion of the Committee's little changed over March and April, partly discussion, all of the members indicated reflecting further reductions in energy prices. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 78th Annual Report, 1991 Short-term interest rates have declined Meeting Held on since the Committee meeting on March 26, July 2-3, 1991 while bond yields have changed little. The Board of Governors approved a reduction in the discount rate from 6 to 5Vi percent on Domestic Policy Directive April 30. The trade-weighted value of the dollar in terms of the other G-10 currencies The information reviewed at this meetshowed little change on balance over the ing suggested that an upturn in ecointermeeting period. nomic activity had begun in recent Growth of M2 and M3 weakened in April; months. Sizable gains in consumer for the year thus far, expansion of M2 has been at the midpoint of the Committee's spending and small increases in expenrange, while growth of M3 has been in the ditures on residential construction apupper half of its range. peared to be fueling a moderate rise in The Federal Open Market Committee domestic final demand. Although invenseeks monetary and financial conditions that tories were still being liquidated, data will foster price stability, promote a resumpfor industrial production and labor martion of sustainable growth in output, and contribute to an improved pattern of interna- kets indicated that output was being tional transactions. In furtherance of these stepped up to meet that demand. Excludobjectives, the Committee at its meeting in ing food and energy items, increases February established ranges for growth of in consumer prices had been small in M2 and M3 of IVj. to 6V2 percent and 1 to recent months. 5 percent, respectively, measured from the fourth quarter of 1990 to the fourth quarter Total nonfarm payroll employment of 1991. The monitoring range for growth of edged up in May, following nearly a total domestic nonfinancial debt was set at year of uninterrupted declines, and the AV2 to 8^2 percent for the year. With regard average workweek posted a sizable gain. to M3, the Committee anticipated that the ongoing restructuring of thrift depository in- The turnaround in employment was stitutions would continue to depress its fairly broad-based. In manufacturing, growth relative to spending and total credit. recalls of workers in the motor vehicles The behavior of the monetary aggregates industry more than accounted for the will continue to be evaluated in the light of overall increase, but most other manuprogress toward price level stability, movements in their velocities, and developments facturing industries registered either in the economy and financial markets. small job gains or greatly moderated job In the implementation of policy for the losses. Employment also turned up in immediate future, the Committee seeks to the construction sector and in private maintain the existing degree of pressure on service-producing industries. The unemreserve positions. Depending upon progress ployment rate rose to 6.9 percent in May toward price stability, trends in economic activity, the behavior of the monetary aggre- but, averaged over April and May, the gates, and developments in foreign exchange unemployment rate was little changed and domestic financial markets, somewhat from its March level. greater reserve restraint or somewhat lesser Industrial production rose in April reserve restraint might be acceptable in the and May, after declining sharply earlier intermeeting period. The contemplated reserve conditions are expected to be consis- in the year; the limited product data tent with growth of M2 and M3 over the available for June pointed toward anperiod from March through June at annual other gain. Perhaps reflecting the pickup rates of about 4 and 2 percent, respectively. in housing starts in recent months, production of construction supplies turned Votes for this action: Messrs. Greenspan, up in April and May. Further advances Corrigan, Angell, Black, Forrestal, Keehn, in assemblies of motor vehicles contrib- Kelley, LaWare, Mullins, and Parry. Votes against this action: None. uted to a slight rise in manufacturing Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 129 output over the two months; in spite of durable categories. For most industries, the overall increase in activity, though, the sharp inventory corrections of recent the operating rate in manufacturing months along with a pickup in sales edged lower in May and remained well have reduced inventory-to-sales ratios below its level of a year earlier. substantially. Real personal consumption expendi- In April, the preliminary nominal U.S. tures rebounded in May from an April merchandise trade deficit widened decline; over the March-to-May period, slightly from the revised March level; the rise in outlays outpaced gains in however, the April deficit was somepersonal income. In May, a sizable what smaller than the average for the increase in spending for durable goods first quarter, which itself had registered reflected stronger outlays for motor ve- a sizable decrease. The value of both hicles and higher expenditures for most exports and imports rose in April. For major categories of nondurable goods. exports, the increase occurred primarily Excluding outlays for electricity associ- in capital goods and automotive prodated with unusually warm weather, ucts, but gains also were indicated for spending for services increased only a broad range of industrial supplies. modestly in May. Continuing a pattern Increases in the value of imports were of gradual recovery recorded in earlier spread among capital and consumer months, housing starts rose over April goods and non-oil industrial supplies. and May. In these two months, single- Recent indicators of economic activity family starts strengthened further but, in the major foreign industrial countries with apartment vacancy rates continuing had been mixed; on balance, growth high, multifamily construction remained seemed to have been sluggish in the quite weak. second quarter, while inflation in most After declining in the first quarter of of these countries appeared to be stable the year, shipments of nondefense capi- or declining. tal goods increased in both April and Nonfood, nonenergy consumer prices May. The turnaround resulted mostly increased over the March through May from larger shipments of aircraft; ship- period at a substantially slower pace ments of other types of business equip- than over the first two months of the ment increased slightly over the two year. Part of the slowdown in recent months. Recent data on orders pointed months reflected an unwinding of to some firming in the demand for busi- large price increases that had occurred ness equipment. Near-record vacancy in certain components of the index rates for office buildings and above- early in the year. In May, producer average vacancy rates for industrial prices of finished goods firmed somebuildings suggested continuing weak- what, largely reflecting an upturn in enness in nonresidential construction, ergy prices. Although average hourly although a small increase was recorded earnings of production or nonsuperin April. The pace of liquidation of man- visory workers rose at a faster rate in ufacturing and trade inventories slowed April and May than in the first quarter of in April from the very rapid March the year, the increase in earnings over rate, largely reflecting a slower rate of the twelve months ending in May reduction in stocks at auto dealers. In slowed somewhat. For the twelve May, manufacturing inventories fell months ending in March, growth in appreciably further, with drawdowns total employer costs for compensaoccurring in most durable and non- tion of private industry workers had Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 78th Annual Report, 1991 slowed from the comparable year-earlier increased substantially on net over the period. intermeeting period, partly in response At its meeting on May 14, 1991, the to news suggesting that the U.S. econ- Committee adopted a directive that omy was turning upward. The dollar called for maintaining the existing rose strongly against the mark and other degree of pressure on reserve positions European currencies, which also were and that did not contain any pre- affected by political developments in sumption about the likely direction of Europe. possible intermeeting adjustments. Ac- Growth of M2 rebounded in May cordingly, the directive indicated that from its tax-related weakness in April somewhat more or somewhat less pres- but slowed again in June. Over the three sure on reserve positions might be ap- months ending with June, the expansion propriate during the intermeeting period of M2 fell somewhat short of Commitdepending on progress toward price sta- tee expectations. Inflows to the liquid bility, trends in economic activity, the retail deposit components of M2 were behavior of the monetary aggregates, strong in the latest two months, but and developments in foreign exchange small time deposits declined at an acceland domestic financial markets. The erating rate; depositors evidently recontemplated reserve conditions were sponded to less attractive offering rates expected to be consistent with growth of on time deposits by shifting some funds M2 and M3 at annual rates of around not only into liquid money stock com- 4 and 2 percent respectively over the ponents but also into bond and stock three-month period from March through mutual funds and other capital market June. investments not included in this aggre- Open market operations during the gate. M3 fell slightly in June and had intermeeting period were directed to- grown little since February, reflecting ward maintaining the existing degree of continued shrinkage of the thrift induspressure on reserve positions. The fed- try and the weakness in bank loan eral funds rate remained near 53/4 per- demand and therefore in overall bank cent, while adjustment plus seasonal funding needs. For the year thus far, borrowing tended to average a little expansion of M2 and M3 had been in above assumed levels because of some- the middle portion of the Committee's what greater usage of adjustment credit. ranges. Several technical changes were made to The staff projection prepared for this assumed levels of borrowing to reflect meeting suggested that economic activexpected increases in the demand for ity was beginning to recover from the seasonal credit during the spring crop recession and that moderate growth in planting season. Against a backdrop final demand accompanied by a shift in of accumulating evidence that the econ- business inventories from substantial omy was beginning to recover and liquidation to modest accumulation related expectations that no further would lead to considerable growth over easing of monetary policy was likely in the second half of the year. The stimulus the near term, many interest rates rose from the inventory swing was projected slightly during the intermeeting period, to diminish next year and the expansion while most major stock price indexes to slow gradually to a pace consistent edged higher on balance. with continuing moderate growth in The trade-weighted value of the dol- final demand. On balance, the early and lar in terms of the other G-10 currencies subsequent phases of the recovery were Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 131 projected to be relatively slow by past The members projected that the undercyclical standards, reflecting the limited lying rate of inflation would decline in impetus that could be expected from coming quarters—despite quite limited some key sectors of the economy, such progress thus far this year—in light of as nonresidential construction where some continuing slack in demands on activity would be depressed by high production resources and efforts by vacancy rates. In addition, fiscal policy, businesses to contain costs. A number including the budgetary stance of state stressed that the moderate monetary and local governments, was projected to growth over recent years suggested that remain fairly restrictive. Against the monetary policy had been positioned to background of continuing, albeit de- foster a reduction in inflation, and they creasing, slack in labor and product mar- anticipated that the beneficial effects of kets, the core rate of inflation was this policy would show through over the expected to decline considerably over projection period. the period through the end of 1992. In keeping with the practice at meet- In the Committee's review of current ings when the Committee considers its and prospective economic develop- long-run ranges for the money and debt ments, the members generally agreed aggregates, the members of the Committhat a recovery very likely was under tee and the Federal Reserve Bank presiway, that final demand would grow dents not currently serving as members moderately for some time, and that an provided specific projections of the end to inventory reductions would pro- growth in real and nominal GNP, the vide an impetus to production over com- rate of unemployment, and the rate of ing quarters. A number of factors were inflation for 1991 and 1992. These expected to damp the expansion, nota- projections took account of the monebly the budget policies of governments tary growth ranges that the Committee at all levels and continuing weakness in reaffirmed for 1991 and established on a nonresidental construction. There also tentative basis for 1992 at this meeting; were puzzling aspects to the current these ranges are expected to be consissituation and attendant risks to the tent with the Committee's goal of prooutlook: Commodity prices had failed to moting a sustained expansion in the firm in their usual pattern in the early economy, fostered by further progress stages of a recovery; on the financial toward price stability. Forecasts of nomside, money and credit growth had re- inal GNP converged on growth rates of mained modest, and conditions were AVi to 5lA percent for 1991 and 5V2 to still fragile in many respects. However, 6V2 percent for 1992. With regard to the it was noted that sources of strength in rate of expansion in real GNP, the proan economic expansion often have been jections had a central tendency of 3/4 to difficult to anticipate near a cycle 1 percent for 1991 as a whole, implying trough. Moreover, while the expansion a sizable rebound over the balance of was expected to be slower than the aver- the year; for the year 1992, the central age for postwar business cycles, the re- tendency of the projections was 2V4 to cession had been relatively shallow, and 3 percent. While the civilian unemploya moderate expansion was more likely ment rate was not projected to fall much to be sustained for a considerable period over the balance of the year, the expanahead, in large measure because it sion was expected to result in a decline would be consistent with containing to a somewhat lower range of 6lA to inflation pressures. 6!/2 percent by the fourth quarter of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 78th Annual Report, 1991 1992. With regard to the rate of inflation absence of excessive stocks in most secas measured by the consumer price tors of the economy and parts of the index, the projections had a central ten- country. In these circumstances, the dency of 3V4 to 33/4 percent for 1991 and firming in final sales that appeared to be 3 to 4 percent for 1992; because declines under way was likely to result in a in energy prices had damped the rise of cessation of inventory liquidation over consumer prices substantially thus far in the nearer term and to induce an actual 1991, the similarity of the ranges for the buildup at some point later. It was sugtwo years masked expectations of a gested that this process already had pronounced decline in the core rate of begun and might indeed be somewhat inflation. ahead of earlier expectations. In the course of the Committee's dis- While the swing in inventories was cussion, members reported that business likely to provide a substantial boost to conditions remained uneven across the economic activity over the next few country, depending on the mix of local quarters, some members questioned the industries, but overall economic activity potential strength of ongoing factors now appeared to be expanding at a promoting expansion once the adjustmodest pace in a number of regions and ment in inventories had largely run its to have stabilized following earlier course. Growth in consumer spending declines in several other parts of the might well remain relatively restrained. nation. However, in some areas, notably The saving rate already was low, and portions of the Northeast, business ac- the willingness or ability of many contivity appeared to be weakening further. sumers to incur debt to finance increased Business sentiment remained cautious spending would tend to be inhibited by on the whole, but many contacts were existing debt burdens and perhaps also expressing greater confidence in the by the loss of tax deductibility on conoutlook for the economy and their own sumer loan interest. In addition, wideindustries, at least looking ahead to spread publicity about the fragility of 1992. Agriculture was a source of some financial institutions and continustrength in many parts of the country, ing concerns about employment prosalthough drought conditions in some pects might damp consumer sentiment, areas and excessive rains in others had and the absence of a strong rebound in given rise to some concerns. residential construction would tend to As has tended to occur in the early moderate the growth in spending on stages of previous cyclical recoveries, consumer durables. On the positive side, the swing in business inventories from the favorable effects on disposable insubstantial liquidation toward accumula- come of the earlier decline in oil prices tion was likely to play a leading role in was being supplemented by a resumpbolstering the expansion during the next tion of appreciable growth in personal two or three quarters. The members income as final sales and production acknowledged that inventory develop- improved. ments were difficult to project, and With regard to the outlook for busiviews differed to some extent regarding ness fixed investment, contacts around the strength of the impetus that might be the nation suggested that business execforthcoming from this source over the utives remained cautious about making next few quarters. In any event, the capital spending commitments. Noneavailable data tended to confirm reports theless, the recent pickup in new orders from business contacts regarding the for business equipment and a more Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 133 mixed pattern in nonresidential build- dence in one or more types of lenders, ing contract awards and permits were which could seriously disrupt their abilpromising developments that tended to ity or willingness to supply credit. Howreduce earlier concerns about a possible ever, that risk was likely to lessen over cumulative weakening in business in- time. The rebuilding of balance sheets, vestment. Among the components of including those of commercial banks, this key sector of the economy, non- was a promising development, and the residential construction activity was strength of the stock market along with expected to remain depressed, probably lower risk premia on debt obligations for an extended period in many locali- pointed to an improving financial clities, because of the substantial overhang mate. Borrowers with direct access to of vacant office space and other com- capital markets were finding abundant mercial facilities. Some members noted, credit at lower spreads. Many deposihowever, that nonresidential construc- tory institutions apparently were contion was improving in some areas, in tinuing to pursue very cautious lending part as a result of public works projects. policies, though the shift toward even Despite the likelihood of persisting more stringent terms on loans seemed weakness in nonresidential construction, to have abated. Overall, debt growth overall business fixed investment was appeared to be quite sluggish, with expected to strengthen to a limited much of the weakness concentrated extent once the recovery in economic at depository institutions; this probactivity was more firmly established. ably was contributing to the relatively The outlook for residential construc- damped expansion of the monetary tion was viewed as somewhat more aggregates around the cycle trough. The promising. Home sales appeared to be relationship between borrowing and on a distinct uptrend, notwithstanding spending seemed to be adjusting in ways the temporary reversal in new home that were not entirely understood, but sales in May, and residential construc- the behavior of both debt and money tion was picking up in many areas as were cautionary signs that needed to be housing backlogs were worked lower. monitored carefully. Members commented, however, that the A number of members commented upswing in such construction might be that in comparison with prior cyclical relatively subdued by past cyclical stan- experience the budget policies of all levdards, reflecting fairly high vacancy els of government were likely to be relarates and the failure of mortgage rates to tively restrictive over the projection decline as much as they had in previ- horizon. At the federal level, despite ous recession periods. Continuing con- burgeoning borrowing requirements in straints on the availability of loans for the near term, cutbacks in defense land acquisition and construction might spending and other efforts to curb exalso be a factor tending to inhibit con- penditures under the budget agreement struction activity, at least currently. of 1990 and to maintain that control With regard to the financial setting of under procedures put in place by the the economy more generally, members agreement, appeared to have helped put noted that the distress being experienced federal spending for goods and services by some financial intermediaries was a on a downward path. At the state and key source of concern and downside local level, severe budgetary problems risk for the economy. One could not rule were being addressed in many areas by out a major deterioration in public confi- increased taxes and restraints on spend- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 78th Annual Report, 1991 ing. These efforts to control govern- those measures in 1992. The current mental spending were likely to be an ranges included growth of 2Vi to important factor contributing to a 6J/2 percent for M2 and 1 to 5 percent subdued expansion in nonresidential for M3 for the period from the fourth construction. quarter of 1990 to the fourth quarter Turning to the outlook for inflation, of 1991. A monitoring range of 4Vi to the members remained optimistic that 8V2 percent had been set for growth in substantial progress could be made in total domestic nonfinancial debt in 1991. reducing its underlying rate over the In the course of the Committee's deprojection horizon. Some expressed dis- liberations, all of the members agreed appointment that, while a number of that the ranges established for this year special factors had been involved, the remained appropriate. The members deceleration in consumer prices had noted that both M2 and M3 were in the been very limited this year, excluding middle portions of their ranges. With the effects of a sharp drop in energy regard to developments affecting M2, prices and slower increases in food growth of nominal income had weakprices. Nonetheless, the members gener- ened over the first half of the year, but ally believed that if the recovery tended demands for M2 balances had been bolto unfold as they were projecting, pres- stered by declines in market interest sures on production resources would rates that had brought a narrowing of the remain subdued and efforts to contain opportunity costs associated with holdlabor and other business costs would ing deposits. On balance, growth of this continue, especially in the context of aggregate thus far in 1991 had fallen very competitive markets for most prod- short of what might have been expected ucts. Additionally, the appreciation of on the basis of historical relationships the dollar this year could be expected to with nominal income and interest rates. exert a damping effect on inflation. As a The reasons for the shortfalls were not trend toward lower inflation became fully understood, but the continuing more pronounced and widely perceived, redirection of credit flows away from the disinflationary forces in the econ- depository institutions and toward maromy would be reinforced by a modera- ket channels as well as apparent investor tion of inflationary expectations. An preferences for the higher yields offered integral part of these developments, by longer-term investments appeared to which several members emphasized, be contributing factors. The projected was the role of restrained monetary pickup in nominal GNP growth in the expansion over an extended period in second half of the year would by itself curbing underlying inflation pressures. tend to boost the growth of M2 some- Against the background of the Com- what, but increases in velocity also were mittee's views regarding prospective quite possible. Any strengthening of M2 economic developments and in keeping probably would be limited by some with the requirements of the Full Em- widening of opportunity costs associployment and Balanced Growth Act of ated with a further decline in offering 1978 (the Humphrey-Hawkins Act), the rates on liquid deposits in lagged re- Committee at this meeting reviewed the sponse to earlier declines in market ranges for growth in the monetary and rates. Moreover, the likely persistence debt aggregates that it had set in Febru- of a steep yield curve could lead deposiary for 1991, and it established on a tors to continue to place some maturing tentative basis ranges for growth in time deposits in long-term market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 135 instruments that had more attractive second half of the year. While slowing yields, such as bond mutual funds. Con- debt growth had a number of positive siderable uncertainty continued to sur- aspects for the long-run stability of the round the demand for money and the financial markets and the economy, a behavior of velocity. However, in the tendency for debt to drop below its curjudgment of the Committee, it now rent range might indicate that supply or seemed that growth within the cur- demand conditions were inconsistent rent range would indicate that policy with a satisfactory economic expansion. was positioned to foster a sustainable At the conclusion of this discussion, economic expansion, and that the the Committee voted to approve the fol- 4-percentage-point range provided ade- lowing broad policy statement and to quate leeway for any adjustments that reaffirm the 1991 ranges that it had might be needed in the event the established in February for growth of economy or monetary velocity were M2, M3, and nonfinancial debt: to diverge substantially from their expected paths. The Federal Open Market Committee Through the remainder of 1991, M3 seeks monetary and financial conditions that growth also could be expected to be will foster price stability and promote sustainable growth in output. In furtherance of boosted by the strengthening of the rethese objectives, the Committee reaffirmed covery, which was likely to stimulate at this meeting the ranges it had established some pickup in bank credit extensions. in February for growth of M2 and M3 of However, a faster pace of resolutions by 2Vi to 6J/2 percent and 1 to 5 percent, respecthe Resolution Trust Corporation (RTC) tively, measured from the fourth quarter of would tend to depress thrift credit—by 1990 to the fourth quarter of 1991. The monitoring range for growth of total domestic placing more thrift assets under governnonfinancial debt also was maintained at ment control or in the hands of private AVi to 8V2 percent for the year. nondepository institutions—and issuance of large time deposits by branches Votes for this action: Messrs. Greenspan, and agencies of foreign banks could be Corrigan, Angell, Black, Forrestal, Keehn, expected to slow from the pace earlier in Kelley, LaWare, Mullins, and Parry. Votes the year as more of the adjustment to the against this action: None. change in relative borrowing costs caused by the reduction in reserve re- In the Committee's discussion of the quirements late last year was completed. ranges for 1992, most of the members The members took note of a number supported a proposal to extend the 1991 of factors that had tended to depress the ranges provisionally to next year. Insogrowth of domestic nonfinancial debt, far as developments bearing on ecowhich had been growing at the low end nomic and financial conditions in 1992 of the Committee's monitoring range. could be anticipated at this point, these The latter included the slower pace of members believed that monetary growth economic activity, more cautious atti- within the current ranges would be tudes on the part of borrowers toward consistent with sustainable economic taking on debt and lenders toward ex- expansion in the context of continuing tending it, and a sharply lower pace of progress toward price stability. The net equity retirements. Looking ahead, upper bounds of those ranges provided the members anticipated that, with the desirable leeway for policy to resist any pickup in the economy, nonfinancial tendency for the recovery to falter while debt would expand more rapidly in the the lower ends allowed ample room for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

136 78th Annual Report, 1991 policy to counter stronger-than-expected hand about velocity in the second half of inflationary pressures. the year and some of the uncertainties Several members favored a reduction about the strength of the recovery would in the M2 range for next year. Such a be diminished. At that time, careful move would continue the trend of mov- consideration would need to be given to ing the range downward until it was reducing the range, if conditions implied consistent with price stability. Recent that such an action was appropriate in developments suggested that conditions furthering and underscoring the Syswere favorable for making substantial tem's goal of reducing inflation over progress toward lower inflation, and time. these members emphasized that it was At the conclusion of this discussion, important for the Committee not only to with two members dissenting, the Comtake advantage of this opportunity but to mittee approved provisional ranges for signal its determination in this regard. 1992 that were unchanged from those The resulting improvement in the for 1991, and it voted to incorporate the credibility of the Committee's anti- following statement regarding the 1992 inflationary policy and the related favor- ranges in its domestic policy directive: able effects on inflationary expectations would reduce the transitional costs of For 1992, on a tentative basis, the Comachieving price stability. mittee agreed to use the same ranges as in 1991 for growth in each of the monetary Those in favor of retaining the current aggregates and debt, measured from the range for M2 commented that the range fourth quarter of 1991 to the fourth quarter had been reduced substantially in recent of 1992. With regard to M3, the Committee years and that its midpoint already was anticipated that the ongoing restructuring of thrift depository institutions would continue close to a rate consistent with price stato depress the growth of this aggregate relability over time, presuming no unanticitive to spending and total credit. The behavpated trend in the velocity of M2 and ior of the monetary aggregates will continue some upward bias in measured inflation. to be evaluated in the light of progress For 1992, some members were con- toward price level stability, movements in their velocities, and developments in the cerned that, absent a significant increase economy and financial markets. in the velocity of M2, satisfactory nominal GNP growth—within the central Votes for this action: Messrs. Greenspan, tendency of the members' forecasts— Corrigan, Forrestal, Keehn, Kelley, already implied expansion of M2 in the LaWare, Mullins, and Parry. Votes against upper part of a 2Vi to 6V2 percent range. this action: Messrs. Angell and Black. A lower range might not provide suffi- Messrs. Angell and Black dissented cient flexibility to deal with an unanticibecause they preferred to reduce the M2 pated shortfall in aggregate demand or range for 1992 by Vi percentage point. disturbances to still-fragile financial They pointed out that the lower range markets. Uncertainties about the behavwould be centered on the average ior of velocity at a time when an imporgrowth of M2 in recent years and would tant restructuring of financial flows approvide a timely signal of the Commitpeared to be in process, especially with tee's continuing commitment to price regard to the role of depository institustability, thereby reinforcing and extendtions, also argued for simply carrying ing the progress in curbing inflation over the existing range. There would be anticipated over the next several quaran opportunity to review the range next ters. They believed that the resulting February, when evidence would be in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 137 decline in inflationary expectations continuing weak growth might require a would lower the transitional costs of review of this conclusion. A staff projecachieving price stability and, by favor- tion prepared for this meeting indicated ably affecting long-term interest rates, that, with reserve market conditions would help sustain the expansion in unchanged, somewhat faster growth in economic activity. the broader aggregates was likely to In the Committee's discussion of pol- emerge in the months ahead, induced by icy for the intermeeting period ahead, all greater money demands in the context of the members were in favor of main- of a strengthening economy. taining an unchanged degree of pressure With regard to possible adjustments on reserve positions. They believed that to the degree of reserve pressure during at this juncture an unchanged policy the intermeeting period ahead, nearly all course offered the greatest promise of the members expressed a preference for reconciling the Committee's goals of a directive that did not bias prospective sustaining the nascent business recovery operations toward tightening or easing while also fostering further progress but made an intermeeting adjustment, if against inflation. There were obvious any, equally likely in either direction areas of uncertainty and vulnerability in depending on economic and financial the current economic and financial situa- developments and the behavior of the tion, but developments were unlikely monetary aggregates. One member preto require an immediate adjustment in ferred a directive that was tilted toward reserve market conditions. For now, possible tightening; in this view, a monetary policy appeared to be on an prompt response to any tendency for appropriate course. inflationary conditions to re-emerge The members devoted some attention would have a favorable effect on infladuring this discussion to the relatively tionary expectations and long-term debt sluggish growth of M2 and M3 in recent markets and might avert the need for a months. Some commented that the be- more substantial policy adjustment later. havior of the broader aggregates might Other members agreed on the desirimply that monetary policy had not been ability of a prompt adjustment to inflaeased sufficiently in recent months and tionary developments, but they did not therefore might not provide adequate see a special need to anticipate such an support to sustain the expansion. It was adjustment in the period ahead. noted, however, that apart from the usual At the conclusion of the Committee's uncertainties about the relationship of discussion, all of the members indicated M2 and M3 to growth and spending in that they favored a directive that called the short run, the expansion of Ml and for maintaining the existing degree of especially of reserves and the monetary pressure on reserve positions. The membase had been fairly robust since early bers also noted that they preferred or spring. Moreover, many borrowers were could accept a directive that did not meeting their financing needs through include a presumption about the likely market sources. In this situation, the direction of any intermeeting adjustmembers generally concluded that the ments in policy. Accordingly, the Combehavior of M2 and M3, which on a mittee decided that somewhat greater cumulative basis were still in the middle reserve restraint or somewhat lesser portions of the Committee's ranges for reserve restraint might be acceptable the year, did not call for any policy during the period ahead depending on adjustments at this point. Nonetheless, progress toward price stability, trends in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

138 78th Annual Report, 1991 economic activity, the behavior of the 1990 to the fourth quarter of 1991. The monmonetary aggregates, and developments itoring range for growth of total domestic nonfinancial debt also was maintained at in foreign exchange and domestic finan- AVi to 8V2 percent for the year. For 1992, on cial markets. The reserve conditions a tentative basis, the Committee agreed to contemplated at this meeting were ex- use the same ranges as in 1991 for growth in pected to be consistent with some each of the monetary aggregates and debt, measured from the fourth quarter of 1991 to increase in the growth of M2 and M3 the fourth quarter of 1992. With regard to to annual rates of around 5Vi and 3 per- M3, the Committee anticipated that the cent respectively over the three-month ongoing restructuring of thrift depository period from June through September. institutions would continue to depress the At the conclusion of the meeting, the growth of this aggregate relative to spending and total credit. The behavior of the monefollowing domestic policy directive was tary aggregates will continue to be evaluated issued to the Federal Reserve Bank of in the light of progress toward price level New York: stability, movements in their velocities, and developments in the economy and financial The information reviewed at this meeting markets. suggests that economic activity has begun to In the implementation of policy for the recover from the recent recession. The unem- immediate future, the Committee seeks to ployment rate rose to 6.9 percent in May, but maintain the existing degree of pressure on total nonfarm payroll employment edged up reserve positions. Depending upon progress and the average workweek posted a sizable toward price stability, trends in economic gain. Manufacturing output has risen in re- activity, the behavior of the monetary aggrecent months, led by appreciable increases in gates, and developments in foreign exchange assemblies of motor vehicles. Consumer and domestic financial markets, somewhat spending has been bolstered in part by an greater reserve restraint or somewhat lesser upturn in personal income. An increase in reserve restraint might be acceptable in orders points to a firming in demand for the intermeeting period. The contemplated business equipment, but nonresidential con- reserve conditions are expected to be consisstruction remains weak. Housing starts rose tent with growth of M2 and M3 over the over April and May. The nominal U.S. mer- period from June through September at chandise trade deficit in April was somewhat annual rates of about 5Vi and 3 percent, below the average rate in the first quarter. respectively. Increases in consumer prices have been small in recent months. Votes for the paragraph on short-run pol- Most interest rates have risen slightly icy implementation: Messrs. Greenspan, since the Committee meeting on May 14. Corrigan, Angell, Black, Forrestal, Keehn, The trade-weighted value of the dollar in Kelley, LaWare, Mullins, and Parry. Votes terms of the other G-10 currencies increased against this action: None. substantially on balance over the intermeeting period. M2 grew at a moderate pace over May and June, while M3 changed little. For the Meeting Held on year thus far, expansion of M2 and M3 has August 20, 1991 been in the middle portion of the Committee's ranges. The Federal Open Market Committee The information reviewed at this meetseeks monetary and financial conditions that ing was mixed, but it suggested on will foster price stability and promote sus- balance that economic activity was extainable growth in output. In furtherance of panding at a moderate pace. Some these objectives, the Committee reaffirmed strengthening in consumption expendiat this meeting the ranges it had established in February for growth of M2 and M3 of tures, notably for motor vehicles, and in 2l/i to 6V2 percent and 1 to 5 percent, respec- single-family residential investment was tively, measured from the fourth quarter of providing much of the impetus for the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 1 39 recovery. On the other hand, business July. As had been the case thus far in fixed investment was still weak, and the the upturn, most of the July increase runoff of business inventories was show- occurred in single-family units; multiing few signs of abating. On the supply family starts edged up but remained near side, production had strengthened, par- the thirty-year low recorded in May. ticularly in manufacturing and housing, Sales of both new and existing homes but labor demand remained soft overall. strengthened further in June. Increases in consumer prices had been Business fixed investment declined small in recent months, while the pace again in the second quarter as outlays of labor cost increases did not appear to for producers durable equipment fell have slowed further. modestly, and forward-looking indica- Total nonfarm payroll employment tors pointed to sluggishness in spendedged down in July, but substantial ing for equipment over the near term. upward revisions to data for May and Reflecting in part the damping effect on June left the July level above that for office construction of high vacancy rates April. Job gains were recorded in manu- and falling property values for existing facturing, retail trade, and health ser- buildings, the decline in nonresidential vices in July, but employment in con- construction continued in the second struction and various financial service quarter, and data on construction perindustries continued to contract. Despite mits and contracts suggested that this the lower employment level and a sharp sector likely would remain weak for an decline in the average workweek, the extended period. Inventory liquidation unemployment rate fell slightly to by manufacturers and non-auto trade 6.8 percent in July apparently owing to establishments continued through the a net exit of jobless workers from the second quarter, although the pace labor force. slowed in June from the sharp declines Led by another rise in the production of April and May. The ratio of stocks to of motor vehicles, industrial produc- sales at these establishments was about tion rose appreciably further in July, unchanged. although the rate of increase was a little The nominal U.S. merchandise trade less than the average pace in the second deficit narrowed somewhat in June from quarter. Over the period from April the downward revised May value and through July, production retraced nearly was somewhat below its rate for the half of the decline that had occurred first quarter. For the second quarter, between September of last year and there was substantial growth in the value March. Total industrial capacity utili- of exports, primarily resulting from zation rose for a fourth consecutive strength in machinery, commercial airmonth in July, but the overall operating craft, and automotive products. The rate was still well below its longer-run value of imports edged up as increases average. in foods and selected capital goods were Retail sales rose in July, and previ- not quite offset by declines in oil and ously reported increases for May and automotive products. Economic activity June were revised upward. Gains at au- in the major foreign industrial countries tomotive dealers remained strong, and continued to present a mixed picture. sales at general merchandise, apparel, Tentative signs of more rapid growth and furniture outlets in July more than emerged in the second quarter in some retraced a sharp June decline. Housing European countries, but the pace of ecostarts continued to trend higher in nomic activity appeared to have eased in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

140 78th Annual Report, 1991 Japan and Germany from robust rates in indications that price pressures were the first quarter. abating and the recovery was proving Declines in the prices of food and to be sluggish at a time of persisting energy in June and July damped the rise weakness in the broad monetary aggrein consumer prices and lowered pro- gates. Over the course of the period, two ducer prices of finished goods. Exclud- technical increases were made to exing food and energy items, consumer pected levels of adjustment plus seaprices rose over the twelve months sonal borrowing to reflect the run-up ended in July at a slightly slower rate in seasonal borrowing that usually than in the preceding twelve months. At occurs at this time of the year. In the the producer level, prices of nonfood, three reserve maintenance periods comnon-energy items continued to increase pleted since the July meeting, adjustin July at the very slow second-quarter ment plus seasonal borrowing tended pace. Total compensation per hour for to run at appreciably higher levels private industry workers accelerated a than expected, owing in part to difficulbit in the second quarter, reflecting the ties in estimating nonborrowed reserve effects of a sharp increase in the cost of needs near the ends of reserve maintebenefits and the upward adjustment of nance periods. The federal funds rate the minimum wage in April. averaged around 53A percent in the early At its meeting on July 2-3, 1991, the part of the intermeeting period, but Committee adopted a directive that following the action to ease reserve called for maintaining the existing conditions, the rate averaged about degree of pressure on reserve positions 5 ^percent. and that did not include a presumption Other market interest rates declined about the likely direction of any inter- appreciably over the intermeeting period meeting adjustments to policy. Accord- in response to downward revisions in ingly, the Committee decided that some- market expectations about the pace of what greater or somewhat lesser reserve the recovery and price pressures, the restraint might be acceptable during the easing of reserve conditions, and espeintermeeting period ahead depending on cially for short-term Treasury securities, progress toward price stability, trends in the uncertain outcome of the coup economic activity, the behavior of the attempt in the Soviet Union that had monetary aggregates, and developments begun a few days before the meeting. in foreign exchange and domestic finan- Despite the uncertainty surrounding the cial markets. The reserve conditions status of the recovery, interest rates on contemplated at this meeting were ex- private instruments fell as much as Treapected to be consistent with some sury yields, and most major indexes of increase in the growth of M2 and M3 stock market prices advanced considerto annual rates of around 5V2 and 3 per- ably. Expectations of a slower recovery cent respectively over the three-month and an easier monetary policy in the period from June through September. United States contributed to a decline on Open market operations during the balance in the trade-weighted value of intermeeting period initially were di- the dollar in terms of the other G-10 rected toward maintaining the existing currencies over the intermeeting period. degree of pressure on reserve positions. Late in the period, the coup attempt in Subsequently, in early August, reserve the Soviet Union triggered a sharp rise pressures were eased slightly; this ac- in the dollar against many European tion was taken against a backdrop of currencies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 141 The broad monetary aggregates were slack in the economy was expected to quite weak in July. After several months induce a further moderation in cost presof sluggish growth, M2 contracted as sures and an appreciable decline in the expansion in transaction deposits slowed core rate of inflation over the period and retail time deposits continued to run through 1992. off at a rapid rate. M3 fell further in July In the Committee's discussion of as declines in M2 were augmented by current and prospective economic and further runoffs of large time deposits. financial conditions, the members gener- The reasons for the weaker-than- ally agreed that the recovery was conexpected growth of the broader aggre- tinuing, although recent economic data gates were not entirely understood; how- and the general tenor of the anecdotal ever, it appeared that the underlying information suggested an uneven perforweakness in credit growth at depository mance in different sectors of the econinstitutions combined with shifts of omy and parts of the country. While funds out of the broader aggregates by sustained expansion at a moderate pace depositors reaching for higher yields was still viewed as a reasonable expectawere contributing to the reduced growth. tion, many members now believed that For the year through July, M2 and M3 the risks were tilted toward the downhad expanded at rates near the lower side. These risks stemmed to an imporends of the Committee's ranges. tant extent from the financial side of the The staff projection prepared for this economy: life insurance companies as meeting indicated that the economy was well as banks had become quite cautious continuing to recover from the recent lenders, and the very weak recent data recession, although somewhat slower on both money and credit added to congrowth than previously anticipated was cerns about financial developments. In now projected for the second half of the addition, consumer surveys and busiyear. The projection still pointed to ness contacts suggested some erosion in moderate expansion in final demand the confidence that had built up amid the over the next several quarters, with eco- initial signs of an economic turnaround nomic activity later this year and in the after the end of the Persian Gulf war. first part of 1992 given added impetus Some members commented, however, by a cyclical swing from substantial that the prospective sources and potenliquidation to modest accumulation in tial strength of the expansion were business inventories. The stimulus from always difficult to discern at this stage the swing in inventories was expected of the recovery, and a stronger-thanto diminish during the first part of projected expansion could not be ruled next year, but business capital expendi- out. With regard to the outlook for inflatures were projected to pick up as the tion, members continued to anticipate a recovery continued. Real purchases of reduction in its core rate over coming goods and services by the federal gov- quarters, especially following an exernment were projected to trend down- tended period of restrained monetary ward, and budgetary problems were growth. However, several expressed disexpected to restrain spending by state appointment regarding the recent behavand local governments. On balance, the ior of labor costs and commented that expansion in economic activity was progress toward lower inflation might projected to be relatively moderate in be more limited, at least in the quarters comparison with past cyclical experi- immediately ahead, than they had exence. Persisting though diminishing pected earlier. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

142 78th Annual Report, 1991 Recent events in the Soviet Union many business firms were taking advanhad introduced a new element of uncer- tage of their direct access to financial tainty in the economic outlook. The out- markets. In the absence of further detericome of the coup attempt was uncertain oration in lender confidence, the availbut, should it succeed, early market ability of loans from financial intermedireactions suggested the possibility of aries could be expected to increase over some adverse consequences for the U.S. time and appeared likely to be adequate economy stemming in part from a fur- to finance a moderate recovery. Nonether deterioration in business and con- theless, the risks seemed to be skewed sumer confidence, an increase in the toward the possibility of further difficulprice of oil and the value of the dollar, ties damping credit supplies and impedand perhaps higher long-term interest ing economic growth. rates. In the course of their discussion, The financial sector of the domestic members commented on continuing economy continued to be seen as a indications of mixed business condipotential source of developments that tions in different parts of the country. could hold the expansion below the fore- They noted that economic activity cast. Financing from a number of insti- appeared to have deteriorated at least tutional lenders had been curtailed for marginally in several regions, though some time and did not yet show signs of the available evidence pointed on the becoming more readily available; in- whole to growth in the overall economy. deed, mounting difficulties for some life Members referred to the contrast beinsurance companies could reduce fur- tween gloomier business attitudes and ther the willingness of these lenders to the improvement that was occurring in extend credit. Members also commented some sectors of the economy, notably that the continuing publicity given to the industrial production and housing. Busiweakened condition of many financial ness executives seemed disappointed by institutions along with widespread re- a much less vigorous rebound in deports of financial scandals tended to mand than they had anticipated with the erode confidence. Several observed that end of the Persian Gulf war. In the the weakness of the monetary aggre- circumstances, they remained very caugates, while not closely correlated with tious in managing their inventories and short-run economic performance, was reluctant to undertake major investment nonetheless a matter of increasing con- projects. cern to the extent that it implied unusual Available information suggested that constraints on the availability of credit inventories had declined somewhat furand possibly a faltering economic ex- ther in recent months. As at previous pansion. On the positive side, the finan- meetings, members anticipated that with cial condition of banking institutions inventories at much reduced levels, the appeared to be continuing to stabilize or pickup in final demand would at some improve. Indeed, while banks had raised point stimulate a turnaround in inventheir credit standards, bank financing tory investment that would in turn prowas widely reported to be readily avail- vide an important fillip to the expansion. able to creditworthy borrowers, at least Thus far, however, the evidence did outside the real estate sector, though not indicate a cumulative expansionary bank lending continued to lag because process involving stepped-up inventory of weak credit demand associated in part demand that generated growth in prowith inventory liquidation and because duction, incomes, and spending and in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 143 turn stimulated further demand for inven- by a number of state and local governtories. Some members commented that ments. Current spending for business the relative weakness in commodity equipment was less depressed though prices was further evidence that a self- also indicative of considerable caution reinforcing process of that kind had not on the part of businessmen in the conyet emerged in the current cyclical text of disappointing profits and uncerrecovery. There was little reason to con- tain demand for their products. While a clude, however, that a dynamic process pickup in equipment spending could be of that sort, which in the early stages of expected to occur with some lag during past cyclical recoveries had tended to the course of the cyclical upswing, overprovide the major thrust to the expan- all capital spending was likely to grow sion, would fail to materialize in the at a relatively subdued pace unless final quarters ahead. demand turned out to be much stronger During their discussion, members than the members currently expected commented that retail sales appeared to and induced a major turnaround in busibe improving at least a little in many ness sentiment. parts of the country but remained The outlook for residential construcquite sluggish elsewhere. An important tion remained more promising. Spurred but geographically uneven source of by reduced mortgage rates, sales of strength was the sale of motor vehicles, homes continued on a moderate uptrend though contacts in the auto industry sug- in most areas and, indeed, represented a gested some disappointment over the bright spot in some otherwise depressed sales performance of many new models. regions such as New England. While In general, consumers remained con- the construction of new housing was cerned about financial developments, still being damped by relatively high relatively heavy debt burdens, and un- vacancy rates and the difficulties certainty about employment prospects. encountered by some builders in obtain- While further growth in consumer ing financing, modest strengthening in spending was a likely development, var- homebuilding was occurring in many ious factors tending to inhibit consumer parts of the country. The recent decline confidence and an already low saving in long-term interest rates was cited as a rate pointed to relatively limited expan- further favorable factor for housing consion in such spending over the quarters struction activity. ahead. Turning to the outlook for the na- Members did not see business capital tion's trade balance, members comspending as an important source of stim- mented that export demand had continulus to the economy over the next few ued to grow and several expressed quarters. There were continuing reports optimism regarding the prospects for of marked weakness in commercial con- further growth, including the outlook for struction activity, reflecting the persis- expanding markets in Latin America. tence of high vacancy rates in many The trade balance would be influenced parts of the country that were likely to to an important extent by the value of hold back new building for an extended the dollar in foreign exchange markets; period. Nonetheless, overall nonresiden- the latter was subject to considerable tial construction appeared to have bot- uncertainty, especially in connection tomed out in some areas and indeed to with the events that were under way in have edged up in others, buttressed by the Soviet Union. Those events had expenditures on public works projects raised questions about trade develop- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 78th Annual Report, 1991 ments, notably the potential for reduced benefits, especially medical insurance. world oil supplies and lower foreign In this situation, several members demand for U.S. goods, especially agri- observed that they now anticipated less cultural products. The members also progress toward a lower core rate of recognized that the domestic economic inflation over the next several quarters. expansion would have a damping effect Against the background of a broad on the trade balance by stimulating consensus that a moderately paced growth in imports. recovery with ebbing inflation probably The members anticipated that federal was under way, all of the members indigovernment purchases of goods and ser- cated that they preferred or could accept vices would be curtailed in line with last a proposal to maintain an unchanged year's budget agreement. They noted degree of pressure on reserve positions. that the recent developments in the In addition, a majority expressed a pref- Soviet Union had raised new uncertain- erence for an asymmetric directive that ties about the size of cutbacks in defense was tilted toward possible easing during spending, which had been projected to the weeks ahead. Those favoring such account for all the reduction in real fed- asymmetry felt that the risks to the eral expenditures. With regard to the expansion were largely on the side of a state and local governments, there con- weaker-than-projected economy, and tinued to be widespread reports of cur- they believed that the Federal Reserve rent or expected spending cuts and should react promptly to any signs that higher taxes to counter budgetary short- the expansion was less robust than falls. On balance, overall government desired or that monetary conditions spending and tax policies appeared might be inconsistent with sustained likely to exert a somewhat negative growth. However, they believed that an influence on the economic expansion. immediate easing move would be pre- Given a projection of some persisting mature because the most recent ecoslack in labor and product markets and nomic information, although mixed, still following an extended period of rela- suggested a moderate rate of economic tively restrained monetary growth, the expansion and also because of the quesmembers continued to anticipate appre- tions that were raised about how to ciable progress toward lower inflation interpret the behavior of the monetary over the period through 1992. Competi- aggregates. Some members marginally tive pressures, including competition favored an immediate move toward ease from foreign producers, remained strong because of the weakness in the broader in markets for many products, and the monetary aggregates and a sense that decline in consumer inflation over the such a move might bolster confidence course of recent months was likely to and better ensure a satisfactory recovery have a favorable effect on inflationary in the months ahead. Nonetheless, they expectations. On the negative side, the found acceptable an initially unchanged recent lack of progress in bringing down policy that was coupled with an instructhe rate of increase in labor costs was a tion calling for policy implementation to worrisome development. While some of be especially alert to developments that the upward pressures on such costs might require some easing during the appeared to reflect special factors such intermeeting period. Other members as the second-quarter rise in the mini- viewed the risks to the expansion as mum wage, a major underlying cause more evenly balanced or questioned the was the continuing surge in the cost of extent to which further easing in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 145 near term might stimulate monetary for policy was the evidence that some growth or result in lower long-term of the weakness of the monetary interest rates. Accordingly, they felt that aggregates stemmed from unusual retaining the current symmetric direc- constraints on the amount of credit tive was a preferable option. They were provided by depository institutions and concerned about the risk of responding implied restraint on the overall supply to what might prove to be short-lived of credit. The weak growth in credit fluctuations in the economic data and extended by depository institutions anecdotal information bearing on the reflected, of course, an uncertain comperformance of the economy. In particu- bination of anemic demand by creditlar, the persistence of inflationary cost worthy borrowers and supply conpressures made it advisable to pause in straints by lending institutions. The order to assess the implications of the behavior of M2 and M3 also might be information that would become avail- indicative of even weaker nominal able over the next few weeks, including spending than was currently recognized data on the behavior of the monetary and hence a monetary policy stance that aggregates. Nonetheless, given prevail- was too tight under such circumstances. ing uncertainties, these members could According to a staff analysis prepared accept a directive that was biased toward for this meeting, growth in both meapossible easing in the weeks ahead. sures could be expected to pick up a In the course of the Committee's dis- little over the months ahead, assuming cussion, members devoted considerable steady reserve conditions. The persisattention to the behavior of the mone- tence in some degree of recent relationtary aggregates. While the cumulative ships between movements in short-term growth of M2 and M3 for the year to interest rates, income, and monetary date was still within the Committee's growth would imply slower monetary ranges—though near the bottom of those expansion than might otherwise be ranges—the weakness in recent months, expected. including declines in both aggregates in In these circumstances, many mem- July, was seen by many members as a bers indicated that continued weakness disturbing development. The members in M2 and M3 would be a matter of acknowledged that it was difficult to dis- increasing concern, especially given entangle the various reasons for the un- questions about the strength of the ecoexpected shortfall in monetary growth nomic recovery. Some favored a proand thus the implications for the thrust posal to give greater emphasis in the of monetary policy. In the context of directive to the behavior of the moneessentially unchanged or even declining tary aggregates in guiding possible interinterest rates, there appeared to be little meeting adjustments in policy, at least import for the economy and monetary for the period ahead. However, a majorpolicy to the extent that the shortfall ity preferred to retain the current direcreflected shifts of funds out of the tive wording. In support of this view, broader aggregates and into nonmone- some commented that in recent years tary investment instruments that pro- the broader aggregates have been unrelivided higher interest returns, thereby able indicators of the path of the econbypassing depository institutions but omy over the quarters immediately tending to have little effect on the over- ahead and thus imperfect guides for all availability of credit. Of poten- short-run policy adjustments. Some tially greater concern and significance observed that growth in Ml and total Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 78th Annual Report, 1991 reserves had held up fairly well on bal- The information reviewed at this meeting ance over the past several months and has been mixed, but it suggests on balance that economic activity is expanding at a that the behavior of those measures moderate pace. The unemployment rate fell might be more indicative of the underly- slightly to 6.8 percent in July, but total noning thrust of monetary policy than that farm payroll employment edged down and of the broader aggregates on which the the average workweek posted a sharp de- Committee had tended to focus. Giving cline. Industrial production rose appreciably further in July. Consumer spending has the monetary aggregates more promiincreased considerably in recent months, led nence in the directive could provide a by sizable gains in expenditures for motor misleading indication of the adjustments vehicles. New orders for nondefense capital that would be made to reserve condi- goods point to little change in spending for tions in response to the behavior of the business equipment over the near term, and nonresidential construction remains weak. aggregates, including aberrant fluctua- Housing starts rose further in June and July. tions, thereby misconstruing the views The nominal U.S. merchandise trade deficit of many members. declined in June, and its average for the At the conclusion of the Committee's second quarter was somewhat below the rate in the first quarter. Increases in consumer discussion, all of the members indiprices have been small in recent months. cated that they could vote for a directive Over the intermeeting period prior to that called for maintaining the existing August 19, market interest rates declined degree of pressure on reserve positions. appreciably and the trade-weighted value of All also indicated that they preferred the dollar in terms of the other G-10 currenor could accept a directive that included cies depreciated somewhat. Subsequently, in a bias toward possible easing during the the wake of events in the Soviet Union, Treasury bill rates fell somewhat further and intermeeting period. Accordingly, the the dollar rebounded sharply against many Committee decided that somewhat European currencies. greater reserve restraint might be accept- M2 contracted in July after several months able or somewhat lesser reserve restraint of slow growth and M3 fell further. For the would be acceptable during the period year through July, expansion of M2 and M3 has been near the lower ends of the Commitahead depending on progress toward tee's ranges. price stability, trends in economic ac- The Federal Open Market Committee tivity, the behavior of the monetary seeks monetary and financial conditions that aggregates, and developments in foreign will foster price stability and promote susexchange and domestic financial mar- tainable growth in output. In furtherance of these objectives, the Committee at its meetkets. The reserve conditions conteming in July reaffirmed the ranges it had estabplated at this meeting were expected lished in February for growth of M2 and M3 to be consistent with a resumption of 2Vi to 6V2 percent and 1 to 5 percent, in the growth of M2 and M3 during the respectively, measured from the fourth quarweeks ahead, but in light of the declines ter of 1990 to the fourth quarter of 1991. The in these aggregates since June, the monitoring range for growth of total domestic nonfinancial debt also was maintained at Committee now anticipated that M2 AVi to 8V2 percent for the year. For 1992, on would be little changed and M3 would a tentative basis, the Committee agreed in be down at an annual rate of about 1 per- July to use the same ranges as in 1991 for cent in the period from June through growth in each of the monetary aggregates September. and debt, measured from the fourth quarter of 1991 to the fourth quarter of 1992. With At the conclusion of the meeting, the regard to M3, the Committee anticipated that following domestic policy directive was the ongoing restructuring of thrift depository issued to the Federal Reserve Bank of institutions would continue to depress the New York: growth of this aggregate relative to spending Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 147 and total credit. The behavior of the mone- reflected primarily in a sizable rise in tary aggregates will continue to be evaluated aggregate hours worked rather than in in the light of progress toward price level the number of jobs. Increases in prices stability, movements in their velocities, and appeared to be on a gradual downtrend. developments in the economy and financial markets. In August, total nonfarm payroll em- In the implementation of policy for the ployment retraced part of a July decline immediate future, the Committee seeks to and on balance was little changed since maintain the existing degree of pressure on March. Manufacturing employment regreserve positions. Depending upon progress istered widespread gains in August, and toward price stability, trends in economic the factory workweek rose to its highest activity, the behavior of the monetary aggregates, and developments in foreign exchange level in nearly a year. In the private and domestic financial markets, somewhat service-producing sector, new hires in greater reserve restraint might or somewhat health and business services displayed lesser reserve restraint would be acceptable appreciable strength, but the rest of this in the intermeeting period. The contemplated sector, particularly wholesale and retail reserve conditions are expected to be consistent with a resumption of growth of M2 and trade, remained weak. Jobs in construc- M3 in the weeks ahead; but in view of the tion continued to decline, and employdeclines already posted since June, the Com- ment reductions occurred in state and mittee anticipates that M2 would be little local governments for a second straight changed and M3 would be down at an month. The civilian unemployment rate annual rate of about 1 percent over the was 6.8 percent in both July and August. period from June through September. Industrial production posted a moder- Votes for this action: Messrs. Greenspan, ate further rise in August after several Corrigan, Angell, Black, Forrestal, Keehn, months of sizable gains. Assemblies of Kelley, LaWare, Mullins, and Parry. Votes motor vehicles slowed in August when a against this action: None. number of plants were closed temporarily for model changeovers, but output Meeting Held on of other consumer durables continued to October 1, 1991 increase and that of consumer nondurables rebounded. Production of business equipment remained weak and on bal- Domestic Policy Directive ance had changed little since spring after The information reviewed at this meet- dropping sharply in late 1990 and early ing suggested on balance that the econ- 1991. Total industrial capacity utilizaomy was continuing to recover from the tion edged up in August; over the course recession but that its performance was of recent months it had retraced only a uneven across sectors. Consumer spend- small part of the decline that occurred ing was rising, especially for durable between mid-1990 and March 1991. goods, but businesses remained cautious Operating rates in manufacturing had about investing in plant, equipment, or recovered to a somewhat greater extent, inventories. On the production side, the reflecting in part the rebound in motoradvance in manufacturing activity con- vehicle assemblies. tinued, although the recovery in housing Retail sales fell in August, mostly construction appeared to have lost some because of a decline in sales of motor of the momentum evident through the vehicles. For July and August together, spring, and little growth was occurring nonautomotive retail sales were up conin much of the service-producing sector. siderably on balance. After increasing The pickup in production had been appreciably since January, housing starts Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

148 78th Annual Report, 1991 rose only slightly further in July and economic activity in the major foreign August. The number of permits for industrial countries continued to be construction of single-family homes mixed. In western Germany and Japan, declined in August and was unchanged growth fell sharply in the second quarter from the second-quarter level. In the and apparently remained slow in the multifamily sector, construction activity third quarter, while economic activity remained near its thirty-year low. Sales picked up in some other industrial counof new homes were down in July, while tries in the second quarter. sales of existing homes fell in both July Producer prices of finished goods and August. were unchanged over July and August Shipments of nondefense capital after declining on balance in earlier goods, measured in nominal terms, were months of the year. Further reductions in down on balance over July and August. food prices in August, notably prices of Taking into account the substantial re- fresh fruits and vegetables, offset a cent declines in the prices of computing rebound in the prices of finished energy equipment, however, real outlays for goods. Excluding food and energy, the business equipment apparently rose on increase in producer prices of finished balance over the two months as reduced goods in the twelve months ended in spending on industrial equipment was August was little different from the rise more than offset by increased invest- over the previous twelve months. At the ment in computers and, to a lesser ex- consumer level, increases in prices were tent, transportation equipment. Recent small in July and August because of data on orders and shipments of non- declines in the prices of food and energy defense capital goods pointed to a items. Although nonfood, non-energy further small rise in real outlays for consumer prices had risen somewhat business equipment. The value of non- faster in recent months, the twelveresidential construction put in place in month change in this index had contin- July was substantially below the second- ued to edge down. quarter level, reflecting the continuing At its meeting on August 20, 1991, decline in office, other commercial, and the Committee adopted a directive that hotel construction. Available informa- called for maintaining the existing tion on new contracts suggested a con- degree of pressure on reserve positions tinuing downtrend in nonresidential and that also provided for giving special construction. weight to potential developments that The nominal U.S. merchandise trade might require some further easing durdeficit widened substantially in July to a ing the intermeeting period. Accordrate considerably above its average in ingly, the Committee decided that somethe second quarter. In July, the value of what greater reserve restraint might be imports rose sharply from a low second- acceptable or somewhat lesser reserve quarter average; the rise was concen- restraint would be acceptable during the trated in consumer goods, automobiles, intermeeting period depending on and computers. The value of exports progress toward price stability, trends in changed little in July from a second- economic activity, the behavior of the quarter level that was high compared monetary aggregates, and developments with other recent quarters; the improve- in foreign exchange and domestic finanment in exports in recent months had cial markets. The reserve conditions been the result of the strong perfor- contemplated at the August meeting mance of capital goods. The pattern of were expected to be consistent with a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 149 resumption in the growth of M2 and M3 tion, and an associated easing of moneover the balance of the third quarter. tary policy. The average commitment However, in view of the declines in rate on fixed-rate mortgages reached its these aggregates that had taken place lowest level since 1977, and the prime since June, the Committee anticipated rate was reduced by lh percentage point that, over the three-month period from to 8 percent after the easing of monetary June through September, M2 would be policy in mid-September. The tradelittle changed and M3 would be down at weighted value of the dollar in terms of an annual rate of about 1 percent. the other G-10 currencies fell sharply Open market operations during the over the intermeeting period; much of intermeeting period were directed ini- the drop retraced the previous run-up tially toward maintaining the existing associated with the attempted coup in pressures on reserve positions. Subse- the Soviet Union that began shortly quently, on September 13, the discount before the August meeting. rate was lowered by Vi percentage point After contracting in July, M2 was to 5 percent and part of this decline was about unchanged in August and Septemallowed to show through to the federal ber. M3 declined further in July and funds rate. Two technical decreases to August and apparently changed little in expected levels of adjustment plus sea- September. Both aggregates were somesonal borrowing were made during the what weaker than anticipated at the time intermeeting period to reflect the abate- of the August meeting. For the year thus ment of seasonal credit needs. Early in far, expansion of M2 and M3 had been the period, adjustment plus seasonal at the lower ends of the Committee's borrowing averaged nearly $400 mil- ranges. lion. Later, in part because of the decline The staff projection prepared for this in seasonal funding needs, the volume meeting pointed to a sustained recovery of borrowing slipped below $350 mil- in economic activity; however, because lion. The federal funds rate averaged of persisting weaknesses in some secaround 5Vi percent during the first part tors of the economy the pace of the of the intermeeting period, but after the expansion was projected to remain subdiscount rate was reduced, the federal dued compared with past cyclical expefunds rate edged down to a little above rience and the risks of a different out- 5 ^percent. come seemed to be mostly on the In the period immediately after the downside. Consumer spending was August 20 meeting, most other market expected to continue to provide much interest rates rose slightly, reflecting in of the impetus to the expansion, but a part the absence of an anticipated easing swing from inventory liquidation to of monetary policy and data indicating modest accumulation was projected to that the expansion might be more robust supply an additional boost to economic than expected. Treasury bill rates also growth during the quarters immediately were boosted by an unwinding of the ahead. As the stimulus from the swing flight to quality and liquidity that had in inventories began to wane during the been prompted by the attempted coup in course of 1992, spending for business the Soviet Union. In subsequent weeks, equipment was projected to strengthen market rates declined as incoming nonfi- to some extent. Housing construction nancial and monetary indicators were also would provide some stimulus over seen by market participants as portend- the projection horizon. Further declines ing a sluggish expansion, reduced infla- in the construction of commercial struc- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 78th Annual Report, 1991 tures were expected to inhibit the eco- tions and on business and consumer nomic expansion. Additionally, real pur- sentiment continued to have a generally chases of goods and services by the negative tone that did not appear to be federal government were assumed to be fully consistent with the available ecoon a mildly declining trend, and spend- nomic statistics. To a degree, business ing by many state and local govern- attitudes seemed to reflect perceptions ments was expected to be constrained of little momentum in business activity by severe budgetary problems. The per- and related concerns about the outlook sisting slack in labor and product mar- for profits. On the positive side, busikets, while diminishing over time, was ness conditions in some areas were projected to restrain the rise in labor contributing to some optimism, at least costs and to foster some slowing in the among business managers whose activiunderlying trend of inflation. ties tended to be limited to local mar- In the Committee's review of prevail- kets, and the performance of the stock ing and prospective economic develop- market continued to provide evidence ments, members observed that the of confidence on the part of many mixed nature of the recent economic investors. information and the uneven economic Turning to the outlook for key sectors conditions in different parts of the coun- of the economy, members noted that try made it particularly difficult to assess despite reports of quite weak retail sales the overall state of the economy. They in some parts of the country, real congenerally concluded that, on balance, sumer outlays had been trending upward the evidence was consistent with a con- on an overall basis since the early part tinuing though still sluggish recovery in of the year, and in the absence of a new economic activity and that the prospects adverse shock to consumer confidence, remained favorable for a sustained ex- consumers were likely to continue to pansion at a moderate pace over the next provide important support to the overall several quarters. Many commented, economic expansion. However, the exhowever, that the risks to the expansion tent of that support might remain someappeared to be tilted at least marginally what limited because consumer sentito the downside. Those risks were felt to ment was still cautious amid concerns stem especially from a variety of finan- about employment opportunities and cial strains in the economy, and several personal debt burdens. In the circummembers also indicated that they were stances, retailers in many areas anticiuneasy about the potential implications pated relatively sluggish sales during the of the ongoing weakness in broad mea- upcoming holiday season. In the context sures of money and credit. With regard of an already low saving rate, the outto the outlook for inflation, many of the look for retail sales would continue to members expressed confidence that the hinge on growth in disposable incomes relatively moderate rate of expansion in and the latter in turn would tend to economic activity that they anticipated be constrained by the moderate growth was likely to be associated with appre- that was anticipated in overall economic ciable progress in reducing the core activity. rate of inflation over the next several The members continued to anticipate quarters. that a turnaround from inventory liqui- In the course of the Committee's dis- dation to at least modest accumulation cussion, members commented that the would stimulate the economy in the anecdotal reports on economic condi- quarters ahead. Available data and anec- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 151 dotal reports suggested that overall non- nonetheless, anecdotal reports that sale farm business inventories had continued prices of commercial real estate might to decline through July and probably be stabilizing in some areas and that over the third quarter as a whole. With new and renewal lease prices were no stocks now at generally low levels, a longer declining in some markets and pickup in final demands, including ex- indeed might have begun to edge up. pected further growth in exports, was The government sector also was seen as likely to foster some tendency to rebuild likely to exert some restraint on the inventories. Looking further ahead, overall expansion. Federal government some concern was expressed that, once spending for goods and services apthe expected swing in inventories began peared to have swung into a gradual to abate next year in line with the usual downtrend associated with cutbacks in cyclical pattern, other sources of eco- defense spending. At the same time, the nomic stimulus might not materialize to budgetary difficulties affecting many the extent needed to support continued state and local governments were likely economic growth at an adequate pace. to continue to constrain the overall On the other hand, some members ob- growth in state and local government served that both the economic statistics spending. and reports from business contacts were Many of the members referred to the consistent with some pickup in business potential impact of financial conditions spending for equipment, which could on the outlook for economic activity. In well strengthen further as the recovery some important respects, financial dematured. velopments could be viewed as favor- Residential construction also seemed able. Financial markets were receptive likely to provide some ongoing stimulus to new financing activity as evidenced to the expansion. While this sector by the large volumes of stock and bond appeared to have lost some momentum issuance. Moreover, the balance sheets during the summer months, declines in of many financial institutions were immortgage interest rates along with antic- proving; banks, for example, were makipated moderate growth in overall eco- ing considerable efforts to increase their nomic activity and incomes pointed to a capital, work out problem loans, and gradual uptrend in housing construction. rationalize their operations. On the other The prospective strength of housing hand, the balance sheets of many busiactivity was viewed as likely to be tem- ness firms like those of a significant pered, however, by continuing weakness portion of households were burdened by in the multifamily market; the latter was heavy debt loads. Furthermore, many adversely affected by high vacancy rates contacts referred to the continuing probin many local areas and over time by a lems of small and medium-size busislower pace of family formations. nesses in securing financing to carry on Among the negative developments or expand their operations. In this rethat could be expected to limit the gard, it was difficult to assess the extent strength of the overall economic expan- to which the weakness in loan extension was the outlook for commercial sions through financial intermediaries construction. Indeed, the overbuilt con- reflected unwarranted constraints on dition of commercial space in major credit supplies as opposed to a lack of markets around the country portended demand from qualified borrowers. Rean extended period of weak activity in ports from several parts of the country this sector of the economy. There were, tended to suggest that, while to some Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

152 78th Annual Report, 1991 extent credit standards had been tight- immediately forseeable economic and ened further this year, lenders remained financial circumstances. In particular, willing to provide financing to credit- insofar as could be judged at this point, worthy borrowers. On balance, while the present policy stance provided an the members differed in their appraisals appropriate balance between the risks of of the severity and possible implications a faltering economic expansion and the of the financing problems of borrowers risks of little or no progress toward price without access to financial markets, they stability. The easing steps in recent agreed on the need for careful moni- months and the associated declines in toring of the availability of adequate interest rates, including mortgage rates, credit to support a sustained economic appeared to have supplied more monerecovery. tary stimulus than had yet shown The members continued to view the through to the economy. Several memoutlook for inflation as favorable. The bers commented, however, that the moderate rate of economic expansion Committee needed to remain particuanticipated over the forecast horizon larly alert to indications of renewed was expected to be associated with weakening in business activity, espeenough slack in productive resources to cially given the current financial fragiliaccommodate further downward adjust- ties in the economy and the likely diffiments in the underlying rate of inflation. culty of reviving the economy in the Competition from foreign producers was event of another downturn. Other memlikely to remain substantial in many do- bers gave somewhat more weight to the mestic markets. Indeed, overall compet- need to avoid over-stimulating the econitive pressures and resistance to price omy; a failure to take advantage of the increases were strong in key markets apparent momentum toward lower inflaand provided a promising setting for tion would have seriously adverse conprogress toward price stability. From a sequences on longer-term debt markets different perspective, a number of mem- and the outlook for sustained economic bers observed that the lagging growth in growth. The members agreed that a money, at least as measured by M2 and steady policy course was desirable for M3, had favorable implications for now while the Committee assessed the prices over the longer run. In particular, economy's responses to its earlier easit was suggested that the restrained ing actions. growth in money over recent years In the course of the Committee's diswould tend to foster lower inflation cussion, the members expressed varying while providing liquidity sufficient to degrees of concern about the continuing sustain a moderate rate of economic weakness in the broader monetary expansion. aggregates and overall credit growth. It In the Committee's discussion of pol- was clear that a significant restructuring icy for the intermeeting period, all of the of household and business balance members indicated that they were in sheets was occurring that partly infavor of maintaining an unchanged de- volved adjustments to the unusually gree of pressure on reserve positions. rapid buildup of debt during the 1980s While the economy was subject to an and that such restructuring was being unusual array of problems and related reflected in the behavior of the broader uncertainties, the members generally felt monetary aggregates. Resolutions of that monetary policy was on the right insolvent thrift institutions, which in course under currently prevailing and recent months had resumed in volume, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 153 also were acting to depress M2 as well that they favored a directive that called as M3. In addition, the more liquid com- for maintaining the existing degree of ponents of the monetary aggregates pressure on reserve positions. They also were growing relatively strongly. Under noted their preference or acceptance of these circumstances, slow growth in a directive that included a slight bias broader money and credit did not neces- toward possible easing during the intersarily indicate that monetary policy was meeting period. Accordingly, the Combeing too restrictive by damping the mittee decided that slightly greater reexpansion of incomes or curtailing serve restraint might be acceptable demands for goods and services. More- during the intermeeting period or over, a staff analysis prepared for this slightly lesser reserve restraint would meeting indicated that some recovery in be acceptable depending on progress the growth of these aggregates could be toward price stability, trends in ecoexpected over the balance of 1991, nomic activity, the behavior of the monassuming an unchanged degree of pres- etary aggregates, and developments in sure in reserve markets. Nonetheless, foreign exchange and domestic financial many of the members felt that the be- markets. The reserve conditions contemhavior of M2 and M3, whose growth for plated at this meeting were expected to the year to date was at the bottom of the be consistent with growth of M2 and Committee's ranges, needed to be moni- M3 at annual rates of around 3 percent tored with special care and, at least in and Wi percent respectively over the one view, that some further easing mea- three-month period from September sures might be desirable in the near term through December. to improve the prospects that monetary At the conclusion of the meeting, the expansion for the year would be within following domestic policy directive was the Committee's ranges. issued to the Federal Reserve Bank of Turning to possible adjustments to the New York: degree of reserve pressure during the intermeeting period, a majority of the The information reviewed at this meeting members indicated a preference for a has been mixed, but it suggests on balance directive that was biased at least margin- that economic activity has been expanding ally toward easing. Such a bias was at a moderate pace. Total nonfarm payroll called for in this view by the downside employment changed little over July and August, and the civilian unemployment rate risks in the economy, though a number was 6.8 percent in both months. Employof these members also felt that there ment in manufacturing continued to advance should be no strong presumption that in August, and industrial production posted a any easing would be undertaken during further rise after several months of sizable the intermeeting period ahead. The other gains. Consumer spending increased considerably on balance in July and August. Recent members indicated that they could supdata on orders and shipments of nondefense port an asymmetric directive toward capital goods point to a small increase in real ease though they preferred a symmetric outlays for business equipment, but nonresiintermeeting instruction, especially in dential construction has remained weak. the context of the further stimulus Housing starts rose only slightly further in that could be expected to result over July and August after increasing appreciably on balance since January. The nominal U.S. time from the earlier monetary easing merchandise trade deficit widened substanactions. tially in July and was considerably above its At the conclusion of the Committee's average rate in the second quarter. Increases discussion, all of the members indicated in consumer prices have been small in recent Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 78th Annual Report, 1991 months, owing to declines in food and lesser reserve restraint would be acceptable energy prices. in the intermeeting period. The contemplated Most interest rates have declined further reserve conditions are expected to be consissince the Committee meeting on August 20. tent with growth of M2 and M3 over the The Board of Governors approved a reduc- period from September through December at tion in the discount rate from 5Vi to 5 per- annual rates of about 3 and IV2 percent, cent on September 13. The trade-weighted respectively. value of the dollar in terms of the other G-10 currencies fell sharply over the intermeeting Votes for this action: Messrs. Greenspan, period; much of the drop retraced the previ- Corrigan, Angell, Black, Forrestal, Keehn, ous run-up associated with the attempted Kelley, LaWare, Mullins, and Parry. Votes coup in the Soviet Union that began shortly against this action: None. before the August Committee meeting. After contracting in July, M2 was about unchanged in August and September. M3 Meeting Held on declined further in July and August and is indicated to have changed little in Septem- November 5,1991 ber. For the year thus far, expansion of M2 and M3 has been at the lower end of the 1. Domestic Policy Directive Committee's ranges. The Federal Open Market Committee The information reviewed at this meetseeks monetary and financial conditions that ing suggested that economic activity had will foster price stability and promote sustainable growth in output. In furtherance of turned sluggish after registering considthese objectives, the Committee at its meet- erable gains around midyear. Consumer ing in July reaffirmed the ranges it had estab- spending for goods had been lackluster lished in February for growth of M2 and M3 recently, and businesses remained cauof 2V2 to 6V2 percent and 1 to 5 percent, tious about investing in increased prorespectively, measured from the fourth quarter of 1990 to the fourth quarter of 1991. The duction capacity or inventories. Indusmonitoring range for growth of total domes- trial production had flattened out, tic nonfinancial debt also was maintained at nonresidential construction had moved 4V2 to SV2 percent for the year. For 1992, on sharply lower, and housing construction a tentative basis, the Committee agreed in had lost much of its forward momen- July to use the same ranges as in 1991 for growth in each of the monetary aggregates tum. Price inflation evidently remained and debt, measured from the fourth quarter on a gradual downtrend. of 1991 to the fourth quarter of 1992. With After falling sharply in the first half regard to M3, the Committee anticipated that of the year, total nonfarm payroll emthe ongoing restructuring of thrift depository ployment rose slightly in the third quarinstitutions would continue to depress the ter and was unchanged in October. growth of this aggregate relative to spending and total credit. The behavior of the mone- Sizable job gains in the services sector, tary aggregates will continue to be evaluated notably in health and business services, in the light of progress toward price level were offset by losses elsewhere. Manustability, movements in their velocities, and facturing employment declined further; developments in the economy and financial durable goods industries bore all of the markets. loss. Job cutbacks in construction and In the implementation of policy for the immediate future, the Committee seeks to retail trade were larger in October than maintain the existing degree of pressure on they had been in recent months. Also, reserve positions. Depending upon progress the small September increase in average toward price stability, trends in economic weekly hours worked by production or activity, the behavior of the monetary aggrenonsupervisory workers was reversed in gates, and developments in foreign exchange and domestic financial markets, slightly October. The civilian unemployment greater reserve restraint might or slightly rate edged back up to 6.8 percent. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 155 Industrial production was little major types of structures, but particuchanged over August and September larly for commercial buildings, fell after sizable gains in earlier months; sharply. Available information on new available data indicated that production contracts and commitments suggested would remain flat in October. Sluggish- that the rate of decline for non-office ness had been evident in most compo- construction activity might slow in comnents of the index since July; abstracting ing months. from the output of motor vehicles and The pace of inventory liquidation by parts, which had been subject to wide businesses slowed in July and August swings, the production of consumer from the substantial second-quarter rate. goods and construction supplies had Ratios of inventories to sales edged been rising much less rapidly since mid- down at manufacturing and non-auto year while the output of business equip- retail firms. In September, stocks held ment had not expanded much since by manufacturers increased. reaching its low last March. Total indus- The nominal U.S. merchandise trade trial capacity utilization edged lower in deficit widened appreciably in August. September. For the July-August period, the trade Real personal consumption expendi- deficit was significantly larger than its tures advanced considerably further in average rate in the second quarter, the third quarter, partly reflecting a sharp reflecting a strong expansion in the rise in purchases of motor vehicles. value of imports and a small reduction However, outlays for non-auto goods in the value of exports. The increase in weakened in August and September, and imports was entirely in consumer goods partial data for October suggested a and automotive products; other major slowing in sales of motor vehicles in trade categories registered small dethat month. In addition, indicators of clines. Part of the drop in exports reconsumer confidence, which had re- sulted from a partial reversal of a sharp mained at subdued levels since the end second-quarter increase in exports of of the war in the Persian Gulf, had dete- aircraft and parts. Indicators of ecoriorated significantly in October. Hous- nomic activity in the major foreign ing starts declined in September after industrial countries suggested continued rising substantially on balance in earlier weak growth on balance in the third months of this year. Sales of both new quarter. The rate of growth in western and existing houses had dropped re- Germany and Japan was considerably cently despite lower mortgage rates and slower in the second and third quarters favorable price developments. than earlier in the year, although capac- Shipments of nondefense capital ity utilization rates remained high in goods rose for a second straight month both countries. In some other major in September. For the third quarter as a countries, economic activity was slowly whole, real business spending for com- and unevenly recovering from a period puters, aircraft, and motor vehicles reg- of recession. istered a sizable gain while outlays for Producer prices of finished goods industrial machinery fell further. Recent were little changed in September; a data on orders pointed to some further firming of prices of finished energy moderate expansion in business spend- goods was offset by lower food prices. ing for equipment in the near term. Non- For finished goods other than food and residential construction continued to energy, producer prices had advanced contract at a rapid rate as outlays for all thus far in 1991 at a pace appreciably Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 78th Annual Report, 1991 below that for 1990. At the consumer this action was taken in response to level, the September rise in prices was signs of a weaker-than-expected ecolarger than the increases in the prior few nomic recovery and flagging consumer months. Excluding food and energy and business confidence. Just before the items, consumer prices advanced in Sep- intermeeting period, adjustment plus tember at the same elevated rate as in seasonal borrowing had averaged the previous three months; however, for around $340 million. During the period, 1991 to date, nonfood, non-energy con- several technical decreases were made sumer prices had increased at a slightly to expected levels of adjustment plus slower pace than in 1990. Total hourly seasonal borrowing to reflect the usual compensation for private industry work- autumn pattern of ebbing seasonal credit ers rose at a somewhat slower rate in the needs. By the end of the intermeeting third quarter than in the first half of the period, following the slackening of seayear. For the year to date, wage in- sonal funding needs and the easing of creases had slowed appreciably, but reserve conditions, the volume of borbenefit costs had continued their rapid rowing had declined to around $125 milrise. lion. The federal funds rate remained At its meeting on October 1, 1991, near 5VA percent during most of the the Committee adopted a directive that intermeeting period but slipped to about called for maintaining the existing de- 5 percent after the easing of reserve gree of pressure on reserve positions conditions. and for giving special weight to poten- Over the early weeks of the intermeettial developments that might require ing period, other short-term interest rates some easing during the intermeeting declined somewhat as market participeriod. Accordingly, the directive indi- pants interpreted incoming data as indicated that slightly greater reserve re- cating a sluggish economy. At the same straint might be acceptable or slightly time, long-term rates moved considerlesser reserve restraint would be accept- ably higher in response to the release of able during the intermeeting period disappointing statistics on consumer depending on progress toward price sta- prices and concerns stemming from disbility, trends in economic activity, the cussions of possible measures of fiscal behavior of the monetary aggregates, stimulus that would increase the federal and developments in foreign exchange deficit and borrowing needs. Subseand domestic financial markets. The quently, short-term rates fell further and reserve conditions contemplated at this long-term rates retraced a portion of meeting were expected to be consistent their rise as markets reacted to informawith a resumption in the growth of both tion suggesting additional economic M2 and M3; these aggregates were weakness and reduced pressure on labor expected to expand at annual rates of costs, and to actual as well as prospecaround 3 percent and 1 Vi percent respec- tive further easing of monetary policy. tively over the three-month period from The prime rate remained unchanged at September through December. 8 percent over the period, but primary- Over most of the intermeeting period, market yields on mortgages fell to their open market operations were directed lowest levels since 1977. Most stock toward maintaining the existing degree price indexes were slightly higher on of pressure on reserve positions. At the balance. end of October, however, a slight easing The trade-weighted value of the dolof reserve conditions was implemented; lar in terms of the other G-10 currencies Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 157 fluctuated in a fairly narrow range over Increases in the construction of singlethe intermeeting period but declined family housing and in business spending slightly on balance. The dollar was gen- for equipment, along with a shift from erally higher over the first half of the inventory liquidation to limited accumuperiod but then weakened in response to lation, were expected to give impetus to growing evidence of a sluggish U.S. the expansion during 1992. As in earlier economy and consequent market antici- forecasts, real federal government purpation of an easing of U.S. monetary chases were projected to fall somewhat policy. The dollar was up a little against next year, with defense expenditures the mark, in large part reflecting con- more than accounting for the decline, cerns that the Soviet Union might de- and fiscal adjustments at the state and fault on its foreign debt, much of which local levels and a continuing decline in is owed to or guaranteed by the German commercial construction were expected government. The yen was strong on to be persisting sources of restraint on balance, in part because of continuing aggregate demand. Significant though indications of growing Japanese trade diminishing slack in labor and product surpluses. markets was projected to induce a fur- M2 expanded slowly in October after ther decline in the underlying rate of shrinking on balance over the previous inflation over the next several quarters. three months. The turnaround was con- In the Committee's discussion of cursistent with the Committee's expecta- rent and prospective economic developtions for the fourth quarter and reflected ments, the members commented on in part the rapid growth in the liquid- widespread indications of deteriorating deposit components of this monetary business and consumer confidence and aggregate. As the Committee also had on evidence that the recovery in busiexpected, the pickup in M2 showed ness activity had weakened since early through to M3, which posted its first summer. Nonetheless, despite quite negmonthly increase since May. For the ative anecdotal reports from many parts year through October, expansion of both of the country, the members generally M2 and M3 was estimated to have been concluded that the available economic at the lower ends of the Committee's data appeared consistent with continuannual growth ranges. ing, albeit sluggish, expansion in overall The staff projection prepared for this economic activity. Views differed to meeting pointed to a continuing recov- some extent with regard to the risks to a ery in economic activity, but recent continuing recovery. A number of memreports on business and consumer confi- bers expressed concern about the potendence combined with other information tial for some further softening, espehad led to an appreciable markdown in cially in light of the vulnerability of the the projected rate of expansion for the expansion stemming from the troubled current quarter and to a lesser mark- condition of many financial institutions down for the first quarter of 1992. Eco- and the heavy debt burdens of numerous nomic growth was projected to pick up business firms and individual houseby the spring of next year, but as in holds; other members saw the risks as earlier staff forecasts, it was expected more evenly balanced and perhaps even to remain subdued in comparison with tilted marginally to the upside. While past cyclical experience and the risks the performance of the economy was of a different outcome continued to be likely to remain relatively lackluster seen as predominantly on the downside. over the nearer term and the risks of a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 78th Annual Report, 1991 downturn would be greatest during the In the course of the Committee's next quarter or two, many of the mem- review of business developments in difbers judged a resumption of growth next ferent regions, members continued to year at a pace broadly in line with the report uneven conditions ranging from staff forecast to be a reasonable expecta- modest growth to some further decline tion. In this regard, some noted that in regional activity, but business and much of the stimulus from the easing in consumer sentiment was described as monetary policy over the course of re- almost universally negative. It was uncent months had not yet been felt in the clear to what extent the drop in confieconomy. Many of the members empha- dence reflected the disappointing pace sized that the prospects for appreciable of the economic recovery so far or was a progress toward price stability were harbinger of further weakening in ecoquite favorable, though some expressed nomic activity. Members commented reservations about the extent of the that surveys of consumer confidence progress that could be expected over the had to be viewed with caution because forecast horizon. they had tended in the past to be coinci- Several members referred to the con- dent rather than leading indicators of tinuing adjustments by financial institu- economic activity. More generally, beartions and many business firms to the ish sentiment, though perhaps more financial excesses of the past decade and muted, had not been an unusual occurthe greater-than-expected downward rence in the early stages of past business pressure that these adjustments appeared recoveries. to be exerting on the expansion. The While the potential sources of ecoefforts to reduce debt exposure and nomic stimulus were subject to uncerrebuild equity positions were necessi- tainty and recent developments heighttated by the effects on balance sheets of ened concerns that the rate of economic the contraction in the value of a variety expansion would remain below a desirof assets, notably in the structurally able pace for an extended period, the troubled sectors of the economy such members generally anticipated that imas commercial real estate, and the fail- provement in key areas of the economy, ure of other assets to appreciate as ex- notably certain interest-sensitive sectors pected. The rebuilding of balance sheets and business inventories, eventually augured well for the future financial would provide the impetus needed to health and stability of the economy, but promote at least moderate growth in members commented that an extended overall business activity. In the critical period would be required before that area of consumer demand, members obprocess could be completed. In the served that consumer caution reflected interim, the retrenchment that was not only concerns about employment involved implied reduced propensities prospects and, in the case of many to spend and constrained growth in households, relatively heavy debt burbusiness activity. One facet of the dens, but also appeared to stem from adjustment process was greater caution actual or perceived declines in the maron the part of institutional lenders. Many ket value of residences. Consumer exbusiness borrowers continued to com- penditures on services were continuing plain about the difficulty of obtain- to grow, though at a relatively slow ing credit, while institutional lenders pace, but spending on goods had edged stressed the lack of demand from quali- lower over the course of recent months fied borrowers. and many retailers reported that they Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 159 expected very weak sales during the could be expected to provide ongoing approaching holiday season. With strength, especially once the expansion regard to the longer-term outlook for was well under way. consumer expenditures, some pickup in In their comments concerning the outinterest-sensitive spending for durable look for inflation, members observed goods was seen as a likely prospect that that many of the recent statistical indicawould have feedback effects on the tors and especially the anecdotal evidemand for inventories and production. dence from around the country provided According to available data and re- the basis for considerable optimism that ports from around the country, inven- progress was being made toward price tories generally appeared to be near stability. Developments on the financial acceptable levels, and members contin- side, including low levels of business ued to anticipate that a further swing and consumer borrowing and an exfrom inventory liquidation to modest tended period of limited monetary accumulation would provide some stim- growth, reinforced expectations of an ulus to the economy over the year ahead. ongoing movement toward stable prices. The members recognized that a number Members also noted that the informaof developments argued against a typi- tion on wages was consistent with a cal surge in inventory investment during downtrend in labor costs despite still the recovery, including the now wide- substantial upward pressures on emspread practice of "just-in-time" inven- ployee benefit costs. Some members tory management. Nonetheless, despite cautioned, however, that an appreciable sluggish demand, the pace of inventory inflationary risk remained in the econliquidation appeared to have slowed in omy. While inflationary expectations the third quarter, and there were scat- might well be waning, as evidenced in tered reports of efforts by some manu- part by the behavior of equity markets, facturers to increase their inventories. the level of long-term interest rates sug- The construction of new housing also gested that inflation concerns had not appeared likely to play a positive, disappeared. though possibly limited, role in helping In the Committee's discussion of an to sustain the recovery. Recent indica- appropriate policy for the intermeeting tors of home sales and housing starts period ahead, a majority of the members were disappointing, but the demand for indicated that they could support a pronew single-family homes would respond posal to ease reserve conditions slightly over time to the declines that had at this time and to bias the directive occurred in mortgage interest rates. toward possible further easing later in Some of that demand might be post- the intermeeting period. The members poned, however, until borrowers were recognized that monetary policy had persuaded that interest rates had bot- been eased considerably over the course tomed out. On the negative side, com- of recent months, including a decision to mercial construction activity would reduce reserve pressures at the end of probably remain depressed for an ex- October, and that all of the stimulus tended period as excess capacity in from the earlier actions had not yet been many parts of the country gradually was felt in the economy. Nonetheless, in the absorbed. With regard to business view of many members further modest spending for new equipment, real out- easing was desirable at this point to lays were indicated to have risen, espe- provide some added insurance against cially for computers, and this sector the downside risks in the economy. Such Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

160 78th Annual Report, 1991 a policy move would help counter the dence under prevailing circumstances. deterioration in business and consumer Indeed, appreciable further easing, or confidence, and it might also encourage any easing, would incur too much risk some decline in longer-term interest of reviving inflationary concerns with rates. Under current economic and adverse consequences for longer-term financial conditions, this easing would debt markets. While none of these mempose negligible risks of deflecting infla- bers wanted to rule out the potential tion from its downward path. Continu- need to ease monetary policy signifiing weakness in the monetary aggre- cantly further, they preferred to pause gates reinforced the need for easier and wait for additional evidence before reserve conditions. such action was taken, especially given There was considerable discussion the further stimulus that could be anticiregarding the possible advantages of a pated from previous easing moves. Consomewhat stronger move at this junc- cern also was expressed that the Comture. A Vi percentage point reduction of mittee might not recognize the need to the discount rate was pending at several reverse its course and tighten policy on Federal Reserve Banks, but the Board of a timely basis should inflationary pres- Governors had not yet made a decision sures tend to revive later. with regard to those proposals. It was Members noted that the expansion of noted during this discussion that the M2 appeared to have resumed in Octo- Federal Reserve had tended to imple- ber, though at a pace that kept the aggrement its easing of monetary policy since gate only at the bottom of the Committhe spring of 1989 through a series of tee's range for the year. According to an small policy actions. That approach gen- analysis prepared by the staff for this erally appeared to have been appropri- meeting, M2 was likely to continue to ate, but a number of members expressed expand slowly over the balance of the concern that further small moves would year, despite the effects of earlier policy lack the visibility that was needed in easing actions, and for the year as a present circumstances. If reserve pres- whole M2 growth was expected to sures were to be reduced only modestly, average close to the lower end of the this action should be accompanied in Committee's range. Some members the view of many members by Board commented that an easing in reserve approval of the pending discount rate conditions would not only improve proposals to signal clearly that monetary slightly the odds that M2 growth would policy was moving against the weak- end the year within the Committee's ening tendencies in the economy. An range but would also help to put M2 on accompanying reduction in the discount a desirable growth path by early next rate also was seen as providing further year. While the relationship between encouragement to a drop in the prime money growth and economic activity rate. was subject to substantial uncertainty in Other members expressed reserva- the short run, they saw a marked advantions about the need for substantial eas- tage, in terms of the continuity of moneing, and two indicated that they could tary policy and its credibility, for the not support any easing through open Committee to more aggressively foster market operations at this time. Some growth of M2 within the annual range. questioned whether monetary policy With regard to possible adjustments actions could have a constructive influ- to the degree of reserve pressure during ence on business and consumer confi- the intermeeting period, most of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 1 61 members who favored some immediate immediate slight easing in the degree of easing of reserve conditions also sup- pressure on reserve positions. These ported a directive that remained biased members also noted their acceptance of toward further easing. However, some a directive that included a bias toward also indicated that if the Board were to possible easing during the intermeeting approve the pending proposals to reduce period. Accordingly, the Committee the discount rate, the intermeeting decided that slightly greater reserve instruction should then be viewed as restraint might be acceptable during the symmetrical. intermeeting period or slightly lesser The members discussed at some reserve restraint would be acceptable length the appropriate timing of the depending on progress toward price sta- Committee's easing action. Starting that bility, trends in economic activity, the afternoon and continuing over the next behavior of the monetary aggregates, two days, the Treasury would be con- and developments in foreign exchange ducting its quarterly auctions of notes and domestic financial markets. The and bonds. In view of this, an immediate reserve conditions contemplated at policy move would come as a surprise this meeting were expected to be to many participants in financial mar- consistent with growth of M2 and M3 kets, although such a move shortly after at annual rates of around 3 percent the auctions was widely anticipated. and 1 percent respectively over the An immediate move, even in the easing three-month period from September direction, could have an adverse effect through December. on some Treasury market participants, At the conclusion of the meeting the with potentially unsettling consequences following domestic policy directive was for current and future Treasury financ- issued to the Federal Reserve Bank of ings. The members agreed that in gen- New York: eral it was preferable to avoid policy moves during Treasury refundings, but The information reviewed at this meeting most felt that the contemplated easing portrays a sluggish economy and a marked deterioration in business and consumer conmove should not be delayed for any fidence. Total nonfarm payroll employment significant period. They concluded that, was unchanged in October after rising on balance, it would be less misleading slightly over the third quarter, and the civilto take action immediately rather than to ian unemployment rate edged back up to wait until the Treasury auctions were 6.8 percent. Industrial production has been flat in recent months. Consumer spending completed later in the week. It was increased considerably through the summer, noted in this connection that a prompt in part because of a sizable rise in expendieasing of reserve conditions, and any tures on motor vehicles; sales of motor vehiaccompanying Board action to approve cles slowed in October, however. Real outa lower discount rate, would become lays for business equipment—especially for known to outside observers after the computers—have been rising, but nonresidential construction has continued to deauction of the shorter-term Treasury cline. Housing starts and home sales have note but before the auctions of the weakened recently. The nominal U.S. merintermediate- and long-term Treasury chandise trade deficit in July-August was issues. significantly above its average rate in the second quarter. Wage and price increases At the conclusion of the Committee's have continued to trend downward. discussion, all but two of the members Short-term interest rates have declined indicated that they favored or could somewhat further since the Committee meetaccept a directive that called for an ing on October 1, while bond yields are Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

162 78th Annual Report, 1991 about unchanged to slightly higher on bal- LaWare, Mullins, and Parry. Votes against ance. The trade-weighted value of the dollar this action: Messrs. Angell and Kelley. in terms of the other G-10 currencies declined on balance over the intermeeting Mr. Angell dissented because he was period. concerned about the impact of further Expansion in M2 and M3 resumed in easing on inflation expectations and con- October, albeit at a slow pace. For the year through October, expansion of both M2 and sequently on long-term interest rates. In M3 is estimated to have been at the lower his view, the prospect for a robust and ends of the Committee's ranges. long-lasting recovery is dependent on The Federal Open Market Committee the completion of adjustments in busiseeks monetary and financial conditions that ness pricing practices, household savwill foster price stability and promote susings, and balance sheets more generally. tainable growth in output. In furtherance of these objectives, the Committee at its meet- Monetary policy actions that are pering in July reaffirmed the ranges it had estab- ceived as a shift from a focus on pricelished in February for growth of M2 and M3 level stability to one on short-term ecoof 2Vz to 6V2 percent and 1 to 5 percent, nomic growth may well abort the needed respectively, measured from the fourth quaradjustments. In his view, credible priceter of 1990 to the fourth quarter of 1991. The monitoring range for growth of total domes- level targeting would provide assurance, tic nonfinancial debt also was maintained at particularly given the somewhat precari- 4V2 to 8V2 percent for the year. For 1992, on ous short-term business outlook, that a tentative basis, the Committee agreed in monetary policy would act to counter July to use the same ranges as in 1991 for either deflation or inflation. The congrowth in each of the monetary aggregates and debt, measured from the fourth quarter sequence would be to foster a considof 1991 to the fourth quarter of 1992. With erable downward thrust in long-term regard to M3, the Committee anticipated that interest rates and to set the stage for the ongoing restructuring of thrift depository sustained expansion. institutions would continue to depress the growth of this aggregate relative to spending Mr. Kelley dissented because he beand total credit. The behavior of the mone- lieved that a steady policy course was tary aggregates will continue to be evaluated appropriate, at least for now, in the conin the light of progress toward price level text of the ongoing stimulus that could stability, movements in their velocities, and be anticipated from the System's earlier developments in the economy and financial markets. easing actions. In his view, the outlook In the implementation of policy for the for continuing expansion in economic immediate future, the Committee seeks to activity remained favorable, and he saw decrease somewhat the existing degree of considerable risks in further easing at pressure on reserve positions. Depending this time. In particular, he was conupon progress toward price stability, trends cerned that a policy easing move would in economic activity, the behavior of the monetary aggregates, and developments in stimulate inflation expectations with adforeign exchange and domestic financial verse implications for long-term interest markets, slightly greater reserve restraint rates and the performance of interestmight or slightly lesser reserve restraint sensitive sectors of the economy. Furwould be acceptable in the intermeeting pether, he did not believe that many of the riod. The contemplated reserve conditions factors that are importantly inhibiting are expected to be consistent with growth of M2 and M3 over the period from September economic expansion could be constructhrough December at annual rates of about tively addressed by a more accommoda- 3 and 1 percent, respectively. tive position. He also feared that the dollar would come under downward Votes for this action: Messrs. Greenspan, Corrigan, Black, Forrestal, Keehn, pressure in foreign exchange markets Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 163 with only slight benefits for exports but being restrained by budgetary imbaladded inflation pressures in the domes- ances. Recently, industrial production tic economy. had fallen, and payroll employment had dropped sharply. Wage and price increases had continued to trend 2. Authorization for Domestic downward. Open Market Operations Total nonfarm payroll employment The Committee approved a temporary fell sharply in November after rising increase of $2 billion, to a level of somewhat in the third quarter and changing little in October. Declines in $10 billion, in the limit on changes employment were widespread: The between Committee meetings in System number of manufacturing jobs decreased Account holdings of U.S. government in November for a third straight month, and federal agency securities. The inand further job losses were reported in crease amended paragraph l(a) of the construction and in wholesale and retail Authorization for Domestic Open Martrade. However, the average weekly ket Operations and was effective for the hours worked by production or nonsuintermeeting period ending with the pervisory workers in the private nonclose of business on December 17,1991. farm sector edged up in November, Votes for this action: Messrs. Greenspan, and the civilian unemployment rate Corrigan, Angell, Black, Forrestal, Keehn, remained at 6.8 percent. Kelley, LaWare, Mullins, and Parry. Votes Industrial production fell appreciably against this action: None. in November after changing little in the previous three months. A portion of the The Manager for Domestic Opera- November decline reflected a sizable tions advised the Committee that the drop in the output of motor vehicles current leeway of $8 billion for changes and parts. In addition, however, the proin System Account holdings might not duction of non-auto consumer goods be sufficient to accommodate the potenslackened, and the output of business tially large need to add reserves over the equipment other than motor vehicles intermeeting period ahead to meet an remained near its low of last March; anticipated seasonal bulge in currency the latter reflected in part the persisting in circulation and required reserves. effects of a strike at a major producer of industrial equipment. As in most earlier Meeting Held on months of the year, the production of December 17, 1991 defense and space products declined. With industrial output down in November, total industrial capacity utilization Domestic Policy Directive decreased, and declines in operating The information reviewed at this meet- rates were widespread across industries. ing indicated that the economy was slug- Real consumer spending had been gish and that business and consumer soft on balance in recent months, reconfidence remained depressed. Spend- flecting sluggish growth in disposable ing for housing and business equipment incomes, weak labor-market conditions, had been rising, but consumption expen- and depressed consumer confidence. ditures had softened, commercial con- Nominal retail sales expanded somestruction activity was still declining, and what in November from a downward government spending at all levels was revised level for October. The Novem- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

164 78th Annual Report, 1991 ber increase reflected a rebound in sales sale inventories were up slightly in of nondurable goods other than food and October after a sizable decline in the a rise in sales at automotive dealers; previous month; the inventory-to-sales sales of durable goods other than autos ratio remained in the narrow range that were about unchanged. Housing starts had prevailed in recent months. fell in November, retracing part of a The nominal U.S. merchandise trade substantial advance in October; on aver- deficit widened slightly further in Sepage, starts were appreciably higher in tember. For the third quarter, the deficit October and November than in the third was somewhat above its average rate quarter. Despite low mortgage interest over the first half of 1991 but well below rates and steady house prices, sales its rate in 1990. The value of exports in of single-family homes in October the third quarter remained close to the remained well below their spring levels. record high reached in the second quar- After changing little over the third ter while the value of imports increased quarter, shipments of nondefense capital appreciably, with most of the rise goods registered a sharp rise in October, reflecting larger imports of automotive reflecting a bulge in outlays for comput- products and consumer goods. The ing equipment; shipments of most other increase in imports of consumer goods types of business equipment remained appeared to have contributed to the subsluggish. Recent data on orders sug- stantial buildup in retail inventories in gested little growth in aggregate outlays the United States, particularly in the for business equipment over the near month of September. The available data term. Nonresidential construction, nota- on economic activity in the major forbly of office and other commercial struc- eign industrial countries provided furtures, continued to shrink in October. ther evidence of relatively weak growth The vacancy rate for office buildings on balance in these countries in the third was still very high, and this along with quarter and gave few indications of a available information on contracts and revival in the fourth quarter. The trend commitments suggested that nonresi- toward reduced inflation had continued dential construction activity would re- in most of the industrial countries. main weak for an extended period. Producer prices of finished goods Business inventories turned up advanced in November at about the slow sharply in September after many months pace recorded since midyear; over this of liquidation. At the retail level, inven- period, declines in food prices roughly tories rose further in October, with offset increases in energy prices. At the nearly half of the buildup occurring at consumer level, food and energy prices auto dealers. The additional rise in jumped in November, but the increase in stocks coupled with declines in sales led the prices of nonfood, non-energy items to higher inventory-to-sales ratios at was about the same as that registered many types of retail establishments. since midyear and considerably below Aggregated over all retail establish- the 1990 pace. Average hourly earnings ments other than auto dealers, the ratio of production or nonsupervisory workof inventories to sales in October was ers in the October-November period close to the peak posted in early 1991. increased at about the reduced third- By contrast, in manufacturing, stocks quarter rate; over the past twelve changed little in October, and the ratio months, average hourly earnings had of stocks to sales decreased and nearly risen more slowly than in the previous reached its low of August 1990. Whole- twelve-month period. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 165 At its meeting on November 5, 1991, eral funds rate averaged around 43A perthe Committee adopted a directive that cent over most of the period but softcalled for an immediate slight easing in ened to around AVi percent after the the degree of pressure on reserve posi- second easing action. tions and that provided for giving spe- Other short-term interest rates decial weight to potential developments clined more than the federal funds rate that might require some additional as market participants reacted to actual easing during the intermeeting period. and anticipated further easing steps amid Accordingly, the directive indicated that growing evidence that the economic slightly greater reserve restraint might recovery had stalled. Expectations of be acceptable during the intermeeting more subdued economic activity conperiod or slightly lesser reserve restraint tributed to declines in yields on longerwould be acceptable depending on term instruments as well. Yields on progress toward price stability, trends in intermediate maturity securities dropped economic activity, the behavior of the almost as much as short-term rates while monetary aggregates, and developments rates on mortgages, corporate bonds, in foreign exchange and domestic finan- and long-term Treasuries fell by less. cial markets. The reserve conditions The prime rate was reduced by Vi percontemplated under this directive were centage point to IV2 percent early in the expected to be consistent with growth of intermeeting period. Broad stock price M2 and M3 at annual rates of around indexes were down slightly. 3 percent and 1 percent respectively The trade-weighted value of the dolover the three-month period from Sep- lar in terms of the other G-10 currencies tember through December. declined further on balance over the Immediately following the November intermeeting period. During most of the meeting, open market operations were period, signs of weakness in the U.S. directed toward a slight easing of condi- economy and the easings of U.S. monetions in reserve markets; this step was tary policy had a depressing effect on taken in conjunction with the reduction the value of the dollar. The dollar's in the discount rate from 5 to 4Vi per- depreciation was primarily against the cent approved by the Board of Gover- mark and other European currencies; the nors on November 6. In early Decem- mark was supported by reports of furber, as economic indicators continued to ther increases in wage and price inflapoint to a faltering recovery and growth tion in Germany and associated expectaof the broad monetary aggregates re- tions that German monetary policy mained sluggish, an additional slight would be tightened. The dollar declined easing of reserve conditions was carried less against the Japanese yen as eviout. Several technical reductions were dence accumulated that the Japanese made during the intermeeting period to economy was slowing further and some expected levels of adjustment plus sea- easing was implemented in Japanese sonal borrowing to reflect the declining monetary policy. usage of seasonal credit during the au- Expansion in M2 picked up in tumn. For most of the intermeeting in- November from a slow pace in October. terval, adjustment plus seasonal borrow- At least in part this reflected the cumulaing tended to run a little below expected tive effect of earlier declines in shortlevels, averaging slightly more than term market interest rates in lowering $100 million over the three complete the opportunity costs of holding liquid reserve maintenance periods. The fed- deposits. The somewhat faster expan- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

166 78th Annual Report, 1991 sion of M2 was consistent with the ments, the members focused on an evi- Committee's expectations for M2 dent pause in the business recovery and growth in the fourth quarter. The more its interaction with very gloomy busirapid growth of M2 showed through to a ness and consumer sentiment. A number limited extent to M3. For the year of factors that had been expected to through November, expansion of both damp the expansion—including the re- M2 and M3 was estimated to have been trenchment associated with the rebuildat the lower ends of the Committee's ing of balance sheets by heavily inannual ranges. debted businesses and consumers and The staff projection prepared for this the efforts of many firms to improve meeting pointed to a recovery in eco- efficiency by streamlining operations nomic activity. However, a variety of and reducing employment—had in fact incoming information, notably indica- proved to be stronger and more persistions of a depressed state of confidence, tent than anticipated. The timing of a weaker than expected consumer spend- renewed expansion in business activity ing, and sluggish industrial production was uncertain, and a number of memsuggested a pause in the recovery that bers commented that the economy might might extend into early 1992. By the well remain quite sluggish over the spring, the cumulative effects of de- months immediately ahead. Nonetheclines in interest rates in recent months less, considerable progress in business would contribute to a resumption of eco- and financial restructuring activities was nomic growth at a moderate rate, with in train, and the latter, together with the the risks of a stronger or weaker trajec- stimulus that could be expected from the tory for the economy being viewed as lagged effects of earlier monetary policy about in balance. Increases in residential easing actions, was likely to lead to a construction, somewhat larger consump- moderate pickup in the economy later in tion expenditures, and some pickup in 1992. With regard to the outlook for business equipment spending were pro- inflation, many members observed jected to provide the underpinnings for that the statistical and anecdotal evithe resumption of growth. As in earlier dence pointed to faster progress toforecasts, the continuing downtrend in ward price stability than they had anticicommercial construction and ongoing pated earlier. adjustments in state and local govern- As they had at earlier meetings, the ment spending in response to budget members gave considerable emphasis to imbalances were expected to have a current business and consumer sentiretarding effect on aggregate demand. ment, which they judged to be much At the federal level, projected declines more negative than under similar busiin defense outlays, which would be only ness and employment conditions in the partially offset by higher nondefense past. The underlying reasons were diffispending, also would be a source of cult to ascertain but probably reflected restraint, at least in the absence of new a variety of developments, including fiscal initiatives. The substantial though widespread disappointment over the diminishing slack expected in labor and pace of the economic recovery, related product markets in coming quarters was consumer concerns about employment projected to induce further declines in opportunities, and fears associated with the underlying rate of inflation. heavy debt burdens and the weakened In the Committee's discussion of cur- financial condition of many business and rent and prospective economic develop- financial institutions. The size of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 167 federal budget deficit was adding to ployment prospects, debt burdens, and those concerns, and the budgetary prob- softness in real estate prices. Some lems of many state and local govern- members also observed that the saving ments were seen as likely to result in rate was already on the low side and that higher taxes and spending cutbacks. On the risks of a rise in that rate could not the positive side, while the efforts to be ruled out in the environment that rebuild balance sheets and to restructure was likely to prevail during the months business activities were likely to con- ahead. tinue to exert restraining effects on the The members did not discern signs of economy, such developments had favor- significant strengthening in business able implications for the financial health expenditures for equipment over the and the competitive strength of the econ- nearer term, though the output of capital omy over the longer run. Members goods appeared to be on a slowly rising noted in this connection that a record trend in at least one major capitalvolume of equity issues was helping to producing region. Nonresidential conreduce balance sheet leverage and that struction activity remained very weak in proceeds from large offerings of debt most parts of the country, and high securities were being used to a consider- vacancy rates suggested little prospect able extent to pay down short-term lia- for improvement in the commercial bilities. The sizable decline in interest building sector for an extended period. rates over the course of recent months On the other hand, significant imwas easing the debt service burdens of provement in housing construction was many borrowers, and in a few geo- reported in some parts of the country, graphic areas banking institutions were and housing activity appeared to be reported to be making funds more holding up reasonably well on a nationreadily available. The stock market con- wide basis. The declines that had tinued to display appreciable strength, occurred in interest rates would tend reflecting the drop in interest rates and over time to stimulate housing and other suggesting investor confidence in the interest-sensitive sectors of the econlonger-run outlook for the economy. omy. The outlook for U.S. exports was Some members also cited the indica- tempered by more sluggish business tions of reviving growth in the broader conditions in several key countries than monetary aggregates as an encouraging had been expected earlier, but exports if still tentative development. would be supported by the depreciation Turning to developments in key sec- in the foreign exchange value of the tors of the economy, the members com- dollar since mid-1991. mented that it was still too early to get a Businesses continued to pursue caufirm indication regarding holiday spend- tious inventory investment policies. ing by consumers, though retailers in Contacts in most parts of the country some parts of the country reported that described current inventories as lean, sales were somewhat better than they and many retailers were prepared to had projected. Nonetheless, consumers accept reduced sales rather than to add remained quite cautious nationwide, and to their inventories under prevailing some members commented that con- conditions, although some buildup had sumer spending for durable goods might occurred in recent months in association well continue sluggish over the months with weak demands. While rising invenahead, especially in a context of wide- tories were not likely to make a major spread consumer concerns about em- contribution to the anticipated recovery, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 78th Annual Report, 1991 any significant firming in final demands In the Committee's discussion of polprobably would be reflected fairly icy for the period ahead, most of the promptly in increased production. members indicated that they favored or With regard to the outlook for the could accept a directive that called for government sectors, members com- no immediate change in the degree of mented that the massive size of current pressure on reserve positions but that federal budget deficits greatly limited carried an especially strong presumption any flexibility in providing some stimu- that some easing in reserve conditions lus through fiscal policy actions. It would be implemented unless improvewas noted in this connection that any ment in the economy became evident legislation that was seen as signifi- fairly promptly or there was significant cantly increasing the size of the federal evidence of a pickup in M2 growth in deficits over the longer run could have the period immediately ahead. Sepaadverse repercussions on long-term rately, the Board of Governors would interest rates and business and con- need to decide how the discount rate sumer confidence. Some members also should be structured in order to get the referred to the negative effects on confi- maximum benefits from any easing, dence and spending stemming from the given the current state of business and budgetary difficulties of numerous state consumer confidence. and local governments; at least in some The policy discussion focused on areas, however, capital expenditures by the need to foster a sustained, noninflasuch government entities were being tionary recovery. Such an environment accelerated by lower interest and other would promote continuing balance sheet costs. adjustments and business restructurings The members were encouraged by that would over time enhance the finanevidence that inflationary pressures cial soundness and competitive strength appeared to be subsiding at a faster pace of the economy. For now, however, than they had anticipated earlier. Anec- these activities were having restraining dotal reports suggested very competitive effects on the economy, and there were conditions in producer and retail mar- as yet no clear indications that the rekets and favorable wage patterns. Em- covery was resuming. While the risks of ployee benefit costs were still rising a substantial weakening in the economy rapidly, notably medical costs, but mem- were perhaps small, such a development bers cited some examples of promising would have severe consequences for the efforts on the part of medical providers economy and financial institutions. In to curb the escalation in their costs. It these circumstances, many of the memwas suggested that the behavior of com- bers believed that some further easing of modity prices over the past year was reserve conditions likely would be consistent with an outlook for stable called for, especially if indications of producer prices. The members saw little some strengthening in the economy or risk of worsening inflationary pressures in the growth of the monetary aggreover the forecast horizon even if the gates should fail to materialize in the pace of the recovery proved to be some- near future. A number of members also what more vigorous than they currently commented that against the background expected; however, some stressed that it of better-than-expected progress toward was important for monetary policy to price stability, a stalled recovery, and sustain the downtrend in inflation over slow monetary growth, the inflation an even longer horizon. risks of further easing were minimal. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 169 Some members indicated that they implement somewhat easier reserve consaw an advantage in making a more ditions would stimulate slightly faster substantial policy move at some point in monetary expansion in the early months the period ahead rather than additional of next year, though the broader aggrelimited easing actions of the sort that gates would probably remain appreciahad been implemented in recent years. bly below the midpoints of the tentative In this view, a larger and more visible ranges that the Committee had estabpolicy action, which generally was not lished for 1992. The members observed anticipated in financial markets, would that to an important extent the weakness have greater effectiveness in part be- of the monetary aggregates appeared to cause it would be more likely to bolster be related to developments that involved confidence. The level of interest rates some reduction in the intermediary role and money growth that would be of depository institutions and might not expected to ensue from such an action, have adverse implications for the overagainst the background of the substan- all availability of financing in the econtial easing that had already been imple- omy. Some members suggested that a mented, should be sufficient to foster number of indicators, including the expansion and promote the view that behavior of commodity prices, the slope further easing would not be needed. of the yield curve, and trends in the Other members, while not disagree- growth of reserves and narrow measures ing that further easing might be desir- of money, pointed to an adequate available, nonetheless expressed reservations ability of liquidity in the economy. about the urgency to ease in the near Nonetheless, several members expressed term and especially the need for a siz- concern about the continuing lagging able move. These members emphasized growth in the broad measures of money, that a substantial amount of easing had and they felt that consideration should been implemented over the past several be given to an easing of reserve condimonths and that to a considerable extent tions if incoming data were to suggest the effects of such easing had not yet that the recent pickup was not being shown through in the economy. A num- sustained. ber of these members also expressed the In the course of the Committee's disview that monetary policy could do little cussion, the members reviewed a proto offset the restraining effects of the posal to amend the wording of the statebalance sheet adjustments and business ment in the operational paragraph of the restructuring activities that were cur- directive that related to possible interrently under way. Moreover, a resur- meeting adjustments to the degree of gence of inflation pressures as the recov- reserve pressures. While several memery gathered strength could not be bers expressed a slight preference for ruled out, and too much easing in the retaining the current statement, which period immediately ahead might have contained an ordering of the factors conto be reversed later with unsettling sidered by the Committee in guiding consequences. intermeeting policy adjustments, and a According to a staff analysis prepared few preferred to delete the listing of for this meeting, M2 and M3 were likely factors altogether from the sentence, all to continue to grow at a restrained pace of the members indicated that they could over the months ahead in light of slug- support a proposed alternative. That gish expansion in nominal income and alternative would make clearer the Comvery limited loan growth. A decision to mittee's focus on its long-term goals by Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 78th Annual Report, 1991 inserting a reference to those goals at a depressed state of business and consumer the beginning of the sentence and would confidence. Total nonfarm payroll employment fell sharply in November; however, the refer in a more general way to the immeaverage workweek in the private nonfarm diate economic, financial, and monesector edged up and the civilian unemploytary developments that might prompt ment rate remained at 6.8 percent. Industrial an intermeeting adjustment. This new production fell in November, partly reflectwording implied less focus in the direc- ing a sizable drop in motor vehicle assemblies. Consumer spending has been soft on tive itself on the ranking of the factors, balance in recent months. Real outlays for but the understandings reached at meetbusiness equipment appear to be rising ings regarding their relative importance slowly, and nonresidential construction has would continue to be explained fully in continued to decline. Housing starts were the policy record. The members agreed appreciably higher on average in October and November than in the third quarter. The that the revised statement should be nominal U.S. merchandise trade deficit reviewed every year or more often if widened slightly further in September; the warranted by changing economic or deficit in the third quarter was substantially financial conditions. larger than in the second quarter. Wage and price increases have continued to trend At the conclusion of the Committee's downward. discussion, all but one of the members Interest rates have declined appreciably indicated that they favored or could since the Committee meeting on November accept a directive that would call 5. The Board of Governors approved a initially for maintaining the existing reduction in the discount rate from 5 to degree of pressure on reserve positions. 4x/2 percent on November 6. In foreign The members also noted their prefer- exchange markets, the trade-weighted value of the dollar in terms of the other G-10 ence or acceptance of a directive that currencies declined further over the interincluded a marked bias toward easing meeting period; the dollar depreciated priduring the intermeeting period. Accord- marily against the mark and other European ingly, in the context of the Committee's currencies. long-run objectives for price stability Expansion in M2 and M3 edged up in November from a slow pace in October; the and sustainable economic growth, and slightly faster growth reflected a strengthengiving careful consideration to ecoing in the most liquid components of the nomic, financial, and monetary develop- aggregates. For the year through November, ments, slightly greater reserve restraint expansion of both M2 and M3 is estimated might be acceptable or somewhat lesser to have been at the lower ends of the Committee's ranges. reserve restraint would be acceptable The Federal Open Market Committee during the intermeeting period. The seeks monetary and financial conditions that reserve conditions contemplated at this will foster price stability and promote susmeeting were expected to be consistent tainable growth in output. In furtherance of with growth of M2 and M3 at annual these objectives, the Committee at its meetrates of around 3 percent and Wi per- ing in July reaffirmed the ranges it had established in February for growth of M2 and M3 cent respectively over the four-month of 2Vi to 6V2 percent and 1 to 5 percent, period from November through March. respectively, measured from the fourth quar- At the conclusion of the meeting the ter of 1990 to the fourth quarter of 1991. The following domestic policy directive was monitoring range for growth of total domestic nonfinancial debt also was maintained at issued to the Federal Reserve Bank of 4V6 to 8V2 percent for the year. For 1992, on New York: a tentative basis, the Committee agreed in July to use the same ranges as in 1991 for The information reviewed at this meeting growth in each of the monetary aggregates continues to portray a sluggish economy and and debt, measured from the fourth quarter Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 1 71 of 1991 to the fourth quarter of 1992. With beneficial to the economy as interestregard to M3, the Committee anticipated that sensitive decisions to spend no longer the ongoing restructuring of thrift depository were postponed in anticipation of still institutions would continue to depress the lower interest rates. He recognized that growth of this aggregate relative to spending and total credit. The behavior of the mone- lower interest rates could alleviate heavy tary aggregates will continue to be evaluated debt service burdens, but he was conin the light of progress toward price level cerned about the effects of a further stability, movements in their velocities, and decline in interest rates on the value of developments in the economy and financial the dollar in foreign exchange markets. markets. At a telephone conference on Decem- In the implementation of policy for the immediate future, the Committee seeks to ber 20, 1991, the Committee discussed maintain the existing degree of pressure on the approval by the Board of Governors reserve positions. In the context of the Com- of a 1 percentage point reduction in the mittee's long-run objectives for price stabildiscount rate, effective that day, and the ity and sustainable economic growth, and implications of that action for the implegiving careful consideration to economic, financial, and monetary developments, mentation of the Committee's policy slightly greater reserve restraint might or with regard to the degree of pressure to somewhat lesser reserve restraint would be sought in reserve markets. It was be acceptable in the intermeeting period. noted during this discussion that the lim- The contemplated reserve conditions are ited data received since the Committee's expected to be consistent with growth of M2 and M3 over the period from November meeting on December 17 continued to through March at annual rates of about 3 and point to a very sluggish economy. In 1 Vi percent, respectively. keeping with the Committee's decision at its recent meeting, it was deemed Votes for this action: Messrs. Greenspan, appropriate to direct open market opera- Corrigan, Angell, Black, Forrestal, Keehn, tions toward allowing part of the reduc- Kelley, Lindsey, Mullins, Parry, and tion in the discount rate to be reflected Ms. Phillips. Vote against this action: Mr. LaWare. in the federal funds rate. Members commented that the substantial cut in the Mr. LaWare dissented because he did discount rate and the accompanying not favor the inclusion in the directive adjustment in open market operations of a strong presumption that monetary were likely to have a favorable effect on policy would be eased further during the financial markets and the behavior of intermeeting period. While future devel- the monetary aggregates and in conjuncopments might call for further easing, he tion with the ongoing effects of earlier preferred not to prejudge that need but easing actions would provide the finanto wait and assess the effects of the cial basis for a resumption of sustainconsiderable easing actions undertaken able economic growth. In light of the earlier. In his view, the main barrier to a substantial size of these actions, it would satisfactory economic performance was be appropriate to view the directive as a crisis in confidence that was not likely symmetrical with regard to any further to be alleviated by further incremental changes in policy over the remainder of easing. In present circumstances, a the intermeeting period. • steady policy could provide a firm signal that the downward drift in interest rates associated with a long series of small easing actions had come to an end. This signal might well prove to be Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

173 Consumer and Community Affairs The Community Reinvestment Act, the congressional testimony on consumer Home Mortgage Disclosure Act, and affairs issues. discrimination in mortgage lending were a major focus of activity in the Regulatory Matters Division of Consumer and Community Affairs during 1991. Responding to The Board amended Regulation C heightened interest in the effect of (Home Mortgage Disclosure) to require interstate banking and bank consolida- institutions to use 1990 census tract numtion on local communities, the Board bers, beginning in 1992, in reporting held public meetings on two bank hold- data about their mortgage lending activing company applications. Together ity. The Board made a comprehensive with other agencies, the Board collected review of Regulation E (Electronic Fund and processed a voluminous amount of Transfers), and studied whether the HMDA data, which were made avail- Electronic Fund Transfer Act should apable to the public in October. The data ply to electronic systems used by govrenewed concerns about disparities in ernment agencies to deliver benefits. the rate of loan approvals among differ- The Board revised the commentary to ent racial groups and raised perceptions Regulation Z (Truth in Lending) to adof unlawful discrimination in mortgage dress issues such as renewals of home lending. In response to a resolution from equity lines of credit and credit card the Federal Reserve's Consumer Ad- substitution. The Board proposed visory Council, the Board explored amendments to Regulation Z that would whether testing was a feasible enforce- require the lender to disclose payment ment tool in detecting mortgage credit examples for each payment option ofdiscrimination. fered to consumers, as well as the exact This chapter presents the Board's amount of any "teaser" or discounted efforts to promote fair lending and com- interest rate. The amendments also pliance with the CRA. It also presents would allow banks to include a demand the Board's implementation in 1991 of provision in home equity loans to execunew statutory protections for consum- tive officers. ers; reports on the examination of insti- The Board amended Regulation CC tutions for compliance with consumer (Expedited Funds Availability) to allow laws—by the Federal Reserve and other banks to hold deposits made at nonproregulatory agencies—and on the Sys- prietary ATMs for up to five business tem's handling of consumer complaints; days, in keeping with the underlying discusses the community affairs pro- statute. The statutory rule, adopted for a gram of the Board and Reserve Banks; temporary period ending November 27, details the activities of the Board's Con- 1992, was made permanent by the Consumer Advisory Council; and reports on gress at year-end. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

174 78th Annual Report, 1991 Regulation C (FFIEC) compiles the data and prepares (Home Mortgage Disclosure) HMDA disclosure statements for covered lenders. Revisions to Regulation C that took In 1991, the FFTEC collected and tabeffect in 1990 expanded the information ulated the data for 1990 (almost 6.6 milthat lenders collect about loans for home lion records) and prepared more than purchase or home improvement. During 24,000 individual reports. The reports 1991 the Board, the other banking agen- consist of a series of tables and total cies, and the Department of Housing more than 1.2 million pages of data. The and Urban Development implemented a tables, as many as thirty-one for each new system for processing the HMDA metropolitan area in which a lender has data submitted by more than 9,600 insti- offices, display information about loans tutions. Regulation C generally applies purchased and about the disposition of to mortgage lenders located in metropol- loan applications, all by type of loan and itan areas and with assets of more than geographic location of the property. For $10 million. loans sold, the tables show the type of In the past, HMDA reports have secondary market purchaser. The tables focused on the geographic distribution also give summaries for six categories of mortgage loans. Lenders prepared of loan applications, showing the dispopublic disclosures that reported data by sition of applications by characteristics the type of loan and the census-tract of the applicant (annual income, race or location of the home for loans that they national origin, and sex) and by characmade or purchased. Amendments in teristics of the neighborhood in which 1990 expanded the data collected to in- the property related to the loan applicaclude the race or national origin, sex, tion is located (median family income and income of applicants and, for loans and percentage of the population that that the lender sells, the type of pur- belongs to a minority group). chaser. Lenders now also report loan HMDA disclosure statements are applications that do not result in a loan. available to the public from the lender. These data will help the Board and The FFIEC also prepares aggregate rethe other regulatory agencies monitor ports that show the overall home lendthe compliance of lenders with the ing picture among all reporting lenders laws on fair lending and community in each of the nation's 341 metropolitan reinvestment. areas; these reports, and copies of the The new HMDA reporting system individual reports, are available at a data calls for lenders to provide information depository in each metropolitan area. about each application or loan instead of In addition, the FFIEC provides aggregating the data by census tract. edited raw data on magnetic tape, giving The lenders send the data to their community groups, researchers, and othrespective supervisory agencies—the ers access to a larger body of data for Federal Reserve, the Federal Deposit analysis of lending patterns than was Insurance Corporation, the National possible under the old system. Because Credit Union Administration, the Office of the massive volume of the HMDA of the Comptroller of the Currency, data, however, analysis can be complithe Office of Thrift Supervision, or cated and time-consuming. In Septemthe Department of Housing and ber the Board hosted a meeting with Urban Development. The Federal Finan- community representatives to identify cial Institutions Examination Council ways in which the data might be com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 175 piled and loaded onto diskettes to make with fair lending laws but also with its use on personal computers feasible community reinvestment obligations. To for local groups. In October the Board facilitate statistical analyses, the agenand the other HMDA agencies took part cies are developing computer-based sysin a forum organized to explore the tems that will help them identify spefeasibility of making the data available cific groups of applicants for whom the through alternative automated means. application-disposition rates are signifi- The expanded HMDA reports for cantly different from those of other 1990 became public in October 1991. groups. They can thereby target specific They received considerable attention files for in-depth review. from the news media because of sub- In November the Board published stantial differences in the dispositions of changes to Regulation C that become loan applications when applicants were applicable in January 1992. The major categorized by race and income. In par- change requires financial institutions to ticular, the data revealed that the per- use 1990 census tract numbers, rather centage of rejected home loan applica- than the 1980 numbers, to identify and tions was much larger for black and report property locations. In many com- Hispanic applicants than for white and munities demographics have changed Asian applicants. The data raised con- dramatically since the time of the 1980 cerns about access to home mortgage census, and use of the 1990 census tracts credit among minority applicants and will make the HMDA data more accuabout unlawful discrimination in the rate and useful. The Board also amended lending process. They also raised ques- Regulation C to make clear that institutions about the performance of lenders tions are subject to civil money penalin meeting their obligations under the ties for violations of HMDA reporting Community Reinvestment Act. requirements. Changes to the reporting The HMDA data are subject to an instructions emphasized that institutions important limitation, however: They do are expected to submit their HMDA data not include the wide range of financial in automated format (unless they report factors—about the applicants and the only a small number of transactions) to properties they seek to purchase—that improve the accuracy and timeliness of lenders consider in evaluating loan ap- reports. plications. For example, the HMDA data An article in the November 1991 Feddo not contain information about appli- eral Reserve Bulletin described analyticants' debt and asset levels, employ- cal studies based on the geographic data ment experience, or credit history. Thus, available under the old reporting sysit is not possible to determine from the tem, and it presented preliminary num- HMDA data alone whether individual bers drawn from nationwide aggregates institutions or groups of lenders are dis- of the 1990 data while sounding some criminating unlawfully against minority cautions about the limitations of the applicants. data.1 The article discussed potential Because the agencies have access to uses of the expanded data, with a focus application files and institutions' lend- on the supervisory agencies, and took ing standards, they can largely overcome this limitation in examining lenders' actions. With the expanded data, the 1. See Glenn B. Canner and Dolores S. Smith, "Home Mortgage Disclosure Act: Expanded Data agencies will be able to evaluate more on Residential Lending," Federal Reserve Bullethoroughly lenders' compliance not just tin, vol. 77 (November 1991), pp. 859-84. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

176 78th Annual Report, 1991 a look at an area newly covered by as an alternative to paper-based deliv- HMD A—sales of home loans to the sec- ery. EBT offers opportunities for imondary mortgage market. proving delivery to recipients, maximizing efficiency of operations, and over time, minimizing costs for all parties. To date, the Board has refrained from Regulation E covering EBT in Regulation E so as not (Electronic Fund Transfers) to impede pilot programs being tested The Board began a comprehensive re- by federal and state agencies. This result view of Regulation E, with major em- has been achieved by narrowly defining phasis on the law's applicability to elec- what constitutes an "asset account" for tronic systems used by government purposes of coverage. agencies for delivery of benefits. In prescribing rules, the Board is di- Regulation E, which implements the rected by the statute to consider their Electronic Fund Transfer Act, estab- effect on the availability of EFT services lished rights and responsibilities for con- to different groups of consumers, parsumers and providers of electronic trans- ticularly low-income consumers. The fer services. Among the consumer rights Board also must take into account costs are the right to disclosure of terms and and benefits to all parties and demonconditions, to receipts and periodic strate, to the extent practicable, that the statements, to error resolution within protection accorded consumers outspecified periods, and to limits on the weighs the costs of compliance imposed consumer's liability for unauthorized on consumers and on the providers of transfers. The statute's coverage extends the EFT services. to any entity that provides EFT services Bringing EBT under the regulation to consumers, not just traditional finan- raises questions about who must comply cial institutions such as banks. and how exactly to apply the rules. The comprehensive review is in keep- Some existing rules would be easy to ing with Federal Reserve policy that apply to EBT; others raise significant calls for a periodic look at Board regula- policy questions and operational probtions. It has centered on identification of lems, especially in regard to who bears substantive changes needed because of liability for unauthorized use. An article technological and other developments. in the April 1991 Federal Reserve Bulle- A rewriting of the official staff commen- tin gave an overview of the developing tary is also under way. interest in EBT programs among vari- The Board's consideration of the ap- ous parties, described some of the pilot plicability of Regulation E to systems programs carried out by federal and state for electronic delivery of government agencies, and discussed regulatory and benefits arises from a statutory mandate. other issues raised by the implementa- In the event that EFT services are of- tion of EBT programs.2 fered by nonfinancial institutions, the To ensure adequate attention to the statute directs the Board to ensure that potential effects of Regulation E on EBT rights and responsibilities created by the act are made applicable to these services. Accordingly, during 1991 the Board examined whether Regulation E 2. John C. Wood and Dolores S. Smith, "Electronic Transfer of Government Benefits," Fedought to apply to government agencies' eral Reserve Bulletin, vol. 77 (April 1991), use of electronic benefit transfer (EBT) pp. 203-17. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 177 systems, the Board during 1991 contin- give payment examples for each payued to consult with federal and state ment option offered to consumers.3 agencies, financial institutions, the retail food industry and other private-sector Regulation CC participants in EBT systems, the Federal (Expedited Funds Availability) Reserve's Consumer Advisory Council, and consumer advocacy groups. The In February the Board published revi- Federal Reserve joined in discussions sions that conformed Regulation CC to with a task force assembled to facilitate amendments to the Expedited Funds the exchange of information between Availability Act (EFAA). The revisions the private and public sectors, and it has continued—for a period extending from maintained close liaison with the De- September 1, 1990 through November partment of the Treasury, which is coor- 27, 1992—the hold schedule for deposdinating efforts among federal agencies its made at nonproprietary automated in promoting EBT programs. teller machines (ATMs); the schedule Any regulatory proposal that results allows banks to hold such deposits for from the review of Regulation E and five business days. The Federal Deposit EBT programs will be published for Insurance Corporation Improvement Act comment, and members of the public of 1991, enacted in December, amends will have the opportunity to give their the EFAA by making the Board's temviews. porary rule permanent. The new law also allows banks to extend holds, on an exception basis, on checks that normally Regulation Z require next-day availability and allows (Truth in Lending) one-time notices of exception holds in certain cases. [In early 1992 the Board In December the Board proposed proposed revisions to Regulation CC to amendments to Regulation Z on home implement these changes.] equity lines of credit. One of the proposals resolves a conflict between the home Interpretations equity rules and regulations on loans to bank executive officers. A demand pro- In 1991 the Board continued to offer vision in loans to executive officers is legal interpretations and guidance on currently required by the Federal Re- Regulation B (Equal Credit Opportuserve Act and Regulation O (Loans to nity), Regulation E (Electronic Fund Executive Officers), but a demand provi- Transfers), and Regulation Z (Truth in sion is generally prohibited by the home Lending) through official staff commenequity rules of Regulation Z. To resolve taries. These commentaries, intended to the conflict, the Board proposed a lim- help financial institutions and others apited exception in Regulation Z for trans- ply the regulations to specific situations, actions involving bank officers. The balance of the proposed changes 3. The U.S. District Court for the District of respond to issues raised in a lawsuit Columbia ruled in favor of the Board (No. 89filed by Consumers Union in 1989 that 3008, filed Nov. 1, 1989). On appeal by the plaincontested existing rules. The amend- tiff (No. 90-5156, D.C. Circuit, filed May 2, ments would require lenders to disclose 1990), the court decided in favor of the Board on four issues and remanded two other issues to the the specific "teaser" or discounted an- Board for further consideration; the December nual percentage rate of interest and to amendments were in response to this action. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 78th Annual Report, 1991 are updated periodically to address sig- consumers to contact if they suspect disnificant questions that arise. criminatory practices. In April the Board revised the commentary to Regulation Z. The revisions Community Affairs addressed a variety of issues such as renewals of home equity lines of credit, During 1991, the availability to the pubcredit card substitution, and disclosures lic of financial institutions' CRA evaluafor renewable balloon-payment mort- tions and ratings stimulated an increase gages. In the same month, the Board in requests for information about the revised the commentary to Regulation B Community Reinvestment Act from to clarify the Board's long-standing po- banks and from neighborhood, housing, sition that a notice of adverse action small business, and civil rights groups need not be provided in instances when throughout the country. Especially notaa creditor terminates an account or takes ble was increased interest among offiother action because of a current delin- cials of local and state governments and quency or default on the account. development agencies about the CRA In December the Board proposed an- and about bank involvement in local other revision to the commentary on community development programs. Regulation B. The proposal addresses Community Affairs staff members at the the relationship between Regulations B Board and at the Reserve Banks also and C with regard to data collection on responded to a large number of requests mortgage loan applications received by for information about HMDA and creditors through brokers or others. It banks' mortgage lending patterns after makes clear that loan brokers or other the release of the expanded HMDA data persons do not violate Regulation B in October. (which limits questions about the appli- Community Affairs educational procant's race, national origin, and sex) if grams continued their strong focus on they collect the information for a credi- bank and bank holding company partor that is required to comply with the ticipation in community development Home Mortgage Disclosure Act. financing for low- and moderate-income housing, small and minority businesses, and community revitalization projects. Home Mortgage Brochure The Board's Community Affairs staff In March the Board revised an existing developed two related publications on consumer pamphlet, renaming it "Home community development corporations Mortgages: Understanding the Process (CDCs) and investments. Community and Your Right to Fair Lending." The Development Investments describes the brochure describes how to shop for a Federal Reserve's policies and guidemortgage and what to expect in the ap- lines governing approval of bank holdplication process; it also describes some ing company CDCs and other commuof the laws that protect home mortgage nity development equity investment borrowers—in particular, those laws that activities. A companion piece, Direcprohibit discrimination based on such tory: Bank Holding Company Commufactors as race or national origin. The nity Development Investments, profiles brochure explains that creditors cannot existing CDCs and investments authotake certain personal characteristics into rized by the Board. account when considering a mortgage The number of Community Affairs application and provides sources for newsletters published by the Reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 179 Banks grew in 1991 with publication by than fifty seminars focused largely on the Atlanta Reserve Bank of Partners CRA and public-private partnership in Community and Economic Develop- programs that banks can use in financing ment. This newsletter highlights CRA- community development projects in related issues and community develop- smaller communities. The Chicago Rement finance partnerships among banks, serve Bank intensified its outreach and community organizations, government education program for rural areas. agencies, and others. It brings to nine During 1991, bank interest in multithe number of Reserve Bank newsletters bank approaches to the financing of that address community development. community development increased sig- During 1991, these newsletters reached nificantly. Community Affairs staff more than 37,300 financial institutions, members at the Atlanta and San Francommunity organizations, local govern- cisco Reserve Banks devoted resources ment officials, and others interested in to assisting bankers, local governments, bank involvement in community devel- and others in structuring multilender opment and reinvestment efforts. consortiums. The Philadelphia Reserve Bank pub- A key part of the Community Affairs lished Resources for Revitalization, a program during 1991 was CRA and directory of selected government and community development training for other public-private programs that Federal Reserve consumer compliance financial institutions can use to finance examiners. A session on advanced CRA affordable housing, small businesses, examination techniques became a perand economic development. The New manent part of the Board's training York and Atlanta Reserve Banks created curriculum. Community Affairs staff computerized databases with informa- members from the Board and from tion on community groups, govern- the Reserve Banks helped familiarize ments, small businesses, and other System commercial examiners with the organizations interested in banking, key concepts of community developcommunity development, and CRA- ment lending and the objectives of the related issues. CRA. To help educate both the public and the banking community about CRA and community development lending, Re- FFIEC Activities serve Banks sponsored 124 Community Affairs conferences and seminars during The Federal Financial Institutions Ex- 1991. In addition, Community Affairs amination Council (FFIEC) is an interastaff members from the Board and the gency body that prescribes uniform prin- Reserve Banks made more than 315 ciples, standards, and report forms for speeches and presentations at confer- the examination of financial institutions ences, seminars, and meetings of bank- by the federal supervisory agencies. ing, community, and other organizations Membership consists of the Board, the on community development, CRA, and Federal Deposit Insurance Corporation, related topics. the National Credit Union Administra- Reserve Banks developed special pro- tion, the Office of the Comptroller of grams on rural development issues. The the Currency, and the Office of Thrift Kansas City Reserve Bank, in coopera- Supervision. tion with state bankers associations In November the FFIEC approved a throughout its District, conducted more policy statement concerning the Fair- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

180 78th Annual Report, 1991 Credit Reporting Act (FCRA) that ad- reporting period from July 1, 1990, to dressed prescreening by financial insti- June 30, 1991.4 tutions. Credit bureaus often compile lists of consumers who meet the specific Truth in Lending Act credit-granting criteria provided by an (Regulation Z) institution, and institutions use these prescreened lists to solicit consumers The data from the Board, the Federal for credit products. The FFIEC policy Deposit Insurance Corporation (FDIC), statement noted that prescreening is per- the National Credit Union Administramissible under the FCRA if the institu- tion (NCUA), the Office of the Comption follows certain rules. Prescreening troller of the Currency (OCC), and the may be conducted if the institution Office of Thrift Supervision (OTS) show makes a firm offer of credit to each that, on average, 42 percent of examined consumer who meets the prescreening institutions were in full compliance with criteria. An institution may withdraw Regulation Z, down slightly from such an offer only if a significant 44 percent in 1990.5 The FDIC and the change, such as foreclosure or filing for NCUA showed increases in compliance, bankruptcy, happens between the pre- while the Board, the OCC, and the OTS screen and the consumer's acceptance reported declines. Some agencies were of the offer. able to provide the frequency of vio- In December the FFIEC approved a lations (the Board, the NCUA, the policy statement that encourages finan- OCC, and the OTS); these agencies indicial institutions to analyze the geo- cated that of the financial institutions graphic distribution of their lending pat- examined that were not in full compliterns as a part of their CRA planning ance, 53 percent had between one and process. The FFIEC emphasized that five violations (the lowest frequencythese analyses should be reviewed by category), up from 51 percent in 1990. the board of directors and appropriate The most frequent violations of Regulevels of management in setting an insti- lation Z observed by the five regulatory tution's CRA programs and its lending agencies were the failure to disclose acpolicies. curately the finance charge, the annual percentage rate, and the number, amounts, and timing of payments sched- Compliance with Consumer uled to repay the obligation; the failure to provide consumers with notice of Regulations their right to rescind certain transac- Data received from the five federal agencies that supervise financial institutions and from other federal super- 4. The federal agencies that regulate financial visory agencies indicate that compliance institutions do not use the same method to compile with the Truth in Lending Act and the compliance data. However, the data reported to the Board support the general conclusions presented Expedited Funds Availability Act dehere. clined slightly from 1990 levels and 5. The percentage of institutions in full complithat compliance with the Equal Credit ance with the regulations included in this report is Opportunity Act and the Electronic calculated using a straight average of the percent- Fund Transfer Act remained essen- age of institutions in compliance as reported by the five financial regulatory agencies. The figures tially unchanged. This section summareported for previous years were calculated using rizes these compliance data for the a weighted average. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 181 tions; and the failure to provide Truth in creased more than 31 percent from the Lending disclosures that accurately re- 1990 reporting period. As a result of flected the terms of the legal obligation. examinations and enforcement activi- The Board, the FDIC, and the OTS ties, the FCA took formal enforcement each issued one cease and desist order actions against four institutions for involving violations of Regulation Z. violations of Regulation Z or Regulation The OTS also assessed civil money pen- B or both. These institutions are now alties against two savings associations. in substantial compliance with the The OCC issued notice of charges to regulations. two banks for violations of Regulation The Packers and Stockyards Adminis- Z. One bank reimbursed customers and tration of the Department of Agriculture the other has appealed to the U.S. Court received no complaints and initiated of Appeals. Under the Interagency En- no enforcement actions. Individuals forcement Policy on Regulation Z, a and firms regulated by the Administratotal of 379 institutions supervised by tion are believed to be in substantial the Board, the FDIC, the OCC, and compliance. the OTS refunded to customers about $5.7 million on 26,796 accounts in 1991 Consumer Leasing compared with roughly $4.5 million on (Regulation M) 52,344 accounts in 1990. The Federal Trade Commission The five financial regulatory agencies (FTC) continued its Truth in Lending reported substantial compliance with enforcement program and obtained re- Regulation M, which implements the lief in three cases involving understated consumer leasing provisions of the annual percentage rates (APRs). The Truth in Lending Act. More than 99 FTC accepted for public comment percent of examined institutions were two consent agreements addressing un- found to be in full compliance with the derstated credit costs including APRs. regulation. The violations that were The FTC also issued an order involv- noted by the agencies involved the failing a nationwide mortgage lender that ure to provide disclosures clearly, condisclosed understated APRs for its spicuously, in a meaningful sequence, adjustable-rate mortgages. and in accordance with the regulation. Educating consumers and businesses about their rights and responsibilities Equal Credit Opportunity Act continued to be an integral part of the (Regulation B) FTC's enforcement activities. In this effort, the FTC released a publication on The five financial regulatory agencies fraudulent automobile financing prac- reported that compliance with Regulatices and is developing a publication on tion B remained similar to levels in reverse mortgages. 1990. In the 1991 reporting period, The Department of Transportation re- 58 percent of examined institutions were ported a satisfactory level of compliance in compliance with the ECOA compared with Regulation Z by foreign and do- with 57 percent for 1990. The four agenmestic carriers. Consumer inquiries that cies that were able to provide the frewere investigated resulted in no formal quency of violations (the Board, the enforcement proceedings for violations. NCUA, the OCC, and the OTS) reported The Farm Credit Administration that of the institutions examined that (FCA) reported that violations had in- were not in full compliance, 73 percent Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 78th Annual Report, 1991 had between one and five violations, a of the Department of Agriculture, and rate similar to that for 1990. The most the Securities and Exchange Comfrequent violations involved the failure mission—reported substantial complito take the following actions: ance among the entities they supervise. • Notify the applicant of the action taken within thirty days of the date Electronic Fund Transfer Act that the creditor receives a completed (Regulation E) application • Provide a written notice of adverse The five financial regulatory agencies action that contains a statement of the found that, at 84 percent, the level of action taken, the name and address of compliance with Regulation E remained the creditor, the ECOA notice, and the similar to that in 1990. The following name and address of the federal agency five rules were the most frequently viothat enforces compliance lated provisions of Regulation E: • Provide the specific reasons for • Provide, in a timely manner, a writadverse action ten statement outlining the terms and • Follow the prescribed form of the conditions of the EFT service ECOA notice • Provide a summary of consumers' • Request information, for monitor- liability for unauthorized EFTs ing purposes, about race or national ori- • Provide a statement for each gin, sex, marital status, and age on credit monthly cycle in which an EFT ocapplications for the purchase or refi- curred or at least a quarterly statement if nancing of a primary dwelling. no transfer occurred The Board and the FDIC each issued • Provide a periodic notice of the proone cease and desist order that addressed cedures for resolving alleged errors violations of Regulation B. • Investigate and resolve alleged The FTC obtained consent judgments errors promptly. before litigation in two cases involving A cease and desist order issued by the practices in violation of the ECOA. One FDIC covered violations of Regulation other case previously filed in federal E in addition to violations of Regulacourt was resolved by a consent judg- tions B and Z. ment. Litigation continues in another The Federal Trade Commission recase previously filed. ported ongoing litigation with one The FCA reported a satisfactory level telemarketing company that allegedly of compliance with the ECOA. As a failed to obtain written authorization result of examinations and enforcement from consumers for preauthorized activities, the FCA took formal enforce- transfers. ment actions against four institutions for violations of Regulation Z or Regu- Expedited Funds Availability Act lation B or both. These institutions are (Regulation CC) now in substantial compliance. The total number of ECOA violations decreased The five financial regulatory agencies 14 percent from 1990 levels. The other reported that the level of compliance agencies that enforce the ECOA—the with Regulation CC declined from Department of Transportation, the 76 percent in the 1990 reporting period Interstate Commerce Commission, the to 73 percent. The four agencies that Small Business Administration, the were able to provide the frequency of Packers and Stockyards Administration violations (the Board, the NCUA, the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 183 OCC, and the OTS) reported that of the bankers and the public through Commuinstitutions examined that were not in nity Affairs offices at the Reserve Banks full compliance, 76 percent had between • CRA analyses of the records of one and five violations. The five most banks and bank holding companies subfrequent violations of Regulation CC mitting an application for expansion or were the failure to reorganization. • Provide next-day availability for Federal Reserve examiners review required items performance in fair lending, community • Provide a specific disclosure of the revitalization, and other relevant areas availability policy followed by the insti- to assess CRA compliance. During the tution in most cases 1991 reporting period, they examined • Adequately train employees and 651 state member banks for compliance provide procedures to ensure with the consumer laws, including those compliance that address fair lending, and examined • Post the availability policy at loca- 637 state member banks for compliance tions where employees accept deposits with the CRA. When appropriate, exam- • Provide the deposit availability iners suggested ways to improve CRA notice on preprinted deposit slips. performance. A cease and desist order issued by the The 1991 reporting period is the first Board covered violations of Regulation that includes information on public CRA CC in addition to violations of Regula- ratings. Sixty-three banks received an tions B and Z. outstanding rating for meeting community credit needs, 516 received a satisfactory rating, 52 received a rating of Community Reinvestment Act "needs to improve," and 6 received a (Regulation BB) rating of "substantial noncompliance." The Community Reinvestment Act In June the Board amended Regulation (CRA) requires the Board to encourage BB to clarify that state member banks financial institutions under its jurisdic- may respond to their CRA evaluations tion to help meet the credit needs of and place their responses in the public their entire communities, including low- file but are not required to do so. In and moderate-income neighborhoods, in December the Board announced that, in a manner consistent with safe and sound keeping with an FFIEC recommendabanking practices. The Board assesses tion, it will publish weekly the CRA the CRA performance of state member examination ratings of state member banks during regular compliance exami- banks. nations and takes the CRA record into During calendar year 1991, adverse account, along with other factors, when CRA ratings were at issue in thirtyacting on applications from state mem- one bank and bank holding company ber banks and bank holding companies. applications received by the Federal The Federal Reserve System main- Reserve System, down from forty-two tains a three-faceted program for enforc- in both 1990 and 1989. The number of ing and fostering better bank perfor- applications that generated protests mance under the CRA: because of CRA performance declined • Examination of institutions to from twenty-seven in 1990 to twentyassess compliance four in 1991. Three of the protested • Dissemination of information on applications—the request of Mitsui community development techniques to Taiyo Kobe Bank to convert a trust com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

184 78th Annual Report, 1991 pany into a bank, NCNB Corporation's cial institutions. About two-thirds of all acquisition of C&S/Sovran Corporation, depository institutions offered EFT serand the merger of Chemical Banking vices and were covered by the act. The Corporation with Manufacturers Han- economic effect of the act increased in over Corporation—involved numerous 1991 as a result of continued growth in protests. In the Mitsui case, the Board the availability and use of EFT services. held a public hearing at which about Automated teller machines are the 20 individuals and groups testified; most widely used EFT service in the the application was later withdrawn. United States. Most of the nation's The Board received more than 150 banks and thrift institutions offer ATM comments regarding the NCNB and services to consumers, and more than C&S/Sovran application, and it held half of all households currently have public meetings in four cities—Atlanta, access cards for ATMs. The availability Dallas, Richmond, and Charlotte—at of ATM services has been enhanced by which more than 100 witnesses testified; the development of shared networks. the Board approved the application in Virtually all ATM terminals in operation December. The Board approved the today are part of one or more shared Chemical-Manufacturers application in networks. The monthly number of ATM November. transactions increased about 13 percent, In October the Board considered a from 474.9 million in 1990 to 534.9 mil- 1990 application by First Interstate lion in 1991. Over the same period, the BancSystem of Montana, Inc., to merge number of installed ATMs rose about with Commerce BancShares of Wyo- 3 percent. ming, Inc. The application was protested Point-of-sale (POS) systems account by a community organization. The for a small fraction of all EFT transac- Board denied the application based tions, but their use grew rapidly in solely on deficiencies in the CRA record 1991: POS volume rose 23 percent, to of a subsidiary of First Interstate. 19.5 million transactions per month; and At year-end, eighteen protested appli- the number of POS terminals rose cations had been approved and six appli- 28 percent, to 77,700. Direct deposit is cations were pending. another widely used EFT service. More than 40 percent of all U.S. households receive direct deposit of funds into their Economic Effects of the accounts. Direct deposit is particularly Electronic Fund Transfer Act widespread in the public sector, with In accordance with statutory require- about half of social security payments ments, the Board monitors the effect of and two-thirds of federal salary and rethe Electronic Fund Transfer Act on the tirement payments made by direct decompliance costs and consumer benefits posit. Although direct deposit is less from EFT services. In 1991, there were common in the private sector, it has no new requirements or changes in the grown substantially in recent years. regulation that altered the economic The benefits to consumers from the effect of the act. Electronic Fund Transfer Act are diffi- The act covers a large number of cult to measure because they cannot be accounts and financial institutions. In isolated from consumer protections that 1991, about three-fourths of all house- would have been provided in the abholds in the United States had one or sence of regulation. The available evimore EFT features on accounts at finan- dence provides no indication of serious Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 185 consumer problems with electronic ance costs. Thus, the regulation is not transactions. One source of information likely to have any greater effect on EFT on potential problems is the Board's Con- costs now than it had in 1981. sumer Complaint Control System. In 1991, sixty-nine of the complaints pro- Utility of the New HMDA Data cessed involved electronic transactions. The Federal Reserve System forwarded The new data available under the Home thirty-six complaints that did not involve Mortgage Disclosure Act, beginning state member banks to other agencies with the year 1990, offer expanded opfor resolution. Of the remaining thirty- portunities for analysis of lending patthree complaints, none involved a viola- terns in metropolitan areas. The new tion of the act or regulation. data enhance the regulatory agencies' The Board also obtains information ability to assess lender performance in a about potential problems from consumer number of ways. surveys. The University of Michigan's Before 1990, data required by the December 1990 Survey of Consumer Home Mortgage Disclosure Act re- Attitudes contained several Board- vealed only the geographic distribution sponsored questions about consumer of residential lending by institutions experience with EFT. The survey results covered by the act. These data could be suggest that EFT problems are relatively used to help evaluate the extent to which infrequent and that the vast majority of reporting institutions were serving the problems that do occur are resolved sat- housing needs of their local communiisfactorily. Of the households that had ties. The usefulness of the data was limaccounts with EFT features, 7.5 percent ited, however, providing little informareported experiencing EFT errors in the tion about the demand for credit arising previous twelve months. This percent- from different geographic areas or about age is about the same as that reported in the demand faced by individual lenders. surveys from 1981 and 1983. In 1990, The expanded disclosures, mandated 88.0 percent of those experiencing prob- by statutory amendments enacted in lems complained to the institution about 1989, now include the disposition the error, and 87.8 percent of the com- of applications—approved, denied, plainants reported that the error was withdrawn, or files closed for resolved to their satisfaction. incompleteness—and the number and The incremental costs associated with dollar amount of loan applications. the EFTA are also difficult to quantify, These data provide specific information again because the industry practices that on credit demand among individual would have evolved in the absence of lenders and groups of creditors serving statutory requirements are unknown. different neighborhoods. The informa- Cost estimates from 1981 suggested that tion substantially enhances the ability to the ongoing compliance cost of an elec- evaluate the residential lending activitronic transaction was not high enough ties of covered institutions, including the to compromise the cost advantage of conventional and FHA lending of indesuch transactions over check-based pendent mortgage companies. transactions. Since that time, few The expanded disclosures also will changes have been made in the regula- help the supervisory agencies to better tion, and an increase in transaction vol- assess the CRA performance of the instiume has allowed financial institutions to tutions they regulate. The agencies can exploit economies of scale in compli- examine an institution's record to deter- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

186 78th Annual Report, 1991 mine how its lending performance com- fairness of the mortgage lending propares with the record of other lenders cess. HUD also will use the data to serving the same locality. If peer lenders assess methodologies for targeting and report a significantly greater number of conducting fair lending investigations applications and home mortgages, the under the Fair Housing Amendments comparison may suggest that the institu- Act of 1988. The HMDA data alone will tion needs to focus greater attention on not suffice for determining whether a determining and meeting community lender is discriminating unlawfully credit needs, by reexamining its market- against minority mortgage applicants, ing and outreach programs and the mix principally because the data do not inof its loan products. Alternatively, if clude the wide range of financial factors peer lenders also receive few applica- that lenders consider in evaluating loan tions for home loans, weak demand in applications. Because the agencies have the locality might explain the lack of access to application files and institulending activity. A general lack of appli- tions' lending standards, however, they cations may also indicate, however, that can overcome most of the limitations outreach efforts and marketing among when examining lenders' actions. all lenders are ineffective or inadequate The data will be useful to financial to reach the community. institutions in developing strategies and The new HMDA data also can be programs to respond to the credit needs used to assess whether a lender has es- of the various segments of their commutablished a reasonable CRA community nities. Such analyses were not fully posdelineation. Although many factors sible before the 1990 HMDA data beaffect a lender's choice of the primary came available. service area it seeks to serve, analyses The 1989 amendments to HMDA also of HMDA data can help determine require lenders to report the type of secwhether the distribution of home loan ondary market purchaser for home loans applications received by a lender is con- that they sell during the year. The legissistent with this geographic delineation. lative history suggests that the Congress If most of a lender's applications for sought the new information to help idenhome purchase loans come from outside tify any secondary market requirements its service area, examiners may question that may have a discriminatory effect on why it is not receiving more applica- protected groups. The HMDA data protions from its delineated community and vide an opportunity for the first time to whether the existing delineation is rea- profile, for loans covered by HMDA, sonable. The lender might need to re- the characteristics of both the borrowers consider and perhaps revise the bound- whose loans are purchased by secondary aries of the area it seeks to serve. market entities and the neighborhoods The added data now disclosed about in which they reside. In addition, the loan applicants—their race or ethnic ori- information permits an assessment of gin, sex, and income—provides an op- the distribution of home purchase and portunity for insight into the provision securitization activity of secondary marof home purchase and home improve- ket institutions. In its oversight capacity, ment loans to certain categories of con- HUD plans to make use of the 1990 data sumers. The agencies that supervise to assess the adequacy of secondary depository institutions will use this in- market allocations for central areas of formation, together with data on the dis- cities and for low- and moderate-income position of applications, in assessing the households. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 187 Some uses of the HMDA data will banks (see accompanying table). The build on information available from Board also received 282 written inquirother sources. For example, HUD plans ies concerning consumer credit laws and to enter into research contracts that will banking practices. In responding to assess the allocation of FHA and con- these complaints and inquiries, staff ventional lending to a sample of metro- members of the Board and of the Repolitan areas. This lending data will be serve Banks gave specific explanations combined with recent information on of laws, regulations, and banking pracloan defaults linked to census tract at- tices and provided relevant printed tributes to provide a more complete materials. description on the volume and charac- A second table summarizes the nature teristics of areas served by FHA and and resolution of the 891 complaints conventional lending. against state member banks. About 55 percent involved loan functions, 7 percent alleged discrimination on a Complaints about State Member prohibited basis, and 48 percent con- Banks cerned credit denial on nonprohibited The Federal Reserve investigates com- bases (such as length of residency) and plaints against state member banks, and other unregulated lending practices the Board forwards to appropriate en- (such as the disclosure of the amount of forcement agencies those that involve appraisal fees). About 29 percent inother creditors or businesses. In 1991 volved disputes concerning interest on the Board implemented an on-line sys- deposits and general practices involving tem for tracking consumer complaints deposit accounts. and inquiries. In 1991, the Federal Reserve received Unregulated Practices 2,398 complaints: 1,912 by mail, 471 by telephone, and 15 in person. The Fed- In 1991 the Board continued to monitor, eral Reserve investigated and resolved under section 18(f) of the Federal Trade the 891 that were against state member Commission Act, complaints about Consumer Complaints Received by the Federal Reserve System, by Subject, 1991 Subject State member Other banks lenders lotai Regulation B (Equal Credit Opportunity) 59 57 116 Regulation E (Electronic Fund Transfers) 33 36 69 Regulation Q (Interest on Deposits) 18 34 52 Regulation Z (Truth in Lending) 93 259 352 Regulation BB (Community Reinvestment) 1 6 7 Regulation CC (Expedited Funds Availability) 25 53 78 Fair Credit Reporting Act 12 83 95 Fair Debt Collection Practices Act 7 13 20 Fair Housing Act 0 1 1 Flood Disaster Protection Act 1 0 1 Real Estate Settlement Procedures Act 1 5 6 Holder in due course 0 1 1 Unregulated practices ' 641 959 1,600 Total 891 1,507 2,398 1. Complaints against nonmember institutions were referred to the appropriate regulatory agencies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 78th Annual Report, 1991 banking practices that are not subject to loan by the agreed settlement date, the existing regulations to focus on those amount a bank charged for an appraisal that may be unfair or deceptive. Two fee, and a bank's refusal to make change categories each accounted for 5 percent for a nondepositor. or less of the 1,600 complaints: denial of credit card applications based on Consumer Advisory Council credit history (59) and miscellaneous practices (74). Complaints about credit The Consumer Advisory Council (CAC) denials based on credit history indicate met in March, June, and October to adthat applicants underestimate the impor- vise the Board on its responsibilities tance lenders give to a poor credit his- under the consumer credit protection tory or a lack of borrowing experience laws and on other issues dealing with when assessing creditworthiness. The financial services to consumers. The miscellaneous complaints covered a council's thirty members come from wide variety of practices, including a consumer and community-based organilender's failure to close on a mortgage zations, financial institutions, academia, Consumer Complaints Received by the Federal Reserve System, by Function, Institution, and Resolution, 1991 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 informationl... 34 14 Information furnished to complainant2 120 16 62 25 14 Bank legally correct No accommodation 342 26 172 93 14 10 27 Accommodation made3 . 125 4 65 42 4 2 8 Clerical error No correction made 37 1 16 12 2 1 5 Corrected 59 1 23 17 5 1 12 Factual dispute 4 43 2 13 18 1 3 6 Bank violation, resolved5 . 6 1 2 2 0 0 1 Matter in litigation6 9 0 5 2 0 0 2 Customer error 12 2 6 4 0 0 0 Pending, December 31 104 49 34 3 0 10 Total, state member banks . 891 63 427 258 33 18 92 Percent 100 7 48 29 4 2 10 Complaints about nonmember institutions7 1,507 68 834 351 36 11 207 Total. 2,398 131 1,261 609 69 29 299 1. The staff has been unable, after follow-up correspon- 4. Involves a factual dispute not resolvable by the Federal dence with the consumer, to obtain sufficient information to Reserve System or a contractual dispute that can be resolved process the complaint. only by the courts. Consumers wishing to pursue the matter 2. When it appears that the complainant does not under- may be advised to seek legal counsel or legal aid or to use stand the law and that there has been no violation on the part small claims court. of the bank, the Federal Reserve System explains the law in 5. The Federal Reserve determined that a state member question and provides the complainant with other pertinent bank violated a law or regulation, and the bank took corrective information. measures voluntarily or as indicated by the Federal Reserve. 3. The bank appears to be legally correct but has chosen to 6. Parties are seeking resolution through the courts. make an accommodation. 7. Complaints referred to other agencies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 189 and state and local government. Council about the testing technique; perceptions meetings are open to the public. about racial discrimination and its costs In 1991 the council considered pro- in social terms; questions about the posed banking reform, data collected potential effectiveness of testing in under the Home Mortgage Disclosure the mortgage lending area; and cost Act, issues related to the feasibility of considerations. using testers to detect racial discrimina- The council debated the issues and tion in mortgage lending, and other adopted a resolution recommending matters. that the Board, along with the other In March the council considered the banking agencies and the Department main elements of Treasury Department of Housing and Urban Development, recommendations for changes in the fund a research project that would deposit insurance system and reform of define the way testing could be used to the banking laws. Members supported investigate unlawful mortgage lending the idea of better, publicly available in- practices. formation on the financial condition of The Board considered the council's institutions to help large corporate de- testing recommendation in September positors and sophisticated customers to and decided not to pursue the proapply market discipline to encourage gram. Its decision, conveyed to the safe bank investments. Many believed, council in October, was based on however, that it is unrealistic to expect concerns about the validity of testing the average cpnsumer to similarly use in the mortgage credit area, its subthat information in choosing depository stantial cost, and the use of deception institutions. by the government. The Board empha- Members of the council's committee sized that, although it has chosen not to on depository and delivery systems ac- undertake a testing project, it continues cepted, with some reluctance, the need to be concerned about the reported for the "too-big-to-fail" doctrine as a disparities in mortgage lending when way to protect the integrity of the bank- applicants are grouped by race. Besides ing system. They indicated, however, working on more sophisticated exthat deposit insurance premiums should amination procedures to detect disbe adjusted to reflect the actual risks to crimination, the Board has directed the insurance funds and that small insti- the staff to explore other promising tutions should not indirectly fund the methods to address discrimination iscosts associated with preventing the sues. The Board also is planning to use large ones from failing. nationwide surveys to learn more about In October 1990 the council had consumer experience in seeking mortasked the Board for a feasibility study gage loans, and it is working with the on the possible use of testers to detect Department of Justice and other agenunlawful discrimination in mortgage cies in identifying ways to address fair lending. In February 1991 the Board lending concerns. approved the preparation of that study During the year, the council also conby staff members in the Divisions of sidered the following issues: Consumer and Community Affairs and • The functioning of the new CRA of Research and Statistics. The study, public disclosure process, focusing on presented at the council's June meeting, public access to the evaluations, the exfocused on several areas: ethical con- amination process, and the usefulness of cerns expressed by Board members information contained in the evaluations Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 78th Annual Report, 1991 • Possible effects of electronic ben- tress. The Board noted that although efit transfer programs on recipients of most institutions do not base special republic assistance views on residency, more banks may • Referral practices among real estate follow this course of action if pockets of brokers who market and originate mort- the country continue to decline economgage loans for various lenders. ically. Such reviews may benefit card A roundtable discussion among mem- issuers but may create hardship for conbers of the council and Board members, sumers who have their credit reduced or known as the Members Forum, gave eliminated. council members the opportunity to The Equal Credit Opportunity Act, offer their views on a variety of other implemented by the Board's Regulation topics. During 1991 the council dis- B, prohibits creditors from discriminatcussed matters such as the level of, and ing against credit applicants or existing ways to improve, consumer confidence customers because of factors such as in the banking system and the current race, color, religion, sex, or marital availability of commercial and real status. The law does not prohibit the estate credit in their local markets. review of cardholders based on their residency. If a creditor decides not to grant credit to an applicant or reduces Testimony and Legislative credit to a nondelinquent consumer, Recommendations however, it must notify the consumer and give the reasons. Furthermore, the The Board testified on credit card issues Fair Credit Reporting Act mandates that and disclosures related to deposit if a creditor makes a negative decision accounts. based on information contained in a report from a credit bureau, the creditor Regional Evaluation of Credit Card must so advise the consumer and furnish Holders the name and address of the credit The Board testified in April before a bureau. If information in the report is House banking subcommittee on the incorrect, the consumer has the right to manner in which financial institutions an investigation and the correction of evaluate the creditworthiness of card- any inaccuracies. The bank's practices, holders. The hearing was prompted by a on which the hearing focused, included bank credit card issuer's evaluation of proper notification. customers in a nine-state region in which bankruptcy filings had increased Credit and Charge Card Legislation significantly. The bank applied a creditscoring model to evaluate cardholders In October the Board testified before a who had been delinquent in payments House banking subcommittee on proover the previous fourteen months or posed amendments to the Truth in Lendhad exceeded their credit limit. The ing Act that would require additional bank then closed or reduced the credit disclosures and would grant substantive limit on accounts perceived to pose a rights to consumers when creditors risk of loss. change certain terms. In addition, the The Board favored a flexible regula- Board reported on the credit card industory stance to allow geographic evalua- try and gave possible reasons why credit tion of credit card portfolios if certain card interest rates have not fallen along regions show signs of economic dis- with the lenders' cost of funds. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 191 The Board believes that the existing many consumers elect to keep their curlaw provides adequate disclosure to con- rent cards and pay the higher rates. sumers on the costs associated with credit and charge card accounts. The Truth in Savings Board acknowledged the value of disclosure but noted that the pending legis- The Board testified in May before a lation would greatly burden the industry House banking subcommittee on prowith more compliance costs without posed truth in savings legislation that meaningful benefit to consumers. called for depository institutions to dis- Although the Truth in Lending Act is close certain information about conprimarily a disclosure statute, the pro- sumer deposit accounts. The Federal posed legislation sought to grant con- Deposit Insurance Corporation Improvesumers a substantive right to close their ment Act, adopted in December, inaccounts and pay off existing balances cludes provisions from the earlier proaccording to the original terms if the posals. The new law mandates detailed creditor changed certain terms, such as rate and fee information in advertisethe annual percentage rate. The Board ments and account schedules and rebelieves that substantive laws of this quires depository institutions to inform type remain within the domain of state account holders when terms are law. changed, all of which will allow con- The Board commented on the credit sumers to more readily compare the card industry generally. In recent years, costs of deposit accounts. The Board the profitability of credit card operations expects to propose rules in early 1992 to has been increasing. As profits climb, so implement the law. does competition—in the form of low or no annual fees, increased credit limits, Recommendations of Other the addition of special features to the Agencies card plans, and the entry of new firms into the market. Each year the Board asks those agencies The Board noted the concerns of that have enforcement responsibilities some that credit card interest rates have under Regulations B, E, M, Z, and CC not tracked the decline of creditors' cost for recommended changes to the regulaof funds but observed that the interest tions or the underlying statutes. The rate is only one component of credit FDIC has recommended revising Regucard pricing. Other components include lation B to require a specific notice inannual fees, grace periods, and credit forming consumers who were denied limits. When funding costs change, credit that they should contact the financreditors may choose to modify these cial institution rather than the instituother components rather than the inter- tion's regulatory agency if they have est rate. The Board also suggested that questions. • creditors may lack the incentive to lower interest rates because many consumers will not change creditors even if they must pay more to maintain their accounts. To obtain a new credit card, a consumer must often incur fees, expend time and effort, and risk a rejection. With these costs and risks in mind, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

193 Litigation During 1991, the Board of Governors sought review of a Board order dated was named in twenty-seven lawsuits, the May 22, 1989, approving the applicasame number as in 1990. Eleven new tion of SouthTrust Corporation to aclawsuits were filed in 1991, five of quire a national bank in Georgia by which raised questions under the Bank relocating an Alabama national bank Holding Company Act. As of Decem- subsidiary across state lines pursuant ber 31, 1991, eleven cases were pend- to 12 U.S.C. §30 (75 Federal Reserve ing, six of which involved questions Bulletin 516). On December 20, 1991, under the Bank Holding Company Act. the Court of Appeals held that the Board has no authority over interstate relocations and vacated the Board's order. Bank Holding Companies— In Babcock and Brown Holdings, Inc. Antitrust Actions v. Board of Governors, No. 89-70518 (9th Circuit, filed November 22, 1989), In United States v. First Hawaiian, Inc., petitioners sought review of a Board No. 90-00904 (D. Hawaii, filed Decemorder dated October 25, 1989, in which ber 28, 1990), the Department of Justice the Board requested the Federal Deposit challenged the acquisition by First Ha- Insurance Corporation to condition dewaiian, Inc., a Hawaiian bank holding posit insurance for a proposed District company, of First Interstate of Hawaii, of Columbia bank on Board approval of Inc., under the antitrust laws. The Board the acquisition of control of the bank by had approved the transaction on Novem- Babcock and Brown Holdings, Inc., a ber 30, 1990 (77 Federal Reserve Bullebrokerage firm. On April 7, 1991, the tin 52). The case was settled. court dismissed the case as moot (931 In United States v. Fleet/Norstar F.2d 59). Financial Group, Inc., No. 91-0219-P In Kaimowitz v. Board of Governors, (D. Maine, filed July 5, 1991), the De- No. 90^3067 (1 lth Circuit, filed January partment of Justice challenged the ac- 23, 1990), petitioner, raising issues unquisition by Fleet/Norstar Financial der the Community Reinvestment Act, Group, a bank holding company, of the sought review of a Board order dated New Bank of New England, N.A., and December 22,1989, approving an appli- New Connecticut Bank & Trust Comcation by First Union Corporation to pany, N.A., under the antitrust laws. The acquire Florida National Banks (76 Fed- Board had approved the transaction on eral Reserve Bulletin 83). On August July 1, 1991 (77 Federal Reserve Bulle- 27, 1991, the Court of Appeals ruled tin 750). The case was settled. that the petitioner lacked standing to bring the action (940 F.2d 610). Bank Holding Company Act— In Citicorp v. Board of Governors, No. 90-4124 (2nd Circuit, filed October Review of Board Actions 4, 1990), petitioner sought review of a In Synovus Financial Corporation v. Board order requiring Citicorp to termi- Board of Governors, No. 89-1394 (D.C. nate certain insurance activities by a Circuit, filed June 21, 1989), petitioner nonbank subsidiary of Citicorp's subsid- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

194 78th Annual Report, 1991 iary bank in Delaware (76 Federal Re- Board orders assessing civil money penserve Bulletin 977). On June 10, 1991, alties and issuing orders of prohibition. the Court of Appeals vacated the On July 31, 1991, the Court of Appeals Board's order (936 F.2d 66). The peti- upheld the Board's orders (940 F.2d tion for certiorari was denied on January 1360). 13, 1992 (No. 91-587). In Stanley v. Board of Governors, No. In First Interstate BancSystem of 90-3183 (7th Circuit, filed October 3, Montana, Inc. v. Board of Governors, 1990), petitioners sought review of a No. 91-1525 (D.C. Circuit, filed No- Board order imposing civil money penvember 1, 1991), petitioner seeks re- alties. On August 15, 1991, the Court of view of a Board order dated October 7, Appeals upheld the Board's order (940 1991, denying on Community Reinvest- F.2d 267). ment Act grounds petitioner's applica- In Board of Governors v. Pharaon, tion under section 3 of the Bank Hold- No. 91-CIV-6250 (S.D. New York, ing Company Act to merge with filed September 17, 1991), the Board Commerce Bancshares of Wyoming, seeks to freeze the assets of an individ- Inc. (77 Federal Reserve Bulletin 1007). ual pending administrative adjudication The case is pending. of a civil money penalty assessment by the Board. On September 17 the court issued an order temporarily restraining the transfer or disposition of the individ- Litigation under the Financial ual's assets. The order has been ex- Institutions Supervisory Act tended by agreement. In MCorp v. Board of Governors, No. In Board of Governors v. Shoaib, No. 90-913 (U.S. Supreme Court, petition CV 91-5152 (CD. California, filed Sepfor certiorari filed December 10, 1990), tember 24, 1991), the Board seeks to the Board appealed a preliminary in- freeze the assets of an individual pendjunction entered by the district court en- ing administrative adjudication of a civil joining pending and future enforcement money penalty assessment by the Board. actions against a bankrupt bank holding On October 15 the court issued a prelimcompany (101 Bankr. 483, S.D. Texas inary injunction restraining the transfer 1989). On May 15, 1990, the Fifth Cir- or disposition of the individual's assets. cuit Court of Appeals vacated the in- In Greenberg v. Board of Governors, junction in part and affirmed it in part No. 91-4200 (2nd Circuit, filed Novem- (900 F.2d 852). On December 3, 1991, ber 22, 1991), the petitioner seeks rethe Supreme Court affirmed the Court of view of a Board order dated October 28, Appeals' vacating of part of the injunc- 1991, prohibiting former national bank tion and vacated the remainder of the officials from banking. The case is injunction. A related case, MCorp v. pending. Board of Governors (No. CA3-88- In two cases filed under seal in the 2693, N.D. Texas, filed October 28, U.S. District Court for the District of 1988), has been stayed for the duration Columbia, two institution-affiliated parof the preliminary injunction entered by ties of a bank holding company and the Southern District of Texas in the state member bank applied, pursuant to above case. 12 U.S.C. 1818(f), for a stay of suspen- In Burke v. Board of Governors, No. sion and prohibition orders against them 90-9505 (10th Circuit, filed February pending completion of the Board's ad- 27, 1990), petitioners sought review of ministrative proceedings. On May 10, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 195 1991, the Court denied plaintiffs' mo- had been substantially justified. On tion for an injunction. April 12, 1991, the Court of Appeals affirmed the Board's decision on both grounds (930 F.2d 39). In Rutledge v. Board of Governors, Other Actions No. 90-7599 (11th Circuit, filed August In White v. Board of Governors, No. 21, 1990), appellant appealed a district 88-623 (D. Nevada, filed July 29,1988), court grant of summary judgment in fathe plaintiff alleged discriminatory prac- vor of the Board in connection with his tices under the Age Discrimination in challenge to Board and Reserve Bank Employment Act. The case was dis- supervisory actions under several tort missed on August 30, 1991. theories. The Court of Appeals sum- In Consumers Union of U.S., Inc. v. marily affirmed the lower court on Janu- Board of Governors, No. 90-5156 (D.C. ary 17, 1991 (924 F.2d 1065). Circuit, filed May 2, 1990), appellant In Sibille v. Federal Reserve Bank of appealed a district court decision grant- New York, et al, No. 90-CIV-5898 ing summary judgment for the Board in (S.D. New York, filed September 12, connection with a challenge to various 1990), plaintiff sought review of a deamendments to Regulation Z imple- nial of a Freedom of Information Act menting the Home Equity Loan Con- request. On July 9, 1991, the district sumer Protection Act. On July 12, 1991, court granted the Board's motion to the Court of Appeals affirmed the major- dismiss. ity of the district court decision uphold- In State of Illinois v. Board of Govering the Board's regulation but remanded nors, No. 90-C-6863 (N.D. Illinois, two issues to the Board for further ac- filed November 27, 1990), the State of tion (938 F.2d 266). Illinois filed suit to prevent disclosure of In May v. Board of Governors, No. state examination reports provided to 90-1316 (D. District of Columbia, filed the Board under a confidentiality agree- June 5, 1990), the plaintiff challenged ment. The documents were the subject the Board's response to his requests un- of a congressional subpoena. On Deder the Freedom of Information Act and cember 28, 1990, the district court pre- Privacy Act. On July 17, 1990, the dis- liminarily enjoined disclosure of the retrict court granted the Board's motion ports. The House Banking Committee to dismiss, and plaintiff subsequently appealed (Nos. 90^3824, 91-1048) to appealed (No. 90-5235) to the D.C. Cir- the U.S. Court of Appeals for the Sevcuit. On May 16,1991, the court granted enth Circuit. On June 25,1991, the court the Board's motion for summary affir- dismissed the case as moot {Harris v. mance and dismissed the appeal (946 Board of Governors, 938 F.2d 720). F.2d 1565). In Fields v. Board of Governors, No. In Kuhns v. Board of Governors, No. 3:91CV7069 (N.D. Ohio, filed February 90-1398 (D.C. Circuit, filed July 30, 5, 1991), the plaintiff appeals the denial 1990), petitioner sought review of a of a request for information under the Board order denying a request for attor- Freedom of Information Act. The case is ney's fees under the Equal Access to pending. Justice Act on the grounds that the peti- In Hanson v. Greenspan, No. 91tioner had failed to provide reliable fi- 1599 (District of Columbia, filed June nancial information establishing his eli- 28, 1991), the plaintiffs sued for return gibility and that the filing against him of funds and financial instruments alleg- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

196 78th Annual Report, 1991 edly owned by plaintiffs. On December 6, 1991, the district court granted motions to dismiss. In In re Smouha, No. 91-B-13569 (Bkr. S.D. New York, filed August 2, 1991), petitioners—the provisional liquidators of BCCI Holdings (Luxembourg), S.A., and affiliated companies— seek relief under the U.S. bankruptcy code ancillary to foreign liquidation proceedings. On August 15,1991, the bankruptcy court issued a temporary restraining order staying certain judicial and administrative actions, which has been continued by consent. In In re Subpoena Served Upon the Board of Governors of the Federal Reserve System, No. 91-5428 (D.C. Circuit, filed December 27, 1991), the Board appeals from an order of the D.C. District Court (No. 91-320) ordering the Board to produce bank and bank holding company examination reports of the Fleet/Norstar Financial Group that the Board had sought to protect from disclosure on the grounds of the bank examination and deliberative process privileges. The Board had been subpoened to produce these documents in a shareholder derivative and class action suit pending in the U.S. District Court in Rhode Island against the Fleet/Norstar Financial Group. The case is pending. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

197 Legislation Enacted In 1991 the Congress passed a bill that less than $100 million in assets that is requires changes in several areas of bank well-capitalized and was given an outregulation. standing rating during its last examination may be examined once every eighteen months if control has not Federal Deposit Insurance changed within twelve months of the Corporation Improvements Act last examination. of 1991 Title I also requires an insured depository institution with assets of more than Public Law 102-242, the Federal De- $150 million to have annual, indepenposit Insurance Corporation Improvedent audits, including reports on internal ments Act of 1991 (FDICIA), was encontrols and compliance with certain acted on December 19, 1991. The regulatory requirements to be specified following discussion briefly summarizes by the FDIC. For an insured subsidiary each of the act's five titles and describes of a bank holding company, this requirein more detail the portions that bear ment may be met by audits at the holdsignificantly on the Federal Reserve and ing company level if the insured instituthe institutions it regulates. tions received a CAMEL rating of 1 or 2 in its most recent examination.1 Title I Title I removes provisions of the Federal Deposit Insurance Act that allowed Title I of the act addresses funding of banks to become insured institutions the Bank Insurance Fund and general upon receiving a national charter or, for safety and soundness questions, provid- state-chartered institutions, upon becoming for improvements in the examina- ing members of the Federal Reserve tion and auditing of insured depository System. All depository institutions now institutions and the accounting standards must apply directly to the FDIC to reapplicable to these institutions. Title I ceive deposit insurance. also provides for prompt corrective action concerning any depository institu- Accounting Reforms tion that fails to meet certain minimum Title I generally requires that the accapital standards; it also generally re- counting principles applicable to the requires the FDIC, as conservator or reports of insured institutions must be uniceiver, to seek the least-cost resolution form and consistent with generally of failed depository institutions. accepted accounting principles (GAAP). The accounting principles may depart Supervisory Reforms from this requirement if federal banking Under title I, insured depository institu- agencies determine that the application tions generally must be examined annually by their primary federal regulator. 1. CAMEL is the acronym for a consolidated For state-chartered institutions, state exrating gauging a depository institution's level of aminations may be substituted in alter- capital, asset quality, management, earnings, and nate years. A depository institution with liquidity. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

198 78th Annual Report, 1991 of a particular principle results in finan- control of the undercapitalized institucial statements and reports that do not tion must provide a limited guarantee accurately reflect the capital of an insti- that the institution will comply with tution or do not facilitate supervision the plan until it has been adequately and prompt corrective action; alterna- capitalized for four consecutive quartive accounting principles prescribed by ters. An undercapitalized institution may the agencies must, however, be no less not make acquisitions, establish new stringent than GAAP. branches, or engage in new lines of busi- Within a year of enactment of the ness unless its plan has been accepted FDICIA, all federal banking agencies and the proposed action is found to be must review all existing reporting and consistent with the plan. In addition to regulatory requirements and modify any requiring the institution to raise addithat do not appropriately reflect capital tional capital, the institution's federal and facilitate supervision and corrective banking agency may also restrict transaction. Uniform accounting standards actions with affiliates, interest rates paid, are to be used by the agencies in deter- asset growth, acceptance of interbank mining regulatory compliance by insti- deposits, or other activities of the institutions. Each agency also must develop tution; the agency may also require reporting requirements for contingent changes in the institution's management assets and liabilities and must jointly and require divestitures by the institudevelop methods for supplemental dis- tion or its parent. closures of market values of assets. If an institution is significantly under- Title I also requires depository institu- capitalized, or if it is undercapitalized tions to provide additional reporting on and has not submitted an acceptable capthe availability of credit to small busi- ital plan, the appropriate federal banking nesses and farms. agency is required to take one or more of the actions referred to above and may impose additional requirements if neces- Prompt Regulatory Action sary. Title I also places restrictions on The FDICIA requires the federal bank- the compensation of such an instituing agencies to address the financial dif- tion's management. ficulties of insured institutions with Critically undercapitalized institutions prompt corrective action. Title I estab- generally are prohibited from making lishes categories of capitalization, with any investments, acquisitions, sales of the specific ratios to be set by the agen- assets, payments on subordinated debt, cies, and requires successively more and other actions without the permission stringent regulatory actions as an institu- of the FDIC. Within ninety days of the tion's capital deteriorates. Title I also date the institution becomes critically authorizes the appropriate federal bank- undercapitalized, the appropriate federal ing agency to downgrade the categoriza- banking agency must appoint a consertion of an institution it believes to be vator or receiver or, with the concurunsafe and unsound or to be engaged in rence of the FDIC, require other action an unsafe or unsound practice. to restore capital. If the institution is Title I requires an undercapitalized critically undercapitalized during the institution to file with its federal regula- calendar quarter beginning 270 days tor an acceptable capital restoration plan after the date the institution became critwithin a brief time after becoming ically undercapitalized, the agency must undercapitalized. Any company having appoint a conservator or receiver unless Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 199 the agency, with the concurrence of the two-thirds of the board of the FDIC, determines that the institution is FDIC—determines that the FDIC's in compliance with its capital plan and compliance with these provisions would other requirements. result in serious adverse effects on eco- If either deposit insurance fund suf- nomic conditions or financial stability fers a material loss with respect to an that would be avoided by the FDIC's insured institution, title I requires that use of other resolution methods. The the inspector general of the institution's FDIC is required to recover any addifederal banking agency review the su- tional costs incurred through special pervision of the institution, report on the insurance assessments. cause of the loss, and recommend ways Title I amends the Federal Reserve to prevent such losses in the future. Act—effective two years after the enact- Title I also requires federal banking ment of the FDICIA—to limit lending agencies to prescribe standards for oper- by any Federal Reserve Bank to an ations, management, asset quality, earn- undercapitalized institution to sixty days ings, stock valuation, and compensation out of any one-hundred-twenty-day for all insured depository institutions period. An exception is provided if the and depository institution holding com- head of the appropriate federal banking panies. It also requires institutions and agency or the Chairman of the Federal holding companies that do not meet such Reserve Board certifies that the institustandards to submit compliance plans to tion is viable. The Federal Reserve may their regulators. continue lending for more than sixty In order to implement the require- days to an undercapitalized institution ments for prompt corrective action, without such certification, but the Fedtitle I significantly expands the grounds eral Reserve would be required to reimon which a conservator or receiver may burse the FDIC for any loss in excess of be appointed. These provisions give the the loss that would have been incurred Federal Reserve Board the authority to had the FDIC closed the institution five appoint the FDIC as receiver for a state days after the institution became critimember bank after consulting with the cally undercapitalized. appropriate state regulator. In any event, if the Federal Reserve lends to any critically undercapitalized Least Cost Resolution institution for more than a five-day Title I amends the Federal Deposit In- period, the Federal Reserve will be liasurance Act to require the FDIC to use ble to the FDIC for losses over those the least costly method to resolve its that would have been incurred if the insurance obligations with regard to an institution had been closed at the end of insured institution. After 1994, title I the five day period. Title I limits the will prevent the FDIC from taking any Federal Reserve's liability to the lesser action to protect uninsured depositors or of the loss that it would have incurred creditors if such action will increase on increases in advances made after the costs to the insurance funds. The FDIC five-day period had the advances been may resolve its obligation to a troubled unsecured or the amount of interest reinstitution without following the least- ceived on increases in advances made cost requirement in limited situations in after the end of the five-day period. The which the Secretary of the Treasury— Federal Reserve is also given the authorupon a recommendation of two-thirds ity to examine any depository institution of the Federal Reserve Board and or depository institution affiliate in con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 78th Annual Report, 1991 nection with lending to the depository Title II also limits state-chartered institution. branches and agencies of foreign banks to the same activities and lending limits as those permitted federally chartered Title II branches and agencies, unless the Fed- Title II expands the regulation of for- eral Reserve Board and, for insured eign bank operations in the United branches, the FDIC approve exceptions. States and addresses several consumer Further, the Board is authorized to imissues, including the Truth in Savings pose conditions on the approval of fed- Act, low-cost basic transaction accounts, eral branches and agencies by the Office and affordable housing. of the Comptroller of the Currency (OCC). Regulation of Foreign Banks Title II strengthens the Board's au- Title II amends the International Bank- thority to examine any branch or agency ing Act to strengthen federal supervi- of a foreign bank, any commercial lendsion, regulation, and examination of for- ing company or bank controlled by a eign bank operations in the United foreign bank, and any other office or States. Under the International Banking affiliate of a foreign bank. Title II re- Act, a foreign bank now must obtain the quires foreign banks to obtain the apapproval of the Federal Reserve Board proval of the Federal Reserve Board bebefore establishing a branch or an fore establishing representative offices agency or before acquiring ownership or in the United States. Title II also adds a control of a commercial lending com- provision to the Federal Deposit Insurpany. To approve such an application by ance Act to require any financiali nstitua foreign bank, the Board must deter- tion that has extensions of credit secured mine that the foreign bank engages di- by 25 percent or more of any class of rectly in the business of banking outside shares of an insured depository instituof the United States, that it is subject to tion to provide consolidated reports to comprehensive supervision or regula- the insured institution's primary federal tion on a consolidated basis in its home regulator. Civil and criminal penalties country, and that the foreign bank has are established for violations by foreign provided adequate information to assess banks, and specific references to forthe application. eign bank operations are added in a The amendments permit the Board to number of consumer and related statuterminate the activities of a state- tory provisions. chartered branch, agency, or commer- Title II requires foreign banks that cial lending subsidiary of a foreign bank maintain accounts with balances of less if the foreign bank is not subject to than $100,000 to establish a banking comprehensive supervision or regula- subsidiary and obtain deposit insurance tion in its home country, or if it is being from the FDIC; accounts that were held operated in an unsafe and unsound man- in an insured branch on the date of ner. Title II also directs the Board to FDICIA's enactment are exempted from develop and publish the criteria to be this requirement. used in evaluating the operations of any Title II requires the Board, jointly foreign bank in the United States that with the Treasury, to report to the Conthe Board has determined is not sub- gress on the regulatory capital standards ject to comprehensive supervision or that apply to foreign banks operating in regulation. the United States and to establish guide- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 201 lines to be used in comparing foreign deposit. Additional amendments permit bank capital to the risk-based capital longer holds on certain large or redeposand leverage requirements for United ited government or depository institu- States banks. The Board is also required tion checks. to report, jointly with the OCC, the Title II also requires that a ninety-day FDIC, and the Attorney General, as to advance notice of the closing of any whether foreign banks should be re- branch of an insured depository instituquired to conduct banking operations in tion be provided to the federal regulator the United States through subsidiaries and customers of the institution. rather than branches. Bank Enterprise Act Customer and Consumer Provisions Title II requires the Board and the FDIC Within one year of the enactment of the to establish minimum requirements for FDICIA, the Federal Financial Institu- "lifeline" accounts, which provide basic tions Examination Council is required to transaction services. Subject to conreview all policies and procedures used gressional appropriations, institutions to enforce compliance with all laws un- providing such accounts may be able to der the jurisdiction of the federal bank- pay lowered deposit insurance premiing agencies and the Treasury and to ums on funds in these accounts. Credits report to the Congress on revisions that against deposit insurance assessments can be made without weakening compli- are also allowed for institutions inance with, or enforcement of, consumer creasing certain qualifying activities, laws and without endangering the safety including lending to low- and moderateand soundness of insured institutions. income persons or enterprises in dis- Title II amends the Equal Credit Op- tressed communities, subject to congresportunity Act to require federal agencies sional appropriations. to refer to the Attorney General cases in which creditors discourage or deny loan Whistleblower Protections applications in violation of the act and Title II provides protections for employto require the reporting of individual ees of depository institutions and federal instances of suspected mortgage dis- banking agencies if they report misconcrimination to the Department of Hous- duct at an institution or agency, effective ing and Urban Development and to the retroactively to January 1, 1987. Emapplicant. Lenders are required upon re- ployees that believe they had been quest to provide applicants with copies wrongfully discharged or discriminated of appraisals in connection with loans against under this provision could file secured by residential real property. civil actions for damages or reinstate- Title II also amends the Home Mortgage ment within two years after enactment Disclosure Act to extend its require- of the FDICIA. ments to a broader range of financial institutions. Truth in Savings Title II amends the Expedited Funds The Truth in Savings Act (TSA), Availability Act to permit deposits made adopted as subtitle F of title II of the at nonproprietary automated teller ma- FDICIA, provides for uniform disclochines to be treated as nonlocal checks, sure of the rates of interest payable on thereby allowing depository institutions deposit accounts and the fees payable on to put a hold on the proceeds of the such accounts. All advertisements that checks until the fifth business day after refer to a specific interest rate must in- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 78th Annual Report, 1991 elude the annual percentage yield on the amount of interest earned, the amount of account and the period during which the any fees or charges imposed, and the annual percentage yield is in effect, as number of days in the reporting period. well as any minimum balances, mini- The Board is required to promulgate mum initial deposit, fees, and early regulations to implement the provisions withdrawal penalties. The TSA autho- of the TSA within nine months of enactrizes the Federal Reserve Board to ex- ment of the FDICIA, with such regulaempt advertisements made by broadcast, tions to be effective within six months electronic media, or outdoor displays of final publication. The TSA provides not on the premises of the depository for administrative enforcement by the institution if such disclosure would be appropriate federal banking agency and unnecessarily burdensome. The TSA civil liability for violations. prohibits references to free or no-cost accounts if minimum balances or limits on transactions are required to avoid Title III fees or if any regular service fee or transaction fee is imposed; the TSA also Title III places limitations on deposit generally prohibits any depository instiinsurance, brokered deposits, real estate tution or deposit broker from making lending and lending to insiders, and any statement that is inaccurate or misthe activities of FDIC-insured stateleading or that misrepresents a deposit chartered banks generally; it also procontract. vides penalties for false assessment re- The TSA requires each depository inports. Title III requires the Board to stitution to maintain a schedule of fees, develop rules to limit the exposure of charges, interest rates, and terms and insured depository institutions to other conditions applicable to each type of depository institutions and requires studaccount offered, as detailed in regulaies on ownership of deposits and on tions to be established by the Board. deposit insurance. These schedules must be available to any person upon request, to customers before an account is opened, and to Activities holders of automatically renewable time Title III restricts the acceptance of brodeposits. Notice must be given thirty kered deposits to institutions that are days in advance of any change in the well-capitalized or that are adequately terms or conditions of an account that capitalized and have received a waiver may reduce the yield or adversely affect from the FDIC. The interest rates on the account holder. brokered deposits may not be signifi- The TSA requires that interest be cal- cantly above (1) the rates paid on deposculated on the full amount of the princi- its of comparable maturity in the institupal in an account for each day of the tion's normal market area or (2) above calculation period at the stated rate of national rates as determined by the interest, and that interest begin to accrue FDIC. no later than the availability date re- The FDIC is required to establish a quired by the Expedited Funds Avail- system of risk-based deposit insurance ability Act. Each depository institution premiums, which will account for the is also required to include with each risk to the insurance funds posed by the periodic statement a statement of the types and concentrations of assets and annual percentage yield earned, the liabilities of an institution. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 203 A provision of title III effective one mittee of the Bank for International year after enactment of the FDICIA re- Settlements. stricts the activities of insured state- Title III amends the Federal Reserve chartered banks to those activities that Act to recodify and strengthen existing are permissible for national banks; the law concerning extensions of credit to restriction does not apply if the FDIC officers, directors, and principal sharedetermines that the activity poses no holders. The provision makes applicable risk to the insurance fund and that the to lending to directors the restrictions state bank is in compliance with applica- that currently apply to lending to bank ble capital requirements. Insured state officers. The provision also imposes an banks generally will be prohibited from aggregate limit on the total extensions engaging in insurance activities that are of credit to the bank's officers, directors, not permissible for national banks. In- and principal shareholders and their resured state banks will also be prohibited lated interests. The Board is permitted to from holding any equity investment of a set a higher aggregate limit for lending type or in an amount not permitted for a by small banks when necessary to prenational bank, with limited exceptions, vent the restriction of credit in a comincluding exceptions for certain subsidi- munity or to permit banks to attract aries and qualified housing projects. directors. Insiders are prohibited from State banks are given a period of several knowingly receiving, or permitting their years to conform existing investments. related interests to receive, prohibited Subsidiaries of insured state banks extensions of credit. may engage as principal in activities Title III provides the FDIC with the that are not permissible for a subsidiary authority to take enforcement action of a national bank only if the activity is directly against any insured depository approved by the FDIC and the parent institution under certain circumstances. bank meets applicable capital require- Title III also amends the Federal Rements. Insurance activities that were serve Act to add a new section 23, which lawfully provided in a state as of No- requires the Board to prescribe stanvember 21, 1991, may continue within dards to limit the exposure of insured that state. Title insurance and savings depository institutions to the failure of a bank life insurance activities are grand- large depository institution. fathered or permitted for certain insured state banks. Deposit and Pass-through Insurance Title III requires the Board and other Title III modifies the current system of federal banking agencies to adopt uni- federal deposit insurance to eliminate form standards for real estate lending insurance coverage for certain bank and provides that loan evaluation stan- investment contracts held by employee dards should not require loans to be benefit plans that permit penalty-free considered nonperforming solely be- withdrawals. The FDIC is directed to cause the proceeds are invested in resi- study the feasibility of tracking deposits dential, commercial, or industrial prop- of any individual, and the Board erty. The Board and each appropriate is directed to survey the ownership, federal banking agency are also required amounts, and types of deposits held by to review capital and risk-based capital individuals. standards biennially and to discuss the Title III prohibits the FDIC, the Feddevelopment of comparable standards eral Reserve System, and any other with members of the supervisory com- agency or instrumentality of the United Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

204 78th Annual Report, 1991 States from making any payment for the The Board, jointly with the FDIC, the benefit of foreign depositors except pay- National Credit Union Administration, ments by the FDIC to meet the require- the OCC, and the Office of Thrift Superments of least-cost resolution. Federal vision, is required to report to the Con- Reserve Banks may continue to extend gress on the feasibility of payment by credit to member banks under the provi- the Federal Reserve Banks to the desions of the Federal Reserve Act, re- posit insurance funds of imputed intergardless of whether the bank has foreign est on reserve accounts held by insured deposits. depository institutions. Title III also provides for a three- Title IV amends the Federal Reserve tiered system of penalties applicable to Act to permit a Federal Reserve Bank, insured institutions that make false re- upon an affirmative vote of at least five ports in connection with insurance pre- members of the Federal Reserve Board, mium assessments. to provide secured lending in unusual and exigent circumstances to individuals, partnerships, or corporations with- Title IV out regard to the purpose of the notes Title IV concerns payment system risk, used to secure the lending. FDIC operations and settlement proce- Under Title IV, the Board and other dures, qualified thrift lenders, emer- appropriate federal banking agencies are gency loan guarantees, the right to fi- required to determine the amount of purnancial privacy; it also mandates several chased mortgage servicing rights that studies and reports. may be included in an institution's tangible capital, risk-based capital, and le- Reduction of Payment System Risk verage limit. To promote efficiency and reduce sys- Each year, the Board must collect and temic risk within the banking system publish information on the availability and financial markets, title IV validates of credit to small businesses, including bilateral netting contracts between cer- farms and minority-owned businesses. tain financial institutions and multilateral netting contracts between members Title V of clearing organizations. Title IV provides that netting contracts between de- Title V amends the Federal Deposit Inpository institutions, brokers, dealers, surance Act to allow a bank that is not and futures commission merchants will part of a bank holding company to be enforceable even in the event of the merge or consolidate with a savings asbankruptcy of one of the parties; the sociation or acquire its assets and liabil- Board is authorized to expand the cover- ities without payment of the entrance age of this provision to include affiliates and exit fees required under the Finanof brokers and dealers and other finan- cial Institutions Reform, Recovery, and cial institutions. Enforcement Act of 1989. The amendments also permit a thrift institution to Miscellaneous Provisions acquire a bank in the same manner. The Title IV permits the FDIC to settle im- amendments require the filing of a bank mediately all uninsured and unsecured merger application and generally require claims against an institution in receiver- the Board to review applications for ship by making final payments reflecting mergers under the same standards applithe FDIC's average rate of recovery. cable to other bank mergers. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

205 Banking Supervision and Regulation The past year was another difficult one misunderstandings about them on the for the U.S. banking system, and it made part of both bankers and bank examinnew demands on the Federal Reserve's ers. In general, the statements emphabank supervisory and regulatory activi- sized the importance of reviewing loans ties. The continued weakening of com- in a consistent, prudent, and balanced mercial real estate markets, in particular, fashion that recognized the borrower's put many banking organizations under willingness and capacity to repay and increased stress and kept the rate of the income-producing capacity of the bank failures high. Real estate prob- properties. They also emphasized the lems, sometimes compounded with ex- need for banks to extend credit to sound posures to heavily indebted borrowers borrowers and to work with troubled and to developing countries, forced borrowers in resolving problems. some institutions to report low or nega- These lending patterns reflect only tive earnings and to take exceptional one dimension of a financial system that measures to rebuild their capital bases. is changing rapidly in response to new Many institutions also took steps to technology, regulatory initiatives, and strengthen loan underwriting standards, market pressures and innovations. The which had declined in past years. In stress and opportunities brought about large part, these measures were needed by these and other events continued to to improve the industry's performance encourage consolidation within the U.S. and to maintain a sound and responsive banking industry. In late 1991, the Board banking system. In certain areas, how- approved the two largest bank combinaever, they also contributed to a general tions in U.S. history. Other significant tightening of credit availability that may mergers and acquisitions are pending. have gone beyond a point of sensible The ongoing administration and conbalance and produced unnecessarily tinued development of the international adverse effects on some creditworthy risk-based capital standard remained an borrowers. important element of the Federal Re- In response to these developments, serve's supervisory process. In the fall, the Federal Reserve Board took steps to several changes were made to the U.S. promote the increased availability of standard to bring it into closer conforcredit. In addition to its monetary policy mity with interpretations of the internaactions, the Board—often in connection tionally agreed Basle Accord and also to with other federal bank regulatory remove certain impediments to the issuagencies—issued a series of policy ance of noncumulative perpetual prestatements intended to clarify its super- ferred stock. Throughout the year, staff visory policies, prevent excessive criti- also worked to develop a framework for cism of weak assets by examiners, and incorporating risks arising from interest encourage bankers to extend funds to rate changes, foreign exchange movecreditworthy borrowers. ments, and securities trading activities These statements did not change the into the risk-based capital measure. One Board's longstanding supervisory poli- approach for evaluating interest rate risk cies but rather were aimed at correcting was described in the August 1991 Fed- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

206 78th Annual Report, 1991 eral Reserve Bulletin, and work in all of the selection of Stephen C. Schemering these areas continues on an international as deputy director; both have been longbasis.1 time staff members in the division. During much of the year, supervisory efforts relating to the July failure of the Scope of Responsibilities Luxembourg-based Bank of Credit and for Supervision and Regulation Commerce International (BCCI) required close coordination and coopera- The Federal Reserve is the primary fedtion with banking authorities worldwide. eral supervisor and regulator of all U.S. These efforts also placed significant de- bank holding companies and of statemands on the Federal Reserve as it chartered commercial banks that are sought to minimize losses to U.S. cus- members of the Federal Reserve Systomers and to identify abusive and unau- tem. In its supervision of the general thorized practices of the bank. Also in operations of these organizations, the the international area, the May imple- Federal Reserve primarily seeks to promentation of final revisions to Regula- mote their safety and soundness and tion K (International Banking Opera- their compliance with laws and regulations) provided a basis for improving tions, including the Bank Secrecy Act the competitiveness of U.S. banks oper- and consumer and civil rights laws.2 The ating abroad. Federal Reserve also reviews the follow- Problems with BCCI, along with leg- ing specialized activities of these instituislative initiatives proposed by the U.S. tions: electronic data processing, fidu- Treasury to reform the domestic finan- ciary activities, government securities cial system, led to enactment of the Fed- dealing and brokering, municipal securieral Deposit Insurance Corporation Im- ties dealing and clearing, and securities provement Act of 1991 (FDICIA). That underwriting and dealing through secmajor legislation expanded the authority tion 20 securities subsidiaries. of the Federal Reserve to regulate and The Federal Reserve also has responsupervise foreign banks conducting sibility for the supervision of (1) all business in the United States and in- Edge Act corporations and agreement cluded numerous other provisions that corporations (organizations chartered by will have significant effects on supervi- the Federal Reserve to provide all segsory and regulatory activities in future ments of the U.S. economy with a means years (see the chapter on Legislation of financing international trade, espe- Enacted). Near year-end, William Taylor, the 2. The Board's Division of Consumer and Staff Director of the Division of Community Affairs has the responsibility of coor- Banking Supervision and Regulation, dinating the Federal Reserve's supervisory activiresigned to become Chairman of the ties with regard to the compliance of banking Federal Deposit Insurance Corporation organizations with consumer and civil rights laws. (FDIC). Subsequently, the Board an- To carry out this responsibility, institutions are examined by specially trained Reserve Bank exnounced the appointment of Richard aminers. The chapter of this REPORT covering Spillenkothen as the new director and consumer and community affairs describes these regulatory responsibilities. Compliance with other statutes and regulations, which is treated in this 1. James V. Houpt and James A. Embersit, "A chapter, is the responsibility of the Board's Divi- Method for Evaluating Interest Rate Risk in U.S. sion of Banking Supervision and Regulation and Commercial Banks," Federal Reserve Bulletin, the Reserve Banks, whose examiners check for vol. 77 (August 1991), pp. 625-37. safety and soundness. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 207 daily exporting), (2) the international appraisal of the quality of the instituoperations of state member banks and tion's assets, (2) an evaluation of man- U.S. bank holding companies, and agement, including internal policies, (3) the operations of foreign banking operations, and procedures, (3) an ascompanies in the United States. In addi- sessment of the key financial factors of tion, the FDICIA increased the Federal capital, earnings, asset and liability man- Reserve's authority over branches, agen- agement, and liquidity, and (4) a review cies, commercial lending subsidiaries, for compliance with applicable laws and and representative offices of foreign regulations. banks in the United States with respect to the establishment, examination, and termination of such offices. State Member Banks Through its administration of the At the end of 1991 there were 982 state Bank Holding Company Act, the Bank member banks, 65 fewer than in 1990. Merger Act, and the Change in Bank These banks represented about 8 percent Control Act for bank holding companies of all insured commercial banks and acand state member banks, the Federal counted for about 16 percent of their Reserve also exercises important regula- assets. tory influence over entry into, and the The Federal Reserve in 1986 instructure of, the U.S. banking system. creased the frequency of scheduled ex- The Federal Reserve is also responsible aminations and inspections of state for the regulation of margin require- member banks and bank holding compaments on securities transactions. The nies. The guidelines call for state mem- Federal Reserve coordinates its super- ber banks to be examined at least annuvisory activities with other federal ally by either a Reserve Bank or, if an and state regulatory agencies and with alternate examination agreement exists, the bank regulatory agencies of other by a state banking agency. Large or trounations. bled banks must be examined at least annually by a Reserve Bank. Under FDICIA, annual on-site examinations Supervision for Safety are now required for all depository instiand Soundness tutions, except well-capitalized and well-managed institutions with assets of To ensure the safety and soundness of less than $100 million. banking organizations, the Federal Re- Because of the reassignment in 1991 serve conducts on-site examinations and of bank examiners to address other inspections, off-site surveillance and emerging problems in the banking inmonitoring, and enforcement and other dustry, scheduled examinations of 21 supervisory actions. healthy, well-managed banks were deferred into the first quarter of 1992. All Examinations and Inspections other state member banks were exam- The on-site review of operations is an ined at least once in 1991. Altogether, integral part of ensuring the safety and the Reserve Banks conducted 790 examsoundness of financial institutions. Ex- inations (some of them jointly with state aminations of state member banks and banking departments), and state banking Edge Act and agreement corporations departments conducted 281 independent and inspections of bank holding compa- examinations. Also, under policy guidenies and their subsidiaries entail (1) an lines, Reserve Bank officials held 313 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

208 78th Annual Report, 1991 meetings with directors of large state holding companies to discuss supervimember banks and those that displayed sory concerns. significant weaknesses. Enforcement Actions, Civil Money Penalties, Bank Holding Companies and Significant Criminal Referrals At year-end 1991, the number of bank holding companies totaled 6,441, 16 In 1991 the Federal Reserve Banks recmore than in 1990. These organizations ommended, and members of the Board's control about 8,500 commercial banks, staff initiated and worked on, 198 forwhich hold approximately 93 percent of mal enforcement cases involving 449 the assets of all insured commercial separate actions—such as written agreebanks in the United States. ments, cease and desist orders, removal Large bank holding companies (gen- and prohibition orders, and civil money erally, those with assets in excess of penalties—dealing with unsafe or un- $150 million) and smaller companies sound practices and violations of law. with significant nonbank assets are to be Of these, 54 cases involving 106 actions inspected annually under the guidelines were completed by year-end. In addifor frequency and scope of examina- tion, the Board and several Reserve tions. Small companies that do not Banks undertook the most extensive appear to be experiencing problems enforcement-related investigation ever are inspected on a sample basis, and conducted by the Federal Reserve, admedium-sized companies that do not dressing the activities of BCCI in the appear to be experiencing problems are United States and other countries. As a inspected on a three year cycle. result of the investigation, which was The inspection focuses on the opera- continuing at year-end, the Board in tions of the parent holding company and 1991 initiated 23 actions, including 6 its nonbank subsidiaries. In judging the actions seeking $257 million in civil condition of subsidiary banks, Federal money penalties. Reserve examiners consult the examina- All final enforcement actions issued tion reports of the federal and state by the Board and all written agreements banking authorities that have primary executed by the Reserve Banks in 1991 responsibility for supervision of these are available to the public. In addition to banks. In 1991, 2,269 bank holding formal enforcement actions, the Reserve companies were inspected. Federal Banks initiated and worked on 297 in- Reserve examiners inspected 2,145 of formal enforcement actions and comthem; state examiners inspected 124. pleted 235 of them through instruments Because certain institutions require such as memorandums of understanding more than one inspection per year, the with state member banks, bank holding Federal Reserve made a total of 2,254 companies, and foreign financial instituinspections in 1991, of which 142 were tions subject to the jurisdiction of the off-site. Because members of the exam- Federal Reserve. In addition to the foreining staff were assigned to work with going, the Board obtained approxiother industry problems in 1991, 53 mately $2.7 million in restitution to, and bank holding company inspections were over $140 million in capital infusions deferred until 1992. During 1991, Re- into, state member banks and bank holdserve Bank officials held 524 meetings ing companies through informal actions with the boards of directors of bank that were taken in lieu of the issu- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 209 ance of formal enforcement orders or sory companies that are subsidiaries of agreements. bank holding companies. In 1991, the Division of Banking Super- On-site examinations are essential to vision and Regulation forwarded 222 ensure the safety and soundness of ficriminal referrals to the Fraud Section nancial institutions that have fiduciary of the Criminal Division of the Depart- operations. The scope of these examinament of Justice for inclusion in its sig- tions includes (1) an evaluation of mannificant referral tracking system. agement, policies, audit procedures, and risk management, (2) an appraisal of the quality of trust assets, (3) an assessment Specialized Examinations of earnings, (4) a review for conflicts of interest, and (5) a review for compliance The Federal Reserve conducts spe- with laws, regulations, and general fiducialized examinations in the following ciary principles. areas of bank activity: electronic data During 1991, Federal Reserve examprocessing, fiduciary activities, govern- iners conducted on-site trust examinament securities dealing and brokering, tions of 152 state member banks and municipal securities dealing and clear- state member trust companies and 36 ing, and securities underwriting and inspections of bank holding company dealing through section 20 securities subsidiaries engaged in fiduciary activisubsidiaries. ties. The institutions examined in 1991 held more than $2.2 trillion in fiduciary assets. Electronic Data Processing Under the Interagency EDP Examination Program, the Federal Reserve ex- Government Securities Dealers amines the electronic data processing and Brokers activities of state member banks, Edge The Federal Reserve is responsible for Act and agreement corporations, and in- examining the activities of state member dependent centers that provide EDP ser- banks, and of some foreign banks that vices to these institutions. In 1991, Fed- are government securities dealers and eral Reserve examiners conducted 277 brokers, for compliance with the Govon-site EDP reviews. In addition, the ernment Securities Act of 1986 and with Federal Reserve reviews reports of EDP the Treasury Department's regulations. examinations issued by other bank regu- Forty-four state member banks, three latory agencies on organizations that state branches of foreign banks, and one provide data processing services to state state agency of a foreign bank currently member banks. have on file with the Board notices that they are government securities dealers or brokers that are not otherwise exempt Fiduciary Activities from Treasury Department regulations. The Federal Reserve has supervisory responsibility for institutions that hold more than $3.1 trillion of discretionary Municipal Securities Dealers and nondiscretionary assets in various and Clearing Agencies fiduciary capacities. This group of insti- The Securities Act Amendments of 1975 tutions includes 316 state chartered made the Board responsible for supermember banks and trust companies and vising state member banks and bank 80 trust companies and investment advi- holding companies that act as municipal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

210 78th Annual Report, 1991 securities dealers or as clearing agen- At year-end 1991, thirty-one bank cies. Registered with the Board are holding companies had section 20 subforty-four banks that act as municipal sidiaries authorized to underwrite and securities dealers and five clearing agen- deal in ineligible securities. Of these, cies that act as custodians of securities seven could underwrite any debt or involved in transactions settled by book- equity securities; three could underwrite keeping entries. In 1991 the Federal Re- all types of debt securities; and twentyserve examined all five of the clearing one could underwrite only the limited agencies and nineteen of the banks that types of debt securities approved by the deal in municipal securities. Board in 1987. Specialized inspection procedures have been developed for use Securities Subsidiaries of Bank Holding in reviewing operations of these securi- Companies ties subsidiaries. Section 20 of the Banking Act of 1933, commonly known as the Glass-Steagall Transfer Agents Act, prohibits the affiliation of a mem- Federal Reserve examiners conduct sepber bank with a company that is "enarate reviews of state member banks and gaged principally" in underwriting or bank holding companies that act as dealing in securities. The Board in 1987 transfer agents. Transfer agents counterapproved proposals by banking organisign and monitor the issuance of securizations to underwrite and deal on a limties, register their transfer, and exchange ited basis in specified classes of bank or convert them. During 1991, System "ineligible" securities (that is, commerexaminers reviewed 66 of the 169 banks cial paper, municipal revenue bonds, and bank holding companies registered conventional residential mortgageas transfer agents with the Board. related securities, and securitized consumer loans) in a manner consistent with the Glass-Steagall Act and the Bank Surveillance and Monitoring Holding Company Act. At that time the Board limited revenues from these The Federal Reserve monitors the finannewly approved activities to no more cial condition of state member banks than 5 percent of total revenues for each and bank holding companies through a securities subsidiary. This limit was sub- quarterly surveillance program to supsequently increased in September 1989 plement the Federal Reserve's on-site to 10 percent. examinations. This program consists of In January 1989 the Board approved automated screening systems that idenapplications by five U.S. bank holding tify organizations with poor or deteriocompanies to underwrite and deal in cor- rating financial profiles. Banking organiporate and sovereign debt and equity zations submit financial statements from securities, subject in each case to re- which the screening systems compute views of managerial and operational in- numerous financial ratios. These ratios frastructure and other conditions and re- are then analyzed to determine whether quirements specified by the Board. Four the organizations have emerging probof these organizations subsequently re- lems that may require the commitment ceived authorization to underwrite and of examiner resources for on-site examideal in corporate and sovereign debt nations or other appropriate supervisory securities, and two also received equity responses. The Federal Reserve suppleunderwriting and dealing authority. ments the quarterly surveillance pro- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 211 grams with ad hoc screening reports on the supervisory authorities of the counspecific areas of supervisory concern. tries in which the examinations took To enhance the timeliness and quality place; when applicable, they were coorof the surveillance processes, the current dinated with the Office of the Comptrolsystem is being revised and will include ler of the Currency. Also, examiners an early-warning model to continually made five visits to overseas offices to evaluate a banking organization's super- obtain current financial information on visory rating based on the most current their operations and to evaluate their financial information available. compliance with corrective measures previously required. International Activities U.S. Activities of Foreign Banks The Federal Reserve is responsible Foreign banks continue to be significant for supervising international activities participants in the U.S. banking system. through various vehicles. As of year-end 1991, 313 foreign banks operated 529 state-licensed branches Edge Act Corporations and agencies, of which 53 are insured and Agreement Corporations by the Federal Deposit Insurance Corpo- Edge Act corporations are international ration. These foreign banks also operbanking organizations chartered by the ated 84 branches and agencies licensed Board to provide all segments of the by the Office of the Comptroller of the U.S. economy with a means of financing Currency, of which 9 have FDIC insurinternational trade, especially exports. ance. Foreign banks also directly owned An agreement corporation is a company 11 Edge Act corporations and 13 comthat enters into an agreement with the mercial lending companies. In addition, Board not to exercise any power that is foreign banks held an interest of at least impermissible for an Edge Act corpora- 25 percent in 90 U.S. commercial banks. tion. In 1991 the Federal Reserve exam- Altogether, these foreign banks control ined all 97 Edge Act and agreement approximately 24 percent of U.S. bankcorporations, which held about $29 bil- ing assets. lion in total assets at year-end. The Federal Reserve has broad authority to supervise and regulate foreign Foreign-Office Operations of U.S. banks that engage in banking and re- Banking Organizations lated activities in the United States The Federal Reserve examines the inter- through branches, agencies, commercial national operations of state member lending companies, Edge Act corporabanks, Edge Act corporations, and bank tions, banks, and certain nonbanking holding companies, principally at the companies. The Federal Reserve con- U.S. head offices of these organizations ducted or participated with state regulawhere the ultimate responsibility for tory authorities in the examination of their foreign offices lies. In 1991 the 123 such offices during the past year. Federal Reserve examined eight foreign Before the December 1991 passage branches of state member banks and of the FDICIA, the Federal Reserve twenty-four subsidiaries of Edge Act had residual authority to examine all corporations and bank holding compa- branches, agencies, and commercial nies. All of the examinations abroad lending subsidiaries of foreign banks were conducted with the cooperation of in the United States. The International Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

212 78th Annual Report, 1991 Banking Act of 1978 instructed the standards for federally related transac- Federal Reserve to use, to the extent tions ended on January 25, 1991, with possible, the examination reports of more than 2,800 comment letters being other state and federal regulators. The received. For such transactions, the pro- FDICIA amended the International posed amendment seeks reconsideration Banking Act and increased the Fed- of the level above which financial instieral Reserve's authority with respect to tutions would be required to obtain the these foreign bank operations, including services of a licensed or certified aprepresentative offices, in the United praiser. The Board's existing regulation States. The Federal Reserve may coordi- sets the level at $100,000, and the pronate the examinations of foreign bank posal would lower the threshold to operations with other state and federal $50,000. Recently, the FDIC and the regulators. Branches and agencies are Office of the Comptroller of the Curnow required to be examined at least rency (OCC) announced amendments to once during each twelve-month period their regulations to raise their appraisal in an on-site examination. The FDICIA threshold from $50,000 to $100,000. also authorizes the Federal Reserve to The Board amended its appraisal regterminate the operations of foreign ulation as a result of a provision in the banks in the United States under certain FDICIA that changed—from July 1, conditions. In addition, the legislation 1991, to December 31, 1992—the effecrequires Federal Reserve approval to tive date for the use of state licensed and establish foreign bank branches, agen- certified appraisers in federally related cies, commercial lending subsidiaries, transactions. However, any requireand representative offices in the United ments of state law regarding the use of States. licensed or certified appraisers remain unaffected by the Board's action. Supervisory Policy Risk-Based Capital Standards During 1991 the Federal Reserve underat Year-End 1991 took several major supervisory and regulatory policy initiatives. These initia- The risk-based capital standard provides tives included increased supervision of for a two-year phase-in period, which problem banking organizations, action began December 31, 1990. As of that on several merger applications involv- date, banking organizations were exing large regional and multinational pected to maintain total capital equal to banking organizations, and an intensi- at least 7.25 percent of risk-adjusted fied review of internal supervisory poli- assets. This minimum standard rises to cies relative to alleviating credit avail- 8 percent at year-end 1992. The riskability conditions throughout the nation. based capital standard was developed in The following sections summarize these cooperation with the FDIC and OCC initiatives and review other activities and representatives of the other eleven conducted in 1991 to enhance the Fed- members of the Basle Committee on eral Reserve's supervisory programs. Banking Regulations and Supervisory Practice. In October 1991 the Board also is- Real Estate Appraisals sued for public comment a proposal to The comment period on the Board's establish new guidelines for bank holdamendment to its regulation on appraisal ing companies, which would remove the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 213 limit on the amount of noncumulative ing centers, the risk-based capital stanperpetual preferred stock a bank holding dard helps to create a level playing field company may include in its tier 1 capi- for U.S. banking organizations as they tal. The guidelines would continue to compete with banks in other countries. limit cumulative perpetual preferred When the Basle Committee adopted stock to 25 percent of tier 1 capital. The the risk-based capital standards in 1988, additional flexibility provided by this it expected that further efforts would be step may assist bank holding companies required to incorporate certain noncredit to strengthen their capital positions and risks into the risk-based framework. In expand their lending capacity. [The this connection, the Federal Reserve in Board approved the proposal in January 1991 participated in various interna- 1992.] tional efforts to strengthen the capital The Board issued in final form the positions of internationally active bankclarifications, modifications, and techni- ing organizations. These efforts include cal changes to the risk-based capital incorporating into the risk-based capital guidelines that became effective No- framework a capital charge for risks vember 8, 1991. The modifications and arising from changes in interest rates technical changes relate to the (1) treat- (interest rate exposure) and from ment of certain assets sold with re- changes in foreign exchange rates (forcourse, (2) redemption of perpetual eign exchange position risk). preferred stock, (3) treatment of supervi- The Federal Reserve has advanced a sory goodwill in the definition of capi- preliminary proposal for measuring and tal, and (4) treatment of claims on cen- evaluating interest rate risk in U.S. comtral banks of countries outside the mercial banks. During the second half of Organisation for Economic Cooperation 1991, both Federal Reserve and FDIC and Development. The purpose of these examiners conducted field tests of the modifications, clarifications, and techni- proposed measurement system in secal changes is to make the Federal lected banks across the country. Once Reserve's risk-based capital framework fully developed and field-tested, the apconsistent with recent international in- proach under consideration could supterpretations of the risk-based capital plement existing examination proceaccord and with the current proposed dures and provide an additional off-site treatment of certain items by the other monitoring tool for identifying banks federal banking agencies. In addition, with excessive exposures to interest rate these changes are intended to bring the changes. guidelines into closer conformity with the risks associated with certain transac- Report on Capital and Reporting tions and with current Federal Reserve Standards supervisory practices. The risk-based capital framework of As required by section 1215 of the the Basle Accord encourages banking Financial Institutions Reform, Recovorganizations to strengthen their capital ery, and Enforcement Act of 1989 positions. The standard offers the advan- (FIRREA), the Federal Reserve, totages of differentiating, in a broad way, gether with the other federal banking among the relative riskiness of banking agencies, is required to prepare an anassets and accounting for off-balance- nual report to the Congress discussing sheet risks. Because of its acceptance by any differences in their capital and accountries with major international bank- counting standards for federally insured Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

214 78th Annual Report, 1991 depository institutions. The second an- guidance that was both prudent from a nual report was delivered to the Con- supervisory perspective and consistent gress on August 9, 1991. with generally accepted accounting prin- The report indicated that the banking ciples. In addition, officials of each agencies' guidelines relating to the capi- agency held meetings with their examintal treatment of identifiable intangible ers to ensure that they fully understood assets are not entirely uniform. The Fed- these policies. eral Reserve is working with other bank- The Federal Reserve also issued guiding agencies to reach agreement on the ance for resolving differences that can matter. arise between banks and examiners dur- The report also indicated that the ing an examination. In addition, meetaccounting and reporting requirements ings were held with the senior manageapplicable to commercial banks are sub- ment of major banking organizations stantially consistent among the three around the country to explain these federal banking agencies. However, the initiatives. Senior agency officials also federal banking agencies and the Office participated in several regional meetof Thrift Supervision continue to under- ings, sometimes referred to as "town take projects and study ways to reduce meetings," involving bankers, businessdifferences in reporting standards be- men, and members of the Congress. tween commercial banks and savings and loan associations. Environmental Liability In October the Board issued guidance to Credit Availability examiners regarding the risks to banks The Federal Reserve, together with and borrowers posed by the liability asother supervisors of depository institu- sociated with the clean-up of hazardous tions, has been working to ensure that substance contamination under the fedsupervisory policies and examiner eral "Superfund" statute. The guidance practices—and bankers' perceptions of provided an overview of the Superfund these policies and practices—are not de- statute and identified specific situations tering lenders from meeting the finan- in which a bank might find itself liable cial needs of creditworthy borrowers. To for hazardous substance contamination. that end, the Federal Reserve and other In addition, the statement provided exsupervisory agencies have introduced a aminer guidance on assessing the adeseries of initiatives designed to clarify quacy and effectiveness of a bank's pollongstanding policies and to make sure icies and procedures to identify and limit that examiners and depository institu- hazardous substance liability. The guidtions are fully informed of these poli- ance gives specific procedures and precies. These efforts, which included cautions for banks to limit their Superthe issuance of policy statements on fund liability. March 1 and November 7 to reiterate and clarify longstanding guidance regarding general lending practices and Dividend Payments the evaluation of real estate collateral, were designed to ensure that examiners In 1990 the Board issued amended reguuse prudent and balanced practices and lations on the payment of dividends procedures. The agencies sought to offer by state member banks, which became Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 215 effective January 1, 1991. The rule sim- Staff Training plifies and clarifies the calculation of The training of System staff members certain statutory limitations on the payemphasizes analytical and supervisory ment of dividends. The rule also makes themes common to the four areas the treatment of loan-loss allowances of supervision and regulation—examand provisions for dividend payment inations, inspections, applications, and purposes consistent with current regulasurveillance—and stresses the interdetory reporting standards and generally pendence among these areas. During accepted accounting principles. 1991, the Federal Reserve conducted a variety of schools and seminars, and Highly Leveraged Transactions Federal Reserve staff members participated in several courses offered by or In 1991 the Federal Reserve, together cosponsored with other agencies, as with the other banking regulatory agenshown in the accompanying table. In cies, provided additional interpretive 1991, the Federal Reserve trained 1,634 guidance on the definition of highly lepersons in System schools, 875 in veraged transactions (HLT). The guid- FFIEC schools, and 26 in other schools, ance clarified the purpose test, clarified for a total of 2,535 students, including the application of the HLT definition to 116 representatives from foreign banks. parent companies and their subsidiaries, The Federal Reserve System also proand broadened the criteria for removing vided scholarship assistance to the states loans from HLT status. It also excluded for training their examiners in Federal debtor-in-possession financings from Reserve and FFIEC schools. Through HLT designation and clarified other prothis program, 402 state examiners were visions. However, further questions and trained; 196 in Federal Reserve courses, comments concerning the HLT defini- 203 in FFIEC programs, and 3 in other tion prompted the agencies to seek addicourses. tional public comments. The Federal Reserve received more than 260 comments. [In early 1992 the Board decided Federal Financial Institutions to phase out the HLT definition by mid- Examination Council year.] The members of the FFIEC approved a policy statement on securities activities Sale of Uninsured Annuities mainly to update and revise its 1988 on Retail Banking Premises supervisory policy statement on the "Selection of Securities Dealers and In 1991 the Federal Reserve issued Unsuitable Investment Practices."3 The guidelines to examiners for reviewing policy statement addresses the selection the sale of uninsured annuities on retail of securities dealers, requires depository banking premises. This guidance indiinstitutions to establish prudent policies cated that state member banks and bank holding companies should not market, sell, or issue uninsured annuities, or allow third parties to do so, in a manner 3. The FFIEC consists of representatives from that could give purchasers the impres- the Board of Governors of the Federal Reserve sion that the annuities are federally in- System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, sured deposits or that they are obligathe Office of the Comptroller of the Currency, and tions of the depository institution. the Office of Thrift Supervision. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

216 78th Annual Report, 1991 and strategies for securities transactions, posed changes fall into four general defines securities trading or sales prac- areas: (1) real estate lending and related tices that are viewed by the agencies as exposures, (2) other asset quality inforbeing unsuitable when conducted in an mation, including highly leveraged investment portfolio, indicates charac- transactions, (3) assets held for sale, and teristics of loans held for sale or trading, (4) sources of other noninterest income and establishes a framework for identi- and expense. There are also several misfying certain mortgage derivative prod- cellaneous proposed changes. ucts as high-risk mortgage securities that The Federal Reserve has continued its must be held either in a trading account support of the appraisal subcommittee or a held-for-sale account. of the FFIEC. The subcommittee was The Board, together with the FFIEC, established pursuant to title XI of is also reviewing guidance on the allow- FIRREA to monitor the overall impleance for loan and lease losses with a mentation of real estate appraisal review to developing an interagency pol- form. During the past year, the subcomicy statement. mittee retained permanent staff to handle The FFIEC is continuing its study on its daily affairs. The subcommittee is the appropriate regulatory reporting and working with the state appraisal regucapital treatments to be applied to re- latory agencies to implement appraiser course arrangements for depository in- license and certification programs. In stitutions and bank holding companies. addition, to promote communications The FFIEC also proposed several with the states, the subcommittee held a changes to the Report of Condition and two-day conference for state regulators Income (Call Report), which is filed by on the requirements of title XI of all insured commercial banks. The pro- FIRREA. Training Programs for Banking Supervision and Regulation, 1991 Number of sessions Agency and type of training Total Regional Schools or seminars conducted by the Federal Reserve Banking I Banking II Banking III 6 Senior forum for current banking and regulatory issues 3 Effective writing for banking supervision staff 18 Credit analysis 13 12 Abbreviated cash flow seminar 4 3 Bank holding company applications 1 ' V Bank holding company inspection 5 Conducting meetings with management 13 13 Basic entry-level trust 1 Advanced trust 2 Consumer compliance 3 Seminar for senior supervisors of foreign central banksl 1 Other agencies conducting courses2 Federal Financial Institutions Examination Council , 78 15 Federal Deposit Insurance Corporation and Feder O a f l f i B c u e re o a f u t h o e f C In o v m e p st tr ig o a ll t e i r o n o 3 f the Currency 1 4 2 ' V 1. Conducted jointly with the World Bank. posit Insurance Corporation, Office of the Comptroller of 2. Open to Federal Reserve employees. the Currency, Office of Thrift Supervision, and the Reso- 3. Cosponsored by the Federal Reserve, Federal De- lution Trust Corporation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 217 Regulation of the U.S. Banking bank holding company by acquiring Structure control of one or more banks. Moreover, once formed, a bank holding company The Board administers the Bank Holdmust receive the Federal Reserve's aping Company Act, the Bank Merger Act, proval before acquiring additional banks and the Change in Bank Control Act for or nonbanking companies. bank holding companies and state mem- In reviewing an application filed by ber banks. In doing so, the Federal Rea bank holding company, the Federal serve acts on a variety of proposals that Reserve considers factors including the directly or indirectly affect the structure financial and managerial resources of of U.S. banking at the local, regional, the applicant, the future prospects of and national levels. The Board also has both the applicant and the firm to be primary responsibility for regulating the acquired, the convenience and needs of international operations of domestic the community to be served, the potenbanking organizations and the overall tial public benefits, and the competitive U.S. banking operations of foreign effects of the proposal. banks. In addition, the Board has estab- In 1991 the Federal Reserve acted on lished regulations for the interstate 1,261 bank holding company and rebanking activities of these foreign banks lated applications. The Federal Reserve and for foreign banks that control a U.S. approved 213 proposals to organize subsidiary commercial bank. bank holding companies and denied 2; approved 37 proposals to merge existing bank holding companies and denied 1; Bank Holding Company Act approved 207 bank acquisitions by ex- By law, a company must obtain the Fed- isting bank holding companies and deeral Reserve's approval if it is to form a nied 1; approved 772 requests by exist- Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1991 Action under authority delegated by the Board of Governors Direct action by the Director of the Office Proposal Board of Governors Division of Banking of the Federal Total Supervision and Reserve Banks Secretary Regulation Approved Denied Approved Denied Approved Approved Permitted Formation of holding company 13 2 0 0 3 197 0 215 Merger of holding company 5 1 0 0 2 30 0 38 Retention of bank 0 0 0 0 0 00 0 Acquisition Bank 32 1 0 0 11 164 0 208 Nonbank 114 4 451 0 40 489 84 776 Bank service corporation 0 0 0 0 0 0 1 1 Other 2 0 21 0 0 0 0 23 Total 166 8 66 0 56 880 85 1,261 1. Each of these actions represents the acquisition of a ted by the Financial Institutions Reform, Recovery, and savings association that was subsequently merged into an Enforcement Act of 1989. existing subsidiary of a bank holding company, as permit- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

218 78th Annual Report, 1991 ing companies to acquire nonbank firms cases to assure consistency in adminisengaged in activities closely related to tering the act. The Federal Reserve banking and denied 4; and approved submitted 719 reports on competitive 24 other applications. Data on these factors to the other Federal banking and related bank holding company deci- agencies in 1991. sions are shown in the accompanying table. Included in the totals are applications related to the sale of failed thrift institutions by the Resolution Trust Change in Bank Control Act Corporation. The Change in Bank Control Act requires persons seeking control of a bank Bank Merger Act or bank holding company to obtain The Bank Merger Act requires that all approval from the appropriate Federal proposed mergers of insured depository banking agency before the transaction institutions be acted upon by the appro- occurs. Under the act, the Federal priate federal banking agency. If the Reserve is responsible for reviewing institution surviving the merger is a changes in the control of state member state member bank, the Federal Re- banks and of bank holding companies. serve has primary jurisdiction. Before In so doing, the Federal Reserve must acting on a proposed merger, the Fed- review the financial condition, compeeral Reserve considers factors relating tence, experience, and integrity of the to the financial and managerial resources acquiring person; consider the effect on of the applicant, the future prospects the financial condition of the bank or of the existing and combined institu- bank holding company to be acquired; tions, the convenience and needs of the and determine the effect on competition community to be served, and the com- in any relevant market. petitive effects of the proposal. The Fed- The appropriate Federal banking eral Reserve must also consider the agencies are required to publish notice views of certain other agencies on of each proposed change in control and the competitive factors involved in the to invite public comment, particularly transaction. from persons located in the markets During 1991 the Federal Reserve ap- served by the institution to be acquired. proved 90 merger applications. As re- The Federal banking agencies are also quired by law, each merger is described required to assess the qualifications of in this REPORT (in table 16 of the Statis- each person seeking control; the Federal tical Tables chapter). Reserve routinely makes such a determi- When the Federal Deposit Insurance nation and verifies information con- Corporation, the Office of the Comptrol- tained in the proposal. ler of the Currency, or the Office of In 1991 the Federal Reserve acted on Thrift Supervision has jurisdiction over 183 proposed changes in control of state a merger, the Federal Reserve is asked member banks and bank holding compato comment on the competitive factors nies. The total number of notices was to assure comparable enforcement of the less than the year before because, in late antitrust provisions of the act. The Fed- 1990, the Board amended Regulation Y eral Reserve and those agencies have to reduce the filing requirements for inadopted standard terminology for as- dividuals purchasing additional shares sessing competitive factors in merger of a banking organization. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 219 Public Notice of Federal Reserve Board Policy Decisions Decisions and Developments in Bank-Related Activities An order or announcement effects each decision by the Federal Reserve that in- Having made certain that the proper volves a bank holding company, bank managerial and operational infrastrucmerger, change in control, or interna- tures were in place, the Board in 1991 tional banking proposal. An order states permitted a domestic banking organizathe decision along with the essential tion and several foreign banking organifacts of the application and the basis for zations to commence equity underwritthe decision; an announcement states ing activities under authority originally only the decision. All orders and an- granted in 1989 and 1990. In mid-1991 nouncements are released immediately the Board permitted a regional bank to the public; they are subsequently re- holding company to acquire an investported in the Board's weekly H.2 statis- ment banking firm that would continue tical release and in the monthly Federal to engage in a full range of securities Reserve Bulletin. The H.2 release also activities, including the underwriting of contains announcements of applications equity securities. During the year the and notices received, but not yet acted Board also approved other new nonon, by the Federal Reserve. banking activities for individual bank holding companies. Timely Processing of Applications The Federal Reserve maintains target Action on Nonbanking Activities dates and procedures for the processing In 1991 the Board for the first time of applications. These target dates promote efficiency at the Board and the approved a proposal by a foreign Reserve Banks and reduce the burden banking organization to trade for the on applicants. The time allowed for company's account in futures, options, a decision is 60 days; during 1991, and options on futures based on U.S. 91 percent of the decisions met this government securities that are permissistandard. ble investments for national banks and certain money market instruments. The Board also approved several more pro- Delegation of Applications posals by domestic bank holding com- The Board has delegated certain regula- panies to provide asset management tory functions—including the authority services to the Resolution Trust Corpoto approve, but not to deny, certain types ration, the FDIC, and unaffiliated third of applications—to the Reserve Banks, party investors, for pools of assets asto the Director of the Board's Division sembled from failed or troubled finanof Banking Supervision and Regulation, cial institutions. and to the Secretary of the Board. In early 1991 the Board denied an The delegation of responsibility for application by a foreign bank to clear applications allows staff members to securities options and other financial inwork more efficiently at both the Board struments for the accounts of profesand the Reserve Banks by removing sional floor traders because the proposal, routine cases from the Board's agenda. as structured, involved potential adverse In 1991, delegated authority was in- effects that outweighed the potential volved in 78 percent of the applications. public benefits. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 78th Annual Report, 1991 Proposals to Engage in New their intention to withdraw from mem- Nonbanking Activities bership in the Federal Reserve, although In 1991 the Board continued to consider the notice period may be shortened or several proposals related to nonbanking eliminated in specific cases. activities. One proposal involved expanding the list of generally permissible nonbanking activities for bank holding Stock Repurchases by Bank companies to include (1) combined Holding Companies investment advisory and securities brokerage activities, and (2) financial A bank holding company sometimes advisory activities. The Board also purchases its own shares from its shareconsidered modifying its investment holders. When the company borrows the advisory policy statement to ease cur- money to buy the shares, the transaction rent limitations on the securities under- increases the debt of the bank holding writing powers of bank holding com- company and simultaneously decreases panies and to permit certain joint its equity. Relatively large purchases marketing and common management may therefore undermine the financial officials. In addition, the Board consid- condition of a bank holding company ered adding higher-residual-value leas- and its bank subsidiaries. The Board's ing to the list of generally permissible regulations require holding companies nonbanking activities for bank holding to give advance notice of repurchases companies. that retire 10 percent or more of their consolidated equity capital. The Federal At year-end, two other rulemakings Reserve may object to stock repurchases were under consideration. One was a by holding companies that fail to meet proposal to rescind an existing rule that certain standards, including the Board's permits bank holding companies to escapital guidelines. During 1991 the tablish or acquire indirectly, through Federal Reserve reviewed 94 proposed their state-chartered bank subsidiaries, stock repurchases by bank holding nonbank operations subsidiaries encompanies. gaged in activities that may be conducted by the parent bank. The other rulemaking was a proposal to permit bank holding companies to engage in International Activities of U.S. real estate investment activities within Banking Organizations certain limitations. The Board has several statutory responsibilities in supervising the international Applications by State Member operations of U.S. banking organi- Banks zations. The Board must provide authorization and regulation of foreign State member banks must obtain the per- branches of member banks; of overseas mission of the Federal Reserve to open investments by member banks, Edge new domestic branches, to make in- Act corporations, and bank holding vestments in bank premises that exceed companies; and of investments by bank 100 percent of capital stock, and to add holding companies in export trading to their capital bases from sales of sub- companies. In addition, the Board is reordinated debt. State member banks quired to charter and regulate Edge Act must also give six months' notice of corporations and their investments. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 221 Foreign Branches of Member of Regulation K, this equity to risk- Banks asset ratio will be replaced with a minimum ratio of qualifying total capital Under provisions of the Federal Reserve to weighted-risk assets of 10 percent, Act and of Regulation K (International effective January 1, 1993. Banking Operations), member banks in most cases must seek Board approval to Foreign Investments establish branches in foreign countries. In reviewing proposed foreign branches, Under authority of the Federal Reserve the Board considers the requirements of Act and the Bank Holding Company the law, the condition of the bank, and Act, U.S. banking organizations may enthe bank's experience in international gage in activities overseas with the aubusiness. In 1991, the Board approved thorization of the Board. Significant inthe opening of ten foreign branches. vestments require advance review by the By the end of 1991, 123 member Board, although pursuant to Regulation banks were operating 794 branches in K, most foreign investments may be foreign countries and overseas areas of made under general-consent procedures the United States; 92 national banks that involve only after-the-fact notificawere operating 674 of these branches, tion to the Board. and 31 state member banks were operating the remaining 120 branches. Export Trading Companies In 1982 the Bank Export Services Act Edge Act Corporations amended section 4 of the Bank Holding and Agreement Corporations Company Act to permit bank holding companies, their subsidiary Edge Act or Under sections 25 and 25(a) of the Fedagreement corporations, and bankers' eral Reserve Act, Edge Act corporations banks to invest in export trading compaand agreement corporations may engage nies, subject to certain limitations and in international banking and foreign fiafter Board review. The purpose of this nancial transactions. These corporations, amendment was to allow effective parwhich are usually subsidiaries of memticipation by bank holding companies in ber banks, may (1) conduct a deposit the financing and development of export and loan business in states other than trading companies. The Export Trading that of the parent, provided that the busi- Company Act Amendments of 1988 ness is strictly related to international provide additional flexibility for bank transactions and (2) make foreign inholding companies engaging in export vestments that are broader than those of trading company activities. Although the member banks because they can invest Board did not approve any new export in foreign financial organizations, such trading companies in 1991, it has since as finance companies and leasing com- 1982 acted affirmatively on notifications panies, as well as in foreign banks. by forty-seven bank holding companies By the end of 1991 there were ninetyto establish export trading companies. seven Edge Act corporations, which together had forty-four branches. The Enforcement of Other Laws Board requires each Edge Act corporaand Regulations tion that is engaged in banking to maintain a ratio of equity to risk assets of at This section describes the Board's releast 7 percent. In line with the revision sponsibilities for the enforcement of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

222 78th Annual Report, 1991 laws, rules, and regulations other than insight into the Federal Reserve's belief those specifically related to bank safety in strict compliance with the rules and and soundness and the integrity of the regulations of the Bank Secrecy Act. banking structure. The Systemwide committee established within the Federal Reserve in 1990 to coordinate anti-money- Bank Secrecy Act laundering activities has continued to The proliferation of criminal activity is develop innovative programs to assist viewed by many as the result of criminal the law enforcement community and edenterprises having the ability to retain ucate the banking community with rethe cash proceeds of their illegal activ- gard to the Bank Secrecy Act and ity. The Currency and Foreign Transac- money laundering issues. The Federal tions Reporting Act (the Bank Secrecy Reserve has also continued to assist law Act) was originally proposed as a means enforcement agencies conducting crimiof creating and maintaining records of nal investigations related to the Bank various transactions that otherwise Secrecy Act and money laundering would not be identifiable. The records violations. required by the Bank Secrecy Act pro- During the past year, a Federal Revide useful data for aiding in the detec- serve study of the effectiveness and tion of unlawful activity as well as de- practicability of its current procedures termining the safety and soundness of for conducting examinations under the financial institutions. Bank Secrecy Act concluded that the The Federal Reserve has maintained procedures could be more streamlined its practice of regularly scheduled Bank and more effective. New procedures Secrecy Act examinations of financial have been developed and continue to be institutions under its supervision. The subjected to considerable testing before Federal Reserve also continues to pro- their release. vide quarterly reports to the Department of the Treasury detailing all Bank Se- Securities Regulation crecy Act violations discovered during the examination process and it provides Under the Securities Exchange Act of more specific information of such viola- 1934, the Board is responsible for regutions when required by the Treasury De- lating credit in certain transactions partment for their enforcement func- involving the purchase or carrying of tions. Additionally, the Federal Reserve securities. The Board limits the amount has increased its efforts with regard to of credit that may be provided by securienforcement actions against financial in- ties brokers and dealers (Regulation T), stitutions which result from violations by banks (Regulation U), and by other of the Bank Secrecy Act. lenders (Regulation G). Regulation X The Federal Reserve is still commit- extends these credit limitations, or marted to ensuring that all new examiners gin requirements, to certain borrowers receive training in the areas of the Bank and to certain credit extensions, such as Secrecy Act and money laundering credit obtained from foreign lenders by and that seasoned examiners receive U.S. citizens. refresher courses in these areas. In addi- Several regulatory agencies enforce tion, the Federal Reserve has partici- compliance with the securities credit pated in numerous programs that pro- regulations. The Securities and Exvide the financial community with change Commission, the National Asso- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 223 ciation of Securities Dealers, and the Pursuant to a 1990 amendment to national securities exchanges examine Regulation T, the Board publishes a list brokers and dealers for compliance with of foreign stocks that are eligible for Regulation T. The federal banking agen- margin treatment by brokers and dealers cies examine banks under their respec- on the same basis as domestic margin tive jurisdictions for compliance with securities. In 1991 the foreign list was Regulation U. Lenders subject to Regu- revised in February, May, August, and lation G are examined by the Board, the November; the November list contained Farm Credit Administration, the Na- 294 stocks. tional Credit Union Administration, or The Board adopted two sets of the Office of Thrift Supervision, accord- amendments in September 1991 to ing to the jurisdiction involved. At the equalize treatment between lenders and end of 1991, 593 lenders were registered between regulations. Amendments to under Regulation G, and 331 came un- Regulations G and T excluded from the der the Board's supervision. Of these margin regulations the deposit of mar- 331, the Federal Reserve regularly in- gin securities with clearing agencies regspects 221 either biennially or trienni- ulated either by the Commodity Futures ally, according to the type of credit they Trading Commission or the Securities extend. During 1991, Federal Reserve and Exchange Commission. Amendexaminers inspected 41 lenders for com- ments to Regulations G and U extended pliance with Regulation G. the exemption for subsequent transfers In general, Regulations G and U im- of under-margined loans currently found pose credit limits on loans secured by in each of the regulations to loans made publicly held securities when the pur- by one type of lender that are later transpose of the loan is to purchase or carry ferred to the other type of lender. those or other publicly held equity secu- The Board also issued an interpretarities. Regulation T limits the amount of tion of the "single-credit" rule in Regcredit that brokers and dealers may ex- ulations G and U to indicate that tend when the credit is used to purchase compliance with the withdrawal and or carry publicly held debt or equity substitution provisions for syndicated securities. Collateral for such loans at loans can be met by the lead bank or brokers and dealers must be securities in lender. one of the following categories: those Under section 8 of the Securities Extraded on national securities exchanges, change Act, a nonmember domestic or certain over-the-counter (OTC) stocks foreign bank may lend to brokers or that the Board designates as having dealers posting registered securities as characteristics similar to those of stocks collateral only if the bank has filed an listed on the national exchanges, or agreement with the Board that it will bonds that meet certain requirements. comply with all the statutes, rules, and The Federal Reserve monitors the regulations applicable to member banks market activity of all OTC stocks to regarding credit on securities. The determine which of them are subject to Board processed no new agreements in the Board's margin regulations. The 1991. Board publishes the resulting "List of In 1991 the Securities Regulation Marginable OTC Stocks" quarterly. In Section of the Board's Division of 1991 the OTC list was revised in Febru- Banking Supervision and Regulation ary, May, August, and November; the issued forty-nine interpretations of the November list contained 2,766 stocks. margin regulations. Those that presented Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

224 78th Annual Report, 1991 sufficiently important or novel issues Loans to Executive Officers were published in the Securities Credit Under Section 22(g) of the Federal Re- Transactions Handbook, which is part serve Act, state member banks must inof the Federal Reserve Regulatory Serclude with each quarterly report of convice. These interpretations serve as a dition a report of all extensions of credit guide to the margin regulations. made by the bank to its executive officers since the date of the bank's previous report of condition. The accompany- Financial Disclosure by State ing table summarizes this information, Member Banks beginning with the last quarter of 1990 and continuing through the first three State member banks must disclose cerquarters of 1991. tain information of interest to investors, including financial reports and proxy Federal Reserve Membership statements, if they issue securities registered under the Securities Exchange Act At the end of 1991, 4,831 banks were of 1934. By statute, the Board's finan- members of the Federal Reserve Syscial disclosure rules must be substan- tem, a decrease of 216 from the previtially similar to those issued by the ous year. Member banks operated Securities and Exchange Commission. 34,874 branches on December 31, 1991, At the end of 1991, thirty-seven state a net increase of 1,569 for the year. member banks, most of which are small Member banks accounted for 39 peror medium-sized, were registered with cent of all commercial banks in the the Board under the Securities Exchange United States and for 66 percent of all Act. commercial banking offices. • Loans by State Member Banks to their Executive Officers, 1990-91 Range of interest Period Number Amount (dollars) rates charged (percent) October 1-December 31,1990 793 15,206,000 5.0-18.0 January 1-March 31, 1991 773 14,439,000 5.0-18.0 April 1-June 30, 1991 904 22,646,000 6.5-28.5 July 1-September 30,1991 771 12,483,000 6.8-18.0 SOURCE. Call Report data for the period Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

225 Regulatory Simplification In 1978 the Board of Governors estab- rather than technological aspects of selished the Regulatory Improvement curity, which become obsolete and re- Project in the Office of the Secretary to quire constant updating. The regulation help minimize the burdens imposed by gives managers flexibility to design seregulation. In 1986 the Board reaffirmed curity programs that include devices and its commitment to regulatory improve- procedures warranted by individual cirment, renaming the project the Regula- cumstances so long as the devices and tory Review Section and creating a sub- procedures meet minimum requirements committee of the Board called the of the regulation. Regulatory Policy and Planning Committee. The purpose of the regulatory International Banking simplification function is to ensure that the economic effect of regulation on In April the Board completed its perismall business is considered, to afford odic review of Regulation K, Internainterested parties the opportunity to par- tional Banking Operations. The Internaticipate in designing regulations and to tional Banking Act requires that the comment on them, and to ensure that Board review its regulation of Edge Act regulations are written in simple and corporations at least every five years. clear language. Board staff members During some of the mandated reviews, continually review regulations for their the Board considers only the aspects of adherence to these objectives. Regulation K that relate to Edge Act corporations; this time the Board included all of Regulation K in its review. Minimum Security Devices Many provisions of the revised reguand Procedures lation expand the authority of U.S. banks In March, after a period of public com- to operate in overseas financial markets ment, the Board completed its review of without first obtaining Board approval. Regulation P, which implements the Among other things, the revisions en- Bank Protection Act of 1968. Since its large existing authority to engage in adoption in 1969, the regulation has re- underwriting and dealing in equity secuceived only minor revisions, in 1973 rities outside the United States, increase and 1981. The Board's revisions sim- the dollar limits under which U.S. bankplify and clarify the parts of the regula- ing organizations may make investments tion that already granted to bank man- abroad without advance notice to the agement flexibility in achieving the Board, and clarify portfolio investment purposes of the act; eliminate many ob- authority under which U.S. banking orsolete or technical requirements, particu- ganizations may make limited equity inlarly those in Appendix A; and delete vestments in any type of company outreporting requirements no longer specif- side the United States. ically mandated by statute. Under the revision, Edge Act corpora- The revised regulation highlights the tions can provide domestic banking sersecurity responsibilities of boards of di- vices to foreign persons and governrectors and security officers of banks ments; and U.S. banking organizations Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

226 78th Annual Report, 1991 may engage in futures merchant activities and life insurance underwriting as permissible activities abroad. The revision also modifies the authorization for debt-for-equity investments by permitting banking organizations to include a cash component in such investments without first notifying the Board. Applications by Bank Holding Companies To Conduct Nonbanking Activities In 1990 the Board proposed for public comment adding three activities to the list of generally permitted activities under Regulation Y for nonbank subsidiaries of certain bank holding companies. The list of permissible activities allows simplified applications by bank holding companies to form or acquire subsidiaries engaging in the listed activities. The three activities proposed for inclusion were (1) leasing through non-fullpayout contracts, (2) giving financial advice to financial and nonfinancial institutions and to individuals with high net worth, and (3) giving advice on securities investments in combination with the brokering of such investments. Because of pending legislation on bank products and services, the Board took no action on these regulatory proposals in 1991, but it will re-examine them in 1992 in light of the public comments received. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

227 Federal Reserve Banks The Federal Reserve Banks are prepar- rate of 102.9 percent. In 1990, the Sysing to consolidate their general purpose tem recovered 103.3 percent of its data processing operations. Currently, service costs.1 each of the twelve Banks maintains a general purpose data processing center; Check Collection in addition, the System has four backup centers (located in New York, Chicago, The Federal Reserve's 1991 operating Los Angeles, and Culpeper, Virginia). expenses and imputed costs for commer- Over the next several years, the data cial check collection were $524.0 milprocessing functions of the centers will lion (see the second pro forma income be consolidated at three facilities—the statement for priced services at the end Bank headquarters in Dallas (currently of this chapter). Overall, check operaunder construction) and Richmond and tions for the year generated $561.3 milthe New York Bank's East Rutherford, lion in income and a net of $10.6 mil- New Jersey, operations center (also lion in other income and expenses. Inunder construction). The primary objec- come from operations after imputed tives of consolidation are improved costs was $37.3 million. The Federal reliability, enhanced responsiveness to Reserve Banks handled 18.7 billion changing business requirements, in- checks, an increase of 0.8 percent over creased control of payment system risk 1990. in a national banking environment, and In 1989, the Board approved a pilot greater efficiency. program in three Federal Reserve Dis- The decision to use three sites in the tricts under which the Reserve Banks consolidation was influenced by antici- will accept intermingled deposits of pated capacity requirements, recovery returned and forward-collection checks capabilities, and flexibility in workload from depository institutions and in turn management. A key consideration in de- may present intermingled cash letters to signing the consolidated environment the institutions. (Normally, these items has been the new nationwide telecom- must be kept separate.) In February munications network currently being 1991, the Director of the Division of established. Reserve Bank Operations and Payment Systems, acting under delegated authority, approved expansion of the pilot pro- Other Developments in Federal gram to additional offices in the three Reserve Services 1. For a detailed breakdown of revenue, cost, The Monetary Control Act of 1980 reand net revenue, see the first pro forma income quires the Federal Reserve System to statement at the end of this chapter. Revenue is the recover all its costs of providing ser- sum of income from services and investment invices. In 1991, income from all priced come. Cost is the sum of production expenses, imputed costs, earnings credits, imputed income services was $912.5 million and costs taxes, and the targeted return on equity. Net revewere $886.8 million, resulting in net nue is net income less the targeted return on income of $25.6 million and a recovery equity. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

228 78th Annual Report, 1991 Districts. The expansion is making it image technology to check processing. possible to test specific aspects of ex- Use of the technology in such areas changing intermingled checks among as archival systems, return item noti- Federal Reserve offices within the same fication, check truncation, and adjust- District. Expansion also has allowed ments may make check collection more large depository institutions that have efficient. During 1991, high-speed sysaffiliates served by several Federal tems and low-speed applications were Reserve offices within the same District evaluated. to participate in a pilot program. In May the Board revised the criteria Automated Clearinghouse for offering a tiered pricing structure for check collection: (1) Tiered pricing may Operating expenses and imputed costs be offered in all collection zones but of providing automated clearinghouse may be used only when clear cost differ- (ACH) services in 1991 were $54.1 milences exist between groups of checks lion; income was $57.4 million. The within a zone; (2) tiered prices may be Federal Reserve Banks processed used only when they have a potential to 1,119 million commercial transactions provide net savings for a substantial during the year, an increase of 22.3 pernumber of depositing institutions or a cent over 1990. substantial amount of deposited volume; In June the Board adopted a proposal, (3) a blended per-item fee will be of- issued for comment in December 1990, fered as an alternative to tiered prices requiring depository institutions to origfor each deposit category; and (4) Fed- inate or receive commercial ACH transeral Reserve Banks may offer more than actions through the Federal Reserve two price tiers within a collection zone, Banks via electronic connections. This provided clear cost differences exist to practice will enable the Reserve Banks justify more than two tiers. The Board to improve their ACH services signifialso modified the process for approving cantly by increasing the speed of delivimplementation of tiered pricing; the ery of ACH payments and reducing the revised process is the same as the pro- risks associated with ACH payments. cess for approving other changes in Depository institutions must establish price and service levels. these electronic connections by July 1, In October the Board voted not to 1993. approve an August 1990 proposal to introduce a cap on the per-item fees Funds Transfer charged to ship checks from one Federal Reserve office to another via the Inter- Operating expenses and imputed costs district Transportation System (ITS). of providing funds transfer services in The Board believed that the proposed 1991 totaled $73.0 million, and income pricing structure did not adequately re- was $78.2 million. The number of Fedflect the marginal cost of transporting wire funds transfers originated increased checks via ITS, and it determined that 7.0 percent over 1990, to 66.9 million. an alternative structure should not be In January the Federal Reserve Banks adopted until a Federal Reserve System started providing same-day telephone study of ITS can be completed and the notice of receipt of incoming Fedwire results evaluated. third-party funds transfers (including The Federal Reserve System contin- nonvalue messages related to a transfer ues to study the application of digital of funds) to all depository institutions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 229 that do not have electronic access to tion and the Student Loan Marketing Fedwire. Approved by the Board in Association. Book-entry services for September 1990, the service is designed federal agency securities, a Federal to promote efficiency in the payments Reserve priced service, in 1991 incurred mechanism by providing timely infor- costs of $12.3 million and earned inmation, which in turn permits prompt come of $11.5 million. The Federal crediting of funds to beneficiary Reserve processed 2.8 million such accounts. transfers during the year, a 9.6 percent increase over 1990. Most Federal Reserve Banks have Net Settlement fully implemented the Regional Deliv- During 1991, 770,000 net settlement ery System (RDS) for over-the-counter transactions were processed for partici- savings bonds. The total number of pants in small-dollar clearing and set- bonds printed by the Federal Reserve tlement arrangements, predominantly System in 1991, RDS and other, excheck clearing arrangements; this vol- ceeded 37 million. ume was approximately the same as that processed in 1990. Net settlement via Definitive Securities Safekeeping Fedwire is provided to two large-dollar and Noncash Collection clearing and settlement arrangements— the Clearing House Interbank Payments The System received $13.8 million in System and Participants Trust Company. income for definitive securities safe- Transaction volumes, costs, and income keeping and noncash collection services arising from the net settlement service in 1991; the cost of providing these are included with figures for the funds services was $14.4 million. The average transfer service. number of definitive securities issues In April the Federal Reserve Bank of and deposits maintained in safekeeping San Francisco began using a national accounts at the Federal Reserve Banks ACH clearing arrangement to provide decreased 30.5 percent in 1991, to net settlement services to depository in- 57,039. The number of noncash collecstitutions. The service is the first ACH tion items processed decreased 21.4 pernet settlement arrangement that uses a cent, to 2.2 million. special settlement account and that is With volumes in both services declinintended to operate nationally. The ing, the System is developing a longaccount is funded by participants in net range plan for the definitive safekeeping debit positions using Fedwire transfers, service and will consolidate noncash and the funds are then disbursed to parcollection functions at the Cleveland ticipants in net credit positions using Bank and the Jacksonville Branch of the Fedwire transfers. Atlanta Bank by 1993. Securities and Fiscal Agency Currency and Coin Services The Federal Reserve provides book- In its currency and coin operations, the entry securities services for debt issues Federal Reserve continued to focus on of the U.S. Treasury and for certain fed- effectiveness of controls, efficiency of erally sponsored agencies such as the processing, and maintenance of quality Federal Home Loan Mortgage Corpora- in circulating currency. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

230 78th Annual Report, 1991 In 1991, income from priced cash Examinations services was $15.2 million, and the The Board's Division of Reserve Bank cost was $14.6 million. Four Federal Operations and Payment Systems exam- Reserve Districts provided transportaines the operations of the twelve Federal tion of cash by armored carrier, and Reserve Banks and their twenty-five three Districts provided wrapped coin to Branches each year, as required by secdepository institutions. tion 21 of the Federal Reserve Act. The The Western Currency Facility of the findings of the examinations are re- U.S. Treasury's Bureau of Engraving ported to the management and directors and Printing began printing currency in of the respective Banks and to the Board April and began shipping currency to of Governors. Also, to assess conform- Federal Reserve offices in June. In ance with policies established by the August the Federal Reserve began dis- Federal Open Market Committee tributing a new series of $100 note with (FOMC), the division annually audits two new features—a security thread and the accounts and holdings of the System microprinting—to discourage photo- Open Market Account at the Federal copied counterfeits. Over the next five Reserve Bank of New York and the years, these security features will be foreign currency operations conducted incorporated into notes of all denominaby that Bank. The division furnishes tions except the $1 note. copies of these reports to the FOMC. In September a comprehensive as- The examination procedures used by the sessment of the quality of U.S. currency division are reviewed each year by a was completed. The study revealed that, public accounting firm. generally, the quality of currency in circulation is acceptable to consumers. In October the first delivery of the Income and Expenses System's new currency-processing equipment (ISS-3000), manufactured by The accompanying table summarizes the Giesecke and Devrient, Inc., was re- income, expenses, and distribution of ceived at the Baltimore Branch of the net earnings of the Federal Reserve Federal Reserve Bank of Richmond. Banks for 1991 and 1990. The new equipment will be installed Income was $22,553 million in 1991 throughout the Federal Reserve System and $23,477 million in 1990. Total exby 1997. penses were $1,539 million ($1,265 mil- The Federal Reserve System contin- lion in operating expenses, $164 million ued to work with the Department of the in earnings credits granted to depository Treasury and other agencies to deter institutions, and $110 million in assesscounterfeiting and laundering of U.S. ment for expenditures by the Board of currency. Governors). The cost of currency was $261 million. Income from financial services was $737 million. Float The profit and loss account showed a Federal Reserve float decreased to a net addition of $496 million, primarily a daily average of $348 million in 1991, result of realized and unrealized gains compared with $431 million in 1990. on assets denominated in foreign curren- The costs of Federal Reserve float asso- cies and gains on the sales of securities ciated with priced services are recov- from the System Open Market Account ered each year. portfolio. Dividends paid to member Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 231 Income, Expenses, and Distribution of Net Earnings of Federal Reserve Banks, 1991 and 1990l Millions of dollars Item 1991 1990 Current income 22,553 23,477 Current expenses 1,429 1,350 Operating expenses2 1,265 1,211 Earnings credits granted 164 139 Current net income 21,124 22,127 Net addition to (deduction from) current net income 496 2,201 Cost of unreimbursed services to Treasury 90 102 Assessments by the Board of Governors 371 297 For expenditures of Board 110 104 For cost of currency 261 193 Net income before payments to Treasury 21,158 23,929 Dividends paid 153 141 Payments to Treasury (interest on Federal Reserve notes). 20,778 23,608 Transferred to surplus 228 18C 1. Details may not sum to totals because of rounding. pension costs of $83 million in 1991 and $60 million in 2. Operating expenses include a net periodic credit for 1990. banks, as required by law, totaled lion, an increase of $19,485 million over $153 million, $12 million more than in 1990 (see accompanying table). From 1990. The rise reflects an increase in the 1990 to 1991, average daily holdings of capital and surplus of member banks U.S. government securities increased and a consequent increase in the paid-in $20,036 million, and average daily holdcapital stock of the Federal Reserve ings of loans decreased $551 million. Banks. Over the same period, the average rate Payments to the U.S. Treasury in the of interest decreased from 8.45 percent form of interest on Federal Reserve to 7.51 percent on holdings of U.S. govnotes totaled $20,778 million, compared ernment securities and from 7.88 perwith $23,608 million in 1990. The pay- cent to 5.74 percent on loans. ments consist of all net income after deduction of dividends and deduction of Volume of Operations the amount necessary to bring the surplus of the Banks to the level of capital Table 9, in the Statistical Tables chapter, paid in. shows the volume of operations in the In the Statistical Tables chapter of principal departments of the Federal this report, table 6 details income and Reserve Banks for the years 1988-91. expenses of each Federal Reserve Bank for 1991, and table 7 shows a condensed statement for each Bank for 1914-91. A Federal Reserve Bank Premises detailed account of the assessments and During 1991, the Board of Governors expenditures of the Board of Governors authorized construction of new headappears in the next chapter—Board of quarters buildings for the Federal Re- Governors Financial Statements. serve Banks of Cleveland and Minneapolis. Construction of the new operations center for the New York Bank and the Holdings of Securities and Loans new headquarters building for the Dallas Average daily holdings of securities and Bank continued. Renovations of the loans during 1991 were $256,929 mil- main lobby of the St. Louis Bank and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

232 78th Annual Report, 1991 the main auditorium of the New York owned or occupied by the Federal Bank were completed. Table 8, in the Reserve Banks and Branches and of real Statistical Tables chapter, shows the estate acquired for future banking-house costs and book values both of premises purposes. Securities and Loans of Federal Reserve Banks, 1989-91 Millions of dollars, except as noted U.S. Item and year Total government Loans2 securities1 Average daily holdings31 1989 233,449 232,312 1,137 1990 . 237,444 236,523 921 1991 256,929 256,559 370 Earnings 1989 20,163 20,065 99 1990 20,067 19,995 73 1991 19,283 19,262 21 Average interest rate (percent) 1989 8.64 8.64 8.70 1990 8.45 8.45 7.88 1991 7.51 7.51 5.74 1. Includes federal agency obligations. 3. Based on holdings at opening of business. 2. Does not include indebtedness assumed by FDIC. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 233 Pro Forma Balance Sheet for Priced Services, December 31, 1991 and 1990l Millions of dollars Item 1991 1990 Short-term assets2 Imputed reserve requirement on clearing balances 453.8 270.4 Investment in marketable securities 3,328.2 1,982.6 Receivables 63.4 60.4 Materials and supplies 5.7 6.2 Prepaid expenses 13.1 15.4 Items in process of collection 4,167.4 2,474.1 Total short-term assets 8,031.7 4,809.1 Long-term assets3 Premises 360.1 319.9 Furniture and equipment 163.5 158.0 Leases and leasehold improvements 22.0 18.3 Prepaid pension costs 97.3 71.1 642.9 567.3 Total long-term assets 8,674.5 5,376.4 Total assets Short-term liabilities Clearing balances and balances arising from early 4,576.0 2,726.8 credit of uncollected items 3,373.4 2,000.3 Deferred-availability items 82.3 82.0 Short-term debt 8,031.7 4,809.1 Total short-term liabilities Long-term liabilities Obligations under capital leases 1.2 1.2 Long-term debt 173.1 157.4 174.3 158.6 Total long-term liabilities 8,206.0 4,967.7 Total liabilities 468.6 408.7 Equity Total liabilities and equity4 8,674.5 5,376.4 1. Details may not sum to totals because of rounding. cost of float, or net CIPC during the period (the difference 2. The imputed reserve requirement on clearing bal- between gross CIPC and deferred-availability items, ances held at Reserve Banks by depository institutions which is the portion of gross CIPC that involves a financreflects a treatment comparable to that of compensating ing cost), valued at the federal funds rate. balances held at correspondent banks by respondent insti- 3. Long-term assets used solely in priced services, the tutions. The reserve requirement imposed on respondent priced-services portion of long-term assets shared with balances must be held as vault cash or as nonearning nonpriced services, and an estimate of the assets of the balances maintained at a Reserve Bank; thus, a portion of Board of Governors used in the development of priced priced services clearing balances held with the Federal services. Effective Jan. 1,1987, the Reserve Banks imple- Reserve is shown as required reserves on the asset side of mented Financial Accounting Standards Board Statement the balance sheet. The remainder of clearing balances is No. 87, Employers' Accounting for Pensions. Accordassumed to be invested in three-month Treasury bills, ingly, in 1991 the Reserve Banks recognized a credit to shown as investment in marketable securities. Receiv- expenses of $28.1 million and a corresponding increase in ables are (1) amounts due the Reserve Banks for priced this asset account. services and (2) the share of suspense-account and 4. Under the matched-book capital structure for difference-account balances related to priced services. assets that are not "self-financing," short-term assets are Materials and supplies are the inventory value of short- financed with short-term debt. Long-term assets are term assets. Prepaid expenses include salary advances financed with long-term debt and equity in a proportion and travel advances for priced-service personnel. Items in equal to the ratio of long-term debt to equity for the fifty process of collection (CIPC) is gross Federal Reserve largest bank holding companies, which are used in the CIPC stated on a basis comparable to that of a commer- model for the private sector adjustment factor (PSAF). cial bank. It reflects adjustments for intra-System items The PSAF consists of the taxes that would have been paid that would otherwise be double-counted on a consoli- and the return on capital that would have been provided dated Federal Reserve balance sheet; adjustments for had priced services been furnished by a private-sector items associated with nonpriced items, such as those firm. Other short-term liabilities include clearing balances collected for government agencies; and adjustments for maintained at Reserve Banks and deposit balances arising items associated with providing fixed availability or credit from float. Other long-term liabilities consist of obligabefore items are received and processed. Among the costs tions on capital leases. Digitizedt ofo br eF rRecAovSeEreRd under the Monetary Control Act is the http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

234 78th Annual Report, 1991 Pro Forma Income Statement for Federal Reserve Priced Services, Calendar Years 1991 and 1990l Millions of dollars Item 1991 1990 Income from services provided to depository institutions2 737.5 730.2 Operating expenses3 611.9 597.1 Income from operations 125.6 133.1 Imputed costs4 Interest on float 19.0 33.2 Interest on debt 19.4 17.0 Sales taxes 9.9 8.0 FDIC insurance 6.3 54.6 5.0 63.2 Income from operations after imputed costs 71.0 70.0 Other income and expenses5 Investment income 175.0 155.5 Earnings credits 162.3 12.7 139.2 16.3 Income before income taxes 83.7 86.2 Imputed income taxes6 25.5 24.0 Net income 58.1 62.3 MEMO Targeted return on equity7 32.5 33.6 1. Details may not sum to totals because of rounding. Unrecovered float includes float generated by services 2. Income for priced services is realized from direct to government agencies and by other central bank sercharges to an institution's account or from charges against vices. Float recovered through income on clearing balaccumulated earnings credits. ances is the result of the increase in investable clearing 3. Operating expenses include direct, indirect, and balances; the increase is produced by a deduction for float other general administrative expenses of the Reserve for cash items in process of collection, which reduces Banks for priced services and the expenses of staff mem- imputed reserve requirements. The income on clearing bers of the Board of Governors working directly on the balances reduces the float to be recovered through other development of priced services, which were $2.0 million means. As-of adjustments and direct charges are midin 1991 and $1.7 million in 1990. The credit to expenses week closing float and interterritory check float, which under FASB 87 is reflected in operating expenses (see the may be recovered from depositing institutions through pro forma balance sheet, note 3). adjustments to the institution's reserve or clearing bal- 4. Interest on float is derived from the value of float to ance or by valuing the float at the federal funds rate and be recovered, either explicitly or through per-item fees, billing the institution directly. Float recovered through during the period. Float costs include costs for checks, per-item fees is valued at the federal funds rate and has book-entry securities, noncash collection, ACH, and been added to the cost base subject to recovery in 1991. funds transfers. 5. Investment income is on clearing balances and rep- Interest is imputed on debt assumed necessary to fi- resents the average coupon-equivalent yield on threenance priced-service assets. The sales taxes and FDIC month Treasury bills applied to the total clearing balance insurance assessment that the Federal Reserve would maintained, adjusted for the effect of reserve requirehave paid had it been a private-sector firm are among the ments on clearing balances. Expenses for earnings credits components of the PSAF (see the pro forma balance granted to depository institutions on their clearing balsheet, note 4). ances are derived by applying the average federal funds The following list shows the daily average recovery of rate to the required portion of the clearing balances, float by the Reserve Banks for 1991 in millions of dollars: adjusted for the net effect of reserve requirements on clearing balances. Total float 603.2 6. Calculated at the effective tax rate derived from the Unrecovered float 16.6 PSAF model. Float subject to recovery 586.6 7. The after-tax rate of return on equity that the Fed- Sources of recovery of float eral Reserve would have earned had it been a private Income on clearing balances 70.2 business firm, as derived from the PSAF model. As-of adjustments 258.5 Direct charges 102.4 Per-item fees 155.5 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 235 Pro Forma Income Statement for Federal Reserve Priced Services, by Service, 19911 Millions of dollars Definitive Com- Funds Com- safekeeping Bookmercial transfer Cash Item Total mercial and entry check and net services ACH noncash securities collection settlement collection Income from services 737.5 561.3 78.2 57.4 13.8 11.5 15.2 Operating expenses 611.9 481.1 69.3 49.5 13.3 10.2 14.4 Income from operations . 125.6 80.2 8.9 7.9 .4 1.3 .8 Imputed costs2 54.6 42.9 _T7 J6 _U 2.1 .2 Income from operations after imputed costs . 71.0 37.3 5.2 3.3 -.7 -.8 .6 Other income and expenses, net3 12.7 10.6 .9 .7 .2 .1 .2 Income before income taxes 83.7 47.9 6.1 4.0 -.5 -.7 .8 1. Details may not sum to totals because of rounding. the actual float incurred for each priced service. Other The effect of implementing FASB 87 (see the pro forma imputed costs are allocated among priced services balance sheet, note 3) is reported only in the "total" according to the ratio of operating expenses less shipping column in this table and has not been allocated to expenses for each service to the total expenses for all individual priced services. Taxes and the aftertax targeted services less the total shipping expenses for all services. rate of return on equity, as shown on the overall pro 3. Income on clearing balances and the cost of earnforma income statement, have not been allocated among ings credits. Because clearing balances relate directly to services because these elements relate to the organization the Federal Reserve's offering of priced services, the as a whole. income and cost associated with these balances are 2. Includes interest on float, interest on debt, sales allocated to each service based on the ratio of income taxes, and the FDIC assessment. Float costs are based on from each service to total income. Activity in Federal Reserve Priced Services, Calendar Years 1991, 1990, and 1989l Thousands of items, except as noted Percent change Service 1991 1990 1989 1991-90 1990-89 Funds transfers 66,921 62,559 60,645 7.0 3.2 Commercial ACH 1,119,073 915,257 740,623 22.3 23.6 Commercial checks 18,742,950 18,594,652 18,014,301 .8 3.2 Securities transfers 2,800 2,555 2,536 9.6 .7 Definitive safekeeping 57 82 110 -30.5 -25.4 Noncash collection 2,243 2,854 3,180 -21.4 -10.3 Cash transportation 338 330 322 2.4 2.5 1. Activity is defined as follows: for wire transfer of for securities, number of basic transfers originated on funds, the number of basic transactions originated; for line; for definitive safekeeping, average number of issues ACH, total number of commercial items processed; for or 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; portation, number of armored-carrier stops. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

236 78th Annual Report, 1991 Income and Expenses for Locally Priced Federal Reserve Services, by District, 1991] Millions of dollars Total Operating Float Total Net District expense expense expense income Commercial check collection Boston 39.9 31.9 1.1 33.0 6.9 New York ... 72.4 61.2 2.3 63.5 8.9 Philadelphia.. 28.2 24.9 2.4 27.3 .9 Cleveland 32.2 27.4 1.1 28.5 3.7 Richmond 54.0 46.7 1.6 48.3 5.7 Atlanta 73.3 61.7 1.6 63.3 10.0 Chicago 72.7 60.5 2.3 62.8 9.9 St. Louis 24.6 19.3 1.4 20.7 3.9 Minneapolis . 30.7 27.2 .5 27.7 3.0 Kansas City.. 36.0 30.5 1.2 31.7 4.3 Dallas 38.1 33.6 1.6 35.2 2.9 San Francisco 59.2 56.2 1.5 57.7 1.5 System total. 561.3 481.1 18.6 499.7 61.6 Definitive safekeeping and noncash collection Boston .7 .7 .7 .0 New York ... 2.4 2.4 2.4 .0 Philadelphia.. .9 .8 .8 .1 Cleveland.... 1.6 1.3 9 1.3 .3 Richmond .8 .9 .9 -.1 Atlanta 2.4 1.9 1.9 .5 Chicago 2.0 2.1 2.1 -.1 St. Louis .7 .5 3 .5 .2 Minneapolis.. .2 .3 .3 -.1 Kansas City.. .9 1.3 1.3 -.4 Dallas 1.2 1.1 i 1.1 .1 San Francisco * * * System total. 13.8 133 .1 13.4 A Cash services Boston New York ... Philadelphia.. 1.8 1.8 .0 Cleveland.... 1.9 1.8 .1 Richmond Atlanta Chicago .5 .5 .0 St. Louis .1 .1 .0 Minneapolis.. 3.0 2.6 .4 Kansas City.. .6 .5 .1 Dallas San Francisco 7.2 6.9 System total. 15.2 14.4 .8 1. Details may not sum to totals because of rounding; service shown in this table with that shown in the income also, expenses related to research and development statement by service, adjustments must be made for projects are reported at the System level, and therefore imputed interest on debt, sales taxes, FDIC assessment, the sum of expenses for the twelve Districts may not Board expenses for priced services, and net income on equal the System total. The financial results for each clearing balances. Reserve Bank shown here do not include the dollars to be •In absolute value, greater than zero and less than recovered through the PSAF and the net income on $50,000. clearing balances. To reconcile net revenue by priced Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

237 Board of Governors Financial Statements The financial statements of the Board independent public accountants, for were audited by Coopers & Lybrand, 1991 and 1990. 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), as of December 31, 1991 and 1990, 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 audits in accordance with generally accepted auditing standards and 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, 1991 and 1990, 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 12, 1992 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

238 78th Annual Report, 1991 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BALANCE SHEETS As of December 31, 1991 1990 ASSETS CURRENT ASSETS Cash $ 4,498,138 $ 9,256,285 Accounts receivable 1,227,367 1,146,044 Prepaid expenses and other assets 778,485 827,876 Total current assets 6,503,990 11,230,205 PROPERTY, BUILDINGS AND EQUIPMENT, Net (Note 3) 50,338,953 50,841,923 Total assets $56,842,943 $62,072,128 LIABILITIES AND FUND BALANCE CURRENT LIABILITIES Accounts payable $ 3,609,392 $ 4,208,717 Accrued payroll and related taxes 1,120,332 3,673,252 Accrued annual leave 5,057,365 4,760,513 Unearned revenues and other liabilities 1,257,442 1,042,167 Total current liabilities 11,044,531 13,684,649 COMMITMENTS (Note 5) FUND BALANCE 45,798,412 48,387,479 Total liabilities and fund balance $56,842,943 $62,072,128 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 239 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF REVENUES AND EXPENSES AND FUND BALANCE For the years ended December 31, 1991 1990 BOARD OPERATING REVENUES Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $ 109,631,000 $ 103,752,200 Other revenues (Note 4) 4,520,462 4,217,225 Total operating revenues 114,151,462 107,969,425 BOARD OPERATING EXPENSES Salaries 75,056,412 69,562,505 Retirement and insurance contributions 11,590,355 9,529,726 Depreciation and net losses on disposals 5,682,355 5,968,909 Travel 3,542,401 3,466,251 Postage and supplies 3,344,444 3,358,071 Utilities 3,286,946 3,460,224 Contractual services and professional fees 3,113,853 3,048,327 Repairs and maintenance 2,877,050 2,709,196 Software 2,478,238 2,125,800 Printing and binding 2,059,165 2,202,823 Other expenses (Note 4) 3,709,310 2,988,899 Total operating expenses 116,740,529 108,420,731 BOARD OPERATING REVENUES (UNDER) EXPENSES (2,589,067) (451,306) ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES Assessments levied on Federal Reserve Banks for currency costs 261,316,379 193,006,998 Expenses for currency printing, issuance, retirement, and shipping 261,316,379 193,006,998 CURRENCY ASSESSMENTS (UNDER) OVER EXPENSES — — TOTAL REVENUES (UNDER) EXPENSES (2,589,067) (451,306) FUND BALANCE, Beginning of year 48,387,479 48,838,785 FUND BALANCE, End of year $ 45,798,412 $ 48,387,479 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

240 78th Annual Report, 1991 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash For the years ended December 31, 1991 1990 CASH FLOWS FROM OPERATING ACTIVITIES Board operating revenues (under) expenses $(2,589,067) $ (451,306) Adjustments to reconcile operating revenues (under) expenses to net cash provided by operating activities: Depreciation and net losses on disposals 5,682,355 5,968,909 Increase in accounts receivable, and prepaid expenses and other assets (31,932) (210,391) Increase in accrued annual leave 296,852 422,251 (Decrease) in accounts payable (599,325) (652,063) (Decrease) Increase in payroll payable (2,552,920) 641,836 Increase in unearned revenue and other liabilities 215,275 139,027 Net cash provided by operating activities 421,238 5,858,263 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposals of furniture and equipment 36,156 8,900 Capital expenditures (5,215,541) (3,521,903) Net cash used in investing activities (5,179,385) (3,513,003) NET INCREASE (DECREASE) IN CASH (4,758,147) 2,345,260 CASH BALANCE, Beginning of year 9,256,285 6,911,025 CASH BALANCE, End of year $ 4,498,138 $ 9,256,285 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 241 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 $674,700 in 1991 and Board Operating Revenues and Expenses—Assess- $639,600 in 1990. ments made on the Federal Reserve Banks for Board Employees of the Board may also participate in the operating expenses and capital expenditures are calcu- Federal Reserve System's Thrift Plan. Under the Thrift lated based on expected cash needs. These assessments, Plan, members may contribute up to a fixed percentage of other operating revenues, and operating expenses are their salary. Board contributions are based upon a fixed recorded on the accrual basis of accounting. percentage of each member's basic contribution and were $2,696,800 in 1991 and $2,107,700 in 1990. Issuance and Redemption of Federal Reserve Notes— The Board incurs expenses and assesses the Federal Re- The Board also provides certain health benefits for serve 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 $522,100 in 1991 and $367,300 in 1990. revenues and expenses because they are not Board operating transactions. (3) PROPERTY, BUILDINGS AND EQUIPMENT Property, Buildings and Equipment—The Board's The following is a summary of the components of the property, 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 three to ten years for furniture As of December 31, and equipment and from ten to fifty years for building 1991 1990 equipment and structures. Upon the sale or other disposi- Land and tion of a depreciable asset, the cost and related accumu- improvements $ 1,301,314 $ 1,301,314 lated depreciation are removed from the accounts and any Buildings 63,726,137 63,573,336 gain or loss is recognized. Furniture and equipment . 35,146,359 32,768,173 100,173,810 97,642,823 (2) RETIREMENT BENEFITS Less accumulated Substantially all of the Board's employees participate depreciation 49,834,857 46,800,900 in either the Retirement Plan for Employees of the Fed- Total property, eral Reserve System or the Civil Service Plan. The Sys- buildings and equipment $ 50,338,953 tem's Plan is a multiemployer plan which covers employ- $ 50,841,923 ees 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 following are summaries of the components of the Board who entered on duty after 1983 are covered by Other Revenues and Other Expenses. a non-contributory defined benefits program under the Plan. The Civil Service Plan is a defined contribution For the years plan. ended December 31, Contributions to the System's Plan are actuarially de- 1991 1990 termined and funded by participating employers at Other Revenues amounts prescribed by the Plan's administrator. No sepa- Data processing rate accounting is maintained of assets contributed by the revenue $2,364 284 $2 002 546 Subscription participating employers and net pension cost for the perevenue 1,744,775 1,681,241 riod is the required contribution for the period. As of Assistance December 31, 1991, actuarial calculations showed that to Federal the fair value of the assets of the System's Plan exceeded agencies 43,426 332,658 the projected benefit obligations by 113 percent. Based on Miscellaneous 367,977 200,780 these calculations and similar calculations performed for Total other 1990, it was determined that employer funding contribu- revenues $4,520,462 $4,217,225 tions were not required for the years 1991 and 1990 and the Board was not assessed a contribution for these years. Excess Plan assets will continue to fund future years' contributions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

242 78th Annual Report, 1991 (4) OTHER REVENUES AND OTHER EXPENSES—Cont. Other Expenses Cafeteria operations, net $ 783,362 $ 694,047 Tuition, registrations and membership fees 692,131 615,534 Equipment and facility rentals 682,962 544,187 Subsidies and contributions ... 638,975 529,289 Miscellaneous 911,880 605,842 Total other expenses $3,709,310 $2,988,899 (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 31,1991, are as follows: 1992 $ 611,242 1993 571,978 1994 456,441 1995 406,620 1996 422,796 $2,469,077 Rental expenses under these operating leases were $635,100 and $471,500 in 1991 and 1990, 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 1991 and 1990, the Board paid $241,040 and $146,200, respectively, in assessments for operating expenses of the Council. These amounts are included in subsidies and contributions for 1991 and 1990. 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 $40,000 and $34,000 for 1991 and 1990, 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

244 78th Annual Report, 1991 1. Detailed Statement of Condition of All Federal Reserve Banks Combined, December 31, 1991l Thousands of dollars ASSETS Gold certificate account 11,058,778 Special drawing rights certificate account 10,018,000 Coin 527,613 Loans and securities Loans to depository institutions 218,356 Federal agency obligations Bought outright 6,044,500 Held under repurchase agreement 552,850 U.S. Treasury securities Bought outright Bills 132,635,005 Notes 101,519,719 Bonds 32,331,474 Total bought outright 266,486,198 Held under repurchase agreement 15345,150 Total securities 281,831,348 Total loans and securities 288,647,054 Items in process of collection Transit items 7,093,797 Other items in process of collection 1,191,655 Total items in process of collection 8,285,452 Bank premises Land 144,591 Buildings (including vaults) 690,804 Building machinery and equipment 191,695 Construction account 199,872 Total bank premises 1,082,371 Less depreciation allowance 240,249 842,122 Bank premises, net 986,714 Other assets Furniture and equipment 819,345 Less depreciation 480,008 Total furniture and equipment, net 339,337 Denominated in foreign currencies2 27,626,276 Interest accrued 3,111,150 Premium on securities 1,869,578 Overdrafts 17,312 Prepaid expenses 354,413 Suspense account 12,698 Real estate acquired for banking-house purposes 16,753 Other 189,675 Total other assets 33,537,192 Total assets 353,060,803 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 245 1.—Continued LIABILITIES Federal Reserve Notes Outstanding (issued to Federal Reserve Banks) 366,467,574 Less held by Federal Reserve Banks 78,561,962 Total Federal Reserve notes, net 287,905,612 Deposits Depository institutions 29,412,997 US. Treasury, general account 17,696,902 Foreign, official accounts 967,609 Other deposits Officers' and certified checks 19,932 International organizations 79,778 Other3 1,606,070 Total other deposits 1,705,780 Deferred credit items 7,259,372 Other liabilities Discount on securities 2,319,224 Sundry items payable 72,311 Suspense account 34,095 All other 383,884 Total other liabilities 2,809,514 Total liabilities 347,757,787 CAPITAL ACCOUNTS Capital paid in 2,651,508 Surplus 2,651,508 Other capital accounts4 0 Total liabilities and capital accounts 353,060,803 1. Amounts in boldface type indicate items in the 3. In closing out the other capital accounts at year-end, Board's weekly statement of condition of the Federal the Reserve Bank earnings that are payable to the Trea- Reserve Banks. sury are included in this account pending payment. 2. Of this amount $8,152.3 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

246 78th Annual Report, 1991 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1991 and 1990 Millions of Dollars1 Total Boston Item 1991 1990 1991 1990 ASSETS Gold certificate account 11,059 11,058 747 750 Special drawing rights certificate account 10,018 10,018 711 711 Coin 528 535 34 41 Loans To depository institutions 218 190 14 Other 0 0 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 6,045 6,342 409 426 Held under repurchase agreements 553 1,341 0 0 U.S. Treasury securities Bought outright2 266,486 235,090 18,041 15,794 Held under repurchase agreements 15,345 17,013 0 0 Total loans and securities 288,647 259,975 18,450 16,233 Items in process of collection 8,286 6,106 464 287 Bank premises 987 872 89 90 Other assets Denominated in foreign currencies3 27,626 32,633 1,111 1,207 Allother 5,911 6,376 303 287 Interdistrict Settlement Account 0 0 -1,287 1,909 Total assets 353,061 327,573 20,623 21,515 LIABILITIES Federal Reserve notes 287,906 267,657 18,350 18,879 Deposits Depository institutions 29,413 38,658 1,391 2,109 U.S. Treasury, general account 17,697 8,960 0 0 Foreign, official accounts 968 369 6 6 Other 1,706 242 81 3 Total deposits 49,783 48,228 1,478 2,118 Deferred credit items 7,259 3,540 443 132 2,810 3,301 156 192 Other liabilities and accrued dividends4 47,758 322,727 20,428 21,320 Total liabilities CAPITAL ACCOUNTS 2,652 2,423 99 97 Capital paid in 2,652 2,423 98 97 Surplus 0 0 0 0 Other capital accounts Total liabilities and capital accounts 353,061 327,573 20,623 21,515 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes outstanding (issued to Bank) 366,468 304,829 23,044 21,409 Less: Held by Bank 78,562 37,172 4,693 2,530 Federal Reserve notes, net 287,906 267,657 18350 18,879 Collateral for Federal Reserve notes Gold certificate account 11,059 11,058 Special drawing rights certificate account 10,018 10,018 Other eligible assets 0 0 U.S. Treasury and federal agency securities 266,829 246,581 Total collateral 287,906 267,657 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 247 2.—Continued New York Philadelphia Cleveland Richmond 1991 1990 1991 1990 1991 1990 1991 1990 3,914 3,501 318 384 692 688 948 1,008 3,395 3,395 319 319 645 645 961 961 16 16 40 31 30 39 99 105 7 23 45 24 0 0 105 6 0 0 0 0 0 0 0 0 2,382 2,341 160 185 378 380 478 590 553 1,341 0 0 0 0 0 0 105,022 86,783 7,041 6,846 16,674 14,084 21,079 21,881 15,345 17,013 0 0 0 0 0 0 123,309 107,501 7,246 7,055 17,052 14,464 21,662 22,476 969 570 592 527 354 257 608 341 127 76 44 45 34 36 123 122 7,606 8,844 1,312 1,468 1,428 1,795 1,688 2,023 2,918 2,373 146 179 350 332 374 906 -12,000 -1,044 3,172 -702 1,766 1,077 321 -5,674 130,253 125,233 13,189 9,307 22,352 19,332 26,784 22,270 100,834 102,697 10,872 7,078 19,950 17,005 23,426 18,904 6,461 9,934 1,470 1,774 1,572 1,817 2,210 2,654 17,697 8,960 0 0 0 0 0 0 859 259 7 7 8 8 9 9 642 156 74 2 88 2 66 16 25,658 19,310 1,551 1,782 1,667 1,827 2,285 2,679 866 382 490 132 270 83 541 119 1,353 1,511 66 84 143 167 191 271 128,710 123,899 12,979 9,077 22,029 19,082 26,443 21,974 111 667 105 115 161 125 171 148 771 667 105 115 161 125 171 148 0 0 0 0 0 0 0 0 130,253 125,233 13,189 9,307 22,352 19,332 26,784 22,270 128,066 108,722 13,068 8,380 23,151 18,651 31,583 24,543 27,231 6,026 2,196 1,302 3,201 1,646 8,158 5,639 100,834 102,697 10,872 7,078 19,950 17,005 23,426 18,904 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

248 78th Annual Report, 1991 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1991 and 1990—Continued Millions of Dollars1 Atlanta Chicago Item 1991 1990 1991 1990 ASSETS Gold certificate account 479 465 1,370 1,377 Special drawing rights certificate account 303 303 1,336 1,336 Coin 46 54 53 33 Loans To depository institutions 12 13 20 Other 0 0 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 202 221 760 773 Held under repurchase agreements 0 0 0 0 U.S. Treasury securities Bought outright2 8,912 8,209 33,486 28,672 Held under repurchase agreements 0 0 0 0 Total loans and securities 9,115 8,443 34,259 29,465 Items in process of collection 895 581 799 759 Bank premises 57 58 112 110 Other assets Denominated in foreign currencies3 2,799 3,198 3,420 4,079 All other 205 336 599 759 Interdistrict Settlement Account 1,987 2,887 237 2,974 Total assets 15,887 16,325 42,183 40,892 LIABILITIES Federal Reserve notes 11,426 11,768 37,207 36,047 Deposits Depository institutions 2,970 3,723 3,102 3,511 U.S. Treasury, general account 0 0 0 0 Foreign, official accounts 15 15 19 19 Other 117 3 211 31 Total deposits 3,102 3,740 3,332 3,560 Deferred credit items 792 226 702 343 81 100 301 342 Other liabilities and accrued dividends4 5,401 15,834 41,542 40,292 Total liabilities CAPITAL ACCOUNTS 243 246 321 300 Capital paid in 243 246 321 300 Surplus 0 0 0 0 Other capital accounts 15,887 16,325 42,183 40,892 Total liabilities and capital accounts FEDERAL RESERVE NOTE STATEMENT 17,196 15,085 41,660 39,007 Federal Reserve notes outstanding (issued to Bank) 5,771 3,317 4,452 2,960 Less: Held by Bank Federal Reserve notes, net 11,426 11,768 37,207 36,047 1. Components may not sum 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 249 2.—Continued St. Louis Minneapolis Kansas City Dallas San Francisco 1991 1990 1981 1990 1991 1990 1991 1990 1991 1990 328 346 171 203 370 422 515 585 1,207 1,329 307 307 172 172 334 334 463 463 1,072 1,072 29 36 14 13 31 33 43 44 94 89 25 28 0 6 9 10 3 23 11 25 0 0 0 0 0 0 0 0 0 0 160 184 78 101 168 207 237 226 633 706 0 0 0 0 0 0 0 0 0 0 7,058 6,817 3,445 3,755 7,386 7,672 10,456 8,391 27,886 26,185 0 0 0 0 0 0 0 0 0 0 7,243 7,028 3,523 3,862 7,563 7,890 10,695 8,640 28,528 26,917 275 280 544 365 515 478 773 977 1,498 685 29 28 32 33 53 54 141 72 147 149 724 881 782 979 1,055 1,273 2,105 2,480 3,597 4,405 128 146 77 107 136 168 192 224 482 559 1,609 183 2,640 -189 -810 -926 1,600 986 3,983 -1,482 7,453 9,235 7,955 5,546 9,247 9,725 16,526 14,472 40,608 33,722 6,035 7,507 6,691 3,929 7,145 7,799 13,530 11,481 32,440 24,563 914 1,410 653 1,028 1,313 1,202 1,646 1,757 5,713 7,741 0 0 0 0 0 0 0 0 0 0 4 4 4 5 6 6 11 11 20 20 42 1 38 6 60 9 97 7 192 7 960 1,415 695 1,039 1,379 1,217 1,754 1,775 5,924 7,768 255 105 399 395 458 430 722 746 1,321 448 73 80 31 46 68 95 96 100 251 313 7,322 9,108 7,816 5,408 9,049 9,540 16,103 14,102 39,936 33,092 66 64 70 69 99 93 211 185 336 315 66 64 70 69 99 93 211 185 336 315 0 0 0 0 0 0 0 0 0 0 7,453 9,235 7,955 5,546 9,247 9,725 16,526 14,472 40,608 33,722 8,883 9,163 8,117 4,698 9,618 9,910 17,683 13,926 44,400 31,335 2,848 1,656 1,427 769 2,473 2,111 4,152 2,445 11,961 6,773 6,035 7,507 6,691 3,929 7,145 7,799 13,530 11,481 32,440 24,563 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

250 78th Annual Report, 1991 3. Federal Reserve Open Market Transactions, 1991 Millions of dollars Type of transaction Jan. Feb. Mar. Apr. U.S. TREASURY SECURITIES Outright transactions (excluding matched transactions) Treasury bills Gross purchases 0 Gross sales 120 Exchanges 23,702 Redemptions 1,000 Others within 1 year Gross purchases 0 Gross sales 0 Maturity shift 989 Exchanges -1,326 Redemptions 1,000 1 to 5 years Gross purchases 0 Gross sales 0 Maturity shift -778 Exchanges 929 5 to 10 years Gross purchases 0 Gross sales 0 Maturity shift -212 Exchanges 397 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 1967 313 0 0 21,381 18,808 0 0 100 700 0 0 2,292 413 -3,045 -1,877 0 0 0 2,950 0 0 -1,909 -213 2,545 1,877 350 50 0 0 -23 -200 400 0 0 0 -361 100 0 2,417 120 0 1,000 0 137,176 127,589 137,512 127,502 36,337 44,688 38,462 44,809 oooo 908 0 21,981 0 700 0 4,324 -993 0 550 0 -A,2U 111 0 0 -110 216 4,013 0 0 151,096 151,412 23,821 38,589 oooo 2,158 0 0 185,662 187,032 16,173 16,173 -2,909 2,209 -10,439 3,528 ooo 4,416 3,571 845 2,064 ooo 3,546 4,466 -920 1,290 ooo 0 0 91 2,518 640 3,784 640 -1,266 -91 -11,705 3,437 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 251 3.—Continued May June July Aug. Sept. Oct. Nov. Dec. Total 3,411 37 1,359 5,776 529 2,198 2,823 837 20,158 0 0 0 0 0 0 0 0 120 27,548 19,680 25,180 28,009 19,508 25,409 24,141 21,967 277,314 0 0 0 0 0 0 0 0 1,000 200 0 625 340 200 0 178 0 3,043 0 0 0 0 0 0 0 0 0 5,175 0 1,478 3,425 1,131 2,002 1,655 1,570 24,454 -4,887 0 -3,136 -2,443 -2,202 -2,034 -2,585 -3,562 -28,090 0 0 0 0 0 0 0 0 1,000 0 0 0 0 650 0 2,133 300 6,583 0 0 0 0 0 0 0 0 0 -3,410 0 -1,192 -3,425 -1,131 -1,877 -1,492 -1,570 -21,211 4,287 0 2,601 1,993 2,202 1,686 2,135 3,562 24,594 0 0 0 0 0 0 880 0 1,280 0 0 0 0 0 0 0 0 0 -1,605 0 -286 -688 0 -126 163 0 -2,037 400 0 534 300 0 347 300 0 2,894 0 0 0 0 0 0 375 0 375 0 0 0 0 0 0 0 0 0 -160 0 0 -688 0 0 0 0 -1,209 200 0 0 150 0 0 150 0 600 3,611 37 1,984 6,116 1,379 2,198 6,390 1,137 31,439 0 0 0 0 0 0 0 0 120 0 0 0 0 0 0 0 0 1,000 147,796 118,903 120,292 112,414 116,266 137,073 98,063 118,127 1,570,456 147,803 118,239 121,803 110,280 118,481 135,281 97,925 118,263 1,571,534 9,241 9,440 35,149 16,847 40,447 12,432 14,165 51,345 310,084 9,241 8,478 36,111 16,847 40,447 3,718 22,879 36,000 311,752 3,618 335 2,532 3,981 3,595 9,121 -2,462 16,619 29,729 0 0 37 885 885 -37 3,581 ooo 0 0 55 1,225 3,245 748 3,722 477 -532 812 2,000 ooo 0 0 0 0 0 5 0 0 0 5 0 14 51 45 292 537 3,061 714 275 1,744 22,807 537 3,061 695 294 1,191 23,595 0 -5 5 -70 508 -1,085 3,981 3,590 9,126 -2,532 17,127 28,644 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

252 78th Annual Report, 1991 4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities, December 31, 1989-91 * Millions of dollars Increase or December 31 decrease (-) Description 1991 1990 1989 1991 1990 U.S. Treasury securities, total 281,831 252,103 228,367 29,728 23,736 By term 1-15 days2 21,109 22,530 9,413 -1,421 13,117 16-90 days 66,759 57,538 55,523 9,221 2,015 91 days to 1 year 90,655 75,428 70,687 15,227 4,741 1-5 years 64,299 58,749 53,509 5,550 5,240 5-10 years 14,469 13,121 12,529 1,348 592 More than 10 years 24,540 24,736 26,706 -196 -1,970 By type of holding Held outright Treasury bills3 132,635 112,520 104,581 20,115 7,939 Treasury notes 101,520 91,407 91,381 10,113 25 Treasury bonds 32,331 31,163 30,814 1,168 350 Held under repurchase agreements 15,345 17,013 1,592 -1,668 15,421 Federal agency obligations, total 6,045 6^42 6,525 -297 -183 By term 1-15 days2 200 200 153 0 47 16-90 days 811 737 568 74 169 91 days to 1 year 1,329 1,639 1,346 -310 293 1-5 years 2,508 2,555 3,198 -41 -643 5-10 years 1,008 1,022 1,071 -14 -49 More than 10 years 189 188 188 1 0 By type of holding Held outright Federal Farm Credit Banks 1,440 1,560 1,630 -120 -70 Federal Home Loan Banks 2,029 2,161 2,251 -132 -90 Federal Home Loan Financing Corporation. 0 0 0 0 0 Federal Home Loan Mortgage Corporation. 0 0 0 0 0 Federal Intermediate Credit Banks3 0 0 0 0 0 Federal Land Banks 66 108 130 -42 -22 Federal Home Administration 0 0 0 0 0 Federal National Mortgage Association 2,342 2,346 2,347 -4 -1 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 12 13 0 -1 Held under repurchase agreements 553 1,341 525 -788 816 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 253 5. Number and Salaries of Officers and Employees of Federal Reserve Banks, December 31, 1991 President Other officers Employees Total Federal Reserve Bank (including) Annual Annual Number Annual Annual branches (d s o al l a la r r y s) N b u e m r - ( s d a o la ll r a i r e s s ) Full- Part- ( s d a o la ll r a i r e s s ) N b u e m r - ( s d a o la ll r a i r e s s ) time time Boston 162,600 56 4,982,200 1,264 267 45,447,152 1,588 50,591,952 New York 245,400 173 17,254,050 3,834 62 135,587,042 4,070 153,086,492 Philadelphia 173,500 58 4,870,350 1,272 146 38,775,718 1,477 43,819,568 Cleveland Vacant 62 5,129,800 1,301 70 36,592,862 1,434 41,722,662 Richmond 187,900 87 7,120,600 1,921 132 52,486,264 2,141 59,794,764 Atlanta 196,000 71 5,660,700 2,255 63 62,856,318 2,390 68,713,018 Chicago 209,000 95 7,837,150 2,405 34 74,310,793 2,535 82,356,943 St. Louis 179,000 50 3,718,100 1,072 101 29,596,497 1,224 33,493,597 Minneapolis 162,000 49 3,881,500 989 123 29,999,915 1,162 34,043,415 Kansas City 146,500 58 4,599,000 1,550 46 44,389,377 1,655 49,134,877 Dallas 147,500 58 4,627,300 1,624 49 50,336,327 1,732 55,111,127 San Francisco 210,000 100 9,346,925 2,430 78 79,618,829 2,609 89,175,754 Total 2,019,400 917 79,027,675 21,917 1,171 679,997,094 24,017 761,044,169 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

254 78th Annual Report, 1991 6. Income and Expenses of Federal Reserve Banks, 1991 Dollars Item1 Total Boston New York Philadelphia Cleveland CURRENT INCOME Loans 25,571,333 1,845,058 3,526,832 510,153 477,189 U.S. Treasury and federal agency securities 19,262,265,500 1,293,210,618 7,506,681,372 522,542,526 1,181,833,460 Foreign currencies 2,499,370,712 99,778,152 687,140,766 118,175,928 129,935,784 Priced services 737,454,292 49,114,837 105,489,922 37,861,697 43,638,765 Other 28,339,977 1,212,267 18,369,961 824,337 635,040 Total 22,553,001,814 1,445,160,932 8,321,208,853 679,914,641 1,356,520,238 CURRENT EXPENSES Salaries and other personnel expenses 738,153,925 50,947,365 157,898,201 43,484,791 44,513,218 Retirement and other benefits2 101,544,004 11,326,125 37,066,336 10,632,465 11,164,188 Fees 20,456,306 2,817,489 2,447,486 512,588 5,872,972 Travel 32,816,521 1,694,429 4,402,544 1,801,676 2,338,517 Software expenses 32,733,641 1,734,559 8,338,608 1,275,675 1,463,654 Postage and other shipping costs 88,175,111 5,130,166 10,876,235 4,916,471 6,209,011 Communications 9,773,482 589,212 2,001,558 453,934 623,744 Materials and supplies 54,576,433 3,383,120 9,921,250 2,913,789 3,059,846 Building expenses Taxes on real estate 26,526,902 3,679,240 3,944,404 1,841,755 1,345,599 Property depreciation 35,554,702 2,841,455 3,976,235 1,796,763 1,800,882 Utilities 26,706,109 2,156,338 3,795,032 2,986,575 1,813,805 Rent 23,629,300 651,033 15,935,929 100,276 400,177 Other 20,542,848 880,511 3,103,584 964,753 703,652 Equipment Purchases 6,386,264 231,896 41,171 341,693 145,222 Rentals 20,741,963 753,471 4,770,697 811,205 740,619 Depreciation 87,143,920 5,486,594 16,880,471 3,986,909 6,540,737 Repairs and maintenance 51,852,412 3,037,153 8,137,433 2,374,637 3,687,398 Earnings-credit costs 163,976,030 9,180,545 33,190,616 13,986,254 8,545,603 Other 34,791,808 2,428,345 5,556,468 1,641,305 2,351,105 Shared costs, net3 0 (1,062,949) (873,667) 2,424,132 1,874,861 Recoveries (36,945,993) (8,977,795) (4,096,735) (2,855,095) (4,152,604) Expenses capitalized4 (2,691,014) (235,354) (6,386) (36,858) (444,877) Total 1,581,444,679 98,672,948 327^07,470 96355,693 100,597,326 Reimbursements (152,122,522) (6,915,454) (29,467,199) (17,115,996) (14,807,673) Net expenses 1,429,322,157 91,757,494 297,840,271 79,239,697 85,789,653 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 255 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 5,441,635 4,229,770 945,379 2,524,832 3,394,970 1,190,054 292,159 1,193,302 1,600,439,605 649,486,457 2,383,565,534 522,560,419 266,252,373 560,940,540 729,589,919 2,045,162,677 152,907,456 252,467,935 309,683,301 65,657,650 71,102,234 95,650,099 190,408,514 326,462,893 64,150,968 89,947,749 95,097,878 31,356,786 39,930,238 47,494,854 49,081,803 84,288,795 838,713 935,572 2,198,281 495,690 425,266 380,806 662,911 1,361,132 1,823,778^77 997,067,483 2,791,490^73 622,595,377 381,105,082 705,656^53 970,035306 2,458,468,800 60,990,329 71,550,121 85,682,157 35,200,543 35,230,037 52,250,411 52,645,903 92,760,850 14,894,132 17,793,529 19,673,511 8,202,399 8,188,371 13,299,790 12,718,401 19,731,480 1,312,589 1,180,655 776,982 578,414 1,210,338 1,165,726 1,318,377 1,262,690 2,518,849 3,126,865 3,624,046 1,777,061 2,008,755 2,603,411 2,429,251 4,491,117 3,077,506 2,353,502 4,263,971 1,614,931 1,786,926 1,544,840 1,822,605 3,456,864 7,516,573 10,401,775 9,835,913 4,064,431 5,879,536 6,024,001 4,534,350 12,786,650 782,050 996,837 1,121,169 521,084 491,719 694,438 779,807 717,930 5,135,240 5,729,944 6,267,190 3,303,832 2,189,054 3,677,754 3,351,103 5,644,311 2,161,783 1,631,583 5,862,998 428,854 1,003,977 834,409 1,255,119 2,537,181 4,300,009 2,960,406 4,576,443 1,684,390 1,297,874 3,043,845 1,486,904 5,789,497 2,468,448 2,331,870 2,654,552 1,591,563 885,798 1,591,706 1,185,138 3,245,283 740,206 892,117 2,155,506 413,323 502,098 291,333 1,327,810 219,493 2,300,283 1,788,087 4,346,653 970,852 894,267 903,517 925,801 2,760,888 785,129 707,555 691,219 266,367 692,486 304,108 524,746 1,654,673 1,047,190 1,992,374 3,537,473 450,210 1,113,096 2,226,718 1,059,684 2,239,226 8,735,006 7,858,882 11,821,842 2,740,652 5,135,159 2,733,877 5,057,737 10,166,054 5,266,409 5,619,705 8,337,465 2,008,891 2,772,736 1,905,121 2,573,953 6,131,511 14,382,148 13,482,866 29,503,710 5,935,048 5,164,840 8,317,915 6,049,595 16,236,890 1,724,207 3,832,039 5,569,728 1,344,225 1,428,432 2,158,378 2,536,879 4,220,697 (4,712,948) 1,155,339 (6,858,100) 2,321,670 2,013,741 1,334,622 1,918,705 464,599 (3,468,751) (2,375,021) (3,305,633) (1,243,942) (1,169,381) (895,743) (705,207) (3,700,086) (374,869) (269,975) (220,589) (67,601) (164,707) (392,559) (325,435) (151,805) 131,581,518 154,741,055 199,918,206 74,107,196 78,555,152 105,617,618 104,471,226 192,665,993 (9,845,150) (12,129,248) (15,949,065) (8,686,314) (5,790,842) (10,023,655) (7,341,520) (14,050,405) 121,736,368 142,611,807 183,969,141 65,420,882 72,764,310 95,593,963 97,129,706 178,615,588 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

256 78th Annual Report, 1991 6. Income and Expenses of Federal Reserve Banks, 1991—Continued Dollars Item1 Total Boston New York Philadelphia Cleveland PROFIT AND LOSS Current net income 21,123,679,659 1,353,403,438 8,106,515,306 600,674,945 1,270,730,586 Additions to and deductions from current net income5 Profits on sales of U.S. Treasury and federal agency securities 131,447,796 8,828,460 49,980,606 3,632,617 8,018,932 Profit on foreign exchange transactions 366,450,220 11,931,153 97,121,050 15,218,772 21,833,127 Other additions 153,614 2,546 37,427 3,604 935 Total additions 498,051,630 20,762,159 147,139,083 18,854,993 29,852,993 Total deductions (1,851,036) (35,007) (671,921) (14,090) (6,240) Net additions to or deductions (-) from current net income 496,200,594 20,727,152 146,467,162 18,840,903 29,846,753 Cost of unreimbursed Treasury services 90,471,276 4,517,310 13,380,979 11,939,825 9,694,406 Assessments by Board Board expenditures6 109,631,000 4,558,600 31,222,600 4,818,600 6,028,900 Cost of currency 261,316,379 18,431,584 100,248,786 6,912,056 16,602,497 Net income before payment to U.S. Treasury 21,158,461,599 1,346,623,096 8,108,130,103 595,845,367 1,268,251,536 Dividends paid 152,553,160 6,006,860 43,267,767 6,134,888 9,032,226 Payments to U.S. Treasury (interest on Federal Reserve notes) 20,777,552,288 1,340,045,736 7,960,494,986 599,783,979 1,223,419,259 Transferred to surplus 228,356,150 570,500 104,367,350 (10,073,500) 35,800,050 Surplus, January 1 2,423,151,600 97,281,500 667,053,050 115,174,000 125,355,700 Surplus, December 31 2,651,507,750 97,852,000 771,420,400 105,100,500 161,155,750 1. Details may not sum to totals because of rounding. 4. Includes expenses for labor and materials tempo- 2. The effect of the 1987 implementation of Financial rarily capitalized and charged to activities when the prod- Accounting Standards Board Statement No. 87— ucts are consumed. Employers' Accounting for Pensions—is recorded in the 5. Includes reimbursement from the U.S. Treasury for Total column only and has not been distributed to each uncut sheets of Federal Reserve notes, gains-losses on the District. Accordingly, the sum of the Districts will not sale of Reserve Bank buildings, counterfeit currency that equal the Total column for this category or for Total net is not charged back to the depositing institution, and stale expenses, and New York will not sum to current net Reseve Bank checks that are written off. income. The effect of FASB 87 on the Reserve Banks was 6. For additional details, see the last four pages of a reduction in expenses of $83,146,723. the preceding section: Board of Governors, Financial 3. Includes distribution of costs for projects performed Statements. by one Bank for the benefit of one or more other Banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 257 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 1,702,042,008 854,455,675 2,607,521,232 557,174,495 308,340,773 610,062,390 872,905,600 2,279,853,211 11,254,137 4,472,899 16,210,524 4,176,758 1,888,462 3,944,925 4,907,714 14,131,763 23,177,649 34,233,757 46,416,592 10,301,032 11,858,119 14,698,435 27,748,498 51,912,037 5,912 5,670 359 239 81,619 1,209 5,674 8,421 34,437,698 38,712,326 62,627,475 14,478,029 13,828,199 18,644,569 32,661,885 66,052,221 (61,619) (119,710) (10,535) (551,842) (59,531) (170,160) (27,877) (122,504) 34,376,079 38,592,616 62,616,940 13,926,188 13,768,669 18,474,409 32,634,008 65,929,717 6,210,206 6,844,689 9,544,401 4,274,362 3,992,817 6,561,327 4,271,749 9,239,205 6,947,500 10,430,300 13,527,400 2,843,700 2,963,400 4,132,600 8,034,000 14,123,400 18,464,922 11,484,999 35,192,869 7,330,281 3,836,426 7,615,887 11,210,264 23,985,808 1,704,795,459 864,288,303 2,611,873,502 556,652,339 311,316,799 610,226,985 882,023,595 2,298,434,515 9,770,119 14,806,390 18,583,288 3,880,528 4,146,543 5,818,508 11,467,541 19,638,502 1,672,578,641 852,190,013 2,572,456,564 550,749,761 305,855,306 597,599,727 843,853,254 2,258,525,064 22,446,700 (2,708,100) 20,833,650 2,022,050 1,314,950 6,808,750 26,702,800 20,270,950 148,060,400 245,507,100 300,030,900 63,560,300 68,511,400 92,503,350 184,736,800 315,377,100 170,507,100 242,799,000 320,864,550 65,582,350 69,826,350 99,312,100 211,439,600 335,648,050 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

258 78th Annual Report, 1991 7. Income and Expenses of Federal Reserve Banks, 1914-91l 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 ^,673,446 594,818 1920 181,296,711 27,548,505 -3,743,907 709,525 1921 122,865,866 33,722,409 -6,314,796 741,436 1922 50,498,699 28,836,504 -4,441,914 722,545 1923 50,708,566 29,061,539 -8,233,107 702,634 1924 38,340,449 27,767,886 -6,191,143 663,240 1925 41,800,706 26,818,664 -4,823,477 709,499 1926 47,599,595 24,914,037 -3,637,668 721,724 1,714,421 1927 43,024,484 24,894,487 -2,456,792 779,116 1,844,840 1928 64,052,860 25,401,233 -5,026,029 697,677 805,900 1929 70,955,496 25,810,067 -4,861,642 781,644 3,099,402 1930 36,424,044 25,357,611 -93,136 809,585 2,175,530 1931 29,701,279 24,842,964 311,451 718,554 1,479,146 1932 50,018,817 24,456,755 -1,413,192 728,810 1,105,816 1933 49,487,318 25,917,847 -12,307,074 800,160 2,504,830 1934 48,902,813 26,843,653 -4,430,008 1,372,022 1,025,721 1935 42,751,959 28,694,965 -1,736,758 1,405,898 1,476,580 1936 37,900,639 26,016,338 485,817 1,679,566 2,178,119 1937 41,233,135 25,294,835 -1,631,274 1,748,380 1,757,399 1938 36,261,428 25,556,949 2,232,134 1,724,924 1,629,735 1939 38,500,665 25,668,907 2,389,555 1,621,464 1,356,484 1940 43,537,805 25,950,946 11,487,697 1,704,011 1,510,520 1941 41,380,095 28,535,547 720,636 1,839,541 2,588,062 1942 52,662,704 32,051,226 -1,568,208 1,746,326 4,826,492 1943 69,305,715 35,793,816 23,768,282 2,415,630 5,336,118 1944 104,391,829 39,659,496 3,221,880 2,296,357 7,220,068 1945 142,209,546 41,666,453 -830,007 2,340,509 4,710,309 1946 150,385,033 50,493,246 -625,991 2,259,784 4,482,077 1947 158,655,566 58,191,428 1,973,001 2,639,667 4,561,880 1948 304,160,818 64,280,271 -34,317,947 3,243,670 5,186,247 1949 316,536,930 67,930,860 -12,122,274 3,242,500 6,304,316 1950 275,838,994 69,822,227 36,294,117 3,433,700 7,315,844 1951 394,656,072 83,792,676 -2,127,889 4,095,497 7,580,913 1952 456,060,260 92,051,063 1,583,988 4,121,602 8,521,426 1953 513,037,237 98,493,153 -1,058,993 4,099,800 10,922,067 1954 438,486,040 99,068,436 -133,641 4,174,600 6,489,895 1955 412,487,931 101,158,921 -265,456 4,194,100 4,707,002 1956 595,649,092 110,239,520 -23,436 5,339,800 5,603,176 1957 763,347,530 117,931,908 -7,140,914 7,507,900 6,374,195 1958 742,068,150 125,831,215 124,175 5,917,200 5,973,240 1959 886,226,116 131,848,023 98,247,253 6,470,600 6,384,083 1960 1,103,385,257 139,893,564 13,874,702 6,533,700 7,455,011 1961 941,648,170 148,253,719 3,481,628 6,265,100 6,755,756 1962 1,048,508,335 161,451,206 -55,779 6,654,900 8,030,028 1963 1,151,120,060 169,637,656 614,835 7,572,800 10,062,901 1964 1,343,747,303 171,511,018 725,948 8,655,200 17,229,671 1965 1,559,484,027 172,110,934 1,021,614 8,576,396 23,602,856 1966 1,908,499,896 178,212,045 996,230 9,021,600 20,167,481 1967 2,190,403,752 190,561,166 2,093,876 10,769,596 18,790,084 1968 2,764,445,943 207,677,768 8,519,996 14,198,198 20,474,404 1969 3,373,360,559 237,827,579 -557,553 15,020,084 22,125,657 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 259 7.—Continued Payments to U.S. Treasury Trail sferrfid Div p i a d i e d nds Franchise Under Fed In er te a r l e R st e s o e n rve (s Xt e oI c C U t s i I o uul n vrlpl vli 1 iu 3 s b) 1 ( t s o l e o c l s l t u o io r lv p n l l l u v 7 s U ) 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 '. '. '. 291,661 27,695 607,422 7,829,581 227,448 102,880 352,524 7,940,966 176,625 67,304 2,616,352 8,019,137 119,524 -419,140 1,862,433 8,110,462 24,579 -425,653 4,533,977 8,214,971 82,152 -54,456 17,617,358 8,429,936 141,465 -4,333 570,513 8,669,076 197,672 49,602 3,554,101 8,911,342 244,726 135,003 40,327,237 9,500,126 326,717 201,150 48,409,795 10,182,851 247,659 262,133 81,969,625 10,962,160 67,054 27,708 81,467,013 11,523,047 35,605 75,283,818 86,772 8,366,350 11,919,809 166,690,356 18,522,518 12,329,373 193,145,837 21,461,770 13,082,992 196,628,858 21,849,490 13,864,750 254,873,588 28,320,759 14,681,788 291,934,634 46,333,735 15,558,377 342,567,985 40,336,862 16,442,236 276,289,457 35,887,775 17,711,937 251,740,721 32,709,794 18,904,897 401,555,581 53,982,682 20,080,527 542,708,405 61,603,682 21,197,452 524,058,650 59,214,569 22,721,687 910,649,768 -93,600,791 23,948,225 896,816,359 42,613,100 25.569,541 687,393,382 70,892,300 27,412,241 799,365,981 45,538,200 28,912,019 879,685,219 55,864,300 30,781,548 1,582,118,614 -465,822,800 32,351,602 1,296,810,053 27,053,800 33,696,336 1,649,455,164 18,943,500 35,027,312 1,907,498,270 29,851,200 36,959,336 2,463,628,983 30,027,250 39,236,599 3,019,160,638 39,432,450 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

260 78th Annual Report, 1991 7. Income and Expenses of Federal Reserve Banks, 1914-91—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 1991 22,553,001,815 1,429,322,157 496,200,596 109,631,000 261,316,379 Total, 1914-91 306,789^65,773 21,853,044,903 5,992,537,781 1,573,977,608 2,596,878,123 Aggregate for each Bank, 1914-91 Boston 16,264,953,430 1,440,486,112 208,440,526 57,377,486 157,926,126 New York 93,387,502,883 4,331,691,989 1,629,214,138 412,102,586 718,017,914 Philadelphia 11,908,379,850 1,168,688,247 266,084,769 75,849,418 108,689,256 Cleveland 20,253,318,881 1,442,044,215 287,609,331 114,705,490 163,790,587 Richmond 24,398,593,168 1,735,274,160 347,089,590 84,821,676 237,382,718 Atlanta 13,091,540,927 1,937,332,109 553,832,021 123,782,760 145,070,727 Chicago 43,134,265,658 2,856,768,715 729,664,356 218,399,072 358,638,108 St. Louis 10,177,663,539 1,139,332,018 154,705,167 47,842,872 94,442,151 Minneapolis 5,541,631,415 1,025,919,831 186,939,633 46,707,415 44,603,140 Kansas City 12,771,936,223 1,405,226,579 243,179,019 66,217,009 116,419,895 Dallas 17,015,823,986 1,291,578,195 499,476,826 105,456,373 145,641,166 San Francisco 38,843,755,814 2,318,238,863 886,302,400 220,715,451 306,256,335 Total 306,789,3*5,773 21,853,044,9034 5,992,537,781 1,573,977,608 2,596,878,123 1. Details may not sum to totals because of rounding. capital of the Federal Deposit Insurance Corporation 2. For 1987 and subsequent years, includes the cost of (1934) and $3,657 net upon elimination of sec. 13b services provided to the Treasury by Federal Reserve surplus (1958); and was increased by transfer of Banks for which reimbursement was not received. $11,131,013 from reserves for contingencies (1945), leav- 3. The $2,551,844,799 transferred to surplus was re- ing a balance of $2,400,910,572 on Dec. 31,1990. duced 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 261 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 23,608,397,730 180,291,500 152,553,160 20,777,552,290 228,356,150 2,583,226,869 149,138300 2,188,893 281,009,629,148 (3,657) 2,780,200,949* 104,984,470 7,111,395 280,843 14,586,014,730 135,411 107,946,825 702,594,457 68,006,262 369,116 88,180,797,056 (433,412) 808,676,971 135,410,959 5,558,901 722,406 10,529,232,886 290,661 119,430,722 199,352,355 4,842,447 82,930 18,416,818,939 (9,906) 174,389,543 135,323,399 6,200,189 172,493 22,354,295,539 (71,517) 176,386,908 188,909,204 8,950,561 79,264 10,975,794,021 5,491 248,065,540 351,031,319 25,313,526 151,045 39,693,584,132 11,682 336,193,304 9,997,418 2,755,629 7,464 8,885,976,666 (26,515) 70,722,978 73,058,447 5,202,900 55,615 4,449,687,355 64,874 73,703,563 106,452,553 6,939,100 64,213 11,194,234,390 (8,674) 103,452,050 163,819,096 560,049 102,083 15,581,044,712 55,337 215,717,078 342,293,191 7,697,341 101,421 36,162,148,720 (17,089) 345,515,467 2,583,226,869 149,13830 2,188,893 281,009,629,148 (3,657) 2,780,200,949 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

262 78th Annual Report, 1991 Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks and Branches, December 31, 1991l 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 82,486,486 5,582,111 110,142,098 89,218,858 Annex.. 27,840 125,317 44,538 197,695 167,185 NEW YORK. 3,436,277 116,649,642 21,735,584 141,821,503 122,920,203 Annex 447,863 1,136,219 745,855 2,359,936 706,862 Buffalo 887,844 3,118,698 2,471,014 6,477,557 3,474,280 PHILADELPHIA 2,251,556 53,271,757 5,903,704 61,427,017 44,271,308 CLEVELAND . 1,074,281 8,740,141 6,858,976 16,673,399 11,539,388 1,224,363 Cincinnati 2,246,599 13,942,719 7,623,142 23,812,459 12,021,662 Pittsburgh 1,658,376 8,574,545 4,230,643 14,463,564 10,739,757 RICHMOND. 5,237,036 58,593,682 14,420,091 78,250,809 54,293,182 Annex 572,128 3,725,466 3,924,584 8,222,179 4,631,774 Baltimore 6,476,335 26,879,073 3,842,189 37,197,597 30,457,607 Charlotte 3,129,645 27,402,251 4,698,497 35,230,393 33,403,463 ATLANTA... 1,209,360 12,241,666 4,319,451 17,770,477 13,597,584 13,072,919 Birmingham.. 3,197,830 1,905,770 1,072,438 6,176,039 4,205,538 Jacksonville.. 1,665,439 16,485,846 2,363,679 20,514,964 18,490,892 912,*813 Miami 3,767,616 11,995,766 2,223,399 17,986,781 14,087,994 Nashville .... 592,342 1,474,678 1,416,665 3,483,685 1,417,245 New Orleans. 3,087,693 3,330,539 1,575,492 7,993,725 5,162,943 292,710 CHICAGO. 4,511,942 107,526,660 17,197,585 129,236,187 102,856,819 Annex... 53,066 1,016,162 426,419 1,495,648 1,227,377 Detroit 797,734 4,857,747 5,062,528 10,718,009 8,581,301 ST. LOUIS. 700,378 14,340,398 5,298,206 20,338,982 17,404,159 Little Rock., 1,148,492 2,082,669 1,003,022 4,234,183 2,494,660 Louisville.. 700,075 2,870,836 1,131,238 4,702,149 3,332,679 Memphis 1,135,623 4,216,382 2,280,473 7,632,478 5,335,943 MINNEAPOLIS. 1,394,384 27,604,213 7,851,532 36,850,129 20,350,501 Helena 1,954,514 9,036,528 486,396 11,477,438 11,256,465 KANSAS CITY. 1,798,804 16,351,116 11,707,026 29,856,947 22,803,073 149,948 Denver 3,187,962 4,507,028 3,711,037 11,406,027 8,734,962 Oklahoma City.. 646,386 3,644,075 2,182,552 6,473,013 4,218,228 Omaha 6,534,583 11,102,353 1,401,083 19,038,019 17,461,651 1,100,000 DALLAS 33,352,767 93,555,687 3,737,706 130,646,160 128,251,554 El Paso 262,477 1,566,054 404,946 2,233,478 2,036,401 Houston 2,205,500 3,490,638 1,112,539 6,808,677 6,401,785 San Antonio . 482,284 2,969,399 1,183,116 4,634,799 3,771,644 SAN FRANCISCO. 15,541,937 67,394,008 17,581,323 100,517,269 79,647,327 Los Angeles 3,891,887 50,604,257 8,398,066 62,894,210 55,810,304 Portland 415,924 4,174,067 1,128,105 5,718,096 4,776,887 Salt Lake City 480,222 4,190,703 1,458,650 6,129,575 3,408,941 Seattle 324,772 2,653,881 1,899,563 4,878,215 2,902,369 Total 144,591,273 891,835,123 191,695,166 1,228,121,5<>3 987,872,757 16,752,753 1. Details may not sum to totals because of rounding. 4. Covers acquisitions for banking-house purposes 2. Includes expenditures for construction at some and bank premises formerly occupied and being held offices, pending allocation to appropriate accounts. pending sale. 3. Excludes charge-offs of $17,698,968 before 1952. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 263 9. Operations in Principal Departments of Federal Reserve Banks, 1988-91 Operation 1991 1990 1989 1988 Millions of pieces (except as noted) Loans (thousands) 11 15 22 22 Currency received and counted 19,711 19,462 19,857 17,580 Currency verified and destroyed 6,254 6,561 6,319 5,910 Coin received and counted 9,462 12,072 12,668 17,137 Checks handled U.S. government checks 503 547 541 547 Postal money orders 166 162 147 144 All other 18,743 18,595 18,014 17,623 Issues, redemptions, and exchanges of U.S. Treasury and federal agency securitiesl 52 44 40 186 Transfer of funds 65 63 60 56 Automated clearinghouse transactions Commercial2 1,119 915 741 602 Government 521 520 441 408 Food stamps redeemed 3,439 2,875 2,334 2,327 Millions of dollars Loans 64,597 194,538 229,358 537,952 Currency received and counted 265,473 252,430 246,598 195,647 Currency verified and destroyed 77,496 65,863 59,985 47,184 Coin received and counted 1,354 1,734 1,828 3,684 Checks handled U.S. government checks 610,106 623,008 635,064 608,307 Postal money orders 17,716 16,485 14,284 13,189 All other 12,164,175 12,514,201 12,321,576 11,789,787 Issues, redemptions, and exchanges of U.S. Treasury and federal agency securities! 119,114,811 102,332,172 98,130,603 89,516,419 Transfer of funds 192,254,895 199,067,200 182,575,303 160,730,050 Automated clearinghouse transactions Commercial2 6,188,185 4,173,667 3,840,462 3,372,615 Government 723,426 486,809 391,463 n.a. Food stamps redeemed 17,888 14,517 11,714 10,748 1. Agents' savings bonds transactions are not included 2. Data for years preceding 1991 do not include items after 1988 and are small in dollar amount. sent to the Reserve Banks by the New York Automated Clearing House. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

264 78th Annual Report, 1991 10. Federal Reserve Bank Interest Rates, December 31, 1991 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.. 3.5 3.5 4.85 1. Adjustment credit is available on a short-term basis sources, when exceptional circumstances or practices into help depository institutions meet temporary needs for volve only a particular institution or when an institution is funds that cannot be met through reasonable alternative 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 move- the first business day of each two-week reserve maintement in their deposits and loans. nance period. At the discretion of the Federal Reserve See section 201.3(b)(l) of Regulation A. Bank, the time period for which the basic discount rate is 2. Extended credit is available to depository institutions, applied may 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 265 11. Reserve Requirements of Depository Institutionsl Requirements Type of deposit2 Percent of deposits Effective date Net transaction accounts3 $0 million-$42.2 million 3 12/17/91 More than $42.2 million 12 12/17/91 Nonpersonal time deposits4 0 12/27/90 Eurocurrency liabilities5 0 12/27/90 1. Reserve requirements in effect on Dec. 31, 1991. transfers in excess of three per month for the purpose of Required reserves must be held in the form of deposits making payments to third persons or others. However, with Federal Reserve Banks or vault cash. Nonmember money market deposit accounts (MMDAs) and similar institutions may maintain reserve balances with a Federal accounts subject to the rules that permit no more than six Reserve Bank indirectly on a pass-through basis with preauthorized, automatic, or other transfers per month, of certain approved institutions. For previous reserve re- which no more than three can be checks, are not transacquirements, see earlier editions of the Annual Report or tion accounts (such accounts are savings deposits). the Federal Reserve Bulletin. Under provisions of the The Monetary Control Act of 1980 requires that the Monetary Control Act, depository institutions include amount of transaction accounts against which the 3 percommercial banks, mutual savings banks, savings and cent reserve requirement applies be modified annually by loan associations, credit unions, agencies and branches of 80 percent of the percentage change in transaction acforeign banks, and Edge corporations. counts held by all depository institutions, determined as 2. The Garn-St Germain Depository Institutions Act of June 30 each year. Effective Dec. 17, 1991 for instituof 1982 (Public Law 97-320) requires that $2 million of tions reporting quarterly and Dec. 24, 1991 for institureservable liabilities of each depository institution be tions reporting weekly, the amount was increased from subject to a zero percent reserve requirement. The Board $41.1 million to $42.2 million. is to adjust the amount of reservable liabilities subject to 4. For institutions that report weekly, the reserve rethis zero percent reserve requirement each year for the quirement on nonpersonal time deposits with an original succeeding calendar year by 80 percent of the percentage maturity of less than \xh years was reduced from 3 perincrease in the total reservable liabilities of all depository cent to \xh percent for the maintenance period that began institutions measured on an annual basis as of June 30. Dec. 13,1990, and to zero for the maintenance period that No corresponding adjustment is to be made in the event began Dec. 27,1990. The reserve requirement on nonperof a decrease. On Dec. 17, 1991, the exemption was sonal time deposits with an original maturity of Wi years raised from $3.4 million to $3.6 million. The exemption or more has been zero since Oct. 6,1983. applies in the following order: (1) net negotiable order of For institutions that report quarterly, the reserve rewithdrawal (NOW) accounts (NOW accounts less allow- quirement on nonpersonal time deposits with an original able deductions); and (2) net other transaction accounts. maturity of less than \xh years was reduced from 3 per- The exemption applies only to accounts that would be cent to zero on Jan. 17,1991. subject to a 3 percent reserve requirement. 5. The reserve requirement on Euroccurency liabilities 3. Transaction accounts include all deposits against was reduced from 3 percent to zero in the same manner which the account holder is permitted to make withdraw- and on the same dates as were the reserve requirement on als by negotiable or transferable instruments, payment nonpersonal time deposits with an original maturity of orders of withdrawal, and telephone and preauthorized less than 1 xh years (see note 4). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

266 78th Annual Report, 1991 12. Initial Margin Requirements under Regulations T, U, G, and X1 Percent of market value Effective date M st a o r c g k i s n Con b v o e n r d t s ible Sh T or o t n s l a y l 2 es, 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 nors pursuant to the Securities Exchange Act of 1934, option. On Sept. 30, 1985, the Board changed the relimit the amount of credit to purchase and carry "margin quired margin on individual stock options, allowing it to securities" (as defined in the regulations) when such be the same as the option maintenance margin required credit is collateralized by securities. Margin requirements by the appropriate exchange or self-regulatory organizaon securities other than options are the difference between tion; such maintenance margin rules must be approved by the market value (100 percent) and the maximum loan the Securities and Exchange Commission. Effective June value of collateral as prescribed by the Board. Regulation 6, 1988, the SEC approved new maintenance margin T was adopted effective Oct. 15, 1934; Regulation U, rules, permitting margins to be the current market value effective May 1, 1936; Regulation G, effective Mar. 11, of the option plus 20 percent of the market value of the 1968; and Regulation X, effective Nov. 1, 1971. stock underlying the option. On Jan. 1,1977, the Board of Governors for the first time 2. From Oct. 1,1934, to Oct. 31,1937, the requirement established in Regulation T the initial margin required was the margin "customarily required" by the brokers for writing options on securities, setting it at 30 percent of and dealers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 267 13. Principal Assets and Liabilities and Number of Insured Commercial Banks, by Class of Bank, June 30, 1991 and 1990l Asset and liability items shown in millions of dollars Member banks Nonmember Item Total banks Total National State June 30, 1991 Loans and investments 2,445,569 1,775,046 1,436,507 338,539 670,523 Gross loans 1,849,239 1,368,963 1,121,475 247,488 480,276 Net loans 1,838,524 1,361,764 1,115,632 246,132 476,760 Investments 596,329 406,083 315,032 91,051 190,247 U.S. Treasury and federal agency securities 453,603 310,807 244,450 66,358 142,796 Other 142,726 95,275 70,582 24,693 47,451 Cash assets, total 191,511 146,926 120,060 26,866 44,585 Deposits, total 2,294,434 1,645,777 1,342,201 303,576 648,657 Interbank 44,983 38,152 29,260 8,892 6,830 Other transaction 604,021 444,565 360,293 84,272 159,456 Other nontransaction 1,868,424 1,316,613 1,080,761 235,852 551,811 Equity capital 221,969 157,296 123,644 33,651 64,674 Number of banks 12,090 4,893 3,907 986 7,197 June 30, 1990 Loans and investments 2,399,166 1,764,503 1,430,039 334,464 634,663 Gross loans 1,852,133 1,387,501 1,134,670 252,831 464,633 Net loans 1,839,702 1,378,895 1,127,766 251,129 460,807 Investments 547,033 377,002 295,369 81,633 170,031 U.S. Treasury and federal agency securities 398,815 274,656 218,919 55,738 124,159 Other 148,218 102,346 76,451 25,895 45,872 Cash assets, total 207,721 160,768 129,472 31,297 46,952 Deposits, total 2,224,783 1,607,654 1,314,183 293,471 617,128 Interbank 48,372 41,595 31,095 10,500 6,777 Other demand 590,962 435,794 352,426 83,368 155,168 Other time and savings 1,790,490 1,272,178 1,049,994 222,184 518,312 Equity capital 212,001 150,827 119,371 31,456 61,175 Number of banks 12,439 5,065 4,049 1,016 7,374 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

268 78th Annual Report, 1991 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-91, and Month-End 1991l Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasury and cial Treafederal agency securities draw- sury Period Other Gold ing curu H n e d l e d r Loans Float2 ot A h l e l r3 R Fe e d se e r r v a e l Total stock5 c r e ig r h ti t f s - r o e u n t c - y Total o B u o t u ri g g h h t t r c e h p a u s r e - assets4 ic a a c t - e s i ta n n g d 6 agree- count ment 1918 239 239 0 1,766 199 294 0 2,498 2,873 1,795 1919 300 300 0 2,215 201 575 0 3,292 2,707 1,707 1920 287 287 0 2,687 119 262 0 3,355 2,639 1,709 1921 234 234 0 1,144 40 146 0 1,563 3,373 1,842 1922 436 436 0 618 78 273 0 1,405 3,642 1,958 1923 134 80 54 723 27 355 0 1,238 3,957 2,009 1924 540 536 4 320 52 390 0 1,302 4,212 2,025 1925 375 367 8 643 63 378 0 1,459 4,112 1,977 1926 315 312 3 637 45 384 0 1,381 4,205 1,991 1927 617 560 57 582 63 393 0 1,655 4,092 2,006 1928 228 197 31 1,056 24 500 0 1,809 3,854 2,012 1929 511 488 23 632 34 405 0 1,583 3,997 2,022 1930 739 686 43 251 21 372 0 1,373 4,306 2,027 1931 817 775 42 638 20 378 0 1,853 4,173 2,035 1932 1,855 1,851 4 235 14 41 0 2,145 4,226 2,204 1933 2,437 2,435 2 98 15 137 0 2,688 4,036 2,303 1934 2,430 2,430 0 7 5 21 0 2,463 8,238 2,511 1935 2,431 2,430 1 5 12 38 0 2,486 10,125 2,476 1936 2,430 2,430 0 3 39 28 0 2,500 11,258 2,532 1937 2,564 2,564 0 10 19 19 0 2,612 12,760 2,637 1938 2,564 2,564 0 4 17 16 0 2,601 14,512 2,798 1939 2,484 2,484 0 7 91 11 0 2,593 17,644 2,963 1940..... 2,184 2,184 0 3 80 8 0 2,274 21,995 3,087 1941 2,254 2,254 0 3 94 10 0 2,361 22,737 3,247 1942 6,189 6,189 0 6 471 14 0 6,679 22,726 3,648 1943 11,543 11,543 0 5 681 10 0 12,239 21,938 4,094 1944 18,846 18,846 0 80 815 4 0 19,745 20,619 4,131 1945 24,252 24,252 0 249 578 2 0 15,091 20,065 4,339 1946 23,350 23,350 0 163 580 1 0 24,093 20,529 4,562 1947 22,559 22,559 0 85 535 1 0 23,181 22,754 4,562 1948 23,333 23,333 0 223 541 1 0 24,097 24,244 4,589 1949 18,885 18,885 0 78 534 2 0 19,499 24,427 4,598 1950 20,778 20,725 53 67 1,368 3 0 22,216 22,706 4,636 1951 23,801 23,605 196 19 1,184 5 0 25,009 22,695 4,709 1952 24,697 24,034 663 156 967 4 0 25,825 23,187 4,812 1953 25,916 25,318 598 28 935 2 0 26,880 22,030 4,894 1954 24,932 24,888 44 143 808 1 0 25,885 21,713 4,985 1955 24,785 24,391 394 108 1,585 29 0 26,507 21,690 5,008 1956 24,915 24,610 305 50 1,665 70 0 26,699 21,949 5,066 1957 24,238 23,719 519 55 1,424 66 0 25,784 22,781 5,146 1958 26,347 26,252 95 64 1,296 49 0 27,755 20,534 5,234 1959 26,648 26,607 41 458 1,590 75 0 28,771 19,456 5,311 1960 27,384 26,984 400 33 1,847 74 0 29,338 17,767 5,398 1961 28,881 30,478 159 130 2,300 51 0 31,362 16,889 5,585 1962 30,820 28,722 342 38 2,903 110 0 33,871 15,978 5,567 1963 33,593 33,582 11 63 2,600 162 0 36,418 15,513 5,578 1964 37,044 36,506 538 186 2,606 94 0 39,930 15,388 5,405 Digitized for FRASER For notes see last two oases of table. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 269 14.—Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with Federal Reserve Banks Other Cur- Re- Trea- Other Federal rency quired sury Federal Reserve in clearcash Reserve liacir- ing With Curhold- ac- bilities c t u io la n - ings7 T s r u e r a y - F ei o g r n - Other counts4 bal- ca a p n it d al4 R F B e e a d s n e e r k r v a s e l r c e a o n n i c n d y 9 qu R ir e e - d 1( ce E s x s - 10 4,951 288 51 96 25 118 0 0 1,636 0 1,585 51 5,091 385 51 73 28 208 0 0 1,890 0 1,822 68 5,325 218 57 5 18 298 0 0 1,781 0 0 0 4,403 214 96 12 15 285 0 0 1,753 0 1,654 99 4,530 225 11 3 26 276 0 0 1,934 0 0 0 4,757 213 38 4 19 275 0 0 1,898 0 1,884 14 4,760 211 51 19 20 258 0 0 2,220 0 2,161 59 4,817 203 16 8 21 272 0 0 2,212 0 2,256 -44 4,808 201 17 46 19 293 0 0 2,194 0 2.250 -56 4,716 208 18 5 21 301 0 0 2,487 0 2,424 63 4,686 202 23 6 21 348 0 0 2,389 0 2,430 -41 4,578 216 29 6 24 393 0 0 2,355 0 2,428 -73 4,603 211 19 6 22 375 0 0 2,471 0 2,375 96 5,360 222 54 79 31 354 0 0 1,961 0 1,994 -33 5,388 272 8 19 24 355 0 0 2,509 0 1,933 576 5,519 284 3 4 128 360 0 0 2,729 0 1,870 859 5,536 3,029 121 20 169 241 0 0 4,096 0 2,282 1,814 5,882 2,566 544 29 226 253 0 0 5,587 0 2,743 2,844 6,543 2,376 244 99 160 261 0 0 6,606 0 4,622 1,984 6,550 3,619 142 172 235 263 0 0 7,027 0 5,815 1,212 6,856 2,706 923 199 242 260 0 0 8,724 0 5,519 3,205 7,598 2,409 634 397 256 251 0 0 11,653 0 6,444 5,209 8,732 2,213 368 1,133 599 284 0 0 4,026 0 7,411 6,615 11,160 2,215 867 774 586 291 0 0 12,450 0 9,365 3,085 15,410 2,193 799 793 485 256 0 0 13,117 0 11,129 1,988 20,499 2,303 579 1,360 356 339 0 0 12,886 0 11,650 1,236 25,307 2,375 440 1,204 394 402 0 0 14,373 0 12,748 1,625 28,515 2,287 977 862 446 495 0 0 15,915 0 14,457 1,458 28,952 2,272 393 508 314 607 0 0 16,139 0 15,577 562 28,868 1,336 870 392 569 563 0 0 17,899 0 16,400 1,499 28,224 1,325 1,123 642 547 590 0 0 20,479 0 19,277 1,202 27,600 1,312 821 767 750 106 0 0 16,568 0 15,550 1,018 27,741 1,293 668 895 565 714 0 0 17,681 0 16,509 1,172 29,206 1,270 247 526 363 746 0 0 20,056 0 19,667 389 30,433 1,270 389 550 455 111 0 0 19,950 0 20,520 -570 30,781 761 346 423 493 839 0 0 20,160 0 19,397 763 30,509 796 563 490 441 907 0 0 18,876 0 18,618 258 31,158 767 394 402 554 925 0 0 19,005 0 18,903 102 31,790 775 441 322 426 901 0 0 19,059 0 19,089 -30 31,834 761 481 356 246 998 0 0 19,034 0 19,091 -57 32,193 683 358 272 391 1,122 0 0 18,504 0 18,574 -70 32,591 391 504 345 694 841 0 0 18,174 310 18,619 -135 32,869 377 485 217 533 941 0 0 17,081 2,544 18,988 637 33,918 422 465 279 320 1,044 0 0 17,387 2,544 18,988 96 35,338 380 597 247 393 1,007 0 0 17,454 3,262 20,071 645 37,692 361 880 171 291 1,065 0 0 17,049 4,099 20,677 471 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

270 78th Annual Report, 1991 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-91 and Month-End 1991x—Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasury and cial Treafederal agency securities draw- sury Period Other Gold ing curu H n e d l e d r Loans Float2 ot A he ll r3 R F e e s d e e r r v a e l Total stock5 c ri e g r h ti t f s - r o en u c t- y Total 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- count ment 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 259,786 241,432 18,354 190 2,566 0 39,880 302,421 11,058 10,018 20,404 1991 288,429 272,531 15,898 218 1,026 0 34,524 324,197 11,059 10,018 21,038 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, 1941- directly by the Treasury. The largest components are 1970 (Board of Governors of the Federal Reserve Sys- fractional and dollar coins. For details see "Currency and tem, 1976), pp. 507-23. Components may not sum 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 in concept; see Federal Reserve Bulletin, vol. 47 (Febru- to the Reserve Bank. ary 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, 10. Estimated through 1958. Before 1929, data were and was reported as "Other Federal Reserve accounts"; available only on call dates (in 1920 and 1922 the call thereafter, "Other Federal Reserve assets" and "Other dates were Dec. 29). Beginning on Sept. 12, 1968, the Federal Reserve liabilities and capital" are shown amount is based on close-of-business figures for the reseparately. serve period two weeks before the report date. 5. Before Jan. 30, 1934, includes gold held in Federal Reserve Banks and in circulation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 271 14.—Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with reserves 8 Federal Reserve Banks Other Cur- Re- Trea- Other Federal rency quired sury Federal Reserve in clearcash Reserve liacir- ing With Curhold- ac- bilities c t u io la n - ings7 T s r u e r a y - F ei o g r n - Other counts4 a b n a c l- es ca a p n it d al4 F R B e e a d s n e e k r r s a v l e r c e a o n n i c d n y 9 qu R i e r - ed 10 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 1,233 0 0 1,986 24,150 5,423 30,033 -460 61,068 460 2,020 294 999 0 0 2,131 27,788 5,743 32,496 1,035 66,516 345 1,855 325 840 0 0 2,143 25,647 6,216 32,044 9813 72,497 317 2,542 251 1,41914 0 0 2,669 27,060 6,781 35,268 -1,360 79,743 185 2,113 418 1,27514 0 0 2,935 25,843 7,370 37,011 -3,798 86,547 483 7,285 353 1,090 0 0 2,968 26,052 8,036 35,197 -1,10315 93,717 460 10,393 352 1,357 0 0 3,063 25,158 8,628 35,461 -1,535 103,811 392 7,114 379 1,187 0 0 3,292 26,870 9,421 37,615 -1,265 114,645 240 4,196 368 1,256 0 0 4,275 31,152 10,538 42,694 -893 125,600 494 4,075 429 1,412 0 0 4,957 29,792 11,429 44,217 -2,835 136,829 441 3,062 411 617 0 0 4,671 27,456 13,654 40,558 675 144,774 443 4,301 505 781 0 117 5,261 25,111 15,576 42,145 -1,442 154,908 429 5,033 328 1,033 0 436 4,990 26,053 16,666 41,391 1,328 171,935 479 3,661 191 851 0 1,013 5,392 20,413 17,821 39,179 -945 183,796 513 5,316 253 867 0 1,126 5,952 20,693 i ii i 197,488 550 9,351 480 1,041 0 1,490 5,940 27,141 211,995 447 7,588 287 917 0 1,812 6,088 46,295 230,205 454 5,313 244 1,027 0 1,687 7,129 40,097 I 247,649 395 8,656 347 548 0 1,605 7,683 37,742 n1.a. n.a. n1.a. 260,453 450 6,217 589 1,298 0 1,626 8,486 36,701 286,965 561 8,960 369 242 0 1,963 8,147 36,695 307,780 636 17,697 968 1,706 0 3,955 8,113 25,458 11. Beginning Dec. 1, 1966, includes federal agency 14. For the period before July 1973, includes certain obligations held under repurchase agreements and be- deposits of domestic nonmember banks and foreignginning Sept. 29, 1971, federal agency issues bought owned banking institutions held with member banks and outright. redeposited in full with Federal Reserve Banks in connec- 12. Beginning in 1969, includes securities loaned— tion with voluntary participation by nonmember institufully guaranteed by U.S. government securities pledged tions in the Federal Reserve System program of credit with Federal Reserve Banks—and excludes securities restraint. sold and scheduled to be bought back under matched As of Dec. 12,1974, the amount of voluntary nonmemsale-purchase transactions. ber bank and foreign-agency and branch deposits at Fed- 13. Beginning with week ending Nov. 15, 1972, in- eral Reserve Banks that are associated with marginal cludes $450 million of reserve deficiencies on which reserves are no longer reported. However, two amounts Federal Reserve Banks are allowed to waive penalties for are reported: (1) deposits voluntarily held as reserves by a transition period in connection with bank adaptation to agencies and branches of foreign banks operating in the Regulation J as amended, effective Nov. 9, 1972. Allow- United States and (2) Eurodollar liabilities. able deficiencies are as follows (beginning with first state- 15. Adjusted to include waivers of penalties for rement week of quarter, in millions): 1973—Ql, $279; Q2, serve deficiencies, in accordance with change in Board $172; Q3, $112; Q4, $84; 1974—Ql, $67; Q2, $58. The policy effective Nov. 19, 1975. transition period ended with the second quarter of 1974. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

272 78th Annual Report, 1991 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-91, and Month-End 19911—Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Sne- U.S. Treasury and cial Treafederal agency securities draw- sury Period ing cur- Total ou B t o r u ig g h h t t 12 r u c H e h n p e a d l u s e d e r r - Loans Float2 ot A h l e l r3 R F a O e e s d s s th e e e r e t r s v a r 4 e l Total s G to o c l k d 5 c r i e i c a g r a c t h t - i e f t - s s r i t o e n a u n n g t c d 6 - y agree- count ment 1991 Jan. .. 257,722 240,648 17,074 180 690 0 41,458 300,049 11,058 10,018 20,461 Feb. .. 259,012 242,978 16,034 506 684 0 38,706 298,907 11,058 10,018 20,519 Mar. .. 247,307 247,307 0 244 2,542 0 36,639 286,731 11,058 10,018 20,577 250,743 250,743 0 291 1,263 0 36,584 288,881 11,058 10,018 20,644 May '.'.254,324 254,324 0 205 503 0 36,166 291,199 11,057 10,018 20,697 June .. 255,136 253,697 1,439 1,479 280 0 34,992 291,887 11,062 10,018 20,752 July .. 257,137 257,137 0 574 1,006 0 35,014 293,731 11,062 10,018 20,783 Aug. .. 261,118 261,118 0 844 191 0 31,334 293,487 11,062 10,018 20,841 Sept. . 264,708 264,708 0 315 285 0 32,365 297,672 11,062 10,018 20,889 Oct. .. 273,834 265,101 8,733 153 798 0 32,765 307,549 11,059 10,018 20,940 Nov. .. 271,302 271,302 0 105 853 0 32,420 304,680 11,058 10,018 20,982 Dec. .. 288,429 272,531 15,898 218 1,026 0 34,524 324,197 11,059 10,018 21,038 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 273 14.—Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with Federal Reserve Banks Other reserves8 Cur- Re- Trea- Other Federal rency sury Federal quired Reserve in cash Reserve clear- liacir- hold- ac- ing bilities With Curc t u io la n - ings T s r u e r a y - F ei o g r n - O w t in hp cr r counts a b n a c l e - s ca a p n it d al4 F R B e e a d s n e e k r r s v al e r c e a o n n i c d n y 9 qu R ir e e - d10 ce E ss x 1 - 0'13 283,011 590 27,810 271 183 0 2,275 9,820 17,627 i k, 285,176 605 23,898 329 171 0 2,434 8,216 19,674 286,685 623 10,922 228 188 0 2,674 5,670 21,393 286,794 652 13,682 292 276 0 2,909 6,826 19,172 290,509 629 6,619 196 225 0 3,018 8,570 23,205 291,563 613 11,822 224 213 0 3,034 7,082 19,167 292,596 605 5,831 314 212 0 3,147 8,165 24,724 n.a. nI.a. nI.a. 294,892 605 6,745 256 219 0 3,165 8,729 20,798 293,512 607 7,928 385 283 0 3,177 9,522 24,228 296,522 631 18,111 223 213 0 3,310 8,354 22,203 301,817 636 6,317 346 221 0 3,795 10,156 23,450 307,780 636 17,697 968 1,706 0 3,955 8,113 25,458 f Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

274 78th Annual Report, 1991 15. Changes in Number of Banking Offices in the United States, 1991 * Commercial banks2 Mutual savings Type of office Total Member Nonmember and change Total Non- Non- Total National State Insured insured3 Insured insured Banks, Dec. 31, 1990... 13,032 12,669 5,040 3,986 1,054 7,356 273 363 Changes during 1991 New banks 105 102 39 31 8 63 0 3 Ceased banking operation -155 -136 -57 -49 -8 -67 -12 -19 Banks converted into branches -All ^08 -187 -151 -36 -221 0 -9 Other4 66 48 3 1 28 17 18 2 Net change -401 -394 -202 -35 -197 5 -7 -167 Banks, Dec. 31,1991 .. 12,631 12,275 4,838 1,019 7,159 278 356 3,819 Branches and additional offices, Dec. 31, 1990 54,191 51,305 33,270 27,365 5,905 17,928 107 2,886 Changes during 1991 De novo 2,694 2,480 1,595 1,375 220 881 214 Banks converted into branches 417 408 255 215 40 153 0 9 Discontinued -1,240 -1,164 -822 -692 -130 -340 -2 -76 Sale of branch 0 50 38 19 19 12 0 -50 Other4 79 130 663 244 419 -533 0 -51 Net change4 1,950 1,904 1,729 1,161 568 173 46 Branches and additional offices, Dec. 31,1991 ... 56,141 53,209 34,999 28,526 6,473 18,101 109 2,932 1. Preliminary. Final data will be available in the 3. As of Dec. 31, 1988, includes noninsured national Annual Statistical Digest, 1991, 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 275 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1991 Correction: On page 254 of the Board's 77th rized by the Bank Merger Act, to permit the Fed- Annual Report, 1990, the entry for the merger of eral Reserve System to act immediately to safe- Texas Bank with Citizens National Bank contains guard the depositors. an error. The entry should read: BASIS FOR APPROVAL BY THE FEDERAL RESERVE (2/1/91) Texas Bank, Weatherford, Texas to merge with Fleet Bank of Maine (Applicant) has assets of Citizens National Bank, Denton, Texas $1.8 billion and the Maine Savings Bank (Bank) has assets of $1.4 billion. The Maine Superintendent for the Bureau of Banking has recommended Isabella Bank and Trust, Mt Pleasant, Michi- immediate action by the Federal Reserve System gan to acquire certain assets and liabilities of the to prevent the probable failure of Bank. Beal City branch of First of America Bank, Mt. Pleasant, Michigan Dollar Savings and Trust Company, Young- SUMMARY REPORT BY THE ATTORNEY GENERAL stown, Ohio to acquire the assets and liabilities of (12/5/90) The McKinley Bank, Niles, Ohio The proposed transaction would not be significantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the BASIS FOR APPROVAL BY THE FEDERAL RESERVE competitive factors was dispensed with, as autho- (01/14/91) rized by the Bank Merger Act, to permit the Fed- Isabella Bank (Applicant) has assets of $183 mil- eral Reserve System to act immediately to safelion and the Beal City branch (Branch) has assets guard the depositors. of $3.9 million. Applicant and Branch operate in the same market. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (2/22/91) The banking factors and considerations relating Dollar Savings and Trust Company (Applicant) to the convenience and needs of the community has assets of $1.0 billion and The McKinley Bank are consistent with approval. (Bank) has assets of $66 million. The State of Ohio has recommended immediate action by the United New Mexico Bank at Albuquerque, Al- Federal Reserve System to prevent the probable buquerque, New Mexico to acquire the assets failure of Bank. and liabilities of American Bank, N.A., Rio Rancho, New Mexico Moorcroft State Bank, Moorcroft, Wyoming to SUMMARY REPORT BY THE ATTORNEY GENERAL acquire the assets and liabilities of The National No report received. Request for report on the Bank of Newcastle, Newcastle, Wyoming competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Fed- SUMMARY REPORT BY THE ATTORNEY GENERAL (1/24/91) eral Reserve System to act immediately to safe- The proposed transaction would not be signifiguard the depositors. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (1/25/91) (3/4/91) United New Mexico Bank (Applicant) has assets Moorcroft State Bank (Applicant) has assets of of $360 million and American Bank (Bank) has $11.0 million and The National Bank of Newcasassets of $22 million. The OCC has recommended tle (Bank) has assets of $20.5 million. Applicant immediate action by the Federal Reserve System and Bank do not operate in the same market. to prevent the probable failure of Bank. The banking factors and considerations relating to the convenience and needs of the community Fleet Bank of Maine, Portland, Maine to ac- are consistent with approval. quire the assets and liabilities of Maine Savings Bank, Portland, Maine Citizens Bank & Trust Company, Blackstone, SUMMARY REPORT BY THE ATTORNEY GENERAL Virginia to acquire the assets and liabilities of the No report received. Request for report on the Blackstone, Virginia, branch of First Colonial competitive factors was dispensed with, as autho- Savings Bank, Hopewell, Virginia Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

276 78th Annual Report, 1991 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1991—Continued SUMMARY REPORT BY THE ATTORNEY GENERAL of Commonwealth Federal Savings and Loan, (3/5/91) Fort Lauderdale, Florida through SouthTrust The proposed transaction would not be signifi- of Florida FSB, St. Petersburg, Florida cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/5/91) (3/8/91) The proposed transaction would not be signifi- Citizens Bank & Trust Company (Applicant) has cantly adverse to competition. assets of $122.6 million and the Blackstone BASIS FOR APPROVAL BY THE FEDERAL RESERVE branch (Branch) has assets of $8.7 million. Appli- (3/8/91) cant and Bank operate in the same market. SouthTrust Bank of Pinellas County (Applicant) The banking factors and considerations relating has assets of $252.3 million and Commonwealth to the convenience and needs of the community Federal Savings and Loan (Thrift) has assets of are consistent with approval. $33.1 million. Applicant and Thrift operate in the same market. First United Bank, Boca Raton, Florida to ac- The banking factors and considerations relating quire the assets and liabilities of First Marine to the convenience and needs of the community Bank of Florida, Palm City, Florida are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the UnionBank/Streator, Streator, Illinois to accompetitive factors was dispensed with, as authoquire the assets and liabilities of Ottawa National rized by the Bank Merger Act, to permit the Fed- Bank, Ottawa, Illinois eral Reserve System to act immediately to safeguard the depositors. SUMMARY REPORT BY THE ATTORNEY GENERAL (3/8/91) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (3/8/91) cantly adverse to competition. First United Bank (Applicant) has assets of BASIS FOR APPROVAL BY THE FEDERAL RESERVE $50.2 million and First Marine Bank of Florida (3/22/91) (Bank) has assets of $16.5 million. The Depart- UnionBank/Streator (Applicant) has assets of ment of Banking and Finance, State of Florida has $151.9 million and Ottawa National Bank (Bank) recommended immediate action by the Federal has assets of $54.9 million. Applicant and Bank Reserve System to prevent the probable failure of operate in the same market. Bank. The banking factors and considerations relating to the convenience and needs of the community The Peoples Bank, Pratt, Kansas to acquire the are consistent with approval. assets and liabilities of Sharon Valley State Bank, Sharon, Kansas Tiog State Bank, Spencer, New York to acquire SUMMARY REPORT BY THE ATTORNEY GENERAL (01/01/91) the assets and liabilities of the Waverly branch The proposed transaction would not be signifi- of Norstar Bank, N.A., Buffalo, New York cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (2/21/91) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (3/8/91) cantly adverse to competition. The Peoples Bank (Applicant) has assets of $134 million and Sharon Valley State Bank (Bank) BASIS FOR APPROVAL BY THE FEDERAL RESERVE (4/5/91) has assets of $6 million. Applicant and Bank do not operate in the same market. Tiog State Bank (Applicant) has assets of The banking factors and considerations relating $78.7 million and the Waverly branch (Branch) to the convenience and needs of the community has assets of $13.5 million. Applicant and Branch are consistent with approval. operate in the same market. The banking factors and considerations relating SouthTrust Bank of PineUas County, St. Peters- to the convenience and needs of the community burg, Florida to acquire the assets and liabilities are consistent with approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 277 16.—Continued Caliber Bank, Phoenix, Arizona to acquire the $15.9 million. Applicant and Branch operate in the assets and liabilities of the Phoenix and Mesa same market. Arizona branches of Arizona Commerce Bank, The banking factors and considerations relating Tucson, Arizona to the convenience and needs of the community are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the Vectra Bank, Denver, Colorado to merge with competitive factors was dispensed with, as autho- Columbine Valley Bank and Trust, Littleton, rized by the Bank Merger Act, to permit the Fed- Colorado eral Reserve System to act immediately to safeguard the depositors. SUMMARY REPORT BY THE ATTORNEY GENERAL (4/1/91) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (4/10/91) cantly adverse to competition. Caliber Bank (Applicant) has assets of $1.0 million and the Phoenix and Mesa Arizona branches BASIS FOR APPROVAL BY THE FEDERAL RESERVE (Branches) of Arizona Commerce Bank have (04/26/91) assets of $20.5 million. The State Banking Com- Vectra Bank (Applicant) has assets of $42.5 milmissioner has recommended immediate action by lion and Columbine Valley Bank and Trust (Bank) the Federal Reserve System to prevent the proba- has assets of $7.2 million. Applicant and Branch ble failure of Arizona Commerce Bank. operate in the same market. The banking factors and considerations relating Manufacturers Hanover Trust Company, New to the convenience and needs of the community York, New York to acquire the assets and liabili- are consistent with approval. ties of thirteen branches of Goldome, Buffalo, New York Signet Bank/Virginia, Richmond, Virginia to SUMMARY REPORT BY THE ATTORNEY GENERAL acquire the assets and liabilities of Madison (4/11/91) National Bank of Virginia, McLean, Virginia The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. No report received. Request for report on the BASIS FOR APPROVAL BY THE FEDERAL RESERVE competitive factors was dispensed with, as autho- (4/19/91) rized by the Bank Merger Act, to permit the Fed- Manufacturers Hanover Trust Company (Appli- eral Reserve System to act immediately to safecant) has assets of $58 billion and the thirteen guard the depositors. branches of Goldome (Branches) have assets of BASIS FOR APPROVAL BY THE FEDERAL RESERVE $1.5 billion. Applicant and Branches operate in (5/10/91) the same market. Signet Bank/Virginia (Applicant) has assets of The banking factors and considerations relating $8.2 billion and Madison National Bank of Virto the convenience and needs of the community ginia (Bank) has assets of $139.8 million. The are consistent with approval. OCC has recommended immediate action by the Federal Reserve System to prevent the probable Chemical Bank Bay Area, Bay City, Michigan failure of Bank. to acquire the assets and liabilities of the Marlette, Michigan, branch of First Federal Sav- Centura Bank, Rocky Mount, North Carolina ings Bank and Trust, Pontiac, Michigan from to acquire the assets and liabilities of the Wil- Old Kent Bank-Central, Owosso, Michigan mington, North Carolina, branch of Pioneer SUMMARY REPORT BY THE ATTORNEY GENERAL Savings Bank, Inc., Rocky Mount, North (4/19/91) Carolina The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. No report received. Request for report on the BASIS FOR APPROVAL BY THE FEDERAL RESERVE competitive factors was dispensed with, as autho- (4/23/91) rized by the Bank Merger Act, to permit the Fed- Chemical Bank (Applicant) has assets of $232 mil- eral Reserve System to act immediately to safelion and the Marlette branch (Branch) has assets of guard the depositors. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

278 78th Annual Report, 1991 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1991—Continued BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (5/17/91) (6/14/91) Centura Bank (Applicant) has assets of $2.3 bil- Chemical Bank Michigan (Applicant) has assets lion and the Wilmington branch (Branch) has of $147.7 million and the Harrison branch assets of $11.1 million. The RTC has recom- (Branch) has assets of $6.3 million. Applicant and mended immediate action by the Federal Reserve Branch operate in the same market. System to prevent probable failure of Pioneer Sav- The banking factors and considerations relating ings Bank. to the convenience and needs of the community are consistent with approval. Centura Bank, Rocky Mount, North Carolina to acquire the assets and liabilities of Watauga United Jersey Bank, Hackensack, New Jersey Savings and Loan Association, Inc., Boone, to acquire the assets and liabilities of the North North Carolina Arlington and Tenafly branches of Howard SUMMARY REPORT BY THE ATTORNEY GENERAL Savings Bank, Livingston, New Jersey (4/12/91) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (5/13/91) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (5/17/91) BASIS FOR APPROVAL BY THE FEDERAL RESERVE Centura Bank (Applicant) has assets of $2.3 bil- (6/28/91) lion and Watauga Savings and Loan (Thrift) has United Jersey Bank (Applicant) has assets of assets of $120.1 million. Applicant and Thrift do $6 billion and the North Arlington and Tenafly not operate in the same market. branches (Branches) have assets of $172 mil- The banking factors and considerations relating lion. Applicant and Branches operate in the same to the convenience and needs of the community market. are consistent with approval. The banking factors and considerations relating Manufacturers and Traders Trust Co., Buffalo, to the convenience and needs of the community New York to acquire the assets and liabilities of are consistent with approval. various branches of Goldome, Buffalo, New York Fleet Bank of Maine, Portland, Maine to ac- SUMMARY REPORT BY THE ATTORNEY GENERAL quire the assets and liabilities of New Maine (4/17/91) National Bank, Portland, Maine The proposed transaction would not be significantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (6/28/91) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (5/31/91) cantly adverse to competition. Manufacturers and Traders Trust Co. (Applicant) has assets of $5.3 billion and the Goldome BASIS FOR APPROVAL BY THE FEDERAL RESERVE branches (Branches) have assets of $1.9 bil- (7/1/91) lion. Applicant and Branches operate in the same Fleet Bank of Maine (Applicant) has assets of market. $2.8 billion and the New Maine National Bank The banking factors and considerations relating (Bank) has assets of $1.0 billion. Applicant and to the convenience and needs of the community Bank operate in the same market. The banking factors and considerations relating are consistent with approval. to the convenience and needs of the community Chemical Bank Michigan, Midland, Michigan are consistent with approval. to acquire the assets and liabilities of the Harrison, Michigan, office of Mutual Savings Bank, Crestar Bank, Richmond, Virginia to acquire FSB, Bay City, Michigan the assets and liabilities of the Heritage Federal Savings Bank, Richmond, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL (5/17/91) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- No report received. Request for report on the cantly adverse to competition. competitive factors was dispensed with, as autho- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 279 16.—Continued rized by the Bank Merger Act, to permit the Fed- Haygood and Kempsville branches of Atlantic eral Reserve System to act immediately to safe- Permanent, FSB, Norfolk, Virginia guard the depositors. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE No report received. Request for report on the (7/5/91) competitive factors was dispensed with, as autho- Crestar Bank (Applicant) has assets of $11.7 bil- rized by the Bank Merger Act, to permit the Fedlion and Heritage Federal Savings Bank (Bank) eral Reserve System to act immediately to safehas assets of $542 million. The RTC has recom- guard the depositors. mended immediate action by the Federal Reserve BASIS FOR APPROVAL BY THE FEDERAL RESERVE System to prevent the probable failure of Bank. (7/12/91) The Bank of Tidewater (Applicant) has assets of Fifth Third Bank, Cincinnati, Ohio, and Fifth $79.7 million and the Haygood and Kempsville Third Bank of Columbus, Ohio to acquire the branches (Branches) have assets of $24.4 million. assets and liabilities of nine branches of the The RTC has recommended immediate action by Chase Bank of Ohio, Columbus, Ohio the Federal Reserve System to prevent the proba- SUMMARY REPORT BY THE ATTORNEY GENERAL ble failure of Atlantic Permanent. (7/9/91) The proposed transaction would not be significantly adverse to competition. The Bank of New York, FSB, New York, New York to acquire the assets and liabilities of the BASIS FOR APPROVAL BY THE FEDERAL RESERVE Monsey branch of Ensign FSB, New York, (7/12/91) New York Fifth Third Bank of Cincinnati has assets of $4.5 billion and Fifth Third Bank of Columbus SUMMARY REPORT BY THE ATTORNEY GENERAL (Applicants) have assets of $422 million and the No report received. Request for report on the nine branches (Branches) have total assets of competitive factors was dispensed with, as autho- $225 million. Applicants and Branches operate in rized by the Bank Merger Act, to permit the Fedthe same market. eral Reserve System to act immediately to safe- The banking factors and considerations relating guard the depositors. to the convenience and needs of the community BASIS FOR APPROVAL BY THE FEDERAL RESERVE are consistent with approval. (7/19/91) The Bank of New York (Applicant) has assets of St. Bernard Bank & Trust Company, Arabi, $36.6 billion and the Monsey branch (Branch) has Louisiana to acquire the assets and liabilities of assets of $100 million. Applicant and Branch oper- Commonwealth Federal Savings Association, ate in the same market. The RTC has recom- New Orleans, Louisiana mended immediate action by the Federal Reserve SUMMARY REPORT BY THE ATTORNEY GENERAL System to prevent the probable failure of Ensign. No report received. Request for report on the competitive factors was dispensed with, as autho- Chemical Bank, New York, New York to acrized by the Bank Merger Act, to permit the Fedquire the assets and liabilities of nine New York eral Reserve System to act immediately to safe- City and two Westchester County, New York, guard the depositors. branches of Ensign FSB, New York, New York BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (7/12/91) No report received. Request for report on the St. Bernard Bank & Trust Company (Applicant) competitive factors was dispensed with, as authohas assets of $180.1 million and Commonwealth rized by the Bank Merger Act, to permit the Fed- Federal Savings Association (Thrift) has assets of eral Reserve System to act immediately to safe- $30.8 million. The RTC has recommended immeguard the depositors. diate action by the Federal Reserve System to prevent the probable failure of Thrift. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (7/19/91) The Bank of Tidewater, Virginia Beach, Vir- Chemical Bank (Applicant) has assets of $47.6 bilginia to acquire the assets and liabilities of the lion and the branches (Branches) have assets of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

280 78th Annual Report, 1991 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1991—Continued $588 million. The RTC has recommended imme- assets of $77.4 million. The OTS and RTC have diate action by the Federal Reserve System to recommended immediate action by the Federal prevent the probable failure of Ensign. Reserve System to prevent the probable failure of Bank. First State Bank, Beebe, Arkansas to acquire the assets and liabilities of the Indian Hills 1st United Bank, Boca Raton, Florida to acquire branch of First Savings of Arkansas, F.A., Little the assets and liabilities of Bank of South Palm Rock, Arkansas Beaches, Hypoluxo, Florida SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the No report received. Request for report on the competitive factors was dispensed with, as autho- competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Fed- rized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safe- eral Reserve System to act immediately to safeguard the depositors. guard the depositors. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (7/26/91) (8/9/91) First State Bank (Applicant) has assets of 1st United Bank (Applicant) has assets of $25.1 million and the Indian Hills Branch $65.5 million and Bank of South Palm Beaches (Branch) has assets of $13 million. The OTS has (Bank) has assets of $43.2 million. The Florida recommended immediate action by the Federal State Banking Commissioner has recommended Reserve System to prevent the probable failure of immediate action by the Federal Reserve System First Savings. to prevent the probable failure of Bank. Central Bank of Oklahoma City, Oklahoma Banco Popular de Puerto Rico, Hato Rey, City, Oklahoma to merge with Lakeshore Bank, Puerto Rico to acquire the assets and liabilities of N.A., Oklahoma City, Oklahoma a branch of The New York Capital Bank, N.A., SUMMARY REPORT BY THE ATTORNEY GENERAL New York, New York (6/12/91) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- No report received. Request for report on the cantly adverse to competition. competitive factors was dispensed with, as autho- BASIS FOR APPROVAL BY THE FEDERAL RESERVE rized by the Bank Merger Act, to permit the Fed- (8/1/91) eral Reserve System to act immediately to safe- Central Bank (Applicant) has assets of guard the depositors. Bank (Bank) has assets of $270.6 million. Applicant and Bank operate in the same market. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (8/13/91) The banking factors and considerations relating Banco Popular de Puerto Rico (Applicant) has to the convenience and needs of the community assets of $8.8 billion and the branch (Branch) has are consistent with approval. assets of $68 million. The OCC has recommended immediate action by the Federal Reserve System Central Bank, Monroe, Louisiana to acquire the to prevent the probable failure of The New York assets and liabilities of Homestead Savings Bank Capital Bank. SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the Citizens Fidelity Bank and Trust Company, competitive factors was dispensed with, as autho- Louisville, Kentucky to acquire the assets and rized by the Bank Merger Act, to permit the Fedliabilities of the main office and the Shively, eral Reserve System to act immediately to safe- Jeffersontown, Okolona/Highview, Highlands, guard the depositors. Fern Creek/Buechel, St. Matthews, Pleasure BASIS FOR APPROVAL BY THE FEDERAL RESERVE Ridge Park, and Middletown branches in (8/2/91) Louisville and the Glasgow and Tompkinsville, Central Bank (Applicant) has assets of $677.4 mil- Kentucky, branch offices of Future FSB, Louislion and Homestead Savings Bank (Bank) has ville, Kentucky Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 281 16.—Continued SUMMARY REPORT BY THE ATTORNEY GENERAL and liabilities of Peoples FSB, New Kensington, No report received. Request for report on the Pennsylvania through BT Interim FSB, competitive factors was dispensed with, as autho- Johnstown, Pennsylvania rized by the Bank Merger Act, to permit the Fed- SUMMARY REPORT BY THE ATTORNEY GENERAL eral Reserve System to act immediately to safe- No report received. Request for report on the guard the depositors. competitive factors was dispensed with, as autho- BASIS FOR APPROVAL BY THE FEDERAL RESERVE rized by the Bank Merger Act, to permit the Fed- (8/30/91) eral Reserve System to act immediately to safe- Citizens Fidelity Bank and Trust Company (Appli- guard the depositors. cant) has assets of $52 billion and the branches BASIS FOR APPROVAL BY THE FEDERAL RESERVE (Branches) have assets of $326 million. The RTC (9/6/91) has recommended immediate action by the Fed- Johnstown Bank and Trust Company (Applicant) eral Reserve System to prevent the probable failhas assets of $437.9 million and Peoples Federal ure of Future. Savings Bank (Bank) has assets of $97.1 million. The RTC has recommended immediate action by Trustco Bank New York, Schenectady, New the Federal Reserve System to prevent the proba- York to acquire the assets and liabilities of ble failure of Bank. Home & City Savings Bank, Albany, New York SUMMARY REPORT BY THE ATTORNEY GENERAL (06/03/91) Commercial Trust and Savings Bank, Mitchell, The proposed transaction would not be signifi- South Dakota to acquire the assets and liabilities cantly adverse to competition. of First FSB, Huron, South Dakota, through Mitchell Interim FSB, Mitchell, South Dakota BASIS FOR APPROVAL BY THE FEDERAL RESERVE (8/30/91) SUMMARY REPORT BY THE ATTORNEY GENERAL Trustco Bank New York (Applicant) has assets of No report received. Request for report on the $927 million and Home & City Savings Bank competitive factors was dispensed with, as autho- (Bank) has assets of $866 million. Applicant and rized by the Bank Merger Act, to permit the Fed- Bank operate in the same market. eral Reserve System to act immediately to safe- The banking factors and considerations relating guard the depositors. to the convenience and needs of the community BASIS FOR APPROVAL BY THE FEDERAL RESERVE are consistent with approval. (9/13/91) Commercial Trust and Savings Bank (Applicant) Premier Bank (formerly Bank of Shawsville), has assets of $140.9 million and First FSB (Bank) Shawsville, Virginia to acquire the assets and has assets of $26.4 million. The OTS and RTC liabilities of Bank of Speedwell, Speedwell, have recommended immediate action by the Fed- Virginia eral Reserve System to prevent the probable fail- SUMMARY REPORT BY THE ATTORNEY GENERAL ure of Bank. (8/16/91) The proposed transaction would not be signifi- Hand County State Bank, Miller, South Dakota cantly adverse to competition. to acquire the assets and liabilities of Miller BASIS FOR APPROVAL BY THE FEDERAL RESERVE Savings, Miller, South Dakota (9/6/91) Premier Bank (Applicant) has assets of $42 mil- SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the lion and Bank of Speedwell (Bank) has assets of competitive factors was dispensed with, as autho- $105 million. Applicant and Bank operate in the rized by the Bank Merger Act, to permit the Fedsame market. eral Reserve System to act immediately to safe- The banking factors and considerations relating guard the depositors. to the convenience and needs of the community are consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (9/13/91) Johnstown Bank and Trust Company, Hand County State Bank (Applicant) has assets of Johnstown, Pennsylvania to acquire the assets $44.8 million and Miller Savings (Bank) has assets Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

282 78th Annual Report, 1991 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1991—Continued of $5.4 million. The OTS and RTC have recom- eral Reserve System to act immediately to safemended immediate action by the Federal Reserve guard the depositors. System to prevent the probable failure of Bank. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (9/20/91) Pioneer Bank of Longmont, Longmont, Colo- Crestar Bank (Applicant) has assets of $10.3 bilrado to acquire the assets and liabilities of First lion and United FSB (Bank) has assets of America Federal Savings Bank, Longmont, $272 million. The RTC has recommended imme- Colorado diate action by the Federal Reserve System to prevent the probable failure of Bank. SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the competitive factors was dispensed with, as autho- Marine Bank of Springfield, Springfield, Illirized by the Bank Merger Act, to permit the Fed- nois to acquire the assets and liabilities of the eral Reserve System to act immediately to safe- Taylorsville branch of United Savings Associaguard the depositors. tion of America, Chicago, Illinois BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the (9/13/91) competitive factors was dispensed with, as autho- Pioneer Bank of Longmont (Applicant) has assets rized by the Bank Merger Act, to permit the Fedof $24.2 million and First America Federal Saveral Reserve System to act immediately to safeings Bank (Bank) has assets of $10.7 million. The guard the depositors. RTC has recommended immediate action by the Federal Reserve System to prevent the probable BASIS FOR APPROVAL BY THE FEDERAL RESERVE failure of Bank. (9/27/91) Marine Bank of Springfield (Applicant) has assets of $694.4 million and the Taylorsville branch Farmers & Merchants Bank, Huron, South Da- (Branch) has assets of $31.4 million. The OTS has kota to acquire the assets and liabilities of Farmrecommended immediate action by the Federal ers & Merchants Savings Bank, FSB, Huron, Reserve System to prevent the probable failure of South Dakota United. SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the Ireland Bank, Malad City, Idaho to acquire the competitive factors was dispensed with, as authoassets and liabilities of the Soda Springs, Grace, rized by the Bank Merger Act, to permit the Fedand Lava Hot Springs branches of Security eral Reserve System to act immediately to safe- State Bank, Soda Springs, Idaho guard the depositors. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (8/2/91) (9/13/91) The proposed transaction would not be signifi- Farmers & Merchants Bank (Applicant) has assets cantly adverse to competition. of $143 million and Fanners & Merchants Savings Bank (Bank) has assets of $3.7 million. The OTS BASIS FOR APPROVAL BY THE FEDERAL RESERVE and RTC have recommended immediate action by (10/4/91) the Federal Reserve System to prevent the proba- Ireland Bank (Applicant) has assets of $42 million ble failure of Bank. and the branches (Branches) have assets of $14 million. Applicant and Branches operate in the same market. Crestar Bank, Richmond, Virginia to acquire The banking factors and considerations relating the assets and liabilities of United FSB, Vienna, to the convenience and needs of the community Virginia through CRFC Interim FSB, Rich- are consistent with approval. mond, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL Beaver Trust Company, Beaver, Pennsylvania No report received. Request for report on the to merge with Colony FSB, Wexford, Penncompetitive factors was dispensed with, as autho- sylvania through Interim FSB, New Castle, rized by the Bank Merger Act, to permit the Fed- Pennsylvania Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 283 16.—Continued SUMMARY REPORT BY THE ATTORNEY GENERAL Chemical Bank, New York, New York to ac- No report received. Request for report on the quire the assets and liabilities of Community competitive factors was dispensed with, as autho- National Bank & Trust Company of New York, rized by the Bank Merger Act, to permit the Fed- Staten Island, New York eral Reserve system to act immediately to safe- SUMMARY REPORT BY THE ATTORNEY GENERAL guard the depositors. No report received. Request for report on the BASIS FOR APPROVAL BY THE FEDERAL RESERVE competitive factors was dispensed with, as autho- (10/11/91) rized by the Bank Merger Act, to permit the Fed- Beaver Trust Company (Applicant) has assets of eral Reserve System to act immediately to safe- $285 million and Colony FSB (Bank) has assets of guard the depositors. $222 million. The OTS and RTC have recom- BASIS FOR APPROVAL BY THE FEDERAL RESERVE mended immediate action by the Federal Reserve (11/8/91) System to prevent the probable failure of Bank. Chemical Bank (Applicant) has assets of $47.6 billion and Community National Bank & Trust Company of New York (Bank) has assets of $322 mil- SouthTrust Bank of Pinellas County, St. Peterslion. The OCC has recommended immediate burg, Florida to acquire the assets and liabilities action by the Federal Reserve system to prevent of a branch of Florida Bank of Commerce, the probable failure of Bank. Clearwater, Florida SUMMARY REPORT BY THE ATTORNEY GENERAL The Provident Bank, Cincinnati, Ohio to merge (10/11/91) with Hunter Savings Association, Cincinnati, The proposed transaction would not be signifi- Ohio cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (9/13/91) BASIS FOR APPROVAL BY THE FEDERAL RESERVE (10/30/91) The proposed transaction would not be signifi- SouthTrust Bank of Pinellas County (Applicant) cantly adverse to competition. has assets of $257.2 million and the branch BASIS FOR APPROVAL BY THE FEDERAL RESERVE (Branch) has assets of $18.0 million. Applicant (11/13/91) and Branch operate in the same market. The Provident Bank (Applicant) has assets of The banking factors and considerations relating $22 billion and Hunter Savings Association to the convenience and needs of the community (Thrift) has assets of $1.0 billion. Applicant and are consistent with approval. Thrift operate in the same market. The banking factors and considerations relating to the convenience and needs of the community Centura Bank, Rocky Mount, North Carolina are consistent with approval. to acquire the assets and liabilities of Citizens Federal Savings and Loan Association, Ruther- Clifton Trust Bank, Cockeysville, Maryland to fordton, North Carolina, through Centura merge with The Commercial Bank, Bel Air, Interim Bank, Rutherfordton, North Carolina Maryland SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (10/4/91) (10/18/91) The proposed transaction would not be signifi- The proposed transaction would not be significantly adverse to competition. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11/1/91) (11/13/91) Centura Bank (Applicant) has assets of $2.2 bil- Clifton Trust Bank (Applicant) has assets of lion and Citizens Federal Savings and Loan Asso- $66 million and Commercial Bank (Bank) has ciation (Thrift) has assets of $79.2 million. Appli- assets of $215 million. Applicant and Bank opercant and Thrift operate in the same market. ate in the same market. The banking factors and considerations relating The banking factors and considerations relating to the convenience and needs of the community to the convenience and needs of the community are consistent with approval. are consistent with approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

284 78th Annual Report, 1991 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1991—Continued Johnstown Bank and Trust Company, The banking factors and considerations relating Johnstown, Pennsylvania to acquire the assets to the convenience and needs of the community and liabilities of Somerset branch of Atlantic are consistent with approval. Financial Savings, FA, Bala Cynwyd, Pennsylvania, through BT Interim FSB, Johnstown, Fifth Third Bank of Columbus to acquire the Pennsylvania assets and liabilities of one branch office of Chase Bank of Ohio, Columbus, Ohio SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the SUMMARY REPORT BY THE ATTORNEY GENERAL competitive factors was dispensed with, as autho- (10/16/91) rized by the Bank Merger Act, to permit the Fed- The proposed transaction would not be signifieral Reserve System to act immediately to safe- cantly adverse to competition. guard the depositors. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11/19/91) (11/15/91) Fifth Third Bank (Applicant) has assets of Johnstown Bank and Trust Company (Applicant) $441.9 million and the branch (Branch) has assets has assets of $516.3 million and the branch of $58.7 million. Applicant and Branch operate in (Branch) has assets of $26.2 million. The RTC has the same market. recommended immediate action by the Federal The banking factors and considerations relating Reserve System to prevent the probable failure of to the convenience and needs of the community Atlantic Financial. are consistent with approval. First State Bank of Taos, Taos, New Mexico to 1st Source Bank, South Bend, Indiana to acmerge with National Bank of Albuquerque, quire the assets and liabilities of the LaPaz Albuquerque, New Mexico branch, LaPaz, Indiana, of Norcen Bank, Culver, Indiana SUMMARY REPORT BY THE ATTORNEY GENERAL (9/27/91) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (10/4/91) cantly adverse to competition. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11/15/91) (11/21/91) First State Bank of Taos (Applicant) has assets of 1st Source Bank (Applicant) has assets of $57 million and National Bank of Albuquerque $980.6 million and the LaPaz branch (Branch) has (Bank) has assets of $54 million. Applicant and assets of $25.6 million. Applicant and Bank oper- Bank operate in the same market. ate in the same market. The banking factors and considerations relating The banking factors and considerations relating to the convenience and needs of the community to the convenience and needs of the community are consistent with approval. are consistent with approval. Auburn State Bank, Auburn, Indiana to merge Manufacturers and Traders Trust Company, with Citizens State Bank, Waterloo, Indiana Buffalo, New York to merge with The First National Bank of Highland, Newburgh, New York SUMMARY REPORT BY THE ATTORNEY GENERAL (10/25/91) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (11/8/91) cantly adverse to competition. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11/18/91) BASIS FOR APPROVAL BY THE FEDERAL RESERVE Auburn State Bank (Applicant) has assets of (11/27/91) $93.6 million and Citizens State Bank (Bank) has Manufacturers and Traders Trust Company (Apassets of $16.1 million. Applicant and Bank oper- plicant) has assets of $6.6 billion and The First ate in the same market. National Bank of Highland (Bank) has assets of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 285 16.—Continued $451.5 million. Applicant and Bank do not operate assets of $257.1 million. Applicant and Branches in the same 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 to the convenience and needs of the community are consistent with approval. are consistent with approval. Fifth Third Bank, Cincinnati, Ohio to acquire Marine Bank of Springfield, Springfield, Illithe assets and liabilities of MidFed Savings nois to acquire the assets and liabilities of the Bank, Middletown, Ohio Taylorville, Illinois, branch of Champion Federal Savings and Loan Association SUMMARY REPORT BY THE ATTORNEY GENERAL (11/1/91) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (10/4/91) cantly adverse to competition. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11/26/91) BASIS FOR APPROVAL BY THE FEDERAL RESERVE Fifth Third Bank (Applicant) has assets of (11/29/91) $4.9 billion and MidFed Savings Bank (Bank) has Marine Bank of Springfield (Applicant) has assets assets of $240.5 million. Applicant and Bank do of $745.1 million and the Taylorville branch not operate in the same market. (Branch) has assets of $74.2 million. Applicant The banking factors and considerations relating and Branch operate in the same market. to the convenience and needs of the community The banking factors and considerations relating are consistent with approval. to the convenience and needs of the community are consistent with approval. Chemical Bank, New York, New York to merge with Manufacturers Hanover Trust Company, Lorain County Bank, Elyria, Ohio to merge New York, New York with the Greenwich and Shiloh, Ohio, branches of Society Bank and Trust, Toledo, Ohio SUMMARY REPORT BY THE ATTORNEY GENERAL (11/21/91) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (10/31/91) cantly adverse to competition. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11/29/91) BASIS FOR APPROVAL BY THE FEDERAL RESERVE Chemical Bank (Applicant) has assets of $48.5 bil- (12/9/91) lion and Manufacturers Hanover Trust Company Lorain County Bank (Applicant) has assets of (Bank) has assets of $59.3 billion. Applicant and $421 million and the branches (Branches) have Bank operate in the same market. assets of $19.9 million. Applicant and Bank oper- The banking factors and considerations relating ate in the same market. to the convenience and needs of the community The banking factors and considerations relating are consistent with approval. to the convenience and needs of the community are consistent with approval. Fifth Third Bank, Cincinnati, Ohio to acquire the assets and liabilities of five branches of 1st United Bank, Boca Raton, Florida to merge Chase Bank of Ohio, Columbus, Ohio with Mizner Bank, Boca Raton, Florida SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (11/1/91) (11/1/91) The proposed transaction would not be signifi- The proposed transaction would not be significantly adverse to competition. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11/29/91) (12/17/91) Fifth Third Bank (Applicant) has assets of 1st United Bank (Applicant) has assets of $4.9 billion and the five branches (Branches) have $103.9 million and Mizner Bank (Bank) has assets Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

286 78th Annual Report, 1991 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1991—Continued of $43.6 million. Applicant and Bank operate in General indicates that the transaction would not the same market. have a significantly adverse effect on competition The banking factors and considerations relating because the proposed merger is essentially a corto the convenience and needs of the community porate reorganization. The Board of Governors, are consistent with approval. the Federal Reserve Bank, or the Secretary of the Board of Governors, whichever approved the ap- Mergers Approved Involving Wholly Owned plication, determined that the competitive effects Subsidiaries of the Same Bank Holding of the proposed transaction, the financial and man- Company agerial resources and prospects of the banks con- The following transactions involve banks that are cerned, as well as the convenience and needs of subsidiaries of the same bank holding company. In the community to be served were consistent with each case, the summary report by the Attorney approval. Assets Institution! (millions Date of approval of dollars) First of America Bank-Northern Michigan, Traverse City, Michigan 588 1/8/91 Merger First of America Bank-Manistee, Manistee, Michigan 101 PrimeBank, Federal Savings Bank, Grand Rapids, Michigan 425 3/1/91 Merger First of America Bank-Holland, N.A., Holland, Michigan 130 United Jersey Bank, Hackensack, New Jersey 6249 3/15/91 Merger United Jersey Bank/Northwest, Randolph, New Jersey 535 Comerica Bank-Detroit, Detroit, Michigan 10,200 3/21/91 Merger Comerica Bank, N.A., Jackson, Michigan 1,800 Star Bank, Northern Kentucky, Covington, Kentucky 298 4/9/91 Merger Star Bank, N. A., Newport, Kentucky 182 Fanners Loan & Trust Company, Columbia City, Indiana 81 4/19/91 Merger INB National Bank, Indianapolis, Indiana 1042 United New Mexico Bank at Albuquerque, Albuquerque, New Mexico 361 4/26/91 Merger United New Mexico Bank at Rio Rancho, Rio Rancho, New Mexico 60 Centura Bank, Rocky Mount, North Carolina 2340 5/17/91 Merger Watauga Savings and Loan Association, Inc., Boone, North Carolina 120 Jackson Exchange Bank and Trust Company, Jackson, Missouri 167 6/27/91 Merger First Exchange Bank of Madison County, Fredericktown, Missouri .. 4 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 287 16—Continued Assets Institutionl (millions Date of approval of dollars) Central Bank of Oklahoma City, Oklahoma City, Oklahoma 247 8/1/91 Merger Lakeshore Bank, N.A., Oklahoma City, Oklahoma 478 First of America Bank-Ann Arbor, Ann Arbor, Michigan 618 8/1/91 Merger First of America Bank-Wayne, Wayne, Michigan 104 Boatmen's Bank of Vandalia, Vandalia, Missouri 39 8/5/91 Merger Boatmen's National Bank of St. Louis, St. Louis, Missouri 46 2 Norstar Bank of Upstate NY, Albany, New York 4,600 8/30/91 Merger Norstar Bank of Central NY, Syracuse, New York 125 Old Kent Bank of Kalamazoo, Kalamazoo, Michigan 788 9/30/91 Merger Old Kent Bank-Southwest, Niles, Michigan 351 First of America Bank-West Michigan, Grand Rapids, Michigan (formerly PrimeBank, FSB) 578 9/30/91 Merger First of America Bank-Muskegon, Muskegon, Michigan 380 Signet Bank/Maryland, Baltimore, Maryland 3,307 10/3/91 Merger Signet Bank, National Association, Washington, D. C 142 United Missouri Bank Northeast, Monroe City, Missouri 32 10/31/91 Merger United Missouri Bank of Paris, Paris, Missouri 38 Commonwealth Bank, Williamsport, Pennsylvania 1,327 11/21/91 Merger County Bank, Montrose, Pennsylvania 184 First Bank of Troy, Troy, Michigan 135 Liberty State Bank, Mount Carmel, Pennsylvania 64 First Bank of Greater Pittston, Pittston, Pennsylvania 137 Manufacturers and Traders Trust Company, Buffalo, New York . 11/27/91 Merger 6,600 The First National Bank of Highland, Newburgh, New York 452 Citizens Fidelity Bank and Trust Company, Louisville, Kentucky 11/29/91 Merger 5,200 Citizens Fidelity Bank and Trust Company, Lexington, Kentucky 455 Chemical Bank Michigan, Clare, Michigan 12/9/91 Merger 146 Chemical Bank Gladwin County, Beaverton, Michigan 67 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

288 78th Annual Report, 1991 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1991—Continued Assets Institutionl (millions Date of approval of dollars) Old Kent Bank-Chicago, Chicago, Illinois 537 12/24/91 Merger Old Kent Bank, N. A., Elmhurst, Illinois 740 1. Each proposed transaction was to be effected under 2. Involves the acquisition of only certain assets and the charter of the first named bank. The entries are in liabilities of the affiliated bank. chronological order of approval. Mergers Approved Involving a Nonoperating of the surviving bank by the holding company, the Institution with an Existing Bank merger would have no effect on competition. The Board of Governors, the Federal Reserve Bank, or The following transactions have no significant the Secretary of the Board, whichever approved effect on competition; they merely facilitate the the application, determined that the proposal acquisition of the voting shares of a bank (or would, in itself, have no adverse competitive banks) by a holding company. In such cases, the effects and that the financial factors and consider- Summary Report by the Attorney General indiations relating to the convenience and needs of the cates that the transaction will merely combine an community were consistent with approval. existing bank with a nonoperating institution; in consequence, and without regard to the acquisition Assets Institutionl (millions Date of of dollars)2 approval Commercial State Bank Interim of Orlando, Orlando, Florida 7/12/91 Merger Commercial State Bank of Orlando, Orlando, Florida 56 Commercial Savings Bank of Florida, Miami, Florida 7/19/91 Merger Commercial Bank of Florida, Miami, Florida 69 Teutopolis Interim Bank, Teutopolis, Illinois 9/5/91 Merger Teutopolis State Bank, Teutopolis, Illinois 25 C & D Banking Company, Marietta, Ohio 9/20/91 Merger The Dime Bank, Marietta, Ohio 35 Millersburg Interim Bank, Millersburg, Ohio 11/14/91 Merger The Commercial & Savings Bank of Millersburg, Millersburg, Ohio . 154 1. Each proposed transaction was to be effected under 2. Where no assets are listed, the bank is newly orgathe charter of the first-named bank. The entries are in nized 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

290 78th Annual Report, 1991 Board of Governors of the Federal Reserve System December 31,1991 Term expires ALAN GREENSPAN of New York, Chairmanl January 31, 1992 DAVID W. MULLINS, JR., of Arkansas, Vice Chairmanl January 31, 2000 SUSAN M. PHILLIPS of Iowa January 31, 1998 WAYNE D. ANGELL of Kansas January 31, 1994 LAWRENCE B. LINDSEY of Virginia January 31, 2000 EDWARD W. KELLEY, JR., of Texas January 31, 2004 JOHN P. LAWARE of Massachusetts January 31, 2002 OFFICE OF BOARD MEMBERS DIVISION OF CONSUMER Joseph R. Coyne, Assistant to the Board AND COMMUNITY AFFAIRS Donald J. Winn, Assistant to the Board Griffith L. Garwood, Director Theodore E. Allison, Assistant to the Board Glenn E. Loney, Assistant Director for Federal Reserve System Affairs Ellen Maland, Assistant Director Bob Stahly Moore, Special Assistant Dolores S. Smith, Assistant Director to the Board Diane E. Werneke, Special Assistant ^ „ o to the Board DIVISION OF BANKING SUPERVISION AND REGULATION Richard Spillenkothen, Director LEGAL DIVISION Stephen C. Schemering, Deputy Director J. Virgil Mattingly, Jr., General Counsel j^ Don £ Associate Director Scott G. Alvarez, Associate General Frederick M. Struble, Associate Director n- C u o u . n j s w el A L* A • W «r i - l « li - a m AA . « R y i bac i k, A A ssoc - iate ^ > Director Richard M. Ashton, Associate __ . . _/ . . _. General Counsel Herbert A« Biem' Assistant Director Oliver Ireland, Associate General R°ger T- Cole' distant Director Counsel James I. Garner, Assistant Director Ricki R. Tigert, Associate General Counsel James D. Goetzinger, Assistant Director Kathleen M. O'Day, Assistant General Michael G. Martinson, Assistant Director Counsel Robert S. Plotkin, Assistant Director MaryEllen A. Brown, Assistant Sidney M. Sussan, Assistant Director to the General Counsel Homer, Securities Credit Officer Laura M OFFICE OF THE SECRETARY DIVISION OF INTERNATIONAL FINANCE William W. Wiles, Secretary Edwin M. Truman, Staff Director Jennifer J. Johnson, Associate Secretary Larry J. Promisel, Senior Barbara R. Lowrey, Associate Secretary Associate Director Richard C. Stevens, Assistant Secretary2 Charles J. Siegman, Senior Associate Director Dale W. Henderson, Associate Director David H. Howard, Senior Adviser Donald B. Adams, Assistant Director Peter Hooper III, Assistant Director 1. The Chairman is currently serving under a recess Karen H. Johnson, Assistant Director appointment which will expire at the end of the 102d Ralph W. Smith, Jr., Assistant Director Congress. The designation of Vice Chairman expires on July 24, 1995, unless the service of this member of the Board shall have terminated sooner. Digitized for FRASER 2. On loan from the Division of Information Rehttp://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 291 DIVISION OF RESEARCH OFFICE OF THE CONTROLLER AND STATISTICS George E. Livingston, Controller Michael J. Prell, Director Stephen J. Clark, Assistant Controller Edward C. Ettin, Deputy Director Darrell R. Pauley, Assistant Controller William P. Jones, Associate Director Thomas D. Simpson, Associate Director DIVISION OF SUPPORT SERVICES Lawrence Slifman, Associate Director Robert E. Frazier, Director David J. Stockton, Associate Director George M. Lopez, Assistant Director Martha Bethea, Deputy David L. Williams, Assistant Director Associate Director Peter A. Tinsley, Deputy Associate Director DIVISION OF INFORMATION Myron L. Kwast, Assistant Director RESOURCES MANAGEMENT Stephen R. Malphrus, Director Patrick M. Parkinson, Assistant Director Bruce M. Beardsley, Deputy Director Martha S. Scanlon, Assistant Director Robert J. Zemel, Senior Advisor Joyce K. Zickler, Assistant Director Marianne M. Emerson, Assistant Director Levon H. Garabedian, Assistant Director (Administration) Po Kyung Kim, Assistant Director Raymond H. Massey, Assistant Director Edward T. Mulrenin, Assistant Director DIVISION OF MONETARY AFFAIRS Day W. Radebaugh, Jr., Assistant Director Donald L. Kohn, Director Elizabeth B. Riggs, Assistant Director David E. Lindsey, Deputy Director Brian F. Madigan, Assistant Director Richard D. Porter, Assistant Director DIVISION OF FEDERAL RESERVE BANK Normand R.V. Bernard, Special Assistant OPERATIONS AND PAYMENT SYSTEMS to the Board Clyde H. Farnsworth, Jr., Director David L. Robinson, Deputy Director (Finance and Control) OFFICE OF THE INSPECTOR GENERAL Bruce J. Summers, Deputy Director Brent L. Bowen, Inspector General (Payments and Automation)* Barry R. Snyder, Assistant Inspector General Charles W. Bennett, Assistant Director Jack Dennis, Jr., Assistant Director Earl G. Hamilton, Assistant Director OFFICE OF STAFF DIRECTOR Jeffrey C. Marquardt, Assistant Director FOR MANAGEMENT John H. Parrish, Assistant Director S. David Frost, Staff Director Louise L. Roseman, Assistant Director William C. Schneider, Jr., Project Director Florence M. Young, Assistant Director Portia W. Thompson, Equal Employment Opportunity Programs Officer DIVISION OF HUMAN RESOURCES MANAGEMENT David L. Shannon, Director John R. Weis, Associate Director Anthony V. DiGioia, Assistant Director Joseph H. Hayes, Jr., Assistant Director Fred Horowitz, Assistant Director 3. On loan from Federal Reserve Bank of Richmond. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

292 78th Annual Report, 1991 Federal Open Market Committee December 31,1991 Members ALAN GREENSPAN, Chairman, Board of Governors E. GERALD CORRIGAN, Vice Chairman, President, Federal Reserve Bank of New York WAYNE D. ANGELL, Board of Governors ROBERT P. BLACK, President, Federal Reserve Bank of Richmond ROBERT P. FORRESTAL, President, Federal Reserve Bank of Atlanta SILAS KEEHN, President, Federal Reserve Bank of Chicago EDWARD W. KELLEY, JR., Board of Governors JOHN P. LAWARE, Board of Governors LAWRENCE B. LINDSEY, Board of Governors DAVID W. MULLINS, JR., Board of Governors ROBERT T. PARRY, President, Federal Reserve Bank of San Francisco SUSAN M. PHILLIPS, Board of Governors Alternate Members THOMAS M. HOENIG, President, Federal Reserve Bank of Kansas City THOMAS C. MELZER, President, Federal Reserve Bank of St. Louis RICHARD F. SYRON, President, Federal Reserve Bank of Boston JAMES H. OLTMAN, First Vice President, Federal Reserve Bank of New York VACANCY, Federal Reserve Bank of Cleveland Officers DONALD L. KOHN, J. ALFRED BROADDUS, JR., Secretary and Economist Associate Economist NORMAND R.V. BERNARD, RICHARD G. DAVIS, Deputy Secretary Associate Economist JOSEPH R. COYNE, DAVID E. LINDSEY, Assistant Secretary Associate Economist GARY P. GILLUM, LARRY J. PROMISEL, Assistant Secretary Associate Economist J. VIRGIL MATTINGLY, KARL A. SCHELD, General Counsel Associate Economist ERNEST T. PATRIKIS, CHARLES J. SIEGMAN, Deputy General Counsel Associate Economist MICHAEL J. PRELL, THOMAS D. SIMPSON, Economist Associate Economist EDWIN M. TRUMAN, LAWRENCE SLIFMAN, Economist Associate Economist JACK H. BEEBE, SHEILA L. TSCHINKEL, Associate Economist Associate Economist PETER D. STERNLIGHT, Manager for Domestic Operations, System Open Market Account VACANCY, Manager for Foreign Operations, System Open Market Account During 1991, the Federal Open Market Com- Policy Actions of the Federal Open Market mittee held eight meetings (see Record of Committee in this REPORT.) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 293 Federal Advisory Council December 31,1991 Members District 1—IRA STEPANIAN, Chairman and Chief Executive Officer, Bank of Boston, Boston, Massachusetts District 2—CHARLES S. SANFORD, JR., Chairman, Bankers Trust Company, New York, New York District 3—TERRENCE A. LARSEN, Chairman, President, and Chief Executive Officer, CoreStates Financial Corp., Philadelphia, Pennsylvania District 4—JOHN B. MCCOY, Chairman, President, and Chief Executive Officer, Bane One Corporation, Columbus, Ohio District 5—EDWARD E. CRUTCHFIELD, Chairman and Chief Executive Officer, First Union Corporation, Charlotte, North Carolina District 6—E. B. ROBINSON, JR., Chairman and Chief Executive Officer, Deposit Guaranty Bank, Jackson, Mississippi 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 PAUL HAZEN, President LLOYD P. JOHNSON, Vice President HERBERT V. PROCHNOW, Secretary WILLIAM J. KORSVIK, Associate Secretary Directors IRA STEPANIAN TERRENCE A. LARSEN DAN W. MITCHELL The Federal Advisory Council met on Janu- ing industry from each of the twelve Federal ary 31-February 1, May 2-3, September Reserve Districts, is required by law to meet 5-6, and October 31-November 1, 1991. in Washington at least four times each year The Board of Governors met with the coun- and is authorized by the Federal Reserve Act cil on February 1, May 3, September 6, and to consult with, and advise, the Board on all November 1, 1991. The council, which is matters within the jurisdiction of the Board, composed of one representative of the bank- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

294 78th Annual Report, 1991 Consumer Advisory Council December 31,1991 Members VERONICA E. BARELA, Executive Director, NEWSED Community Development Corp., Denver, Colorado GEORGE H. BRAASCH, Corporate Credit Counsel, Spiegel, Inc., Oak Brook, Illinois TOYE L. BROWN, Director, Freedom House, Inc., Boston, Massachusetts CLIFF E. COOK, Vice President, Puget Sound National Bank, Tacoma, Washington R. B. (JOE) DEAN, JR., Associate Director, South Carolina Downtown Development Association, Columbia, South Carolina DENNY D. DUMLER, Senior Vice President, Consumer Banking, Colorado National Bank of Denver, Denver, Colorado WILLIAM C. DUNKELBERG, Dean, School of Business and Management, 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 DONALD A. GLAS, President, First State Federal Savings and Loan Association, Hutchinson, Minnesota DEBORAH B. GOLDBERG, Reinvestment Specialist, Center for Community Change, Washington, D.C. MICHAEL M. GREENFIELD, Professor of Law, Washington University, St. Louis, Missouri JOYCE HARRIS, President and Chief Executive Officer, Telco Community Credit Union, Madison, Wisconsin COLLEEN D. HERNANDEZ, Executive Director, Kansas City Neighborhood Alliance, Kansas City, Missouri JULIA E. HILER, Executive Vice President, Sunshine Mortgage Corporation, Marietta, Georgia HENRY JARAMILLO, JR., President, Ranchers State Bank, Belen, New Mexico BARBARA KAUFMAN, Co-Director, KCBS Call for Action, San Francisco, California KATHLEEN E. KEEST, Staff Attorney, National Consumer Law Center, Boston, Massachusetts MICHELLE S. MEIER, Counsel for Government Affairs, Consumers Union, Washington, D.C. BERNARD F. PARKER, JR., Executive Director, Community Resource Projects, Detroit, Michigan OTIS PITTS, JR., President, Tacolcy Economic Development Corp., Miami, Florida 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 DAVID B. WARD, ESQ., Consultant, Beneficial Management Corp., Chester, New Jersey SANDRA L. WILLETT, Consultant on Quality Service, Boston, Massachusetts Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 295 Consumer Advisory Council—Continued Officers JAMES W. HEAD, Chairman LINDA K. PAGE, Vice Chairman The Consumer Advisory Council met with consumer and community interests. It was members of the Board of Governors on established pursuant to the 1976 amend- March 14, June 20, and October 10, 1991. ments to the Equal Credit Opportunity Act The council is composed of academics, state to advise the Board on consumer financial government officials, representatives of the services, financial industry, and representatives of Thrift Institutions Advisory Council December 31,1991 Members DANIEL C. ARNOLD, Chairman and President, Farm & Home Financial Corporation, Houston, Texas JAMES L. BRYAN, President and Chief Executive Officer, TEXINS Credit Union, Richardson, Texas DAVID L. HATFIELD, President, Fidelity Savings Bank, FSB, Kalamazoo, Michigan LYNN W. HODGE, President and Chief Executive Officer, United Savings Bank, Inc., Greenwood, South Carolina ELLIOTT K. KNUTSON, Chairman and Chief Executive Officer, Washington Federal Savings and Loan Association, Seattle, Washington JOHN WM. LAISLE, President and Chief Executive Officer, MidFirst Bank SSB, Oklahoma City, Oklahoma RICHARD A. LARSON, Chairman and Chief Executive Officer, West Bend Savings Bank, West Bend, Wisconsin PRESTON MARTIN, Chairman and Chief Executive Officer, WestFed Holdings, Inc., San Francisco, California RICHARD D. PARSONS, President and Chief Executive Officer, The Dime Savings Bank of New York, FSB, New York, New York MARION O. SANDLER, President and Chief Executive Officer, World Savings and Loan Association, Oakland, California EDMOND M. SHANAHAN, President and Chief Executive Officer, Bell Federal Savings and Loan Association, Chicago, Illinois WOODBURY C. TITCOMB, President and Chief Executive Officer, Peoples Bancorp of Worcester, Inc., and Peoples Savings Bank, Worcester, Massachusetts Officers MARION O. SANDLER, President LYNN W. HODGE, Vice President The members of the Thrift Institutions Advi- unions, savings and loan associations, and sory Council met with the Board of Gover- savings banks, consults with and advises the nors on March 8, May 9, September 13, and Board on issues pertaining to the thrift indus- November 15, 1991. The council, which try and on various other matters within the is composed of representatives from credit Board's jurisdiction. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

296 78th Annual Report, 1991 Officers of Federal Reserve Banks, Branches, and Offices December 31,1991* BANK, Chairman2 President Vice President Branch, ox facility Deputy Chairman First Vice President in charge of Branch BOSTON3 Richard N. Cooper Richard F. Syron Jerome H. Cathy E. Minehan Grossman 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 Jane G. Pepper William H. Stone, Jr. CLEVELAND3... John R. Miller Vacant A. William William H. Reynolds Hendricks Cincinnati Kate Ireland Charles A. Cerino4 Pittsburgh Robert P. Bozzone Harold J. Swart4 RICHMOND3.... Anne Marie Robert P. Black Whittemore Jimmie R. Henry J. Faison Monhollon Baltimore John R. Hardesty, Jr. Ronald B.Duncan4 Anne M. Allen Albert D. Charlotte Tinkelenberg4 John G. Stoides4 Culpeper Larry L. Prince Robert P. Forrestal ATLANTA Edwin A. Huston Jack Guynn Donald E. Nelson Birmingham Roy D. Terry FredR.Herr4 Jacksonville Hugh M. Brown James D. Hawkins4 Miami Dorothy C. Weaver James T. Curry in Nashville Shirley A. Zeitlin Melvyn K. Purcell New Orleans JoAnn Slaydon Robert J. Musso CHICAGO3 Charles S. McNeer Silas Keehn Richard G. Cline Daniel M. Doyle Detroit Phyllis E. Peters Roby L. Sloan4 ST. LOUIS H. Edwin Trusheim Thomas C. Melzer Robert H. Quenon James R. Bowen Little Rock L. Dickson Flake Karl W. Ashman Louisville Lois H. Gray Howard Wells Katherine Hinds Raymond Laurence Smythe Memphis Delbert W. Johnson Gary H. Stern Gerald A. Thomas E. Gainor MINNEAPOLIS. Rauenhorst James E. Jenks John D. Johnson Helena Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 297 BANK, Chairman2 President Vice President Branch, or facility Deputy Chairman First Vice President in charge of Branch KANSAS CITY Fred W. Lyons, Jr. Thomas M. Hoenig Burton A. Dole, Jr. Henry R. Czerwinski Denver Barbara B. Grogan Kent M. Scott Oklahoma City Ernest L. Holloway David J. France Omaha Herman Cain Harold L. Shewmaker DALLAS Hugh G. Robinson Robert D. McTeer, Jr. Leo E. Linbeck, Jr. Tony J. Salvaggio El Paso W. Thomas Beard III Sammie C. Clay Houston Gilbert D. Gaedcke, Jr. Robert Smith III4 San Antonio Roger R. Thomas H. Robertson Hemminghaus SAN FRANCISCO Robert F. Erburu Robert T. Parry Carolyn S. Patrick K. Barron Chambers Los Angeles Yvonne B. Burke John F. Moore4 Portland William A. Hilliard Leslie R. Watters Salt Lake City D. N. Rose Andrea P. Wolcott Seattle Judith Runstad Gerald R. Kelly4 1. A current list of these officers appears each month New Jersey; Jericho, New York; Utica at Oriskany, New in the Federal Reserve Bulletin. York; Columbus, Ohio; Columbia, South Carolina; 2. The Chairman of a Federal Reserve Bank, by stat- Charleston, West Virginia; Des Moines, Iowa; Indianapoute, serves as Federal Reserve Agent. lis, Indiana; and Milwaukee, Wisconsin. 3. Additional offices of these Banks are located at 4. Senior Vice President. Lewiston, Maine; Windsor Locks, Connecticut; Cranford, Conference of Chairmen On November 19, 1990, the Conference elected Thomas C. Melzer, Presi- The Chairmen of the Federal Reserve Banks dent of the Federal Reserve Bank of St. are organized into the Conference of Chair- Louis, as its Chairman for 1991-92, and men, which meets to consider matters of common interest and to consult with, and Robert T. Parry, President of the Federal advise, the Board of Governors. Such meet- Reserve Bank of San Francisco, as its ings, attended also by the Deputy Chairmen, Vice Chairman. The Conference apwere held in Washington on May 29 and 30, pointed Frances E. Sibley, of the Federal and on December 4 and 5, 1991. Reserve Bank of St. Louis, as its Secre- The Executive Committee of the Con- tary and Elizabeth Masten, of the Fedference of Chairmen during 1991 comprised eral Reserve Bank of San Francisco, as Peter A. Benoliel, Chairman; Hugh G. Robits Assistant Secretary. inson, Vice Chairman; and Larry L. Prince, member. On December 5, 1991, the Conference Conference of First elected its Executive Committee for 1992, Vice Presidents naming Anne Marie Whittemore as Chairman, Delbert W. Johnson as Vice Chairman, The Conference of First Vice Presidents of and Richard N. Cooper as the third member. the Federal Reserve Banks was organized in Conference of Presidents 1969 to meet periodically for the consideration of operations and other matters. The presidents of the Federal Reserve Banks On October 16, 1990, the Conference are organized into the Conference of Presi- elected Jimmie R. Monhollon, First Vice dents, which meets periodically to consider President of the Federal Reserve Bank of matters of common interest and to consult Richmond, as its Chairman for 1991, and with, and advise, the Board of Governors. William H. Hendricks, First Vice President Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

298 78th Annual Report, 1991 of the Federal Reserve Bank of Cleveland, as Federal Reserve Branches have either five its Vice Chairman. The Conference ap- or seven directors, a majority of whom are pointed Marsha S. Shuler, of the Federal appointed by the parent Federal Reserve Reserve Bank of Richmond as its Secretary, Bank; the others are appointed by the Board and Creighton R. Fricek, of the Federal of Governors. One of the directors appointed Reserve Bank of Cleveland, as its Assistant by the Board is designated annually as chair- Secretary. man of the board of that Branch in a manner prescribed by the parent Federal Reserve Directors Bank. For the name of the chairman and deputy The following list of directors of Federal chairman of the board of directors of each Reserve Banks and Branches shows for each Reserve Bank and of the chairman of each director the class of directorship, the princi- Branch, see the preceding table, "Officers pal business affiliation, and the date the term of Federal Reserve Banks, Branches, and expires. Each Federal Reserve Bank has nine Offices." 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. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 299 Term expires Dec. 31 DISTRICT 1—BOSTON Class A William H. Chadwick Vice Chairman of the Board and Chief 1991 Operating 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 Norman F. C. Kent President, First National Bank of Portsmouth, 1993 Portsmouth, New Hampshire Class B 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 Stephen R. Levy Chairman of the Board and Chief Executive 1993 Officer, Bolt Beranek and Newman, Inc., Cambridge, Massachusetts Class C 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 John E. Flynn Executive Director, The Quality Connection, 1993 East Dennis, Massachusetts DISTRICT 2—NEW YORK Class A John F. 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 Barbara Harding Chairman of the Board and Chief Executive 1993 Officer, Phillipsburg National Bank and Trust Company, Phillipsburg, New Jersey Class B Richard L. Gelb Chairman of the Board and Chief Executive 1991 Officer, Bristol-Myers Squibb Company, New York, New York John A. Georges Chairman of the Board and Chief Executive 1992 Officer, International Paper, Purchase, New York Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

300 78th Annual Report, 1991 Term expires Dec. 31 DISTRICT 2, Class B— Continued Rand V. Araskog Chairman and Chief Executive Officer, ITT 1993 Corporation, New York, New York Class C Maurice R. Greenberg Chairman and Chief Executive Officer, 1991 American International Group, Inc., New York, New York Cyrus R. Vance Presiding Partner, Simpson Thacher & Bartlett, 1992 New York, New York Ellen V. Futter President, Barnard College, New York, New York 1993 BUFFALO BRANCH Appointed by the Federal Reserve Bank Richard H. Popp Operating Partner, Southview Farm, 1991 Castile, New York Robert G. 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, FNB of 1992 Rochester, Rochester, New York Susan A. McLaughlin President, Eastman Savings and Loan 1993 Association, Rochester, New York Appointed by the Board of Governors Mary Ann Lambertsen Former 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 Joseph J. Castiglia President and Chief Executive Officer, Pratt & 1993 Lambert, Inc., Buffalo, New York DISTRICT 3—PHILADELPHIA Class A H. Bernard Lynch 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 Gary F. Simmerman President and Chief Executive Officer, 1993 United Jersey Bank/South, N.A., Cherry Hill, New Jersey Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 301 Term expires Dec. 31 DISTRICT 3—Continued Class B Nicholas Riso Executive Vice President, AHOLD, U.S.A., 1991 Harrisburg, Pennsylvania David W. Huggins President, RMS Technologies, Inc., 1992 Marlton, New Jersey James M. Mead President, Capital Blue Cross, 1993 Harrisburg, Pennsylvania Class C Donald J. Kennedy Business Manager, International Brotherhood of 1991 Electrical Workers, Local Union No. 269, Trenton, New Jersey Peter A. Benoliel Chairman of the Board, Quaker Chemical 1992 Corporation, Conshohocken, Pennsylvania Jane G. Pepper President, The Pennsylvania Horticultural 1993 Society, Philadelphia, Pennsylvania DISTRICT 4—CLEVELAND Class A 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 Alfred C. Leist President, Chairman and Chief Executive 1993 Officer, Apple Creek Banking Company, Apple Creek, Ohio Class B 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 Verna K. Gibson Business Consultant, Columbus, Ohio 1993 Class C John R. Miller Former President and Chief Operating Officer, 1991 The Standard Oil Company (Ohio), Cleveland, Ohio A. William Reynolds Chairman and Chief Executive Officer, 1992 GenCorp, Fairlawn, Ohio John R. Hodges President, Ohio AFL-CIO, Columbus, Ohio 1993 CINCINNATI BRANCH Appointed by the Federal Reserve Bank Allen L. Davis President and Chief Executive Officer, The 1991 Provident Bank, Cincinnati, Ohio Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

302 78th Annual Report, 1991 Term expires Dec. 31 DISTRICT 4, CINCINNATI BRANCH Appointed by the Federal Reserve Bank—Continued Clay Parker Davis President and Chief Executive Officer, Citizens 1992 National Bank, Somerset, Kentucky Jack W. Buchanan President, Sphar & Company, Inc., 1993 Winchester, Kentucky Harry A. Shaw III Chairman and Chief Executive Officer, Huffy 1993 Corporation, Dayton, Ohio Appointed by the Board of Governors Kate Ireland National Chairman of the Board, Frontier 1991 Nursing Service, Wendover, Kentucky Eleanor Hicks Advisor for Intl. Liaison Protocol and Services 1992 and Associate Professor of Political Science, University of Cincinnati, Cincinnati, Ohio Marvin Rosenberg Partner, Towne Properties, Ltd., Cincinnati, Ohio 1993 PITTSBURGH BRANCH Appointed by the Federal Reserve Bank E. James Trimarchi President and Chief Executive Officer, First 1991 Commonwealth Financial Corporation, Indiana, Pennsylvania William F. Roemer Chairman and Chief Executive Officer, 1992 Integra Financial Corporation, Pittsburgh, Pennsylvania George A. Davidson, Jr. Chairman of the Board and Chief Executive 1993 Officer, Consolidated Natural Gas Company, Pittsburgh, Pennsylvania I. N. Rendall Harper, Jr. President, American Micrographics Company, Inc., 1993 Monroeville, Pennsylvania Appointed by the Board of Governors Jack B. Piatt Chairman of the Board, Millcraft Industries, Inc., 1991 Washington, Pennsylvania Robert P. Bozzone President and Chief Executive Officer, 1992 Allegheny Ludlum Corporation, Pittsburgh, Pennsylvania Sandra L. Phillips Executive Director, Pittsburgh Partnership 1993 for Neighborhood Development, Pittsburgh, Pennsylvania DISTRICT 5—RICHMOND Class A C. R. Hill, Jr. Executive Vice President, Beckley National 1991 Bank, Oak Hill, West Virginia A. Pierce Stone Chairman, President, and Chief Executive 1992 Officer, Virginia Community Bank, Louisa, Virginia Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 303 Term expires Dec. 31 DISTRICT 5, Class A—Continued James G. Lindley Chairman, President, and Chief Executive 1993 Officer, South Carolina National Bank, Columbia, South Carolina Class B Edward H. Covell President, The Covell Company, Easton, Maryland 1991 R. E. Atkinson, Jr. Chairman, Dilmar Oil Company, Inc., 1992 Florence, South Carolina Paul A. DelaCourt Chairman, The North Carolina Enterprise 1993 Corporation, Raleigh, North Carolina Class C Anne Marie Whittemore Partner, McGuire, Woods, Battle & Boothe, 1991 Richmond, Virginia Henry J. Faison President, Faison Associates, Charlotte, 1992 North Carolina Stephen Brobeck Executive Director, Consumer Federation of 1993 America, Washington, D.C. BALTIMORE BRANCH Appointed by the Federal Reserve Bank Joseph W. Mosmiller Chairman of the Board, Loyola Federal Savings 1991 and Loan Association, Baltimore, Maryland F. Levi Ruark Chairman of the Board and President, 1991 The National Bank of Cambridge, Cambridge, Maryland Richard M. Adams Chairman and Chief Executive Officer, United 1992 Bankshares, Inc., Parkersburg, West Virginia Daniel P. Henson III Senior Development Director, Struever Bros., 1993 Eccles & Rouse, Inc., Baltimore, Maryland Appointed by the Board of Governors Thomas R. Shelton President, Case Foods, Inc., Salisbury, Maryland 1991 John R. Hardesty, Jr. President, Preston Energy, Inc., Kingwood, 1992 West Virginia William H. Wynn International President, United Food and 1993 Commercial Workers International Union, AFL-CIO & CLC, Washington, D.C. CHARLOTTE BRANCH Appointed by the Federal Reserve Bank Crandall C. Bowles President, The Springs Company, Lancaster, 1991 South Carolina L. Glenn Orr, Jr. Chairman, President, and Chief Executive 1991 Officer, Southern National Corporation, Lumberton, North Carolina Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

304 78th Annual Report, 1991 Term expires Dec. 31 DISTRICT 5, CHARLOTTE BRANCH Appointed by the Federal Reserve Bank—Continued David B. Jordan President, Chief Executive Officer, and Director, 1992 Omni Capital Group, Inc. and OMNIBANK, Salisbury, North Carolina Jim M. Cherry, Jr. President and Chief Executive Officer, 1993 Williamsburg First National Bank, Kingstree, South Carolina Appointed by the Board of Governors Harold D. Kingsmore President and Chief Operating Officer, 1991 Graniteville Company, Graniteville, South Carolina Anne M. Allen President, Anne Allen & Associates, Inc., 1992 Greensboro, North Carolina William E. Masters President, Perception, Inc., Easley, South Carolina 1993 DISTRICT 6—ATLANTA Class A Virgil H. Moore, Jr. Chairman of the Board, First Farmers and 1991 Merchants National Bank, Columbia, Tennessee W. H. Swain Chairman of the Board, First National Bank, 1992 Oneida, Tennessee James B. Williams Chairman and Chief Executive Officer, SunTrust 1993 Banks, Inc., Atlanta, Georgia Class B Saundra H. Gray Co-Owner, Gemini Springs Farm, 1991 DeBary, Florida J. Thomas Holton Chairman of the Board and President, 1992 Sherman International Corporation, Birmingham, Alabama Andre M. Rubenstein Chairman of the Board and Chief Executive 1993 Officer, Rubenstein Brothers, Inc., New Orleans, Louisiana Class C Larry L. Prince Chairman and Chief Executive Officer, Genuine 1991 Parts Company, Atlanta, Georgia Leo Benatar Chairman of the Board and President, Engraph, Inc., 1992 Atlanta, Georgia Edwin A. Huston Senior Executive Vice President-Finance, Ryder 1993 System, Inc., Miami, Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 305 Term expires Dec. 31 DISTRICT 6—Continued BIRMINGHAM BRANCH Appointed by the Federal Reserve Bank 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 of Wetumpka, Wetumpka, Alabama Julian W. Banton Chairman, President, and Chief Executive 1993 Officer, SouthTrust Bank of Alabama, N.A., Birmingham, Alabama Appointed by the Board of Governors Roy D. Terry President and Chief Executive Officer, 1991 Terry Manufacturing Company, Inc., Roanoke, Alabama Nelda P. Stephenson President, Nelda Stephenson Chevrolet, Inc., 1992 Florence, Alabama Donald E. Boomershine President, Better Business Bureau of Central 1993 Alabama, Inc., Birmingham, Alabama JACKSONVILLE BRANCH Appointed by the Federal Reserve Bank Perry M. Dawson President and Chief Executive Officer, Suncoast 1991 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 Hugh H. Jones, Jr. Chairman of the Board and Chief Executive 1993 Officer, Barnett Bank of Jacksonville, N.A., Jacksonville, Florida Appointed by the Board of Governors Hugh M. Brown President and Chief Executive Officer, 1991 BAMSI, 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 Joan Dial Ruffier General Partner, Sunshine Cafes, 1993 and Vice President, Vista Landscaping, Orlando, Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

306 78th Annual Report, 1991 Term expires Dec. 31 DISTRICT 6—Continued MIAMI BRANCH Appointed by the Federal Reserve Bank Roberto G. Blanco Vice Chairman of the Board and Chief 1991 Financial Officer, Republic National Bank of Miami, Miami, Florida A. Gordon Oliver President and Chief Executive Officer, Citizens 1992 and Southern National Bank of Florida, Fort Lauderdale, Florida Steven C. Shimp President, O-A-K/Florida, Inc., 1993 Fort Myers, Florida Pat L. Tornillo, Jr. Executive Vice President, United Teachers of 1993 Dade, Miami, Florida Appointed by the Board of Governors Dorothy C. Weaver President, Intercap Equities, Inc., 1991 Coral Gables, Florida R. Kirk Landon Chairman and Chief Executive Officer, 1992 American Bankers Insurance Group, Miami, Florida Michael T. Wilson President, Vinegar Bend Farms, Inc., 1993 Belle Glade, Florida NASHVILLE BRANCH Appointed by the Federal Reserve Bank William Baxter Lee III Chairman of the Board and President, Southeast 1991 Services Corporation, Knoxville, Tennessee Marguerite W. Sallee President and Chief Executive Officer, 1991 Corporate Child Care, Inc., Nashville, Tennessee James D. Harris President and Chief Executive Officer, 1992 Brentwood National Bank, Brentwood, Tennessee Williams E. Arant, Jr. President and Chief Executive Officer, 1993 First National Bank of Knoxville, Knoxville, Tennessee Appointed by the Board of Governors 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 Victoria B. Jackson President and Chief Executive Officer, Diesel 1993 Sales and Service, Inc., and Prodiesel, Inc., Nashville, Tennessee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 307 Term expires Dec. 31 DISTRICT 6—Continued NEW ORLEANS BRANCH Appointed by the Federal Reserve Bank Joel B. Bullard, Jr. President, Joe Bullard Automotive Companies, 1991 Mobile, Alabama Kay L. Nelson President-Owner, Nelson Capital Corporation, 1991 New Orleans, Louisiana Earl W. Lundy Chairman of the Board and Chief Executive 1992 Officer, First National Bank of Vicksburg, Vicksburg, Mississippi A. Hartie Spence President, Calcasieu Marine National Bank, 1993 Lake Charles, Louisiana Appointed by the Board of Governors JoAnn Slaydon President, Slaydon Consultants, 1991 Baton Rouge, Louisiana Lucimarian Tolliver Roberts Commission President, Mississippi Coast 1992 Coliseum, Pass Christian, Mississippi Victor Bussie President, Louisiana AFL-CIO, 1993 Baton Rouge, Louisiana DISTRICT 7—CHICAGO Class A John W. Gabbert President and Chief Executive Officer, First of 1991 America Bank-LaPorte, N.A., LaPorte, Indiana B. F. Backlund Chairman of the Board and Chief Executive 1992 Officer, Bartonville Bank, Peoria, Illinois David W. Fox Chairman, President, and Chief Executive 1993 Officer, The Northern Trust Corporation and The Northern Trust Company, Chicago, Illinois Class B Max J. Nay lor President, Naylor Farms, Inc., Jefferson, Iowa 1991 Paul J. Schierl Financial Consultant, Green Bay, Wisconsin 1992 A. Charlene Sullivan Associate Professor of Management, Krannert 1993 Graduate School of Management, Purdue University, West Lafayette, Indiana Class C Charles S. McNeer Retired Chairman of the Board and Chief 1991 Executive Officer, Wisconsin Energy Corporation, Milwaukee, Wisconsin Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

308 78th Annual Report, 1991 Term expires Dec. 31 DISTRICT 7, Class C— Continued Richard G. Cline Chairman of the Board, President, and 1992 Chief Executive Officer, NICOR, Inc., Naperville, Illinois Robert M. Healey President, Chicago Federation of Labor and 1993 Industrial Union Council, AFL-CIO, Chicago, Illinois DETROIT BRANCH Appointed by the Federal Reserve Bank 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 Charles E. Allen President and Chief Executive Officer, Graistone 1993 Realty Advisors, Inc., Detroit, Michigan William E. Odom Chairman, Ford Motor Credit Company, 1993 Dearborn, Michigan Appointed by the Board of Governors 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 Beverly Beltaire President, P R Associates, Inc., Detroit, Michigan 1993 DISTRICT 8—ST. LOUIS Class A Henry G. River, Jr. President and Chief Executive Officer, 1991 First 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 Ray U. Tanner Chairman of the Board and Chief Executive 1993 Officer, Jackson National Bank and Volunteer Bancshares, Inc., Jackson, Tennessee Class B Thomas F. McLarty III Chairman of the Board and Chief Executive 1991 Officer, Arkla, Inc., Little Rock, Arkansas Frank M. Mitchener, Jr. President, Mitchener Farms, Inc., 1992 Sumner, Mississippi Warren R. Lee President, W. R. Lee & Associates, Inc., 1993 Louisville, Kentucky Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 309 Term expires Dec. 31 DISTRICT 8—Continued Class C Robert H. Quenon Mining Consultant, St. Louis, Missouri 1991 H. Edwin Trusheim Chairman of the Board and Chief Executive 1992 Officer, General American Life Insurance Company, St. Louis, Missouri Janet McAfee Weakley President, Janet McAfee, Inc., St. Louis, Missouri 1993 LITTLE ROCK BRANCH Appointed by the Federal Reserve Bank Barnett Grace Chairman and Chief Executive Officer, 1991 First Commercial Bank, N.A., Little Rock, Arkansas Patricia M. Townsend President, Townsend Company, 1992 Stuttgart, Arkansas James V. Kelley III Chairman, President and Chief Executive 1993 Officer, First United Bancshares, Inc., El Dorado, Arkansas Mahlon A. Martin President, Winthrop Rockefeller Foundation, 1993 Little Rock, Arkansas Appointed by the Board of Governors James R. Rodgers Airport Manager, Little Rock Regional Airport, 1991 Little Rock, Arkansas L. Dickson Flake President, Barnes, Quinn, Flake & Anderson, Inc., 1992 Little Rock, Arkansas Vacancy 1993 LOUISVILLE BRANCH Appointed by the Federal Reserve Bank Douglas M. Lester Chairman of the Board, President, and Chief 1991 Executive Officer, Trans Financial Bancorp, Inc., Bowling Green, Kentucky Morton Boyd Chairman and Chief Executive Officer, 1992 First Kentucky National Corporation, Louisville, Kentucky Laura M. Douglas Legal Director, Metropolitan Sewer District, 1993 Louisville, Kentucky Vacancy 1993 Appointed by the Board of Governors Lois H. Gray Chairman of the Board, James N. Gray 1991 Construction Company, Inc., Glasgow, Kentucky Daniel L. Ash Managing Director, Louisville Energy and 1992 Environment Corporation, Louisville, Kentucky John A. Williams Chairman and Chief Executive Officer, 1993 Computer Services, Inc., Paducah, Kentucky Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

310 78th Annual Report, 1991 Term expires Dec. 31 DISTRICT 8—Continued MEMPHIS BRANCH Appointed by the Federal Reserve Bank Vacancy 1991 Michael J. Hennessey President, Munro & Company, Inc., 1992 Wynne, Arkansas Thomas M. Garrott President and Chief Operating Officer, National 1993 Bank of Commerce and National Commerce Bancorporation, Memphis, Tennessee Larry A. Watson Chairman of the Board and President, Liberty 1993 Federal Savings Bank, Paris, Tennessee Appointed by the Board of Governors Katherine Hinds Smythe President, Memorial Park, Inc., 1991 Memphis, Tennessee Sandra B. Sanderson- Chesnut President and Chief Executive Officer, 1992 Sanderson Plumbing Products, Inc., Columbus, Mississippi Seymour B. Johnson Owner, Kay Planting Company, 1993 Indianola, Mississippi DISTRICT 9—MINNEAPOLIS Class A 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 Charles L. Seaman President and Chief Executive Officer, First 1993 State Bank of Warner, Warner, South Dakota Class B Duane E. Dingmann President, Trubilt Auto Body, Inc., 1991 Eau Claire, Wisconsin Bruce C. Adams Partner, Triple Adams Farms, 1992 Minot, North Dakota Earl R. St. John, Jr. President, St. John Forest Products, Inc., 1993 Spalding, Michigan Class C Jean D. Kinsey Professor, Consumption and Consumer 1991 Economics, Department of Agricultural and Applied Economics, University of Minnesota, St. Paul, Minnesota Gerald A. Rauenhorst Chairman of the Board and Chief Executive 1992 Officer, Opus Corporation, Minneapolis, Minnesota Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 311 Term expires Dec. 31 DISTRICT 9, Class C— Continued Delbert W. Johnson President and Chief Executive Officer, Pioneer 1993 Metal Finishing, Minneapolis, Minnesota HELENA BRANCH Appointed by the Federal Reserve Bank Beverly D. Harris President, Empire Federal Savings and Loan 1991 Association, Livingston, Montana Robert T. Gerhardt Chairman, President and Chief Executive 1992 Officer, First Interstate Bank of Montana, N.A., Kalispell, Montana Nancy M. Stephenson Executive Director, Neighborhood Housing 1992 Services, Great Falls, Montana Appointed by the Board of Governors James E. Jenks Jenks Farms, Hogeland, Montana 1991 J. Frank Gardner President, Montana Resources, Inc., 1992 Butte, Montana DISTRICT 10—KANSAS CITY Class A Robert L. Hollis Chairman of the Board and Chief Executive 1991 Officer, First National Bank and Trust Co. of Okmulgee, Okmulgee, Oklahoma Harold L. Gerhart, Jr. Chairman and Chief Executive Officer, First 1992 National Bank, Newman Grove, Nebraska Roger L. Reisher Co-Chairman of the Board, FirstBank Holding 1993 Company of Colorado, Lakewood, Colorado Class B Frank J. Yaklich, Jr. President, CF & I Steel Corporation, 1991 Pueblo, Colorado Frank A. McPherson Chairman of the Board and Chief Executive 1992 Officer, Kerr-McGee Corporation, Oklahoma City, Oklahoma Don E. Adams Buffalo, Oklahoma 1993 Class C 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 Thomas E. Rodriguez President and General Manager, Thomas E. 1993 Rodriguez & Associates, PC, Aurora, Colorado Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

312 78th Annual Report, 1991 Term expires Dec. 31 DISTRICT 10—Continued DENVER BANCH Appointed by the Federal Reserve Bank Norman R. Corzine President and Chief Executive Officer, 1991 First 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 Peter R. Decker President, Decker & Associates, 1993 Denver, Colorado Appointed by the Board of Governors 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 Gilbert Sanchez President, New Mexico Highlands University, 1993 Las Vegas, New Mexico OKLAHOMA CITY BRANCH Appointed by the Federal Reserve Bank C. Kendric Fergeson Chairman of the Board and Chief Executive 1991 Officer, The National Bank of Commerce, Altus, Oklahoma W. Dean Hidy, M.D Chairman of the Board, Triad Bank, N.A., 1992 Tulsa, Oklahoma John Wm. Laisle President, MidFirst Bank, SSB, Oklahoma City, 1992 Oklahoma Appointed by the Board of Governors Ernest L. Hollo way President, Langston University, Langston, 1991 Oklahoma William R. Allen President and Chief Executive Officer, 1992 Union Equity Cooperative Exchange, Enid, Oklahoma OMAHA BRANCH Appointed by the Federal Reserve Bank Sheila Griffin Special Advisor to the Governor for 1991 International Trade, Lincoln, Nebraska John T. Selzer Chairman of the Board and Chief Executive 1991 Officer, FirsTier Bank, N.A., Scottsbluff, Nebraska John R. Cochran President and Chief Executive Officer, Norwest 1992 Digitized for FRASER Bank Nebraska, N.A., Omaha, Nebraska http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 313 Term expires Dec. 31 DISTRICT 10, OMAHA BRANCH—Continued Appointed by the Board of Governors LeRoy W. Thorn President, T-L Irrigation Company, 1991 Hastings, Nebraska Herman Cain President and Chief Executive Officer, 1992 Godfather's Pizza, Inc., Omaha, Nebraska DISTRICT 11—DALLAS Class A 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, N.A., 1992 Houston, Texas T. C. Frost Chairman of the Board, Frost National Bank, 1993 San Antonio, Texas Class B Peyton Yates President, Yates Drilling Company and 1991 Executive Vice President, Yates Petroleum Corporation, Artesia, New Mexico Gary E. Wood President, Texas Research League, 1992 Austin, Texas J. B. Cooper, Jr. Farmer, Roscoe, Texas 1993 Class C Hugh G. Robinson Chairman of the Board and Chief Executive 1991 Officer, The Tetra Group, Inc., Dallas, Texas Leo E. Linbeck, Jr. Chairman of the Board and Chief Executive 1992 Officer, Linbeck Construction Corporation, Houston, Texas Henry G. Cisneros Chairman and Chief Executive Officer, Cisneros 1993 Asset Management Co., San Antonio, Texas EL PASO BRANCH Appointed by the Federal Reserve Bank Humberto F. Sambrano President, SamCorp General Contractors, 1991 El Paso, Texas Wayne Merritt President, Claydesta National Bank, 1992 Midland, Texas Veronica K. Callaghan Vice President and Principal, KASCO Ventures, 1993 Inc., El Paso, Texas Ben H. Haines, Jr. President, First National Bank of Dona Ana 1993 County, Las Cruces, New Mexico Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

314 78th Annual Report, 1991 Term expires Dec. 31 DISTRICT 11, EL PASO BRANCH—Continued Appointed by the Board of Governors Alvin T. Johnson Senior Vice President and Founder, 1991 Management Assistance Corporation of America, El Paso, Texas W. Thomas Beard III President, Leoncita Cattle Company, Alpine, Texas 1992 Diana S. Natalicio President, The University of Texas at El Paso, 1993 El Paso, Texas HOUSTON BRANCH Appointed by the Federal Reserve Bank Jeff Austin, Jr. President, First National Bank of Jacksonville, 1991 Jacksonville, Texas Jenard M. Gross President, Gross Builders, Inc., Houston, Texas 1992 Walter E. Johnson President and Chief Executive Officer, 1993 Southwest Bank of Texas, Houston, Texas Clive Runnells President and Director, Runnells Cattle 1993 Company, Bay City, Texas Appointed by the Board of Governors Gilbert D. Gaedcke 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 Milton Carroll President, Instrument Products, Inc., 1993 Houston, Texas SAN ANTONIO BRANCH Appointed by the Federal Reserve Bank 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 Javier Garza Executive Vice President, The Laredo National 1993 Bank, Laredo, Texas Sam R. Sparks President, Sam R. Sparks, Inc., Santa Rosa, Texas 1993 Appointed by the Board of Governors 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), Lockheed Missiles and 1992 Space Company, Austin, Texas Erich Wendl President, Maverick Markets, Inc., 1993 Corpus Christi, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 315 Term expires Dec. 31 DISTRICT 12—SAN FRANCISCO Class A William E. B. Siart President, First Interstate Bancorp, 1991 Los Angeles, California Warren K. K. Luke President and Director, Hawaii National 1992 Bancshares, Inc., and Vice Chairman of the Board, Hawaii National Bank, Honolulu, Hawaii Richard L. Mount Chairman, President, and Chief Executive Officer, 1993 Saratoga Bancorp, Saratoga, California Class B William L. Tooley Chairman, Tooley & Company, Investment 1991 Builders, Los Angeles, California E. Kay Stepp President, Portland General Electric, 1992 Portland, Oregon John N. Nordstrom Co-Chairman of the Board, Nordstrom, Inc., 1993 Seattle, Washington Class C Carolyn S. Chambers President and Chief Executive Officer, 1991 Chambers Communications Corp., Eugene, Oregon Robert F. Erburu Chairman of the Board and Chief Executive 1992 Officer, The Times Mirror Company, Los Angeles, California James A. Vohs Chairman of the Board, Kaiser Foundation 1993 Health Plan, Inc., and Kaiser Foundation Hospitals, Oakland, California Los ANGELES BRANCH Appointed by the Federal Reserve Bank David R. Lovejoy Former Vice Chairman of the Board, 1991 Security Pacific 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 Anita Landecker Director of California Programs, Local Initiatives 1993 Support Corporation, Los Angeles, California Appointed by the Board of Governors 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

316 78th Annual Report, 1991 Term expires Dec. 31 DISTRICT 12—Los ANGELES BRANCH Appointed by the Board of Governors—Continued Donald G. Phelps Chancellor, Los Angeles Community College 1993 District, Los Angeles, California PORTLAND BRANCH Appointed by the Federal Reserve Bank Stuart H. Compton Chairman of the Board and Chief Executive 1991 Officer, Pioneer Trust Bank, N.A., Salem, Oregon Elizabeth K. Johnson President and Chief Operating Officer, 1992 Transwestern Helicopters, Inc., Scappoose, Oregon Cecil W. Drinkward President and Chief Executive Officer, Hoffman 1993 Construction Company, Portland, Oregon Stephen G. Kimball President and Chief Executive Officer, Baker 1993 Boyer Bancorp, Walla Walla, Washington Appointed by the Board of Governors William A. Hilliard Editor, The Oregonian, Portland, Oregon 1991 Wayne E. Phillips, Jr. Vice President, Phillips Ranch, Inc., 1992 Baker, Oregon Ross R. Runkel Director, Willamette University Center for 1993 Dispute Resolution, Salem, Oregon SALT LAKE CITY BRANCH Appointed by the Federal Reserve Bank 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 Curtis H. Eaton Vice President; Manager, Community Banking 1993 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, Utah 1993 Appointed by the Board of Governors D. N. Rose President and Chief Executive Officer, Mountain 1991 Fuel Supply Company, Salt Lake City, Utah Gary G. Michael Chairman and Chief Executive Officer, 1992 Albertson's, Inc., Boise, Idaho Constance G. Hogland Executive Director, Boise Neighborhood 1993 Housing Services, Inc., Boise, Idaho Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 317 Term expires Dec. 31 DISTRICT 12—Continued SEATTLE BRANCH Appointed by the Federal Reserve Bank Robert P. Gray President, National Bank of Alaska, 1991 Anchorage, Alaska H. H. Larison President, Columbia Paint & Coatings, 1992 Spokane, Washington B. R. Beeksma Chairman of the Board, InterWest Savings 1993 Bank, Oak Harbor, Washington Gerry B. Cameron President and Chief Operating Officer, 1993 U.S. Bank of Washington, N.A., Seattle, Washington Appointed by the Board of Governors William R. Wiley Senior Vice President, Technology 1991 Management; and Director, Northwest Division, Battelle Memorial Institute, Richland, Washington Judith M. Runstad Managing Partner, Foster Pepper and 1992 Shefelman, Seattle, Washington George F. Russell, Jr. Chairman, President, and Chief Executive Officer, 1993 Frank Russell Company, Tacoma, Washington Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

319 Index Agreement corporations, international Board of Governors (See also Federal banking activities, 211, 221 Reserve System) Agriculture, Department of, Packers and Banking supervison and regulation, 205 Stockyards Administration, 181 Consumer and Community Affairs, 173 Assets and liabilities Economy in 1991, 7 Banks, by class, 267 Federal Open Market Committee, policy Board of Governors, 238 actions, 97 Federal Reserve Banks, 246 Federal Reserve Banks, 227 Automated clearinghouse, fees for services, Financial statements, 237 228 International developments, 31 Automated teller machines, usage in 1991, Legislation enacted, 197 184 Litigation, 193 Members and officers, 290 Monetary policy and financial markets, Bank Enterprise Act, FDICIA, Title II (See also Federal Deposit Insurance 19 Corporation Improvement Act of Monetary policy, reports to the Congress, 1991), 201 39 Bank Export Services Act, 221 Policy actions, 87 Bank for International Settlements, 203 Regulatory simplification, 225 Bank Holding Company Act of 1956 (See Salaries, 253 also Regulations: Y) Staff Litigation, 193 Schemering, Stephen C, 206 Regulation of banking structure, 217 Spillenkothen, Richard, 206 Securities subsidiaries examination, 210 Taylor, William, 206 Bank holding companies Testimony Applications to conduct nonbanking Evaluation of card holders, 190 activities, 226 Legislation, 190 Banking structure, 217 Truth in Lending Act, 190 Examinations and inspections, 208 Litigation, 193 C&S Sovran Corporation, 183 Risk-based capital guidelines, California, whitefly infestation, 17 clarifications, 89 CAMEL reporting system, 197 Stock repurchases, 220 Capital accounts Bank Merger Act, regulation of banking Banks, by class, 262 structure, 218 Federal Reserve Banks, 245, 246, 248 Bank mergers and consolidations, 275 Chairmen, presidents, and vice presidents Bank of Credit and Commerce of Federal Reserve Banks International, 206 Conferences, 297 Bank Protection Act of 1968, 225 List, 296 Bank Secrecy Act, 206, 222 Salaries of presidents, 253 Bankers acceptances, Federal Reserve Change in Bank Control Act, regulation of Banks, holdings, 246 banking structure, 218 Banking offices, changes in number, 274 Check clearing and collection Banking supervision and regulation by the Fees for Federal Reserve services, 227 Federal Reserve System, 205 Volume of operations, 263 Basle Committee, 213 Chemical Banking Corporation, 183 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

320 78th Annual Report, 1991 Clearing House Interbank Payments Dividends, Federal Reserve Banks, 256, System, 229 258 Commerce BancShares of Wyoming, Inc., 184 Earnings of Federal Reserve Banks (See Commodity Credit Corporation, 13 also Federal Reserve Banks, income Commodity Futures Trading Commission, and expenses), 230, 254 oo, LLo Economy in 1990 Commodity swaps by state member banks, Business, 46 88 External, 49 Community Reinvestment Act Government, 48 Community affairs, 178 Household, 45 Compliance, 183 Labor markets, 50 Consumer and community affairs Price developments, 52 activities in 1991, 173 Economy in 1991 Institution ratings, amendment to Business, 10, 70 regulation, 90 External, 73 Comptroller of the Currency, Office of the, Government, 12, 72 174, 179,200,211 Household, 8, 69 Condition statements of Federal Reserve Labor markets, 14, 75 Banks, 244 Price developments, 16, 77 Conferences of chairmen, presidents, and Edge Act corporations, international vice presidents of Federal Reserve banking activities, 211, 221 Banks, 297 Electronic benefit transfers, application of Congressional Budget Office, 60 Regulation E requirements, 176 Consumer Advisory Council, 188, 294 Electronic Fund Transfer Act Consumer attitudes survey, 185 Compliance, 182 Consumer Complaint Control System, 184 Economic effects, 184 Consumer leasing, compliance, 181 Equal Credit Opportunity Act Consumers Union, 177 Compliance, 181 Credit FDICIA, Title II (See also Federal Availability in 1991, 213 Deposit Insurance Corporation Evaluation of cardholders, testimony, Improvement Act of 1991), 201 190 Examinations, inspections, regulation, and Legislation, testimony, 190 audits Currency and Foreign Transactions Bank holding companies, 208 Reporting Act (See Bank Secrecy Enforcement actions, civil money Act) penalties, 208 International activities Data processing operations, 227 Edge Act corporations and agreement Defense Cooperation Account, 13 corporations, 211 Depository institutions Foreign-office operations of U.S. Reserves and related items, 268 banking organizations, 211 Deposits U.S. activities of foreign banks, 211 Banks, by class, 267 Specialized Federal Reserve Banks, 246, 268 Electronic data processing, 209 Insurance, 203 Fiduciary activities, 209 Desert Shield/Storm, Operation (See also Government securities dealers, Kuwait), 12, 37 brokers, 209 Directors, Federal Reserve Banks and Municipal securities dealers and Branches, list, 298 clearing agents, 209 Dividend payments to state member banks, Securities subsidiaries, 210 214 Transfer agents, 210 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 321 Examinations, inspections, regulation, and Federal Reserve Banks—Continued audits— Continued B anks— Continued State member banks, 207 Chicago, 179 Surveillance and monitoring, 210 Cleveland, 229, 231 Exchange Stabilization Fund, 38 Dallas, 231 Expedited Funds Availability Act, 91 Kansas City, 179 Compliance, 182 Minneapolis, 231 FDICIA, Title II, 201 New York, 230, 231 Export Trading Companies, 221 Philadelphia, publication, Resources for Revitalization, 179 Richmond, Baltimore Branch, 230 Fair Credit Reporting Act, 179 San Francisco, 179 Fair Housing Amendments Act of 1988, St. Louis, 231 186 Branches Farm Credit Administration, 181, 223 Baltimore Branch, 230 Federal Advisory Council, 293 Bank premises, 262 Federal agency securities Directors, list, 298 Federal Reserve Bank holdings and Jacksonville Branch, 229 earnings, 246, 268 Vice presidents in charge, 296 Federal Reserve open market Capital accounts, 245, 246 transactions, 1989, 250 Chairmen and deputy chairmen, 296 Repurchase agreements, 245, 246, 250, Check clearing and collection, 227 252 Condition statement, 244 Federal Deposit Insurance Corporation, Conferences of chairmen, presidents, and 174, 179,211 vice presidents, 297 Federal Deposit Insurance Corporation Data processing operations, 227 Improvements Act of 1991 Deposits, 245, 246 Banking supervision and regulation, 206 Directors, list, 298 Expedited Funds Availability, 177 Dividends paid, 256, 259, 261 Legislation, 197 Examinations, 230 Federal Financial Institutions Examination Income and expenses, 230 Council Interest rates, 264 Activities, 179 Loans and securities, 244, 246, 252, 254, HMD A reporting system, 174 268, 270, 272 Policy statement, 215 Officers and employees, number and Title II, 201 salaries, 253 Training courses, 215 Operations, volume, 231, 263 Federal Open Market Committee Payments to the U.S. Treasury, 259, 261 Meetings, 102, 113, 120, 128, 138, 147, Presidents and first vice presidents, 253, 154, 163 296 Members and officers, list, 292 Priced services Federal Reserve Act, FDICIA, Title III, Developments, 227 203 Financial statements, 233 Federal Reserve Banks Tables, 268 Assessments for expenses of Board of Securities and loan holdings, 231 Governors, 256, 258 Federal Reserve notes Bank premises, 231, 244, 246, 262 Condition statement data, 246 Banks Cost of issuance and redemption, 241, Atlanta 256 Jacksonville branch, 229 Federal Reserve System (See also Board of Publication, Partners in Community Governors) and Economic Development, Map, 328, 329 178 Membership, 224 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

322 78th Annual Report, 1991 Federal Trade Commission, 181 Insured commercial banks (See also Federal Trade Commission Act, 187 Commercial banks) Fees, Federal Reserve services to Assets and liabilities, by class of bank, depository institutions 267 Automated clearinghouse, 228 Banking offices, changes in number, 274 Check clearing and collection, 227 Number, by class of bank, 267 Currency and coin, 229 Interagency EDP examinations, 209 Pricing of, 254 Interdistrict Transportation System, 228 Financial Institutions Reform, Recovery, Interest rates, Federal Reserve Banks and Enforcement Act of 1989, 90, 92 Discount rates, 1991, 22, 92 Financial Institutions Supervisory Act, Table, 264 litigation, 194 International Banking Act, 200, 225 Financial statements, Board of Governors, International banking activities, 89, 211, 237 220, 225 First Interstate BancSystem of Montana, International developments, review of Inc., 184 1991, 31 Float (See also Check clearing and International transactions, 35 collection), 230 Interpretations of regulations, 177 Foreign bank regulation, 200 Investments Foreign currencies Federal Reserve Banks, 244, 246 Federal Reserve income on, 254 State member banks, 267 Operations, 38 Iraq (See Kuwait) Foreign economies, 32 Foreign investments by U.S. banking Justice, Department of, 189, 209 organizations, 221 Foreign-office operations, international Kuwait, invasion of, by Iraq (See also banking activities, 211 Desert Shield/Storm), 7, 36 Least-cost resolution of failed institutions General Accounting Office, 60 by FDIC, legislation, 199 Giesecke and Devrient, Inc., 230 Legislation enacted (See also specific act), Glass-Steagall Act, 210 197 Gold certificate accounts of Reserve Banks Legislative recommendations, other and gold stock, 246, 270, 272 agencies with enforcement responsibilities, 191 Hazardous substance contamination Litigation liability, 214 Bank holding companies, 193 Highly leveraged transactions Board procedures and regulations, Definition, 215 challenges to, 195 Monetary policy effects, 59 Loans Home Mortgage Disclosure Act Banks, by class, 267 Consumer and community affairs Executive officers, by member banks, activities, 173 224 Data revision, 185 Federal Reserve Banks FDICIA, Title II, 201 Depository institutions, 244, 246, 254, Housing and Urban Development, 270, 272 Department of, 174, 186, 189, 201 Holdings and income, 244, 246, 270, 272 Income and expenses Interest rates, 264 Board of Governors, 239 Volume of operations, 263 Federal Reserve Banks, 254 Insurance, deposit and pass-through, Manufacturers Hanover Corporation, 203 183 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 323 Margin requirements, 266 Publications Member banks (See also Depository "Home Mortgages: Understanding the institutions) Process and Your Right to Fair Assets, liabilities, and capital accounts, Lending," 178 267 "List of Marginable OTC Stocks," 223 Banking offices, changes in number, 274 Community Development Investments, Number, 267 178 Reserve requirements, 265 Partners in Community and Economic Michigan, University of, 1990 Survey of Development, 178 Consumer Attitudes, 185 Securities Credit Transactions Mitsui Taiyo Kobe Bank, 183 Handbook, 224 Monetary policy Credit markets, 23 Real estate appraisals, supervision, 212 Developments during 1990, 54 Regulation of banking organizations Financial markets relative to, 19 Application processing and delegation, Implementation, 20 219 Reports to the Congress, 39 Bank Holding Company Act, 217 Review of 1990, 43 Bank Merger Act, 218 Review of 1991, 67, 79 Bank Secrecy Act, 222 Mutual savings banks, 274 Change in Bank Control Act, 218 Public notice of Board decisions, 219 Regulations National Association of Securities B, Equal Credit Opportunity Act Dealers, 223 Compliance, 181 National Credit Union Administration, 174, Interpretation in 1991, 177 179, 223 BB, Community Reinvestment Act NCNB Corporation, 183 Compliance, 183 Nonmember depository institutions Ratings of institutions, amendment, 90 Assets and liabilities, 267 C, Home Mortgage Disclosure Banking offices, changes in number, 274 Reporting requirements revision, 173 Number, 267 CC, Availability of Funds and Collection of Checks Officers of Federal Reserve Banks, Checks, policy action for same day Branches, and Offices, 296 settlement, 91 Over-the-counter marginable stocks, 223 Compliance, 182 Schedule for deposits availability, 91 Packers and Stockyards Administration Schedule on holds for deposits at (See Agriculture, Department of, ATMs, 177 Packers and Stockyards D, Reserve Requirements of Depository Administration) Institutions Participants Trust Company, 229 Clarification of certain technical Payments system risk, reduction, 204 amendments, 87 Point-of-sale systems, usage in 1991, 184 E, Electronic Fund Transfers Policy actions Compliance, 182 Board of Governors Electronic benefit transfers, application Regulations, 87 to, 176 Statements and other actions, 91, 92 Interpretation in 1991, 177 Priced services, Federal Reserve, 254 G, Securities Credit by Persons other Definitive securities safekeeping, 229 than Banks, Brokers, or Dealers Net settlement transactions, 229 Margin securities, deposit acceptance, Securities and fiscal agency services, 229 88 Profit and loss, Federal Reserve Banks, Transfers between lenders of purpose 256 loans, 88 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

324 78th Annual Report, 1991 Regulations— Continued Securities (See also specific types) H, Membership of State Banking Credit, 88, 266 Institutions in the Federal Reserve Definitive, 229 System Fiscal agency services, 229 Commodity swap approvals, 88 Holdings of Federal Reserve Banks, 231 Risk-based capital guidelines, Policy statement regarding activities by clarifications, 89 depository institutions, 92 K, International Banking Operations Regulation, 222 Commodity swap approvals, 88 Securities and Exchange Act of 1934, Expand scope, 89 financial disclosure, 224 M, Consumer Leasing Securities and Exchange Commission, 88, Compliance, 181 222 P, Minimum Security Devices and Security devices and procedures, 225 Procedures for Federal Reserve "Selection of Securities Dealers and Banks and State Member Banks Unsuitable Investment Practices" Revision, 90 FFIEC policy statement, 215 T, Credit by Brokers and Dealers Soviet Union, effect on U.S. economy, 17, Margin securities, deposit acceptance, 32 88 Special drawing rights, 244, 246, 268, 270, U, Credit by Banks for the Purpose of 272 Purchasing or Carrying Margin Spillenkothen, Richard, appointment, 206 Stocks State member banks (See also Member Transfers between lenders of purpose banks) loans, 88 Applications, 220 Y, Bank Holding Companies and Change Assets and liabilities, 267 in Bank Control Banking offices, changes in number, 274 Risk-based capital guidelines, Commodity swap approvals, 89 clarifications, 89 Complaints against, 187 Z, Truth in Lending Examinations and inspections, 207 Compliance, 180 Financial disclosure, 224 Home equity loans to bank executive Foreign branches, 221 officers, 177 Foreign investments, 221 Interpretations in 1991, 177 Loans to executive officers, 224 Regulatory Improvement Project, 225 Membership, 224 Regulatory Policy and Planning Number, by class of bank, 267 Committee, 225 Superfund statute, 214 Supervision Report of Condition and Income, 216 Reserve requirements of depository Dividend payments, 214 institutions Environmental liability, 214 Amendment to Regulation D, 87 Loans to executive officers, 224 Table, 265 Policy, 212 Policy decisions in bank-related Reserves and related items, 268 Resolution Trust Corporation, 13, 25, 29, activities, 219 59, 218 Safety and soundness, 207 Risk-based capital, 89, 212 Scope of responsibilities, 206 Rules regarding delegation of authority, System Open Market Account, authority to merger approval by System officials, effect transactions in domestic amendment, 92 operations and in foreign currencies Domestic Open Market Operations, Salaries authorization for, 97 Board of Governors, 239 Domestic policy directive, 99, 113, 120, Federal Reserve Banks, 253 128, 147, 154, 163 Schemering, Stephen C, appointment, 206 Foreign currency directive, 101 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 325 System Open Market Account—Continued Foreign currency operations Agreement to "warehouse" foreign currencies, 112 Authorization for, 100 Taylor, William, resignation, 206 Thrift Institutions Advisory Council, 295 Thrift Supervision, Office of, 179, 223 Training, 215 Transactions, highly leveraged, definition, 59, 215 Transfers of funds {See also Fees and Regulations: E) Federal Reserve operations, volume, 263 Priced services, Federal Reserve, 228, 254 Schedule for deposit availability, amendment, 91 Transportation, U.S. Department of, 181 Treasury securities Bank holdings, by class of bank, 267 Federal Reserve Banks Holdings, 244, 246, 252, 268, 270, 272 Income, 254 Open market transactions, 250 Repurchase agreements Tables, 244, 246, 250, 252, 268, 270, 272 Treasury, U.S. Department of, 177, 230 Truth in Lending Act Compliance, 180 Testimony, 190 Truth in Savings Act FDICIA, Title II, 201 Uninsured annuities, sale of, on retail banking premises, 215 Unregulated practices, complaints about, 187 West Texas intermediate, crude oil, 16 Whistleblower protection, FDICIA, Title II, 201 Yankee CDs, 27 FRB1/1—12500—0492C Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

326 78th Annual Report, 1991 Maps of the Federal Reserve System 1 9 BOSTON MINNEAPOLIS • 2 " 7 m BNEW YORK 12 CHIC/ CLEVELANr • SAN FRANCISCO 10 4 • KANSAS CITYB ST. LOUIS RICHMOND 8 5 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, Washington, D.C. NOTE The Federal Reserve officially identifies Bank serves the Commonwealth of Districts by number and Reserve Bank Puerto Rico and the U.S. Virgin Islands; city (shown on both pages) and by letter the San Francisco Bank serves Ameri- (shown on the facing page). can Samoa, Guam, and the Common- In the 12th District, the Seattle wealth of the Northern Mariana Islands. Branch serves Alaska, and the San Fran- The Board of Governors revised the cisco Bank serves Hawaii. branch boundaries of the System most The System serves commonwealths recently in December 1991. and territories as follows: the New York Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Maps of the Federal Reserve System 327 4-D 5_E Baltimore Pittsburgh >m Charlotte • Cincinnati KY CLEVELAND RICHMOND 7-G 8-H • Nashville TN j Birmingham X AL WI MI Louisville Detroit • • • Memphis IN Litti? ) MS Rock \ ATLANTA CHICAGO ST. LOUIS 9-1 • Helena MINNEAPOLIS 10-J 12-L Omaha • Oklahoma City KANSAS CITY 11-K Salt Lake City El Paso • Los Angeles SAN FRANCISCO Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis