Annual Report of the Federal Reserve Board, 1992

TZeport vO 1992 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 Board of Governors of the Federal Reserve System, Publications Services, Mail Stop 138, 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 16, 1993 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-Ninth Annual Report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 1992. 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 1992 3 INTRODUCTION 7 THE ECONOMY IN 1992 8 The household sector 10 The business sector 13 The government sector 15 Labor markets 17 Price developments 21 MONETARY POLICY AND FINANCIAL MARKETS IN 1992 21 The implementation of monetary policy 26 Monetary and credit flows 35 INTERNATIONAL DEVELOPMENTS 36 Foreign economies 39 U.S. international transactions 41 Foreign currency operations 43 MONETARY POLICY REPORTS TO THE CONGRESS 43 Report on February 19, 1992 67 Report on July 20, 1992 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Part 2 Records, Operations, and Organization 95 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS 95 Regulation D (Reserve Requirements of Depository Institutions) 97 Regulation F (Limitations on Interbank Liabilities) 97 Regulation H (Membership of State Banking Institutions in the Federal Reserve System) 98 Regulation H and Regulation Y (Bank Holding Companies and Change in Bank Control) 98 Regulation J (Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers through Fedwire) and policy statements on measures for reducing payment system risks 99 Regulation K (International Banking Operations) and Regulation Y 100 Regulation O (Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks) and Regulation Y 101 Regulation Y and Rules of Procedure 103 Regulation Z (Truth in Lending) 103 Regulation CC (Availability of Funds and Collection of Checks) 104 Regulation DD (Truth in Savings) and Regulation Q (Prohibition Against the Payment of Interest on Demand Deposits) 105 Policy statements 106 1992 discount rates 109 RECORD OF POLICY ACTIONS OF THE FEDERAL OPEN MARKET COMMITTEE 109 Authorization for domestic open market operations 111 Domestic policy directive 111 Authorization for foreign currency operations 113 Foreign currency directive 113 Procedural instructions with respect to foreign currency operations 114 Meeting held on February 4-5, 1992 125 Meeting held on March 31, 1992 133 Meeting held on May 19, 1992 141 Meeting held on June 30-July 1, 1992 151 Meeting held on August 18, 1992 159 Meeting held on October 6, 1992 167 Meeting held on November 17, 1992 176 Meeting held on December 22, 1992 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

185 CONSUMER AND COMMUNITY AFFAIRS 185 Regulatory matters 190 Community affairs 192 FFIEC and other interagency activities 193 Mortgage lending discrimination 194 Use of the expanded HMDA data 196 Compliance with consumer regulations 201 Economic effects of the Electronic Fund Transfer Act 202 Complaints about state member banks 204 Unregulated practices 204 Consumer Advisory Council 205 Testimony and legislative recommendations 205 Recommendations of other agencies 207 LITIGATION 207 Bank holding companies—antitrust action 207 Bank Holding Company Act—review of Board actions 207 Litigation under the Financial Institutions Supervisory Act 208 Other actions 211 LEGISLATION ENACTED 211 Depository Institutions Disaster Relief Act of 1992 211 Federal Reserve Bank Branch Modernization Act 212 Futures Trading Practices Act of 1992 212 Housing and Community Development Act of 1992 215 BANKING SUPERVISION AND REGULATION 216 Scope of responsibilities for supervision and regulation 222 Supervisory policy 229 Regulation of the U.S. banking structure 232 International activities of U.S. banking organizations 233 Enforcement of other laws and regulations 236 Federal Reserve membership 237 REGULATORY SIMPLIFICATION 237 Reviews of regulatory burden 237 Reserve requirements 238 Bank holding companies 238 Application procedures 238 Policy on disaster relief 241 FEDERAL RESERVE BANKS 241 Developments in Federal Reserve services 245 Examinations 245 Income and expenses Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FEDERAL RESERVE BANKS—Continued 246 Holdings of securities and loans 246 Volume of operations 247 Federal Reserve Bank premises 248 Financial statements for priced services 253 BOARD OF GOVERNORS FINANCIAL STATEMENTS 259 STATISTICAL TABLES 260 1. Detailed statement of condition of all Federal Reserve Banks combined, December 31, 1992 262 2. Statement of condition of each Federal Reserve Bank, December 31, 1992 and 1991 266 3. Federal Reserve open market transactions, 1992 268 4. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities, December 31, 1990-92 269 5. Number and salaries of officers and employees of Federal Reserve Banks, December 31, 1992 270 6. Income and expenses of Federal Reserve Banks, 1992 274 7. Income and expenses of Federal Reserve Banks, 1914-92 278 8. Acquisition costs and net book value of premises of Federal Reserve Banks and Branches, December 31, 1992 279 9. Operations in principal departments of Federal Reserve Banks, 1989-92 280 10. Federal Reserve Bank interest rates, December 31, 1992 281 11. Reserve requirements of depository institutions 282 12. Initial margin requirements under Regulations T, U, G, and X 283 13. Principal assets and liabilities and number of insured commercial banks, by class of bank, June 30, 1992 and 1991 284 14. Reserves of depository institutions, Federal Reserve Bank credit, and related items—year-end 1918-92, and month-end 1992 290 15. Changes in number of banking offices in the United States, 1992 291 16. Mergers, consolidations, and acquisitions of assets or assumptions of liabilities approved by the Board of Governors, 1992 305 FEDERAL RESERVE DIRECTORIES AND MEETINGS 306 Board of Governors of the Federal Reserve System 308 Federal Open Market Committee 309 Federal Advisory Council 310 Consumer Advisory Council 311 Thrift Institutions Advisory Council 312 Officers of Federal Reserve Banks, Branches, and Offices 313 Conferences of chairmen, presidents, and first vice presidents 314 Directors 334 MAPS OF THE FEDERAL RESERVE SYSTEM 336 INDEX Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Parti Monetary Policy and the US. Economy in 1992 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction Economic activity accelerated over the of important sectors—housing, concourse of 1992, and the rise in real gross sumer durables, and business fixed domestic product during the year cumu- investment—continued to benefit in the lated to more than 3 percent, the largest second half from the substantial easing increase since 1988. Inflation continued of money market conditions that had to trend lower in 1992, with many broad been implemented over time by the Fedmeasures of price change showing in- eral Reserve. creases that were among the smallest of With the firming of the economy, recent decades. employment turned up in 1992, but the Although the rise of real GDP in 1992 rate of job growth was relatively slugwas far from robust by the standards of gish. The structural adjustments underpast cyclical upswings in activity, it was taken by large businesses were accoma much larger gain than many analysts— panied in many cases by permanent both inside and outside government— cutbacks in employment. More generhad thought likely, given the extraor- ally, businesses were able to meet their dinary headwinds with which the output objectives through hefty ineconomy had to contend. Chief among creases in productivity, thereby limiting the influences restraining growth were the need for additional workers. The budgetary stresses at all levels of gov- unemployment rate rose in the first half ernment, widespread structural changes of 1992 in conjunction with a surge in in the business sector, both in defense- the share of the working-age population related industries and elsewhere, excep- in the labor force but turned down tional caution among financial inter- thereafter as labor force participation mediaries, and ongoing efforts by fell back. The unemployment rate in businesses and households to strengthen December was 7.3 percent, almost half a their finances by restricting the growth percentage point below the peak rate of of their indebtedness. Adding still fur- June, but still a little above the level of a ther to the drag on the economy in 1992 year earlier. was the sluggish performance of foreign Price developments remained favorindustrial economies, a number of which able in 1992. The rise in the consumer still were struggling at year-end to price index over the four quarters of the regain forward momentum. year amounted to 3.1 percent, essen- The force of the headwinds seemed tially matching the low rate achieved in greatest in the first half of the year. In the previous year. Consumer energy the second half, their power appeared to prices turned back up in 1992, but the abate somewhat. In addition, a number prices of other goods and services that enter into the CPI generally rose less rapidly than they had in 1991. The suc- NOTE. The discussion here and in the following cess in keeping inflation in check, while two chapters is adapted from Monetary Policy restoring growth, had highly salutary Report to the Congress Pursuant to the Full effects on financial markets and on the Employment and Balanced Growth Act of 1978 process of financial reconstruction, the (Board of Governors, February 1993). Data cited are those available as of mid-March 1993. continuing progress of which is essen- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

79th Annual Report, 1992 tial to the achievement of renewed and because, as the year went on, it became sustainable prosperity. increasingly clear that slow growth of The hesitant pace of the economy the broad money aggregates did not evident in incoming information indicate that financial market conditions throughout much of 1992, along with were impeding the expansion of spendnotable weakness in the monetary and ing and income. In fact, growth of nomcredit aggregates and steady gains inal GDP, which accelerated to 5.7 peragainst inflation, prompted the Federal cent from 3.5 percent in 1991, exceeded Reserve to ease monetary conditions that of M2 by nearly 4 percentage points three times, bringing short-term rates in 1992 and that of M3 by nearly down another full percentage point over 5Vi percentage points. Not only did data the year. The discount rate was reduced on spending itself show a firming trend to 3 percent, and short-term rates gener- over the year, but narrow money (Ml) ally closed the year at their lowest levels and reserves expanded rapidly— since the early 1960s. suggesting to some that liquidity was Long-term rates also fell, on balance. quite ample—and the growth of debt, At times, the declines in long-term rates while restrained, was considerably in were limited by concerns about prospec- excess of that of the broader monetary tive federal budget deficits and about the aggregates. possibility that inflation might begin to The faster rise of nominal GDP in move higher as the expansion pro- 1992 was fueled by spending that was ceeded. However, notable decreases in financed largely outside banks and other long rates were registered in late 1992, depositories, whose liabilities constitute as inflation remained subdued and as the lion's share of the monetary aggrestatements by the incoming Administra- gates. Spurred in part by advances in tion suggested that it might seek only equity prices and by declines in longerlimited near-term fiscal stimulus and term interest rates, businesses and were giving serious consideration to households strengthened their balance proposals aimed at making substantial sheets by raising funds in bond, mortcuts over time in the federal budget def- gage, and equity markets and repaying icit. The trade-weighted foreign ex- bank loans and other short-term debt. change value of the dollar in terms of This shift in the focus of financing the other Group of Ten currencies appre- efforts toward the capital markets, a prociated on balance over the course of cess that had been evident in 1991 as 1992. The dollar benefited from the im- well, helped to redress financial distorproved performance of the U.S. econ- tions that had accompanied the precedomy relative to conditions in other in- ing buildup of debt and the rapid rise of dustrial countries. some asset prices in the 1980s. Growth of the monetary aggregates The low level of credit demanded slowed in 1992 despite an acceleration from depositories meant that these instiin nominal spending and income. For tutions did not need to seek large volthe year, M2 advanced 1.8 percent, umes of deposits. As a consequence, below the 2l/i percent lower end of its rates paid on deposits were adjusted target range. M3 also came in under downward rapidly as short-term market its 1 percent to 5 percent target range, rates declined. Savers, reacting to the growing only 0.3 percent. The Federal lower deposit rates and to attractive Reserve did not make greater efforts to returns on bonds and equity, shifted boost growth to within these ranges funds from M2 deposits into the capital Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction markets. One notable aspect of this shift cent in 1992, somewhat faster than in toward the capital markets was the pur- 1991 but still just above the lower end chase of bond and stock mutual funds, of its monitoring range. With debt growwhich are not included in the monetary ing less rapidly than aggregate income aggregates and which together experi- and with declines in market interest rates enced record inflows in 1992. In addi- allowing higher-cost debt to be rolled tion, with consumer loan rates falling over at lower rates, households and busiby less than deposit rates, households nesses made substantial further progress apparently used M2 assets to repay con- in reducing debt-service burdens over sumer debt or restrain its growth. The the course of the year. combination of rate incentives, desires Some of the financial and economic to strengthen balance sheets, and the adjustments that were evident in the greater availability at low transaction economy in 1992 seemed likely to cost of a broadened array of savings extend into 1993 and perhaps beyond. vehicles beyond traditional deposits At year-end, government spending for appear to have distorted, at least for defense appeared likely to continue on a a time, the traditional relationship path of sharp decline. More broadly, balbetween levels of M2 and M3 assets and ance sheet repair and business restrucgiven levels of spending. turing seemed to be still in progress at Although growth of M2 and M3 was year-end, and near-term prospects for very weak in 1992, Ml growth acceler- the foreign industrial economies were ated to 14.3 percent, the second fastest far from encouraging. The degree to annual increase recorded in the official which these, and other, developments series, which begins with 1959. This might restraint growth in the coming pickup owed in part to the expansion year remained somewhat uncertain. of aggregate spending, but it mainly This uncertainty notwithstanding, reflected the tendency for rates on liquid however, the economy clearly ended the deposits to adjust downward less rapidly year 1992 on stronger footing than it than those on time deposits. In response, had been on at the start of the year. The savers shifted substantial volumes of improvement in household and business funds from maturing time deposits to finances over the course of 1992, to- NOW accounts. In addition, businesses gether with the ongoing efforts of busiboosted their demand deposits substan- nesses to enhance efficiency, seemed to tially. To support this growth in transac- augur well for sustained expansion of tions deposits, the Federal Reserve the economy in 1993 and beyond. In added substantial volumes of reserves in addition, the considerable progress that 1992. Total reserves increased 20 per- had been made in bringing down inflacent last year, and the monetary base, tion provided another of the essential which includes currency outstanding as underpinnings for sustained growth of well as reserves, increased 10.4 percent, real living standards. the highest rate ever registered in the Looking ahead to 1993, the aim of the official series. Federal Reserve will be to promote The decisions of households and busi- financial conditions that will help to nesses to strengthen their balance sheets maintain the greater momentum that also affected debt growth in 1992, the economy developed in 1992, while although not as much as the broad mon- consolidating the trend toward lower etary aggregates. In total, the debt of inflation. But, achieving a satisfactory nonflnancial sectors expanded 4.9 per- economic performance both in 1993 and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

79th Annual Report, 1992 over the long run will depend on government policies in many areas other than monetary policy. The most important, perhaps, is the direction of fiscal policy. The new Administration and the Congress have an opportunity to make a fresh start in coming to grips with the federal government's long-standing budgetary problems. Credible action to reduce the prospective size of future budget deficits would likely yield a direct and meaningful payoff in the form of reduced federal demands on national saving, leading in turn to lower longterm interest rates than would otherwise prevail, increased capital investment, and higher living standards. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1992 The economy began to exhibit renewed real exports of goods and services over firmness in 1992, overcoming a host of the year, 5 percent, was the smallest impediments that were working to gain since 1985. Meanwhile, the faster retard the growth of activity. With the growth of domestic spending pushed up strengthening of growth in the second the growth in imports of goods and half, to an annual rate of more than services to 9lA percent in 1992. 4 percent, the rise in real GDP over the Further progress was made in reducyear cumulated to 3.2 percent, the ing inflation last year. The consumer strongest gain since 1988. Employment price index excluding food and also picked up in 1992, but rather energy—a measure widely used in slowly; the unemployment rate rose gauging the underlying trend of further in the first half of the year but inflation—increased about 3!/2 percent thereafter followed a course of gradual over the four quarters of 1992; this was decline. Inflation continued to trend a full percentage point less than the lower over the year. increase during 1991. The total CPI rose The growth of household and busi- about 3 percent over the four quarters of ness expenditures picked up appreciably 1992, almost the same as in the previous in 1992. Households began to spend year; energy prices, which had fallen more freely on motor vehicles and other sharply in 1991, turned up slightly this goods, and their purchases of homes past year, while increases in food prices also strengthened, spurring additional were quite small for the second year in a gains in residential construction. Busi- row. Except for 1986, when the CPI was nesses began investing more heavily in pulled down by a collapse of world oil new equipment; much of the gain went prices, the increases of the past two for computers and other electronic equipment embodying new technologies. Business outlays for nonresidential Real GDP construction declined, on net, over the Percentage change, annual rate year, but by a much smaller amount than in 1991. In total, the final purchases of households and businesses rose about 4V2 percent in real terms in 1992, after declining in each of the two previous years; the gain was the largest in eight years. By contrast, governments at all levels continued to be burdened by huge budget deficits in 1992, and for a second year their combined purchases of goods and services changed little in real terms. In addition, export growth was slowed by weakness of activity in several for- 1989 1990 1991 1992 eign industrial economies; despite im- The data are seasonally adjusted and come from the provement in the second half, the rise in Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 79th Annual Report, 1992 years are the smallest in a quarter in 1990 and 1991, continued to grow century. rapidly in 1992. By contrast, interest income trended sharply lower, as the rates of return on household deposits and other financial assets fell further. The Household Sector Total after-tax income got a temporary The financial condition of households boost in 1992 from an adjustment of improved in 1992. Income growth federal tax withholdings that took effect picked up a little in the aggregate, the at the start of March. With inflation strains on household balance sheets low, real disposable personal income eased a bit, and the spirits of consumers increased nearly 2V2 percent over the brightened markedly toward year-end. year—not a large gain by past cyclical Growth in consumer spending followed standards, but nonetheless the biggest a stop-and-go pattern through midsum- since 1988. mer, but the gains thereafter were Real personal consumption expendisteadier and fairly sizable overall. tures rose about 3x/4 percent over the Spending for residential investment also four quarters of 1992, after essentially advanced over the year, by a consider- no gain over the two previous years. able amount in total. For a considerable part of 1992, the The aggregate wealth of households increases in spending were interspersed appears to have increased further during with stretches of sluggishness. A surge 1992. The value of households' finan- in consumer expenditures early in the cial assets rose moderately, and the year was followed by listlessness during value of residential real estate also the spring, and a second jump in spendmoved up, on average. On the liability ing around midyear was followed by side, households remained cautious in still another bout of slow growth during taking on new debt in 1992, and the the summer. However, the last few burden of carrying debt continued to months of the year brought fairly sizable ease because of restrained growth in advances, boosting the growth of conthe volume of debt outstanding and sumption expenditures to a rate of about further reductions in interest rates, 43/4 percent in the fourth quarter. which facilitated the ongoing substitution of new, lower-cost debt for old, higher-cost obligations. The incidence Real Income and Consumption of households experiencing loan- Percentage change, annual rate repayment difficulties diminished over Disposable personal income the year. Personal consumption expenditures Income growth picked up moderately in 1992. Wages and salaries rose nearly AVi percent in nominal terms, after a gain of only 2V* percent in 1991. In addition, proprietors' incomes benefited from the strengthening of economic activity, and, with corporate profits on the rise, the dividends paid to sharehold- _L _L ers more than reversed the decline of the 1989 1990 1991 1992 previous year. Transfer payments, which The data are seasonally adjusted and come from the had soared as the economy softened Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1992 Consumer expenditures for motor for nondurables, which also had fallen vehicles increased 8I/2 percent over the in both 1990 and 1991, rose more than four quarters of 1992. A large portion of 3 percent in the latest year. Real expenthe gain came in the fourth quarter, ditures for services increased about when sales of new vehicles were 2 percent during 1992, slightly faster boosted by special promotional incen- than in other recent years. tives and, apparently, by a growing per- The personal saving rate (the share of ception among consumers that better disposable income not used for coneconomic conditions lay ahead. More sumption or other outlays) rose moderthan likely, some fundamental support ately in the first half of the year, when for sales came from the replacement concerns of households about the needs of persons who had put off buying prospects for the economy apparently new vehicles during the recession and led them to adopt more cautious attithe early phases of the recovery. tudes toward spending. The rate then Spending picked up during the sec- turned down in the second half of the ond half of 1992 for many items other year as consumers began to spend more than motor vehicles, with notable gains freely. The fourth-quarter rate was in categories in which an element of slightly below the average for 1992 but discretion typically enters into house- well within the range of quarterly obserholds' purchasing decisions. Real out- vations seen over the past several years. lays for furniture and household equip- Real outlays for residential investment rose at an annual rate of about ment rose almost 15 percent during 15 percent in the second half of 1992, 1992, climbing to a fourth-quarter level and real expenditures for apparel nearly 24 percent above the recession climbed at more than a 10 percent rate. low of early 1991. Most of the 1992 rise In total, spending for consumer durables in residential investment came in the other than motor vehicles grew almost form of increased construction of single- 10 percent in real terms over the four family housing units, which benefited quarters of 1992, after declining in each from the further net reduction in mortof the two previous years. Real outlays gage interest rates over the course of the year. Outlays for home improvements, which make up about one-fifth of total residential investment, also increased in Private Housing Starts Millions of units, annual rate 1992, after declining in each of the three previous years; repair of the damage caused by Hurricane Andrew accounted Single-family for part of that gain. By contrast, multifamily housing remained depressed; high vacancy rates and unfavorable demographic trends continued to be big obstacles to new construction activity in 0.5 that portion of the market. As with consumer spending, the gains in single-family housing activity tended to come in intermittent bursts through much of 1992. Sales of new homes 1986 1988 1990 1992 surged early in the year, weakened in The data are seasonally adjusted and are from the Department of Commerce. the spring, surged again during the sum- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

10 79th Annual Report, 1992 mer, and then flattened out in the fourth Builders, for their part, remained quarter; on net, the increase over the a little cautious in 1992, as did the year amounted to about 15 percent. lenders who finance new construction. Mortgage interest rates, although lower More often than in the past, houses than in 1991, exhibited some mild tended to be started only when a buyer swings during 1992, and these swings was lined up; eagerness to build in anticappear to have contributed to the fluctu- ipation of future sales was not widely ations in home sales. Proposals early in apparent. the year for a tax credit for first-time In the multifamily sector, the number homebuyers also may have affected the of units started in 1992 was about timing of purchases to some degree. 75 percent below the peak rates of the Construction activity in the single- mid-1980s; the sector accounted for family sector also had its ups and downs only 6 percent of total residential investin 1992, influenced by unusual weather ment in 1992. The overbuilding that had patterns as well as by the fluctuations in occurred in the multifamily sector in the sales. Even so, the trend over the year mid-1980s led to high vacancy rates as a whole was decidedly upward, and that stymied activity thereafter. In that the average level of starts in the fourth regard, only limited progress was made quarter was about 20 percent above that in reducing vacancy rates for multiof a year earlier. family rental units in 1992, despite the Nonetheless, by the fourth quarter of greatly diminished level of new con- 1992, starts in the single-family sector struction. Declines in the population of had retraced only part of the decline that young adults continued to hold down took place in the late 1980s and early the speed at which the excess supply of 1990s. Strong impetus for recovery was space could be worked off. provided by the declines in mortgage interest rates, which were considerably lower in 1992 than they were in 1986, The Business Sector when single-family starts were at their most recent annual peak. However, a The past year brought moderate innumber of other developments contin- creases in activity in the business sector ued to retard the recovery of housing of the economy. Production, sales, and activity. Uncertainties about job pros- orders rose, on net, over the year, and pects no doubt deterred some buyers business profits continued to swing back from taking advantage of the lower rates up from the recession lows of 1991. on home mortgages. More broadly, Many businesses continued to undertake demographic trends in 1992 were less major structural changes designed to favorable to growth in the demand for cut costs and enhance efficiency; the single-family housing than were the changes were manifest both through trends of the mid-1980s. The declines in reorganization of existing operations house prices in a number of regions in and through investment in new technolrecent years—and the more general lack ogies. Businesses also continued to of any real price appreciation to speak shore up their finances, trimming away of—also may have affected demand to debt and building equity. Financial pressome extent; certainly, housing was no sures persisted in the business sector longer viewed by potential buyers as the in 1992, but, in general, they seemed sure-fire, high-yield investment that it to become less acute as the year was once thought to be. progressed. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1992 \\ Industrial output rose more than costs led to increases in profits per unit 3 percent from December 1991 to of output. Unit labor costs of nonfinan- December 1992. Production fell in the cial corporations rose only slightly from first month of 1992 but then picked up, the start of the current economic expanrising about XA percent per month from sion to the third quarter of 1992, and net February through May. During the sum- interest costs declined sharply over this mer, the expansion of activity seemed to period because of lower interest rates be losing momentum; orders and ship- and restraint in the use of debt. The ments fell slightly, on net, from May to domestic profits of financial corpora- August, factory inventories backed up a tions were strong in the first half of 1992 little, and industrial production essen- but were severely depressed in the third tially flattened out over a four-month quarter by the unprecedented losses that stretch. However, orders and shipments insurance companies suffered in the began moving up once again in Septem- wake of Hurricane Andrew; in the ber, and they increased considerably in absence of the hurricane, profits in the the fourth quarter. Industrial production financial sector would have increased in also picked up once again in the fourth the third quarter. quarter, rising at an annual rate of about The economic condition of smaller 7 percent over the final three months of companies also seemed to improve the year. somewhat in 1992. The estimated rise in Business profits, which had taken the profits of nonfarm proprietors over a turn for the better late in 1991, the year was the largest annual gain improved further during 1992. The oper- since the mid-1980s; increases had been ating profits earned by nonfinancial cor- relatively small over the three previous porations from their domestic opera- years. tions rose 18 percent from the final The net income of farm proprietors quarter of 1991 to the third quarter of turned back up in 1992 after a moderate 1992, and a further gain seemed implicit decline in 1991. Farm output rose to a in the available data for the fourth quar- record high in 1992, with strong gains ter. (An actual estimate of fourth-quarter for both crops and livestock. Prices, profits was not published by the Depart- meanwhile, lagged year-earlier levels ment of Commerce until late March, through much of 1992, but most of that after this REPORT had gone to press.) Profits of these firms were lifted, in part, by further increases in the volume of Corporate Profits before Taxes output. In addition, tight control over Percent of gross domestic product Industrial Production Index, 1987= 100 1986 1988 1990 1992 Profits of nonfinancial corporations from domestic operations, with adjustments for inventory valuation and _L capital consumption, divided by GDP of nonfinancial 1989 1990 1991 1992 corporate sector. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

12 79th Annual Report, 1992 slippage in farm prices already had advances and competitive market conditaken place by the start of the year; the tions combined to continue driving average level of farm prices in Decem- down the price of real, effective computber 1992 actually was about the same ing power. Businesses also boosted their as that a year earlier. Farm production outlays for telecommunications equipexpenses were little changed for a sec- ment, especially in the second half of ond year as farm operators, like their 1992. Spending for motor vehicles nonfarm counterparts, continued to strengthened in 1992, and investment in maintain tight control over costs. industrial equipment edged up after Business investment in fixed capital three years of decline. Spending for airrose about 8 percent in real terms during craft traced out a volatile pattern during 1992, more than reversing the decline of 1992 and, for the year as a whole, was the previous year. Spending for equip- down only moderately from the high ment increased in each quarter of 1992, level of 1991; at year-end, however, the and the gains cumulated to about prospects for such spending did not 121/2 percent by the fourth quarter; with seem encouraging, given the losses that spare capacity still extensive in most had been experienced by airline compaindustries in 1992, much of the gain in nies and the related cancellations and equipment spending over the year prob- stretch-outs of orders that had been ably was a result of the desire of busi- reported. nesses to modernize their operations. The moderate decline in nonresiden- Meanwhile, nonresidential construction tial construction outlays during 1992 spending, which had plunged 14 percent reflected some widely divergent trends in 1991, fell by a much smaller amount across the various types of construction in 1992—23/4 percent according to the activity. Spending for new office buildestimate in the latest GDP report. ings fell sharply further during the year, Increased spending for computers was to a fourth-quarter level that was more at the forefront of the rise in equipment than 60 percent below the peak of the outlays in 1992. In terms of annual aver- mid-1980s. In addition, real outlays for ages, the nominal outlays for office and industrial structures declined in 1992 for computing equipment rose nearly the second year in a row, influenced, no 17 percent; the gain in real terms was doubt, by the current high levels of much greater still, as technological unused industrial capacity and by the Changes in Real Business Inventories Real Business Fixed Investment Billions of 1987 dollars, annual rate Percentage change, annual rate Structures 30 1 Producers' durable equipment | 15 I •• 1— 1 1 0 1 1 J 10 15 1 1 i 1989 1990 1991 1992 1989 1990 1991 1992 Total nonfarm sector. The data are seasonally adjusted The data are seasonally adjusted and come from the and come from the Department of Commerce. Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1992 13 ongoing trend toward tighter control of ually strengthening, the rate of increase inventories and concomitant reductions in federal receipts picked up a little, to in needed storage space. Annual outlays 3V2 percent, from only 2lA percent in for oil and gas drilling also fell further fiscal 1991. However, spending once in 1992; a rise in drilling in the year's again rose faster than receipts; total fedfinal quarter probably was prompted eral outlays were up AV2 percent in fiscal mainly by a year-end phaseout of cer- 1992, after a rise of nearly 53/4 percent tain tax incentives, although some drill- in the previous fiscal year. ers may also have been responding to an The rates of growth in total spending upturn in natural gas prices over the in 1991 and 1992 may well understate year. the degree of upward momentum in fed- Other types of construction activity eral outlays in those years. In 1991, total fared better in 1992. Spending for com- spending was held down considerably mercial structures other than office by a convention used in the federal budbuildings moved up over the year, after get to account for the flow of contribusharp declines in both 1990 and 1991, tions to the United States from its allies and the outlays of utilities rose apprecia- in the Gulf War. Those contributions bly, boosted by environmental require- were counted as negative defense outments as well as by further moderate lays rather than additions to receipts. additions to capacity. Increases in con- Additional contributions from the allied struction spending also were reported countries were received in fiscal year for various types of institutional struc- 1992, but they were much smaller than tures, such as hospitals. Government Surpluses and Deficits Billions of dollars The Government Sector pFederal govenrnment m Government purchases of goods and services, the portion of government spending that is included in GDP, increased 100 slightly in real terms over the course of 1992, after declining slightly during 200 1991. Federal purchases fell about 3/4 percent in real terms over the year, as I I I I I I •• a further decline in real defense pur- State and local governments chases more than offset a small increase in real nondefense purchases. State and local purchases of goods and services increased about Wi percent during 15 1992, a rise slightly larger than in 1991 but still well below the rates of increase 30 seen through much of the 1980s. Governments at all levels continued II II 1i II II •• I ™ 1986 1988 1990 1992 to be plagued by severe budgetary The data on the federal government are for fiscal years. imbalances in 1992. At the federal level, They are on a unified budget basis and are from the the unified budget deficit rose about Department of the Treasury. $20 billion in fiscal year 1992, to a level The data on state and local governments are for operating and capital accounts on a national income accounts of $290 billion. With the economy gradbasis and are from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 79th Annual Report, 1992 in 1991. Another important factor at port was at the core of the budget diffiwork in 1992, however, was a delay in culties of many states and localities; in funding the activities of the Resolution nominal terms, transfer payments in the Trust Corporation, which kept the 1992 fourth quarter were about 16 percent outlays for deposit insurance programs above the level of a year earlier. much lower than they otherwise would Construction spending by state and have been. local governments picked up in 1992. Excluding the outlays for deposit According to preliminary data, the real insurance and the effect of the allied gain in these outlays amounted to 3 percontributions on reported levels of cent over the four quarters of the year. defense spending, federal expenditures Spending for highways increased conrose about 6V2 percent in nominal terms siderably in 1992, and outlays for buildin fiscal year 1992, after an increase of ings other than schools were strong in nearly 9 percent in fiscal year 1991. the first half of the year. Construction of Spending for entitlements, especially educational facilities, which had been those related to health care and income boosted in previous years by increases support, continued to grow very rapidly in the school-age population, rose furin 1992. In the health area, federal out- ther in 1992, but the increase was small, lays for Medicaid increased nearly both in absolute terms and relative to the 30 percent, and spending for Medicare gains in most other recent years. rose 14 percent. Spending for income Growth in other major categories security was boosted in 1992 by further of state and local expenditures was large increases in unemployment bene- restrained. Compensation of employees, fits and food stamp disbursements. In which accounts for more than half of dollar terms, the combined rise in out- total state and local expenditures, inlays for health care and income security creased IV2 percent in real terms over amounted to about $60 billion. In- the four quarters of 1992; in nominal creased expenditures for social security terms, the rise over the year amounted added almost another $20 billion. to about 43/4 percent, similar to that of Combined spending for all other pro- 1991 but much less than the nominal grams rose only slightly in fiscal year increases seen in the years before 1991. 1992. Within that broad and diverse Restraint on wage growth was widegrouping, defense outlays fell sharply in spread in the state and local sector in nominal terms, once adjustment is made 1992, and although total employment in for the allied contributions, but some the sector grew a little faster than in nondefense functions posted large 1991, hiring freezes, furloughs, and layincreases in outlays. offs continued to be reported in some State and local governments saw no hard-pressed jurisdictions. State and relief from budgetary pressures in 1992. local purchases of durable and nondura- The combined deficit in their operating ble goods—such things as equipment and capital accounts, net of social insur- and supplies—apparently grew little in ance funds, widened a bit over the first real terms over the course of 1992. Real three quarters of the year, reversing the purchases of services from outside supsmall improvement that had been pliers apparently edged down for the achieved in the latter part of 1991. As is third year in a row. true at the federal level, a rapidly rising Many states and localities have implelevel of mandated transfer payments to mented tax increases in recent years in individuals for health and income sup- an effort to bolster receipts. In addition, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1992 15 grants-in-aid from the federal govern- little in 1992, after two years of sharp ment have been rising rapidly, and, in decline. 1992, improvement in the economy About 900,000 new jobs were created helped boost receipts to some degree. In in the service-producing sector of the total, state and local receipts rose economy in 1992. The number of jobs 73/4 percent in annual average terms in in retail trade turned up a little, on net, 1992, outpacing the growth of nominal after dropping about one-half million GDP by a considerable amount. How- over the two previous years. Also, firms ever, for the third year in a row, the that provide services to other businesses increase in receipts fell short of the recorded strong employment growth in annual rise in nominal expenditures, 1992; more than likely, these firms were which amounted to more than 8 percent the ones that benefited most from the in 1992. tendency of businesses to purchase labor and services from other firms rather than hire additional workers of their own. Labor Market Developments Employment in health services, which had remained on a strong upward trend The labor market remained relatively right through the recession, continued to sluggish in 1992. Some large companies grow fairly rapidly in 1992. continued to undergo major restructur- The employment measure that is ings or reorganizations, and these derived from the monthly survey of changes led in many cases to permanent households was stronger than the paywork force reductions at those firms. roll measure in 1992; it showed an More generally, businesses remained increase of about IV2 million in the hesitant to take on new workers, even as number of persons holding jobs and by the recovery progressed. The still- year-end had moved back close to the sluggish pace of output growth in the previous cyclical peak of mid-1990. first half of the year tended to limit labor Reasons for the stronger performance of requirements during that period. Later the household series are not entirely on, when firms started to expand output clear. Differences in coverage between more rapidly, they were able to do so the household survey and the payroll without making major long-term hiring survey accounted for only a small part commitments. Needs for additional of the 1992 gap, and at year-end other workers were met, in many cases, possible explanations were little more through use of temporary-help firms, than conjecture. rather than through permanent additions The number of unemployed persons to companies' own payrolls. increased in the first half of 1992, to a Nonetheless, the tilt of the overall peak in June of nearly 9.8 million. Job employment trend was positive, rather losses—many of them apparently than negative as it had been in 1990 and permanent—continued to mount in the 1991. Payroll employment, a measure first half of the year, and new job opporthat is derived from a monthly survey of tunities did not open up fast enough to business establishments, was up about fully absorb either those workers or 600,000 during 1992. The number of others entering the work force for the jobs in manufacturing fell further in first time. As a result, the unemploy- 1992, but not as much as in either of ment rate rose more than V2 of a percentthe two previous years. In addition, age point in the first half of the year, to a employment in construction changed June level of 7.7 percent. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

16 79th Annual Report, 1992 The second-half outcome was more Labor Market Conditions favorable. The number of unemployed Net change, millions of jobs, annual rate persons declined about one-half million Private nonfarm payroll employment from June to December, and the unemployment rate moved down over that period, to a level of 7.3 percent at yearend. Some of the workers who had been laid off temporarily were recalled in the second half of the year. In addition, the number of unemployed workers not expecting to be recalled—the so-called permanent job losers—also declined; J 1 1 1 L presumably, these workers either found Percent new jobs elsewhere in the economy or Civilian unemployment rate dropped out of the labor force altogether. A similar story applied to unemployed new entrants, a category of jobless workers whose ranks were a little thinner at the end of 1992 than they had been at midyear. In the aggregate, the civilian labor force—the sum of those persons who are employed and those who are looking I I I for work—rose sharply in the first half Percentage change, Dec. to Dec. of 1992 but changed relatively little Employment cost index thereafter. Its level in December was up Total compensation, private industry l3/4 million from that of a year earlier. The labor force participation rate—the • 1 1 1 1 11 proportion of the working-age population that is in the labor force—fell over the second half of the year, reversing part of its first-half rise. Against a backdrop of slack in labor markets and in the context of reduced Percentage change, Q4 to Q4 inflation, the rate of rise in workers' hourly compensation continued to slow Output per hour Nonfarm business sector in 1992. The employment cost index for private industry (a measure of labor cost that includes wages and benefits and covers the entire nonfarm business sector) increased 3V2 percent from December of 1991 to December of 1992. The index had risen nearly AVi percent in the previous twelve-month period, and as I I 1 J L recently as mid-1990 its twelve-month 1986 1988 1990 1992 rate of change had exceeded 5 percent. The data are from the Department of Labor. The employment cost index for wages and salaries increased only 2.6 percent Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1992 17 during 1992; this was the smallest an- tually the same as the increase in the nual rise ever reported in this measure, previous year. Energy prices, which had which dates back to 1975. The rate of fallen in 1991, turned up a little in 1992, rise in the cost of benefits provided by but price increases elsewhere in the firms to their employees also slowed in economy were generally smaller than 1992, but the size of the increase—5lA those of the previous year. The limited percent—was still relatively large. Many rise in labor costs in 1992 was one firms, both large and small, continued to important factor exerting restraint on the be pressured by the rising cost of medi- rate of price increase. In addition, the cal care for their employees and by the cost of materials used in production increased cost of workers compensation rose only moderately over the year, as insurance; the difficulty of bringing did the prices of goods imported from these costs under control may well have abroad. Although inflation expectations, been a serious deterrent to increased hir- as reported in various surveys of coning in 1992. sumers and business officials, remained Despite the further slowdown in nom- a step or so above actual inflation rates, inal compensation per hour in 1992, the they too appear to have moved lower purchasing power of an hour's labor over the year. Their levels toward yearappears to have risen in real terms, as end were about in line with—or, accordthe nominal increase in hourly wages ing to some surveys, less than—the and benefits, as measured by the lower bound of the range of inflation employment cost index, outpaced the expectations reported during the 1980s. rise in consumer prices for the second The CPI for food increased a bit less year in a row. Real compensation, com- than PA percent in 1992, about the same puted in this manner, had declined amount as in 1991. Not since the 1960s sharply in 1990, and the increase in had there been a two-year period in 1989 had been barely positive. which the cumulative increase in food Sustained increases in real living stan- prices was so small. This low rate of dards depend ultimately on advances in food price inflation in 1991 and 1992 the productivity of the work force, and was, in part, a reflection of the same on that score the economy performed factors that were working to pull inflawell in 1992. Output per hour worked in tion down in other parts of the economy. the nonfarm business sector jumped In addition, food prices were restrained more than 3 percent over the year, the by favorable supply conditions in the largest annual gain since 1975. A por- farm sector. Meat production rose furtion of this large rise was a reflection of ther in 1992, and the output of crops normal cyclical tendencies, but longer- soared. Dryness in some regions imrange improvement in productivity parted temporary volatility to crop growth also appeared to be in progress. prices in late spring. Thereafter, grow- The jump in output per hour in 1992, ing conditions turned exceptionally combined with the slowing of compen- favorable and remained so through the sation gains, held the increase in unit summer and into early autumn. Unusulabor costs to just 0.4 percent. ally wet conditions in some regions later on in the autumn apparently made only a small dent in the eventual size of the Price Developments harvest. The consumer price index rose 3.1 per- The rise in consumer energy prices cent over the four quarters of 1992, vir- over the four quarters of 1992 amounted Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

18 79th Annual Report, 1992 to about 2lA percent. The previous year, 1991 decline. The CPI for commodities energy prices had fallen 8 percent. With other than food and energy rose 2Vi perno major supply or demand shocks cent during 1992, after an increase of springing up in world oil markets in more than 4 percent over the four quar- 1992, the price of West Texas intermedi- ters of 1991. Price increases for this ate stayed in the relatively narrow trad- broad category of goods were restrained ing range of about $18 to $23 per barrel. by the cost and price developments in At the retail level, price changes for manufacturing: Unit labor costs in manpetroleum products were mixed in 1992; ufacturing actually declined in 1992, the price of gasoline rose about 3 per- and the producer price index for finished cent, while fuel oil prices declined mod- goods rose less than 2 percent. erately. The CPI for natural gas rose After falling sharply from mid-1990 nearly 5 percent in 1992, considerably to the end of 1991, the prices of indusmore than in other recent years. trial commodities generally changed Although much of that rise in gas prices little, on balance, during 1992. By the came in the second half of the year in end of 1992, however, prices for some the wake of supply disruptions caused industrial metals had begun to tilt up, by Hurricane Andrew, prices of gas at consistent with the pickup in the pace of the wellhead had already moved up considerably before the hurricane hit, apparently in response to a somewhat tighter Prices Percentage change, Q4 to Q4 supply-demand balance than had existed over the previous year or so. Consumer The CPI excluding food and energy rose 3.4 percent over the four quarters of 1992, a percentage point less than it had risen in 1991. The slowdown was widespread among the various categories of goods and services that are included in this measure of core inflation. The rate of rise in the cost of shelter—the single most important category in the CPI, with a weight equal to more than one-fourth of the total— slowed further in 1992; rents for both Consumer excluding food and energy apartments and houses apparently were damped by the large amount of vacant housing that was available in many parts of the country. The prices of other services that are included in the CPI— which collectively make up another onefourth of the total index—also slowed appreciably in 1992; nonetheless, their overall rate of increase remained relatively high. The costs of medical care services and tuition continued to rise 1986 1988 1990 1992 much faster than prices in general in For all urban consumers. The data are seasonally 1992, and airfares rebounded from their adjusted and are from the Department of Labor. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1992 19 industrial expansion toward year-end. The prices of lumber and plywood— following a path considerably different from that of most other commodities— rose substantially during 1992. The surge in prices of these products appeared to be a reflection of the uptrend in single-family housing construction, weather-related supply disturbances in some timber regions, and adjustment of the logging industry to environmental restrictions that had been implemented in some areas of the country. Prices of some other wood products, such as pulp, also rose sharply at the producer level in 1992. The increases in prices of these raw materials showed through to some extent to broader measures of producer prices. For example, the producer price index for intermediate materials excluding food and energy—a price index that encompasses a wide range of production materials—rose 1 percent during 1992 after declining about 3A percentage point over the four quarters of 1991. From an economywide perspective, however, the pickup in materials prices in 1992 was not sufficient to dominate the deceleration in labor costs, which account for a far greater share of total production costs in the economy. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

21 Monetary Policy and Financial Markets in 1992 Federal Reserve policy in 1992 was inflation evidenced further slowing, with directed at promoting and extending the the "core" inflation rate falling to levels recovery from the 1990-91 recession last seen in the early 1970s. Thus, 1992 in the context of continued progress was a year not only of financial repair, toward price stability. Designing and but also of improved aggregate ecoimplementing constructive monetary nomic performance in the United States. policies continued to be exceptionally difficult. As in the previous couple of years, economic activity was held back The Implementation to an unusual degree by the efforts of of Monetary Policy households, nonfinancial businesses, and some key providers of credit to The year 1992 began with short-term the economy, including commercial interest rates at their lowest levels in banks, to strengthen their balance sheets. more than a quarter of a century, follow- These forces tended to alter the normal ing a series of actions by the Federal relations between financial flows— Reserve in the latter part of 1991 that particularly those reflected in move- reduced the discount rate and the level ments in M2 and M3—and the behavior around which the federal funds rate was of the economy. Under the circum- expected to trade to 3Vi percent and stances, the Federal Reserve had to take 4 percent respectively. Long-term rates a flexible approach to the use of money were also at lower levels, reflecting the and credit aggregates as intermediate policy actions and a weakening of ecopolicy targets; specifically, in light of nomic activity in the final quarter of evidence that expansion in economic 1991. activity was being financed to an Evidently in the expectation that these unusual extent in capital markets rather rate cuts would revive the recovery, the than through banks and other deposi- stock market began the year with strong tories, the System tolerated shortfalls of upward momentum, and the dollar M2 and M3 from their target ranges. appreciated. However, other evidence The Federal Reserve judged it appro- that the economy was picking up priate to ease reserve conditions on three remained scanty in the initial part of occasions in 1992, when financial and 1992, despite the significant monetary economic data suggested that the econ- stimulus already in place and the posiomy might be losing momentum. The tive developments in equity and capital extent of the easings last year was con- markets. Apart from rising housing siderably less than in 1991, however, as starts, a phenomenon in part related to the underlying trend of the economy special weather and tax factors, the overall was more positive. Partly as a economy appeared sluggish in the first result of the cumulative effect of the few weeks of 1992, and confidence levmonetary easings of recent years, eco- els were low. Spending by households nomic activity accelerated in 1992 to its and businesses was seemingly being fastest pace since 1988. This pickup was restrained by efforts to strengthen finanachieved even as various measures of cial positions, and banks had done little Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

22 79th Annual Report, 1992 to reverse the substantial tightening of riskiness of private debt as the economy lending standards that occurred in 1990 strengthened coupled with concerns and 1991. In view of the still-tentative about enlarged Treasury demands on nature of the recovery and the solid credit markets stemming from disprogress against inflation that had been cussions of possible fiscal stimulus. made to that point, the Federal Open Areas of weakness in the economy Market Committee at its first meeting of remained, however—some attributable 1992 instructed the Manager of the to the substantially overbuilt commer- Open Market Account at the Federal cial real estate sector and some to the Reserve Bank of New York to remain transition to a smaller defense sector. In especially alert to evidence that money addition, the backup in long-term intermarket conditions might need to be est rates threatened to slow the pace eased before the next scheduled meeting of balance sheet adjustment and to damp of the Committee. Such a policy stance spending for housing, consumer durabiased toward ease had prevailed over bles, and business investment. Meanmuch of 1991. while, the outlook for exports clouded. M2 and M3, which had posted moder- In early April, the System eased ate gains in January, surged in February, reserve conditions again. The action was partly because of stronger income taken on indications that the monetary growth and earlier sharp declines in aggregates, already at the bottom of short-term interest rates and partly be- their target ranges after their sluggish cause of special factors—above-average performance in March, were contracttax refunds and a jump in mortgage ing, that the pace of economic expanrefinancing, which resulted in funds be- sion might be slowing once again, and ing held temporarily in demand depos- that inflation was continuing to recede. its. Underlying money growth remained very weak, however, and well below that consistent with expectations based Short-Term Interest Rates on the historical relationship of money Percent with income, deposit rates, and market interest rates. In March, as the influence of the special factors abated, M2 flattened out, and M3 contracted. News on the economy became more upbeat as the first quarter progressed. Retail sales and housing starts strengthened, industrial production turned up, and the confidence of businesses and Treasury bills households improved, as did the quality Three-month of their balance sheets. The signs of recovery and a market view that prospects for further near-term monetary ease had faded caused long-term interest rates to increase during this period, and 1982 1984 1986 1988 1990 1992 the dollar rose on foreign exchange mar- The data are monthly averages. kets as well. Private interest rates rose The federal funds rate is from the Federal Reserve. less than rates on Treasuries, likely The rate for three-month Treasury bills is the market rate on three-month issues on a coupon-equivalent basis reflecting perceived reductions in the and is from the Department of the Treasury. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 23 Short-term interest rates fell more than ing level of the federal funds rate, as the lA percentage point drop in the trad- market participants judged the economy Reserves, Money Stock, and Debt Aggregates Annual rate of change in percent, based on seasonally adjusted data except as notedl 1992 Item 1989 1990 1991 Year Ql Q2 Q3 Q4 Depository institution reserves 2 Total -.4 2.2 8.7 20.2 23.4 14.9 9.3 27.9 Nonborrowed 4.6 2.4 9.2 20.4 19.3 16.7 6.0 34.5 Required -.2 1.8 9.4 20.4 23.5 15.4 9.9 27.4 Monetary base3 4.0 9.4 8.2 10.4 9.1 7.8 10.5 12.9 Concepts of money4 Ml .6 4.3 8.0 14.3 15.5 10.6 11.6 16.8 Currency and travelers checks 4.8 10.9 8.3 9.1 7.2 6.7 11.1 10.3 Demand deposits -2.9 -.6 3.3 18.0 21.6 13.4 13.3 19.6 Other checkable deposits 1.0 3.6 12.5 15.4 16.9 11.3 10.8 19.3 M2 4.7 4.0 2.8 1.8 3.2 .3 .8 2.7 Non-Mi components 6.2 3.9 1.1 -2.6 -1.1 -3.4 -3.2 -2.8 MMDAs, savings, and smalldenomination time deposits 3.8 2.8 .9 -2.3 -1.6 -2.5 -2.8 -2.2 General-purpose and broker-dealer money market mutual fund assets .. 30.6 11.4 4.2 -5.2 -3.0 -6.6 -7.5 -4.1 Overnight RPs and Eurodollars (n.s.a.) . -8.5 3.4 -6.8 1.7 18.5 -27.8 15.3 2.3 M3 3.7 1.8 1.1 .3 1.9 -.6 .1 -.2 Non-M2 components -.3 -6.5 -6.2 -6.6 -4.1 -4.9 -3.6 -14.3 Large-denomination time deposits — 5.4 -9.7 -13.0 -16.3 -17.6 -16.9 -17.9 -17.1 Institution-only money market mutual fund assets 17.7 21.9 33.5 18.2 33.0 24.0 32.8 -19.3 Term RPs (n.s.a.) -13.3 -12.4 -20.2 7.8 -11.2 16.5 2.6 23.1 Term Eurodollars (n.s.a.) -23.3 -13.6 -10.7 -22.6 -27.0 -24.0 -19.5 -28.5 Domestic nonfinancial sector debt . 6.9 4.3 4.9 4.2 5.7 4.9 4.4 Federal 7.2 10.3 11.0 10.7 10.0 14.4 10.7 6.0 Nonfederal 8.4 5.9 2.2 3.0 2.3 2.8 2.9 3.8 1. Changes are calculated from the average amounts M2 is Ml plus savings deposits (including money outstanding in each quarter. Annual changes are mea- market deposit accounts); small-denomination time sured from Q4 to Q4. deposits (including retail repurchase agreements), from 2. Data on reserves and the monetary base incorporate which have been subtracted all individual retirement adjustments for discontinuities associated with regulatory accounts (IRAs) and Keogh accounts at commercial changes in reserve requirements. banks and thrift institutions; taxable and tax-exempt 3. The monetary base consists of total reserves; plus general-purpose and broker-dealer money market mutual the currency component of the money stock; plus, for all funds, excluding IRAs and Keogh accounts; wholesale quarterly reporters, and for all weekly reporters without overnight and continuing-contract repurchase agreements required reserve balances, the excess of current vault cash (RPs) issued by commercial banks and thrift institutions over the amount applied to satisfy current reserve require- net of money fund holdings; and overnight Eurodollars ments. For further details, see the Federal Reserve's H.3 issued to U.S. residents by foreign branches of U.S. banks Statistical Release. worldwide net of money fund holdings. 4. Ml consists of currency in circulation excluding M3 is M2 plus large-denomination time deposits at all vault cash; travelers checks of nonbank issuers; demand depository institutions other than those due to money deposits at all commercial banks other than those due to stock issuers; institution-only money market mutual depository institutions, the U.S. government, and foreign funds; wholesale term RPs issued by commercial banks banks and official institutions, less cash items in the and thrift institutions net of money fund holdings; and process of collection and Federal Reserve float; and other term Eurodollars held by U.S. residents at all banking checkable deposits, which consist of negotiable orders of offices in Canada and the United Kingdom and at foreign withdrawal and automatic transfer service accounts at branches of U.S. banks worldwide net of money fund depository institutions, credit union share draft accounts, holdings. For further details, see the Federal Reserve's and demand deposits at thrift institutions. H.6 Statistical Release. n.s.a. Not seasonally adjusted. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

24 79th Annual Report, 1992 sufficiently weak to make further near- Nonfinancial data confirmed that the term monetary easing moves likely. The economy remained slack. Although both easing buoyed the stock market, but nonfarm payroll employment and induslong-term rates showed a limited trial production increased in May for the response and remained well above year- fourth straight month, the unemployend levels. ment rate rose sharply because of a ris- In the weeks following the April eas- ing labor force participation rate. Moreing, news on the economy was mixed, over, homebuying and retail sales, other but positive on balance. Single-family than of automobiles, slowed from the housing starts, which had contracted pace earlier in the year, and demand for in March, fell considerably further in U.S. exports was held down as growth April, and retail sales were little in some foreign industrial countries changed on balance between February slowed or turned negative while other and April. However, nonfarm payroll countries struggled to recover from employment and industrial production their downturns in 1991 or remained in continued to expand. Weakness in the recession. monetary aggregates persisted into With the tenor of incoming economic April, but concerns on this front were news having become distinctly negative, allayed to some degree by evidence that long-term Treasury rates, which had this weakness was importantly related to been little changed during most of May the ongoing rechanneling of credit away and June, turned down around midyear, from depository institutions and into although they remained above year-end capital markets, and by expectations that lows. In light of these developments, this rechanneling and other financial and with the downward trend in inflarestructuring would continue to damp tion continuing, the System reinstated money growth considerably more than its bias toward ease at its midyear meeteconomic activity. Moreover, the re- ing. Immediately after that meeting, on straint that balance sheet restructuring July 2, with evidence of a weakening was exerting on spending was seen as economy confirmed by a further rise in likely to abate in view of the consider- the unemployment rate, to 73A percent able progress that by then had been in June, the Federal Reserve reduced made in that regard, both by borrowers both the discount rate and the federal and by depository institutions, as banks funds rate by Vz percentage point, to added rapidly to capital. At its mid-May 3 percent and 3lA percent respectively. meeting, the Committee determined that Banks lowered their prime rate, also by its bias toward ease in assessing possi- Vi percentage point, to 6 percent, leavble intermeeting policy changes was no ing its unusually wide spread over marlonger appropriate. ket rates intact. However, data that became available Long-term interest rates fell in July in in the weeks after the mid-May meeting response to the employment data and suggested that the forces restraining eco- the monetary easing, and they moved nomic expansion continued to be quite down further into early August as the strong. The contraction of consumer incoming economic news continued to credit accelerated, and bank loans more be poor. The drop in yields brought generally began to decline. With the long-term rates to the lowest levels since forces that had been constraining money the early 1970s, and the dollar continued growth intensifying, all three monetary to retreat from the higher levels reached aggregates contracted in June. in April. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 25 In early September, after another exchange markets; a strong deutsche weak labor market report and in the mark had caused several European context of contracting industrial pro- countries to raise interest rates sharply duction and positive but weaker-than- to preserve fixed exchange rate relationexpected expansion in the monetary and ships with the exchange rate mechanism credit aggregates, reserve conditions of the European Monetary System at a were eased further and the federal funds time when aggregate demand in these rate fell to around 3 percent. Shorter- countries was slowing or sluggish. The term market rates dropped on this ac- dollar continued to decline into early tion, bringing them to the neighborhood September but then began to firm. The of zero in real terms. Despite the poor rise in long-term rates contributed to the economic news and expectations that reversal, as did actions by several Eurofurther easing moves were in the offing, pean countries to devalue their currenlong-term interest rates, which had cies, in some cases dropping out of the initially declined after the September ERM, and to lower their interest rates. action, drifted back up on renewed con- With short-term interest rates in the cerns that weakness of the economy United States lower, the monetary might prompt significant fiscal stimulus, aggregates continued to expand in Septhereby enlarging the size of the federal tember. The implications of the strength budget deficit. of M2 were difficult to assess, however, Throughout the late summer and because it reflected to an uncertain early fall, policy was conducted against degree the impact of mortgage refinanca background of tension in foreign ing on demand deposits as well as strong foreign demands for U.S. currency. Stronger income also appeared to be contributing to money growth, as pri- Long-Term Interest Rates vate employment edged up and the Percent unemployment rate declined in September. Nevertheless, the outlook for the economy remained uncertain. Final demand seemed weak and was being 16 met in part through higher imports, . Conventional mortgages holding down industrial production and employment, and business and consumer sentiment remained relatively depressed. In these circumstances, the Committee established a strong bias toward ease at its early October meeting. However, U.S. government bonds an improvement in economic indicators immediately after the meeting, along i i i i i i i i i i 1982 1984 1986 1988 1990 1992 with evidence of some strength in M2 The data are monthly averages. and bank credit, stayed any further eas- The rate for conventional mortgages is the weighted ing actions. Because anticipation of furaverage for thirty-year fixed-rate mortgages with level ther easing had been built into the strucpayments at major financial institutions and is from the Federal Home Loan Mortgage Corporation. ture of interest rates, short-term rates The rate for U.S. government bonds is their market backed up after the meeting. Rates also yield adjusted to thirty-year constant maturity by the Treasury. rose at the long end, responding to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

26 79th Annual Report, 1992 growing expectations that fiscal stimu- pickup in nominal GDP growth last lus could follow the upcoming presiden- year, the broad monetary aggregates tial election, as well as to the indications decelerated further, and expansion of the of improved economic performance. nonfinancial debt aggregate picked up Evidence of greater economic by only a small amount. As had been the strength continued to accumulate in a case in the previous couple of years, variety of indicators of production and considerable efforts in key sectors of the spending during the fourth quarter. economy to improve balance sheets had Although this news initially put further a significant restraining effect on credit upward pressures on longer-term inter- growth and, especially, on money est rates, these increases were slowed growth—indeed, a much greater effect and then reversed as the better economic than on spending itself. Growth of the prospects, along with statements and debt of nonfinancial borrowers other actions of the incoming Administration, than the federal government amounted began to be viewed as reducing the like- to about 3 percent in 1992, only 3A perlihood of outsized fiscal stimulus. Also centage point more than in 1991. Househelping to lower longer-term rates was holds restrained their borrowing in continuing good news on inflation. 1992, in part by limiting the accumula- With the better economic news, the tion of financial assets, and businesses Federal Reserve kept reserve conditions curbed their credit needs by financing spending out of cash flow and equity and short-term interest rates unchanged issuance. toward year-end, and the Committee at its December meeting decided to move The expansion of federal debt slowed back to a symmetric policy stance. slightly to a still-rapid IO3A percent, held Reflecting the improved economic out- down by the lack of activity by the look, a stock market rally developed that Resolution Trust Corporation (RTC) rivaled in strength the rally at the begin- after April, when it exhausted its legislaning of the year, and the dollar rose tive authority to fund losses at savings further. and loans. Reflecting the slowdown Although the monetary aggregates in the activities of the RTC and the strengthened a bit in the fourth quarter, the depressing effects of balance sheet restructuring continued to be important, Total Domestic Nonfinancial Debt a fact that became clearer once the hard- Trillions of dollars to-measure temporary boost to deposits Actual deriving from higher mortgage refinancing abated after October. The velocities 12.0 of both M2 and M3 rose significantly further in the final quarter of the year, contributing to the exceptional velocity 11.5 increases posted by both measures for the year as a whole. Range 11.0 Monetary and Credit Flows I i i i i i i i i i i Credit flows were damped again in 1991 1992 1992, and money growth was exception- The range was adopted by the FOMC for the period ally weak. Despite an appreciable from 1991:Q4to 1992:Q4. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 27 improving health of depositories, fed- depressed at these banks as well. Moreeral outlays attributable to deposit insur- over, other regulatory factors may have ance activity fell from around $50 bil- contributed to a reduction in the willinglion in 1991 to nil in 1992. The total ness of banks to take deposits and make nonfinancial debt aggregate expanded loans; these factors included rising about 5 percent in 1992, a rate that was deposit insurance premiums and tighter near the lower end of the Committee's regulations and requirements of the laws monitoring range. governing banks and thrift institutions The sluggishness in credit and money in recent years. A similar pattern of asset growth in 1992 appeared to represent growth concentrated in government semainly weak demand rather than any curities occurred at credit unions, which new tightening of credit supply terms. are not subject to the Basle capital stan- At banks, loan flows were depressed, dards. Although loan growth at banks and, in the absence of appreciable credit generally remained lackluster in 1992, it demands, bank asset growth mainly took did strengthen in the final quarter of the the form of security acquisitions. year as the economy began to expand Some observers have argued that the more rapidly. At the same time, the shift to government securities in 1992 growth of bank holdings of government and other recent years was motivated by securities, which had been very rapid all the Basle risk-weighted capital stan- year, slowed in the fourth quarter. dards, which require capital against To be sure, the pickup of bank lendloans but not against many government ing toward year-end seemed primarily securities. However, the effect of these related to stronger demand. Banks gave standards appears to have been rela- little indication in Federal Reserve surtively minor. As in 1990 and 1991, veys that they had begun to ease the banks that had already achieved ade- tighter lending standards and terms that quate capital positions were the major they had put in place in 1990 and 1991, purchasers of U.S. Treasury and agency and the unusually wide spread of the securities in 1992, and loan flows were prime rate over market rates persisted. Nonetheless, banks did seem better positioned to meet increases in demand Capital Ratios and the Loan Delinquency thanthey had been a few years earlier. Rate at Commercial Banks Not only has their liquidity improved Percent Percent with the acquisition of government securities, but banks have made substantial Total capital to progress in improving capital positions, risk-weighted assets including leverage ratios—which are 6.0 - unaffected by asset composition. Banks' Delinquency profits and their debt and equity issuance reached record levels in 1992. 5.5 ~ Equity capital to asset1 Moreover, the quality of banks' assets showed some scattered signs of improvement; the delinquency rate for bank loans, though still high, began to 5.0 turn down, as did the rate of charge-offs. Other financial intermediaries also have taken steps to strengthen balance sheets, and the availability of credit 1988 1990 1992 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

28 79th Annual Report, 1992 from these lenders also remained some- mortgage debt outstanding; the volume what constrained in 1992—though prob- of mortgage refinancings increased conably not more than in 1991. Life insur- siderably. Some of the proceeds of mortance companies, having suffered from gage refinancings likely were used to an abundance of bad loans, remained pay down higher-cost consumer credit. saddled with poor-quality commercial Consumer credit also was held down in real estate loans in 1992. Such firms 1992 by the tendency of households to limited their acquisitions primarily to pay down high-cost debt using funds high-quality, easily marketable assets; that otherwise would have been held in thus, as in 1991, some medium-sized, low-yielding deposits. below-investment-grade companies With the pace of debt accumulation found credit from life insurance compa- by the household sector damped, and nies difficult to obtain in 1992. Some with rates on consumer debt falling and business finance companies also experi- mortgage debt being refinanced at lower enced high and rising levels of nonper- rates, the ratio of debt-servicing payforming loans, many of which were ments to household income declined secured by commercial real estate, with considerably further in 1992. Other indieffects on the willingness of these lend- cators of financial stress also improved ers to make new loans. somewhat. Consumer loan delinquency Downgradings of the manufacturing rates mostly fell over the year, although parents of automobile sales finance com- they remained at relatively high levels. panies led to some increases in their Home mortgage delinquency rates also funding costs in 1992. However, the declined in 1992; by year-end, they had downgradings had little or no effect on moved back down to near their prethe cost or availability of consumer recession levels and were around the credit, as these finance companies in- low end of the range of the 1980s. creased the volume of loans they securi- Business debt grew only slightly in tized. The availability of credit at thrift 1992 as internally generated funds institutions likely improved a bit in exceeded investment spending. Taking 1992. Reflecting the declines in interest advantage of the strong stock and bond rates, profits of private sector savings markets, nonfinancial corporations and loan associations reached a record level, sustained by a wide spread between interest earned on assets and Debt Service of the Household Sector the cost of funds as well as by a decline Percent in the industry's still high level of troubled assets. Weak credit demand and constraints on some sources of supply produced 17 generally restrained borrowing in each major nonfinancial sector other than the federal sector. Overall household bor- 15 rowing accelerated but remained moderate, as demand was depressed by insecurity about employment as well as by I I 1 I I I I I efforts to restructure balance sheets. 1980 1985 1990 Declines in mortgage rates were accom- Percentage of disposable personal income. Debt service is a staff estimate of scheduled payments of principal panied by a pickup in the growth of and interest on home mortgages and consumer debt. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 29 stepped up their equity issuance and ume that was called. Net debt growth of refinanced large volumes of longer-term state and local debt continued to be moddebt at more favorable rates. In part, the erate, however, as the sector's spending proceeds of these issues were used to remained constrained. pay down short-term debt, particularly Although balance sheet restructuring bank loans, thereby lengthening liability damped credit flows and spending in structures. 1992, its greatest impact was on the The hospitality of the capital markets monetary aggregates, as an unusually extended even to lower-graded business high proportion of spending again was borrowers, which issued substantially financed outside depositories, whose liamore bonds than in other recent years. bilities make up the bulk of the mone- Overall public gross bond issuance by tary aggregates. Some spending was nonfinancial corporations was well supported through sources other than above the 1991 level. Likewise, gross borrowing—for example, by issuing equity issuance by nonfinancial corpora- equity or restraining the accumulation tions also rose from the already high of liquid assets. Depository credit pace of 1991 and was four times that of expanded last year, after two years of the late 1980s and early 1990s. As a contraction, but its share of total nonresult of debt refinancing and sales of financial debt continued to shrink, as equity, corporate net interest payments borrowers concentrated their credit as a percentage of cash flow fell sharply demands in long-term securities for a second year. As declining interest rates allowed firms to reduce debt burdens, and as the economy advanced, corporate debt ratings began to improve Changes in Debt of and quality spreads narrowed. the Domestic Nonfinancial Sector The state and local sector also bene- and in Depository Credit Percent fited from interest rate declines in 1992. Large amounts of state and local debt Debt were refinanced, including a large vol- Net Interest Payments of the Business Sector Percent 30 1960 1970 1980 1990 Domestic nonfinancial debt covers borrowing by 25 households, farm businesses, nonfarm noncorporate businesses, corporate nonfinancial businesses, state and local governments, and the federal government. 20 Depository credit is the sum of credit market funds advanced by savings institutions and commercial banks. The percentage changes are four-quarter moving averages. They are calculated by first subtracting the level at 1980 1985 1990 the end of the previous quarter from the level at the end of Percentage of cash flow plus net interest payments. a given quarter (flow) and dividing by the level at the end Cash flow is depreciation (book value) plus retained of the previous quarter. The quarterly percentage changes earnings (book value). are then used in computing four-quarter moving averages. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

30 79th Annual Report, 1992 markets—bonds for corporations and the year but was about flat over the fixed-rate mortgages for households. middle quarters. The underlying weak- The sluggish expansion of depository ness of money growth appeared to stem credit was echoed in M3, which com- from several important factors, many of prises most—though not all—of the which were related to the unattractiveinstruments depositories use to finance ness of holding funds in M2 assets relatheir credit extensions. In fact, growth tive to other possible uses of savings. of M3 slowed last year to lA percent Contributing to the relative attractivedespite the pickup in depository credit, ness of nonmonetary assets was the as depositories relied much more on rapidity with which banks adjusted equity issuance and sales of subordi- down offering rates on retail deposits nated debt, which are not in M3. Large as market rates declined in 1992. time deposits at banks and thrift institu- Banks' unaggressive pricing of deposits tions fell rapidly. The tendency for reflected substantial paydowns of bank spending to be financed outside of debt by households and businesses, depositories, along with the latter's reli- which kept loan demand low and banks' ance on non-M3 funds, produced a siz- need for funds to finance them quite able increase in M3 velocity in 1992— limited. In addition, banks and thrift at a rate far above that of other recent institutions were discouraged from years. The rise in velocity of M3 would going after deposits by the rising cost of have been even greater had it not been issuing deposits to make loans; among for strong inflows into institution-only the factors accounting for this increase money funds over the first three quarters were increases in deposit insurance rates of the year. The attractiveness of these and higher capital ratios occasioned by funds increases when short-term interest market and regulatory forces. rates are falling, a phenomenon caused The prompt declines and low level of by the fact that the funds do not mark to deposit rates combined with several market, so that their yields tend to other factors to induce savers to cut exceed market rates when those rates back on holdings of assets in M2. One are declining. important influence was the unprece- M2 increased about \3A percent last dented steepness of the yield curve, year, below the 2!/2 percent lower end of which pulled deposit funds into capital its target range. M2 registered modest growth in the first and last quarters of StockofM2 Trillions of dollars StockofM3 Range Trillions of dollars 3.6 Actual i_ -^^ 4.30 i% **—- "• 1 3.4 4.15 Actual Range i i 1 1 i i i i i t i i i i i i 1 1 1! i i i i i i i i 1991 1992 1991 1992 The range was adopted by the FOMC for the period The range was adopted by the FOMC for the period from 1991:Q4to 1992:Q4. from 1991:Q4to 1992:Q4. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 31 markets. An important channel for increase in debt and was financed in part accomplishing this portfolio shift was by reducing or limiting holdings of mutual funds, which experienced record financial assets. inflows in 1992. Not only were yields The cuts in bank deposit rates were on these funds attractive, but the funds particularly evident for larger (and had become increasingly available presumably more interest sensitive) through banks and thrift institutions. accounts and at longer maturities. Small Assets in bond and equity mutual funds time deposits ran off throughout the (apart from those held by institutions year. Some of these funds appeared to and those in IRA and Keogh accounts) flow into more-liquid deposit accounts, increased $125 billion in 1992, up from as rates on small time deposits fell faster $117 billion in 1991 and an average of than those on savings and checkable $30 billion over the previous five years. deposits. General purpose and broker- The years 1991 and 1992 were the first dealer money market mutual funds ever in which increases in mutual fund (MMMFs) also contracted over the year, assets exceeded increases in M2. despite the yield advantage these assets Money growth also was weakened offered vis-a-vis other money market by the tendency of consumer loan rates rates in an environment of declining to move downward less rapidly than yields. This contraction appeared to be deposit rates. As a consequence, house- another reflection of the attractiveness holds faced a considerable interest rate of bond and equity funds and other capincentive—particularly after taking ital market instruments. MMMFs grew account of changes in the tax deductibil- in October and November, however, in a ity of consumer interest payments—to reversal that perhaps reflected reactions use funds from deposit accounts to pay to capital losses in bond funds resulting down debt or to limit its accumulation. from the rise in long-term rates in Sep- In fact the rise in consumption in 1992 tember and October. was accompanied by an unusually small Spreads between Pre-Tax and After-Tax Changes in M2 and in Assets Rates on Auto Loans and Rate Paid on of Stock and Bond Mutual Funds Small Time Deposits Billions of dollars Percentage points Net change in M2 Pre-tax 400 Net change in mutual funds 300 L Net change in M2 plus funds 1.5 200 100 i i i i i i i i i i i i i i i i i + 1975 1980 1985 1990 0 The auto loan rate is the forty-eight-month rate. The 1 1 11 J L small time deposit rate is for maturities of two and one-half years and longer. The marginal federal tax rate is 1986 1988 1990 1992 based on John J. Seater, "On the Construction of Mar- Mutual fund data have been adjusted to exclude institu- ginal Federal Personal and Social Security Tax Rates in tional holdings and IRA and Keogh balances; for 1992 the U.S." Journal of Monetary Economics, vol. 15 (Januthe adjustment is an estimate. ary 1985), pp. 121-35. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

32 79th Annual Report, 1992 The overall effect of the unusual result of changes in deposit rates lagforces that influenced M2 in 1992 were ging behind changes in market rates: summed up by the behavior of its veloc- When short-term rates fell, deposit rates ity, the growth of which accelerated declined by a lesser amount, providing for the second year in a row, to nearly an incentive for savers to shift assets 4 percent, despite the continued sharp from market instruments to deposits, downward trend in short-term interest thereby depressing M2 velocity. Howrates. In previous decades, M2 velocity ever, because of the unusual configuraand short-term rates had moved together tion of forces discussed above, these in a reasonably predictable way (upper incentives to hold M2 did not follow panel of chart on M2 velocity and mea- their usual pattern in either 1991 or sures of opportunity cost). This seem- 1992. Instead, a combination of the ingly predictable relationship was the steep yield curve, sluggish adjustment of loan rates, and other factors decreased the incentive to hold M2, forestalling the developments that normally M2 Velocity and Indicators would have been seen in a period of of Opportunity Cost rapidly falling short-term interest rates. Ratio scale Percent, ratio scale In other words, the opportunity cost of holding M2—the earnings given up— actually widened in 1992, rather than narrowing as had happened in the past when market interest rates fell; that divergence from past patterns helps to explain why M2 velocity rose atypically 1.6 - M2 velocity (bottom panel of chart). Another indication of the unusual behavior of M2 velocity in 1992 was provided by the performance of the I I I I I 1 1 Board staff's P* model in predicting Ratio scale Percentage points, ratio scale inflation. The model is premised on reasonably stable M2 velocity over time and is used to predict the price level and inflation rates that are consistent with 1.7 - M2 growth. In situations where the velocity of M2 is rising atypically, slow 1.6 - -0.75 Stock of Ml Billions of dollars 15% ^^ i i i i i i i i i i i i 1,000 1980 1985 1990 The broad measure of opportunity cost is the difference 950 between a weighted average of competing rates and a weighted average of rates paid on components of M2. The competing rates are those on three-month and five- 900 year Treasury securities and after-tax rates on auto loans. The indicators of opportunity cost are two-quarter mov- I 1 1 1 1 1 1 1! i i i i i ing averages. 1991 1992 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 33 Velocity of Debt and Money growth of M2 would be associated with Ratio scale a lesser degree of disinflationary pressure than would be predicted by the P* Debt model, which assumes normal velocity behavior. That, in fact, was what happened in 1992, when the model, using actual M2 growth as an input, underpredicted inflation. 0.7 The growth of M2 that did take place during 1992 was entirely attributable to its currency and transactions deposit 1 I components, as Ml growth surged to about 14V4 percent. Although this M2 strength of Ml was in part a reflection of the pickup in aggregate income growth in 1992, it stemmed mainly from declines in both short- and long-term interest rates. Long-term rate declines prompted large volumes of mortgagerate refinancings, particularly in the first and last quarters. Because a large por- 1 I tion of prepayments are held in demand deposits until the mortgage servicer M3 remits the funds, the level of demand deposits is temporarily boosted by mortgage refinancings. Falling short-term rates boosted demand deposits by lowering the opportunity cost of holding them and by increasing the amount of depos- 1.3 its businesses needed to hold under compensating balance arrangements. In 1 I addition, NOW accounts were boosted by funds shifted from small time deposits, as rates on the latter fell faster than those offered on the former. Growth in NOW accounts accelerated in 1992 from the already brisk pace of 1991, and demand deposits posted the largest 4.5 increase since at least 1959. To accommodate the growth in transactions deposits associated with the process of easing reserve conditions, the 1960 1970 1980 1990 Federal Reserve supplied large volumes The velocity of each quantity is the ratio of gross domes- of new reserves in 1992. Total reserves tic product, measured in current dollars, to the stock of the grew at around 20 percent, more than quantity. The data are quarterly averages. twice the rate of increase in 1991. Currency growth also was rapid, in part because of shipments abroad, and as Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

34 79th Annual Report, 1992 a consequence the monetary base increased lOVi percent last year—the highest growth rate in the Board's official series, which extends back to 1959. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

35 International Developments Expectations of economic recovery in in 1992. The growth rate of U.S. exports the major foreign industrial countries was only about half that of U.S. imports, during 1992 were not realized. Despite which were boosted by the early effects measures taken in some countries to of the domestic economic recovery. boost spending and stimulate activity, Largely because of an improvement in real gross domestic product in the for- net service receipts, however, the cureign G-10 countries increased by a dis- rent account deficit widened by less than appointing lA percent.1 In Japan and the trade deficit after adjusting for 1991 western Germany, strong first-quarter and 1992 cash transfers associated with performances gave hope that late-1991 the Persian Gulf war. slumps had been temporary, but activity The value of the dollar rose about decelerated sharply thereafter. Economic 5V2 percent from December 1991 to activity also weakened during the year December 1992 in terms of a tradein France and Italy, while the United weighted average of the other G-10 cur- Kingdom showed scant signs of recov- rencies. The dollar's appreciation was ery. Among the major foreign industrial nearly the same after adjustment for countries, only Canada experienced a changes in consumer price levels here pickup in growth, which was supported and abroad, as consumer price inflation partly by the U.S. recovery. in the United States exceeded a trade- By contrast, economic growth during weighted measure of the average rate of 1992 was robust in many developing inflation in the foreign G-10 countries countries, particularly in the Middle by only about lA percentage point. The East (which continued to rebound after value of the dollar measured against the the Gulf War) and Asia. Results in Latin mark gained slightly more than 1 per- America were mixed; economic reforms cent; in terms of the yen, it deteriorated boosted growth in several countries, but about 3 percent. The rise in the weighted political distractions dampened activity average value of the dollar mainly in Brazil. In Mexico, the pace of activity remained solid, but it was slower than in 1991. Sluggish economic activity in many Exchange Value of the Dollar markets for U.S. exports contributed to a versus Selected Currencies larger U.S. merchandise trade deficit December 1991 = 100 Canadian dollar 1. The Group of 10 consists of Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States. Unless otherwise indicated, Japanese yen growth rates and inflation rates are calculated from the fourth quarter of 1991 to the fourth quarter of German mark 1992, and averages for groups of countries are weighted by the countries' gross domestic prod- I i • I i i 1 i ucts as valued after adjusting for differences in the 1992 purchasing power of their currencies. Foreign currency units per dollar. The data are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

36 79th Annual Report, 1992 mirrored sharp depreciations in several Before rebounding, the value of the European currencies and to a lesser dollar in terms of most European currenextent the Canadian dollar. cies fell to levels well below those at Over the first three months of 1992, which it had begun the year. the dollar appreciated and U.S. long- In the fall, arrangements in Europe term interest rates rose amid expecta- governing exchange rates both within tions that an economic recovery would and outside the European Monetary Systake hold in the United States during the tem came under severe stress, with the year. Over the summer, however, when result that some currencies were devalthe U.S. recovery proved halting and ued and others were allowed to float. In U.S. long-term interest rates moved back addition, the Bundesbank allowed down, the movement in the dollar's German interest rates to fall somewhat. value reversed course. At the same time, These adjustments contributed to an continuing growth in the German mone- appreciation of the dollar that was tary aggregates at rates above Bundes- already gaining momentum from bank targets and rising inflation renewed indications of recovery in the prompted the Bundesbank to maintain a United States. stringent monetary stance, boosting the Net intervention in marks by foreign mark's value versus the dollar. Authori- central banks was of unprecedented size ties in the other countries in the Euro- in 1992 as a result of exchange rate pean Monetary System supported the pressures in Europe. Net intervention in value of their currencies in terms of dollars by fifteen major central banks marks by holding interest rates high amounted to sales of about $9 billion. in spite of laggard economic activity. U.S. intervention was moderate in 1992, with sales of $200 million for yen and purchases of about $1,270 million for Exchange Value of the Dollar marks. U.S. monetary authorities also and Interest Rate Differential exchanged about $6 billion equivalent Percentage points Ratio scale, March 1973 = 100 of marks for dollars directly with the Bundesbank. Price-adjusted 6 - exchange value of the dollar Foreign Economies 4 - All major industrial countries operated below potential in 1992, some considerably so, and inflation continued to mod- 80 erate. Average consumer price inflation in the foreign G-10 countries was only 2Vi percent in 1992, almost Wi percenti i i i i 1975 1980 1985 1990 age points below the inflation rate The exchange value of the U.S. dollar is its weighted recorded in 1991. Effects on prices in average exchange value in terms of the currencies of the 1992 from the depreciation of currenother Group of 10 (G-10) countries using 1972-76 total trade weights. Price adjustments are made using relative cies in the United Kingdom, Italy, and consumer prices. Canada were small. Wages also deceler- The interest rate differential is the rate on long-term ated in most foreign industrial countries. U.S. government bonds minus the rate on comparable foreign securities, both adjusted for expected inflation esti- The leading exception to the generally mated by a thirty-six-month moving average of actual con- disinflationary pattern abroad was westsumer price inflation or by staff forecasts where needed. ern Germany, where inflation remained The data are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 37 in the neighborhood of 33A percent unemployment rate in Canada exceeded and contributed to the reluctance of Ger- H3/4 percent in late 1992, although man monetary authorities to ease more thereafter signs emerged that Canada's rapidly. long upward trend in unemployment Labor-market conditions deteriorated might have peaked. The west German during 1992 in the major industrial unemployment rate also moved up, countries. Unemployment rates moved although only to 7lA percent, a level still up across Europe, reaching IOV2 percent below historical peaks. In Japan, the in the United Kingdom and France. The unemployment rate remained below 2V2 percent, but more sensitive indicators suggested a slackening of labor market conditions. GDP, Demand, and Prices The main factors that contributed to Percentage change from previous year the generally disappointing performance Gross domestic product of demand abroad were high levels of Constant prices real interest rates in Europe, continued adjustment in spending by households and enterprises so as to reduce high levels of debt, a reduced pace of lending in some countries, and worries about financial-sector problems, especially in Japan and Scandinavia. Growth in major monetary aggregates J L abroad generally remained subdued in Total domestic demand 1992, with the important exception that Constant prices in Germany M3 increased %3A percent, a rate well outside the Bundesbank's target range. Money market conditions nonetheless eased in several key countries, including Japan and, late in the year, Germany, as decelerating demand provided room for authorities to let short-term interest rates decline. Japanese short-term interest rates moved J L down about 2lA percentage points, and Consumer price index the official discount rate was cut twice by a total of 1 lA percentage points. German authorities also allowed short-term interest rates to ease after mid-year, from a peak of about 93A percent to near SV2 percent. In other countries, pressures in foreign exchange markets re- 1988 1990 1992 quired authorities to keep short-term in- Data for the foreign G-10 countries are weighted by the countries' GDP as valued after adjusting for differences terest rates above desired levels, in the purchasing power of their currencies; the data are particularly when those pressures intenfrom foreign official sources. sified in the fall. The September depar- Data for the United States are from the Departments of Commerce and Labor. ture of sterling and the lira from the For GDP and domestic demand, the data are quarterly; exchange rate mechanism of the Eurofor consumer prices, the data are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

38 79th Annual Report, 1992 pean Monetary System allowed the earnings while imports were being United Kingdom and Italy to lower spurred by strong growth in real output short-term interest rates, but rates in in many developing countries. The France (which held the franc in the current account surplus of the newly exchange rate mechanism) were kept industrializing economies of Asia was high and finished the year up about about $13 billion in 1992, essentially 75 basis points. A declining trend in unchanged from the previous year. A Canadian short-term interest rates was decline of $5 billion in the surplus of temporarily reversed in the autumn; Taiwan was offset by increased surinterest rate increases were intended to pluses in Hong Kong and Singapore and relieve downward pressure on the Cana- a smaller deficit in Korea. By contrast, dian dollar that was related in part to the combined current account deficit of political uncertainties. fourteen heavily indebted developing In 1992 the combined current account countries rose from $17 billion in 1991 surplus of the foreign G-10 countries to $30 billion in 1992.2 Much of this widened about $30 billion, to nearly shift was in Argentina, Mexico, and $40 billion. This change was more than Venezuela. The value of imports by accounted for by a $44 billion increase these countries rose 30 percent in 1992, in Japan's surplus as Japanese domestic in part because of increased spending on demand slowed. Much of the change investment goods. represented a widening of Japan's bilat- The rate of growth of real output eral surpluses with European and Asian in developing countries as a group trading partners. Lower inflation in increased sharply, from 3V4 percent in France improved French competitive- 1991 to 53/4 percent in 1992.3 However, ness and helped move the current within the group, output growth was far account into surplus. By contrast, cur- from uniform; it fell below population rent account positions in both the United growth rates in the Western Hemisphere Kingdom and Italy deteriorated because and Africa, but it increased in Asia of their weakening competitive posi- more than 1 percentage point, to almost tions and softening demand in their 7 percent. Growth declined consider- European markets; the German current ably in Brazil—which faced political account deficit also widened slightly. problems—and moderately in Mexico, The current account deficit of devel- where the authorities sought to limit the oping countries as a group improved current account deficit and reduce inflafrom $80 billion in 1991 to $59 billion tion further. However, Argentina and in 1992. A decline in the collective trade Chile, which have implemented major surplus was more than offset by an economic reform programs in recent improvement in net services that was years, registered gains in real output of due in part to lower international interest rates. Net transfers also shifted in favor of the developing countries because the large war-related transfers in 1991 from Saudi Arabia and Kuwait 2. The countries are Argentina, Bolivia, Brazil, to industrial countries were not repeated Chile, Colombia, Cote d'lvoire, Ecuador, Mexico, in 1992. The deterioration of the trade Morocco, Nigeria, Peru, Philippines, Uruguay, and balance was traceable to weak external Venezuela. 3. The growth of output in developing coundemand and a decline in commodity tries is calculated by comparing measures of total prices; both factors limited export annual output rather than fourth-quarter output. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 39 6V2 percent or more, as did Venezuela.4 The U.S. current account worsened The most dramatic acceleration in out- substantially more than the trade put was in the Middle East, where account, moving from near balance in growth rebounded from around zero in 1991 to a deficit of nearly $60 billion in 1991 to 10 percent in 1992 as the region 1992. However, abstracting from onerecovered from the Gulf War. Real out- time cash transfers associated with the put was also particularly robust in Gulf War (they reduced the current China, where the rate of expansion is account deficit by $42 billion in 1991, estimated to have been nearly 13 per- but by only $1 billion during 1992), the cent in 1992, compared with 7 percent current account weakened less than in 1991. the trade account largely because of During 1992, both Brazil and Argen- increased net service receipts. U.S. tina made progress toward normalizing armed forces purchased fewer services relations with foreign creditor banks to abroad, and foreign reinsurers made whom they are in substantial arrears. In July, Brazil reached preliminary agreement with its bank creditors on a debtreduction package, which will be imple- U.S. International Trade mented in 1993 if the country makes Billions of dollars further progress toward macroeco- Balances nomic stabilization. Argentina and its bank creditors signed an agreement in December to reduce the country's external debt in 1993. 60 120 U.S. International Transactions Merchandise trade The U.S. merchandise trade deficit, mea- J L sured on a balance-of-payments basis, Ratio scale, billions of 1987 dollars widened to $96 billion in 1992, com- Merchandise trade pared with $73 billion in 1991. Imports 600 Total imports rose nearly twice as fast as exports as economic recovery gained some —'*** 400 momentum in the United States, while ^000"^ Total exports growth in many U.S. export markets was sluggish. Early in the year, the deficit 1 I 1 1 I narrowed somewhat when a drop in oil Ratio scale, 1987 = 100 prices lowered the value of imports. GDP fixed-weight price index After the first quarter, however, the defi- 120 cit widened sharply: Imports expanded Non-oil imports strongly during the second and third ^ ^~ quarters, while export growth remained As Total exports subdued until late in the year. 100 t i l l! 4. Argentina's reforms not only stimulated 1988 1990 1992 rapid growth but brought inflation below 20 per- The data are quarterly, seasonally adjusted at annual cent, compared with about 85 percent in 1991 and rates, and come from the Department of Commerce. The more than 1,300 percent in 1990. 1992 data are preliminary. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

40 79th Annual Report, 1992 substantial payments on claims for hur- exported in significantly larger quantiricane damage in the United States. ties in 1992; overall, the volume of agri- U.S. merchandise exports rose cultural exports rose 9 percent over the 6J/2 percent in real terms over the four four quarters of the year. The biggest quarters of 1992. Most of the increase gains in the value of U.S. exports were occurred in the second half of the year, made in trade with the developing counand the largest gains were in computer tries in Asia and Latin America where exports. Other nonagricultural exports fairly strong economic growth took increased 3V2 percent in real terms, place. The value of exports to Japan and about half the rate reached in 1991; to European countries declined. among these items, machinery (other Merchandise imports expanded more than computers) and automotive prod- than 10 percent in real terms during ucts accounted for most of the strength. 1992. Two categories accounted for a Among agricultural products, wheat, significant portion of that rise: oil and soybeans, meat, and dairy products were computers. The quantity of imported oil U.S. International Transactions * Billions of dollars, seasonally adjusted Quarter Year Transaction 1991 1992 P 1991 1992P Q4 Ql Q2 Q3 Q4 Merchandise trade, net -73 -96 -19 -18 -25 -28 -26 Exports 416 439 108 108 107 110 114 Imports 489 535 126 125 132 138 140 Services, net 45 55 13 14 13 16 13 Receipts 164 178 43 45 44 45 45 Payments 118 123 30 31 31 29 32 Investment income, net 16 10 2 4 2 3 1 Direct investment, net 53 49 12 14 12 13 11 Portfolio investment, net -37 -39 -10 -9 -10 -9 -10 Unilateral transfers, private and government, net -31 -7 -7 -10 Current account balance -62 -7 -18 -16 -22 Private capital flows, net -23 32 -6 25 6 7 Bank-related capital, net (outflows, -) -18 47 11 10 22 4 U.S. net purchases (-) of foreign securities -45 -49 -11 -9 -14 -18 Foreign net purchases (+) of U.S. securities Treasury securities 16 35 1 -1 10 5 21 Corporate and other non-Treasury bonds 26 35 7 8 12 7 8 Corporate stocks 9 -5 -2 -3 -1 4 U.S. direct investment abroad -27 -35 -12 -16 -7 -9 Foreign direct investment in United States 11 -4 6 -4 5 -3 -3 Other corporate capital flows, net 5 8 2 1 4 -3 n.a. Foreign official assets in United States (increase, +) 18 40 13 21 21 -7 U.S. official reserve assets, net (increase, -) -1 U.S. government foreign credits and other claims, net -1 Total discrepancy -1 -13 2 -8 29 15 Seasonal adjustment discrepancy 0 0 1 5 1 -7 Statistical discrepancy -1 -13 2 -13 -30 22 1. Details may not sum to totals because of rounding. n.a. Not available. p Preliminary. *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 41 rose 13 percent over the four quarters of heavily on large time deposits issued in 1992 as U.S. consumption of petroleum the United States and less on inflows products recovered from depressed lev- from abroad to finance asset growth. els in 1991 and as domestic oil produc- Although securities transactions also tion resumed a downward course. Mea- contributed to the net inflow of capital sured in constant dollars, imports of in 1992, strong two-way gross flows computers (including peripheral equip- again emphasized the widening scope ment and parts) jumped nearly 50 per- for cross-border financial transactions. cent in 1992. U.S. domestic sales of Foreigners added substantially to their computers became strong beginning in holdings of U.S. government and corpothe summer; they were fueled by price rate bonds, although they were net sellwars and by a push on the part of ers of U.S. equities. U.S. net purchases U.S. businesses to take advantage of of foreign stocks and bonds were large; improvements in software by upgrad- in fact, the pace of foreign bond issues ing desktop microcomputers. Most of in the United States set a record. these sales were in lower-technology U.S. direct investment abroad was equipment—items that are often im- strong again in 1992. Outflows to Latin ported. Imports of products other than America and Asia grew, and outflows to oil and computers rose 6 percent in real Europe were again substantial. By conterms in 1992 as domestic demand in trast, foreign direct investment in the the United States picked up. Major United States remained depressed at a sources were developing countries in level close to zero, compared with the Latin America and Asia, especially peak of almost $70 billion, reached in China. 1989. Merger and acquisition activity in The substantial U.S. current account the United States has declined since the deficit in 1992 was more than matched 1980s, and foreign investors in particuby recorded net capital inflows, so the lar may have been discouraged in 1992 statistical discrepancy was negative. By by the disappointing returns on much contrast, in 1991 the current account, recent foreign investment in the United capital account, and statistical discrep- States. ancy all had been close to zero. As shown in the table, substantial in- Foreign Currency Operations flows were recorded for both official and private capital. Foreign official holdings U.S. monetary authorities intervened in in the United States increased $40 bil- foreign exchange markets on a moderate lion, more than twice as much as in scale in 1992. In late January and early 1991. Substantial inflows were recorded February, during a period when the dolfrom both industrial and other countries. lar was appreciating relative to the yen, The net flow of private capital the Federal Reserve System and the reversed in 1992, reaching an inflow of Treasury's Exchange Stabilization Fund, about $32 billion. Banks more than cooperating with foreign authorities, accounted for these net inflows, and purchased Japanese yen worth $200 milforeign-related banks were a particu- lion, of which $50 million was for the larly important factor. They used the account of the Federal Reserve. As the funds to help finance a continued gen- dollar depreciated sharply during July eral expansion of their assets in the and August, particularly in terms of the United States. In 1991, by contrast, German mark, U.S. authorities purforeign-based banks had relied more chased $1,270 million for marks in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

42 79th Annual Report, 1992 cooperation with foreign authorities. The proceeds of these operations were split evenly between the accounts of the Federal Reserve and the Treasury. U.S. authorities also exchanged $6,177 million of marks for dollars directly with the Bundesbank, including $3,705 million of marks from System balances. These transactions were made to bring U.S. and German balances of foreign currencies more nearly in line with current needs. On April 2 the Exchange Stabilization Fund purchased $2 billion equivalent of marks that had been warehoused with the System. No warehoused balances were outstanding from that date through the end of the year. At year-end, the System held $21,514 million of foreign currencies valued at current exchange rates, almost entirely in marks and yen. The System realized $804 million in profits on sales of foreign currency during 1992 and recorded a translation loss of $1,882 million on foreign currency balances. There was no activity on the Federal Reserve swap network during the year. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

43 Monetary Policy Reports to the Congress Given below are reports submitted to layoffs that continued through year-end. the Congress on February 19 and July Although the economy—as measured 20, 1992, pursuant to the Full Employ- by its real gross domestic product— ment and Balanced Growth Act of 1978. continued to grow in the second half of the year, the pace of expansion was only marginally positive. Report on February 19, 1992 The faltering of the recovery process apparently owed to a variety of forces, some of which were operating well Monetary Policy and the Economic before the oil price shock of 1990 tipped Outlook for 1992 the economy into recession. In a slug- When the Federal Reserve presented its gish economy and amid unexpectedly midyear monetary policy report to Con- weak asset values—particularly in real gress last July, a moderate economic estate—deteriorating financial positions upturn was under way. Consumer spend- of debt-laden households and corporaing and housing activity had risen con- tions further damped credit demands and siderably since the winter, bolstered by aggregate spending. Financial intermethe decline in oil prices, by a rebound in diaries, chastened by their negative consumer confidence in the wake of the experience with earlier loans, became allied victory in the Persian Gulf con- more hesitant about extending new flict, and by lower interest rates. Inven- credit; the resultant tighter lending stantories had been trimmed appreciably, dards deepened the slowdown in ecoorders were rising, and businesses, while nomic activity and inhibited the substill cautious, had begun to increase sequent recovery. In the government employment and production. The key sector, where deficits remained large, monetary aggregates had accelerated not only at the federal level but also and were around the middle of their in many state and local jurisdictions, 1991 target ranges. With the stance of efforts to curb spending and increase monetary policy seemingly conducive revenues constituted a further drag on to an upturn in economic activity, the aggregate demand in the short run. Federal Reserve, after having progres- Inflation, meanwhile, moved down sively reduced pressures on reserve over the second half of 1991. Weak positions earlier in the year, maintained demand reduced pressures in both labor a more neutral money market posture in and product markets, and, after some the spring and early summer. acceleration of wages and prices in 1989 As the year wore on, however, the and 1990, an underlying disinflationary incipient recovery lost its momentum. trend has now been established. Impor- Consumer spending turned down, and tant in this process has been a reduction business and consumer sentiment began in inflation expectations, visible not only to erode. Inventories at wholesale and in a variety of survey data but also in the retail trade establishments began to behavior of securities markets. increase relative to sales, inducing a new With actual and prospective inflationoutbreak of production adjustments and ary pressures easing, economic activity Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

44 79th Annual Report, 1992 flagging, and the broader monetary local governments all retrenched, curbaggregates weakening and growing near ing spending and borrowing in order to the bottom of their target ranges, the buttress deteriorating financial positions. Federal Reserve resumed easing money The weakness in the monetary aggremarket conditions in the second half of gates M2 and M3 reflected not only the year. As a result, the federal funds subdued overall credit usage but also a rate fell from 53A percent in July to continued decline in the share of credit 4 percent by year-end, and most other intermediated by depositories. With short-term rates followed suit; the dis- the thrift industry contracting further, count rate was also reduced over this commercial banks exercising caution in period, from 5Vi percent to 3V2 percent, their credit extensions, and borrowing the lowest rate in nearly thirty years. demand concentrated in longer-term Long-term interest rates, which had instruments, depository credit continued failed to respond to declines in money to shrink as a share of overall credit market rates in the early months of the extensions. As a result, the velocity of year, came down significantly in the M3—a monetary aggregate that comlatter part of 1991, partly in response to prises most of the liabilities used by the easing in inflationary expectations. depositories to fund credit growth— Although long-term rates have backed increased again in 1991, as M3 grew up some in recent weeks, they remain only 1 lA percent, near the bottom of its appreciably below the levels of last sum- target range. Depository restructuring mer. The decline in rates has helped also restrained M2, which grew in line reduce the financial burdens of highly with nominal GDP despite a steep drop leveraged households and corporations, in short-term market interest rates; ordiwhich have taken this opportunity to narily such a drop would have been refinance mortgages and to replace expected to depress the velocity of this existing debt with new lower-cost aggregate. Banks, eager to improve capbonds. Lower interest rates also have ital positions, reduced deposit rates contributed to an increase in stock more than loan rates, increasing the prices, inducing firms to boost equity incentive for households to pay down issuance and to pay down debt, further debt rather than to accumulate monetary strengthening their balance sheets. With assets. Less aggressive pursuit of retail the decline in U.S. interest rates, the accounts by depositories also led invesforeign exchange value of the dollar has tors to switch into other financial assets, largely reversed the upward movement such as bond and stock mutual funds. that had occurred earlier in the year. The unusually slow growth of the key Ranges for Growth of Monetary monetary and credit aggregates last year and Debt Aggregatesl was, to a degree, indicative of the Percent continuing restraint on private credit usage and spending. The aggregate debt Aggregate 1990 1991 1992 of domestic nonfinancial sectors— abstracting from federal government M M 2 3 3 1 - - 7 5 21/2 1 ^ -5 61/2 21/2 1 - - 6 5 1/2 debt, which continued to grow briskly— Debt2 5-9 41/2-81/2 41/2-81/2 expanded only 23A percent in 1991, the 1. Change from average for fourth quarter of preceedslowest advance in decades, and below ing year to average for fourth quarter of year indicated. the pace of nominal GDP; households, Ranges for monetary aggregates are targets; range for debt is a monitoring range. nonfinancial businesses, and state and 2. Domestic nonfinancial sector. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 45 Flows into these funds helped finance ues to be channeled outside deposicredit that had formerly been intermedi- tories; in this case, relatively modest ated by depositories, facilitating shifts to growth in M2 would be adequate to longer-term borrowing and reducing the support a satisfactory outcome for the adverse effects of any retrenchment by economy. On the other hand, as the balbanks and thrifts on the cost and avail- ance sheets and capital positions of deability of credit to many borrowers. positories continue to improve, banks However, some types of lending that and thrifts may adopt a generally more are not so easily rechanneled—such as accommodative posture with respect to construction loans and credits to small credit extensions and would therefore and lower-rated businesses—have been have greater need for retail deposits. In curtailed, and a number of borrowers that event, somewhat faster growth of now face more stringent credit terms. M2 would be appropriate. On balance, the Committee's M2 range for 1992 allows room for a variety Monetary Objectives for 1992 of developments in the intermediation In formulating its objectives for mone- process and thus in the behavior of tary policy for 1992, the Federal Open monetary velocity. Flexibility in inter- Market Committee has sought to pro- preting M2 within its range is particumote a sustainable upturn in economic larly important at this time, in light of activity while continuing to build upon the ongoing and unpredictable shifts in the hard-won gains against inflation that the patterns of credit usage and financial have already been made. The task of intermediation that likely will continue translating these objectives into specific to buffet our financial system. Looking ranges for money and debt continues to ahead to future years, the Committee be complicated by the ongoing restruc- also recognizes that the range for M2 turings of depositories and by the evolv- growth may eventually have to be lowing attitudes toward credit on the part of ered in order to put in place the moneborrowers and lenders. The Committee tary and credit conditions consistent believes that the rechanneling of credit with price level stability. flows away from depository institutions The target range for M3 growth in could well continue to produce slower 1992 remains at 1 percent to 5 percent. growth in the broad monetary aggre- Although credit growth is expected to gates than normally would be associated pick up somewhat in 1992, in line with a with a given path for nominal GDP. firming of economic activity, much of Taking account of these effects, the this credit likely will be financed outside Committee has deemed the ranges for the depository system. The thrift indus- 1992 tentatively adopted last July as try is expected to contract further as appropriate for achieving its objectives. activity by the Resolution Trust Corpo- The target range for M2 growth in 1992 ration continues apace, and banks, faced is 2Vi percent to 6V2 percent, unchanged with continued—though moderating— from 1991. Demands for M2 relative to pressures on capital positions, will still income would be damped if, as seems be somewhat hesitant to expand. At the likely, banks and thrifts continue to same time, additional households are reduce deposit rates in lagged response likely to refinance adjustable-rate mortto the decline that has occurred in mar- gages with fixed-rate obligations that ket rates. These deposit-rate reductions can easily be securitized, and corporacould be especially large if credit contin- tions will probably continue to turn to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

46 79th Annual Report, 1992 equity markets and long-term bonds likely to be cautious about hiring until rather than bank loans. As a result, they are fully persuaded of the sustained depository funding needs are likely to vitality of the upturn, gains in employremain damped relative to the pace of ment are expected to come slowly. Thus, economic activity, and the velocity of only a small improvement in the unem- M3 should consequently rise further. ployment rate is anticipated this year, The monitoring range for the aggre- with the central tendency of projections gate debt of domestic nonflnancial sec- being a range of 63/4 percent to 7 percent tors for 1992 is AVi percent to SVi per- for the fourth quarter of 1992. With cent, also unchanged from 1991. Federal regard to inflation, the central tendency government borrowing is expected to range for the CPI increase this year is remain heavy in 1992, given the large 3 percent to 3V2 percent. These forecasts budget deficit. Debt growth in nonfed- are, in general, very similar to the proeral sectors, however, should remain jections presented by the Administration fairly subdued relative to economic in the fiscal year 1993 budget. Indeed, activity as borrowers and lenders alike the Administration's forecast for nomimaintain a cautious approach to lever- nal GDP is well within the Committee's age, in part because of a desire to make central tendency range and thus appears further repairs to damaged balance to be quite consistent with the FOMC's sheets. monetary ranges. In their early February discussion of Economic Projections for 1992 the economic outlook, the Board mem- Although the long-standing structural bers and Reserve Bank presidents problems that aborted the fledgling observed that the effects of recent job recovery last summer clearly are being losses and weak consumer confidence addressed, the speed of their resolution— are likely to restrain activity in the near and the associated restraint on economic term. Under the circumstances, the growth—is quite difficult to gauge, Board members and Bank presidents augmenting the usual uncertainties in stressed that economic developments assessing the economic outlook. On the need to be monitored closely to guard whole, however, the members of the against the possibility that the economy Board of Governors and the Reserve might falter. Nonetheless, the monetary Bank presidents believe that, with the stimulus already in train is expected to easing of monetary conditions to date provide effective support for economic providing considerable impetus to the growth this year, and in this regard the economy, the most likely outcome is for early indications of a marked pickup in a moderate reacceleration of activity residential real estate activity and a rise over 1992. At the same time, they antic- in retail sales are a particularly favoripate that the trend toward price stabil- able sign. ity, which now appears to be rooted It is also expected that the drags on more securely, will be sustained through growth from disruptions in credit supply this year. and from the restructuring of household The forecasts of most of the gover- and business balance sheets will begin nors and presidents for growth of real to lessen over the year. As noted above, gross domestic product are in a range of this is obviously an area of substantial P/4 percent to 2Vi percent measured uncertainty. However, as household and from the fourth quarter of 1991 to the corporate debt loads diminish in an envifourth quarter of 1992. With employers ronment of stronger economic activity, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 47 and as lower interest rates continue to continue to boost export growth, but the ease financing burdens of borrowers, anticipated pickup in domestic purconsumers and businesses should be chases is likely to draw in additional poised to participate more fully in the imports as well, limiting the potential economic expansion. Moreover, the for further substantial improvement in problems of credit availability that have the trade balance. plagued the economy over the past Only a minority of Board members couple of years should begin to ease in and Reserve Bank presidents foresee a 1992 as the economic recovery takes smaller increase this year in the overall hold and lenders become more confident CPI than the 3 percent rise experienced about extending credit. in 1991. But the pickup in inflation sug- Nonetheless, the pace of expansion gested by the 3 percent to 3lA percent this year is expected to remain weaker central tendency range is deceptive: the than in previous business cycle recov- underlying trends in price movement are eries. In large part, this expectation more favorable. The CPI was held down reflects some still-unresolved economic to a substantial degree last year by the and financial imbalances in particular unwinding of the energy price shock segments of the economy. The persistent that followed Iraq's invasion of Kuwait overhang of space in office and other in August 1990, and further sharp commercial buildings undoubtedly will declines in energy prices do not appear inhibit new construction in that sector likely in the current environment. Howfor some time. In addition, the budget- ever, an ongoing deceleration in prices ary constraints that have capped govern- is evident for a wide range of other ment spending are likely to linger; a goods and services, and with inflationgood many states and localities are ary tendencies under considerable finding that budget gaps are reopening restraint from several factors— despite the spending cuts and tax including further moderation in labor increases they instituted last year. Mean- cost growth, continued slack in induswhile, the external sector is expected to trial product markets, and small have a relatively neutral net influence on increases in import prices—"core" domestic production this year; foreign inflation is expected to move down demand—particularly from Mexico and appreciably in 1992. Indeed, this trend developing countries in Asia—should should carry into 1993—a pattern Economic Projections for 1992 FOMC members and Item other FRB presidents Administration MEMO 1991 actual Range Central tendency Percent change, fourth quarter to fourth quarter1 Nominal GDP 4-6 41/2-53/4 5.4 3.2 Real GDP 11/2-23/4 13/4-21/2 2.2 .2 Consumer price index2 21/2-31/2 3-31/2 3.1 2.9 Average level, fourth quarter (percent) Unemployment rate3 63/4-71/4 63/4-7 6.8 6.9 1. From average for fourth quarter of 1990 to average 2. All urban consumers for fourth quarter of 1992. 3. Percentage of civilian labor force. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

48 79th Annual Report, 1992 that bodes well for the achievement stimulus that normally would have been of a balanced, sustained economic forthcoming from the decline in interest expansion. rates. Fiscal restraint evident at all levels of government weighed on aggregate demand in a way not typically observed The Performance of the Economy in previous economic cycles. Significant in 1991 restructurings of operations in a number The year 1991 began with the U.S. econ- of sectors had the effect of retarding omy in the midst of recession. Activity employment and income growth, at least had contracted sharply after the jump in in the short run. And concerns about oil prices that followed Iraq's invasion debt-servicing burdens as well as about of Kuwait in August 1990, and this economic prospects sustained a relucweakness spilled into the first quarter tance on the part of businesses and with further reductions in production consumers to borrow and increase and employment. By the spring, how- spending. ever, economic data indicated that the Despite their cautious planning, some decline in economic activity had bot- businesses experienced inventory backtomed out. The rapid conclusion of the ups in the late summer and fall, neces- Persian Gulf war boosted consumer con- sitating another round of production fidence, and the reversal of the earlier adjustments. In part, the impact of these runup in oil prices and the cumulative adjustments was felt abroad as busieffects of declining interest rates were nesses cut back their imports of foreign providing support for an increase in goods. However, domestic adjustments household spending. Indeed, construc- were evident as well, and, apart from tion of single-family homes had already atypical weather patterns that tempoturned up noticeably by April, and con- rarily increased the demand for electricsumer spending posted a moderate rise ity, industrial production was flat over in the second quarter. Although busi- the second half of the year. The sluggish nesses continued to liquidate inventories pace of activity in the industrial sector at a fairly rapid pace, industrial produc- was joined by weakness in other parts of tion grew steadily from April through the economy, and overall, the nation's July, and hiring activity increased. real gross domestic product is estimated However, the pickup in the economy to have risen a scant V* percent at an evident from April to July failed to annual rate in the fourth quarter of last develop any momentum, as the thrust to year. In the labor market, layoffs prolifdomestic demand initiated by the end of erated once again, and the civilian the Gulf war dissipated during the sum- unemployment rate rose to 7.1 percent mer. The absence of a more robust at the end of 1991. recovery likely reflected the drag on The deterioration in both industrial aggregate demand from some longer- activity and nonfarm employment term economic and financial adjust- extended into this year, with factory proments. For example, imbalances long duction down sharply in January and evident in the commercial and multi- private payrolls edging beneath the low family construction sectors damped of last April. On the other hand, housing enthusiasm for new projects, and ongo- market activity appears to have picked ing difficulties in the financial sector up somewhat since the beginning of the continued to restrain credit availability; year, and nominal retail sales rose about these influences undoubtedly muted the Vi percent in January. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 49 Inflation slowed in 1991, with con- been sapped by the rise in energy prices sumer prices up 3 percent over the year, and by declines in employment. And much less than the 6 percent rise posted although the retreat in oil prices then in during 1990. In part, the slowing in progress and an improvement in coninflation reflected the sharp drop in oil sumer confidence following the end of prices early in the year; consumer en- the Gulf war provided a boost to spendergy prices in December were IV2 per- ing in the spring, the failure of the cent below their level at the end of 1990, recovery to take hold and concerns with the decline concentrated in the first about financial prospects and debt burquarter of the year. Food price inflation dens restrained spending in the second also moderated considerably, amounting half of the year. On balance, real conto only 2 percent last year after three sumer outlays edged down between July years of increases in excess of 5 percent. and December, retracing part of the Even apart from food and energy, rise that had occurred during the spring inflation now appears to be on a down- and early summer. ward trend. To be sure, there were siz- The weakness in consumer spending able increases in the CPI excluding food over the past year was particularly eviand energy early in the year, as higher dent for durable goods. A sharp drop in federal excise taxes and a pass-through motor vehicle purchases accounted for of the sharp rise in energy prices boosted much of the overall decline in spending prices for a variety of goods and ser- on durables; indeed, the level of motor vices. With the subsequent reversal in vehicle sales in 1991, at \2lA million oil prices and no further major tax hikes, units, was the lowest since 1983. Outhowever, price pressures eased visibly lays for other durable goods were down beginning in the spring. On balance, the slightly over the year, after a 1 Vi percent CPI excluding food and energy rose less decline in 1990. As with total spending, than 4 percent at an annual rate in the purchases of other durables picked up second half of 1991, well below the somewhat in the spring and early sum- 5 percent pace of 1990. Labor cost pres- mer, but then fell in the fourth quarter as sures also diminished last year, although consumers retrenched. Spending on substantial increases in health care nondurable goods also declined last expenses remained a problem for year, with expenditures, especially for employers. As measured by the employ- apparel, down sharply in the fourth ment cost index, nominal compensation quarter. In contrast, outlays for services per hour rose about 4V2 percent over continued to trend up at a pace similar to 1991, somewhat less than the increases that registered in the two previous years. recorded in each of the three previous The patterns of change among the years. components of consumer spending— particularly the steep decline in outlays for "big ticket" durable goods— Household Spending—Consumption and underscore the role of household bal- Residential Construction ance sheet concerns in restraining eco- With household finances adversely nomic growth last year. Household debt affected by job losses and declining real burdens rose substantially during the incomes, real consumer spending rose 1980s, when consumers stepped up just lA percent over the year, the same as spending on motor vehicles and other in 1990. At the beginning of the year, consumer durables, often financing their consumer purchasing power already had purchases with credit. In some parts of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

50 79th Annual Report, 1992 the nation, this spending boom spread to ery over the remainder of the year, residential real estate as well, with the fueled by a reduction in mortgage rates associated borrowing, which was often to their lowest levels since the 1970s. predicated on expectations of rapidly Sales of new and existing single-family rising family incomes, adding further to homes rose over the year, with the the financing burdens of households. As pickup in demand reportedly especially income growth weakened over the past pronounced from first-time buyers. Reyear and a half, consumers struggled flecting the strengthening in demand, the to meet the monthly obligations on excess supply of unsold new homes their accumulated debt and apparently diminished, and the pace of singledeferred some discretionary spending in family housing starts moved above the process. This financial stress also 900,000 units at an annual rate by the was evidenced by an increase in delin- fourth quarter, an increase of more than quency rates for consumer and mort- 16 percent from a year earlier. Neverthegage loans last year to levels comparable less, production was well below that of to those experienced in the previous two earlier years, and, despite the upturn recessions. in activity, the single-family housing A renewed pessimism on the part of market remains softer than would be households may also have contributed expected given recent mortgage rates to the reluctance of consumers to step and the rising number of households up spending over the latter part of 1991. of prime homebuying age. Continued As noted previously, consumer confi- lender caution about granting landdence, which was quite low at the begin- acquisition and construction loans ning of the year, rose markedly upon the reportedly has damped production in conclusion of the Gulf war. However, as some locales. However, given the it became apparent that the anticipated absence of significant price pressures in recovery in the economy was not materi- the housing market, restraint on the alizing and announcements of layoffs demand for single-family homes, stemresumed, confidence turned down, drop- ming from weak income growth, conping especially sharply toward the end cerns about employment prospects, and of the year. In January 1992, the Survey poor conditions for home selling, likely Research Center's index of consumer has been a more prominent influence sentiment stood at the levels of last win- on homebuilding than have supply ter, while the Conference Board's confi- constraints. dence index was below that seen in In the multifamily housing market, an the 1981-82 recession. Many analysts excess supply of vacant units and observed that consumers appeared to be restraints on credit availability continmore apprehensive than normally might ued to depress construction last year. be expected, given the broad macroeco- Starts of multifamily units fell about nomic circumstances—for example, the 30 percent over the twelve months of unemployment rate has remained well 1991, and the number of starts during below that reached in the early 1980s— the year was the lowest since the 1950s. suggesting that concerns about longer- There have been numerous reports of run economic prospects may have restrictive lending practices damping contributed to the heightened anxiety activity in this sector. However, vacancy among households last fall. rates for rental units remain exception- After dropping sharply in January, ally high—and rents soft—suggesting housing starts posted a moderate recov- that in many areas new projects might Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 51 well be of questionable economic via- indeed, a partial reaction to the overbility. Until market supplies begin to hang may have been visible in the sharp tighten discernibly, activity in this seg- drop in nonoil imports in November. ment of the market is unlikely to show Nonetheless, retailers evidently also appreciable improvement. reduced orders from domestic suppliers, contributing to the sluggish pattern of manufacturing output in the fourth quar- Business Spending—Investment in ter. By January of this year, factory pro- Inventories and Fixed Capital duction had dropped back to its level of In early 1991, the investment climate a year earlier, and the operating rate in was dominated by the effects of the industry was back down to levels that, decline in the demand for business out- prior to last winter, had not been seen put and the jump in energy prices during since the brief industrial slump of 1986. the second half of 1990. With profit Business investment in fixed capital margins down sharply and inventory fell 7 percent in real terms over the four imbalances emerging in a number of quarters of 1991. As is typical during sectors, businesses reduced production recessions, spending was inhibited by and employment substantially between weak profits, a rise in excess capacity, October 1990 and March 1991. Cut- and uncertainty regarding the outlook backs in the motor vehicle sector were for sales. However, investment outlays especially sharp over that period, last year also were depressed by a desire although output of most other types of on the part of many businesses to reduce goods and materials turned down as debt burdens and by a continued overwell. supply of office and other commercial By the spring, inventories generally space. Even adjusting for cyclical conwere better aligned with sales, and oper- siderations, last year's weak pace of ating profits, while still low, had turned investment appeared to extend the relaup. As a result, the improvement in tively slow rate of capital formation eviaggregate demand in the second quarter dent for some time. The capital stock in was accompanied by an increase in busi- the nonresidential business sector, net of ness output, and industrial production depreciation, has risen about 23A percent rose an average 0.7 percent per month at an annual rate over the past decade— from April to July. Despite the firming down from 33A percent annually during in sales, businesses remained cautious, the previous decade. In part, this pattern and inventory levels continued to has owed to a shift toward shorter-lived decline through midyear. assets—such as computers—that depre- In late summer, however, final ciate more quickly. However, such outdemand slackened, and after seven lays, by generating a relatively high months of decline, business inventories flow of capital services per dollar of accumulated at a substantial rate from investment, have cushioned the impact September through December. The rise on productivity of the slowing pace of in inventories was centered in wholesale capital formation. Even so, the quantity and retail trade, and inventory-sales of investment, which has also been ratios there moved into ranges that depressed by large federal budget defiappeared undesirably high in light of cits and the resulting low level of carrying costs and expected sales. A national saving, has been inimical to portion of the accumulation appeared to productivity growth and thus to the consist of goods ordered from abroad; advance of living standards. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

52 79th Annual Report, 1992 Real spending for equipment fell market—in particular, the reluctance 3V4 percent over 1991, as outlays of lenders to finance acquisitions of plunged in the first quarter and showed commercial properties—has made the only limited improvement on net over adjustment still more difficult. Such the remainder of the year. The strongest problems are especially acute in the area in investment spending was com- market for office buildings, where puters, for which real outlays increased appraised values have declined nearly more than 40 percent at an annual rate 30 percent since 1985 and where lenders over the second half of the year; these and developers generally have shown gains were driven by new product intro- little interest in new projects. For other ductions and by the substantial price commercial structures—primarily shopcuts offered by computer manufacturers. ping centers and warehouses—the out- In contrast, business investment in other look is slightly less downbeat, with the types of equipment generally declined, data on new contracts and building on balance, over the year. Outlays for permits suggesting that the steepest industrial equipment continued to deteri- declines may have already occurred. orate as excess capacity limited expan- Spending for industrial structures also sion in the manufacturing sector, and generally declined over the year, as low business purchases of motor vehicles rates of capacity utilization curtailed dropped off sharply. In addition, domes- plans for new factory construction. tic orders for commercial aircraft Petroleum drilling activity, meanwhile, plunged after midyear as a number of dropped sharply in response to the domestic airlines trimmed investment decline in oil prices. plans. Although the large backlog of Federal banking regulators have taken unfilled orders that still remains should a number of steps to ensure that supervisustain production and shipments for sory pressures do not unduly restrict real some time, the slackening in demand estate lending. The agencies have, for indicated by the sharp downturn in air- example, addressed issues relating to craft orders suggests that the growth accounting and appraisal, to make sure surge in this sector may have run its that illiquid real estate exposures are course. evaluated sensibly and consistently. Nonresidential construction plum- And, they have issued guidance to meted 15 percent in real terms over the examiners—and simultaneously to four quarters of 1991. The contraction bankers—emphasizing that banks was broadly based, but especially large should not be criticized for renewing declines in outlays were evident for loans to creditworthy borrowers whose office buildings and other commercial real estate collateral has fallen in value— structures. Despite the sharp cutbacks in even when the banks need to build up construction in recent years, prices of capital or reduce loan concentrations existing commercial properties have over time. However, with so adverse a continued to fall, contributing to the supply-demand imbalance in the propsubstantial stress evident in the financial erty market, lenders understandably sector. Of course, the fundamental prob- have remained reluctant to bear the risks lem is the space overhang from the ear- of real estate exposures. lier overbuilding; the vacancy rate for office buildings nationwide was still The Government Sector close to 20 percent at the end of the Budgetary pressures were widespread in year. However, a lack of liquidity in this the government sector in 1991. At the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 53 federal level, the unified budget deficit health programs continued to rise rapincreased to $269 billion in fiscal year idly, elevated by large increases in 1991, up $48 billion from the 1990 defi- health care costs and in outlays for the cit. In large part, the rise in the deficit medicaid program. Among other entitlewas attributable to the slowdown in ment programs, outlays for social secueconomic activity, which reduced tax rity and other income-support programs, receipts and increased outlays for which together account for one-third of income-support programs such as unem- total federal spending, rose more than ployment insurance and food stamps. 11 percent in fiscal 1991, reflecting However, as in 1990, the fiscal 1991 substantial increases in the number of deficit also was affected by special fac- beneficiaries. In contrast, declining tors: A pickup in net outlays for deposit interest rates reduced the growth of insurance added to the deficit, while interest payments on the federal debt. one-time contributions from our allies to Defense outlays—excluding foreign defray the costs of Operations Desert contributions—were up 5l/i percent Shield and Desert Storm reduced it. from fiscal year 1990 to fiscal year 1991, Excluding deposit insurance and these as the additional U.S. outlays for the foreign contributions, the 1991 deficit Persian Gulf conflict were only partially totaled $246 billion. offset by the spending cuts enacted in On the revenue side, federal tax the 1990 budget agreement and in previreceipts rose just 2 percent in fiscal ous years. 1991, the smallest increase in many Federal purchases of goods and seryears. The slowing in receipts largely vices, the portion of federal spending stemmed from weak nominal income that is included directly in GDP, fell growth; indeed, personal income tax ?>lA percent in real terms over the four payments in 1991, which accounted for quarters of 1991. Defense purchases nearly half of total receipts, were about jumped sharply early in the year to supthe same as in 1990 despite changes in port operations in the Persian Gulf, but tax provisions that were projected to declined substantially over the remainraise $16 billion in new revenues. der of the year as the effects of sched- Meanwhile, spending rose nearly uled cuts in defense outlays were aug- 6 percent in fiscal 1991. Part of the mented by a dropoff in purchases for $71 billion increase in nominal federal Desert Storm; on net, defense purchases outlays reflected the slightly more rapid were down about AVi percent last year. pace at which the Resolution Trust Cor- In contrast, nondefense purchases were poration resolved insolvent thrift institu- up slightly in 1991; increases for law tions last year. In contrast, outlays were enforcement, space exploration, and reduced by allied contributions to the health research offset a drawdown in Defense Cooperation Account. These inventories held by the Commodity contributions, which are scored as nega- Credit Corporation. tive outlays in the budget accounts, The fiscal position of state and local exceeded the outlays made in 1991 for governments, which had deteriorated U.S. involvement in the conflict; the sharply in 1990, remained poor in 1991. excess will be put toward the replace- The deficit in the combined operating ment of munitions in 1992 and beyond. and capital accounts (excluding social Excluding deposit insurance and contri- insurance funds) narrowed to $34 bilbutions of allies, outlays rose about lion in the third quarter of 1991 from 9 percent in fiscal 1991. Spending for a high of nearly $47 billion in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

54 79th Annual Report, 1992 fourth quarter of 1990; the shrinkage of in the U.S. economy, as well as developthis deficit represents the first major ments in Eastern Europe that initially improvement since 1984, when the state weighed on the German mark. However, and local budget surplus peaked. Even as the U.S. economic recovery faltered so, relative to GDP, the deficit still is in late summer and market participants quite high on a historical basis. The viewed further easing actions by the credit quality of state and local govern- Federal Reserve as more likely, the ment debt also continued to deteriorate dollar again turned down, averaging in last year, as illustrated by the downgrad- December 1991 only about 3 percent ing of the general obligation debt of above its level in December 1990. The eight states by one rating agency; most dollar rebounded somewhat in January of the rating changes were the direct on market perceptions of a diminished result of budgetary imbalances. likelihood of an additional easing in U.S. The poor fiscal position of state interest rates and expectations that Gerand local budgets led to both severe man authorities would not push their restraints on spending and sizable tax interest rates up further. hikes. Overall, real purchases of goods On a bilateral basis, the dollar rose and services edged down over the four 19 percent against the mark between quarters of 1991. In nominal terms, total December 1990 and July 1991, amid expenditures by these governments disappointment about the effect of Gerwere up 4 percent last year, less than man unification on German inflation and one-half the average pace in recent trade. During the second half of last years. Receipts rose an estimated 7 per- year, German monetary policy tightcent over 1991, as numerous jurisdic- ened, and the dollar gave up much of its tions imposed a variety of new tax previous gains, finishing the year just measures and federal aid to state 4 percent above its December 1990 and local governments—especially for level. Other currencies in the European medicaid—increased substantially. Monetary System generally moved with Nonetheless, many state and local gov- the mark during 1991, although sterling ernments continue to report revenue slipped somewhat near year-end. The shortfalls and spending overruns for the dollar declined about 4 percent on net current fiscal year, setting the stage for against the yen in 1991, as increasing another round of budget-balancing Japanese trade surpluses led to the view measures ahead. that an appreciation of the yen would be welcomed by the authorities. The merchandise trade deficit nar- The External Sector rowed to less than $75 billion in 1991, Measured in terms of the other Group compared with $108 billion in 1990; the of Ten (G-10) currencies, the trade- trade deficit last year was the smallest weighted foreign exchange value of the since 1983. An especially large decline U.S. dollar appreciated 14 percent, on in the deficit was registered early in the balance, from December 1990 to July year, as the drop in oil prices sharply 1991, reversing more than one-half of reduced the value of imports. In addithe decline that had occurred from the tion, trade flows during the first half of middle of 1989 to the end of 1990. In 1991 were influenced by the weakening large part, the rise in the dollar over this of U.S. activity (which reduced demand period reflected the quick end to the for imports), by continued growth Gulf war and expectations of a recovery abroad (which boosted exports), and by Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 55 the lagged effects of the decline in dollar ing 1991. Imports declined early in the exchange rates that had taken place in year as weak domestic spending reduced 1990. However, imports rose sharply in the demand for foreign goods. As the third quarter, and the trade deficit domestic demand in the United States widened somewhat in the second half of turned up in the spring, imports— the year. The current account balance especially of automotive products, comrecorded a small surplus, on average, puters, and consumer goods—rose and during the first three quarters of 1991, a remained strong through the summer. sharp improvement from the $92 billion With the subsequent weakening in deficit in 1990. However, about half of demand, however, some of the addithat improvement resulted from cash tional import volume apparently ended grants from foreign governments to up on retailers' shelves. In response, support operations in the Persian Gulf; U.S. businesses reduced orders from excluding these transfers, the current abroad, and import growth slowed account showed an average deficit sharply over the fourth quarter. The of $48 billion at an annual rate over quantity of oil imports, which had the first three quarters of 1991. The plunged after the sharp rise in oil prices improvement in the current account in the fall of 1990, generally moved up (excluding transfers) was somewhat through the third quarter as refiners greater than that in the trade balance moved to rebuild inventories. However, owing to a strengthening of net service oil import volumes turned down again receipts in such areas as travel, educa- in the fourth quarter, reflecting sluggish tion, and professional services. U.S. activity and unseasonably warm U.S. merchandise exports grew about weather. 10 percent in real terms over the four The sharp reduction in the recorded quarters of 1991, tempering the produc- U.S. current account deficit in the first tion declines associated with the weak- three quarters of 1991 was mirrored by ness in domestic demand. Exports rose changes in recorded capital inflows and fairly strongly in the second quarter, as the statistical discrepancy. The statistihigh levels of investment in such coun- cal discrepancy in the international tries as Germany and Japan boosted accounts, which had jumped to $64 bilexports of computers and other capital lion in 1990, declined to virtually zero equipment. Economic activity in the in the first three quarters of 1991. major foreign industrial countries weak- Inflows of official capital were about ened as the year wore on, however, and matched by outflows of private capital with a deterioration in the competitive in the first three quarters of 1991. Net position of U.S. companies following official inflows amounted to $16 billion the appreciation of the dollar over the despite net intervention sales of dollars first half of the year, export growth in foreign exchange markets by the slowed markedly in the third quarter. G-10 countries and a drawdown of Exports surged again in the fourth quar- reserves held in the United States by ter, led by sales of computers, aircraft, countries helping to cover the costs of and other capital goods. However, some Desert Storm; some countries also of the recent increase appears to repre- financed their contributions by borrowsent a bunching of sales rather than an ing and liquidating investments in the increase in economic activity abroad. Euromarkets. Net private capital out- Merchandise imports excluding oil flows were $18 billion in the first three grew about 4 percent in real terms dur- quarters, largely accounted for by banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

56 79th Annual Report, 1992 In part, these outflows reflected the farm payroll employment down sharply increased net demand for funds in the over the first four months of the year. Euromarkets associated with Desert Economic conditions improved in the Storm transfers. In addition, the elimina- spring, and labor demand turned up for tion by the Federal Reserve of certain a time. However, the subsequent weakreserve requirements in December 1990 ening in activity in the late summer led led some U.S. agencies and branches of to a renewed bout of layoffs that has foreign banks to increase their issuance continued into early 1992, retracing the of large time deposits in the United job gains recorded during the spring and States and to reduce their reliance on summer. borrowing from abroad. The net job losses last year were Securities transactions in the first widespread by industry and reflected three quarters of 1991 reflected the con- both the cyclical weakness in labor detinued internationalization of financial mand associated with the recession and markets. Although the net inflow was more fundamental efforts by many busimodest, private foreigners added sub- nesses to restructure operations and perstantially to their holdings of U.S. stocks manently reduce the size of their workand bonds, while U.S. residents bought a forces. Employment in manufacturing, large volume of foreign stocks and which began its decline in 1989, fell bonds. Reflecting interest rate develop- more than 400,000 over 1991 with most ments that encouraged shifting from of the losses in the durable goods sector. short- to long-term financing, both The continued contraction in commerissues of foreign bonds in the United cial building depressed construction em- States and issues of Eurobonds by U.S. ployment despite the moderate recovery corporations were strong. Capital out- in residential housing demand. Efforts to flows associated with U.S. direct invest- restructure existing operations and to ment abroad also were sizable, as U.S. downsize workforce levels were evident investors positioned themselves to take in the finance, insurance, and real estate advantage of EC 1992 and participated sector as well, where job losses last year in the privatization of previously state- stood in contrast to the past pattern owned enterprises in such countries as of continued hiring during recessions. Mexico. In contrast, foreign direct Employment in trade establishments investment in the United States was far also fell substantially over the year, below recent peaks; foreign takeovers pushed down by the decline in conof U.S. businesses declined, and rein- sumer spending and the high degree of vested earnings were depressed by the financial distress among retailers. In recession. contrast, employment in services continued to trend up over the latter part of the year, as steady gains in health services Labor Markets more than offset sluggish hiring in the Labor market conditions generally dete- more cyclically sensitive business and riorated in 1991, and the unemployment personal service industries. rate rose above 7 percent by the end of Reflecting the substantial declines in the year, the highest level since 1986. output and employment over the past Employers had moved quickly to shed year and a half, the unemployment rate workers when the recession took hold rose more than \Vi percentage points during the second half of 1990, and this between July 1990 and December 1991. pattern continued into 1991, with non- Moreover, the distribution of job losses Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 57 was especially wide compared with Efforts to increase labor productivity previous episodes of rising unemploy- have also intensified in the business ment. Increases in unemployment were community. If the aforementioned plans broadly based across regions, industries, to reorganize corporate structures and to and occupations, and an unusually large downsize the labor force requirements proportion appeared to constitute perma- of existing operations are successful, nent layoffs. the possible outcome is a significant Nonetheless, the rise in the jobless improvement in the productivity trend, rate has been less than in prior episodes much as occurred in the manufacturing of increasing unemployment. In part, the sector after the considerable compresrise has been smaller because labor force sion of manufacturing organizations in growth has been unusually slow over the early 1980s. The performance of the past two years. In particular, the productivity, which rose about 1 percent labor force participation rate, which for the nonfarm business sector in 1991, stood at about 66 percent at the begin- has been somewhat better than is typical ning of this year, is V2 percentage point in a weak economy. However, last year's below its average during the first half advance came after a decline in 1989 of 1990. This decline in participation and no change in 1990, and it is difficult appears to contain some elements of a at this stage to distinguish more fundacyclical pattern: The number of discour- mental changes in productivity trends aged workers rose over the year, and from the apparent cyclical tendency last sizable increases in the number of retir- year for employers to reduce labor ees were reported, perhaps reflecting to inputs aggressively in response to deterisome extent a spate of early retirement orating sales. programs. However, the weak labor With widespread layoffs and the force growth of recent years may also unemployment rate rising throughout represent a downshift in the trend rate of the year, the upward pressures on wages increase in labor supply that—if not off- that had intensified between 1987 and set by productivity gains—could trans- mid-1990 diminished somewhat over late into a reduction in the rate of trend 1991. As measured by the employment potential output growth. In this regard, cost index, increases in hourly compenthe composition of the corresponding sation for private nonfarm workers rose increase in nonparticipants is, in part, a 4V2 percent over the four quarters of favorable long-term development. There 1991, down from more than 5 percent in has been a sharp rise in recent years in the first half of 1990. The wage and the number of individuals who have left salary component of hourly compensathe labor force in order to attend school. tion, which rose 3 percent at an annual Although that increase may, to some rate over the second half of last year, degree, reflect declining opportunity exhibited the most deceleration. costs associated with the poor job pros- Although employer costs for benefits pects of last year, recognition of the have also decelerated from their midlonger-term decline in relative wages 1990 peak, increases in benefit costs—at among lower-skilled workers may also 6V4 percent in 1991—remained well have played a role. As these individuals above those for wages alone. Expenses reenter the labor force upon completion for health insurance have continued to of their schooling, their increased skills spiral upward despite considerable should boost labor productivity and efforts on the part of employers to conpotential output in future years. trol costs by negotiating directly with Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

58 79th Annual Report, 1992 providers and by increasing workers' with the most recent quotes at about $18 share of health expenditures. Employer per barrel. These latest reductions probpremiums for workers compensation ably will show up at the retail level in insurance also rose sharply last year, the first quarter of 1992; indeed, the reflecting both a swelling in the number energy component of the producer price of claims and the rapid pace of inflation index fell nearly 3 percent in January, of medical care costs. and other preliminary information points to sizable declines in both retail gasoline and heating oil prices. Price Developments The CPI for food rose just 2 percent Evidence that a significant slowing of over 1991, well below the increases of inflation is under way mounted over 5 percent to 5Vi percent in the three 1991. The consumer price index rose previous years. In part, the subdued pace 3 percent during the year, about half the of food price inflation reflects an inrate of increase in 1990. A sharp swing creased supply of livestock products. in energy prices accounted for a major Beef production turned up last year in part of this deceleration. However, the response to the strong prices that preelements of a more fundamental diminu- vailed in the preceding few years, and tion of inflation moved into place: Labor supplies of pork and poultry rose cost increases moderated; expectations sharply; in response, meat and poultry of inflation eased; and upward pressures prices fell about 2 percent over the year. from import prices and industrial raw The deceleration in food prices also material prices were virtually absent extended to food groups whose prices during the year. are influenced more by the cost of non- Energy prices dropped sharply in farm inputs than by supply conditions in 1991, mirroring the changes in oil prices agriculture; for example, the increase in over the year. The CPI for energy fell the price of food away from home last 30 percent at an annual rate in the first year was the smallest since 1964. Elsequarter of last year, as the sequence of where, there were large monthly variaevents in the Middle East reduced the tions in prices for fruits and vegetables, posted price of West Texas Intermediate as adverse weather conditions tempocrude oil from a peak of about $39 per rarily boosted prices in the first half of barrel in October of 1990 to less than the year and prices for some fresh vege- $20 by February of last year. Oil prices tables jumped toward the end of the year subsequently held near that level, but because of the whitefly infestation in gasoline prices finned somewhat during California. the summer as reduced imports and The consumer price index for items domestic refinery problems led to some other than food and energy rose 4V2 pertightness in inventories. However, these cent in 1991, about 3A percentage point forces were offset by declines in natural less than in 1990. The index was gas and electricity rates, and energy boosted early in the year by increases in prices changed little, on balance, in the federal excise taxes on cigarettes and second and third quarters. Price pres- alcoholic beverages and by an increase sures again emerged in the fall as crude in postal rates. Price increases last winoil prices trended up in September and ter also were enlarged by the pass- October on concerns about supplies through of the rise in energy prices to a from the Soviet Union. Since October, wide range of nonenergy goods and serhowever, oil prices have retreated again, vices. However, the subsequent decline Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 59 in energy prices soon spread to the non- sumer foods accounted for much of the energy sector, and except for an uptick overall deceleration last year. Even apart during the summer associated with some from food and energy, however, probunching of price increases, this mea- ducer prices slowed to a 3 percent pace. sure of core inflation moderated signifi- Prices for intermediate materials excludcantly over the remainder of the year. ing food and energy declined 3A percent Prices for nonenergy services decel- over the year, reflecting declining fuel erated considerably last year, rising and petroleum feedstock costs, an easing 4V2 percent after an increase of 6 per- of wage pressures, and weak demand. cent in 1990. Reflecting weak real estate The downturn in economic activity also markets, rent increases slowed sharply, depressed industrial commodity markets with both tenants' rent and owners' last year. After dropping sharply in the equivalent rent up less than 4 percent fourth quarter of 1990, spot prices for last year. The drop in interest rates these commodities continued to decline pushed down auto financing costs more gradually over most of 1991. than 7 percent. And, after a brief spurt early in the year, airfares receded as energy costs fell and the weak economy Monetary and Financial cut into demand; more recently, how- Developments in 1991 ever, airfares have turned up again as carriers have reduced the availability of The principal objective of monetary poland increased restrictions on low-end icy this past year has been to help lay "super-saver" fares. In contrast, prices the groundwork for a sustainable expanfor medical care services rose 8 percent sion without sacrificing the progress over the year, while tuition costs and against inflation that had already been other school fees were up nearly set in motion. The Federal Reserve pro- 10 percent. gressively eased money market con- The CPI for commodities excluding ditions in 1991 amid signs of continfood and energy rose 4 percent in 1991, ued sluggish economic activity, weak about V2 percentage point faster than in growth in the broader monetary and 1990. In large part, the more rapid rate credit aggregates, and diminishing inflaof inflation in goods prices reflected the tionary pressures. A more generous proaforementioned hike in excise taxes and, vision of reserves through open market despite weak sales, larger increases in operations, coupled with five separate prices for both new and used cars. How- reductions in the discount rate—which ever, a slowing in price increases was now stands at its lowest level in nearly evident for a number of other goods, 30 years—brought the federal funds rate notably apparel, household paper prod- and most other short-term interest rates ucts, and personal care items. down about 3 percentage points over the The easing of inflationary pressures course of the year. These actions, buildhas been even more evident at earlier ing on earlier easing efforts, pushed the stages of processing. The producer price federal funds rate down to 4 percent, its index for finished goods edged down lowest sustained level since the 1960s over 1991 after an average 5 percent and nearly 6 percentage points below its annual rate of increase over the three most recent peak in the spring of 1989. preceding years; this index posted The faltering of the economic recovanother small decline in January of this ery in the second half of 1991 owed in year. Falling prices for energy and con- part to an unusually cautious approach Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

60 79th Annual Report, 1992 to credit on the part of both borrowers contributed to a major stock market and lenders. Efforts by debt-burdened rally, which induced firms to boost households and businesses to pare debt equity issuance and pay down debt, parin order to strengthen balance sheets tially reversing the trend of the 1980s that had been strained by the general toward increased leverage that had slowdown in income and by declines in severely stretched corporate balance property values exerted further damping sheets. effects on credit demands and on aggre- On the whole, the nation made congate spending. Faced with deteriorating siderable progress in strengthening its asset values and pressures on capital balance sheet in 1991. Less reliance on positions, depositories and other lenders debt, greater use of equity, and lower maintained tighter lending standards and financing costs have helped ease debtwere somewhat hesitant to extend credit. servicing burdens for many financially The more circumspect attitude toward troubled households and corporations. credit and spending on the part of bor- Although to date the trend toward rowers and financial intermediaries was deleveraging has exerted a restraining manifest in the behavior of the aggre- effect on aggregate spending, over time gate debt of domestic nonfinancial sec- this trend should help put consumers, tors, which grew near the bottom of the firms, and financial intermediaries on a Federal Open Market Committee's mon- sounder financial footing, paving the itoring range despite burgeoning U.S. way for healthy, sustainable economic Treasury borrowing. Not only was over- growth. all credit growth subdued, but credit flows continued to be rechanneled away from depositories, reflecting the more The Implementation of Monetary Policy restrictive lending standards at banks The Federal Reserve eased money marand thrifts as well as efforts by borrow- ket conditions several times in the first ers to make greater use of longer-term few months of 1991, extending the debt and equity in order to strengthen series of easing moves initiated in the their balance sheets. Partly as a result, latter stages of 1990. Against a backthe monetary aggregates M2 and M3 drop of further declines in economic also finished the year near the bottoms activity, abating price pressures, weakof their target ranges. ness in the monetary aggregates early in To prevent these forces from stifling the year, and continuing credit restraint the recovery, the Federal Reserve eased by banks and other financial intermedimoney market conditions aggressively aries, a more expansive open market in the latter part of the year. In light of posture was adopted, in conjunction weak aggregate demand and reduced with two Vi percentage point reductions inflationary potential, long-term interest in the discount rate, to engender a 125 rates—which had largely failed to basis point decline in the federal funds respond to monetary easings earlier in rate over the first four months of the the year—came down substantially year. Short-term Treasury rates genertoward the end of 1991. This decline ally followed suit, and banks reduced prompted a flood of mortgage refinanc- the prime rate in three 50 basis point ings and additional corporate and increments to 8V2 percent. municipal bond offerings, which helped Long-term interest rates, by contrast, reduce the financing burdens of nonfed- were roughly unchanged on balance eral sectors. Lower interest rates also over the first few months of the year. At Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 61 first, these rates fell somewhat in economic activity apparently quickenresponse to the continued downturn in ing, and with the broader monetary economic activity and declining energy aggregates near the middles of their prices, especially in light of initial suc- target ranges, the Federal Reserve held cesses in the Gulf war that ensured an money market conditions steady, as the unimpeded flow of oil. Success in the stimulus already in train seemed suffiinitial phases of the war also prompted a cient to support an upturn in aggregate brief dip in the exchange value of the spending. dollar, as safe-haven demands that had As the summer passed, however, the been propping up the dollar's value in strength and durability of the recovery the face of falling interest rates in the appeared less assured. Aggregate spend- United States dissipated. ing, production, and employment began In March, bond yields drifted up on to falter, easing wage and price presthe post-war rebound in consumer confi- sures. In addition, the broader monetary dence and other evidence, particularly aggregates suddenly weakened dramatifrom the housing industry, that an eco- cally, with M2 coming to a virtual standnomic upturn was at hand. The improv- still and M3 actually declining in the ing outlook for recovery also contrib- third quarter. The softness in the aggreuted to narrowing risk premiums on gates was symptomatic of a warier private securities, especially on below- approach to spending and borrowing on investment-grade issues, which had the part of households and corporations, reached very high levels in January. The whose balance sheet problems were debt and equity instruments of banks exacerbated by the stagnant economy. In performed especially well over this addition, credit standards at financial period, responding to lower short-term intermediaries remained restrictive, and interest rates and the likelihood that an spreads between loan and deposit rates economic rebound would help limit the remained high by historical standards, deterioration in their loan portfolios. reinforcing households' inclinations to Moderate official support for the dollar, pay down debt rather than to accumulate better prospects for a U.S. economic assets. recovery, and a rise in U.S. long-term To help ensure that these forces did interest rates relative to those abroad, not imperil the recovery, the Federal together with an uncertain economic and Reserve moved to ease money market political situation overseas, especially conditions further during the latter part in the Soviet Union, helped to reverse of the year. Pressures on reserve posithe dollar's slide on foreign exchange tions were reduced slightly in August markets. and again in September, with the latter As evidence of a nascent economic move accompanied by a 50 basis point recovery cumulated through the remain- reduction in the discount rate. With the der of the spring and into early summer, economic climate remaining stagnant, interest rates and the dollar continued to price pressures subdued, and the broader firm, and quality spreads narrowed fur- monetary aggregates still mired near ther. Although the increases in rates dur- the bottoms of their target ranges, the ing this period were most pronounced at System's easing moves became more the long end of the maturity spectrum, aggressive in the fourth quarter, culmishort-term rates backed up a bit as well nating in a full 1 percentage point reducas prospects for additional monetary tion in the discount rate on December easings faded. Indeed, with the pace of 20. All told, these moves combined to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

62 79th Annual Report, 1992 drive the federal funds rate down from federal government demands on credit 53/4 percent in July to 4 percent by year- markets. end. Most other short-term interest rates declined by similar magnitudes, and the prime rate was reduced by 2 percentage Monetary and Credit Flows points, to 6!/2 percent. Patterns of credit usage and financial The decline in short-term interest intermediation, which began to shift rates, in combination with flagging even before the onset of the economic economic activity, depressed credit downturn, continued to evolve in 1991, demands, and prospects for lower infla- distorting traditional relationships tion, contributed to bringing long-term between overall economic activity and interest rates down significantly in the the monetary and credit aggregates. latter part of 1991. The thirty-year Trea- These changes were evident in the sury bond rate dropped about a percent- behavior of the aggregate debt of age point over the second half of the nonfinancial sectors, which expanded year, and mortgage interest rates tum- 43/4 percent in 1991, leaving this aggrebled to their lowest levels in many years. gate near the bottom of its monitoring Declining interest rates prompted a spate range. Robust growth in federal governof mortgage refinancings, corporate and ment debt, owing to the economic municipal bond offerings, and a major downturn and to additional outlays for stock market rally, which propelled most federal deposit insurance, masked an indexes to record highs. Although mon- even weaker picture for nonfederal debt. etary growth bounced back a bit in Households, nonfinancial corporations, the fourth quarter, both M2 and M3 and state and local governments accuremained near the lower ends of their mulated debt at an anemic 23A percent respective growth cones. The dollar, rate in 1991, the slowest advance in which had begun to lose ground in decades and below even the sluggish foreign exchange markets in the growth rate of nominal GDP. summer—when the weakness in money The small rise in nonfederal debt and credit raised the specter of addi- velocity last year runs counter to the tional easings of U.S. monetary policy— pattern seen in the 1980s, when the depreciated further in the fourth quarter accumulation of debt vastly outstripped as the economic situation deteriorated growth in nominal GDP. The rapid and the pace of policy easings quick- buildup of debt in the 1980s was likely a ened. Rising interest rates in Germany result of the deregulation of interest also put downward pressure on the for- rates and financial innovations, which eign exchange value of the dollar. In combined to lower the cost of borrow- January 1992, the dollar rebounded ing to households and businesses, somewhat, reflecting an emerging view spawning a surge in leveraging activity. that interest rate declines in the United Greater debt burdens may also have States and interest rate increases in Ger- been accumulated under the assumption many might have come to an end. The that nominal income growth would be former view was also reflected in the sustained at the elevated pace of the U.S. bond market, where rates retraced a mid-1980s and that the prices of assets portion of their earlier declines, partly purchased with credit would continue to on brightening prospects for the U.S. climb. economy but also on concerns that In recent years, however, asset values impending fiscal stimulus may increase and income growth have fallen short of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 63 these expectations. In particular, de- held in check by the decline in financing pressed commercial and residential real needs associated with weak aggregate estate values, coupled with slower demand and by efforts of debt-laden income growth, have eroded the net firms to restructure their balance sheets, worth of some borrowers and severely grew only Vz percent in 1991. Taking strained the ability of highly leveraged advantage of a buoyant stock market, households and corporations to service particularly in the latter part of the year, debt. These difficulties, in turn, have fed corporations turned to equity financing; back on to the strength of the financial net equity issuance for the year was intermediaries that extended the credit. positive for the first time since 1983, In an effort to bolster depleted capital and the ratio of the book value of nonpositions, reduce financing burdens, and financial corporate debt to equity, which shore up weakened balance sheets, both had soared in the 1980s amid a flurry of borrowers and lenders have adopted a corporate restructurings, actually turned more chary attitude toward additional down in 1991. Firms also took advancredit. tage of lower interest rates to refinance This more cautious approach to lever- higher-rate long-term bonds and to age has interacted with the sluggish pace reduce uncertainty about their future of economic activity to restrain borrow- financing burdens by substituting longing across nearly all sectors of the econ- term debt for short-term borrowing. omy. Nonfinancial business sector debt, Overall, the mixture of less debt, more equity, and lower interest rates had a salubrious effect on the financial posi- Growth of Money and D]ebt tions of many firms. Indeed, the ratio of Percent interest payments to cash flow for all Debt of nonfinancial firms declined in 1991, domestic reversing some of the runup seen in Period Ml M2 M3 nonfinancial the late 1980s. Consistent with an sector improving financial picture and pros- Annually, fourth pects of an economic rebound, quality f q o u u a rt r h te r q t u o arter] spreads on corporate issues narrowed 1980 7.5 8.9 9.5 9.2 considerably from their peaks in early 1981 54 9.3 12.3 9.9 (2.52) 1991, especially on below-investment- 1982 O O 9.1 9.9 9.2 grade securities. In addition, downgrad- 1983 10.4 12.2 9.9 11.3 1984 5.4 8.0 10.8 14.1 ings of corporate bonds dropped sharply 1985 12.0 8.7 7.6 13.8 in the third and fourth quarters, although 1986 15.5 9.2 9.0 13.8 1987 6.3 4.3 5.9 10.4 they still ran higher than the pace of 1988 4.3 5.2 6.4 9.4 1989 .6 4.8 3.6 8.2 upgrades. 1990 4.2 3.8 1.7 6.9 1991 8.0 3.1 1.3 4.7 Deleveraging was also evident in the household sector in 1991. Consumer Quarterly (annual rate)3 credit declined as households reined in 19911 5.2 3.5 3.3 4.5 expenditures, curbed their accumulation 2 7.4 4.3 1.8 4.0 3 7.5 1.1 -1.1 4.9 of financial assets, and pared existing 4 11.1 3.3 1.2 5.2 debt burdens. Households took advantage of declining interest rates, particu- 1. From average for fourth quarter of preceding year to average for fourth quarter of year indicated. larly in the fourth quarter, by refinancing 2. Adjusted for shift to NOW accounts in 1981. outstanding mortgages; they also substi- 3. From average for preceding quarter to average for quarter indicated. tuted home equity loans for installment Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

64 79th Annual Report, 1992 debt and other consumer credit, which back on their net credit extensions. carry higher financing costs and are no Indeed, bank credit increased only 4 perlonger tax deductible. By reducing their cent, not even enough to offset the connet accumulation of debt and refinanc- tinued runoff at thrifts. Weakness was ing a substantial volume of their remain- particularly evident in bank lending, ing borrowings at lower rates, house- which shrank lA percent last year; holds were able to ease their financing banks' holdings of government securiburdens, reducing the ratio of scheduled ties, by contrast, expanded at a rapid debt payments to disposable personal clip. income, which had risen sharply in the Although the shifting composition of 1980s. Even so, loan delinquency rates bank asset flows in 1991 was reminisrose through much of 1991, albeit to cent of patterns seen in previous periods levels not out of line with what was seen of languid economic activity, the magniin previous cyclical downturns. On the tude of the downturn in loan growth last other side of the ledger, many house- year was more pronounced than the holds that had net creditor positions saw usual experience. Apparently, loan their interest incomes decline last year. growth was depressed not only by Faced with intensifying budgetary reduced credit demands, but also by a pressures and numerous downgradings, more restrained bank lending posture. state and local governments also put Faced with deterioration in the quality only limited net demands on credit mar- of their assets, higher deposit insurance kets in 1991. The outstanding debt of premiums, and more stringent requirethis sector grew but 3 percent last year, ments for capital, banks retrenched, the smallest increase in more than a adopting a more cautious attitude decade. Gross issuance of municipal regarding credit extensions. Concerns bonds was substantial, however, as about capital, especially in light of risstates and localities moved to refinance ing loan delinquency rates and mountdebt at lower rates. ing loan loss provisions, induced many Efforts by borrowers to restructure banks to continue tightening lending balance sheets by substituting long-term standards through the early part of 1991 debt and equity for short-term borrow- and to maintain fairly restrictive staning, along with more restrictive credit dards over the balance of the year. standards by some lenders and the clos- A more prudent approach to capitaliing and shrinkage of troubled thrifts, zation and lending decisions is, in the have affected the channels through main, a positive development that ultiwhich debt flows. In particular, in recent mately will result in strengthened balyears there has been a major rerouting ance sheets for the nation's depositories. of credit flows away from depository Reflecting this improved outlook, prices institutions. The decline in the impor- of outstanding bank debt and equity tance of depositories, when measured by increased markedly from their lows in the credit they book relative to the total late 1990 and early 1991, outperforming debt of nonfinancial sectors, has been broader market indexes. Bank profits, striking, and this trend was extended in benefiting from wide spreads between 1991. Not only did the thrift industry loan rates and deposit rates, also showed continue to contract, as the direct result improvement relative to the depressed of RTC resolutions as well as the levels of recent years, although they retrenchment of marginally capitalized remained low by broader historical institutions, but commercial banks cut standards. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 65 To date, depository retrenchment up in recent years; this trend continued appears to have had some restraining in 1991, as M3 rose only VA percent, effects on aggregate borrowing. Of well below the pace of nominal GDP, course, in some areas, much of the credit leaving this aggregate near the bottom formerly extended by banks and thrifts of its target range. has been supplanted by other intermedi- In the first few months of the year, aries and by credit advanced directly M3 showed surprising strength, boosted through securities markets, at little if in part by a firming of its M2 compoany additional cost to borrowers. For nent, which benefited from declining example, growing markets for securi- interest rates. The most important single tized loans largely have filled the vac- factor contributing to strong M3 growth uum created by depository restraint in in the early part of 1991, however, was the areas of residential mortgage and the rebirth of the market for "Yankee consumer lending. Similarly, many large CDs"—large time deposits issued by businesses have turned to stock and foreign banks in the United States. After bond markets to meet credit needs and the 3 percent reserve requirement to restructure balance sheets, reducing against nonpersonal time deposits and their reliance on banks as well. Both net Euroborrowings was lifted at the end banks and thrifts have cut back on other of 1990, foreign banks showed a distinct types of lending that can less easily be preference for funding with such instrurechanneled, however, including con- ments, rather than borrowing from their struction and nonresidential real estate overseas affiliates or in the federal funds loans, loans to highly leveraged and or repurchase agreement markets. lower-rated borrowers, and loans to Domestic depositories, by contrast, small and medium-sized businesses. faced with high and rising U.S. deposit Other financial intermediaries, including insurance premiums, exhibited no inclilife insurance companies, have been nation to alter their funding strategies in afflicted by some of the same balance favor of large time deposits. sheet problems plaguing depositories The surge in Yankee CD issuance, and have also curbed their lending to which totaled nearly $40 billion over the these sectors. As a result of the pullback first quarter, began to taper off a bit as in credit supplies, these borrowers now the year progressed, revealing the underface somewhat more stringent borrowlying weakness in M3. After slowing ing terms. somewhat in the second quarter, this As in 1990, the retrenchment of banks aggregate contracted at a VA percent and thrifts and the associated redirection annual rate in the third quarter, reflectof credit flows away from depositories ing feeble loan demand in a tepid econcontinued in 1991 to have profound omy as well as the restructuring of effects on the broad monetary aggre- depositories. The Resolution Trust Corgates and their traditional relationships poration played a direct role in damping with aggregate economic activity. M3, M3 growth by taking assets formerly which comprises most of the liabilities held by thrifts and funded with M3 used by banks and thrifts to fund credit deposits onto its own books and financexpansion, has been most affected by ing them with Treasury securities. the reduced importance of depository Although M3 rebounded a bit in the credit in funding spending. The velocity fourth quarter, in line with some firming of this aggregate, which declined of bank credit, its growth remained through much of the 1980s, has trended subdued. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

66 79th Annual Report, 1992 The effects of depository restructur- Growth in this aggregate resumed in ing on M2 remain imperfectly under- the following quarter, fueled by a surge stood. In the past, the velocity of M2 has in transactions deposits owing to additended to move in tandem with changes tional declines in opportunity costs, but in a simple measure of the opportunity inflows to M2 remained fairly weak, and cost of holding this aggregate—that is, this aggregate ended the year only a with changes in the returns on alterna- little above the bottom of its target tive short-term investments relative to range. those available on assets included in Although the unusual behavior of M2 M2. Typically, when the opportunity relative to income and opportunity costs cost of holding M2 declines as de- has not been fully explained, it surely is creases in money market interest rates related to the restructuring of financial outpace drops in yields on deposits, flows and to the downsizing of the bankholdings of M2 strengthen relative to ing system. With inflows of M2 deposits expenditures—and velocity drops. In apparently tending to be more than suffirecent years, however, this relationship cient to fund weak depository credit appears to have broken down, with the growth, banks and thrifts seem to have velocity of M2 holding up despite a pursued additional retail deposits less steep, persistent drop in this measure of aggressively than in the past. Although opportunity cost. This was particularly rates offered on these deposits did not, evident in 1991, when M2 expanded at until very recently, fall unusually rapabout the same pace as nominal GDP idly in response to declining market despite a significant decline in such interest rates, depositories seem to have opportunity costs. M2 finished the year acted in other ways to reduce the cost of near the bottom of its target range and funds, including adjustments in advertismuch weaker than would be expected ing and marketing strategies that would on the basis of historical relationships not show up in traditional measures of among income, interest rates, and the opportunity costs. In addition, by keeppublic's appetite for monetary assets. ing deposit rates very low relative to In the early months of the year, M2 loan rates, partly in an attempt to bolster growth accelerated somewhat from its profit margins while shrinking their ballackluster pace of late 1990. Narrowing ance sheets, depositories provided opportunity costs generated substantial households with a greater incentive to inflows to liquid deposits, particularly finance spending by holding down the those in Ml, which more than offset accumulation of M2 assets rather than continued runoffs in small CDs. Money by taking on new debt. This incentive growth also was temporarily boosted by likely reinforced the impetus to borrowstrong foreign demands for U.S. cur- ing restraint stemming from household rency as a safe haven during the crisis in concerns about their own balance sheets. the Persian Gulf. Through May, M2 The slowdown in M2 growth, particugrowth remained broadly consistent larly in the third quarter, also appears to with the general configuration of oppor- have been related to the configuration of tunity costs and income, and near the returns on financial assets. Yields on middle of its target range. small time deposits and money market M2 began to slow in June, however, mutual funds largely tracked the downand stalled in the third quarter, despite ward path of market interest rates, fallexpansion in nominal income and ing to their lowest levels since the further declines in opportunity costs. deregulation of deposit rates and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 67 prompting significant outflows from balances to pay for bank services these components of M2. Although surged. Demand deposits likely benesome of these funds shifted into the fited as well from the pickup in mortliquid deposit components of M2— gage refinancings, because the proceeds whose offering rates responded slowly, from mortgage prepayments are someas they normally do, to the declines in times housed temporarily in demand market interest rates—a portion of these accounts. Rapid growth in currency, funds appear to have left the aggregate. owing in part to continued strong for- The primary lure seems to have been the eign demands, also contributed to the stock and bond markets, which offered strength in Ml, as well as in the monehigher returns, in part because of the tary base, which increased SVA percent steep upward slope of the yield curve. last year. Indeed, inflows to stock and bond mutual funds were robust throughout Report on July 20, 1992 1991, and especially since midyear, when investors seemed particularly Monetary Policy and the Economic intent on reaching for higher yields by Outlook for 1992 and 1993 lengthening the maturity of their portfolios. Depositories, faced with weak Economic activity has increased on balloan demand and pressures on capital ance since the beginning of the year, but positions, seemed disinclined to com- rather hesitantly in recent months, and pete aggressively for these funds by inflationary pressures have continued to offering competitive rates on longer- abate. Against this backdrop, and with term CDs. money and credit exhibiting renewed The rapid pace of activity by the weakness in the second quarter, the Fed- Resolution Trust Corporation also likely eral Reserve has eased money market depressed M2 growth in the third conditions twice—in April and again in quarter, as it did throughout the year. early July. The descent of domestic The abrogation of existing retail CD interest rates, which began in 1989, has contracts and the disruption of long- now carried nominal yields on many standing depositor relationships often market instruments to the lowest levels attending resolutions of failed thrift in- in two or three decades. stitutions may have encouraged inves- In mid-February, when the Board pretors to reshape their portfolios, substitut- sented its last semiannual report on ing nonmonetary financial assets for M2 monetary policy to the Congress, the deposits. economy seemed to be struggling to Despite sluggish income growth, Ml regain forward momentum. Growth had expanded 8 percent in 1991, the swiftest come almost to a standstill in the final advance since 1986. Unlike M2, this quarter of 1991, and, while a hint of aggregate has responded to declining improvement was evident in some of market interest rates about as would be the indicators that were available in expected given historical relationships. mid-February, convincing signs of a Ml was boosted by large inflows to strengthening of activity had not yet NOW accounts, whose offering rates appeared. Moreover, in looking ahead at responded very slowly, until the end of that time, growth seemed likely to conthe year, to declining market interest tinue to be retarded by the still incomrates. Falling rates also brought new life plete resolution of major structural to demand deposits, as compensating adjustments in a variety of sectors, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

68 79th Annual Report, 1992 financial and nonfinancial. Chief among 1991 and early 1992, began to tilt back those structural impediments were per- up in late winter and early spring, and sistent problems in commercial real business executives expressed greater estate markets, budgetary stress at all optimism. Economic growth, as mealevels of government, a downsizing of sured by the annualized rate of change the defense industry, exceptional cau- in real gross domestic product, moved tion among financial intermediaries, up to 23/4 percent in the first quarter, the and ongoing efforts of businesses and largest quarterly gain in more than three households to reduce the level of their years. indebtedness. The strength in final demand that At the same time, however, consider- seemed to be emerging in the early part able impetus to activity was thought to of the year does not appear to have be already in train, partly as a result of carried through the second quarter, howthe substantial easing of money market ever. Households, restrained by a soft conditions that the System had imple- labor market and the lack of significant mented in the second half of 1991. gains in real income, clamped down on Among other effects, the decline in their spending after the burst early in the short- and long-term interest rates was year; real consumption expenditures reducing debt-servicing obligations and appear to have grown little, if at all, in was facilitating needed balance sheet the second quarter, and new home sales restructuring by borrowers and lenders. fell steadily from February through In assessing the situation as of last Feb- May. In addition, exports, which, over ruary, the Board members and Reserve the past several years, had been an area Bank presidents recognized that the of strength in the economy, showed lituncertainties in the outlook were unusu- tle growth over the first five months of ally large, but they believed that a mod- 1992. Although manufacturers boosted erate pickup in output from the espe- production in April and May, they cially sluggish pace of the fourth quarter tended to do so more by stretching the of 1991, coupled with further improve- hours of their workers, rather than by ment in underlying price trends, was the adding employees to their payrolls. most likely prospect in 1992. Declines in production became evident In the event, economic growth did in the industrial sector in June, as firms move back into a moderate range in the apparently moved quickly to forestall first quarter of 1992. After keeping a unintended inventory accumulation. In tight grip on their expenditures during the labor market, the data for May and the holiday shopping season, consumers June showed a disturbing rise in the stepped up their spending sharply in unemployment rate, to a level of 7.8 perearly 1992; simultaneously, purchases cent. On the whole, the growth of total of new houses soared, spurred in part output in the economy likely was posiby lower mortgage interest rates. An tive again in the second quarter—as it unusually mild winter also helped to had been in each of the four preceding buoy activity in January and February. quarters. But, as the Federal Reserve Although businesses were able to had anticipated at the start of the year, accommodate much of the burst in the drag from ongoing structural adjustspending through a drawdown of inven- ments has remained heavy. tories, the rise in demand sparked a Inflationary forces have been muted rebound in industrial output. Consumer this year. Prices accelerated somewhat sentiment, which had deteriorated in late in the first quarter, but that flare-up Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 69 proved to be short-lived, as increases in the year as the economic expansion the consumer price index were small, on appeared stronger than many people had average, in the second quarter. The expected, raising market concerns about "core" rate of inflation, as measured by a revival of inflationary pressures. Howthe change in the CPI excluding food ever, in recent months many bond and and energy, averaged 3.8 percent at an mortgage rates have retraced their earannual rate in the first six months of lier increases. Broad indexes of stock 1992; this rate of rise was a little lower prices have remained close to record than the average rate of increase during levels. In foreign exchange markets, the 1991, and it was considerably less than weighted average value of the dollar, in the increase seen during 1990. With in- terms of the currencies of other Group flation expectations down appreciably of Ten (G-10) countries, appreciated from recent highs, and with firms striv- until early March, but recent depreing to reduce their costs on all fronts, a ciation, occasioned primarily by a less trend toward gradual reduction in the robust outlook for the U.S. economy, rate of price increase appears to be well has left the dollar somewhat below its established at the present time. 1991 year-end level. Growth in the broad measures of Declining interest rates in recent years money was quite weak in the second have contributed to sizable reductions in quarter, leaving both M2 and M3 in debt-service obligations, as both long- June below the lower bounds of their and short-term debt has been rolled over annual ranges. Measured from its aver- or refinanced at lower rates. In addition, age level in the fourth quarter of 1991, lower long-term rates and high price- M2 increased at an annual rate of earnings ratios on stocks have encour- IV2 percent through June, while M3 aged businesses to reduce the interest edged down at a rate of lA percent over rate risk and the uncertainty associated that same period. As is discussed in with short-term funding by relying more more detail below, the sluggishness of heavily on issuance of long-term debt money during this period seemed to be and equity. Households also have taken more a reflection of changing patterns advantage of lower rates to refinance of finance than of restraint on nominal existing debt, especially mortgages. In income growth. Still, private credit addition, over-leveraged households, growth also was relatively slow, and, in facing uncertain income and employthe context of renewed softness in the ment prospects and wide spreads incoming data on spending and produc- between rates charged on consumer tion, the weakness in both money and credit and yields on monetary assets, credit added to concerns about the have moved to limit debt growth. ongoing strength of the expansion. The resulting improvements in the In this environment, the System eased financial conditions of households and money market conditions slightly in businesses are evident in several indica- April and implemented a reduction of tors: Delinquencies on consumer loans V2 percentage point in the discount rate and home mortgages have declined, raton July 2, along with a commensurate ings for a number of firms have been further easing of money market condi- upgraded, and yield spreads have nartions. In total, short-term interest rates rowed on private fixed-income securihave declined about 3A of a percentage ties relative to Treasury obligations. Of point since the beginning of the year. course, not all parties have benefited Longer-term rates backed up early in from lower interest rates; households Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

70 79th Annual Report, 1992 holding short-term deposits have expe- where—despite the greater risks rienced a sizable decline in interest involved—returns have appeared more income. On balance, however, lower attractive. In addition, given the wide interest rates have helped households deposit-loan rate spreads, some M2 and businesses strengthen their balance holders likely have opted to pay down sheets, thereby building a firmer finan- debt rather than to hold monetary assets. cial foundation for future economic The rechanneling of credit flows away expansion. from depositories and the associated Efforts to return to more sustainable sluggish money growth have not been leverage positions have contributed to entirely benign; many borrowers face slow expansion of the debt of nonfed- higher costs and stricter terms of credit eral sectors in the first half of this year. now than in the past at given levels of Heavy borrowing by the federal govern- market interest rates. Nonetheless, ment has kept total debt expanding at weakness of the monetary aggregates the lower end of the Federal Open Mar- has not been associated with a similar ket Committee's (FOMC) monitoring degree of restraint on aggregate demand. range of 4Vi to 8V2 percent, based on Indeed, growth in nominal spending current estimates. Depository credit has considerably outpaced that of M2 remains especially weak, reflecting not and M3; put differently, both monetary only muted private loan demands, but aggregates appear to have registered sizalso continued caution among deposito- able increases in their income velocities ries. Commercial banks no longer in the first half of the year. The rise appear to be tightening their nonprice in M2 velocity is particularly notable, terms of lending, but the degree of credit given the marked drop in short-term restraint remains substantial and spreads interest rates in the latter part of 1991. between loan rates and the cost of funds Ordinarily, velocity tends to fall for a remain unusually wide. Bank capital time after a decline in short-term rates. positions have improved substantially over the past year; nonetheless, banks Monetary Objectives are likely to continue working to bolster for 1992 and 1993 capital, partly as a consequence of incentives contained in the FDIC Improve- In reviewing the annual ranges for the ment Act. monetary aggregates in 1992, the Com- The contraction of depository credit mittee noted the substantial uncertainhas been mirrored by the meager ties created by the unusual behavior of advance in the monetary aggregates. M2 and M3 velocity thus far this year. If This is seen clearly in M3, which portfolio shifts ebb and more normal includes most of the liabilities banks relationships of depository credit to and thrift institutions use to fund loans spending begin to emerge, growth of the and other assets. But M2 has also been monetary aggregates within the existing affected. Banks and thrift institutions ranges would be consistent with the have not actively pursued deposit fund- Committee's objectives for making ing in light of weak loan growth, and progress toward price stability and fosretail deposit rates have fallen con- tering economic growth. However, it is siderably over the course of the year. unclear whether the forces giving rise to Consumers consequently have sought the unusual behavior of the aggregates higher-yielding assets outside M2, will wane in coming months or continue including those in the capital market unabated. Faced with these uncertain- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 71 Ranges for Growth of Monetary whom participate in the discussions of and Debt Aggregatesl the Federal Open Market Committee, Percent generally believe that the most likely scenario for the economy in the second Provisional Aggregate 1991 1992 range half of 1992 is one in which real GDP for 1993 increases at a moderate pace and job growth is sufficient to impart a down- M2 21/2-6V2 21/2-61/2 21/2-6V2 M3 1-5 1-5 1-5 ward tilt to the unemployment rate. In Debt2 41/2-81/2 41/2-8V2 41/2-81/2 1993, output growth is expected to pick 1. Change from average for fourth quarter of preced- up slightly further from the 1992 pace, ing year to average for fourth quarter of year indicated. bringing additional small reductions in Ranges for monetary aggregates are targets; range for debt is a monitoring range. the unemployment rate. Inflation will 2. Domestic nonfinancial sector. likely hold to a gradual downward trend over the next year and a half. ties, the Committee chose to retain the In quantifying their views of the pros- 2V2 to 6V2 percent range for M2 and the pects for economic growth, the Board 1 to 5 percent range for M3 announced members and Reserve Bank presidents earlier this year for 1992. ended up with forecasts that are some- The Committee also reaffirmed the what stronger than those made in Februexisting 1992 monitoring range for the ary. A large majority of them see the aggregate debt of domestic nonfinancial most likely outcome for this year as sectors. The more cautious attitudes being one in which real gross domestic toward borrowing that have damped credit growth this year, and the improv- Economic Projections for 1992 and 1993 ing balance sheets of borrowers, should lay the groundwork for sustained eco- FOMC members and nomic expansion in years to come. other FRB presidents Item The ongoing structural changes in the Central Range tendency financial system and the tentative nature of the recovery greatly complicated the 1992 task of choosing ranges for the coming Percent change, fourth year. The Committee recognized that the quarter to fourth quarterl range for M2 probably would need to be Nominal GDP 5-61/4 51/4-6 reduced at some point to be consistent R C e o a n l s u G m D e P r price index2 2 3- - 3 3 1 1 / / 2 4 2i/ 3 4- - 2 3 3 1 / / 4 2 with the Federal Reserve's long-run Average level, fourth objective of reasonable price stability. quarter (percent) Unemployment rate3 7-71/2 7^4-71/2 However, pending further analysis of the recent relationship of money stock 1993 movements to income and interest rates, Percent change, fourth the Committee chose to carry forward quarter to fourth quarterx the 1992 ranges for the monetary aggre- Nominal GDP 41/2-7 51/2-6V4 gates and debt as provisional ranges for R C e o a n l s u G m D e P r price index2 2 2 1 1 / / 2 2 - - 3 4 1 /2 2 2 3 3 / / 4 4- - 3 3i/4 1993. Average level, fourth quarter (percent) Uunemployment rate3 61/2-71/4 61/2-7 Economic Projections for 1992 and 1993 1. From average for fourth quarter of 1990 to average The members of the Board of Governors for fourth quarter of 1992. 2. All urban consumers. and the Reserve Bank presidents, all of 3. Projections are for civilian labor force. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

72 79th Annual Report, 1992 product rises 2lA percent to 23A percent index over the four quarters of 1992 to over the four quarters of 1992; the cen- end up in the range of 3 to 3Vi percent. tral tendency of the forecasts for 1993 Although an increase of this magnitude spans a range of 23A to 3 percent. With is to the high side of that realized in regard to the unemployment rate, the 1991, inflation rates were held down last central tendency of the governors' and year by the unwinding of the oil price Bank presidents' forecasts for the fourth shock that had occurred in 1990. Core quarter of 1992 covers a range of 11A to inflation this year is expected to be 7V2 percent, as compared with the lower than it was in 1991, and most second-quarter average of IVi percent; Board members and Reserve Bank presthe corresponding central tendency idents believe that sustained progress range for the final quarter of 1993 is toward the containment of costs and a 6V2 to 7 percent. further easing of inflation expectations The achievement of the projected will keep the trend rate of price increase GDP growth will depend in part on the on a course of gradual slowing next year progress in resolving the various struc- as well. With neither food nor energy tural adjustments noted earlier. In gen- prices anticipated to depart in any meaneral, the Board members and Reserve ingful way from the broad trends of Bank presidents believe that these struc- inflation, the total CPI is also expected tural problems will continue to exert to slow in 1993, to a range of 23A to negative drag on the economy in com- 3V4 percent, according to the central tening quarters, but that their force will dency of the FOMC participants' foregradually lessen. On that score, some of casts. the recent trends have been encourag- Earlier this year, in the Economic ing. In the market for commercial real Report of the President and the Budget, estate, which has been the most striking the Administration issued forecasts that area of weakness in the economy in showed nominal GDP growth in 1992 recent quarters, downward pressures on and 1993 that falls within the ranges the prices of existing properties seem to anticipated by Federal Reserve officials. have begun to diminish, and the rate of Consequently, there would appear to be decline in new construction appears to no inconsistency between the System's be slowing. In addition, businesses and plans for monetary policy and the shorthouseholds also have made considerable term goals of the Administration. progress in strengthening their finances, Looking more toward the long term, and even though that improvement evi- the prospect of a sustained period of dently has not yet generated more declining inflation, together with a resoexpansive attitudes toward spending and lution of the many structural problems investing, such a shift probably will be that currently afflict the economy, sugforthcoming at some point. An obvious gests the opportunity for substantial ecorisk in the outlook is that these, and the nomic gains and a broadening prosperother, structural adjustments could per- ity. The Federal Reserve, for its part, sist with greater intensity than is antici- can best contribute to the achievement pated; but, alternatively, a faster resolu- of those objectives by keeping its sight tion of the structural problems—and a firmly on the long-run goal of price stastronger pickup of the economy—is not bility. But the longer-range progress of out of the question either. American living standards will depend The governors and Bank presidents on more than monetary stability. Sound expect the rise in the consumer price fiscal policies and an open world trading Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 73 system are essential if we are to enhance Although price movements were capital formation and achieve the great- erratic from month to month in the first est possible productivity of our human half of 1992, there was ample evidence and physical resources. that the underlying processes of disinflation still were at work. Wage increases moderated further, and productivity in- The Performance of the Economy creases also contributed importantly to in 1992 the containment of costs. The twelve- After coming almost to a standstill in month change in the consumer price inthe final quarter of 1991, economic dex excluding food and energy, a rough activity showed more vitality in the gauge of the underlying rate of inflation early part of 1992. Buoyed by a surge in in the economy, dropped below the final sales, real gross domestic product 4 percent mark; as recently as the first rose at an annual rate of 23A percent quarter of 1991, that measure had been in the first quarter. Growth evidently running as high as 5Vi percent. The total slowed considerably in the second quar- CPI rose only 3 percent over the twelve ter; in that period, signs of softness months ended in June, held down by began to surface once again in a number small increases in food and energy of the indicators. Most notably, indus- prices over that twelve-month period. trial production and payroll employment turned down in June, after four months of increases, and, with an influx of job- The Household Sector seekers into the labor market, the civil- Indicators of the economic health of ian unemployment rate moved up households were mixed in the first half sharply toward midyear, to a June level of 1992. Households continued to make of 7.8 percent—about 3A of a percentage gradual progress in reducing their debt point above the rate at the end of 1991. burdens in the first half of the year, and The first-quarter surge in final sales the incidence of financial stress seemed was largely a reflection of a firming of to diminish. However, neither income demand in the domestic economy. Con- nor wealth displayed the degree of vigor sumer spending strengthened markedly needed to sustain strength in household in the opening months of the year, expenditures. housing starts and home sales jumped, When the year began, consumer and business fixed investment increased spending was a major question mark in for the first time in several quarters. In the economic outlook. Consumer outthe second quarter, domestic demand lays for goods had weakened appreciaappears to have risen further, but, on the bly in the final quarter of 1991, and whole, at a slower pace than in the first consumer confidence, which had gone quarter. By contrast, the external sector into an alarming plunge during the of the economy, which had contributed autumn, continued to soften into appreciably to growth of the economy in early 1992. But—such pessimism 1990 and 1991, has provided little or no notwithstanding—consumers pushed impetus to activity this year; exports expenditures up at a very rapid pace in have been limited recently by the contin- January and raised them further in Febued sluggishness of many foreign indus- ruary; although spending softened in trial economies, and imports appear to March, the rise in real consumption have moved up after a couple quarters expenditures for the first quarter as a of flatness. whole amounted to 5 percent at an Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

74 79th Annual Report, 1992 annual rate, the strongest quarterly rapidly in recent quarters, buoyed, in advance in four years. Purchases of part, by a rise in unemployment benedurable goods rose briskly, and solid fits. Starting in March, disposable gains were also recorded for a wide income also was lifted by a change in range of nondurables. Given the size of tax withholding schedules that altered those increases—and with housing sales the timing of tax payments to some also rising sharply in the early part of extent, delaying a portion of those paythe year—it seemed for a time that the ments until 1993. forces of expansion might be gathering A combination of restrained debt considerable strength. growth and lower interest rates has led However, the first-quarter surge did to reductions in the debt-servicing burnot carry over into the spring. Indeed, it dens of households, although, measured appears that real consumption expendi- relative to income, the repayment burtures probably were little changed in the den still is relatively high by historical second quarter as a whole. Nevertheless, standards. The incidence of financial a bright spot in the recent spending data stress among households also appears to has been the firmness of motor vehicle have eased somewhat in the most recent sales. After bottoming out in January at quarters for which data are available. an annual rate of about 12 million units, Delinquency rates on consumer loans the sales of cars and light trucks and home mortgages, which rose rebounded to a rate of about HV2 mil- sharply from mid-1990 to mid-1991, lion units in the next three months and turned down in the second half of last then moved up further to a level of year and declined further in the first 133/4 million units in June. Although a quarter of 1992. portion of the recent strength in auto Real outlays for residential investsales apparently is a reflection of ment have been rising since the start of increased business investment in motor 1991. The first-quarter gain—H3/ per- 4 vehicles, it also seems likely that house- cent at an annual rate—took outlays to a holds that have put off buying new cars level close to 10 percent above that of a and trucks in the past couple of years are year earlier. Even so, spending gains now entering the market in greater over the year ended in the first quarter of numbers. 1992 recouped less than half of the Real disposable personal income fell sharp decline of the preceding four after the oil price shock of 1990 and quarters. then turned up in the spring of 1991. For a brief time early this year, resi- Growth since then has been positive in dential investment seemed to be picking each quarter, but a bit erratic and, on up considerably more momentum. In the average, relatively slow. The level of latter part of 1991, mortgage interest real income in the first quarter of this rates had dropped to their lowest levels year was about 2 percent above the in more than fifteen years, and the sales recession low of a year earlier; the aver- of new single-family houses, which had age for April and May was up less than already been moving up at the end 2 percent from the level of a year ago. of last year, surged in January and Growth of wage and salary income has remained strong in February. Reacting remained sluggish this year, and interest to the rise in demand—and aided by income has continued to decline. By an unusually mild winter—builders contrast, government transfer payments boosted the pace of single-family housto individuals have continued to grow ing starts to the highest seasonally Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 75 adjusted level in two years. In March, income. In that regard, the latest round however, sales of new homes plum- of cuts in mortgage interest rates, to the meted, and they weakened further in lowest level since 1973, appears to have April and May. Starts also retreated; the stimulated some pickup in real estate number of single-family units started in activity very recently. the second quarter was 6 percent below the first-quarter average. Several factors have affected the The Business Sector recent patterns of the housing indicators. When the year began, the business sec- The mild winter weather evidently per- tor of the economy was still in the promitted some starts to be undertaken a bit cess of adjusting to the sluggishness of sooner than they otherwise would have demand and the mild backup of invenbeen. In addition, a substantial backup tories that had emerged in the second of mortgage interest rates after January half of 1991. Industrial production, undoubtedly cut into demand to some which had declined in the final two degree; rates on thirty-year fixed-rate months of last year, fell further in Januconventional mortgages rose from about ary; assemblies of motor vehicles SVA percent in mid-January to 9 percent dropped sharply in that month, and cutby March and remained above SVz per- backs in output were reported in other cent until June. Discussion of a possible industries as well. Those production tax credit for first-time homebuyers cuts, coupled with the January surge in also appears to have raised demand household spending, led to a reduction temporarily. in business inventories, clearing away Moreover, the recovery in housing most of the excess stocks that had accuactivity probably has continued to be mulated in the final four months of retarded to some degree by negative 1991. influences that were evident in 1991. A Industrial production turned up in significant number of potential home- February, and, with orders and shipbuyers are being deterred by concerns ments trending up, additional gains folabout jobs and incomes. Others now lowed in each of the next three months. view the purchase of a home as being a Assemblies of motor vehicles rose conriskier, less attractive investment than it siderably during this period and, by once seemed, owing to the sharp May, were at the highest level since the declines seen in house prices in some fall of 1990; although assemblies were regions in recent years and to the lack of reduced by a small amount in June, much price appreciation more generally. automakers have announced plans to High vacancy rates and unfavorable step up assemblies in the third quarter. demographic trends continue to be for- Production of consumer goods other midable obstacles to recovery in the than motor vehicles also increased modmultifamily sector. By contrast, an erately over the four-month period increasingly favorable factor is the beginning in February; a small portion improved affordability of housing: of those gains was reversed in June, Lower mortgage interest rates—in part a however. Bolstered by strong gains in reflection of the less inflationary envi- the production of office and computing ronment of recent years—have substan- equipment, output of business equiptially reduced the size of the monthly ment (other than motor vehicles) rose in payment associated with the purchase of each month from February through a home, measured relative to personal June. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76 79th Annual Report, 1992 Manufacturing and trade inventories, tion, the growth of business debt has measured in real terms, fell further in remained sluggish this year, as internal February. Thereafter, inventories appear sources of funds have proved to be large to have risen somewhat, on net. In man- enough to finance a subdued level of ufacturing, the level of inventories at the business investment. Lower bond yields end of May was relatively low, com- have enabled firms to replace higherpared to the level of sales. But, in parts cost debt and have encouraged a shifting of the trade sector, stocks may have out of short-term liabilities. Among been slightly higher than desired, and farm businesses, income has dropped with household demand looking slug- back from the relatively high levels of gish once again, some businesses may 1989 and 1990, and farmers have cut have felt it appropriate to pull back a bit back on their investment in machinery on orders for additional merchandise, and equipment. However, farmers' baltriggering the production adjustments ance sheets appear to be considerably that were evident in June. stronger at this point than they were in Business profits, which came under the mid-1980s, when the sector went considerable pressure during the reces- through an extended period of severe sion, began rising noticeably in the latter financial stress. part of 1991 and increased sharply in the Business fixed investment turned up first quarter of 1992. The before-tax eco- in the first quarter of this year, after nomic profits of all U.S. corporations declining in each quarter from late 1990 jumped YlVi percent in the first quarter to the end of 1991. Real outlays for and were at the highest level since the equipment increased moderately in the first half of 1989. The profits of finan- first quarter, and business investment cial corporations have been boosted by in new structures turned up, after five sharp reductions in interest expenses and quarters of sharp declines. The secondby a strengthening of their loan port- quarter indicators that are in hand sugfolios. The economic profits of nonfi- gest that equipment spending probably nancial corporations from their domes- increased enough to raise total real busitic operations also have been rising; in ness fixed investment further in that the first quarter of 1992, these profits, on period. a pre-tax basis, were more than 20 per- The first-quarter rise in equipment cent above their quarterly low of late spending amounted to about Vh percent 1990. That rise in profits was the result at an annual rate. Increased outlays for of small increases in volume, a moder- computers and related devices more than ate increase in the margin over unit accounted for the first-quarter gain; labor costs, and substantial reductions in spending for that type of equipment net interest expenses. has been rising briskly since mid- Stress has continued to be evident this 1991, boosted by product innovations, year in several industries—notably extensive price-cutting by computer retailing, airlines, and commercial real manufacturers, and the ongoing efforts estate. Overall, however, corporate bal- of businesses to achieve efficiencies ance sheets have been strengthening. through the utilization of new Issuance of equity by nonfinancial cor- information-processing technologies. By porations has been outstripping share contrast, spending for aircraft, which retirements in recent quarters, after sev- had been strong in 1990 and for most of eral years in which the balance ran 1991, has weakened substantially since markedly in the other direction. In addi- last autumn; a first-quarter uptick in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 77 those outlays retraced only a small part The Government Sector of the fourth-quarter plunge. Business Government purchases of goods and outlays for motor vehicles were down services—the part of government spendmoderately in the first quarter, but they ing that is included in gross domestic appear to have firmed in the second product—increased at an annual rate of quarter. Spending for all other types of 3 percent in real terms in the first quarter equipment, roughly half of which is of 1992, after declining about \Vi perindustrial machinery, was down further cent over the four quarters of 1991. Fedin the first quarter in 1992, but at a eral purchases, which fell 3 percent last much slower pace than in 1991. In year, rose at an annual rate of about total, equipment investment appears to 1 percent in the first quarter; nondefense be exhibiting the traditional lagged purchases moved higher, and the decline response to changes in aggregate eco- in defense purchases was smaller than nomic activity, the recent pickup being those seen in previous quarters. State supported by the rise in profits and and local purchases, which had declined increased cash flow. slightly over the course of 1991, were Real outlays for nonresidential struc- boosted in the first quarter of 1992 by a tures rose at an annual rate of 2!/2 per- surge in the outlays for structures. cent in the first quarter. Investment in Budgetary problems continue to conindustrial structures was up for the sec- front many governmental units. At the ond quarter in a row, and increases also federal level, the unified budget deficit were reported for utilities, private edu- over the first eight months of fiscal cational facilities, and hospitals and 1992—the period from October to institutions. However, spending for gas May—totaled $232 billion; this total and oil drilling fell further in the first was about $56 billion larger than the quarter, and the outlays for construction deficit recorded in the first eight months of office buildings continued to decline. of the previous fiscal year. Federal In total, the first-quarter level of receipts in the current fiscal year are up spending for offices and other commer- only 1 percent from the same period of a cial structures was about 40 percent year earlier, while outlays have climbed below the level of two years earlier, but about IV2 percent. On the receipts side there are tentative indications that the of the ledger, the income taxes paid by steepest part of this protracted decline individuals have been damped by slow may now be over. Although spending income growth, and, despite a pickup for the construction of office buildings recently, the revenue from corporate has continued to fall rapidly this year, profits taxes has been weak for the fiscal the outlays for commercial structures year to date. Receipts from excise taxes other than offices—a category that in- have risen considerably this fiscal year, cludes such things as warehouses, shop- but these do not account for a very large ping malls, and other retail outlets— share of total federal revenue. have changed little, on net, over the past The sharp rise in federal spending this several months. In addition, there are year partly reflects a diminished flow of indications that the rate of decline in contributions to the United States from prices of existing commercial properties our allies in the Gulf War; these contrihas slowed, and transactions in commer- butions are counted as negative outlays cial real estate reportedly have picked in the federal budget, and their shrinkup in some areas of the country this age therefore translates into a rise in year. recorded outlays. By contrast, spending Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78 79th Annual Report, 1992 has been held down this year by a reduc- a little in the first quarter, to a total, tion in outlays for deposit insurance pro- excluding social insurance funds, of grams. This reduction stems, in part, about $26 billion. from delays in funding the activities of Last year's progress in reducing the the Resolution Trust Corporation (RTC), combined state and local budget deficit the federal agency that is responsible for was achieved partly through tax cleaning up the problems of insolvent increases and partly through spending thrift institutions. restraint. With deficits still large this Excluding the allied contributions and year, legislators and administrators are the spending for deposit insurance pro- facing yet another round of painful grams, federal outlays have risen about choices. Tax hikes have been imple- 5Vi percent this fiscal year. Federal mented in some places this year, and financing of health care has continued to efforts to curb spending appear to be rise at a very rapid pace in fiscal 1992; widespread, even as the demands for grants to states for Medicaid, the fastest many types of government services have growing category in the health care bud- continued to rise. Increases in the wages get, are running more than 30 percent and benefits of state and local workers above the level of a year ago. In addi- have slowed considerably in recent tion, slow growth of the economy and quarters, with wage freezes being actions taken to extend unemployment imposed in some cases. Although state benefits have pushed federal spending and local employment has risen a little for income support programs sharply in recent months, partly because of elechigher, and outlays for social security tion activity, the cumulative growth in have been boosted by cost-of-living the number of state and local jobs over adjustments and increases in the number the past year has been quite sluggish, of beneficiaries. Combined federal and some governments have furloughed spending for other functions has risen workers temporarily in order to hold only slightly in nominal terms this fiscal down expenditures. Against the backyear. The mix of this spending is chang- drop of these widespread attempts to ing, however. Outlays for some nonde- restrain spending, the substantial firstfense functions—notably law enforce- quarter rise in real state and local purment, education, and health programs chases may well have been a temporary other than Medicaid—have risen fairly bulge, rather than the harbinger of a rapidly in fiscal 1992; outlays for renewed uptrend in state and local defense have been cut back, even in spending. nominal terms, once adjustment is made for the diminished flow of allied contributions. The External Sector Many state and local governments For the year to date, the foreign still are grappling with severe budgetary exchange value of the dollar, in terms of imbalances, and further progress toward the currencies of the other Group of Ten correcting those imbalances was not (G-10) countries, has declined someevident in the first quarter of 1992. After what, on balance, from its level at the four quarters in which state and local end of 1991. Appreciation early in the governments had managed to chip away year has been offset by subsequent steadily at the deep deficit in their com- depreciation. bined operating and capital accounts, From its low point at the end of 1991, that deficit is estimated to have widened the dollar appreciated through about Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 79 mid-March, reaching a level nearly and was little changed against the 9 percent above where it was at year- yen from the start of the year to midend. The dollar was lifted during this July. The dollar appreciated against the period by data pointing to increasing Canadian dollar; with Canadian real strength in the recovery of U.S. eco- GNP flat in the fourth quarter of 1991 nomic activity, which also worked to and posting only a small rise in the first raise U.S. long-term interest rates rela- quarter of this year, Canadian authorities tive to those in other countries. From eased interest rates and appeared to welmid-March through April, exchange come the associated decline in their currates fluctuated in a fairly narrow range. rency as a way to help stimulate eco- Beginning in May, however, the dollar nomic activity. By contrast, the dollar began to decline as long-term interest depreciated moderately against the currates eased, and as of mid-July, it had rencies of major developing countries more than reversed the rise earlier in over the first half of 1992, after adjustthe year. The market's reassessment of ment for movements in relative price the prospects for a strong U.S. economic levels. recovery appears to have been a major Prices of U.S. non-oil imports accelerfactor underlying the declines in both ated to a 6VA percent annual rate of the dollar and long-term rates. increase in the first quarter of 1992, Developments abroad reinforced more than double the rate of rise in the these factors. The dollar rose sharply fourth quarter of 1991. The jump in against both the Japanese yen and the import prices most likely reflected the German mark early in the year. Signs of lagged effects of the depreciation of the further weakening of economic growth dollar that occurred during the latter part in Japan and the decline of the Japanese of 1991. Most of the price increase of stock market worked to depress the yen. the first quarter was reversed in April Reports of a decline in German output and May. The price of oil imports in the fourth quarter of 1991 and increas- declined 15 percent in the first quarter in ing expectations that the Bundesbank response to strong OPEC production and would not move further toward tighten- warmer-than-normal weather. However, ing German monetary policy contributed that oil price decline was reversed in the to the weakness of the mark. Beginning second quarter in response to production in late April, the dollar started to decline restraint by Saudi Arabia and to indicaagainst the yen and the mark. News of a tions that the Kingdom may be prepared substantial widening of Japan's current to target prices at a somewhat higher account surplus and a belief that the level. Group of Seven nations supported With growth of the U.S. economy still appreciation of the yen contributed to a on a relatively slow track, real merchanturnaround in the dollar's exchange rate dise imports remained about unchanged against that currency. In Germany, eco- in the first quarter, after only a small nomic activity proved stronger than increase in the fourth quarter of 1991. expected in the first quarter and, along Increases in imports of capital goods in with rapid money growth in that coun- the first quarter were about offset by try, led both to a reevaluation of the declines in imports of consumer goods. prospects for an early easing by the Data for April and May show the quan- Bundesbank and to a rise in the mark. tities of imports of most categories of On balance, the dollar declined goods moving up noticeably from their more than 3 percent against the mark first-quarter averages. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80 79th Annual Report, 1992 Export volume, which had climbed A large net capital inflow was resharply in the final quarter of 1991, held corded in the first quarter of 1992; foraround its fourth-quarter pace in the first eign official holdings of reserve assets in five months of 1992. Despite its recent the United States rose strongly, and priflatness, export volume in this five- vate capital transactions showed a small month period was about IVi percent net inflow. Within the private-sector above the level of a year earlier. The accounts, the first quarter brought substrongest growth in exports over the past stantial capital outflows that were assoyear has been in capital goods, particu- ciated with U.S. purchases of foreign larly to developing countries, reflecting securities and increased direct investstrong investment demand in Latin ment abroad—particularly in intercom- America (especially Mexico), the Mid- pany debt flows to Canada and the dle East, and in Asia. However, the gen- United Kingdom. These outflows were eral slowdown in growth in the major largely offset by a sizable net capital industrial countries last year, and the inflow reported by banks, and by private recessions in some countries, generally foreign purchases of U.S. securities continued during the first half of 1992, other than Treasury securities. Inflows depressing the growth of U.S. exports to associated with foreign direct investthese countries. At the same time, ment in the United States amounted to special factors that contributed to the less than $1 billion in the first quarter, strength in exports last year—notably down sharply from the average pace in the surge in investment demand in Latin recent years; acquisitions of U.S. busi- America and replacement demands from nesses by foreigners fell sharply, and the Persian Gulf countries after the slow growth in the United States prowar—have been less pronounced this duced reduced earnings to be reinvested year. in this country. The net capital inflow in The merchandise trade deficit nar- the first quarter exceeded the current rowed to an annual rate of $70 billion in account deficit by a wide margin, implythe first quarter of 1992, slightly below ing a substantial statistical discrepancy the deficit recorded in the fourth quarter in the international accounts—$16 bilof 1991 and also a little below the 1991 lion at a quarterly rate. The discrepancy average. The current account showed a in 1991 had amounted to only $1 billion deficit of $21 billion at an annual rate in over the year as a whole. the first quarter, compared with a deficit of $4 billion for calendar-year 1991. Labor Market Developments However, excluding unilateral transfers Payroll employment, which had deassociated with Operation Desert Storm clined somewhat in the final quarter of in both periods, the current account def- 1991, fell further in January of this year. icit in the first quarter—$23 billion at an Thereafter, employment rose in each annual rate—was about half the deficit month from February through May, seen in 1991. This improvement in cur- before turning down once again in June. rent account transactions reflected a fur- In the private sector, the level of payroll ther widening of the substantial surplus employment in June was up only on net service transactions (particularly slightly from its level at the end of 1991, in the areas of medical, educational, and and it remained well below the preother professional and business services) recession peak of 1990. and an increase in net investment The sectoral patterns of change in the income receipts. number of workers on private payrolls Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 81 continued to vary considerably in the the gains seen at a similar stage of previfirst half of 1992. Employment at estab- ous economic recoveries. lishments that provide services to other Despite the rise in employment in the businesses rose fairly briskly, especially household survey, there were further in the period from February through sharp increases in the number of unem- May. Those gains seemed to be a reflec- ployed, and the civilian unemployment tion of a firming of activity in the busi- rate rose from 7.1 percent in December ness sector, but they also may have been to a level of 7.8 percent in June. Unemsymptomatic of businesses' hesitation ployment rates moved up, on net, for to push aggressively into expansion; it most occupational and demographic appears that firms may simply have been groups during the first half of the year, turning temporarily to outside help, with especially large increases for adult rather than committing themselves to men and teenagers. Much of the rise in the expansion of their own payrolls. unemployment in the first half consisted Elsewhere, employment in the health of persons who had lost their jobs. In services industry continued to rise in the addition, unemployment was boosted by first half of 1992, but in many of the a rise in the number of persons who had other major sectors employment either entered or re-entered the labor force, but changed little or declined. The number were unable to find jobs; this influence of jobs in the construction business in was especially pronounced in May and the second quarter was about the same June, the two months in which most of as in the final quarter of last year. the first-half rise in the unemployment Employment in retail trade was also rate occurred. about flat over that same period. In man- The civilian labor force—the sum of ufacturing, employment fell slightly those persons who are employed and over the first half of the year, with small those who are seeking work but cannot declines reported across a wide range of find it—grew very rapidly in the first industries. half of 1992—about 3 percent at an In total, about 200,000 new jobs annual rate. However, this surge in the were created in the first half of 1992, labor force follows a period in which according to the payroll data obtained labor force growth had been quite weak, from business establishments and gov- and the percentage increase over the past ernments. An alternative employment year is much smaller—about \l/i perseries, compiled from the monthly sur- cent. Moreover, with the labor force parvey of households, showed the number ticipation rate now back to its previous of persons with jobs rising by a larger peak and the working-age population amount—about 850,000—over that estimated to be rising rather slowly in same period. Although a complete coming quarters, it does not seem likely accounting of the reasons for the recent that labor force growth can be maindisparity between these two surveys is tained at its recent pace for very long. not possible, one possibility is that the The softening of labor markets and payroll survey might not be fully captur- easing of inflation expectations since ing job growth at newly created estab- mid-1990 has been reflected in a gradlishments. If that is the case, then actual ual, but persistent deceleration of labor employment growth in the first half of compensation rates over the past couple this year may have been somewhat of years. The twelve-month rate of stronger than the payroll data indicate, change in the employment cost index although it still was not comparable to for private compensation, after peaking Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

82 79th Annual Report, 1992 at 5.2 percent in the first half of 1990, account for a sizable part of that slowdeclined to 4.6 by the end of that year, down, but most non-energy prices have slowed to 4.4 percent in 1991, and eased slowed as well. A halving of the rate of still further, to 4.2 percent in the twelve- price rise also is evident in the fixedmonth period that ended this past weight price index for gross domestic March. The annual rate of increase in purchases, a measure that takes account straight-time wages has been running at of the prices paid by businesses and less than 3x/2 percent in recent quarters. governments as well as those paid by However, the cost of benefits that firms consumers. Measures of price change provide to their employees has contin- that are related to domestic production ued to rise rapidly, propelled by the (rather than to domestic spending) have steep climb in the cost of medical insur- slowed by smaller, but still appreciable, ance and by increases in payments for amounts. For example, the fixed-weight workers' compensation. Nonetheless, price index for gross domestic product, the slower rate of increase in nominal the broadest measure of price change for compensation per hour, coupled with a goods and services produced domestisomewhat faster rate of deceleration cally, rose less than 3 percent over the in consumer prices, has been trans- four quarters ended in early 1992; that lating into increases in real hourly index had moved up at rates of 4 to compensation. 4V2 percent in each year from 1988 to Productivity has been picking up. In 1990. the first quarter of 1992, output per hour Consumer energy prices have continworked in the nonfarm business sector ued to fluctuate since the end of the Gulf was 1.9 percent above the level of a year War, but those fluctuations have been earlier, a four-quarter improvement last relatively subdued. Energy prices at the achieved in early 1988 when the econ- retail level fell early in 1992, influenced omy was still growing rapidly. At the by the mildness of the winter, the further same time that employers have been cut in U.S. industrial production early in cautious in expanding output, they have the year, the persistence of sluggish continued to move aggressively to econ- growth in other industrial countries, and omize on labor input, thus boosting out- the high level of OPEC production. put per hour. The increase in productiv- Later in the winter, however, energy ity, together with the slowing of hourly prices began to firm. The upswing in compensation, held the rise in unit labor U.S. industrial activity that began in costs to just 1.2 percent over the year February gave some lift to prices, as did ended in the first quarter of 1992, the the return to more normal weather patsmallest four-quarter increase in labor terns in late winter. Further impetus to costs in eight years. prices came in the spring, with the apparent mid-May shift by Saudi Arabia toward somewhat greater production Price Developments restraint than had been expected. In All the measures of aggregate price response to these developments, the spot change show inflation to have eased sub- price of West Texas intermediate moved stantially from its most recent peak. The up from a February low of about $18 per 3 percent rate of rise in the consumer barrel to a level of more than $22 per price index over the past year is roughly barrel in June. The CPI for energy, basihalf the rate at which that index in- cally following the lead provided by the creased in 1990; swings in energy prices oil markets, rose moderately in March, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 83 April, and May, and then jumped 2 per- The CPI excluding food and energy, cent in June. These increases more than which had increased at an annual rate of reversed the declines seen early in the only 3 percent during the final three year. Even so, the CPI for energy in months of 1991, climbed at a rate of June was up only moderately from the 43/4 percent in the first three months of level of a year earlier, most of the price 1992. The prices of non-energy services swings of the past twelve months having rose a little faster in the first quarter than essentially cancelled out. In the oil mar- they had in the latter part of 1991, and ket, the price of West Texas intermedi- the prices of commodities other than ate has softened a little, on net, since food and energy, which had changed June and recently has been in a range little in the fourth quarter, surged ahead not much different from that of a year at an annual rate of 5lA percent. Apparel earlier. prices, which had declined in late 1991, Food prices have slowed consider- moved up rapidly in the first quarter, ably over the past year and a half. The and fairly large increases were reported CPI for food rose more than 5 percent in for several other commodities. But, the each year from 1988 to 1990. But last first-quarter flare-up of price increases year they rose only 2 percent, and in the dissipated in the spring, as the annual first half of this year, they changed little rate of increase in the CPI excluding on net. A temporary runup in fruit and food and energy dropped to less than vegetable prices in late winter was 3 percent over the three months ending reversed in the spring, and increases in in June. The price indexes for both comthe prices of other foods were small on modities and services rose much less average during the first half of the year. rapidly during this period than they had As of June the CPI for food was only in the first quarter. 0.1 percent above the level of a year Looking beyond the many twists and earlier. turns that inevitably show up in the price The marked slowing of food prices data over any short period, the reports of since the end of 1990 is partly the result recent months appear to be depicting a of declines in the prices received by gradual, but broadly based, slowing farmers for their products. In addition, in the trend of consumer prices. The however, the food sector is being twelve-month change in the CPI for seraffected by forces similar to those that vices excluding energy, a category that are shaping price trends in other parts of has a weight of more than 50 percent in the economy: Demand growth has been the CPI total, has dropped back about relatively sluggish in the food sector, 2 percentage points since early 1991, to competition is intense in both food a pace of 41/* percent; deceleration is retailing and the fast food business, and evident for most types of services increases in labor costs have been included in that total. A slower rate of restrained. Price increases at grocery price increase also has emerged across a stores over the past year have been small broad range of CPI commodities, even for those foods for which farm although, somewhat surprisingly, the products account for only a small por- slowing there has not proceeded as raption of value added, and the twelve- idly as in the markets for services. month rise in prices of food consumed A sustained easing of inflation presaway from home, a category dominated sures also is widely evident in the data by nonfarm inputs, has been running in on prices received by domestic prothe lowest range since the mid-1960s. ducers. In June, the producer price index Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

84 79th Annual Report, 1992 for finished goods other than food strengthening economy. In addition, the and energy was 2Vi percent above the risk premiums on private credit instrulevel of a year earlier; toward the end of ments relative to Treasury obligations the 1980s, this index had been moving have narrowed, indicating growing marup at more than a 4 percent rate. The ket confidence in private borrowers and prices received by producers of inter- ample credit availability in securities mediate materials other than food and markets. Households and businesses energy have risen less than Vi percent, improved their balance sheets by conon balance, over the past year; their straining total debt growth, issuing cumulative increase over the past three equity, and refinancing costly existing years amounts to just VA percent. The debt with longer-term debt at lower prices of industrial commodities, which rates. As a result of these actions and the tend to track roughly the contours of decline in interest rates, borrowers have the business cycle, have firmed in the been successful in reducing the ratio first half of this year, after sharp of debt-service payments relative to declines from the autumn of 1990 to income. the end of 1991; however, in the context In contrast with the positive signals of a still hesitant recovery, the recent from other financial variables, the finning of these prices has been rela- advance in the money and credit aggretively subdued compared with the gates has been very subdued. M2 and increases seen during many past periods M3 in June stood below the lower end of stronger expansion in industrial of their annual growth cones, and the activity. debt of domestic nonfinancial sectors was running at the lower end of its range. In part, the sluggish expansion of Monetary and Financial M2 and M3 seemed to be related to the Developments in 1992 actions of borrowers and lenders to Monetary policy in 1992 has continued restructure balance sheets and was not to be directed toward the goal of secur- reflected in commensurate weakness in ing a sustained economic expansion spending. Under pressure to improve while making progress toward price sta- their capital positions and earnings and bility. In furtherance of these objectives, facing weak loan demand from borrowthe Federal Reserve this year has eased ers relying more heavily on longer-term money market conditions twice—once debt from market sources, banks and in association with a cut in the discount thrift institutions have not been aggresrate—and lowered reserve requirements. sively seeking to expand loan portfolios. On balance, most signs from financial In these circumstances, depositories markets this year have been consistent have cut deposit rates substantially this with a moderate pace of expansion in year, and many customers have shifted economic activity, but also seemed to their funds to alternative assets or indicate questions about lasting gains applied their deposit balances toward in reducing inflation. Short-term real debt repayment. These actions have and nominal interest rates have declined resulted in appreciable increases in the to unusually low levels, and the yield velocities of the broad aggregates—a curve has been extraordinarily steep situation the FOMC has taken into while share prices have been at near- account in assessing how much weight record levels—a pattern often associ- to place on slow growth in the aggreated with market expectations of a gates in making policy decisions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 85 Implementation of Monetary Policy firms issued bonds and used a portion of Early in the year, economic releases and the proceeds to pay down bank loans. financial market indicators signaled an Faced with tepid loan demand and conimprovement in economic activity— tinuing pressures on earnings and capiconsumer expenditures and confidence tal positions, banks lowered deposit were up, M2 growth surged in late Janu- rates promptly as market rates declined ary and February, a wave of refinancing and did not raise them when intermediactivity indicated households and busi- ate and long-term market rates backed nesses were successfully reducing debt- up in the first quarter. Households servicing costs, and the ebullient tone responded by shifting funds into nonin the stock market anticipated even monetary assets and by paying down stronger economic fundamentals in the debt at the expense of deposit accumulafuture. The Federal Open Market tion. Although these and other portfolio Committee noted these positive devel- adjustments appeared to play a promiopments at its meetings during the late nent role in the deceleration of M2, the winter and spring, but in view of ongo- possibility that income growth might ing impediments to robust expansion— also be slackening, perhaps due to tight including still-strained balance sheets lending terms at banks and the relucand limitations on credit availability— tance of businesses and households to concluded that the recovery was still borrow, could not be ruled out. Incomfragile. Recognizing the tentative nature ing data over the spring suggested only of the recovery and confident that a dis- a modest further rise in economic activinflationary trend had been firmly estab- ity after February, and given the Comlished, the Committee remained espe- mittee's concerns about the sustainabilcially alert in this period to the potential ity of the recovery, the Federal Reserve need for further easing of money market slightly eased the degree of reserve marconditions if the economy failed to show ket pressure in mid-April. The federal continued improvement. funds rate declined to 33A percent, its During the early months of the year, lowest sustained trading level since the the bond market seemed to focus on the 1960s; other short-term rates generally possibility of a strong recovery, and followed suit, edging down about long-term interest rates backed up about 25 basis points. Long-term rates regis- V2 percentage point from early January tered little response to the policy action; through March. A robust recovery could the rate on the thirty-year Treasury bond rekindle upward price pressures and was essentially unchanged in the days would produce stronger demands for following the move. credit. In addition, looming U.S. budget The Federal Reserve's easing of deficits and potential credit needs of reserve market pressure in April came countries undergoing the transition from only days after implementation of a precentrally planned to market economies viously announced reduction in reserve were seen as adding to upward pressure requirements. Reserve requirements are on interest rates in the future. effectively a tax on depository interme- Despite the rise in long-term rates, diation; the cut in reserve requirements corporate bond yields remained well on transaction deposits from 12 to below levels prevailing in recent years. 10 percent was intended to reduce this Eager to refinance costly existing debt burden on depositories and their customand to reduce the uncertainty and inter- ers and thereby to stimulate flows of est rate risk of short-term funding, many credit. The effect on credit should come Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

86 79th Annual Report, 1992 directly as sterile reserves are freed for indicating some weakening relative to lending and indirectly as increased earn- earlier in the year, the Federal Reserve ings improve depository institutions' in early July cut the discount rate Vi peraccess to capital and their willingness centage point to 3 percent and allowed to lend. This year's reduction in reserve this reduction to show through as a requirements sparked little of the height- similar-sized easing of money market ened volatility of the federal funds rate conditions. Banks responded quickly to that ensued from the reserve require- the policy actions, cutting the prime rate ment cut in 1990. In large measure, the by Vi percentage point to 6 percent. smoother transition this year reflected On balance, short-term rates generthe higher level of reserve balances ally have declined about 3A of a percentavailable to cover daily clearing needs; age point this year. Long-term rates, balances have been boosted in recent after falling in recent months, have months by a higher level of transaction about returned to their lows of early deposits in concert with a sizable January. The foreign exchange value of increase in bank clearing balances at the the dollar generally has tracked the Federal Reserve. course of long-term rates, appreciating Neither the April easing of reserve from January through March and market pressure nor the cut in reserve depreciating more recently. On a traderequirements revived the broad mone- weighted basis in terms of the currentary aggregates. Other financial indi- cies of the other G-10 countries, the cators, however, suggested that the dollar in mid-July stood at a level somemarkets were anticipating continued what below its 1991 year-end level. economic expansion. Spreads on commercial paper and corporate bonds Monetary and Credit Flows relative to Treasury rates continued to Overall credit flows have been damped narrow, especially for less-than-prime this year, reflecting a moderate pickup in issues, evidencing easier access to spending and efforts by borrowers to market sources of funds for businesses. pare debt burdens. Although demands Improvement in banks' capital positions for credit by the federal government placed them in a better position to meet have been heavy, growth in the debt of loan demand, and many reported that other sectors has been lethargic, and, as they were no longer tightening credit a result, the total debt aggregate has standards. In addition, long-term inter- remained around the lower bound of its est rates edged down from their March annual range throughout much of 1992. peak, providing some stimulus to mort- Reacting to the difficulties that resulted gage markets and debt restructuring. On from carrying heavily leveraged posibalance, despite continued weakness in tions in a period of weak economic the broad monetary aggregates, many growth and to wide spreads between the financial variables appeared to indicate cost of borrowing and the returns on that conditions conducive to a moderate holding financial assets—especially economic expansion were in place. deposits—households and businesses Still, overall credit growth remained have sought to reduce debt and restrucquite subdued, suggesting that some ture balance sheets. Total debt, includimpediments to borrowing and spending ing that of the federal sector, grew about remained, and M2 and M3 turned down in line with nominal GDP after many further in June. In these circumstances, years in which debt growth exceeded and with direct readings on the economy income. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 87 Along with limiting debt growth, bor- and the salutary effects of lower interest rowers have sought to strengthen their rates and stronger balance sheets on balance sheets by refinancing existing financial conditions. debt at lower rates. By issuing equity Many households also have refiand refinancing debt, businesses have nanced debt at more attractive rates. been successful in reducing debt-service Mortgage refinancing began to increase burdens; the ratio of net interest pay- late in 1991 and was very heavy early ments to cash flow for businesses has this year after mortgage rates fell declined appreciably this year. The sharply. Later, as mortgage rates backed decline in rates over the past year or so up, mortgage refinancing applications has been especially evident for high- subsided, but they remained brisk relayield bonds, indicating that lower-rated tive to recent years. Households eviborrowers are regaining some of the dently shared the view of businesses access to capital markets lost during the that long-term rates presented an opporcredit distress in late 1990 and 1991. A tunity to lock in attractive financing, and substantial number of firms this year many opted to refinance with longerhave been upgraded by rating agencies, term fixed-rate mortgages rather than reflecting improved economic prospects risk future interest rate increases with adjustable-rate mortgages. Just as for businesses, refinancings and debt reduction appear to have Growth of Money and Debt helped relieve the stress on household balance sheets. The ratio of household Percent debt-service payments to personal dis- Debt of posable income has declined appreciadomestic Period Ml M2 M3 non- bly through May. Delinquencies on confinancial sector sumer loans, auto loans, and home mortgages have fallen this year as well. Annually, fourth On the other hand, many households quarter to fourth quarter' with financial assets substantially ex- 1980 7.5 8.9 9.5 9.3 1981 5.4 9.3 12.3 10.1 ceeding debt have seen their spendable (2.5 2) income decrease as a result of lower 1982 8.8 9.1 9.9 9.3 1983 10.4 12.2 9.9 11.4 interest rates. Some of the decline in 1984 5.4 8.0 10.8 14.2 interest rates compensates for lower 1985 12.0 8.7 7.6 13.9 1986 15.5 9.2 9.0 14.1 inflation—the purchasing power of the 1987 6.3 4.3 5.9 10.4 1988 4.3 5.2 6.4 9.4 principal invested is not falling as rap- 1989 .6 4.8 3.6 8.1 idly as in previous years—but real 1990 4.2 4.0 1.7 7.0 1991 8.0 2.8 1.2 4.4 returns have declined as well, especially for short-dated assets. Semiannually (annual rate)3 State and local governments have 1992:1 13.4 2.1 .2 4.5 exhibited a similar trend in credit Quarterly demand; on net, total debt growth has (annual rate)4 been restrained, but gross issuance of 1991:1 16.5 4.3 2.2 3.8 2 9.9 .0 -1.9 5.1 bonds has ballooned as municipalities refinance existing debt. A substantial 1. From average for fourth quarter of preceding year to average for fourth quarter of year indicated. portion of the debt being refinanced 2. Adjusted for shift to NOW accounts in 1981. likely was issued during the high inter- 3. From average for preceding quarter to average for est rate episodes of the early 1980s. quarter indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

79th Annual Report, 1992 Not only has total borrowing been demand, as firms have opted to borrow muted, but banks and thrift institutions directly in the market and have relied on are accounting for a sharply decreasing strong increases in internal funds. Evishare of the total. In fact, credit at dence from survey data indicates very depositories has declined over the past little, if any, additional tightening of two and one-half years even as total credit terms by depositories this year. credit in the economy continued to However, the cumulative degree of advance, and this pattern has left its tightening over the past two years imprint on the monetary aggregates and remains substantial, and many banks their velocities. Part of this rerouting of apparently are still responding to concredit flows reflects the closure of insol- cerns about the condition of borrowers, vent thrift institutions; the RTC usually cumulative loan losses, and pressures to assumes the assets of closed thrift insti- meet or exceed fully phased-in capital tutions and effectively finances them requirements. Foreign banks, which had with Treasury obligations rather than been aggressively seeking new business deposits. Moreover, when the assets are in the recent past, have reined in balance later sold, depositories are not always sheet growth and have tightened the the acquirers. The shift in credit flows terms of lending this year by somewhat away from depositories also reflects more than domestic banks. ongoing market and regulatory pressure With loans falling relative to deposits, on banks and thrift institutions to bolster banks have elected to expand their secuearnings and capital. Responding to rity investment portfolios, pushing the increased deposit insurance costs, to share of government securities in total past and prospective loan losses, and to bank credit to its highest level in twenty regulatory restrictions triggered as years. It seems likely that some of this capital-asset ratios fall below the high- increase represents banks taking advanest levels, depositories have maintained tage of the steep yield curve to improve wide spreads between loan rates and earnings by funding these securities with deposit rates. The prime lending rate, short-term deposits bearing low interest for example, has remained unusually rates. The sharp rise in bank security high relative to market rates and the investments has also been spurred by depository cost of funds, and deposito- capital considerations: Mortgage-backed ries have tightened nonprice terms of securities issued by government sponcredit as well in recent years. On the sored enterprises (GSEs) are treated deposit side, rates have fallen consider- more favorably than the underlying ably as depositories have moved to limit loans by risk-based capital standards. As balance sheet growth and bolster net a result, many banks have sold a subinterest margins. stantial share of their home mortgage Bank credit from the fourth quarter of loan portfolios to GSEs and replaced 1991 to June managed only a 23A per- them with the securities issued by these cent growth rate, slower than in 1991. same agencies. Bank lending to businesses has con- Although continued loan losses and tracted in 1992, leaving total loan increased deposit insurance premiums growth at banks essentially flat. Overall, have added to bank costs, bank profitthe contraction in bank business lending ability has improved. Earnings have in 1992, which has been at an even been bolstered by wider net interest marfaster pace than the decline in 1991, gins and some improvement in the qualappears to reflect primarily weaker ity of loan portfolios. The market has Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 89 looked favorably on these develop- sharply from last year's rapid growth, ments, as gains on bank share prices this have been flat this year. Market conyear have outstripped advances in broad cerns that lower Japanese stock prices stock price indexes. had impaired the capital positions of Conditions in the thrift industry Japanese banks evidently tarnished the appear to have improved this year, at appeal of Yankee CDs for some instileast for solvent institutions. Thrift insti- tutional investors. In response, U.S. tutions in fairly secure financial condi- branches and agencies of Japanese tion have experienced better profit banks cut back issuance of Yankee trends analogous to those of banks, and CDs, shed liquid assets, and relied share prices of better capitalized SAIF- more heavily on funding in Eurodollar insured institutions have fared well over markets. the first half of this year. Still, the Institution-only money market funds improved profit picture for a portion of were the only source of strength in the the thrift industry has not implied any non-M2 portion of M3 during the first expansion in overall thrift balance half of 1992. Investors capitalizing on sheets; total thrift credit is estimated to the sluggish adjustment of money marhave contracted at a 3Vi percent rate ket fund yields to declining market rates from the fourth quarter of 1991 to June. accounted for much of the strength in A large part of this contraction owes to money funds. In addition, some instituthe significant volume of RTC resolu- tional investors, finding their resources tions conducted through early April of augmented rapidly by inflows from this year. However, additional funds to former bank depositors, likely have cover losses have not been appropriated, parked some of the cash inflow in bringing RTC resolutions to a halt after money market funds. early April. The implications of depository re- The limited growth in total bank and trenchment and household balance sheet thrift balance sheets has carried impor- adjustments for longstanding empirical tant implications for the monetary relationships between money and spendaggregates. The velocities of the deposit ing have been perhaps most pronounced components of the broader aggregates, for M2 growth. Despite the pickup in M2 and M3, have tracked the upward nominal income growth this year and trajectory of the velocity of total deposi- very substantial stimulus from drops in tory credit in recent years, and this trend short-term interest rates last year, M2 has continued in 1992. M3, especially, advanced at only a Wi percent annual has been hindered by the lack of growth rate from the fourth quarter of 1991 to of depository credit this year. This June, placing its June level below the aggregate was essentially unchanged lower bound of its annual range. The in June from its fourth-quarter 1991 decoupling of the historical relationships level and fell below the 1 to 5 percent among M2, GDP growth, and shortannual range set by the FOMC. With term interest rates is evident in the retail deposits expanding—if only behavior of M2 velocity. M2 usually sluggishly—and depository credit sub- rises relative to income (its velocity dued, banks and thrift institutions have falls) when market rates drop because shed large time deposits and other man- rates on M2 deposits do not decline one aged liabilities. At branches and agen- for one with market rates, inducing portcies of foreign banks, large time depos- folio shifts into M2 assets. But in recent its (Yankee CDs), having decelerated months, M2 velocity has risen markedly Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

90 79th Annual Report, 1992 despite a substantial decline in market surged as lower rates required busirates and a standard measure of oppor- nesses to build up compensating baltunity costs—the difference between ances and as mortgage servicers held short-term market rates and returns on larger balances during the mortgage refi- M2 assets. nancing boom. Later, the abrupt deceler- In this period of extraordinary re- ation in M2 appeared related to the trenchment, depositories apparently effects of tax flows and RTC resoluhave reduced deposit rates in ways not tions. Federal nonwithheld taxes this captured in standard measures of aver- year were weak relative to previous age deposit rates, and the pull of market years, and this may have resulted in a alternatives has been stronger than is smaller deposit buildup in March and captured by comparisons of deposit rates April than could be anticipated by norto short-term market rates. For example, mal seasonal adjustment factors. In banks and thrift institutions appear to late March and early April, the RTC have made larger cuts in the relatively resolved a substantial number of instituhigh rates offered to individuals with tions. In the past, a heavy volume of larger balances and in the rates offered RTC resolutions has appeared to damp on brokered deposits; holders of both M2 growth for a month or two, appartypes of accounts might be especially ently as acquiring institutions abrogate sensitive to rates on alternative invest- time deposit contracts and depositors ments. In addition, depositories have take the opportunity to reallocate their been particularly hesitant to compete portfolios in light of the current configufor funds at intermediate and longer ration of deposit rates and market rates. maturities. As a result, longer-term bank Thus the RTC resolutions in March and and thrift CDs have not been attractive April likely played a role in slowing M2 investments for savers seeking to raise growth during April and perhaps even in returns by moving out the upward slop- May. ing yield curve. In effect, depositories As the weakness in M2 persisted, have used retail time deposits as man- however, it became increasingly clear aged liabilities in making balance sheet that these special factors were not the adjustments. The result has been large whole story. If the deceleration of M2 in outflows of retail time deposits, with a March and April reflected evolving searelatively large portion of the outflow sonal tax patterns, May and June should finding its way to higher-yielding, non- have witnessed an appreciable rebound monetary assets. Depositors, witnessing in M2 growth. In fact, M2 continued to substantial declines in the rates on their founder, leaving its level in June well accounts relative to market alternatives, below its February level and also below apparently exited M2 in favor of stock the lower bound of its annual range. and bond funds or direct equity and Furthermore, RTC resolutions halted bond investments. Of course, in doing abruptly when additional funding for so, these depositors sacrificed the bene- losses was not forthcoming. By June, fits of deposit insurance and accepted M2 should have been largely free of the risk of asset price fluctuations. RTC effects, but growth of M2 in June For a time, the depressing effects of was, in fact, even weaker than in April depository retrenchment and investor and May. On balance, these special facportfolio shifts on M2 were obscured by tors appeared to figure prominently in the confluence of various special fac- the month-to-month variations of M2 tors. Early in the year, demand deposits growth, but the overall advance of M2 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 91 this year was impeded by more funda- moderate growth in currency, together mental forces. with the brisk advance in transaction These fundamental forces, involving deposits, has fueled growth in the monebalance sheet adjustments by depos- tary base of 13A percent from the fourth itories and money holders, appear to quarter of 1991 to June. be boosting the velocity of M2. There The unusual behavior of the velocity is considerable uncertainty, however, of M3 and, especially, of M2 this year about how long this process will persist, has sparked renewed interest in alternaand whether it will permanently affect tive definitions of the monetary aggrethe equilibrium level or cyclical behav- gates. Two alternatives that have ior of M2 velocity. One means of evalu- received some attention are M2 plus ating this question will be observations stock and bond mutual funds and M2 of the future performance of the P-star plus institution-only money funds less model in predicting inflation. This small time deposits. Both alternative model is based on M2 per unit of poten- aggregates have grown substantially tial output, normalized by equilibrium more rapidly than M2 in recent quarters. velocity, which had proved to be con- The former adds back into M2 the stant. Persistent underpredictions of in- apparent destination of much of the flation by this model would suggest that recent outflows from M2; the latter subthe rise in velocity relative to its histori- tracts the weakest component of M2— cal average may be a more permanent retail time deposits—to create a highly phenomenon. liquid aggregate, which behaves over While highly interest-responsive time very much like Ml. Both alternadepositors were tilting their portfolios tives recently appear to have followed toward capital market instruments, less more closely historical relationships rate-sensitive, more risk-averse house- with income and opportunity costs than holds simply rolled over a portion of has M2. However, both show periods in their maturing small time deposit hold- the past in which their velocities have ings into more liquid M2 deposits, at been highly variable and difficult to prelittle or no sacrifice in yield. In fact, dict. The Federal Reserve is continuing while M2 growth overall this year has to analyze these experimental monetary been moribund, growth in its liquid measures carefully. • components has been robust and more in line with historical relationships to income and interest rates. Ml, for example, has grown at a 12 percent pace through June, a rate well above its average during 1991 of 8 percent. Especially since the introduction of NOW accounts in the early 1980s, the demand for Ml has become quite interest sensitive, leading to wide fluctuations in the velocity of Ml, and the drop in Ml velocity this year is consistent with that pattern. Foreign demands for U.S. currency have been more subdued this year, and currency growth has slowed a bit relative to the pace of 1990 and 1991. Even so, 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

95 Record of Policy Actions of the Board of Governors Regulation D (Reserve requirements. The change was effective Requirements of Depository with the reserve maintenance period Institutions) beginning November 12, 1992. The Board also amended the regulation to increase the amount of excesses February 18, 1992—Amendments or deficiencies in reserve balances that The Board amended Regulation D, an institution can carry over from one effective April 2, 1992, to lower reserve reserve maintenance period to the next. requirements on transaction accounts. Effective September 3,1992, the amount of excess or deficiency that can be car- Votes for this action: Messrs. Greenspan, ried forward was increased from the Mullins, Angell, Kelley, and Lindsey and greater of 2 percent or $25,000, to the Ms. Phillips. Absent and not voting: Mr. greater of 4 percent or $50,000. La Ware. The Board reduced from 12 percent August 12, 1992—Amendments to 10 percent reserve requirements on and Interpretations net transaction accounts to reduce funding costs for depository institutions. It The Board amended Regulation D and was hoped that the reduction would issued several interpretations to prevent strengthen banks' financial condition, the evasion of reserve requirements on improve their access to capital markets, transaction accounts. and put them in a better position to extend credit. The reduction was effec- Votes for these actions: Messrs. Greenspan, tive with the reserve maintenance period Mullins, Angell, and Kelley and Ms. beginning April 2, 1992. Phillips. Votes against these actions: Messrs. LaWare and Lindsey. August 12, 1992—Amendments The Board took several actions to preserve the integrity of reserve require- The Board amended Regulation D to ments, prevent erosion of the reserve reduce the seasonal variation in required base for transaction accounts, and mainreserves and to improve the ability of tain equitable competition among deposdepository institutions to manage their itory institutions. Included in those reserve balances. actions are amendments and interpretations that (1) change the definition of Votes for this action: Messrs. Greenspan, teller's checks to treat them as cashier's Mullins, Angell, Kelley, LaWare, and Lindsey and Ms. Phillips. checks and include them as demand deposits subject to reserve requirements; The Board amended Regulation D to (2) reclassify certain multiple savings shorten by two weeks the lag in the accounts as transaction accounts and application of vault cash to reserve make them subject to reserve require- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

96 79th Annual Report, 1992 ments under certain conditions; (3) re- Votes for these actions: Messrs. Greenspan, classify certain linked time deposits as Angell, Kelley, LaWare, and Lindsey and Ms. Phillips. Absent and not voting: Mr. transaction accounts; (4) revise the defi- Mullins. nition of "cash items in process of collection" to clarify that matured bonds and coupons may be deducted from Under the Monetary Control Act of gross transaction accounts; (5) prohibit 1980, depository institutions, Edge Act larger institutions from reducing their and Agreement corporations, and U.S. reservable liabilities by depositing funds agencies and branches of foreign banks with smaller banks and thereby gen- are subject to reserve requirements set erating a "due from" deduction; and by the Board. Initially, the Board set (6) prohibit the netting of negative bal- reserve requirements at 3 percent of an ances in individual trust accounts institution's first $25 million in transacagainst positive balances in other trust tion balances and at 12 percent of balaccounts to lower reserve requirements. ances above that amount. (Subsequent- Governors LaWare and Lindsey dis- ly, the Board lowered the maximum sented from this action. They thought reserve requirement to 10 percent.) The that the proposal affecting teller's act directs the Board to adjust annually checks inappropriately assessed reserve the amount subject to the lower reserve requirements against the seller of the requirement to reflect changes in transchecks. They believed that the payable- action balances nationwide. By the through bank should be assessed the beginning of 1992, that amount was applicable reserve requirement because $42.2 billion. Recent increases in transthat institution was likely to hold the action balances warranted an increase of transaction account on which the teller's $4.6 million. The Board, therefore, check would be drawn. Governor Lind- amended Regulation D to increase to sey also disagreed with the proposed $46.8 million the amount of transaction treatment of multiple savings accounts. balances to which the lower reserve He preferred alternative measures to requirement applies. prevent evasion of reserve requirements, The Garn-St Germain Depository particularly those that would permit the Institutions Act of 1982 established a payment of interest on required reserve zero percent reserve requirement on the balances. first $2 million of an institution's reserv- The revisions pertaining to teller's able liabilities. The act also provides for checks, cash items in process of collec- annual adjustments to that exemption tion, and trust accounts were effective based on deposit growth nationwide. By December 22, 1992; the others were the beginning of 1992, that amount had effective September 29, 1992. been increased to $3.6 million. Recent growth in deposits warranted an increase to $3.8 million in the amount of deposits November 18, 1992—Amendments subject to a zero percent reserve require- The Board amended Regulation D to ments, and the Board amended Regulaincrease the amount of transaction bal- tion D accordingly. ances to which the lower reserve re- The amendments are effective with quirement applies and to increase the the reserve computation period beginamount of reservable liabilities subject ning December 22, 1992, for instituto a zero percent reserve requirement. tions that report weekly, and Decem- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 97 ber 15, 1992, for institutions that report that is not adequately capitalized would quarterly. be set at 50 percent of an insured institution's total capital beginning June 19, 1994, and would be reduced to 25 per- Regulation F (Limitations cent on June 19, 1995. on Interbank Liabilities) Regulation H (Membership November 20, 1992—Adoption of of State Banking Institutions New Regulation in the Federal Reserve System) The Board adopted Regulation F to limit the risk that the failure of a depository September 14, 1992—Amendments institution would have on insured institutions. The Board amended Regulation H, effective December 19, 1992, to imple- Votes for this action: Messrs. Greenspan, ment legislation requiring prompt cor- Mullins, Angell, Kelley, LaWare, and rective action when assisting financially Lindsey and Ms. Phillips. troubled institutions. The Board adopted the new Regula- Votes for this action: Messrs. Greenspan, tion F to implement provisions of the Mullins, Angell, Kelley, LaWare, and Federal Deposit Insurance Corporation Lindsey and Ms. Phillips. Improvement Act of 1991 that require the Board to limit the risk that the fail- A section of the Federal Deposit ure of a large depository institution Insurance Corporation Improvement Act would pose for federally insured institu- of 1991 requires the Federal Reserve, tions. The new regulation requires that the Comptroller of the Currency, the federally insured depository institutions, Federal Deposit Insurance Corporation, including banks, savings associations, and the Office of Thrift Supervision to and branches of foreign banks, adopt take prompt corrective action to resolve procedures to evaluate and control expo- the problems of insured depository instisure to their correspondents. In addition, tutions, and it requires that such action an insured institution must limit its over- minimize the long-term loss to the night credit exposure to any institution deposit insurance fund. The legislation that is not adequately capitalized to an created a framework that specifies the amount not more than 25 percent of the supervisory actions that the agencies institution's total capital. No regulatory must or should take, depending on the limits have been established for corre- institution's placement in one of five spondents that are at least "adequately categories of capital levels. capitalized," as that term is defined in The Board implemented these rethe rule. quirements for state member banks by The new regulation is effective amending Regulation H. Among other December 19, 1992, but provides for a provisions, the new rules establish capiphased implementation period over tal measures and thresholds for the five thirty months. Insured institutions must categories of capital specified in the stathave internal policies and procedures in ute; establish procedures for providing place by June 19, 1993. The regulatory banks with notice of a proposed superlimit on exposure to a correspondent visory directive; establish procedures Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

98 79th Annual Report, 1992 for lowering a bank's rating if such a amount of purchased mortgage servicreclassification is based on factors other ing rights and purchased credit card relathan capital; and provide a uniform tionships that can be included in tier 1 schedule by which under-capitalized capital and specify the conditions under state member banks must file capital which those intangible assets can be inrestoration plans and by which the Fed- cluded. eral Reserve must review those plans. Pursuant to provisions in the Federal Deposit Insurance Corporation Improvement Act of 1991, the amendments require that organizations determine the Regulation H (Membership of fair market value and the book value of State Banking Institutions in the their purchased mortgage-servicing Federal Reserve System) and rights. The amendments provide criteria Regulation Y (Bank Holding for determining those values. Companies and Change in Bank The other bank regulatory agencies Control) would adopt substantially similar guidelines for the organizations they supervise. December 9, 1992—Amendments The Board amended Regulations H and Y, effective March 9, 1993, to revise the capital adequacy guidelines regarding Regulation J (Collection of the treatment of intangible assets. Checks and Other Items by Federal Reserve Banks and Funds Transfers Votes for this action: Messrs. Greenspan, through Fedwire) and Policy Mullins, Kelley, and La Ware and Ms. Statements on Measures for Phillips. Absent and not voting: Messrs. Angell and Lindsey. Reducing Payment System Risks The Federal Reserve and the other September 30, 1992—Adoption of federal bank regulatory agencies have Amendments and Issuance of been attempting to develop more consis- Policy Statements tent treatment of intangible assets— other than goodwill—in the calculation The Board amended Regulation J and of capital ratios. In connection with issued two policy statements regarding those efforts, the Board amended Regu- fees to be charged and new posting prolations H and Y to revise the capital cedures to be implemented to reduce adequacy guidelines by specifying the risks in the payments system. types of intangible assets that can be included in tier 1 capital when calculat- Votes for these actions: Messrs. Greenspan, ing risk-based capital ratios and lever- Mullins, Angell, Kelley, LaWare, and age ratios. Under the revised guidelines, Lindsey and Ms. Phillips. all identifiable intangible assets other than goodwill, purchased mortgage- Under existing procedures for clearservicing rights, and purchased credit ing and settling transactions on the Fedcard relationships are to be deducted eral Reserve's payments system, instifrom capital. The amendments also tutions present items for payment establish quantitative limits on the throughout the business day and settle Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 99 for the net amount of those transactions Regulation K (International at the end of the day. The Federal Banking Operations) and Reserve, therefore, runs the risk that an Regulation Y (Bank Holding institution using the payments system Companies and Change in Bank might fail during the day or otherwise Control) be unable to settle for the checks presented during the day. April 2, 1992—Interim Rules For some time now, the Board has had in place a program to reduce risks The Board amended Regulations K and both in the Federal Reserve's payments Y to adopt interim rules to implement and in private systems. The latter type provisions of the Foreign Bank Superviof risk can arise in circumstances sion Enhancement Act of 1991 and the such as the failure of a participant on Federal Deposit Insurance Corporation a private-sector transfer network to (FDIC) Improvement Act of 1991. cover a net debit. That failure, in turn, could prevent the creditors of that partic- Votes for these actions: Messrs. Greenspan, ipant from settling their own commit- Mullins, Angell, Kelley, LaWare, and ments and could have further repercus- Lindsey and Ms. Phillips. sions in the payments system and the economy in general. The Board's pro- Because the Foreign Bank Supergram is designed to encourage risk- vision Act was effective when enacted, reducing behavior by payments system the Board published for comment proparticipants. posed implementing amendments and Recently, the Board decided that addi- also adopted them as interim rules. That tional measures were needed and took act included provisions that: (1) require three actions to reduce risks. The pri- foreign banks to obtain Board approval mary change is the introduction of a before establishing a branch, agency, charge for average daily intraday (day- commercial lending company, or reprelight) overdrafts in reserve or clearing sentative office in the United States; accounts. The new daylight overdraft (2) establish standards for entry by forfee will be phased-in in three steps and eign banks; (3) allow termination of a will be assessed against an institution's foreign bank's U.S. office if a violation average daily total of overdrafts. Fees of occurs; (4) require annual examinations $25 or less during any two-week period of U.S. branches of foreign banks and would be waived. permit the Federal Reserve to coordi- To facilitate pricing, the Board also nate examinations of all U.S. operations adopted new procedures for accurate of a foreign bank; (5) permit snaring of measurement of daylight overdrafts. The supervisory information with foreign Board also amended Regulation J to pro- bank regulators; (6) establish limits for vide for intraday posting of debits for state-licensed branches and agencies on checks presented by the Federal Reserve lending to a single borrower; (7) require Banks. foreign banks to obtain Board approval The daylight overdraft measurement before acquiring more than 5 percent of procedures and the Regulation J amend- the shares of a U.S. bank; and (8) estabment are effective October 14, 1993; the lish new restrictions on retail depositassessment of fees for daylight over- taking by branches and agencies of fordrafts will begin April 14, 1994. eign banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

100 79th Annual Report, 1992 The Board also approved adoption of by foreign banks to establish a branch, an interim rule and publication for com- agency, representative office, or comment of an amendment to Regulation Y mercial lending company. In addition, to implement provisions of the FDIC the rules implement other provisions of Improvement Act that govern bank the act relating to the Board's new reguholding companies and foreign banking latory and supervisory powers over the organizations with operations in the U.S. offices of foreign banks. United States. The rule specifies addi- After completion of its review of the tional factors the Board will consider comments received on the interim rules, when reviewing applications to acquire the Board amended Regulation K to a bank. adopt the rules in final form, with certain modifications to reflect those comments. The Board also amended Regulations K and Y to require that a foreign November 4, 1992—Amendments banking organization file an application The Board amended Regulations K and under the Bank Holding Company Act Y to implement provisions of the For- if it proposes to acquire more than 5 pereign Bank Supervision Enhancement cent of the shares of a U.S. bank or bank Act of 1991. holding company. These amendments in the final rules were effective January 28, Votes for this action: Messrs. Greenspan, 1993. In addition, the Board amended Mullins, Angell, Kelley, LaWare, and Regulation Y, effective February 4, Lindsey and Ms. Phillips. 1993, to specify two additional factors it will consider when reviewing foreign The Foreign Bank Supervision En- banking applications and to reflect the hancement Act provided uniform stan- new requirement for an application dards for entry by foreign banks into the from foreign banks that seek to acquire United States and also strengthened more than 5 percent of a U.S. banking supervision of their operations by U.S. organization. banking regulators. Among other provisions, the act requires that any foreign bank that seeks to operate in the United States be subject to comprehensive Regulation O (Loans to Executive supervision, on a consolidated basis, by Officers, Directors, and Principal supervisors in its home country. Shareholders of Member Banks) Because the legislation was effective and Regulation Y (Bank Holding upon enactment, the Board adopted Companies and Change in Bank interim rules in April 1992 and also Control) sought comment on those rules. The interim rules had outlined the standards April 22, 1992—Amendments and the factors that the Board would consider in determining whether an The Board amended Regulation O to organization receives comprehensive implement provisions in the Federal and consolidated supervision in its home Deposit Insurance Corporation (FDIC) country. The rules also reviewed the Improvement Act, to make technical other mandatory and discretionary stan- revisions, and to clarify certain ambidards for Board approval of applications guities in the rules. The Board also Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 101 amended Regulations O and Y to imple- Regulation Y (Bank Holding ment certain reporting requirements Companies and Change in Bank imposed by the act. The amendments Control) and Rules of Procedure were effective May 18, 1992. April 22, 1992—Amendments Votes for these actions: Messrs. Greenspan, The Board amended Regulation Y to Angell, Kelley, LaWare, and Lindsey and Ms. Phillips. Absent and not voting: Mr. permit bank holding companies to Mullins. engage in full-service brokerage and financial advisory activities and in certain leasing transactions; and revised an The FDIC Improvement Act modified interpretative rule regarding advisory in several ways the requirements con- activities. cerning a bank's extensions of credit to its officials, including executive officers, Votes for these actions: Messrs. Greenspan, directors, and principal shareholders and Angell, Kelley, LaWare, and Lindsey and their related interests. One modification Ms. Phillips. Absent and not voting: Mr. Mullins. limits the aggregate amount of credit that a bank may extend to insiders. Another modification extends the aggre- The Board amended Regulation Y, gate lending limits to directors and their effective September 4, 1992, to include related interests. on the list of activities permissible for A bank's aggregate lending limit gen- bank holding companies the provision erally is equal to the amount of its unim- of full-service securities brokerage paired capital and surplus. Because of activities to both institutional and retail the effect that such a limit might have on customers; and the provision of finansmaller banks, the Board established cial advisory services regarding transactemporarily a higher limit for institu- tions such as mergers, acquisitions, and tions that have less than $100 million in divestitures, as well as the structuring of deposits. For such institutions, the limit loan syndications, interest rate swaps, would be up to 200 percent of unim- and similar types of transactions. The paired capital and surplus, provided the permissible activities are subject to cerbank's board of directors passes a reso- tain disclosure and other requirements. lution to establish a limit higher than The Board also expanded the list of 100 percent. The higher lending limit permissible activities to allow holding would be in effect for a year. During that companies to engage in the leasing of time the Board would assess the effect personal property, activities in which of the limitation on the ability of banks national banks are permitted to engage to attract directors and to serve commu- under the Competitive Equality Banking nity credit needs. Act. The Board amended Regulation Y The Board also amended Regulations to permit a holding company to rely on O and Y to implement certain reporting up to 100 percent of the residual value requirements of the FDIC Improvement of a leased property for recovering the Act pertaining to loans to executive offi- holding company's leasing costs. The cers and directors of certain bank hold- amendment imposes a limit on the voling companies, to make technical revi- ume of such leasing activities but persions, and to eliminate ambiguities. mits holding companies to engage in an Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

102 79th Annual Report, 1992 unlimited number of transactions in approval, and (3) define the criteria for which they rely on residual values of up determining when bank holding comto 25 percent of the acquisition cost of pany applications may be waived in conthe leased property for compensation of nection with certain bank mergers. their full leasing costs. This amendment was effective May 14, 1992. The Board also revised an interpre- September 3, 1992—Amendments tive rule, effective August 10, 1992, to and Adoption of New Rule permit a holding company or a nonbank subsidiary to act as an agent for custom- The Board amended Regulation Y, ers in the brokerage of shares of an revised its Rules of Procedure, and investment company to which the holdissued a new rule as part of its efforts to ing company or any of its subsidiaries reduce regulatory burden and simplify provides investment advice. The revithe applications process. sion also permits the provision of investment advice to customers regarding the Votes for these actions: Messrs. Mullins, purchase or sale of shares of an invest- Kelley, and LaWare and Ms. Phillips. ment company to which a holding Votes against: None. Absent and not company affiliate provides investment voting: Messrs. Greenspan, Angell, and advice. In both circumstances, certain Lindsey. disclosures must be made to address the potential conflicts of interest or the pos- The Board revised its Rules of Procesible adverse effects. dure and Regulation Y to reduce the number of times institutions must publish notice in local newspapers of cer- June 19, 1992—Amendments tain applications filed with the Federal Reserve. Effective October 13, 1992, The Board approved several amendinstitutions need publish only once, ments to Regulation Y, effective instead of twice, notices of applications June 29, 1992, as part of its efforts to to become a member of the Federal reduce regulatory burden and simplify Reserve, to establish a branch, to merge the applications process. with or acquire another bank, or to become a bank holding company. Votes for this action: Messrs. Greenspan, In a related action, the Board adopted Mullins, Kelley, and Lindsey and Ms. Phillips. Votes against: None. Absent and a new rule, effective September 11, not voting: Messrs. Angell and LaWare. 1992, to exempt from the limitations of section 23A of the Federal Reserve Act The Board revised several provisions certain transactions between affiliates of of Regulation Y to streamline certain an insured depository institution, proprocedural requirements. Among other vided certain criteria are met. Section provisions, the amendments (1) increase 23A limits the ability of institutionss to the size of nonbank companies that can purchase assets from, or lend to, affilibe acquired by bank holding companies ates. The new rule exempts transactions under the fifteen-day expedited notice that have been approved by an appropriprocedures, (2) increase the relative size ate federal banking agency pursuant to of nonbank assets that holding compa- the Bank Merger Act and thereby eliminies may acquire in the ordinary course nates the need for duplicate federal of business without Federal Reserve applications. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 103 Regulation Z (Truth in Lending) an interim rule for Regulation CC and also sought comment on the rule. The interim rule allows banks—on an excep- July 29, 1992—Amendments tion basis—to extend the holds to "next- The Board adopted amendments to Reg- day" and "second day" availability and ulation Z pertaining to home equity to allow one-time notices of exception loans to bank officials. holds in certain cases. Votes for this action: Messrs. Mullins, Kelley, LaWare, and Lindsey and Ms. July 29, 1992—Amendments Phillips. Absent and not voting: Messrs. Greenspan and Angell. The Board amended Regulation CC, effective September 14, 1992, to adopt The Board amended Regulation Z to an interim rule in final form. permit depository institutions to retain the right to demand payment of a home Votes for this action: Messrs. Greenspan, equity line of credit extended to their Mullins, Angell, Kelley, LaWare, and executive officers when required by fed- Lindsey and Ms. Phillips. eral law. The amendment resolved a discrepancy between the Home Equity Regulation CC implements the Expe- Loan Consumer Protection Act and Regdited Funds Availability Act, in part, by ulation O (Loans to Executive Officers, establishing schedules by which banks Directors, and Principal Shareholders must make available to customers the of Member Banks). The amendment is funds deposited in their transaction effective immediately; compliance is accounts. The FDIC Improvement Act optional, however, until October 1, of 1991 amended provisions of the 1993. Funds Availability Act, and in January the Board had adopted an interim rule. Regulation CC (Availability of Subsequently, it took final action by Funds and Collection of Checks) adopting the rule in final form. The revision to Regulation CC allows banks to extend the holds, on an exception basis, January 15, 1992—Amendments to "next-day" and "second-day" avail- The Board amended Regulation CC, ability checks and allows one-time effective immediately, to implement notices of exception holds, in certain provisions of the Federal Deposit Insur- cases. In addition, the amendments ance Corporation (FDIC) Improvement made permanent the availability sched- Act of 1991. ules that had been in effect for deposits at nonproprietary automated teller Votes for this action: Messrs. Greenspan, machines and affirmed the administra- Angell, Kelley, LaWare, and Lindsey and tive enforcement authority of federal Ms. Phillips. Absent and not voting: Mr. regulatory agencies over U.S. offices and Mullins. branches of foreign banks. The FDIC Improvement Act amended the Expedited Funds Availability Act to September 30, 1992—Amendments allow banks to extend the holds that they place on checks under certain con- The Board amended Regulation CC, ditions. Accordingly, the Board adopted effective January 3, 1994, to provide for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

104 79th Annual Report, 1992 same-day settlement of checks presented tions. The act establishes certain discloby private-sector banks. sures that must be provided whenever a consumer requests the information or Votes for this action: Messrs. Greenspan, before an account is opened. Mullins, Angell, Kelley, LaWare, and The new Regulation DD implements Lindsey and Ms. Phillips. the requirements of the act and also provides explanations and sample dis- The Board amended Regulation CC closure forms to assist in compliance. to require that paying banks settle for Among other provisions, the new reguchecks presented to them by privatelation (1) provides formulas for computsector banks on the same day that the ing the required annual percentage yield checks are presented, without imposing to ensure a uniform method for calculata presentment fee. Under the new rule, ing the return on accounts; (2) specifies paying banks must settle for any checks the conditions under which institutions presented on the same day they are premust disclose any fees imposed, the sented, if the checks are presented by annual percentage yield, and other infor- 8:00 a.m. local time, at the location desmation; (3) limits the manner in which ignated by the paying bank. Settlement an institution may determine the balance must be made by credit to an account at on which interest is paid; and (4) estaba Federal Reserve Bank by the close of lishes rules for advertising deposit business on the day presented. The proaccounts. visions of the rule may be varied by Although Board members were conagreement. cerned about the compliance burden imposed by the legislation, a majority Regulation DD (Truth in Savings) did not object to adoption of Regulation and Regulation Q (Prohibition DD as the best measure for implement- Against the Payment of Interest on ing the statutory requirements. Gover- Demand Deposits) nors Mullins and LaWare, however, did not support adoption of the new regulation. Governor Mullins believed that the September 10, 1992—Adoption of amount of detail in the regulation and New Regulation accompanying model forms would inter- The Board adopted a new Regulation fere with an institution's operations, and DD to implement provisions of the he preferred that the amount of detail in Truth in Savings Act of 1991 and made the explanatory information be reduced. conforming changes to Regulation Q. Governor LaWare thought that the burden of complying with the regulation Votes for this action: Messrs. Angell and would serve to reduce the amount of Lindsey and Ms. Phillips. Votes against interest that institutions paid on deposthis action: Messrs. Mullins and LaWare. its and the amount of service they Absent and not voting: Messrs. Greenspan and Kelley. provided. In a related action, the Board The Truth in Savings Act is part of approved conforming revisions to Reguthe Federal Deposit Insurance Corpora- lation Q to delete advertising and disclotion Improvement Act of 1991. One pur- sure requirements that were included in pose of the Truth in Savings Act is to the new regulation and also changed the assist consumers in comparing deposit title of Regulation Q from "Interest on accounts offered by depository institu- Deposits" to "Prohibition Against the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 105 Payment of Interest on Demand agencies, decided to discontinue super- Deposits." visory use of the definition of highly The new regulation is effective Sep- leveraged transactions and to eliminate tember 21, 1992; compliance is optional, required reporting on such exposure by however, until March 21, 1993. After banking organizations after midyear. this action, the Congress amended the Until use of the term was discontinued, Truth in Savings Act to delay its effec- however, the agencies approved revitive date by three months. Accordingly, sions to the definition that banks and compliance is optional until June 21, bank holding companies should use for 1993. purposes of their financial reports for March 31, and June 30, 1992. Policy Statements March 6, 1992—Community Reinvestment Act January 21, 1992—Highly Leveraged Transactions The Board issued a policy statement noting the responsibility of financial The Board discontinued use of the institutions under the Community Reinsupervisory definition of highly lever- vestment Act (CRA) to analyze the aged transactions, effective after institu- geographic distribution of their lending tions submit their midyear 1992 finan- patterns. cial reports, and made certain interim changes in reporting requirements, Votes for this action: Messrs. Greenspan, effective with the first-quarter Angell, Kelley, LaWare, and Lindsey and Ms. Phillips. Absent and not voting: Mr. statements. Mullins. Votes for this action: Messrs. Greenspan, Mullins, Angell, Kelley, LaWare, and Under the CRA, financial institutions Lindsey and Ms. Phillips. are required to serve the convenience and needs of the communities in which The Board, the Comptroller of the they are chartered, and supervisory Currency, and the Federal Deposit Insur- agencies are required to assess an instiance Corporation had adopted use of the tution's record of meeting the credit definition of highly leveraged transac- needs of its entire community, includtions for supervisory purposes in 1989, ing low- and moderate-income areas. when leveraged buyouts were frequent. Among the factors the agencies consider Besides providing guidance to examin- when making such assessments are ers, the definition had encouraged finan- (1) the extent to which an institution's cial institutions to structure highly lever- board of directors participates in formuaged financings in a manner consistent lating policies and reviewing perforwith the associated risks, to develop mance and (2) the distribution of the adequate internal controls, and to review institution's credit extensions, applicamechanisms to monitor such transac- tions, and denials throughout the delintions. Now, however, merger and acqui- eated community. sition activity has declined significantly, The Board, along with the Federal and the term no longer serves a useful Deposit Insurance Corporation, the purpose. Rather than revise the defini- Comptroller of the Currency, and the tion, the Board, along with the other two Office of Thrift Supervision, adopted a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

106 79th Annual Report, 1992 policy statement to emphasize the need duties; and (5) whether there are no for institutions to analyze the geographic public benefits from continued providistribution of their credit extensions as sion of the service that outweigh the part of their CRA planning process and reasons for withdrawal. The statement to ensure that potential borrowers are also indicated that the Board would contreated fairly and that all segments of sider discontinuing a service line only the community are served appropriately. when a Reserve Bank failed to achieve The statement also reviews the agen- full cost recovery for a particular service cies' expectations regarding such lend- line over the long run. ing and provides guidance regarding how best to meet those expectations. 1992 Discount Rates The Board approved one change in the October 28, 1992—Withdrawal basic discount rate during 1992, a reducfrom a Priced Service tion from 3!/2 to 3 percent in early July. The Board issued a policy statement, The Board also approved numerous effective October 29, 1992, describing changes, including increases and dethe criteria it would consider in deciding creases, in the rates charged for seasonal whether to withdraw from a priced credit and for extended credit; rates for service. both types of credit are set on the basis of market-related formulas and ex- Votes for this action: Messrs. Mullins, ceeded the basic discount rate by vary- Angell, Kelley, LaWare, and Lindsey and ing amounts during the year. Ms. Phillips. Absent and not voting: Mr. The reasons for Board decisions are Greenspan. reviewed below. Those decisions were made in the context of the policy actions The policy statement indicated that of the Federal Open Market Committee the Board would consider the following (FOMC) and the related economic and factors when assessing a request from financial developments that are covered one or more Federal Reserve Banks to more fully elsewhere in this Report. discontinue the provision of a priced service: (1) whether other service providers are likely to provide an adequate Basic Discount Rate level of the same service in the relevant markets(s) if the Federal Reserve with- In December 1991 the Board approved a draws from the service; (2) whether it is reduction of a full percentage point in likely that users could obtain other sub- the basic discount rate, to 3lA percent, stitutable services that can reasonably and the FOMC also acted to reduce meet their needs, if other firms are not pressures on reserve positions. These likely to provide an adequate level of policy easing moves, together with the the same service in the market(s); ongoing effects of cumulatively sizable (3) whether withdrawal from the service easing actions implemented earlier, were would not have a material, adverse viewed as likely to have a positive effect affect on the ability of the Federal on financial markets and to provide a Reserve to provide an adequate level of basis for a rate of economic growth other services; (4) whether withdrawal stronger than the quite sluggish pace would not have an adverse effect on the experienced since the beginning of the System's ability to discharge its other current upturn in the spring of 1991. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 107 The economic expansion picked up expansion remained slow. Against this some momentum in the early months of background, the FOMC implemented a 1992. Much of the impetus was supplied slight further easing of reserve condiby an upswing in consumer spending tions in early September. Over the baland a sharp increase in purchases of new ance of the year, indications of renewed houses. In financial markets, interest firmness in economic activity tended to rates fell considerably around the turn of multiply. Consumer spending picked up, the year, but most rates, including those especially toward year-end; housing on mortgages, subsequently came under demand grew somewhat further; and appreciable upward pressure. By early business purchases of capital equipment spring, growth in final demand moder- continued to rise at a brisk pace. Howated as consumers appeared to respond ever, growth in the broad measures of to continuing weakness in labor markets money and in nonfederal debt remained and the absence of significant gains in quite limited during the latter part of real income. New home sales fell the year. Several Reserve Banks prosteadily after February, net exports posed a further reduction in the basic weakened in the second quarter, and discount rate, to 2Vi percent, during the defense spending remained on a down- September-to-December period, but the trend. On the positive side, wage and Board took no action on these proposprice increases seemed to be trending als, and only one was still pending at lower. After strengthening somewhat in year-end. the first quarter, the broad measures of money weakened markedly in the sec- Structure of Discount Rates ond quarter, and the growth of credit continued to lag. The basic discount rate is the rate In this environment, the FOMC eased charged on loans to depository institupressures on reserve conditions slightly tions for short-term adjustment credit, in April. In the weeks that followed, while flexible, market-related rates genmarket interest rates fell appreciably, erally are charged on other types of notably in short-term markets. During credit. These flexible rates are adjusted this period nearly all of the Reserve periodically, subject to Board approval. Banks recommended that the basic rate Under the seasonal program, loans may be maintained at its then current level, be provided for periods longer than and the Board took no action on a pro- those permitted under adjustment credit posed reduction of V2 percentage point to assist smaller institutions in meeting that was pending at one Bank. Subse- regular needs arising from a clear patquently, on July 2, the Board approved a tern of intra-yearly movements in their reduction in the basic rate from V/2 to deposits and loans. Since its introduc- 3 percent. Open market operations were tion on January 9, 1992, the flexible rate directed toward allowing the full amount charged on seasonal credit has been of the reduction to be reflected in money closely aligned with short-term market market interest rates. rates and is never less than the basic rate Over the course of July and August, applicable to adjustment credit. indicators of economic activity pointed A different flexible rate is charged on to a continuing but quite sluggish expan- extended-credit loans, which are made sion. Although growth in the broad mea- to depository institutions that are under sures of money picked up in August sustained liquidity pressure and are not after declining in previous months, their able to obtain funds from other sources. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 79th Annual Report, 1992 The rate for extended credit is 50 basis ing of market-related rates under the points higher than the seasonal rate and seasonal and extended credit programs is at least 50 basis points above the basic are not shown. All votes taken during discount rate. The first thirty days of 1992 on discount rates were unanimous. borrowing on extended credit may be at Effective July 2, the Board approved the basic rate, but further borrowings proposals by the directors of the Federal ordinarily are charged the flexible rate. Reserve Banks of Boston, New York, Exceptionally large adjustment-credit Philadelphia, Richmond, Atlanta, Chiloans that arise from computer break- cago, Minneapolis, Kansas City, Dallas, downs or other operating problems that and San Francisco to reduce the basic are not clearly beyond the reasonable discount rate from 3Vi to 3 percent. control of the borrowing institution are assessed the highest rate applicable to Votes for this action: Messrs. Greenspan, any credit extended to depository insti- Angell, Kelley, LaWare, Lindsey, and Mullins and Ms. Phillips. Votes against tutions; under the current structure, that this action: None. rate is the flexible rate on extended credit. The Board subsequently approved At the end of 1992 the structure of similar actions taken by the directors of discount rates was as follows: a basic the Federal Reserve Banks of Cleverate of 3 percent for short-term adjustland, effective July 6, and St. Louis, ment credit, a rate of 3.20 percent for effective July 7, 1992. . credit under the seasonal program, and a rate of 3.70 percent for extended credit. During 1992 the flexible rate on seasonal credit ranged from a high of 4.15 percent to a low of 3.15 percent and that on extended credit ranged from a high of 4.65 percent to a low of 3.65 percent. Board Votes Under the provisions of the Federal Reserve Act, the boards of directors of the Federal Reserve Banks are required to establish rates on loans to depository institutions at least every fourteen days and to submit such rates to the Board of Governors for review and determination. Federal Reserve Bank proposals on the discount rate include requests to renew the formulas for calculating the flexible rates on seasonal and extended credit. Indicated below are the votes relating to the Board's decision to reduce the basic discount rate in early July. Votes relating to the reestablishment of existing rates or for the updat- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

109 Record of Policy Actions of the Federal Open Market Committee The record of policy actions of the Fed- quently published in the Federal eral Open Market Committee is pre- Reserve Bulletin. sented in the ANNUAL REPORT of the Policy directives of the Federal Open Board of Governors pursuant to the re- Market Committee are issued to the Fedquirements of section 10 of the Federal eral Reserve Bank of New York as the Reserve Act. That section provides that Bank selected by the Committee to exethe Board shall keep a complete record cute transactions for the System Open of the actions taken by the Board and by Market Account. In the area of domestic the Federal Open Market Committee on open market activities, the Federal Reall questions of policy relating to open serve Bank of New York operates under market operations, that it shall record two sets of instruction from the Open therein the votes taken in connection Market Committee: an Authorization for with the determination of open market Domestic Open Market Operations and policies and the reasons underlying each a Domestic Policy Directive. (A new such action, and that it shall include in Domestic Policy Directive is adopted at its annual report to the Congress a full each regularly scheduled meeting.) In account of such actions. the foreign currency area, the Committee operates under an Authorization for The pages that follow contain entries Foreign Currency Operations, a Foreign relating to the policy actions at the meet- Currency Directive, and Procedural ings of the Federal Open Market Com- Instructions with Respect to Foreign mittee held during the calendar year Currency Operations. These policy 1992, including the votes on the policy instruments are shown below in the form decisions made at those meetings as well in which they were in effect at the beginas a resume of the basis for the decining of 1992. Changes in the instrusions. The summary descriptions of ecoments during the year are reported in the nomic and financial conditions are based records for the individual meetings. on the information that was available to the Committee at the time of the meetings, rather than on data as they may have been revised later. Authorization for Domestic Open Members of the Committee voting for Market Operations a particular action may differ among themselves as to the reasons for their In Effect January 1, 1992 votes; in such cases, the range of their views is noted in the record. When 1. The Federal Open Market Committee members dissent from a decision, they authorizes and directs the Federal Reserve are identified in the record along with a Bank of New York, to the extent necessary summary of the reasons for their dissent. to carry out the most recent domestic policy directive adopted at a meeting of the The policy record for each meeting is Committee: released a few days after the next regu- (a) To buy or sell U.S. Government larly scheduled meeting and is subse- securities, including securities of the Federal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 79th Annual Report, 1992 Financing Bank, and securities that are direct or less, at rates that, unless otherwise obligations of, or fully guaranteed as to prin- expressly authorized by the Committee, shall cipal and interest by, any agency of the be determined by competitive bidding, after United States in the open market, from or to applying reasonable limitations on the volsecurities dealers and foreign and interna- ume of agreements with individual dealers; tional accounts maintained at the Federal provided that in the event Government secu- Reserve Bank of New York, on a cash, regu- rities or agency issues covered by any such lar, or deferred delivery basis, for the System agreement are not repurchased by the dealer Open Market Account at market prices, and, pursuant to the agreement or a renewal for such Account, to exchange maturing U.S. thereof, they shall be sold in the market or Government and Federal agency securities transferred to the System Open Market with the Treasury or the individual agencies Account; and provided further that in the or to allow them to mature without replace- event bankers acceptances covered by any ment; provided that the aggregate amount of such agreement are not repurchased by the U.S. Government and Federal agency securi- seller, they shall continue to be held by the ties held in such Account (including forward Federal Reserve Bank or shall be sold in the commitments) at the close of business on the open market. day of a meeting of the Committee at which 2. In order to ensure the effective conduct action is taken with respect to a domestic of open market operations, the Federal Open policy directive shall not be increased or Market Committee authorizes and directs the decreased by more than $8.0 billion during Federal Reserve Banks to lend U.S. Governthe period commencing with the opening of ment securities held in the System Open business on the day following such meeting Market Account to Government securities and ending with the close of business on the dealers and to banks participating in Governday of the next such meeting; ment securities clearing arrangements con- (b) When appropriate, to buy or sell in ducted through a Federal Reserve Bank, the open market, from or to acceptance deal- under such instructions as the Committee ers and foreign accounts maintained at the may specify from time to time. Federal Reserve Bank of New York, on a 3. In order to ensure the effective conduct cash, regular, or deferred delivery basis, for of open market operations, while assisting in the account of the Federal Reserve Bank of the provision of short-term investments for New York at market discount rates, prime foreign and international accounts mainbankers acceptances with maturities of up to tained at the Federal Reserve Bank of New nine months at the time of acceptance that York, the Federal Open Market Committee (1) arise out of the current shipment of goods authorizes and directs the Federal Reserve between countries or within the United Bank of New York (a) for System Open States, or (2) arise out of the storage within Market Account, to sell U.S. Government the United States of goods under contract of securities to such foreign and international sale or expected to move into the channels of accounts on the bases set forth in paragraph trade within a reasonable time and that are l(a) under agreements providing for the secured throughout their life by a warehouse resale by such accounts of those securities receipt or similar document conveying title within 15 calendar days on terms comparato the underlying goods; provided that the ble to those available on such transactions in aggregate amount of bankers acceptances the market; and (b) for New York Bank held at any one time shall not exceed account, when appropriate, to undertake with $100 million; dealers, subject to the conditions imposed on (c) To buy U.S. Government securities, purchases and sales of securities in paraobligations that are direct obligations of, or graph l(c), repurchase agreements in U.S. fully guaranteed as to principal and interest Government and agency securities, and to by, any agency of the United States, and arrange corresponding sale and repurchase prime bankers acceptances of the types agreements between its own account and authorized for purchase under l(b) above, foreign and international accounts mainfrom dealers for the account of the Federal tained at the Bank. Transactions undertaken Reserve Bank of New York under agree- with such accounts under the provisions of ments for repurchase of such securities, obli- this paragraph may provide for a service fee gations, or acceptances in 15 calendar days when appropriate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions \ 1 1 Domestic Policy Directive of 2x/2 to 6V2 percent and 1 to 5 percent, respectively, measured from the fourth quar- In Effect January 1, 19921 ter of 1990 to the fourth quarter of 1991. The monitoring range for growth of total domes- The information reviewed at this meeting tic nonfinancial debt also was maintained at continues to portray a sluggish economy and 41/2 to 8V6 percent for the year. For 1992, on a depressed state of business and consumer a tentative basis, the Committee agreed in confidence. Total nonfarm payroll employ- July to use the same ranges as in 1991 for ment fell sharply in November; however, the growth in each of the monetary aggregates average workweek in the private nonfarm and debt, measured from the fourth quarter sector edged up and the civilian unemploy- of 1991 to the fourth quarter of 1992. With ment rate remained at 6.8 percent. Industrial regard to M3, the Committee anticipated that production fell in November, partly reflect- the ongoing restructuring of thrift depository ing a sizable drop in motor vehicle assem- institutions would continue to depress the blies. Consumer spending has been soft on growth of this aggregate relative to spending balance in recent months. Real outlays for and total credit. The behavior of the monebusiness equipment appear to be rising tary aggregates will continue to be evaluated slowly, and nonresidential construction has in the light of progress toward price level continued to decline. Housing starts were stability, movements in their velocities, and appreciably higher on average in October developments in the economy and financial and November than in the third quarter. The markets. nominal U.S. merchandise trade deficit In the implementation of policy for the widened slightly further in September; the immediate future, the Committee seeks to deficit in the third quarter was substantially maintain the existing degree of pressure on larger than in the second quarter. Wage and reserve positions. In the context of the Comprice increases have continued to trend mittee's long-run objectives for price stabildownward. ity and sustainable economic growth, and Interest rates have declined appreciably giving careful consideration to economic, since the Committee meeting on November financial, and monetary developments, 5. The Board of Governors approved a slightly greater reserve restraint might or reduction in the discount rate from 5 to somewhat lesser reserve restraint would AVi percent on November 6. In foreign be acceptable in the intermeeting period. exchange markets, the trade-weighted value The contemplated reserve conditions are of the dollar in terms of the other G-10 expected to be consistent with growth of M2 currencies declined further over the inter- and M3 over the period from November meeting period; the dollar depreciated prima- through March at annual rates of about 3 and rily against the mark and other European 1Vi percent, respectively. currencies. Expansion in M2 and M3 edged up in November from a slow pace in October; the Authorization for Foreign slightly faster growth reflected a strengthen- Currency Operations ing in the most liquid components of the aggregates. For the year through November, expansion of both M2 and M3 is estimated In Effect January 1, 1992 to have been at the lower ends of the Committee's ranges. 1. The Federal Open Market Committee The Federal Open Market Committee authorizes and directs the Federal Reserve seeks monetary and financial conditions that Bank of New York, for System Open Market will foster price stability and promote sus- Account, to the extent necessary to carry out tainable growth in output. In furtherance of the Committee's foreign currency directive these objectives, the Committee at its meet- and express authorizations by the Committee ing in July reaffirmed the ranges it had estab- pursuant thereto, and in conformity with lished in February for growth of M2 and M3 such procedural instructions as the Committee may issue from time to time: A. To purchase and sell the following 1. Adopted by the Committee at its meeting on foreign currencies in the form of cable trans- December 17, 1991. fers through spot or forward transactions on Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

112 79th Annual Report, 1992 the open market at home and abroad, includ- Amount ing transactions with the U.S. Treasury, with Foreign bank (millions of the U.S. Exchange Stabilization Fund estab- dollars equivalent) lished by Section 10 of the Gold Reserve Act of 1934, with foreign monetary authori- Austrian National Bank 250 National Bank of Belgium 1,000 ties, with the Bank for International Settle- Bank of Canada 2,000 ments, and with other international financial National Bank of Denmark 250 institutions: Bank of England 3,000 Bank of France 2,000 German Federal Bank 6,000 Bank of Italy 3,000 Austrian schillings Italian lire Bank of Japan 5,000 Belgian francs Japanese yen Bank of Mexico 700 Canadian dollars Mexican pesos Netherlands Bank 500 Danish kroner Netherlands guilders Bank of Norway 250 Pounds sterling Norwegian kroner Bank of Sweden 300 French francs Swedish kronor Swiss National Bank 4,000 German marks Swiss francs 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 rency, plus outstanding contracts for future making operating arrangements with foreign receipt, minus outstanding contracts for central banks on System holdings of foreign future delivery of that currency, i.e., as the currencies, the Federal Reserve Bank of New sum of these elements with due regard to York shall not commit itself to maintain any sign. specific balance, unless authorized by the 2. The Federal Open Market Committee Federal Open Market Committee. Any agreedirects the Federal Reserve Bank of New ments or understandings concerning the ad- York to maintain reciprocal currency ar- ministration of the accounts maintained by rangements ("swap" arrangements) for the the Federal Reserve Bank of New York with System Open Market Account for periods up the foreign banks designated by the Board to a maximum of 12 months with the follow- of Governors under Section 214.5 of Reguing foreign banks, which are among those lation N shall be referred for review and designated by the Board of Governors of the approval to the Committee. Federal Reserve System under Section 214.5 5. Foreign currency holdings shall be of Regulation N, Relations with Foreign invested insofar as practicable, considering Banks and Bankers, and with the approval of needs for minimum working balances. Such the Committee to renew such arrangements investments shall be in liquid form, and on maturity: generally have no more than 12 months Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 113 remaining to maturity. When appropriate in Statement of Procedure with Respect to Forconnection with arrangements to provide in- eign Relationships of Federal Reserve Banks vestment facilities for foreign currency hold- dated January 1, 1944. ings, U.S. Government securities may be purchased from foreign central banks under agreements for repurchase of such securities Foreign Currency Directive within 30 calendar days. 6. All operations undertaken pursuant to In Effect January 1, 1992 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 Commarket 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 purcentral 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 Marcurrencies, 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 Commitexpressly authorized by the Committee. tee, to enter into any needed agreement or 4. System foreign currency operations understanding with the Secretary of the Treashall be conducted: sury about the division of responsibility for A. In close and continuous consultaforeign currency operations between the Systion and cooperation with the United States tem and the Treasury; Treasury; B. To keep the Secretary of the Trea- B. In cooperation, as appropriate, with sury fully advised concerning System forforeign monetary authorities; and eign currency operations, and to consult with C. In a manner consistent with the oblithe Secretary on policy matters relating to gations of the United States in the Internaforeign currency operations; tional Monetary Fund regarding exchange C. From time to time, to transmit arrangements under the IMF Article IV. appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies. Procedural Instructions with 8. Staff officers of the Committee are authorized to transmit pertinent informa- Respect to Foreign Currency tion on System foreign currency operations Operations to appropriate officials of the Treasury Department. 9. All Federal Reserve Banks shall partic- In Effect January 1, 1992 ipate in the foreign currency operations for In conducting operations pursuant to the System Account in accordance with paragraph 3 G(l) of the Board of Governors' authorization and direction of the Fed- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

114 79th Annual Report, 1992 eral Open Market Committee as set forth time available, or with the Chairman, if in the Authorization for Foreign Cur- the Chairman believes that consultation rency Operations and the Foreign Cur- with the Subcommittee is not feasible in rency Directive, the Federal Reserve the time available): Bank of New York, through the Man- A. Any operation that would result ager for Foreign Operations, System in a change in the System's overall open Open Market Account, shall be guided position in foreign currencies exceeding by the following procedural understand- $1.5 billion since the most recent reguings with respect to consultations and lar meeting of the Committee. clearance with the Committee, the For- B. Any swap drawing proposed by eign Currency Subcommittee, and the a foreign bank exceeding the larger of Chairman of the Committee. All opera- (i) $200 million or (ii) 15 percent of the tions undertaken pursuant to such clear- size of the swap arrangement. ances shall be reported promptly to the 3. The Manager for Foreign Opera- Committee. tions shall also consult with the Sub- 1. The Manager for Foreign Opera- committee or the Chairman about protions shall clear with the Subcommittee posed swap drawings by the System, (or with the Chairman, if the Chairman and about any operations that are not of believes that consultation with the Sub- a routine character. committee is not feasible in the time available): A. Any operation that would result Meeting Held on in a change in the System's overall open February 4-5, 1992 position in foreign currencies exceeding $300 million on any day or $600 million 1. Domestic Policy Directive since the most recent regular meeting of the Committee. The information reviewed at this meet- B. Any operation that would result ing suggested that economic activity rein a change on any day in the System's mained sluggish. Spending for housing net position in a single foreign currency and exports was rising, but retail sales exceeding $150 million, or $300 million had been weak, and nonresidential conwhen the operation is associated with struction continued to hold down overall repayment of swap drawings. investment expenditures. Nonfarm pay- C. Any operation that might gener- roll employment had changed little in ate a substantial volume of trading in a December, and industrial production had particular currency by the System, even edged lower in November and Decemthough the change in the System's net ber as business firms acted to hold down position in that currency might be less inventories in the face of slack final than the limits specified in l.B. demand. Wage and price increases con- D. Any swap drawing proposed by tinued to trend downward. a foreign bank not exceeding the larger Total nonfarm payroll employment of (i) $200 million or (ii) 15 percent of was about unchanged in December after the size of the swap arrangement. a large decline in November. Manufac- 2. The Manager for Foreign Opera- turing jobs fell in December for a fourth tions shall clear with the Committee (or consecutive month, with nearly all of with the Subcommittee, if the Subcom- the losses occurring in durable goods mittee believes that consultation with industries. Employment in retail and the full Committee is not feasible in the wholesale trade contracted again, while Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions \ 1 5 employment in construction, which had single-family housing starts rose in been depressed by unseasonably severe December from an upward-revised weather in November, registered a small November level. With high vacancy rise. New hires in December were con- rates persisting for multifamily units, centrated in health services and local starts of such units remained near their governments. The civilian unemploy- May 1991 low. ment rate rose to 7.1 percent in Decem- Business fixed investment appeared ber, its high for the year. to have fallen in the fourth quarter as a Industrial production declined slightly small rise in equipment spending was in December and was unchanged on bal- offset by further steep reductions in nonance since July; the limited information residential construction. After little available suggested that production change in the third quarter, shipments of might have contracted appreciably fur- nondefense capital goods picked up in ther in January. Over the November- the fourth quarter, principally because of December period, output was held down a surge in outlays for computers. Recent in part by reduced production of motor data on orders suggested little growth vehicles; in addition, unseasonably in business spending for equipment over warm weather led to lower production the near term. Office and other comof electricity and natural gas. Additional mercial construction activity weakened restraints on output included the depres- substantially further in November. The sing effects of a strike at a major sup- persistently low occupancy rates for plier of industrial equipment and persist- commercial structures, and the continuing declines in the production of defense ing downtrend in construction contracts and space equipment. By contrast, the and appraisal values of office properties, output of other types of business equip- suggested that nonresidential construcment had strengthened, particularly in tion activity would remain depressed for the office and computing component, some time. and the production of construction sup- Business inventories rose noticeably plies and a variety of nondurable goods over the months of September through had increased. Total industrial capacity November after substantial liquidation utilization declined further in December earlier in the year. At the retail level, but remained somewhat above its low of inventories continued to build, and last March. inventory-to-sales ratios rose for most Consumer spending had been weak types of retailers, although the pace of on balance in recent months amid con- accumulation appeared to have slowed tinuing indications of depressed con- in November. Wholesale inventories sumer confidence and essentially no expanded sharply in October and growth in disposable income. Nominal November; for most types of distriburetail sales were estimated to have tors, inventory-to-sales ratios had moved declined appreciably in November and up in recent months but had remained December, and for the fourth quarter well below their highs of a year ago. By decreases in sales were widespread contrast, manufacturing stocks in the among general merchandise, apparel, aggregate continued to decline, despite and furniture and appliance stores. slowing shipments that led to buildups Against a background of improved con- in stocks of finished goods in some sumer attitudes toward homebuying and industries. The ratio of stocks to sales in the strongest quarterly pace of new manufacturing remained on a downtrend home sales since the spring of 1990, that began in late 1990. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

116 79th Annual Report, 1992 The nominal U.S. merchandise trade nomic, financial, and monetary developdeficit narrowed considerably in No- ments, slightly greater reserve restraint vember. For the October-November might be acceptable or somewhat lesser period, a sizable rise in exports that was reserve restraint would be acceptable in only partly offset by an increase in the intermeeting period. The reserve imports brought a substantial improve- conditions contemplated under this ment in the trade balance from the third- directive were expected to be consistent quarter rate. The strength in exports, with growth of M2 and M3 at annual which may have been associated in part rates of around 3 percent and IV2 perwith a bunching of shipments, was con- cent respectively over the period from centrated in aircraft, machinery, con- November through March. sumer goods, and agricultural products. Shortly after the meeting, with incom- Among imports, most of the rise was in ing information continuing to point to a consumer goods. The available data on very sluggish economy, receding inflaeconomic activity in the major foreign tionary pressures, and slow growth in industrial countries suggested that rela- the broader monetary aggregates, open tively weak growth had continued into market operations were directed toward the fourth quarter. In most of these coun- a substantial easing of conditions in tries, with output moving closer to or reserve markets. This step was taken in further below potential, inflationary conjunction with a reduction in the dispressures appeared to have eased some- count rate from 42/2 to 3V2 percent that what further. was approved by the Board of Gover- Producer prices of finished goods de- nors effective December 20. Two techclined in December; prices of food and nical reductions were made to expected energy moved lower, while prices of levels of adjustment plus seasonal borother finished goods rose at about the rowing during the intermeeting period reduced pace of earlier months in the to reflect the downward drift in seasonal year. At the consumer level, prices of borrowing in early winter. Adjustment nonfood, non-energy items increased in plus seasonal borrowing averaged a lit- December at the moderate rate evident tle above expected levels over most of since the first quarter of 1991 and well the intermeeting interval, although very below the pace for 1990. Average hourly large adjustment borrowing occurred on earnings rose more rapidly in December the settlement day of one reserve mainthan in prior months; however, for the tenance period as a result of a reserve year as a whole, this earnings measure shortfall. At the beginning of the interincreased at a considerably slower pace meeting period, the federal funds rate than in 1990. averaged around 4!/2 percent; after the At its meeting on December 17, 1991, easing of reserve conditions, the funds the Committee adopted a directive that rate dipped to a little below 4Vi percent called for initially maintaining the exist- through the first week of the new year ing degree of pressure on reserve posi- and then dropped further to around tions but that included a marked bias 4 percent as relatively mild year-end toward easing during the intermeeting pressures abated. period. Accordingly, the directive indi- In response to the easing in reserve cated that in the context of the Commit- markets, other short-term interest rates tee's long-run objectives for price stabil- declined about the same amount as the ity and sustainable economic growth, federal funds rate, while longer-term and giving careful consideration to eco- rates fell somewhat less. Rates on Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 117 intermediate- and long-term securities mance earlier, growth of M2 and M3 continued to decline through the early appeared to have slowed in January, part of 1992 as incoming data seemed to partly reflecting temporary distortions in indicate further economic weakness. demand deposits and money market However, these rates began to firm again funds around year-end. The slower by mid-January; over the latter part growth also seemed to reflect the attracof the intermeeting period, concerns tion of relatively high bond yields and mounted with regard to current and pro- persistently rising prices in the stock spective supplies of federal debt offer- market at a time when many banking ings, especially in the context of pro- institutions were aggressively reducing posals for fiscal stimulus, and market offering rates on deposits. For the year participants reacted to evidence that 1991, the expansion of both M2 and M3 tended to suggest an improved economic was estimated to have been at rates a outlook and consequently a reduced little above the lower ends of the Comprospect of further monetary easing. For mittee's ranges, while growth of total the intermeeting period as a whole, domestic nonfinancial debt appeared to interest rates on intermediate-term Trea- have been marginally above the lower sury issues were up somewhat, while end of its monitoring range. rates on long-term Treasury and private The staff projection prepared for this instruments registered mixed changes. meeting pointed to a recovery in eco- Following the 1 percentage point drop nomic activity. In the near term, a small in the discount rate, the prime rate was overhang of inventories and depressed reduced by the same amount, to 61/2 per- confidence would tend to limit overall cent. Broad stock price indexes rose increases in spending despite indicasubstantially. tions of a substantial pickup in residen- In foreign exchange markets, the tial construction, notably of singletrade-weighted value of the dollar in family homes. Subsequently, however, terms of the other G-10 currencies rose the cumulative effects of earlier declines slightly on balance over the intermeet- in interest rates would be expected to ing period. The dollar declined early in lead to a moderate pickup in growth, the period, particularly against the Ger- with the risks to that trajectory for the man mark, in response to the easing of economy being viewed as about in monetary policy in the United States balance. Stronger consumer spending, a and the nearly concurrent rise in official rise in business equipment investment, German lending rates. In January, how- and a swing from liquidation to accumuever, the dollar rebounded sharply amid lation of inventories were projected to market speculation that interest rates in provide most of the impetus for faster the United States might not decline fur- growth. The retarding effects of ther and that interest rates in Germany depressed nonresidential construction might have peaked. On balance, the activity and of the ongoing restructuring dollar weakened appreciably against the of household and business balance Japanese yen over the intermeeting sheets were expected to lessen gradually period in response to concerns about as the expansion progressed. The potentrade imbalances between the two coun- tial nature and size of any stimulative tries and to official intervention during fiscal package remained highly uncerthe period in support of the yen. tain, and the staff projection did not After accelerating somewhat in the incorporate major new fiscal initiatives. fourth quarter from a very weak perfor- The substantial though diminishing Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 79th Annual Report, 1992 slack expected in labor and product mar- and debt aggregates, the Committee kets in coming quarters was projected to members and Federal Reserve Bank induce further declines in the underlying presidents not currently serving as memrate of inflation. bers had prepared projections of eco- In their discussion of the economic nomic activity, the rate of unemploysituation and outlook, Committee mem- ment, and inflation for the year 1992. bers continued to view some strengthen- Measured from the fourth quarter of ing in aggregate demand and overall 1991 to the fourth quarter of 1992, the business activity as the most likely pros- forecasts for growth of real GDP had a pect during the months ahead, with the central tendency of 13A to IVi percent. expansion settling into a pattern of mod- Projections of the civilian rate of unemerate growth by the second half of the ployment in the fourth quarter of 1992 year. The available information sug- were concentrated in a range of 63A to gested that the sluggish performance of 7 percent. These forecasts pointed to the economy was continuing in early rates of resource utilization that seemed 1992, though there were indications, still consistent with appreciable progress very tentative and largely anecdotal, of toward price stability. Projections of the some improvement. Nonetheless, the increase in the CPI from the fourth decline in interest rates over the second quarter of 1991 to the fourth quarter of half of 1991 accompanied by the appre- 1992 were centered in a range of 3 to ciable progress achieved by many finan- 3V2 percent; this range compared with a cial institutions, business firms, and realized increase in the CPI of 3 percent households in improving their balance in 1991, but the result for 1991 had been sheets appeared to have established heavily influenced by the sharp decline a basis for a pickup in final demand. in oil prices, so the members' forecasts The timing and strength of an upturn represented a significant decrease in the remained subject to substantial uncer- underlying rate of inflation. Forecasts tainties, and the need for further policy of growth of nominal GDP had a censtimulus to foster a satisfactory eco- tral tendency of 4Vi to 53A percent for nomic expansion could not be ruled out. 1992. The uncertainties arose in part from the The members acknowledged that largely unpredictable course of fiscal there were substantial risks of an outpolicy, the still depressed state of busi- come outside the central tendency of ness and consumer confidence, the their forecasts for economic activity. strength and effects of continuing efforts Views differed with regard to the most to shore up balance sheets, and the likely direction of any deviation, but extent to which economic growth might many of the members saw those risks slow abroad. With regard to the outlook as being in better balance than previfor inflation, the available data and anec- ously. Among the uncertainties in the dotal information about recent increases outlook was the extent to which finanin costs and prices reflected quite prom- cial intermediaries would continue to ising developments, and the members restrict their extensions of credit to less continued to anticipate appreciable than prime borrowers. In this connecprogress toward a lower core rate of tion, a number of members reported on inflation. anecdotal indications that banking In keeping with the practice at meet- institutions in various parts of the counings when the Committee establishes its try appeared to have become somewhat long-run ranges for growth of the money more willing lenders, even though over- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions \ \ 9 all survey results and many banker com- strongly adverse repercussions on finanments did not indicate any easing in cial markets and perhaps on business credit standards. A second source of and consumer confidence. Indeed, conuncertainty related to the continuing cerns about the outlook for fiscal policy efforts of business firms and households might well have been an important facto strengthen their balance sheets and in tor behind the rise in long-term bond the process to divert some of their cor- yields this year. It also was noted that porate cash flows or disposable personal uncertainty about the exact provisions incomes from spending to reducing of the fiscal program that might eventudebt and improving equity positions. ally be adopted was causing some busi- These efforts together with lower market nesses to defer investment decisions. interest rates already appeared to have In their review of business conditions induced significant progress toward in different parts of the country, memreducing debt exposures and debt ser- bers again reported on mixed patterns of vicing costs, but the financial restruc- activity in recent months, and they turing process was still under way and described overall conditions in the difthe extent to which it would continue ferent regions as ranging from slightly to inhibit spending remained unclear. weaker to slightly stronger. Although an A further source of uncertainty related expected upturn in general business to the ongoing and widespread adjust- activity had not materialized thus far, ments in corporate business structures, many members sensed some improveincluding downsizings, that were aimed ment in business attitudes. Notwithat improving the competitive effi- standing the persistence of gloomy ciency of business firms. While these consumer sentiment, contacts among restructuring activities were serving retailers indicated that many had experito strengthen the long-run competi- enced somewhat better sales in recent tive position of the economy, they weeks than they had anticipated earlier, tended for the present to inhibit overall though reports from some parts of the spending, both directly and indirectly country pointed to significant excepthrough the adverse effects of widely tions. Members commented that the publicized job cutbacks on consumer pickup in sales of single-family homes sentiment. together with reduced interest burdens Many of the members observed that stemming from home mortgage refifiscal policy developments were adding nancings would tend to stimulate conto the uncertainties in the economic sumer spending in the quarters ahead. outlook. At the moment, the potential Over the near term, production activity outcome of fiscal initiatives by the was likely to be inhibited to some Administration and the Congress was degree by the moderate buildup that had unknown. In the view of at least some occurred late in 1991 in wholesale and members, a limited package of short- retail inventories. As the year proterm fiscal stimulus measures imple- gressed, however, a pickup in consumer mented relatively early this year could spending probably would encourage have a favorable effect on business some increase in inventory investment. activity. On the other hand, adoption of Likewise, cautious business attitudes fiscal measures involving substantial along with excess capacity in several stimulus, which would further impede key industries and the ongoing efforts to the prospects for long-term budgetary improve balance sheets would limit the balance, would be likely to have growth in business spending for plant Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 79th Annual Report, 1992 and equipment for some period of time, 1992 that it had established on a tentaprobably until an upturn in final demand tive basis in July 1991. The tentative was well under way. The prospects ranges included expansion of 2Vi to for commercial construction activity 6V2 percent for M2 and 1 to 5 percent remained severely constrained by high for M3, measured from the fourth quarvacancy rates in many parts of the coun- ter of 1991 to the fourth quarter of 1992. try. On the foreign side, the outlook for The monitoring range for growth of torelatively sluggish economic growth in tal domestic nonfinancial debt had been several key industrial nations implied set provisionally at 4Vi to 8!/2 percent more limited growth in U.S. exports; in for 1992. All of these ranges were addition, if sentiment favoring more unchanged from those for 1991 that the protectionism were to gather added Committee had set in February and strength in the context of a weak domes- reaffirmed in July of last year. tic economy, new trade restrictions In the Committee's discussion, a might be imposed that would have majority of the members indicated a adverse effects. preference for affirming the ranges for With regard to the prospects for infla- 1992 that had been established on a tion, members observed that core tentative basis in July. While those inflation was continuing to recede, and ranges were acceptable to all the memin the context of their outlook for bers, several expressed a preference for relatively limited pressures on produc- lowering them. tion resources, some commented that In formulating the Committee's obthey would not view an inflation result jectives for 1992, members stressed that below the central tendency of the mem- policy needed to promote sustainable bers' projections as a surprising out- expansion in economic activity while come. Developments having favorable consolidating and extending gains implications for inflation included an against inflation. Both objectives were extended period of subdued monetary attainable, especially in light of the growth, highly competitive conditions degree of slack in the economy. Howin domestic and international markets ever, the translation of these objectives for numerous products, and productivity into specific money growth ranges was gains associated with business restruc- complicated by questions about the relaturing activities that were adding to the tion of the monetary aggregates to usual operating efficiencies achieved spending. Since 1989, the level of M2 during the early quarters of cyclical had fallen increasingly short of levels upswings. The members did not rule out that past historical relationships with the possibility that unanticipated surges nominal GDP and market interest rates in energy or food prices might tempo- would have indicated. Insofar as could rarily arrest or reverse progress toward be judged at this point, retention of a 2xh price stability, but they assumed that to 6V2 percent range for M2 should prosuch prices would move in line with vide adequate leeway and operational most other prices in the year ahead. flexibility to accommodate a satisfac- In keeping with the requirements of tory economic performance. Demand the Full Employment and Balanced for M2 balances relative to income Growth Act of 1978 (the Humphrey- would continue to be damped if, as Hawkins Act), the Committee at this appeared likely, banks and thrifts were meeting reviewed the ranges for growth to reduce further their offering rates on of the monetary and debt aggregates in deposits in lagged response to earlier Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions \ 21 declines in market rates. The reductions appropriate. Retention of an unchanged in offering rates could be pronounced if monitoring range for growth in nonfibanking institutions maintained their nancial debt also seemed warranted for cautious lending policies and many 1992, even though the expansion in such prime borrowers continued to channel a debt was likely to accelerate somewhat larger-than-usual share of their financ- from a very sluggish pace in 1991, ing needs toward longer-term market mainly as a result of more rapid growth sources of funds and away from deposi- in the federal debt. Nonfederal debt also tory institutions. Under those circum- might increase a little faster this year, stances, velocity could well rise appre- but the pickup was likely to be limited ciably and relatively modest M2 growth by the still cautious attitudes of housewould not necessarily be inconsistent holds and businesses toward new debt. with a satisfactory economic expansion. Thus, the 1991 range for nonfinancial On the other hand, the continuing debt should comfortably encompass an improvement in the balance sheets and expansion of credit to support stronger capital positions of depository institu- spending in 1992. tions might prompt them as a group to Members who preferred a lower range become more willing lenders and thus to for M2 believed that a reduction was bid more aggressively for deposits to desirable at this time to underscore the fund additional lending. In this case Committee's commitment to its longfaster growth of M2, perhaps toward the run objective of price stability. While upper end of the tentative range, might the unchanged range supported by the be desirable. On balance, the members majority might provide the flexibility believed that adoption of the tentative needed for a desirable anti-inflationary M2 range for 1992 should allow suffi- policy in the year ahead, a lower range cient room for the likely range of devel- would be more consistent with the Comopments in the intermediation process. mittee' s ultimate objective of price level Nonetheless, the substantial uncertain- stability. However, in the view of other ties surrounding the outlook for M2 sug- members a reduction at this time could gested that the Committee would have be interpreted as an indication that the to approach monetary developments Committee might not be willing to supwith a great deal of flexibility over the ply enough liquidity to foster an appreyear ahead. ciable strengthening in the economy in An unchanged target range for M3 1992, especially if a fairly rapid increase also was seen as likely to provide in M2 were needed to compensate for adequate room for a desirable rate of relatively slow money growth in 1991. growth in this aggregate in the context No member advocated higher monetary of accommodating the Committee's growth ranges, but a number suggested broad policy objectives. The growth of that the emergence of more normal pat- M3 probably would continue to be af- terns of monetary velocity in association fected to a greater extent than that of M2 with an economic performance in line by the diversion of credit demands to with the central tendency of the memsources outside depository institutions bers' projections might appropriately and by the ongoing contraction of the result in M2 growth in the upper half of thrift industry in conjunction with the the Committee's range. activities of the Resolution Trust Corpo- Concerns about the implications of ration. Accordingly, a lower range for slow money growth in 1991 and the M3 than for M2 appeared to remain possibility of more normal velocity pat- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 79th Annual Report, 1992 terns in 1992 prompted some members the Committee's usual procedures under to suggest a modification of the current the Humphrey-Hawkins Act, the ranges procedure for constructing yearly mone- would be reviewed at midyear, or sooner tary growth ranges. The modification if deemed necessary, in light of the would involve linking the ranges for the behavior of the aggregates and ongoing current year to those for the previous economic and financial developments. year rather than to the actual outcomes The Committee approved the following for that year. The new approach would paragraph for inclusion in the domestic place monetary targeting in a multi-year policy directive: context with the objective of constraining money growth to a desired range The Federal Open Market Committee seeks monetary and financial conditions that over a longer horizon. Such an approach will foster price stability and promote suswould have advantages over current protainable growth in output. In furtherance of cedures if the relationship between these objectives, the Committee at this meetmoney growth and spending could be ing established ranges for growth of M2 and predicted with confidence. In the course M3 of 2x/2 to 6V2 percent and 1 to 5 percent, respectively, measured from the fourth quarof the Committee's discussion, howter of 1991 to the fourth quarter of 1992. The ever, a number of members referred to monitoring range for growth of total domesquestions that had arisen about that rela- tic nonfinancial debt was set at 4V2 to tionship in recent years as thrift insti- 8V2 percent for the year. With regard to M3, tutions were closed and credit flows the Committee anticipated that the ongoing restructuring of depository institutions would increasingly bypassed depository insticontinue to depress the growth of this aggretutions. A satisfactory performance of gate relative to spending and total credit. The the economy in 1992 might well behavior of the monetary aggregates will be accompanied by a rise in velocity, continue to be evaluated in the light of although there was considerable uncer- progress toward price level stability, movements in their velocities, and developments tainty about such an outcome. Should in the economy and financialm arkets. velocity in fact rise, the acceleration of the broader aggregates implied by this Votes for this action: Messrs. Greenspan, alternative approach and the associated Corrigan, Angell, Hendricks, Hoenig, easing of reserve conditions and short- Kelley, LaWare, Lindsey, Melzer, and term interest rates might not be consis- Mullins, Ms. Phillips, and Mr. Syron. Votes against this action: None. tent with the Committee's objectives. Given the uncertainties about velocity, a broad array of indicators, in addition to In the Committee's discussion of polmoney, would need to continue to be icy for the period immediately ahead, all assessed in determining the appropriate of the members favored or found acceptstance of the Committee in providing able a proposal to maintain unchanged reserves. Members concluded that the conditions in reserve markets and to bias proposal should be studied further and the directive toward possible easing durreconsidered later in light of changing ing the intermeeting period. In support circumstances. of this policy, members observed that At the conclusion of the Committee's reserve conditions had been eased subdiscussion, all of the members indicated stantially over the past several months, that they favored or could accept the including the easing undertaken in the ranges for 1992 that the Committee had latter part of December, and that much established on a tentative basis at its of the stimulus from recent policy meeting in July 1991. In keeping with actions had yet to be felt in the econ- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 123 omy. The members generally agreed that gested some pickup in M2 growth, the enough monetary stimulus probably had behavior of that aggregate had been been implemented to foster the desired erratic in recent months and it was diffiupturn in economic activity without fur- cult to discern its underlying trend. ther policy moves. Nonetheless, the high According to a staff analysis prepared degree of uncertainty surrounding the for this meeting, the growth of M2 and outlook suggested that the Committee M3 could be expected to accelerate needed to remain alert to the possibility somewhat in the period ahead, given of developments that might require addi- current conditions in reserve markets tional easing. and some projected strengthening in the In these circumstances, a majority of economy. However, expansion of M2 the members expressed a preference for probably would continue to be rea directive that was biased toward some strained by the aggressive reductions by easing. The lagged effects of earlier eas- depository institutions in their offering ing actions could prove to be less stimu- rates on deposit components of this lative than anticipated, in part because aggregate and the continuation of related of ongoing balance sheet restructuring shifts of M2 funds into higher-yielding activities. The persistence of a weak capital market instruments. In addition, economy might well have especially the expected pickup in the pace of RTC severe consequences, and, in the view of resolutions over the balance of the first some members, signs of such an out- quarter would tend to moderate the come would call for prompt action. growth of M2 and especially M3. To the However, many members who sup- extent that subdued growth of the ported a bias toward ease also stipulated broader aggregates were to reflect such that there should not be an unusually special influences, there would not be strong presumption that any easing significant adverse implications for the would in fact be implemented during the overall performance of the economy. intermeeting period ahead: The Com- Moreover, in the view of some memmittee should ease only in response to bers, the very considerable strength of cumulating evidence that economic narrow measures of money and reserves activity was not picking up or that mon- also tended to attenuate concerns about etary growth was falling appreciably the possibly inadequate expansion of the short of current expectations. A few broader monetary aggregates; indeed, in members, while not ruling out the possi- at least one view, the rapid growth of ble need for further easing, preferred not narrow money would become a worrito bias the directive in either direction. some development were it to persist. In this view, more emphasis needed to The members generally concluded, be put on the inflationary risks of over- however, that somewhat faster growth in reacting to the current weakness in the the broader aggregates would be a weleconomy, and a symmetrical directive come development. would require more persuasive evidence At the conclusion of the Committee's of the need for some easing before discussion, all of the members indicated action was taken. that they were prepared to vote for a With regard to the outlook for mone- directive that called for maintaining the tary expansion, some members ex- existing degree of pressure on reserve pressed concern about the relatively positions. The members also noted their sluggish growth of the broader aggre- preference for or acceptance of a direcgates. While the most recent data sug- tive that included some bias toward pos- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 79th Annual Report, 1992 sible easing during the intermeeting slightly on balance over the intermeeting period. Accordingly, in the context of period. After accelerating somewhat in the fourth the Committee's long-run objectives for quarter, M2 and M3 slowed in January, price stability and sustainable economic partly reflecting temporary distortions growth, and giving careful consideration around year-end. For the year 1991, the to economic, financial, and monetary expansion of both M2 and M3 is estimated developments, slightly greater reserve to have been at rates a little above the lower ends of the Committee's ranges. Growth of restraint might be acceptable or slightly total domestic nonfinancial debt appears to lesser reserve restraint would be have been marginally above the lower end of acceptable during the intermeeting the Committee's monitoring range for the period. The reserve conditions contem- year. plated at this meeting were expected to The Federal Open Market Committee be consistent with growth of M2 and seeks monetary and financial conditions that will foster price stability and promote M3 at annual rates of around 3 percent sustainable growth in output. In furtherance and IVi percent respectively over the of these objectives, the Committee at this three-month period from December meeting established ranges for growth of through March. M2 and M3 of 2!/2 to 61/2 percent and 1 to 5 percent, respectively, measured from the At the conclusion of the meeting the fourth quarter of 1991 to the fourth quarter following domestic policy directive was of 1992. The monitoring range for growth of issued to the Federal Reserve Bank of total domestic nonfinancial debt was set at New York: 4x/2 to 8V2 percent for the year. With regard to M3, the Committee anticipated that the The information reviewed at this meeting ongoing restructuring of depository institusuggests that economic activity has remained tions would continue to depress the growth sluggish. Total nonfarm payroll employment of this aggregate relative to spending and was little changed in December, and the total credit. The behavior of the monetary civilian unemployment rate rose to 7.1 per- aggregates will continue to be evaluated in cent. Industrial production fell slightly in the light of progress toward price level sta- November and December, partly reflecting a bility, movements in their velocities, and desizable drop in motor vehicle assemblies. velopments in the economy and financial Consumer spending has been weak on bal- markets. ance in recent months amid continuing indi- In the implementation of policy for the cations of depressed consumer confidence immediate future, the Committee seeks to and essentially no growth in disposable maintain the existing degree of pressure on income. Demand for business equipment has reserve positions. In the context of the Combeen uneven, while nonresidential construc- mittee's long-run objectives for price stabiltion has remained in a steep decline. Single- ity and sustainable economic growth, and family housing starts continued to recover in giving careful consideration to economic, December. The nominal U.S. merchandise financial, and monetary developments, trade deficit narrowed in November, and for slightly greater reserve restraint might or October-November combined the trade bal- slightly lesser reserve restraint would ance improved substantially from the third- be acceptable in the intermeeting period. quarter rate. Wage and price increases have The contemplated reserve conditions are continued to trend downward. expected to be consistent with growth of M2 Short-term interest rates have declined and M3 over the period from December appreciably since the Committee meeting on through March at annual rates of about 3 and December 17, while longer-term rates have 1V2 percent, respectively. registered mixed changes. The Board of Governors approved a reduction in the dis- Votes for this action: Messrs. Greenspan, count rate from 4Vi to 3V2 percent on Corrigan, Angell, Hendricks, Hoenig, December 20. In foreign exchange markets, Kelley, LaWare, Lindsey, Melzer, and the trade-weighted value of the dollar in Mullins, Ms. Phillips, and Mr. Syron. terms of the other G-10 currencies rose Votes against this action: None. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 125 2. Agreement to "Warehouse" ing much of their increased sales by Foreign Currencies drawing down inventories. Wage and price increases had continued to trend On February 5, 1991, the Committee downward. had approved a reduction from $15 bil- Total nonfarm payroll employment lion to $10 billion in the amount of rebounded in February from a large drop eligible foreign currencies that the Sysin January. The February gain was contem was prepared to "warehouse" for centrated in retail trade, but employment the Treasury and the Exchange Stabiliin services also rose moderately further zation Fund (ESF). The purpose of the and manufacturing payrolls, after five warehousing facility is to supplement months of decline, were lifted somewhat the U.S. dollar resources of the Treasury by the return of auto workers from and the ESF for financing their purtemporary layoffs. The average workchases of foreign currencies and related week increased substantially in manuinternational operations. facturing and in some service-producing At this meeting, the Committee industries. Although employment picked agreed to reduce the limit further to up in February, appreciable expansion $5.0 billion, a ceiling that earlier had of the labor force brought a rise in been in place for many years. System the civilian unemployment rate to holdings of foreign currencies under the 7.3 percent, and initial claims for unemwarehousing facility had risen to a peak ployment insurance remained elevated. of $9.0 billion in March 1990, but by the Industrial production rose considerend of August 1991 they had been cut ably in February but was little changed back to their current level of $2.0 bilon balance over the first two months of lion. Accordingly, the new $5.0 billion the year. Part of the increase reflected an ceiling was expected to provide an adeupturn in motor vehicle assemblies, with quate cushion of unused capacity and, the remainder being spread across a thus, to maintain operational flexibility broad range of other goods. Among final to respond on short notice to unanticiproducts, gains were posted in both pated developments. business products, notably office and computing equipment, and consumer Votes for this action: Messrs. Greenspan, Corrigan, Angell, Hendricks, Hoenig, goods. By contrast, utility output again Kelley, La Ware, Lindsey, Melzer, and was held down by unseasonably warm Mullins, Ms. Phillips, and Mr. Syron. winter weather, and the production of Votes against this action: None. defense and space equipment continued to ebb. Total industrial capacity utilization moved higher in February but Meeting Held on remained well below its pre-recession March 31, 1992 high. Retail sales registered large gains in Domestic Policy Directive January and February after edging down The information reviewed at this meet- in the fourth quarter of 1991. The stroning suggested that domestic final de- ger sales were associated with sizable mand, especially in the consumer sector, increases for most types of durable and had strengthened somewhat in recent nondurable goods. Single-family housmonths. Production and employment ing starts rose substantially further in had not picked up commensurately be- January and February, reaching their cause businesses apparently were meet- highest level since the first quarter of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 79th Annual Report, 1992 1990, and sales of both new and existing and automotive products. A slightly homes were up considerably on balance larger drop in the value of imports over the two months. With vacancy rates reflected weakness in both oil and conpersisting at historically high levels, sumer goods. The available data on starts in the multifamily sector remained fourth-quarter economic activity in the depressed. major foreign industrial countries indi- Shipments of nondefense capital cated that real output declined in Cangoods increased sharply in January and ada, Germany, Japan, and the United February, reflecting strength in office Kingdom, while data for France pointed and computing equipment and in busi- to little change. For the first quarter of ness purchases of motor vehicles; in this year, the limited data available addition, shipments of aircraft re- showed some signs of recovery in contibounded in January from a very low nental Europe but suggested continued level in the fourth quarter. Recent data sluggishness in the other major induson orders pointed to further increases trial countries. over coming months in outlays for busi- Producer prices of finished goods ness equipment other than aircraft. Non- edged down on balance in January and residential construction activity edged February, as a reduction in energy prices up in January but remained below its more than offset an increase in food and fourth-quarter average. Further declines other prices. Excluding the food and were recorded in the construction of energy components, producer prices office buildings and hotels in January, rose over the January-February period and persisting weakness in commercial at about the 1991 pace. At the consumer construction was signaled by continued level, food prices changed little over the decreases in appraised values of office two months while energy prices fell; properties in late 1991. prices of nonfood, non-energy items in- Business inventories registered steep creased at about the same rate as last declines in January after rising substan- year but significantly below that of tially in previous months. Stocks at 1990. Average hourly earnings of prowholesale and retail trade establish- duction or nonsupervisory workers in ments reversed a sizable portion of the February more than reversed a small accumulation that occurred in the fourth decline in January. However, over the quarter; even so, for many types of busi- twelve-month period ending in Februnesses in the trade sector, inventory-to- ary, this measure of worker earnings sales ratios remained at elevated levels. increased more slowly than in the twelve In manufacturing, inventories were months ending in February 1991. reduced further in January, with much of At its meeting on February 4-5, 1992, the drawdown occurring in defense the Committee adopted a directive that aircraft and parts, food products, and called for maintaining the existing petroleum. Inventory-to-shipments degree of pressure on reserve positions ratios in most manufacturing industries but that included a bias toward possible remained well below the cyclical peaks easing during the intermeeting period. reached in early 1991. Accordingly, the directive indicated that The nominal U.S. merchandise trade in the context of the Committee's longdeficit narrowed slightly in January and run objectives for price stability and was essentially unchanged from its aver- sustainable economic growth, and givage rate in the fourth quarter. A decline ing careful consideration to economic, in exports was concentrated in aircraft financial, and monetary developments, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions \ 27 slightly greater reserve restraint might terms of the other G-10 currencies be acceptable or slightly lesser reserve increased substantially over the period. restraint would be acceptable in the The dollar declined initially on market intermeeting period. The reserve condi- expectations of additional monetary eastions contemplated under this directive ing in the United States, but it subsewere expected to be consistent with quently appreciated in response to growth of M2 and M3 at annual rates of indications of a strengthening of the around 3 percent and 1Vi percent respec- recovery. Late in the intermeeting tively over the three-month period from period, a tightening of money market December through March. conditions in Germany, where monetary Open market operations during the growth continued to be quite rapid and intermeeting period were directed to- concerns over wage pressures were ward maintaining the existing degree of mounting, contributed to a retreat in the pressure on reserve positions. Expected dollar. The yen weakened on balance in levels of adjustment plus seasonal bor- relation to the dollar and other major rowing were raised modestly immedi- currencies in response to indications of ately after the Committee meeting in further declines in economic growth and anticipation of a slight rise in seasonal resultant expectations of another moneborrowing. In the event, adjustment plus tary easing action in Japan. seasonal borrowing remained quite low, Growth of M2 and M3 accelerated averaging a little less than $70 million sharply in February, but M2 apparently over most of the intermeeting period; leveled off or even declined slightly in seasonal borrowing, newly subject to a March and M3 contracted somewhat. market-based discount rate, increased Growth of M2 and M3 from December relatively little and adjustment credit through March appeared to have been, remained at depressed levels. The fed- respectively, somewhat above and close eral funds rate averaged around 4 per- to the Committee's expectations. Much cent over most of the intermeeting of the growth in both aggregates over period, although late in the period the recent months reflected a surge in transrate averaged a little lower. actions balances that, in turn, resulted to Many other market interest rates rose an important extent from narrow opporappreciably over the intermeeting tunity costs relative to market interest period, as market participants inter- rates and from a bulge in demand depospreted incoming data as indicating that its associated with mortgage refinancthe economic recovery was regaining ings and other financial market activity. some momentum. The most pronounced The staff projection prepared for this increases occurred at intermediate matu- meeting pointed to a continuing recovrities, perhaps reflecting the improved ery in economic activity. In the near cyclical outlook for business activity. term, growth in consumer spending was Although yields on investment-grade expected to moderate after the firstcorporate debt rose in tandem with rates quarter spurt, but residential construcon U.S. Treasury securities, yields on tion was likely to record further substanlesser-rated securities were unchanged tial gains, and the pace of nonfarm to somewhat lower. Most broad indexes inventory liquidation should slow. Over of stock prices declined somewhat over time, the cumulative effects of earlier the intermeeting period. declines in interest rates, the progress In foreign exchange markets, the achieved in strengthening household and trade-weighted value of the dollar in business balance sheets, and some dimi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 79th Annual Report, 1992 nution of credit supply restraints would ings, that considerable progress had provide continuing impetus to economic been made in strengthening business and activity. Moreover, the retarding effects consumer balance sheets. While media of depressed nonresidential construction attention continued to be focused on activity were expected to lessen as the some large financial and nonfinancial expansion progressed. The projection firms that were experiencing difficulties, did not incorporate any major new fiscal most businesses now appeared to be initiatives at the federal level, and it much more favorably positioned to anticipated that spending for goods and weather adverse developments and to services at all levels of government finance spending that would support an would be restrained somewhat. The sub- expanding economy. The improvement stantial, though diminishing, margin of stemmed from ongoing efforts to slack in resource utilization was pro- streamline operations and enhance projected to be associated with appreciable ductivity and to reduce balance-sheet further slowing in the underlying rate of leverage and interest costs. For some inflation. business firms and many financial insti- In the Committee's discussion, the tutions, recent reports of a tendency for members generally viewed the incom- commercial real estate values to stabiing information, including anecdotal lize was a particularly favorable omen. reports from around the country, as pro- Consumer balance sheets also were benviding substantial evidence of some efiting from lower interest rates that quickening in the pace of overall eco- tended to lessen debt loads in relation to nomic activity. Final demands appeared income and from the appreciated value to be strengthening in the context of of stock portfolios. On the negative side, improving business and consumer confi- the restructuring of business operations dence. Nonetheless, key sectors of the and balance sheets was still exerting economy, such as defense spending and considerable constraints on spending commercial real estate, remained weak and lending activities, and it was unclear and a back-up in long-term interest how much longer or to what extent those rates, owing in part to lagging savings constraints would last. A number of and strong demand for credit by the members also expressed concern that Treasury, threatened to limit gains in the relatively slow growth of the broader housing and business investment. With monetary aggregates, were it to persist, these cross-currents and sources of might prove to be a harbinger of continuncertainty raising at least some ques- ued restraint in lending and of undertions about the sustainability of the lying weakness in the economy. expansion, careful, ongoing evaluation In their review of business conditions was warranted. On balance, however, in different regions, members indicated relatively moderate but sustained growth that overall economic activity appeared was seen as the most probable outcome. to be rising in many parts of the nation The members generally regarded the while some signs of an emerging upturn prospects for some continuing slack in could be discerned in most other areas. labor and product markets as consistent Improving business conditions generally with their projections of a downtrend in were associated with better retail sales the core rate of inflation. since the start of the year and with the With regard to financial developments further recovery in housing demand. bearing on the economic outlook, mem- Indeed, the growing demands for conbers stressed, as they had at earlier meet- sumer goods stemmed to an extent from Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 1 29 the strengthening of housing markets. ings remained high across the country, These developments were accompanied but there were indications in at least and bolstered by widespread indications some major cities that prices and rental of some improvement in business and rates for commercial real estate might consumer confidence, and some mem- be stabilizing or even tending to firm. bers commented that pent-up demands However, the better tone in those marfor many consumer durables might well kets had not translated itself into new materialize in the context of further building activity. Indeed, commercial gains in overall consumer confidence. construction was likely to remain However, most business executives depressed for an extended period and to were still very cautious despite increas- hold down the growth in overall busiing sales and a more favorable outlook ness investment at a time when spendfor corporate profits, and consumer con- ing for business equipment might be fidence remained well below earlier lev- trending appreciably higher. els, apparently reflecting to a major The outlook for exports to a number extent the persistence of anxieties about of major foreign industrial countries was job security and employment oppor- less encouraging than earlier, given tunities. Retail contacts and available financial and other difficulties that statistical reports suggested that an would tend to inhibit economic growth important part of the spurt in retail sales in those countries. On the favorable side, in January and February was met out of U.S. businesses had significantly eninventories. Further growth in such sales hanced their ability to compete in interwould lead to efforts to rebuild invento- national markets over the course of ries and induce related gains in produc- recent years, partly through gains in protion and incomes. ductivity, and they were now in a better Sales of residential real estate and the position both to sustain the nation's construction of new homes, principally exports and to meet competition from single-family dwellings, were display- foreign products in domestic markets. ing considerable strength across the Moreover, the improved health of many country. In a number of areas the Latin American economies was being increases were appreciably greater than reflected in higher export sales to such expected, though the gains appeared to countries. Some parts of the country also be due at least in part to favorable were benefiting from large increases in weather conditions and thus might rep- the number of foreign visitors. Neverresent some borrowing from the future. theless, members suggested that the Even so, and despite the inhibiting export sector was vulnerable to weakeffects of recent increases in mortgage ness from abroad, and reports from interest rates, the construction of single- some business contacts tended to reinfamily homes and its spillover effects in force those concerns. related industries were believed likely to Turning to the outlook for fiscal polmake an important contribution to the icy, members noted that market conoverall expansion of economic activity cerns about possible legislation that over the next several quarters. would substantially increase an already Construction of nonresidential struc- massive federal deficit appeared to have tures continued to decline in many areas subsided. Nonetheless, an important reaas work on existing buildings was com- son for the rise in intermediate- and pleted and few new projects were long-term interest rates since early Janustarted. Vacancy rates for office build- ary had been the apparently worsening Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 79th Annual Report, 1992 outlook for federal deficit financing over and the outlook for continuing expanthe course of the next several years. sion at a pace that was deemed likely to Such deficits would tend to keep long- be consistent with further progress term interest rates fairly high, and in toward price stability. The members association with the nation's relatively acknowledged that the uncertainties in low savings, they implied a financial the economic outlook were considerconstraint on the ability of the U.S. able, but given the ongoing stimulus economy to generate robust increases in stemming from earlier easing actions, investment. Because the volume of sav- they agreed that for now an unchanged ings available for investment was lim- policy represented an appropriate balited, interest rates had tended to react ancing of the various risks to a satisfacfairly strongly to indications of sizable tory economic performance. In this congains in private spending. nection, it was suggested that substantial The outlook for moderate economic further easing at this time might well growth and the associated, if diminish- fail to provide much added stimulus; ing, slack in labor and product markets indeed, it could prove to be counterprowere likely to prove consistent in the ductive because of adverse repercusview of many members with further sions in financial markets. Moreover, too progress in reducing the core rate of much easing at this juncture could estabinflation. Competitive price pressures lish the basis for unduly rapid growth of remained strong in many local markets, money and credit when the economic and efforts to raise prices very often did expansion gathered momentum. not succeed. In this competitive environ- With regard to possible adjustments ment, business firms seeking to maintain to the degree of reserve pressure during or increase profits were forced to con- the intermeeting period, many of the centrate on measures to curb costs members endorsed the view that it rather than to raise prices. Labor mar- would be premature to move away from kets were described as generally soft, a directive that was biased toward ease and most wage settlements continued to to a symmetrical directive. While the have favorable implications for future members generally anticipated that ecocosts and inflation. The outlook for nomic and financial developments durenergy costs, while always subject to ing the intermeeting period would not unanticipated developments, nonethe- call for an adjustment to policy, many less seemed favorable at this point. remained concerned about the vulnera- In the Committee's discussion of pol- bility of the expansion to a variety of icy, all of the members indicated that risks. In the circumstances, any policy they were in favor of maintaining un- adjustments in the weeks ahead were changed conditions in reserve markets more likely to be in the direction of for the period immediately ahead. A some easing than toward restraint. A majority also indicated a preference for number of these members also comretaining the current bias in the directive mented that even though the risks of a toward possible easing during the inter- deviation from the projected path of the meeting period, while the remaining economy now seemed to be in better members were in favor of moving to a balance than earlier, the consequences symmetrical directive. A steady policy of a substantial shortfall from expectacourse, at least for now, was viewed as tions would be much more severe than desirable in the context of encouraging the effects of a comparable overshoot. evidence of a strengthening economy Other members did not rule out the pos- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions \ 31 sible need for an easing move in the money and reserves had been quite period ahead, but they believed that the robust for some time. In the view of at more balanced risks that were now per- least one member, the possibility could ceived to surround the economic out- not be ruled out that this rapid growth look warranted a symmetric directive. could be signaling an overly accommo- Some observed that such a directive did dative monetary policy which, if continnot preclude an easing action that might ued, could boost inflation pressures at be triggered by economic or financial some point. Conclusions could not be developments, including the behavior of drawn on the basis of short-term movethe monetary aggregates, in the weeks ments in the narrow or broad monetary ahead. Moreover, in the view of some of aggregates, and in any event the implithese members, a directive that re- cations for the economy of specific monmained tilted toward ease under prevail- etary growth rates were clouded by a ing circumstances could be misread by variety of developments that the memdomestic and international observers as bers had discussed at length at the evidence of greater concern about the February meeting. Nonetheless, against economic outlook than many members the background of relatively sluggish currently felt, or as an indication of a growth in the broader aggregates for an bias on the part of the Committee extended period, many members agreed toward bolstering the real economy that the ongoing performance of those rather than securing further progress to- aggregates should be monitored closely. ward price stability. Indeed, some observed that concerns In the course of the discussion, mem- about the behavior of the broader aggrebers expressed varying degrees of con- gates, rather than the currently available cern about the behavior of the monetary information on economic activity, peraggregates. According to the most suaded them that a directive that was recently available data for March, M2 tilted toward ease was preferable to a apparently leveled off or declined symmetrical directive at this time. slightly and M3 contracted somewhat. At this meeting, the Committee Moreover, the weekly pattern toward the reviewed its practices with regard to the end of March suggested the possibility maturity composition of its portfolio of sluggish growth on average in April. of Treasury obligations. The overall While this development needed to be approach in recent years had been to assessed in the context of emerging meet the long-term need for growth in information on the economy and finan- the System's portfolio through purcial markets, it was suggested that a chases in all maturity sectors of the persisting shortfall in the growth of M2 market for Treasury obligations, with and M3 could signal that monetary pol- a major emphasis on ensuring substanicy was not positioned to support a satis- tial liquidity in the System's portfolio. factory expansion. For the year through With regard to the Treasury's quarterly March, growth of M2 had fallen some- financings, the Manager had followed what short of the midpoint of the Com- the practice over the past several years mittee's range for 1992, and in the view of exchanging the bulk of the maturing of some members growth near the mid- securities held in the System account point or somewhat higher in the range into the shortest issue offered by the might be more consistent with a desir- Treasury, while placing relatively small able economic performance for the year. amounts in the longer-term Treasury On the other hand, expansion of narrow offerings. This approach had replaced Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 79th Annual Report, 1992 the earlier practice of rolling over matur- through June. ing System holdings into the refinancing At the conclusion of the meeting the issues in roughly proportionate amounts following domestic policy directive was to the size of those issues being offered issued to the Federal Reserve Bank of to the public. The System's participation New York: in Treasury financings had contributed The information reviewed at this meeting importantly to the reduction in the aversuggests a strengthening in domestic final age maturity of the System portfolio in spending, although industrial production and recent years; however, given Treasury overall employment do not appear to have techniques with regard to accommodat- picked up correspondingly. Retail sales reging System rollovers, the System's istered large gains in January and February, actions did not have any effect on the with data on inventories, which are available through January, showing some offsetting amounts or the maturity composition of decline in that month. Single-family housing the securities being acquired by the pubstarts increased substantially further in Janulic. The members generally agreed that ary and February. Recent data on orders and current practices for managing the com- shipments of nondefense capital goods indiposition of the System's portfolio cate an increase in outlays for business equipment, but nonresidential construction remained appropriate. Rollovers in Treahas remained in a steep decline. The nominal sury financings would continue to be U.S. merchandise trade deficit narrowed tilted toward the shorter-maturity offer- slightly in January and was essentially unings, and net additions to System hold- changed from its average rate in the fourth ings would be made in all maturity quarter. Industrial production rose considerareas, taking account of the progress ably in February, partly reflecting an upturn in motor vehicle assemblies, but was little already made in enhancing the liquidity changed on balance over the first two months of the System's portfolio. of the year. Total nonfarm payroll employ- At the conclusion of the Committee's ment rebounded in February from a large decline in January. With the labor force discussion, all of the members indicated growing appreciably in recent months, the that they favored a directive that called civilian unemployment rate has risen to for maintaining the existing degree of 7.3 percent. Wage and price increases have pressure on reserve positions. The mem- continued to trend downward. bers also noted their preference for or Most interest rates have risen appreciably acceptance of a directive that included since the Committee meeting on February 4-5. In foreign exchange markets, the tradesome bias toward easing during the weighted value of the dollar in terms of the intermeeting period. Accordingly, in the other G-10 currencies increased substantially context of the Committee's long-run over the intermeeting period. objectives for price stability and sustain- Growth of M2 and M3 accelerated in Febable economic growth, and giving care- ruary, but M2 appears to have leveled off and ful consideration to economic, financial, M3 to have declined in March. Much of the growth in the broader aggregates over recent and monetary developments, slightly months has been accounted for by a surge in greater reserve restraint might be accepttransactions balances. able or slightly lesser reserve restraint The Federal Open Market Committee would be acceptable during the inter- seeks monetary and financial conditions meeting period. The reserve conditions that will foster price stability and promote contemplated at this meeting were sustainable growth in output. In furtherance of these objectives, the Committee at its expected to be consistent with growth of meeting in February established ranges for M2 and M3 at annual rates of around growth of M2 and M3 of 2x/2 to 6x/2 percent 3Vi percent and IVi percent respectively and 1 to 5 percent, respectively, measured over the three-month period from March from the fourth quarter of 1991 to the fourth Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 1 33 quarter of 1992. The monitoring range for recent trends. growth of total domestic nonflnancial debt Total nonfarm payroll employment was set at 4Vz to 8V2 percent for the year. continued to increase in April, with With regard to M3, the Committee anticimore than half of the job gains occurpated that the ongoing restructuring of ring in service industries, notably in depository institutions would continue to depress the growth of this aggregate relative health and business services. In addito spending and total credit. The behavior of tion, employment in retail trade estabthe monetary aggregates will continue to be lishments registered a relatively strong evaluated in the light of progress toward rise, the number of manufacturing jobs price level stability, movements in their increased for a third straight month, and velocities, and developments in the economy state and local governments added more and financial markets. In the implementation of policy for the workers. By contrast, construction immediate future, the Committee seeks to employment was down slightly in April maintain the existing degree of pressure on and had changed little on balance since reserve positions. In the context of the Com- the beginning of the year. The civilian mittee's long-run objectives for price stabilunemployment rate edged down to ity and sustainable economic growth, and 7.2 percent in April, and initial claims giving careful consideration to economic, financial, and monetary developments, for unemployment insurance fell someslightly greater reserve restraint might or what further. slightly lesser reserve restraint would be Industrial production rose appreciably acceptable in the intermeeting period. The further in April, and in the three months contemplated reserve conditions are exending with that month, industrial outpected to be consistent with growth of M2 and M3 over the period from March through put retraced most of the decline that had June at annual rates of about 3 V2 and 1 Vi per- occurred between October and January. cent, respectively. The April advance reflected in part some further recovery in motor vehicle assem- Votes for this action: Messrs. Greenspan, blies as well as another solid gain in Corrigan, Angell, Hoenig, Jordan, Kelley, the production of industrial equipment, LaWare, Lindsey, Melzer, and Mullins, Ms. Phillips, and Mr. Syron. Votes against especially office and computing equipthis action: None. ment. Output of construction supplies also advanced more rapidly, and the production of consumer goods other than Meeting Held on automobiles increased slightly further. May 19, 1992 Total industrial capacity utilization continued to rise in April but was still well 1. Domestic Policy Directive below its pre-recession high. The information reviewed at this meet- Retail sales rebounded in April after a ing was mixed, but it suggested on bal- sizable decline in March; for the two ance that economic activity was expand- months combined, retail spending was ing at a moderate pace. Retail spending little changed following strong gains in and homebuying apparently had soft- the first two months of the year. Purened after sharp gains early in the year, chases of nondurable goods, particularly but recent data on contracts and orders general merchandise items, were down pointed toward some firming in business on balance for the March-April period, capital spending. Industrial production while spending for durable goods rose and employment had firmed in recent further. Single-family housing starts fell months. Incoming data on prices and considerably for a second month in labor costs suggested little change from April. The declines followed sizable Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 79th Annual Report, 1992 increases earlier in the year that ap- ratios in March were at their lowest peared to have reflected lower mortgage levels in more than a decade. By conrates, unusually warm winter weather, trast, stocks held by wholesalers inand the prospect of a tax credit for first- creased again in March, and inventorytime homebuyers. Starts in the multi- to-sales ratios were little changed from family sector in April reversed the jump the relatively high level at the end of last in March. Vacancy rates for multi- year. family units remained at historically The nominal U.S. merchandise trade high levels. deficit declined in February, and its Business fixed investment apparently average for January-February was firmed in the first quarter after declining somewhat lower than the average rate in moderately over the preceding several the fourth quarter. Exports for the twoquarters. Shipments of nondefense capi- month period were about unchanged tal goods rose somewhat further in the from the strong fourth-quarter rate but first quarter, largely as a result of contin- were considerably higher than a year ued growth in outlays for office and earlier. Imports in January and February computing equipment. Recent data on were down from the fourth-quarter rate; orders pointed to a pickup in business most of the decline was associated spending for a broad range of industrial with a fall in prices of oil imports. The equipment over coming months. Non- available data on first-quarter economic residential construction activity con- activity in the major foreign industrial tracted less rapidly in the first quarter. countries were mixed; signs of strength- While outlays for office buildings con- ening activity in Europe were offset by tinued to plummet in response to the indications of continued weakness in substantial overhang of unoccupied Japan and Canada. space, spending for other commercial Producer prices of finished goods rose buildings declined more slowly, and at a slightly faster pace in March and construction of industrial and public April, as energy prices partially retraced utility structures increased. Recent earlier declines. Excluding food and information on building permits and energy, producer prices increased over contracts suggested some further slow- the March-April period at about the subing of the decline in nonresidential dued average monthly rate seen over the construction. twelve months ending in April. At the Business inventories increased con- consumer level, prices jumped in March siderably in March after changing little and rose more moderately in April. in February. At the retail level, about Prices of nonfood, non-energy consumer half of the rise in March was in stocks at items increased a little more rapidly on automobile dealers. For other retailers, balance in March and April than over the buildup of stocks reversed most of the twelve-month period ending in the drawdowns posted in the preceding April. Total hourly compensation for two months. Inventory-to-sales ratios private industry workers advanced in the rose for most categories of retail stores first quarter at a rate close to that rebut remained well below the elevated corded during the second half of 1991. levels at the end of last year. Manu- At its meeting on March 31, 1992, the facturing inventories were essentially Committee adopted a directive that unchanged in March from the lower lev- called for maintaining the existing els that prevailed in January and Febru- degree of pressure on reserve positions ary. For many industries, stock-to-sales and that included a bias toward possible Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 135 easing during the intermeeting period. funds rate remained around 4 percent Accordingly, the directive indicated that early in the intermeeting period but in the context of the Committee's long- averaged a little below 33/4 percent in run objectives for price stability and sus- the weeks after the easing action. tainable economic growth, and giving Most other short-term interest rates careful consideration to economic, fell more than the federal funds rate. financial, and monetary developments, Many market participants, interpreting slightly greater reserve restraint might incoming data as suggesting that the be acceptable or slightly lesser reserve economic expansion would remain subrestraint would be acceptable in the dued and that the weakness in the broad intermeeting period. The reserve condi- monetary aggregates would persist, contions contemplated under this directive cluded that some further easing in polwere expected to be consistent with icy was likely in the near term. Bond growth of M2 and M3 over the period yields also fell, but generally by less from March through June at annual than short-term rates, and they remained rates of about 3l/z and \xh percent above the lows reached around the turn respectively. of the year. Changes in broad indexes of Open market operations during the stock prices were mixed over the interintermeeting period initially were di- meeting period. rected toward maintaining the existing Questions about the prospects for the degree of pressure on reserve positions. economic recovery in the United States Prior to mid-April, however, operations and the related outlook for interest rates were adjusted to implement some easing affected the value of the dollar in forin the degree of reserve pressure. This eign exchange markets. On a tradeaction was taken in light of the signifi- weighted basis in terms of the other cant weakness in the broad monetary G-10 currencies, the dollar remained aggregates and of indications that the within a fairly narrow range until late in economic expansion was not as strong the period, when growing market expecas its pace early in the year and that tations of a near-term easing in U.S. underlying inflation would continue to monetary policy exerted downward trend lower. The management of pressure on its value. reserves was complicated to some extent M2 and M3 contracted in March and during this period by the uncertainties April. The performance of these aggreassociated with the mid-April tax date. gates was considerably weaker than the A reduction in reserve requirements on Committee's expectations at the time of transactions deposits from 12 percent to the March meeting. Expansion in trans- 10 percent implemented on April 2 had actions balances, which had accounted only minor effects on demands for for much of the growth in the broader excess reserves and on volatility in aggregates over previous months, money markets. Expected levels of slowed markedly. Some of the slowadjustment plus seasonal borrowing down perhaps reflected a reduced need were raised in the intermeeting period in for liquid balances to make personal tax anticipation of a slight rise in seasonal payments, which were unusually weak borrowing. Over the three complete in April. In addition, some retail time reserve maintenance periods during the deposit funds evidently were shifted into intermeeting interval, adjustment plus the capital markets in response to the seasonal borrowing averaged a little low offering rates on these deposits relamore than $100 million. The federal tive to market rates. Through April, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

136 79th Annual Report, 1992 expansion of M2 was slightly above and sustained recovery was under way. Sevthat of M3 was slightly below the lower eral members noted, however, that in the ends of the ranges established by the absence of strong momentum in any Committee for the year. sector of the economy, the advance was The staff projection prepared for this proceeding at a pace that was well meeting pointed to a continuing recov- below the typical rate of growth in the ery in economic activity. In the near early phases of past cyclical upswings. term, expansion in consumer spending In such circumstances, a faltering in the was expected to be considerably below recovery, such as had occurred in 1991, the rapid first-quarter pace, and growth could not be ruled out, especially given in spending on residential construction the financial difficulties still being expewas likely to moderate in response to rienced by many business firms, conthe earlier backup in mortgage interest sumers, and lending institutions that in rates. On the other hand, stronger orders turn appeared to be reflected in the confor nondefense capital goods portended tinued weakness in broad measures of some pickup in business fixed invest- money and credit. A differing view gave ment despite the continuing drag exerted more weight to the recently abnormal by the persisting, though abating, weak- behavior of the velocities of broad ness in nonresidential construction; in money and debt and the possibility that, addition, inventory liquidation was once the recovery was more firmly likely to slow from the first-quarter established, some sectors of the econpace. Over time, some easing of omy and thus the economy more generrestraints on credit supplies and the ally might generate more strength than progress achieved in restructuring busi- was currently projected. With regard ness and household balance sheets to the outlook for inflation, the recent would help set the stage for sustained, performance of some key indicators of moderate growth in spending. The pro- labor compensation and prices was jection did not incorporate any major somewhat disappointing. However, new fiscal initiatives at the federal level. members continued to view further The considerable margin of slack in progress as likely, given the persisting resource utilization, though decreasing, though diminishing slack that was prowas projected to be associated with jected in labor and other production appreciable further slowing in the under- resources. lying rate of inflation. Many of the members commented In the Committee's discussion, mem- that the various financial constraints on bers referred to the indications that the the expansion were diminishing and that rate of economic growth had slowed a sounder financial foundation to supsince earlier in the year, but they inter- port sustained economic recovery was preted the recent statistical and anec- being established. Considerable restrucdotal information as consistent on bal- turing of balance sheets by both busiance with a continuing and relatively ness firms and households had been broad-based expansion in overall busi- accomplished; these developments ness activity. Although some sectors of together with lower interest rates had the economy remained troubled, reports reduced interest burdens and had from many parts of the country sug- increased the capacity to borrow and gested that economic activity was spend. In the financial sector, banking expanding and that business executives institutions were continuing to work were becoming more confident that a down problem credits in their loan port- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 137 folios and, in the context of growing debt burdens and strengthening employprofits associated with relatively wide ment opportunities pointed to further interest margins on loans, were rebuild- gains in consumer spending. Over time, ing their capital positions. The access of such spending was likely to be associlending institutions to the capital mar- ated more closely with developments in kets had improved, and there were labor markets and the related growth in increasing indications, not yet reflected disposable incomes, though the demand in the loan data, that banks were seeking for consumer durables also would lending opportunities more actively in respond to changing conditions in the many parts of the country and that loan housing markets. In those markets, anecdemand from small and medium-size dotal reports from around the country businesses was tending to revive. Thus, tended to confirm recent data indicating while banking institutions remained cau- some slowing of activity from the pace tious lenders and their loan rates were at the start of the year, but conditions on the high side in relation to market varied substantially across the nation. rates, members saw some signs that a Housing activity had tended to display more accommodating climate was considerable sensitivity to changes in emerging in loan markets. mortgage rates, and the recent declines In their reports on business conditions in the latter along with gains in conin various parts of the country, members sumer confidence were seen as likely to noted that at least modest growth encourage some pickup in housing seemed to be occurring in most regions, demand and residential construction. while with some exceptions activity in Nonresidential construction, especially other areas appeared to be stabilizing that of office buildings and hotels, was after declining earlier. Business confi- expected to remain weak for an dence seemed to be improving, indeed extended period in many areas as excess appreciably so in some areas, and was capacity was absorbed. On the positive described as more optimistic even in side, rates of occupancy and prices of sections of the country that did not existing buildings appeared to be appear to be participating thus far in the approaching bottom or stabilizing in economic recovery. Nonetheless, busi- many areas, thereby facilitating sales of ness concerns about the sustainability of repossessed property on the books of the expansion were being reflected in financial institutions. Other nonresidencautious hiring and investment deci- tial construction activity was mixed; oil sions. On balance, current business atti- and gas drilling was still quite weak, but tudes pointed to continuing economic the construction of manufacturing and expansion, though many business exec- wholesale space was displaying some utives did not anticipate a robust recov- strength in various parts of the country. ery and the overall state of confidence Gains in final demand, if sustained, were appeared to be somewhat fragile. expected to foster appreciable further Turning to individual sectors of the increases in the production of business economy, members observed that the equipment. strong growth in consumer spending in Government purchases of goods and the early months of the year, apparently services continued to be constrained by outpacing the expansion in income, budgetary problems, including the seemed to have slowed more recently. severe financial difficulties of many state Nonetheless, improving consumer senti- and local governments, and with defense ment against the background of reduced spending projected to decline substan- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

138 79th Annual Report, 1992 tially, the government sector appeared priately positioned at this point to likely to remain a negative influence on accommodate sustained economic execonomic activity over the next several pansion while also encouraging progress quarters. With regard to the outlook for toward price stability. exports, members referred to reports of In the course of the Committee's disrelatively strong sales abroad by firms in cussion, members devoted considerable some parts of the country. More gener- attention to the behavior of the moneally, prospective growth in exports to tary aggregates. They expressed varying some key industrial nations could be degrees of concern about the slow relatively sluggish if recent economic growth of M2 and M3 in 1992, includtrends in those nations were to persist, ing declines in March and April. Some though exports to a number of develop- emphasized that the lagging growth of ing countries appeared to be rising fairly those aggregates this year was occurring briskly. At the same time, the recovery after relatively limited expansion over in the domestic economy was likely to the previous year or so. Although the foster relatively rapid growth in imports. growth rates and velocities of the On the whole, net exports were expected broader aggregates were subject to conto make little or no contribution to the siderable short-run variations and had to expansion in domestic economic be evaluated in the context of surroundactivity. ing economic and financial circum- Despite the somewhat disappointing stances, average growth over longer inflation news in recent months, the periods of time had been quite subdued. members generally viewed a slow Plausible explanations, relating impordowntrend in the rate of inflation as a tantly to temporary factors such as the plausible outcome for the year ahead. unexpectedly weak build-up of balances Reports from various parts of the coun- associated with the April tax date, pertry emphasized the highly competitive mitted at least some discounting of the markets for many producer goods and recent weakness of the broader aggrethe inability of many sellers to increase gates, and growth of both M2 and M3 profit margins or to pass on rising costs according to a staff analysis was likely through higher prices. Commodity to resume at a modest pace over the prices had tended to fluctuate in a nar- balance of the second quarter. However, row range and appeared consistent with in the opinion of a number of members, progress toward price stability. Con- continuing weakness in these aggregates sumer resistance to rising prices was could be indicative of an increase in described as strong. In the context of the the downside risks to the expansion relatively limited pressures on produc- and would thus be a matter of growing tion resources associated with the mem- concern. bers' outlook for economic activity and Other members tended to discount to an appropriate monetary policy, the slow an extent the sluggish behavior of the process of reducing inflation was be- broader aggregates. In this view, a varilieved likely to continue for some time. ety of developments that were reflected In the Committee's discussion of pol- in the channeling of credit away from icy for the intermeeting period ahead, all depository institutions seemed to have of the members endorsed a proposal to altered previous relationships between maintain an unchanged degree of pres- M2 and M3 and measures of spending sure in reserve markets. The members and income. To an important degree, agreed that policy seemed to be appro- current spending was being financed Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 1 39 internally or, especially in the case of warrant a Committee consultation durbusiness firms, by raising funds in the ing the weeks ahead. capital markets. Moreover, against the A number of members expressed a background of weak loan demand and preference for continuing to bias the relatively low deposit offering rates and directive toward possible easing during an unusually steep yield curve, many the intermeeting period. In this view, the depositors were shifting funds from M2 risks to the expansion appeared to be into higher-yielding, longer-term market tilted at least marginally to the downassets. In these circumstances, satisfac- side, and while a steady policy course tory economic expansion would tend to might well prove to be appropriate until be consistent with weaker growth and a the next meeting, these members higher velocity of M2 than would be believed it would be desirable for policy suggested by historical relationships. to be adjusted fairly promptly should the Some members viewed the strength of incoming evidence suggest a faltering Ml and reserves as indicative of a quite expansion, especially if money growth accommodative monetary policy in were still lagging. Other members prerecent quarters, and they felt that contin- ferred a bias toward possible firming ued rapid expansion in these measures during the intermeeting period. They could raise questions about the consis- believed that a relatively stimulative tency of current monetary policy with monetary policy was in place and that progress toward price stability. the next move in policy might well need The members expressed differing to be to the tightening side if, in the preferences with regard to possible context of a strengthening economy, the adjustments to the degree of reserve Committee was to continue to pursue its pressure during the intermeeting period, long-run objectives of sustainable ecobut all indicated that they could accept a nomic growth and progress toward price symmetric directive. Some preferred stability. such a directive because it would tend to At the conclusion of the Committee's underscore their view that the risks to discussion, all of the members indicated the expansion and the possible need to that they favored a directive that called adjust policy were now fairly evenly for maintaining the existing degree of balanced in either direction. In light pressure on reserve positions. The memof the information on the economy bers also noted that they preferred or reviewed at this meeting, they felt that could accept a directive that did not current monetary policy was likely to include a presumption about the likely remain properly positioned to accommo- direction of any adjustments to policy date the Committee's objectives for during the intermeeting period. Accordsome time and that any adjustment to ingly, in the context of the Committee's policy should be approached with con- long-run objectives for price stability siderable caution. In the context of and sustainable economic growth, and persisting concerns about inflation, an giving careful consideration to ecoeasing in reserve conditions and lower nomic, financial, and monetary developshort-term interest rates might well fail ments, slightly greater or slightly lesser at this time to induce lower interest rates reserve restraint might be acceptable in long-term debt markets, though cir- during the intermeeting period. The cumstances might change. In any event, reserve conditions contemplated at this the Committee should keep its options meeting were expected to be consistent open and changing circumstances might with growth of M2 and M3 at annual Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

140 79th Annual Report, 1992 rates of around 2Vi percent and \l/i per- was set at AV2 to 8V2 percent for the year. cent respectively over the two-month With regard to M3, the Committee anticipated that the ongoing restructuring of period from April through June. depository institutions would continue to At the conclusion of the meeting the depress the growth of this aggregate relative following domestic policy directive was to spending and total credit. The behavior of issued to the Federal Reserve Bank of the monetary aggregates will continue to be New York: evaluated in the light of progress toward price level stability, movements in their The information reviewed at this meeting velocities, and developments in the economy suggests on balance that economic activity is and financial markets. expanding at a moderate pace. Total nonfarm In the implementation of policy for the payroll employment increased somewhat in immediate future, the Committee seeks to April, and the civilian unemployment rate maintain the existing degree of pressure on edged down to 7.2 percent. Industrial pro- reserve positions. In the context of the Comduction rose appreciably further in April mittee's long-run objectives for price stabilpartly reflecting some further recovery in ity and sustainable economic growth, and motor vehicle assemblies. A rebound in retail giving careful consideration to economic, sales in April about offset the decline in financial, and monetary developments, March. Single-family housing starts fell slightly greater reserve restraint or slightly considerably for a second month in April. lesser reserve restraint might be acceptable Recent data on orders and shipments of non- in the intermeeting period. The contemplated defense capital goods indicate appreciable reserve conditions are expected to be increases in outlays for business equipment, consistent with growth of M2 and M3 over and building contracts point to some slowing the period from April through June at of the decline in nonresidential construction. annual rates of about 2Vi and \xh percent, The nominal U.S. merchandise trade deficit respectively. in January-February was somewhat below its average rate in the fourth quarter. Incom- Votes for this action: Messrs. Greenspan, ing data on prices and labor costs suggest Corrigan, Angell, Hoenig, Jordan, Melzer, little change from recent trends. Mullins, Kelley, LaWare, and Lindsey, Most interest rates have fallen since the Ms. Phillips, and Mr. Syron. Votes against Committee meeting on March 31. In foreign this action: None. exchange markets, the trade-weighted value of the dollar in terms of the other G-10 currencies declined on balance over the 2. Authorization for Domestic intermeeting period. Open Market Operations M2 and M3 contracted in March and April; and expansion in transactions bal- The Committee approved a temporary ances, which had accounted for much of the increase of $2 billion, to a level of growth in the broader aggregates over previ- $10 billion, in the limit on changes ous months, slowed markedly. Through between Committee meetings in System April, expansion of M2 was slightly above Account holdings of U.S. government and that of M3 was slightly below the lower ends of the ranges established by the Com- and federal agency securities. The mittee for the year. increase amended paragraph l(a) of the The Federal Open Market Committee Authorization for Domestic Open Marseeks monetary and financial conditions that ket Operations and was effective for the will foster price stability and promote susintermeeting period ending with the tainable growth in output. In furtherance of these objectives, the Committee at its meet- close of business on July 1, 1992. ing in February established ranges for growth of M2 and M3 of 2Vi to 6V2 percent Votes for this action: Messrs. Greenspan, and 1 to 5 percent, respectively, measured Corrigan, Angell, Hoenig, Jordan, Melzer, from the fourth quarter of 1991 to the fourth Mullins, Kelley, LaWare, and Lindsey, quarter of 1992. The monitoring range for Ms. Phillips, and Mr. Syron. Votes against growth of total domestic nonfinancial debt this action: None. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 141 The Manager for Domestic Opera- May, to 7.5 percent, reflecting a surge in tions advised the Committee that the the number of job seekers. Substantial current leeway of $8 billion for changes increases in the labor force since late in System Account holdings might not last year had returned the labor-force suffice to meet the potentially large need participation rate to its average level for to add reserves over the intermeeting the first half of 1990. period to accommodate a seasonal bulge Industrial production rose appreciably in currency in circulation, an increase further in May, partly reflecting continin required reserves, and other factors ued recovery in motor vehicle assemthat might call for substantial reserve blies. Also contributing to the rise were additions. large increases in the production of other consumer durables, notably household appliances and furniture, and of busi- Meeting Held on ness equipment. The recent gains in pro- June 30-July 1, 1992 duction had raised the utilization of total The information reviewed at this meet- industrial capacity considerably, but the ing suggested that economic activity average operating rate remained well was expanding at a moderate pace. below its July 1990 peak. Employment and industrial output had After a surge early in the year, growth continued to rise, but a sizable increase in real personal consumption expendiin the labor force had lifted the unem- tures had slowed despite a strengthening ployment rate to a cyclical high. In- in the demand for motor vehicles. In creased sales and production of motor April and May, spending for goods other vehicles were providing a boost to the than motor vehicles was slightly below economy, as was higher spending for the average level for the first quarter, capital equipment, especially comput- and outlays for services increased only a ers. However, non-auto retail sales and little. Purchases of new single-family homebuying had slowed since earlier in homes declined in May for a fourth the year, and the latest data indicated straight month. Starts of single-family some widening of the merchandise trade housing units rebounded in May to a deficit. Incoming data on retail prices level close to the first-quarter pace, and labor costs suggested that inflation while multifamily housing starts rewas slowing. mained depressed in reflection of his- Total nonfarm payroll employment torically high vacancy rates for such increased for a fourth straight month in housing. May, and aggregate hours worked by Shipments of nondefense capital production or nonsupervisory workers goods other than aircraft over April and exceeded the average for the first quar- May were somewhat above the firstter. The services industry recorded fur- quarter level, boosted mainly by further ther sizable job gains in May, while increases for office and computing employment in retail trade fell consider- equipment. Business purchases of motor ably and had changed little on balance vehicles also were stronger. Recent data thus far this year. Hiring was off slightly on orders pointed to a further pickup in in manufacturing, but further increases business outlays for durable equipment in overtime hours elevated the factory over coming months. Outlays for nonworkweek to a little above its average residential structures continued to trend level for the first half of 1990. The civil- lower in May, but incoming information ian unemployment rate rose sharply in on contracts for new construction sug- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

142 79th Annual Report, 1992 gested that nonresidential building activ- in the prices of energy and other goods ity would decline more slowly in the outweighed a further decline in food months ahead. Although construction of prices. Apart from anomalous jumps in office buildings continued to plummet in the prices of a few items, however, response to the substantial overhang of increases in prices of nonfood, nonvacant office space, spending for other energy finished goods generally renonresidential structures had firmed mained modest. Consumer prices posted since the fourth quarter. a small advance in May, despite a rela- Business inventories rose slightly fur- tively large rise in energy costs. Excludther in April. Stocks increased relatively ing food and energy items, consumer sharply at the retail level, but about half prices increased more slowly in the first the buildup was at automobile dealer- five months of this year than in 1991. ships, where the rise in inventories Average hourly earnings for production appeared to be about in line with a or nonsupervisory workers were little recent pickup in sales of new vehicles. changed over April and May and also In manufacturing, inventories continued had risen more slowly thus far this year to decline; with factory shipments ris- than in 1991. ing, the ratio of stocks to shipments was At its meeting on May 19, the Comat its lowest level in more than a decade. mittee adopted a directive that called for At wholesale establishments, invento- maintaining the existing degree of presries were trimmed substantially further sure on reserve positions and that did in April. However, inventory-sales not include a presumption about the ratios remained near the high end of the likely direction of any adjustments to range that had prevailed over the past policy during the intermeeting period. several years. Accordingly, the directive indicated that The nominal U.S. merchandise trade in the context of the Committee's longdeficit widened in April and was sub- run objectives for price stability and stantially above its average rate for the sustainable economic growth, and givfirst quarter. The value of exports de- ing careful consideration to economic, clined, largely because of a decline in financial, and monetary developments, exports of aircraft. The value of imports slightly greater or slightly lesser reserve increased further in April; a rise in restraint might be acceptable during the imports of capital goods more than off- intermeeting period. The reserve condiset a small decline in imports of con- tions contemplated under this directive sumer goods. The available data on eco- were expected to be consistent with nomic activity in the major foreign growth of M2 and M3 at annual rates of industrial countries in the second quar- about 2Vi and IV2 percent respectively ter were mixed. In Germany and Japan, over the two-month period from April growth during the first quarter had been through June. boosted by transitory influences that Open market operations during the appeared to be unwinding in the second intermeeting period were directed toquarter. By contrast, a moderate recov- ward maintaining the existing degree of ery in economic activity was continuing pressure on reserve positions. During in Canada, and there were some indica- the period, several technical increases tions that economic recovery was get- were made to expected levels of adjustting under way in the United Kingdom. ment plus seasonal borrowing to reflect Producer prices of finished goods rose the rising demands for seasonal credit. more rapidly in May; sizable increases Actual levels of borrowing averaged Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 143 about $165 million over the three year. Growth of nonfinancial debt was reserve maintenance periods completed estimated to be at the lower end of during the intermeeting interval. The the Committee's monitoring range. Borfederal funds rate remained close to rowing had been concentrated in the 33/4 percent. capital markets, with beneficial effects Most other interest rates changed in reducing debt and debt-servicing little on balance over the intermeeting burdens. period. Rates moved higher in the days The staff projection prepared for this following the May meeting as wide- meeting pointed to a modest pickup in spread market expectations of a mone- economic growth over the second half tary easing action were not realized. of the year and to some further accelera- Later in the period, however, interest tion in 1993. The forecast took into rates fell, especially at intermediate account the lagged effects on aggregate maturities, as markets interpreted in- demand of earlier declines in interest coming data on the economy and the rates and the progress that had been monetary aggregates as indicating a made by households and businesses in sluggish recovery. Broad indexes of strengthening their balance sheets. stock prices declined over the period in Nonetheless, financial strains were response to reductions in forecasts of expected to continue to prompt the corporate earnings. diversion of some cash flows from busi- In foreign exchange markets, the ness and consumer spending, though the trade-weighted value of the dollar in magnitude of such adjustments was proterms of the other G-10 currencies jected to lessen over time. Partly as a declined further over the intermeeting consequence, moderate growth well period. The dollar rose initially in re- below that experienced during typical sponse to data pointing to a somewhat cyclical upswings in the past was prostronger economic recovery in the jected in consumer spending and in busi- United States but subsequently more ness investment in durable equipment. than retraced its gains as less positive Economic expansion also would be reeconomic data, including a larger-than- strained by further, though diminishing, expected trade deficit, were reported. declines in business spending on nonres- M2 and M3 changed little in May and idential structures before a projected upappeared to have contracted in June; turn in such spending began to materialboth retail and large-denomination time ize in the second half of next year. deposits continued to run off rapidly. Moreover, in the government sector, fed- Depository institutions, facing weak eral purchases of goods and services loan demand and intent on further bol- were forecast to decrease over the prostering capital positions, had reduced jection horizon, largely reflecting cutrates on time deposits fairly aggres- backs in defense spending. At the state sively earlier in the year, and as a result and local government levels, continuing these components of M2 and M3 had budget problems were expected to result become less attractive relative to alter- in a small decline in real purchases durnative investments or debt repayment. ing the quarters immediately ahead and In addition, Ml was unusually weak in in only modest growth later. A persist- June. Through June, expansion of the ing though decreasing margin of slack two broad aggregates was somewhat in resource utilization was expected to below the lower ends of the ranges be associated with further slowing in established by the Committee for the wage and price inflation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 79th Annual Report, 1992 In the Committee's discussion of eco- In keeping with the practice at meetnomic and financial developments and ings when the Committee sets its longthe outlook for the economy, the mem- run ranges for the money and debt bers agreed that a sustained expansion at aggregates, the members of the Coma moderate pace remained the most rea- mittee and the Federal Reserve Bank sonable expectation and that such an presidents not currently serving as expansion was likely to be associated members provided specific projections with further easing of inflation. They of the growth in nominal and real GDP, noted that considerable progress had the rate of unemployment, and the been made in correcting major structural rate of inflation for the years 1992 and imbalances and financial problems in 1993. These projections took account of various sectors of the economy and that the monetary growth ranges that the business and consumer confidence had Committee reaffirmed at this meeting improved appreciably since the turn of for 1992 and established on a tentative the year. However, the most recent infor- basis for 1993; these ranges were mation suggested some weakening in expected to be consistent with the the expansion, and a number of mem- Committee's goals of promoting a bers expressed concern about the appar- sustained expansion in the economy ent absence of cumulating or self- and continued progress toward price reinforcing improvement in overall stability. The projections generally economic activity. Sluggish growth of portrayed an economy performing in jobs and income, ongoing efforts to line with these objectives—that is, with strengthen balance sheets, and in the expansion at a moderate pace over the view of a number of members the weak- next one and one-half years and inflaness in broad measures of money and tion slowing gradually further. Forecasts credit suggested that the risks to the of nominal GDP converged on growth economy were more heavily weighted ranges of 5lA to 6 percent for 1992 to the downside. Others felt that as a whole and 5lA to 6lA percent for the expansion was now more firmly 1993. With regard to the rate of expanentrenched and that the risks were more sion in real GDP, the projections had a evenly balanced; some of these mem- central tendency of 2lA to 23A percent bers noted, however, that given the for 1992 and of 23A to 3 percent for likely restrained pace of the expansion, 1993, implying a gradual acceleration a significant shortfall from their current from the pace currently estimated for projections could have more worrisome the first half of this year. The projected effects than the limited inflationary pres- strengthening of the economy was sures that might be fostered by a some- associated with some decline in the what stronger-than-projected economy. rate of civilian unemployment to a With regard to the outlook for inflation, consensus range of 6V2 to 7 percent by the members were encouraged by indi- the fourth quarter of 1993. Given the cations of moderating price and labor moderate expansion of the economy cost pressures. Most believed that addi- and the still relatively elevated level tional progress toward price stability of the unemployment rate, the rate of was likely over the next several quarters inflation, as measured by the consumer in the context of some persisting slack price index, was projected to move in labor and other production resources somewhat lower; the central tendency of and after an extended period of slow the range expected for 1993 was 2% to growth in key measures of money. 3 ^percent. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 145 Members observed that developments inventories in the absence of firmer relating to the financial condition of indications of a significant pickup in households and businesses were likely demand. to continue to have an important influ- With regard to developments in major ence on economic activity over the sectors of the economy, members generquarters ahead. Widespread efforts to ally viewed some pickup in consumer strengthen balance sheets along with spending from its recently sluggish pace conservative lending policies at finan- as a likely development that in turn cial intermediaries had exerted a sig- would provide ongoing support to the nificantly retarding effect on economic expansion. An essential element in susactivity by diverting cash flows from taining consumer expenditures, and thus consumer and investment expenditures the economy more generally, would be or limiting the availability of financing the growth in job opportunities and perfor current spending. However, while sonal incomes. While heavy debtthe process of adjusting balance sheets service burdens and reduced interest was still incomplete and was still re- incomes, among other factors, continstraining business and consumer spend- ued to curb the ability or willingness of ing, the combination of greatly reduced many consumers to increase their spendinterest rates and strengthened balance ing, some tentative indications of a firmsheets pointed to subsiding constraints ing trend in such spending could be on expenditures from financial factors. drawn from the signs of reviving con- At the same time, lending institutions sumer confidence and anecdotal reports now appeared to be in a better position suggesting that consumer spending was to accommodate borrowers. Indeed, growing at least modestly in many areas. anecdotal reports from several parts of In particular, demands for motor vehithe country indicated that many banking cles had strengthened, and the related institutions were intensifying their step-up in the production of automotive efforts to make loans, though loan products had accounted for much of the demand remained quite limited. Mem- growth in industrial production over bers also observed that corporate cash recent months. With regard to the outflows and profits were much improved. look for housing, residential construc- In their review of economic condi- tion had weakened in many parts of the tions and business and consumer atti- country, though it was holding up well tudes in different regions, members in some areas. The backup in mortgage reported that gradual expansion charac- rates earlier in the year had reinforced terized most parts of the nation, though the more general cautionary factors that they cited some significant exceptions had tended to inhibit overall spending. and also noted that on the whole recent However, mortgage rates had fallen subindicators pointed to less strength than stantially over the spring, and the memearly in the year. Business and consumer bers expected housing activity to pick sentiment, while considerably improved up somewhat over the quarters ahead. since late last year, nonetheless re- Despite still cautious business attimained quite cautious and seemed vul- tudes, moderate growth in overall businerable to adverse developments. Con- ness fixed investment was anticipated sumers were still very concerned about over the forecast period. Spending could employment opportunities, while busi- be buoyed by demands for business ness executives were reluctant to make equipment, much of which probably investment commitments or to build would be related to efforts to modernize Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 79th Annual Report, 1992 production facilities for competitive rea- members emphasized the lagged effects sons. Rising rates of capacity utilization of the very restrained growth in money also could be expected to spur invest- over a long period while others gave ment demand as time went on. The more weight to the outlook for continuoutlook for nonresidential construction ing if diminishing slack in labor and was more negative. Office construction other production inputs. In addition, appeared likely to remain severely business executives reported that strong depressed for an extended period as competition still was making it very difexcess capacity was absorbed in many ficult to raise prices and that continuing parts of the country. On the more posi- efforts were being made to improve tive side, anecdotal impressions from operating efficiencies and hold down several cities suggested that prices and costs. At the same time, surveys of price lease terms of office and other commer- expectations and conversations with cial structures were tending to stabilize, business contacts suggested a view, though the volume of actual transactions rooted partly in concerns about the prosremained quite limited. pects for and implications of further The government and foreign trade large federal deficits, that inflation ultisectors also were not seen as likely to mately would return to the 4 to 5 percent contribute significantly to the expan- pace of the 1980s. These attitudes sion. The widespread financial problems tended to underscore the need for a of state and local governments pointed sound fiscal policy that in conjunction to quite limited growth in spending, with the continued implementation of an even though examples of sizable expen- anti-inflationary monetary policy would diture programs, such as for highway foster a reduction in inflationary expecconstruction in some areas, could be tations and would facilitate the eventual cited. At the federal level, defense achievement of price stability. spending was on a clear downtrend, and In keeping with the requirements of the persistence of large federal deficits the Full Employment and Balanced argued against sizable new initiatives Growth Act of 1978 (the Humphreyfor nondefense spending. With regard to Hawkins Act), the Committee at this the external sector, a number of mem- meeting reviewed the ranges for growth bers expressed the view that the outlook in the monetary and debt aggregates that for net exports had worsened despite the it had established in February for 1992 weakening in the foreign exchange and decided on tentative ranges for value of the dollar in recent months. The growth in those aggregates in 1993. The growth in exports appeared to be moder- current ranges for the period from the ating, and it was uncertain at this point fourth quarter of 1991 to the fourth to what extent economic expansion quarter of 1992 included expansion of abroad might strengthen and thereby 2!/2 to 6V2 percent for M2 and 1 to produce increased demand for U.S. 5 percent for M3. The monitoring range goods and services. At the same time, for growth of total domestic nonfinandomestic expansion in line with the cial debt had been set at 4V2 to members' forecasts would add to the 8V2 percent. demand for imports. In the course of the Committee's dis- Most members anticipated at least a cussion, all of the members supported a limited decline in the core rate of infla- proposal to retain the ranges established tion over the period through the end of in February for this year. Although the next year. In support of this view, some rates of M2 and M3 growth for the year Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 147 through June were somewhat below the should be maintained, pending further lower ends of the Committee's ranges developments and the possible emerfor both aggregates, this outcome had gence of a more settled outlook for not been associated with unexpected money demand. Some members also weakness in nominal spending; the commented that lowering the ranges expansion in nominal GDP over the first could be misconstrued as an intention to half of the year currently was estimated tighten monetary policy at a time when to have been toward the upper end of the relatively sluggish growth in the econcentral tendency of the members' earlier omy and weakness in the monetary expectations. Instead, velocity had risen aggregates argued for a steady policy appreciably—a highly unusual occur- course or possibly for some easing. rence following a period of sharp At the conclusion of this discussion, declines in interest rates. Among the the Committee voted to reaffirm the developments helping to explain the 1992 ranges of 2Vi to 6V2 percent and weakness in money and the rise in 1 to 5 percent that it had established velocity were a variety of business and in February for growth of M2 and balance sheet pressures that tended to M3 respectively; the Committee also reduce total borrowing and channel decided to retain the range of AV2 to credit flows away from depository insti- 8x/2 percent for growth of nonfinancial tutions, thereby lessening the need of debt in 1992. The following statement those institutions to increase their mone- was approved for inclusion in the Comtary liabilities. At the same time, busi- mittee's domestic policy directive: ness firms and households, in the course of their restructuring activities and The Federal Open Market Committee deleveraging of their balance sheets, had seeks monetary and financial conditions that found that monetary assets had become will foster price stability and promote susless attractive relative to a variety of tainable growth in output. In furtherance of these objectives, the Committee reaffirmed other financial assets or debt repayment. at this meeting the ranges it had established It appeared that the balance sheet in February for growth of M2 and M3 of 2Vi adjustments by depository institutions to 6V2 percent and 1 to 5 percent, respecand their customers that had contributed tively, measured from the fourth quarter of to velocity increases were well under 1991 to the fourth quarter of 1992. The Committee anticipated that developments contribway. However, the factors that were uting to unusual velocity increases could pertending to depress broad money growth sist in the second half of the year. The in relation to measures of economic and monitoring range for growth of total domesprice performance were likely to persist, tic nonfinancial debt also was maintained at and the extent and duration of devia- AV2 to 8V2 percent for the year. tions from historic relationships were highly uncertain. In these circumstances, Votes for this action: Messrs. Greenspan, Corrigan, Angell, Hoenig, Jordan, Kelley, while an argument could be made that a LaWare, Lindsey, Melzer, and Mullins, somewhat lower M2 range might more Ms. Phillips, and Mr. Syron. Votes against readily encompass the rate of expansion this action: None. in money needed for a satisfactory economic performance over the balance of With regard to the ranges for 1993 to the year, the selection of a different be established on a tentative basis at range would imply greater certainty this meeting, a majority of the members about emerging relationships than was endorsed an extension of the current warranted. Instead, the current ranges ranges for another year, but some Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

148 79th Annual Report, 1992 believed that a somewhat lower range addition to reducing the range for 1993 for M2 would be preferable. Members to promote long-run disinflation. All of who wanted to retain the current ranges the members agreed that regardless of acknowledged that a lower M2 range the particulars of the decisions to be probably would be desirable at some made at this meeting, it was vital for the point to be consistent over time with the Committee to reaffirm its commitment Committee's objective of achieving and to the goal of achieving price stability. maintaining reasonable price stability. This outcome was the key contribution However, current uncertainties with the Federal Reserve could make toward regard to how soon and to what extent facilitating the highest possible growth various factors tending to inhibit the of the economy over time; and maintaingrowth in M2 would dissipate argued ing the credibility of the System's antifor caution in making any change to the inflationary effort was the best means range now. A reduction in the M2 range available to the Committee to minimize could be considered next February when disruptions to the economy as it was the Committee meets to set final ranges moving toward its potential. for money growth for 1993, or the range At the conclusion of this discussion, could be lowered even sooner if new the Committee approved provisional information on the emerging relation- ranges for 1993 that were unchanged ship between the monetary aggregates from those for 1992. The Committee and nominal spending allowed a deter- voted to incorporate the following statemination of the appropriate range to be ment regarding the 1993 ranges in its made with more confidence. domestic policy directive: Members who preferred a somewhat lower M2 range for 1993 acknowledged For 1993, the Committee on a tentative that substantial uncertainties with regard basis set the same ranges as in 1992 for growth of the monetary aggregates and debt, to an appropriate rate of M2 growth measured from the fourth quarter of 1992 to were likely to persist for some time, but the fourth quarter of 1993. The behavior of they felt that relatively subdued mone- the monetary aggregates will continue to be tary expansion was likely to be consis- evaluated in the light of progress toward tent with an adequate degree of liquidity price level stability, movements in their velocities, and developments in the economy and a satisfactory economic perforand financial markets. mance next year. Lowering the M2 range at this point would extend the Votes for this action: Messrs. Greenspan, series of gradual reductions in the ranges Corrigan, Angell, Hoenig, Kelley, that had been implemented over the past LaWare, Lindsey, Melzer, Mullins, and five years or so and would have the Syron. Votes against this action: Mr. Jorimportant advantage of affirming the dan and Ms. Phillips. Committee's commitment to price stability, with favorable implications for Mr. Jordan and Ms. Phillips dissented inflationary expectations and in turn per- because they believed that a somewhat haps also for the strength and sustain- lower M2 range for 1993 would be more ability of the expansion. A few members consistent with a policy of continuing favoring this option were also of the progress toward price stability. They view that more weight ought to be recognized that the substantial uncerplaced on M2 as a guide to policy; this tainties surrounding the outlook for M2 would have possible implications for growth and its velocity next year made actions to boost M2 growth in 1992 in it very difficult to determine an appropri- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 149 ate M2 range, but a lower range would monetary policy had been quite accombe needed eventually to achieve and sus- modative. Some members who suptain stable prices. In the interim, it was ported this view expressed concern that important for the System and the credi- in the absence of more definitive indicability of its anti-inflationary policy to tions of a softening economy or much continue the practice of gradually reduc- greater weakness in the monetary aggreing the M2 range to be consistent with a gates, any easing at this point would noninflationary target. They would have tend to erode the credibility of the coupled the decrease in the range for Committee's commitment to an anti- 1993 with actions to expand bank inflationary policy. The result might reserves immediately with the objective well be to put substantial and disruptive of boosting M2 growth to within its downward pressure on the dollar in forrange for 1992. Such a combination eign exchange markets and to arrest or would make clear that the decrease in reverse the tendency for domestic longthe range for M2 growth in 1993 did not term interest rates to decline. represent a monetary "tightening" in Most of the members who preferred the conventional sense, but rather that it an immediate easing of policy emphawas a step toward lasting reductions in sized the risks of a faltering economy in inflation. the period ahead, especially given the Turning to policy for the intermeeting recent indications of some slowing in period ahead, the members were divided the expansion and the already considbetween those who supported an un- erable slack in the economy. Their changed policy stance and others who concerns were heightened by the conpreferred to ease. A majority indicated, straining effects of ongoing structural however, that they could support an adjustments in the economy, the weakunchanged directive that incorporated a ness in various measures of money, and bias toward possible easing. the limited expansion in total credit. A Members who preferred not to change few of these members focused on the policy at this point believed that the desirability of taking relatively prompt economy was on a moderate growth action to foster growth in the broad meapath and that in any case the forces sures of money within the Committee's restraining the expansion were not the ranges for the year. Some members result of inadequate liquidity or a restric- observed that under current circumtive monetary policy. While the outlook stances an easing action might have a was clouded by unusual forces acting on relatively limited effect in stimulating the economy, the available economic monetary growth over the months information remained consistent with ahead, but such a policy move would continuing expansion at a pace that nonetheless tend to boost spending by offered favorable prospects for a gradual reducing the costs of borrowing. reduction of unemployment and abate- In their discussion, the members took ment of inflation. The low level of real account of a staff analysis that suggested and nominal short-term interest rates, only modest growth in M2 and virthe decline in the dollar, and the rapid tually none in M3 for the third quarter growth of reserves and narrow money on the assumption of an unchanged along with the expansion of bond mutual degree of reserve pressure. Relatively funds—which while not in M2 seemed weak expansion in these broad meato provide liquidity at least comparable sures of money did not appear to have to that of time deposits—suggested that the usual implications for the econ- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 79th Annual Report, 1992 omy, as evidenced by experience over the May meeting could have unfavorthe first half of the year. The prospects able repercussions on the Committee's were for continuing balance sheet and credibility. other adjustments that would tend to At the conclusion of the Committee's curb the demand for money assets rela- discussion, all but two of the members tive to spending and income. Many indicated that they favored or could members nonetheless were concerned accept a directive that called for mainabout the possible persistence of the taining the existing degree of pressure recent weakness in reserves and the on reserve positions and that included a longer-term sluggish behavior of broad bias toward possible easing during the money, especially given the relatively intermeeting period. Accordingly, in the subdued pace of the expansion. While context of the Committee's long-run monetary measures might well have objectives for price stability and sustainlost some of their indicator and pre- able economic growth, and giving caredictive properties, continued weakness ful consideration to economic, financial, in money might still be a signal that and monetary developments, slightly financial conditions were not yet condu- greater reserve restraint might be acceptcive to fostering a sustained pickup in able or slightly lesser reserve restraint spending. would be acceptable during the inter- The varying policy preferences ex- meeting period. The reserve conditions pressed by the members were reflected contemplated at this meeting were in differing views with regard to possi- expected to be consistent with a resumpble adjustments to the degree of reserve tion of growth in M2 and M3 at annual pressure in the intermeeting period rates of about 2 percent and Vi percent ahead. All of the members who favored respectively over the three-month period some immediate easing in policy indi- from June through September. cated that they could support an un- At the conclusion of the meeting the changed directive that was tilted toward following domestic policy directive was ease, and at least some of these mem- issued to the Federal Reserve Bank of bers anticipated that developments over New York: the near term were likely to trigger an adjustment toward easing. Most of the The information reviewed at this meeting members who favored an unchanged continues to suggest that economic activity is expanding at a moderate pace. Total nonpolicy stance at this point also indifarm payroll employment increased somecated that they could accept a bias what further in May, but a surge in job toward ease in the directive, especially seekers led to a sizable rise in the civilian in light of current uncertainties and the unemployment rate to 7.5 percent. Industrial potential problems associated with any production rose appreciably further in May, significant shortfall in the expansion partly reflecting continued recovery in motor vehicle assemblies. Growth in consumer from current expectations. Other memspending has slackened after a sharp advance bers who preferred a steady policy earlier this year. Although sales of new course believed that it would be prema- homes declined in May, single-family housture for the Committee to signal any ing starts rebounded to a level close to the bias toward easing, given the relatively first-quarter pace. Recent data on orders and low probability that they assigned to the shipments of nondefense capital goods indicate appreciable increases in outlays for potential need for such a move, and they business equipment, and the trend of buildbelieved that a return to an asymmetric ing contracts points to some slowing of the directive after the move to symmetry at decline in nonresidential construction. The Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 1 51 nominal U.S. merchandise trade deficit and M3 over the period from June through increased in April and was substantially September at annual rates of about 2 and above its average rate in the first quarter. Vi percent, respectively. Incoming data on retail prices and labor costs suggest that inflation is slowing. Votes for short-run policy: Messrs. Most interest rates have changed little Greenspan, Corrigan, Angell, Hoenig, since the Committee meeting on May 19. Jordan, Kelley, Lindsey, and Mullins, Ms. In foreign exchange markets, the trade- Phillips, and Mr. Syron. Votes against this weighted value of the dollar in terms of the action: Messrs. LaWare and Melzer. other G-10 currencies declined further over the intermeeting period. M2 and M3 changed little in May and Messrs. LaWare and Melzer dissented appear to have contracted in June; both retail because they judged an asymmetric and large-denomination time deposits contindirective, with a bias toward easing, as ued to run off rapidly. Through June, expanbeing inappropriate at this time. In their sion of the two aggregates was somewhat below the lower ends of the ranges estab- view, the current stance of monetary lished by the Committee for the year. policy was not impeding an expansion The Federal Open Market Committee consistent with the economy's long-run seeks monetary and financial conditions that potential. In addition, a bias toward will foster price stability and promote susease, especially in the context of the tainable growth in output. In furtherance of Committee's decision at the May meetthese objectives, the Committee reaffirmed at this meeting the ranges it had established ing to adopt a symmetrical directive, in February for growth of M2 and M3 of 2Vi suggested an excessive emphasis on to 6V2 percent and 1 to 5 percent respec- short-term economic developments that tively, measured from the fourth quarter of might undermine the credibility of the 1991 to the fourth quarter of 1992. The Com- System's long-run policies. They were mittee anticipated that developments contributing to unusual velocity increases could per- concerned that such a loss of credibility sist in the second half of the year. The could have adverse effects on the dollar monitoring range for growth of total domes- in foreign exchange markets and on tic nonfinancial debt also was maintained at long-term interest rates in domestic mar- AVi to %Vi percent for the year. For 1993, the kets. Mr. Melzer also believed that, if Committee on a tentative basis set the same ranges as in 1992 for growth of the mone- additional easing were undertaken, a tary aggregates and debt, measured from the greater policy reversal ultimately would fourth quarter of 1992 to the fourth quarter be necessary, making the attainment of of 1993. The behavior of the monetary sustainable economic growth more difaggregates will continue to be evaluated in ficult in the long run. the light of progress toward price level stability, movements in their velocities, and developments in the economy and financial markets. Meeting Held on In the implementation of policy for the August 18, 1992 immediate future, the Committee seeks to maintain the existing degree of pressure on The information reviewed at this meetreserve positions. In the context of the Committee's long-run objectives for price stabil- ing suggested that economic activity ity and sustainable economic growth, and was continuing to expand, although at a giving careful consideration to economic, subdued pace. Consumer spending had financial, and monetary developments, firmed recently; business purchases of slightly greater reserve restraint might or capital equipment had risen further; and slightly lesser reserve restraint would be acceptable in the intermeeting period. The falling mortgage interest rates, which contemplated reserve conditions are ex- appeared to have triggered a wave of pected to be consistent with growth of M2 mortgage refinancings, likely were pro- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

152 79th Annual Report, 1992 viding some impetus to housing de- reported sharp gains following a period mand. On the other hand, industrial pro- of sluggish sales since April, and sales duction and employment had increased rose considerably further at apparel outlittle on balance, and a sizable expan- lets and furniture and appliance stores. sion in the labor force had raised the Sales of motor vehicles dropped back in unemployment rate to a cyclical high. July from an elevated June pace. With Recent data on wages and prices indi- mortgage rates falling, sales of new cated that inflation was slowing. single-family homes increased in June A rebound in total nonfarm payroll after leveling off in May, and reports employment in July more than offset a indicated that mortgage applications for decline in June; however, about half the home purchases were rising. Permits rise over June and July reflected tempo- issued for the construction of new housrary hiring associated with a federally ing units advanced slightly in July, but sponsored summer jobs program that starts of such units declined further. recently had been enacted. Apart from Shipments of nondefense capital the jobs program, moderate gains in goods were up sharply in June, partly employment were recorded in service reflecting continued increases in shipindustries, while payrolls declined in ments of office and computing equipboth manufacturing and construction. ment. Data on new orders pointed to a The average workweek of production or further substantial rise in business purnonsupervisory workers during the chases of durable equipment in coming June-July period was at its lowest level months. Nonresidential construction of the year, and the civilian unemploy- slackened again in June; weakness in ment rate averaged 13A percent. industrial construction added to persist- Industrial production, which had ing contractions in outlays for commerincreased noticeably in earlier months, cial office buildings. Recent information was about unchanged on balance over on new contracts continued to suggest June and July, as a rise in July retraced a that nonresidential construction would decline that had occurred in June. Much decline more slowly over the months of the July advance stemmed from a ahead. higher level of output in mining and Business inventories surged in June utilities, where special factors had held after declining a little in May. At the down production in earlier months. Fac- retail level, inventories increased by a tory output was unchanged in July after substantial amount, with the accumulaa small decline in June; production of tion spread about equally among duracomputers and other information pro- ble and nondurable goods. The jump in cessing equipment continued to increase inventories lifted retailers' stocks-toat a rapid rate, but output of motor vehi- sales ratios to the upper end of the range cles and parts fell in both months. Pro- of the past year. Wholesale trade invenduction schedules indicated that domes- tories also expanded sharply in June, tic assemblies of motor vehicles would with runups reported for a wide range of increase in August. The utilization of goods; sales increased by more, howtotal industrial capacity slipped on bal- ever, and the inventory-to-sales ratio in ance over June and July but remained a wholesale trade fell slightly. By conlittle above its December 1991 level. trast, manufacturing stocks edged down Retail sales increased moderately in in June, and the inventory-to-shipments July after registering little growth in the ratio dropped to its lowest level since second quarter. General merchandisers the middle of 1979. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 153 The nominal U.S. merchandise trade and salary components. For production deficit widened again in May. For April or nonsupervisory workers, average and May combined, the deficit was sub- hourly earnings were unchanged in July, stantially larger than its average rate in and the twelve-month change in this the first quarter. The value of exports measure was substantially reduced. fell considerably over the two-month pe- At its meeting on June 30-July 1, the riod, with reduced shipments of aircraft Committee adopted a directive that accounting for the bulk of the decline. called for maintaining the existing The value of imports rose substantially, degree of pressure on reserve positions as imports of oil rebounded from first- and that included a bias toward possible quarter lows and imports of a wide easing during the intermeeting period. range of other goods also increased. Accordingly, the directive indicated that Economic activity in the major foreign in the context of the Committee's longindustrial countries appeared to have run objectives for price stability and slowed on balance in recent months. sustainable economic growth, and giv- Canada, France, and Italy seemed to ing careful consideration to economic, have experienced modest economic financial, and monetary developments, growth, but activity apparently had slightly greater reserve restraint might slowed or declined in Germany and be acceptable or slightly lesser reserve Japan, and there was little indication restraint would be acceptable during the that a recovery had begun in the United intermeeting period. The contemplated Kingdom. reserve conditions were expected to be Producer prices of finished goods consistent with a resumption of growth increased modestly over June and July. in M2 and M3 at annual rates of about Abstracting from the sometimes volatile 2 percent and Vi percent respectively food and energy components, prices of over the three-month period from June other finished goods rose at a signifi- through September. cantly slower pace in the twelve months The day after the meeting, the Board ended in July than in the preceding of Governors approved a reduction in twelve months. At the consumer level, the discount rate from 3V6 to 3 percent, prices advanced only a little in July after and open market operations were a June increase that had been boosted directed at allowing the full amount of somewhat by a temporary bulge in the reduction to be reflected in money energy prices. Food prices, which were market rates. These actions were taken unchanged on balance over June and in the context of a continuing downtrend July, continued to hold down overall in inflation and in light of incoming increases in consumer prices. Excluding information that suggested flagging mofood and energy items, consumer price mentum in the economic recovery and inflation over the year ended in July was persisting softness in credit and money. markedly lower than in the preceding Later in the intermeeting period, a techyear. Measures of labor costs also evi- nical increase was made to expected denced smaller increases. Hourly com- levels of adjustment plus seasonal borpensation of private industry workers rowing to reflect rising demands for searose at a substantially slower pace in sonal credit. Adjustment plus seasonal the second quarter and in the twelve borrowing averaged close to expected months ended in June. The deceleration levels during the two full reserve mainin overall compensation reflected slower tenance periods completed since the growth in both its benefits and its wage meeting. The federal funds rate, which Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 79th Annual Report, 1992 had been around 33A percent prior to weaker in July than had been anticipated the monetary easing action, averaged at the time of the June 30-July 1 meet- 3lA percent subsequently. ing. The declines in these aggregates Other market interest rates declined apparently reflected in part the continuconsiderably in early July, reflecting ing redirection of household holdings of both the sluggishness portrayed by in- time deposits toward bond and stock coming economic data and the monetary funds or the repayment of debt, and in policy easing. Commercial banks also part the reduced funding needs of deposlowered their prime rate from 6V2 per- itory institutions owing to the further cent to 6 percent. In subsequent weeks, rechanneling of credit demands outside with a steady flow of new information the depository sector, a development pointing to a hesitant recovery and more that was encouraged by the declines in favorable trends in wages and prices, interest rates in long-term debt markets. yields on intermediate- and long-term To some extent, the persisting weakness Treasury securities dropped further. in money also might have been associ- Over the intermeeting period, yields on ated with relatively slow expansion in most private securities tended to decline income since the early months of the by amounts comparable to those on year. Through July, both M2 and M3 Treasury instruments, but rates on fixed- were appreciably below the lower ends rate home mortgages fell by somewhat of the Committee's ranges for their less, apparently owing in large part to growth in 1992. heightened mortgage investor concerns The staff projection prepared for this about prepayment risk stemming from meeting pointed to a continuation of a surge in refinancing activity. Broad subdued economic expansion in the near indexes of stock prices changed little term followed by a gradual pickup in over the period. growth through next year. The forecast In foreign exchange markets, the took account of the further easing of trade-weighted value of the dollar in reserve conditions in early July and the terms of the other G-10 currencies substantial rally that had taken place in declined on balance over the intermeet- the bond markets. Housing construction ing period. Early in the period, the dol- was expected to pick up in response to lar fell in response to the more uncertain the declines in mortgage interest rates; prospects for near-term growth in the and in the business sector, lower interest United States and the concurrent easing rates and improved profits and cash of U.S. monetary policy. Later, the dol- flows were projected to enhance access lar fell further following an increase in to sources of finance and to provide the the discount rate in Germany and the basis for an acceleration in plant and issuance of unfavorable U.S. trade data equipment spending as the recovery for May. Concerted central-bank inter- gained momentum. The slow pace of vention in foreign exchange markets hiring and the modest expansion of inwas undertaken to brake the decline of comes currently were tending to restrain the dollar, and the latter tended to sta- consumer spending, but continued bilize over the remainder of the inter- progress by households in restructuring meeting period. balance sheets and reducing debt- M2 and M3 contracted somewhat servicing burdens, in conjunction with further in July, despite a resumption of improving job prospects, were expected rapid growth in Ml. Both broad mone- to foster growth in consumer spending tary aggregates were substantially more in line with the expansion of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 155 income. In addition, some stimulus to and some observed that faster and more domestic production was projected to convincing progress was being made emerge over the forecast horizon from toward achieving price stability than improving export demand as a result of they had anticipated earlier. the depreciation of the dollar in recent The members recognized that the outmonths and some anticipated strength- look for the economy was subject to ening of economic activity in the major major uncertainties. A number comforeign industrial countries. In the gov- mented that they could not identify any ernment sector, continuing cutbacks in sector of the economy that seemed defense spending were expected to primed to provide the impetus needed damp federal expenditures, and budget for a vigorous expansion, but they also problems at state and local levels of acknowledged the difficulty of anticipatgovernment to constrain spending and ing the pattern and trajectory of an result in tax increases. A persisting expansion. With regard to domestic though decreasing margin of slack in economic developments, the ongoing resource utilization was projected to be restructuring activities by financial and associated with further progress toward nonfinancial firms and by households price stability. were continuing to exert a restraining In the Committee's discussion of cur- effect on economic activity by divertrent and prospective economic develop- ing cash flows from business investment ments, members referred to statistical and consumer expenditures. Considerand anecdotal indications that the rate of able progress appeared to have been economic expansion had slowed to a made toward redressing earlier overrelatively subdued pace since the early expansion and credit excesses. Over months of the year. A number of factors time, cash flows would be redirected seemed to be restraining the expansion, toward more normal patterns of spendincluding efforts by business firms and ing for goods and services, with stimulahouseholds to restructure balance sheets, tive implications for the economy. Howsome apparent deterioration in business ever, the timing and extent of such a and consumer sentiment, and sluggish development could not be predicted with economic growth abroad. Nonetheless, any degree of confidence, and in any the low levels of real and nominal inter- case the positive effects probably would est rates in short-term debt markets, be felt only gradually and there could be recent decreases in intermediate- and substantial restraint on economic activlong-term interest rates and in the for- ity for a longer period than was anticieign exchange value of the dollar, and pated earlier. On the more positive side, the fairly ample liquidity suggested by banking institutions had made a good some measures all were consistent with deal of progress in improving their capiexpectations of some strengthening in tal positions and strengthening their business activity in coming quarters. portfolios, and many of these institu- Still, in the view of a number of mem- tions now were reported to be seeking bers, the economic expansion was likely lending opportunities more actively, to be on a slightly lower track over the though the demand for loans remained next several quarters than they previ- unusually depressed. ously had anticipated. At the same time, Turning to developments in key secmany commented that they were encour- tors of the economy, members noted aged by the accumulating signs of that, for now, consumers continued to diminishing price and wage inflation, be affected by a high degree of caution Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 79th Annual Report, 1992 that appeared to stem especially from sharply upward across the nation, mortconcerns about job security and job gage loan demand for home purchases opportunities in an environment of was still lagging in many areas. continuing business consolidations, cut- Given serious budgetary problems at backs by state and local governments, all levels of government, the public secand reductions in defense spending. tor of the economy was not viewed as Against the background of quite limited likely to provide stimulus to the expangrowth in overall demand, which could sion over the next several quarters. At be met largely through improvements the federal level, continuing declines in in productivity and lengthening work- defense spending were expected to be weeks, business firms were continuing offset only in part by fairly slow growth to hold back in their hiring of new work- in other expenditures for goods and serers. Ongoing efforts by many consumers vices, and some of the most depressed to reduce their debt burdens and lower areas of the country were strongly interest income from declining rates on affected by trends in the defense indusdeposits and market instruments were try. At the state and local government contributing to the softness in consumer levels, the well-publicized budget probspending. Against this background, lems of California were shared to one some members indicated that they degree or another by many other parts of would not rule out a further rise in the the country; spending curbs seemed personal saving rate. likely to hold down any impetus to Overall spending by business firms demand from this sector of the econon fixed investment and inventories omy, while increases in state and local was believed likely to remain rela- taxes would tend to restrain business tively moderate, at least in the quarters and household demand. immediately ahead, in light of the nega- The outlook for the nation's foreign tive business sentiment associated in trade balance was difficult to evaluate. turn with lagging consumer and gov- The decline in the foreign exchange ernment expenditures. While spending value of the dollar had favorable implifor equipment was growing at a fairly cations for net exports over time, but the brisk pace, spurred by efforts to modern- outlook for relatively restrained expanize production facilities for competitive sion in key industrial countries pointed reasons, business construction contin- to limited growth in the demand for U.S. ued to be deterred by an over-supply of exports. At the same time, even moderspace in commercial structures, espe- ate economic growth in the U.S. econcially office buildings, in numerous omy could be expected to foster some areas around the country. Cautious further increases in imports over coming inventory investment reflected lack- quarters despite the lower dollar. luster demand as well as continuing With regard to the outlook for inflaefforts to manage inventories more tion, many of the members commented tightly in relation to sales. on what they viewed as increasingly The outlook for housing activity persuasive evidence of slower rates of appeared to have improved somewhat increase in wages and prices. Against after the recent declines in mortgage the background of relatively restrained rates, though the available data and growth in economic activity and the anecdotal reports on housing market related outlook for limited pressures on developments were mixed. While mort- labor and other productive resources, a gage refinancing activity had turned number of members indicated that they Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 157 had lowered their inflation forecasts for prompted the recent exchange market the next several quarters. There were intervention in support of the dollar by widespread reports of strong competi- the United States and several other tive pressures in most industries and of nations. Any further easing in this view successful efforts to hold down costs should be implemented only under conthrough improvements in productivity. ditions or circumstances in which the On the negative side, the considerable System's commitment to its price stadepreciation of the dollar in recent bility objective was not likely to be months and lingering concerns about brought into question. An unchanged future price pressures, apparently associ- policy also would give the Committee ated especially with worries about the more room to respond vigorously, if outlook for the federal budget, could necessary, to a weaker-than-expected tend to impair progress toward price economy or to disruptive conditions in stability. On balance, however, members financial markets, should they develop saw the prospects for significantly less at some point. inflation over the projection horizon as Members who leaned toward some quite promising. near-term easing of reserve conditions Turning to policy for the intermeeting commented that such a policy move was period, a majority of the members indi- not likely to foster inflationary pressures cated that they favored an unchanged under current or prospective economic policy, while some expressed a prefer- conditions, given the appreciable marence for further easing either at this gin of unused resources in the economy. meeting or in the near future. The mem- At the same time, an easier monetary bers who supported a steady policy policy would accelerate balance-sheet course recognized that in a period char- restructuring activities and tend to comacterized by relatively sluggish eco- pensate for the adverse effects of such nomic expansion and a wide variety of activities on spending. A greater degree risks to the economy, conditions might of monetary policy easing than had been emerge that would warrant consider- needed in the past seemed to be required ation of some further easing. For the to overcome the depressing effects of time being, however, they preferred a the restructuring activities and to cushwait-and-see approach in view of the ion an already sluggish expansion recent easing of reserve conditions and against the possibility of some further the considerable declines in longer-term loss in momentum. interest rates and in the foreign ex- One factor weighing in favor of carechange value of the dollar. The Commit- ful consideration of a more accommodatee should continue to evaluate a variety tive posture in reserve markets was the of indicators for signs that the expansion behavior of the broad monetary aggremight be falling short of an acceptable gates. The staff analysis prepared for growth path. this meeting suggested that some pickup Some members commented that an in the growth of M2 and M3, though to easing of monetary policy under current a still quite sluggish pace, was likely conditions would incur too great a risk over the months ahead on the assumpof adversely affecting domestic bond tion of unchanged conditions in reserve markets. One aspect of that risk was the markets. Members observed that the possibility of a destabilizing decline of indications of some renewed M2 growth the dollar in foreign exchange markets; since late July tended to support that the potential for such a decline had conclusion; some also drew encour- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 79th Annual Report, 1992 agement from the sharp upturn in the during the intermeeting period if such growth of reserves and Ml in July. The a change appeared to be warranted members noted that growth of the by the incoming economic or financial broader aggregates in line with current information. expectations implied expansion for the At the conclusion of the Committee's year at rates somewhat below the lower discussion, all but two of the members ends of the Committee's ranges. Such a indicated that they favored or could development would be consistent with accept a directive that called for mainthe Committee's policy objectives if, as taining the existing degree of pressure expected, unusual strength in the veloc- on reserve positions and that included ity of M2 and M3 were to persist over a bias toward possible easing during the balance of the year. In the circum- the intermeeting period. Accordingly, stances, monetary growth and indica- in the context of the Committee's tors of velocity behavior would need to long-run objectives for price stability be monitored carefully over coming and sustainable economic growth, and months. giving careful consideration to eco- In the Committee's discussion of nomic, financial, and monetary developpossible intermeeting adjustments to ments, slightly greater reserve restraint the degree of reserve pressure, a major- might be acceptable or slightly lesser ity of the members indicated their pref- reserve restraint would be acceptable erence or acceptance of a directive during the intermeeting period. The that was biased toward possible easing reserve conditions contemplated at during the weeks ahead. Members who this meeting were expected to be conpreferred some easing over the near sistent with growth in M2 and M3 at term indicated that they could support a annual rates of about 2 percent and directive that gave particular weight to Vi percent respectively over the sixdevelopments that might call for an month period from June through easing move. Some others noted that December. while they might have preferred a At the conclusion of the meeting, the symmetric directive in current circum- following domestic policy directive was stances, the proposed bias in the direc- issued to the Federal Reserve Bank of tive was acceptable because an easing New York: of reserve conditions was more likely The information reviewed at this meeting than a tightening in the intermeeting suggests that economic activity is continuing period. Moreover, a return to a symto expand at a subdued pace. Total nonfarm metric directive might well be misread payroll employment rebounded in July after as a change in policy that the Com- declining in June, and the civilian unemploymittee did not intend at this point. ment rate edged down to 7.7 percent. Manu- Two members expressed a strong prefer- facturing output was unchanged in July, but overall industrial production was boosted by ence for a symmetric directive because a higher level of mining and utility output. they were persuaded that monetary Retail sales increased moderately in July. policy should not be eased except in Permits issued for the construction of new response to compelling new evidence housing units rose slightly in July, but housthat current policy was impeding an ing starts fell. Recent data on orders and shipments of nondefense capital goods indiexpansion of the economy in line with cate further increases in outlays for business its long-run potential. They noted that equipment, while nonresidential construction a symmetric directive would not rule has remained soft. The nominal U.S. merout a policy change, in either direction, chandise trade deficit in April-May was sub- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions \ 59 stantially above its average rate in the first and M3 over the period from June through quarter. Incoming data on wages and prices December at annual rates of about 2 and suggest that inflation is slowing. Vi percent, respectively. Interest rates have declined considerably since the Committee meeting on June 30- Votes for this action: Messrs. Greenspan, July 1. The Board of Governors approved a Corrigan, Angell, Hoenig, Jordan, Kelley, reduction in the discount rate from 3Vi to Lindsey, and Mullins, Ms. Phillips, and 3 percent on July 2. In foreign exchange Mr. Syron. Votes against this action: markets, the trade-weighted value of the Messrs. LaWare and Melzer. dollar in terms of the other G-10 currencies declined further over the first several weeks of the intermeeting period, but it has sta- Messrs. LaWare and Melzer dissented bilized more recently. because they did not favor a directive M2 and M3 contracted somewhat further that was biased toward possible easing in July. Through July, both aggregates were during the intermeeting period. In their appreciably below the lower ends of the view, monetary policy already was ranges established by the Committee for the appropriately stimulative, as evidenced year. in part by the low level of short-term The Federal Open Market Committee seeks monetary and financial conditions that interest rates and by the rapid growth in will foster price stability and promote sus- reserves since early this year, and was tainable growth in output. In furtherance of consistent with the promotion of ecothese objectives, the Committee at its meetnomic growth in line with the econoing on June 30-July 1 reaffirmed the ranges my's long-run potential. Business and it had established in February for growth of M2 and M3 of 2Vi to 6!/2 percent and 1 to consumer confidence were in fact at low 5 percent respectively, measured from the levels, but they reflected a variety of fourth quarter of 1991 to the fourth quarter problems facing the economy that were of 1992. The Committee anticipated that unrelated to the stance of monetary poldevelopments contributing to unusual velocicy. Accordingly, what was needed at ity increases could persist in the second half of the year. The monitoring range for growth this point was a more patient monetary of total domestic nonfinancial debt also was policy—one that was less predisposed maintained at AV2 to 8!/2 percent for the year. to react to near-term weakness in eco- For 1993, the Committee on a tentative basis nomic data and that allowed more time set the same ranges as in 1992 for growth of for the effects of earlier easing actions to the monetary aggregates and debt measured from the fourth quarter of 1992 to the fourth be reflected in the economy. Indeed, an quarter of 1993. The behavior of the mone easing move in present circumstances tary aggregates will continue to be evaluated might well stimulate inflationary conin the light of progress toward price level cerns by reducing confidence in the Sysstability, movements in their velocities, and tem's willingness to pursue an antidevelopments in the economy and financial markets. inflationary policy and thus could have In the implementation of policy for the adverse repercussions on domestic bond immediate future, the Committee seeks to markets and further damaging effects on maintain the existing degree of pressure on the dollar in foreign exchange markets. reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and Meeting Held on giving careful consideration to economic, October 6, 1992 financial, and monetary developments, slightly greater reserve restraint might or The information reviewed at this meetslightly lesser reserve restraint would be acceptable in the intermeeting period. The ing suggested that economic activity contemplated reserve conditions are ex- was expanding at a subdued pace. pected to be consistent with growth of M2 Domestic final sales appeared to have Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

160 79th Annual Report, 1992 picked up in the third quarter, led by an ous months; for July and August comincrease in consumer spending and bined, spending was moderately higher another sharp gain in business purchases than in the second quarter. In August, of office and computing equipment, but outlays for services continued to rise, demand had remained sluggish in most while expenditures for most major cateother sectors of the economy. The lim- gories of goods declined. Housing starts ited growth in overall demand was being climbed in August, with starts of singlemet in part through higher imports, and family homes reaching their highest as a consequence, industrial production level since March. By contrast, permit and employment had been weak. Recent issuance and sales of new and existing data on wages and prices continued to homes edged lower in August. suggest that inflation was slowing. Shipments of nondefense capital Total nonfarm payroll employment goods slowed considerably in July and fell somewhat further in September, August, retracing much of the sharp gain reflecting a drop in government jobs recorded in June. Shipments of office associated with the end of a federally and computing equipment slackened on funded summer jobs program. Employ- balance over the two months; however, ment in the private sector was up in after adjusting for ongoing rapid de- September, as new hiring in the services clines in prices, the underlying upward industry more than offset job losses trend in demand for such equipment in manufacturing and construction; remained robust. Recent data on orders employment in other industries was and shipments of nondefense capital little changed after a sizable decline in goods suggested that business outlays August. The civilian unemployment rate for durable equipment, particularly for edged down to 7.5 percent in September items other than computers, would grow when the labor force registered another more slowly in coming months. Outlays decrease. for nonresidential construction con- After a considerable gain in July, tracted again in August, with steep industrial production declined apprecia- decreases occurring for commercial and bly in August, and available information industrial structures. Data on contracts suggested further weakness in Septem- continued to indicate that spending for ber. The decline in industrial output new construction would remain sluggish since July partly reflected the disruptive over the months ahead. effects of Hurricane Andrew on oil and Total business inventories rose somegas production and of a labor strike on what further in July following a large the manufacture of automobiles and increase in June. In manufacturing, parts. However, output of a broad range inventory stocks were little changed of other goods also was down. One area over June and July but were up sharply of continuing strength was the produc- in August as factory shipments of goods tion of business equipment, notably slowed; as a result, the ratio of inventooffice and computing equipment. The ries to shipments for all manufacturing utilization of total industrial capacity rebounded to the middle of the range fell on balance over July and August, that had prevailed over the previous retracing a portion of the increase that year. At the wholesale level, inventories occurred over the first half of the year. were trimmed a little in July after a Real personal consumption expendi- sizable rise in June, and the stocks-totures were little changed in August after shipments ratio remained relatively increasing appreciably in the two previ- high. Retail trade inventories expanded Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 1 61 at a considerable pace in July, but a Accordingly, the directive indicated that rebound in sales lowered the inventory- in the context of the Committee's longto-sales ratio somewhat at most types of run objectives for price stability and stores. sustainable economic growth, and giv- The nominal U.S. merchandise trade ing careful consideration to economic, deficit widened somewhat in July from financial, and monetary developments, its average rate in the second quarter. slightly greater reserve restraint might Imports, particularly of capital goods be acceptable or slightly lesser reserve and consumer goods, remained on the restraint would be acceptable during the fairly strong upward path evident dur- intermeeting period. The contemplated ing the first half of the year. Exports reserve conditions were expected to increased by a smaller amount in July; be consistent with growth in M2 and exports of agricultural products rose M3 at annual rates of about 2 percent noticeably, but exports of nonagricul- and Vi percent respectively over the tural goods were about unchanged from six-month period from June through the pace of the previous three quarters. December. Recent indicators of economic activity Open market operations during the in the major foreign industrial countries intermeeting period were directed suggested a continuation of sluggish initially toward maintaining the existing growth on average in those countries. degree of pressure on reserve positions. Producer prices of finished goods In early September, operations were edged up in August in association with a adjusted to implement some easing in rebound in prices of fresh fruits and reserve pressures. This action was taken vegetables. Abstracting from the vola- in response to incoming information that tile food and energy components, the suggested unexpected sluggishness in increase in prices of other finished goods economic activity and a smaller-thanover the twelve months ended in August anticipated pickup in the growth of the was considerably smaller than the rise broad monetary aggregates. Adjustment over the previous twelve-month period. plus seasonal borrowing tended to run a At the consumer level, prices of non- little above expected levels during the food, non-energy items registered intermeeting interval, reflecting in part another modest increase, and the twelve- reserve shortfalls that produced sharp month change in this measure also was increases in borrowing at the end of two down substantially from a year earlier. reserve maintenance periods. The re- In September, a drop in the average serve shortfalls along with quarter-end hourly earnings of production or non- pressures contributed to a somewhat supervisory workers retraced part of a higher federal funds rate than had been sizable rise in August. Over the twelve expected following the monetary easing months ended in September, these earn- action. ings grew at a significantly slower rate Other short-term interest rates also than in the preceding twelve-month declined somewhat, while longer-term period. rates were about unchanged since the At its meeting on August 18, the Committee meeting on August 18. Committee adopted a directive that Short-term debt markets reacted to called for maintaining the existing the Committee's easing action in early degree of pressure on reserve positions September and subsequently to growing and that included a bias toward possible expectations of further System easing in easing during the intermeeting period. the context of continued indications of a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

162 79th Annual Report, 1992 sluggish economic expansion. Yields on months in conjunction with an upturn in intermediate-term securities also fell. bank loans. However, rates on long-term obligations The staff projection prepared for this were little changed on balance; the Sys- meeting indicated that economic activtem's policy easing and generally weak ity would expand at a slow pace in the economic data tended to reduce bond current quarter and that growth would yields, but long-term debt markets also pick up gradually in 1993 to a rate that appeared to reflect growing concerns would remain quite moderate by past about the fiscal outlook and increased cyclical standards. The declines that had uncertainty stemming in part from vola- occurred in interest rates were expected tility in the foreign exchange markets to boost housing activity to some extent, and policy developments abroad. particularly in the single-family sector. In foreign exchange markets, the Gains in expenditures for equipment trade-weighted value of the dollar in were projected to be large enough to terms of the other G-10 currencies fluc- raise business fixed investment despite tuated widely over the intermeeting sluggish spending for nonresidential period but ended somewhat higher on construction. As employment growth balance. The dollar weakened consider- was restored and further improvements ably early in the period on disappointing in household balance sheets were reports about the U.S. economy and achieved, consumer spending would related expectations of Federal Reserve strengthen. The projection pointed to easing. In mid-September, the dollar some decline in federal government purmoved sharply higher as turmoil in chases, reflecting further cutbacks in European currency markets prompted defense expenditures, and weak spendsome safe-haven buying of dollars and ing by state and local governments. The resulted in interest rate reductions in persisting slack in resource utilization in Germany. More recently, reduced ten- this forecast was projected to be associsions within the European Monetary ated with additional progress in reduc- System and heightened expectations of ing inflation. further easing by the Federal Reserve In the Committee discussion of curinduced renewed declines in the dollar. rent and prospective economic develop- Expansion of M2 and M3 resumed in ments, many of the members expressed August, though at fairly slow rates, and disappointment and concern about the limited growth appeared to have contin- sluggish pace of the expansion, and a ued in September. Through September, number commented that the softening in both aggregates were estimated to have several recent business indicators could grown at rates somewhat below the portend quite slow economic growth lower ends of the ranges established by over the months immediately ahead. the Committee for the year. The pickup Business and consumer sentiment was in the broad aggregates seemed to reflect relatively depressed and seemed to have the cumulative effects on demand depos- worsened a bit further recently in some its and liquid retail deposits of declines parts of the country. While further detein market interest rates since midyear rioration in business activity culminatand a related drop in opportunity costs. ing in an economic downturn could not Currency growth strengthened further in be ruled out, some of the very latest data August and September, evidently owing had a slightly more positive tone, and in part to further foreign demand. Bank the members generally continued to credit growth also picked up in both view somewhat stronger economic Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 163 growth as a reasonable prospect for the many lenders, notably banking instituyear ahead. However, no important sec- tions. While some banks clearly were tor of the economy seemed poised to continuing to experience financial diffiprovide much impetus to business activ- culties, many had pared their problem ity, and the timing of the acceleration assets and strengthened their capital from the presently sluggish advance positions. Moreover, a growing number remained uncertain. Nonetheless, de- of reports suggested that banks were clines over the third quarter in the intensifying their efforts to find creditforeign exchange value of the dollar and worthy borrowers, though when such in domestic interest rates—the latter efforts might become more general was along the entire maturity spectrum— another source of uncertainty. suggested improved conditions for Consumer spending seemed to have greater expansion. Recently, these more been reasonably well maintained in most favorable conditions had been reflected parts of the country, including indicain an upturn in money growth and bank tions of some growth in a number of lending activity. With regard to the out- areas where overall business activity look for inflation, the available statistics appeared to be moving sideways or even and anecdotal information continued to edging lower. At least in some parts of indicate appreciable progress toward the the country, retailers were expressing goal of price stability. moderate optimism with regard to their In the course of the Committee's dis- prospective sales during the upcoming cussion, the members gave a great deal holiday season. Even so, very cautious of emphasis to the uncertainties that sur- consumer attitudes, associated esperounded the economic outlook, includ- cially with concerns about employment ing potential developments abroad. Sev- prospects, seemed likely to restrain eral members commented that against overall growth in consumer spending the background of a relatively weak over the next several months. Indeed, expansion, the recent volatility in some barring unanticipated economic develdomestic financial markets and in the opments leading to a major strengthenforeign exchange market tended to ing in employment opportunities, conunderscore the risks of developments tinuing efforts by many households to that could have adverse effects on the improve their financial positions could economy. Another key uncertainty be expected in the context of an already related to the ongoing restructuring of low saving rate to limit the contribution business firms and of business and con- of the consumer sector to faster ecosumer balance sheets. Those activities nomic growth for some considerable were continuing to divert financial flows period. from spending to savings or debt reduc- In their comments about develoption, and prior experience provided little ments in other key sectors of the econbasis for determining when such restruc- omy, members also cited single-family turing might come closer to being com- housing construction as a source of pleted and flows of funds redirected on some stimulus in many regions. The balance into more normal spending manufacturing of related building matechannels. Nonetheless, the members rials had exhibited a corresponding drew considerable encouragement from pickup recently. Other construction the substantial progress that already activity, notably that of office structures, had been made by business firms in remained weak, but there were reports improving their balance sheets and by of some improvement or continuing Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

164 79th Annual Report, 1992 growth in the construction of industrial sures on prices would emerge over the facilities and public works projects in next year or two, even in the context of some parts of the country. In the energy some pickup in the expansion of ecosector, a firming of gas prices was en- nomic activity. While medical, tuition, couraging somewhat greater production. and some other costs were rising at rela- On balance, there was little current evi- tively rapid rates, members cited widedence that construction, other than in the spread examples of very strong competsingle-family sector, would provide sig- itive pressures in markets for goods, nificant impetus to the overall expansion including key agricultural products, and in the year ahead. Likewise, flagging ongoing efforts by firms to cut costs in demand was curtailing the production of the face of steady or even declining aircraft and inducing at least temporary prices in the markets for their products. cutbacks in auto assemblies. In addition, Nonetheless, business contacts still the foreign trade sector was not expected seemed to anticipate rising inflation at to add significantly to demands on the some point for the economy generally if U.S. economy despite the decline in the not in their own industries, and longforeign exchange value of the dollar. term interest rates still appeared to While the latter had fostered large embody higher rates of inflation. increases in tourism from abroad in a In the Committee's discussion of polnumber of areas and some domestic pro- icy for the intermeeting period ahead, ducers reportedly were gaining market the members generally agreed that curshare, recessions or weak expansion in rent uncertainties made an assessment major foreign trading nations were of the economic outlook and the deterlikely to limit the growth in foreign mination of an appropriate course for demand for U.S. goods. monetary policy particularly difficult. The fiscal outlook remained uncer- While the members' preferences for poltain. The large federal deficit was still icy implementation ranged from the tending to preclude the adoption of maintenance of unchanged reserve conspending or tax reduction programs that ditions to an immediate easing move, a would increase fiscal stimulus, but some majority indicated that they could supmembers suggested that continued slug- port a policy prescription of maintaining gishness in the economy might well unchanged reserve conditions for the overcome current inhibitions against present while biasing the directive new initiatives. In any event, defense strongly toward possible easing during spending was on a clear downtrend and the intermeeting period. was exerting an adverse effect on over- Members who favored an unchanged all economic activity in many parts of policy stance argued that despite the the country. At the state and local gov- softness in a number of recent economic ernment levels, severe fiscal problems indicators they could see no currently probably would continue to curb spend- persuasive evidence of a cumulative ing and force many jurisdictions to raise deterioration in the economy. Moreover, taxes so long as a relatively weak econ- earlier monetary policy easing actions omy continued to hold down revenues. had provided a substantial amount of With regard to the outlook for infla- stimulus to the economy that would contion, the members were encouraged by tinue to exert its effects over time. Real the further indications of a disinflation- short-term interest rates were at very ary trend in prices and wages, and they low levels, and intermediate-term rates saw little likelihood that upward pres- had declined considerably since mid- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 165 year. The reductions in interest rates had tive that included a decided presumption greatly facilitated the progress already of some easing if indications of stronger achieved by business firms and house- economic activity failed to emerge or holds in restructuring their debts and the recent firming in money and credit reducing their debt service burdens, flows showed signs of ebbing materithereby strengthening the financial under- ally. It was anticipated that any decision pinnings of the economy. The dollar to ease reserve conditions during this recently had been subject to consider- period would be coordinated with the able volatility in the foreign exchange consideration of a reduction in the dismarkets, and there was some risk that an count rate by the Board of Governors. easing of monetary policy at this time Two members felt strongly that a direcmight tend to destabilize it. These mem- tive calling for unchanged reserve bers concluded that the present stance of conditions should also provide for an monetary policy continued to reflect an unbiased intermeeting instruction. While appropriate balancing of the need to sus- such a directive would not rule out tain progress toward price stability while an intermeeting adjustment—in either encouraging an acceptable rate of eco- direction—it would require more subnomic growth. stantial evidence of changing or unex- Members who favored an immediate pected economic or financial inforeasing of policy believed that the out- mation before a policy action was look for the economy and prices argued implemented. Several members, includfor a policy move at this time. These ing some who favored an immediate members acknowledged that a good deal easing of policy, expressed some disof uncertainty surrounded the economic comfort about the extent to which the outlook. However, there were some risks Committee might be seen as reacting to that an already sluggish economy might individual pieces of incoming data weaken further. In the circumstances, a rather than to an accumulation of inforprompt easing move would be a desir- mation and analysis regarding the course able and prudent course, particularly in of the economy and prices. a situation in which they saw a minimal In the course of the discussion, memrisk that inflation would be deflected bers commented that the pickup in the from its downward trend. In the view of growth of the broad monetary aggresome of these members, continued gates in August and September was a expansion in the broad monetary aggre- reassuring development, even though gates at rates below the Committee's the rates of expansion were still quite ranges suggested that financial condi- sluggish. According to a staff analysis tions were not yet conducive to a pickup prepared for this meeting, the growth of in business activity that was sufficiently both aggregates was likely to remain robust to reduce margins of underuti- quite limited over the balance of the lized resources. An easing in monetary year and to fall somewhat short of the policy seemed to be widely anticipated lower bounds of the Committee's ranges in financial markets, and a failure to for 1992 as a whole. Despite the lingertake action at this time might well result ing effects of earlier declines in shortin an undesirable backup in market term interest rates, the projected expaninterest rates, thus further weakening the sion of M2 and especially that of M3 outlook. would be expected to remain below the A majority of the members noted that growth of nominal GDP, and the velocthey could support an unchanged direc- ity of these monetary aggregates would Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

166 79th Annual Report, 1992 continue to display unusual strength in be acceptable or slightly lesser monecomparison with past patterns. The per- tary restraint would be acceptable dursistence of slow growth in the broader ing the intermeeting period. The reserve aggregates probably would involve fur- conditions contemplated at this meeting ther decreases in deposit offering rates were expected to be consistent with and shifts of funds to higher-yielding growth in M2 and M3 at annual rates of alternatives such as bond and stock about 2 and 1 percent respectively over mutual funds, with little effect on con- the three-month period from September sumer spending or overall economic through December. activity. The members nonetheless rec- At the conclusion of the meeting, the ognized the need to assure adequate following domestic policy directive was monetary expansion for a growing econ- issued to the Federal Reserve Bank of omy and noted that money growth New York: appreciably below current expectations would be a matter of increasing concern. The information reviewed at this meeting A differing view focused on the growth suggests that economic activity is expanding of Ml and reserves, which had been at a subdued pace. Total nonfarm payroll very rapid since the latter months of employment declined somewhat further in September, but the civilian unemployment 1991. In this view, the outsized growth rate edged down to 7.5 percent. Industrial in narrow measures of money was indicproduction is estimated to have declined ative of a quite stimulative monetary appreciably since July. Real personal conpolicy, but given the long lags that were sumption expenditures appear to have risen involved, the inflationary consequences moderately in the third quarter. Data on of such growth, if allowed to continue, housing have been mixed, but on balance they continue to suggest a gradual uptrend in might not become evident until much housing expenditures. Recent data on orders later, perhaps not until well into 1994. and shipments of nondefense capital goods At the conclusion of the Committee's indicate slower growth in outlays for busidiscussion, a majority of the members ness equipment, while expenditures for nonresidential construction have been weak. The indicated their acceptance of a directive nominal U.S. merchandise trade deficit that called for maintaining the existing widened somewhat in July from its average degree of pressure on reserve positions rate in the second quarter. Incoming data on and an understanding that there would wages and prices suggest that inflation is be a marked bias toward possible easing slowing. during the intermeeting period. Two of Short-term interest rates have declined somewhat, while longer-term rates are about the members expressed a strong preferunchanged since the Committee meeting on ence for a symmetric directive with August 18. In foreign exchange markets, the regard to possible intermeeting policy trade-weighted value of the dollar in terms adjustments, while two others were of the other G-10 currencies fluctuated firmly persuaded of the desirability of widely over the intermeeting period but ended the period higher on balance. an immediate increase in reserve avail- Expansion of M2 and M3 resumed in ability to strengthen the growth of M2. August, though at fairly slow rates, and Accordingly, in the context of the Com- limited growth appears to have continued in mittee's long-run objectives for price September. Through September both aggrestability and sustainable economic gates were estimated to have grown at rates growth, and giving careful consideration somewhat below the lower ends of the ranges established by the Committee for the to economic, financial, and monetary year. developments, it was decided that The Federal Open Market Committee slightly greater monetary restraint might seeks monetary and financial conditions that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 167 will foster price stability and promote sus- They believed that this policy action by tainable growth in output. In furtherance of the Committee should be accompanied these objectives, the Committee at its meetby an announcement of reductions of ing on June 30-July 1 reaffirmed the ranges the upper and lower limits of the range it had established in February for growth of M2 and M3 of 2Vi to 6Vi percent and 1 to for M2 growth in 1993. They felt that it 5 percent respectively, measured from the was important to make clear that nearfourth quarter of 1991 to the fourth quarter term action to increase M2 expansion of 1992. The Committee anticipated that de- was not an abandonment of the longvelopments contributing to unusual velocity term objective of non-inflationary moneincreases could persist in the second half of the year. The monitoring range for growth of tary growth. total domestic nonfinancial debt also was Messrs. LaWare and Melzer dissented maintained at AVi to 8V2 percent for the year. because they did not want to bias the For 1993, the Committee on a tentative basis directive toward possible easing during set the same ranges as in 1992 for growth of the intermeeting period. In their view, a the monetary aggregates and debt measured from the fourth quarter of 1992 to the fourth variety of indicators, including the level quarter of 1993. The behavior of the mone- of short-term interest rates and the tary aggregates will continue to be evaluated growth of reserves, suggested that monin the light of progress toward price level etary policy already was positioned to stability, movements in their velocities, and foster an expansion in economic activity developments in the economy and financial markets. consistent with the economy's long-run potential. Moreover, further easing at In the implementation of policy for the immediate future, the Committee seeks to this time would incur a substantial risk maintain the existing degree of pressure on of destabilizing the dollar in the foreign reserve positions. In the context of the Com- exchange markets. In these circummittee's long-run objectives for price stabilstances, they favored a steady monetary ity and sustainable economic growth, and policy that was not disposed to react to giving careful consideration to economic, financial, and monetary developments, near-term weakness in economic data slightly greater reserve restraint might or and that allowed more time for the slightly lesser reserve restraint would be effects of earlier easing actions to be felt acceptable in the intermeeting period. The in the economy. Mr. Melzer also contemplated reserve conditions are exexpressed concern that the progress pected to be consistent with growth of M2 and M3 over the period from September already made toward achieving price through December at annual rates of about 2 stability might be jeopardized if very and 1 percent, respectively. rapid growth in Ml were to continue. Votes for this action: Messrs. Greenspan, Corrigan, Angell, Hoenig, Kelley, and Meeting Held on Mullins, Ms. Phillips, and Mr. Syron. November 17, 1992 Votes against this action: Messrs. Jordan, LaWare, Lindsey, and Melzer. 1. Domestic Policy Directive Messrs. Jordan and Lindsey preferred The information reviewed at this meetimmediate action by the Committee to ing suggested that economic activity had increase the availability of bank reserves been expanding at a moderate pace. sufficiently to achieve the Committee's Consumer spending had picked up pre-announced target growth for M2 in somewhat, business purchases of capital 1992. Such reserve provision would equipment continued to rise at a brisk likely be associated with further de- pace, and housing demand had increased clines in short-term market interest rates. moderately since midyear. At the same Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 79th Annual Report, 1992 time, part of these demands were being plies centers also were up noticeably met through higher imports, and recent over the two months. Housing starts rose gains in industrial production and significantly in August and then edged employment had been limited. Incoming up further in September to their highest data on wages and prices had been level since March. Sales of new homes mixed but suggested on balance a con- had increased on balance over recent tinuing trend toward lower inflation. months, and the inventory of new homes Total nonfarm payroll employment for sale in September had reached its rose slightly in October after declining lowest level since 1983. in August and September. Substantial Real outlays for producers' durable job gains were recorded in the services equipment posted another strong inindustries, especially in health services crease in the third quarter. A sharp and the cyclically sensitive business ser- advance in outlays for computing equipvices, and employment in construction ment outweighed a dropoff in aircraft rebounded from a September decline. purchases from an unsustainably high In manufacturing, the number of jobs level in the second quarter. Purchases of declined further in October, although items other than aircraft and computing total hours worked were unchanged as equipment rose at a rapid rate in the the drop in employment was offset by third quarter, and recent data on orders an increase in overtime. Government for such goods pointed to additional employment continued to contract, growth in the near term. Expenditures reflecting the end of a federally funded for nonresidential construction, which summer jobs program and early retire- had fluctuated within a narrow range ments by postal workers. Initial claims earlier in the year, dropped sharply in fell somewhat during October, and the the third quarter. Office construction civilian unemployment rate edged down registered the largest decline, but other to 7.4 percent. commercial and industrial building also Industrial production rose somewhat fell considerably. further in October following a modest Business inventories rose only increase in the third quarter. Much of slightly in September, but over the third the October gain reflected a sharp rise in quarter as a whole stocks grew at the light truck assemblies, but there was same rate as in the second quarter. In another sizable advance in the manufac- manufacturing, stocks were drawn down ture of office and computing equipment. in September, retracing a sizable portion Elsewhere, the production of consumer of the runup that had occurred in goods other than motor vehicles and August. In most manufacturing indusparts had changed little in recent tries, inventory-to-shipments ratios in months, and the output of defense and September were at or near the bottom space equipment remained on a down- of their recent ranges. Wholesale invenward trend in October. Utilization of tories rose modestly in the third quarter, industrial capacity edged higher in and the stocks-to-sales ratio in Septem- October but was still near its 1991 low. ber was at the low end of the range Retail sales increased appreciably in posted over the past year. At the retail September and October, led by a sub- level, inventories rebounded in Sepstantial rise in sales at automotive deal- tember from an August decline, leaving ers. Sales at general merchandisers, the inventory-to-sales ratio for the retail apparel outlets, furniture and appliance sector unchanged from the second stores, and building materials and sup- quarter. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 1 69 The nominal U.S. merchandise trade At its meeting on October 6, the Comdeficit widened sharply in August; for mittee adopted a directive that called for July and August combined, the deficit maintaining the existing degree of preswas somewhat larger than its average sure on reserve positions and that rate in the second quarter. The value of included a marked bias toward possible exports was little changed from the sec- easing during the intermeeting period. ond quarter, but the value of imports Accordingly, the directive indicated that increased appreciably. Most of the in- in the context of the Committee's longcrease in imports was in capital goods, run objectives for price stability and especially computers, and consumer sustainable economic growth, and givgoods. Recent indicators suggested that ing careful consideration to economic, economic activity in the major foreign financial, and monetary developments, industrial countries had remained slug- slightly greater reserve restraint might gish in the third quarter. A recovery be acceptable or slightly lesser reserve seemed to have gotten under way in restraint would be acceptable during the Canada, but the economies of most intermeeting period. The contemplated European countries and Japan evidenced reserve conditions were expected to be little if any forward impetus, and the consistent with growth in M2 and M3 downturn that began in western Ger- at annual rates of about 2 percent and many in the second quarter appeared to 1 percent respectively over the threehave persisted into the third quarter. month period from September through Producer prices of finished goods December. edged up in October, reflecting a slight Open market operations during the increase in food prices and a further intermeeting period were directed sharp advance in prices of energy prod- toward maintaining the existing degree ucts. Excluding the finished food and of pressure on reserve positions. The energy components, producer prices emergence of more favorable indicadeclined slightly, and for the twelve- tions regarding the performance of the month period ended in October, this economy and the continued more rapid measure of prices increased consider- expansion of money and credit were ably less than it had in the comparable seen as obviating the need to impleyear-earlier period. At the consumer ment an easing in reserve conditions level, prices of nonfood, non-energy that had been contemplated as a goods and services advanced more rap- strong possibility under the directive idly in October than in other any month issued at the October 6 meeting. Several since March. Over the twelve months small technical decreases were made ended in October, however, the rise in during the intermeeting period to this index of consumer prices was con- expected levels of adjustment plus siderably smaller than that recorded in seasonal borrowing to reflect the usual the year-earlier period. Increases in pattern of diminishing needs for sealabor costs, measured by the total hourly sonal credit. Actual borrowing avercompensation of private industry work- aged close to expected levels over ers, slowed further in the third quarter, the three reserve maintenance periods and both the wage and benefits compo- completed since the October meeting. nents of this index had increased sub- Early in the intermeeting period, the stantially less over the four quarters that federal funds rate exhibited some of ended in September than in the preced- the firmness that had prevailed over ing four quarters. most of the previous period, but sub- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 79th Annual Report, 1992 sequently it averaged close to expected expansion in bank credit. Through levels. October, both broad aggregates were Most other interest rates increased estimated to have grown at rates a appreciably over the intermeeting little below the lower ends of the period. At the beginning of the period, ranges established for the year by the rates generally incorporated an expected Committee. near-term easing of monetary policy. The staff projection prepared for this Subsequently, when an easing move was meeting suggested a continuing expannot forthcoming and when concerns sion in economic activity. Growth was about fiscal stimulus increased amid expected to pick up gradually over 1993 some signs of firmer economic activity to a rate that, although quite moderate and increasing money and credit de- by past cyclical standards, would be mands, market interest rates rose for all sufficient to reduce the margins of maturities. The largest increases were in unemployed labor and capital resources. intermediate maturities, which were The recent backup in long-term interest especially affected by expectations of rates and the appreciation of the dollar additional federal borrowing and of a in foreign exchange markets would exert stronger economy that would stimulate some restraining influence over the next rising private credit demands over the several quarters. Continuing cautiousnext few years. Expectations of firmer ness on the part of consumers facing economic growth also boosted stock uncertain job and income prospects prices appreciably over the period. would tend to hold down gains in With interest rates rising in the United consumption for some period ahead. States and falling abroad, the trade- But, as further progress was made in weighted value of the dollar in terms of improving household balance sheets the other G-10 currencies rose very sub- and employment growth gradually stantially over the intermeeting period. resumed, consumer spending would Declines in interest rates in foreign strengthen. Additional gains in outlays countries were widespread, reflecting for business equipment were expected signs of greater economic weakness as over coming quarters as firms sought to well as actual or prospective easing in meet increasing demand for goods and monetary policies abroad. The dollar to respond to competitive pressures by was particularly robust against Euro- modernizing product lines and achievpean currencies but advanced only mod- ing labor-cost savings. The projection erately against the yen. pointed to sluggish export demand in M2 growth strengthened somewhat in light of sustained economic weakness October from its pace in the two previ- abroad. While recognizing the possibilous months. The acceleration of M2 ity of a stimulative fiscal initiative in growth reflected more rapid expansion 1993, the staff retained for this forecast of its transaction components that the assumption employed in several appeared to be associated in part with previous forecasts that fiscal policy the lagged effect of earlier declines in would remain mildly restrictive owing market interest rates and opportunity in large part to a substantial decline in costs and the heavy pace of mortgage defense spending. The persisting slack refinancing activity. M3 grew more in resource utilization over the forecast slowly in October partly owing to horizon was expected to be associated reduced needs for managed liabilities in with additional progress in reducing conjunction with somewhat weaker inflation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 1 71 In the Committee's discussion of cur- much of it was still anecdotal, there rent and prospective economic develop- were growing indications of improving ments, the members indicated that they business and consumer confidence. were encouraged by the somewhat more Some members cautioned that changing positive tone in the latest economic attitudes alone could not be relied on as reports and by the signs of improving harbingers of a more satisfactory ecobusiness and consumer confidence. The nomic performance, as experience in expansion appeared to have gathered recent years made clear, but the somewhat more upward momentum improved financial condition of many than many had anticipated earlier, business firms, households, and lending though a number of members com- institutions provided a further basis for mented that relatively slow economic optimism. A good deal of progress growth was likely to persist over the already had been made toward reducing nearer term. The outlook beyond the debt burdens, and the retarding effects next quarter or two was subject to con- of balance sheet adjustments on current siderable uncertainty and indeed to both spending seemed likely to lessen over upside and downside risks. The advent the forecast horizon. Moreover, despite of a new Administration and a new Con- many lingering problems, the general gress early next year made fiscal policy health of the banking industry had especially hard to predict. Members improved markedly and there were observedthatindicationsofsomeimprove- spreading reports of greater efforts by ment in overall domestic demands, banks to find creditworthy borrowers. should they persist, might well generate At the same time, the members saw considerable strengthening in produc- signs that demands for bank loans might tion activity as businesses attempted to be picking up a bit from very depressed maintain or build up their currently lean levels. inventories. On the other hand, the re- The latest data on retail sales and cent appreciation of the dollar and the anecdotal reports from many parts of the signs of growing weakness in major for- country suggested some improvement eign economies could have adverse in consumer spending. There were implications for demands for goods pro- widespread reports of increasing optiduced in the United States. On balance, mism among retailers regarding the moderate but sustained growth in over- outlook for sales during the holiday seaall economic activity was seen as a son. Sales of automobiles and trucks likely prospect, though the gains proba- appeared to be rising. The members bly would be uneven both in terms of nonetheless generally continued to view their timing and the sectors of the econ- the outlook for consumer spending with omy that would be affected. Against this considerable caution. Consumers rebackground, the members generally mained concerned about job prospects continued to view further progress against the background of continuing toward price stability as a reasonable downsizing and restructuring activities expectation and an important element in by many business firms. Ongoing efforts enabling the expansion to be sustained. to reduce debt burdens also seemed to In their review of developments in be exerting a retarding effect on conkey sectors of the economy, the mem- sumer spending. Against this backbers generally agreed that while the ground, the upturn in consumer confievidence of a strengthening business dence indicated by a recent survey could expansion was still quite limited and prove to be relatively fragile and short- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

172 79th Annual Report, 1992 lived. On balance, a strengthening trend ongoing trade negotiations would furin consumer spending, though to a rela- ther dampen the outlook for U.S. trade. tively moderate pace by past business For the present, anecdotal reports from recovery standards, was still expected to around the country on export sales were provide major support for a sustained mixed, with such sales still well maineconomic expansion. tained in some industries and areas but Since the stimulus from the consumer slowing in others. sector coincided with relatively lean The outlook for fiscal policy constiinventories, its effects might well be tuted a major source of uncertainty; reinforced for a time by business efforts while the enactment of some fiscal to build their inventories. Business policy measures now appeared to be spending for equipment also appeared increasingly likely, there was no reliable likely to remain fairly robust, given a way to predict their overall size, specific moderate expansion in sales and the provisions, or the timing of their effects. improving financial condition of many For now, the downtrend in federal govbusinesses. The housing sector was ernment purchases of goods and serviewed as another potential, though lim- vices constituted a sizable negative in ited, source of stimulus over the forecast the forecast of aggregate demands. In horizon. There were reports of improv- particular, the cutbacks in defense ing home sales and home construction expenditures were having a major effect activity in many parts of the country, on local economies in several parts of including some otherwise depressed the country. Any new fiscal initiatives areas, and many business contacts also might well contain some stimulative were seeing better demand for construc- elements designed to provide a boost to tion materials and home furnishings. On a relatively slow economic expansion. the negative side, nonresidential con- However, the delays usually encounstruction remained weak across much of tered in enacting such legislation the nation, and further reductions in con- together with the subsequent lags before struction activity were likely as major much of the effects were felt in the projects were completed. However, non- economy implied continued fiscal drag residential construction was being main- during the quarters immediately ahead; tained or even trending higher in a few moreover, the propensity for financial areas and appeared to have bottomed markets to raise interest rates in anticiout in others. The rise in natural gas pation of fiscal policy stimulus might prices had spurred drilling activity in also damp spending for some period. recent months, but some members com- Some members saw a risk that much mented that the outlook for significant of the fiscal stimulus would be felt further gains in that industry was not at a time when economic activity promising. might already be gaining considerable Many of the members stressed that momentum. the external sector constituted a major Turning to the outlook for inflation, source of downside risk for the econ- members commented that despite a disomy. The economic prospects for major appointing report on consumer prices foreign economies appeared to have for October, the disinflationary trend deteriorated recently, and given the still appeared to be well established. In appreciation of the dollar, net exports the view of most members, the outlook might well worsen further over the next for relatively subdued pressures on several quarters. The possible failure of resources over the forecast horizon Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 173 together with the slow growth over an A recent staff study had provided some extended period in broad measures of reasons for this unusual behavior, and money augured well for further progress staff analysis pointed to a strong probatoward price stability. Members were bility that velocity would rise again next continuing to observe strong competi- year. tive pressures in local markets, and busi- During the discussion, the members ness contacts were still emphasizing the generally agreed that developments stout resistance that they encountered since mid-1992 had reinforced the case when they tried to raise prices to widen for some reduction in the 1993 range for profit margins or to pass along rising M2, and they indicated that they probacosts. Most businessmen currently saw bly would support proposals for a lower and anticipated little or no inflation in range. Such a reduction would be a techtheir own industries. Consumers also nical adjustment intended to take remained highly price conscious. At the account of the atypical strength in velocsame time, however, there seemed to be ity. Some noted that a lower range also a widespread view in the business com- would be seen as underscoring the desire munity and among consumers that at of the Committee to avoid any pickup in some point the rate of inflation was inflation should the expansion gain likely to rise appreciably from its recent momentum and indeed as promoting level, and such expectations tended to further progress toward price stability, have adverse repercussions in long-term thereby establishing a sounder basis for debt markets and to create tensions in sustained growth in the economy at its wage negotiations and other price- highest potential. The ranges would setting activities. Members noted that be voted on in February before their current inflationary expectations had scheduled announcement to the Conbeen built up over a period of many gress, and by that time more information years and an extended period of reduced would be available to gauge the prospecinflation probably would be required tive behavior of M2 during 1993. before they disappeared. In the Committee's discussion of pol- At this meeting, the Committee had a icy for the intermeeting period ahead, a preliminary discussion of the ranges for majority of the members indicated a monetary growth in 1993 that it had preference for maintaining unchanged established on a tentative basis at the conditions in reserve markets, but sevmeeting on June 30-July 1, 1992. The eral others believed that some easing ranges in question had been set at 2Vi to would be a more appropriate policy. 6V2 percent for M2 and 1 to 5 percent Members who supported a steady policy for M3 and were unchanged from those course emphasized the growing if still adopted for 1992. While there had been tentative indications of a strengthening considerable sentiment at midyear in economy—including the pickup in favor of lowering the ranges, a majority money and credit growth—and the of the members had concluded then that apparent upturn in business and conuncertainties about the prospective rela- sumer confidence. Some also cited the tionship between the monetary aggre- increased prospects of fiscal policy meagates and nominal spending argued for sures that were likely to provide some caution in making any changes. The net stimulus to the economy over the information since midyear had con- intermediate term. Members who prefirmed the persistence of sizable ferred to ease monetary policy at this increases in the velocity of M2 and M3. time referred to what they viewed as an Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

174 79th Annual Report, 1992 unsatisfactory outlook for economic In the Committee's discussion of posactivity, and some stressed the desirabil- sible adjustments to policy during the ity of taking prompt action to promote intermeeting period, many of the memsustained growth in the broader mone- bers expressed a preference for a directary aggregates within the Committee's tive that did not bias potential adjustranges. Members who favored an imme- ments in either direction. In this view, diate easing also endorsed coupling such the expansion was on a reasonably solid a policy move with a reduction at this footing, the risks to the expansion were time in the tentative M2 range for 1993 now fairly evenly balanced, and a steady in order to emphasize the Committee's policy course should be maintained in commitment to noninflationary eco- the absence of unanticipated developnomic growth. ments with significant implications for In the course of the discussion, the the economic outlook. Other members, members took account of a staff analysis while encouraged by recent economic that suggested some moderation in the developments, wanted to bias the direcgrowth of M2 over the remainder of tive toward ease, though without the the year, assuming unchanged condi- strong presumption of some potential tions in reserve markets. While M2 easing that had been associated with the growth on a quarterly average basis was previous directive. They observed that expected to be stronger in the current the economy was still expanding at a quarter than in the previous two relatively subdued pace, inflation was quarters, expansion for the year as a on a downward track, and given the whole was still projected to fall a little earlier tendency for the recovery to below the Committee's annual range. weaken, they believed that the Commit- Some members commented that an tee should react relatively promptly to important policy objective would be to indications, including any downturn in prevent M2 growth from faltering— money growth, that the economy might such a development might parallel a again be falling short of a moderate similar pause in the economy—as it growth path. Most of the members who had earlier in the current expansion. preferred to ease immediately indicated On the other hand, some members that they could accept an unchanged noted the persisting increases in M2 directive that was biased toward ease, velocity. They remarked that the level of and such a directive also was acceptable short-term interest rates together with to many members who favored a symthe very rapid expansion in Ml and metrical directive. reserves pointed to an adequate avail- At the conclusion of the Committee's ability of liquidity in the economy and discussion, all but three of the members thus suggested that current monetary indicated their acceptance of a directive policy already was appropriately stimu- that called for maintaining the existing lative and properly positioned to sup- degree of pressure on reserve positions port the projected strengthening in and that would include some bias toeconomic activity. Indeed, in one ward possible easing during the interview, continued rapid expansion in the meeting period. Two of the members narrrow measures of money and expressed a strong preference for a symreserves, if allowed to continue, would metric directive with regard to possible be a matter of increasing concern with intermeeting policy adjustments, while respect to the longer-run implications another was firmly persuaded of the for inflation. desirability of an immediate increase Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 175 in reserve availability to strengthen the M2 has expanded at a moderate pace since growth of M2. Accordingly, in the con- midsummer, with all of its growth stemming from its Ml component, while M3 grew text of the Committee's long-run objecslowly. Through October, both aggregates tives for price stability and sustainable were estimated to have grown at rates a little economic growth, and giving careful below the lower ends of the ranges estabconsideration to economic, financial, lished by the Committee for the year. and monetary developments, the Com- The Federal Open Market Committee mittee decided that slightly greater mon- seeks monetary and financial conditions that etary restraint might be acceptable or will foster price stability and promote sustainable growth in output. In furtherance of slightly lesser monetary restraint would these objectives, the Committee at its meetbe acceptable during the intermeeting ing on June 30-July 1 reaffirmed the ranges period. The reserve conditions contem- it had established in February for growth of plated at this meeting were expected M2 and M3 of 2Vi to 6V2 percent and 1 to to be consistent with growth in M2 5 percent respectively, measured from the and M3 at annual rates of about 3!/2 and fourth quarter of 1991 to the fourth quarter of 1992. The Committee anticipated that 1 percent respectively over the threedevelopments contributing to unusual velocmonth period from September through ity increases could persist in the second half December. of the year. The monitoring range for growth At the conclusion of the meeting, the of total domestic nonfinancial debt also was maintained at AV2 to SV2 percent for the year. following domestic policy directive was For 1993, the Committee on a tentative basis issued to the Federal Reserve Bank of set the same ranges as in 1992 for growth of New York: the monetary aggregates and debt, measured from the fourth quarter of 1992 to the fourth The information reviewed at this meeting quarter of 1993. The behavior of the monesuggests that economic activity has been tary aggregates will continue to be evaluated expanding at a moderate pace. Total nonfarm in the light of progress toward price level payroll employment was up slightly in Octo- stability, movements in their velocities, and ber after declining in the previous two developments in the economy and financial months, and the civilian unemployment rate markets. edged down to 7.4 percent. Industrial pro- In the implementation of policy for the duction rose somewhat in October. Retail immediate future, the Committee seeks to sales increased considerably in September maintain the existing degree of pressure on and October. There was some strengthening reserve positions. In the context of the Comin residential construction activity over the mittee's long-run objectives for price stabilsummer months. Outlays for business equip- ity and sustainable economic growth, and ment have continued to increase, and recent giving careful consideration to economic, data on orders for nondefense capital goods financial, and monetary developments, point to further growth in the near term; slightly greater reserve restraint might or expenditures for nonresidential construction slightly lesser reserve restraint would be have remained weak. The nominal U.S. mer- acceptable in the intermeeting period. The chandise trade deficit widened somewhat in contemplated reserve conditions are ex- July-August from its average rate in the pected to be consistent with growth of M2 second quarter. Recent data on wages and and M3 over the period from September prices have been mixed but suggest on through December at annual rates of about balance a continuing trend toward lower 31//2 and 1 percent, respectively. inflation. Most interest rates have increased appreciably since the Committee meeting on Votes for this action: Messrs. Greenspan, October 6. In foreign exchange markets, the Corrigan, Angell, Hoenig, Kelley, Lindtrade-weighted value of the dollar in terms sey, and Mullins, Ms. Phillips, and Mr. of the other G-10 currencies rose very sub- Syron. Votes against this action: Messrs. stantially over the intermeeting period. Jordan, LaWare, and Melzer. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

176 79th Annual Report, 1992 Mr. Jordan dissented because he pre- $11 billion, in the limit on changes ferred taking immediate action to in- between Committee meetings in System crease the availability of bank reserves Account holdings of U.S. government sufficiently to raise M2 growth to a pace and federal agency securities. The more consistent with the Committee's increase amended paragraph l(a) of the annual range. Because desirable M2 Authorization for Domestic Open Marexpansion in line with the Committee's ket Operations and was effective for the objectives would be likely to fall within intermeeting period ending with the a lower range next year, he would an- close of business on December 22, 1992. nounce concurrently a reduction in the 1993 range to make clear that near-term Votes for this action: Messrs. Greenspan, Corrigan, Angell, Hoenig, Jordan, Kelley, action to increase M2 expansion was not LaWare, Lindsey, Melzer, and Mullins, an abandonment of the long-term objec- Ms. Phillips, and Mr. Syron. Votes against tive of noninflationary monetary growth. this action: None. Messrs. LaWare and Melzer dissented because they did not want to bias the The Manager of the System Open directive toward possible easing dur- Market Account advised the Committee ing the intermeeting period. In their that the current leeway of $8 billion for view, recent developments pointed changes in System Account holdings to a strengthening economy, and they might not be sufficient to accommodate favored a steady policy that was not the potentially large need to add reserves predisposed to react to near-term weak- over the intermeeting period ahead to ness in economic or monetary data. meet an anticipated seasonal bulge in More time was needed to evaluate the the demand for currency and required effects of prior monetary policy actions, reserves. and they were concerned that the adoption of a more stimulative policy over the near term might well establish a Meeting Held on basis for greater inflation later. Mr. December 22, 1992 Melzer was concerned that rapid growth in total bank reserves, the monetary The information reviewed at this meetbase, and Ml over the past two years ing suggested that economic activity might already have laid a foundation for was rising appreciably in the fourth accelerating nominal GDP growth and a quarter. Consumer spending, in associareversal of the disinflationary trend. In tion with an apparent upturn in wage addition, he noted that policy errors can income and a surge in confidence, had easily be made at this stage of the busi- improved considerably; sizable gains ness cycle. In an economic expansion, were being registered in the sales and efforts to resist increases in the federal starts of single-family homes; and busifunds rate through large reserve injec- ness spending for capital equipment tions eventually lead to higher inflation remained strong. There also had been and higher nominal interest rates. solid advances in industrial output, and private payroll employment had turned up. Data on wages and prices had been 2. Authorization for Domestic slightly less favorable recently, and on Open Market Operations balance they raised the possibility that The Committee approved a temporary the trend toward lower inflation might increase of $3 billion, to a level of be slowing a little. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 177 Total nonfarm payroll employment the preliminary estimate for new home expanded for the third consecutive sales was down in October. month in November, and the average The limited data available suggested workweek increased further. A sizable that real business fixed investment was rise in government employment largely continuing to expand at a brisk pace. reflected temporary hiring to staff poll- Shipments of nondefense capital goods ing places during the general election. were up on balance over September and Private employment also picked up October. A decline in shipments of somewhat, despite a decline in construc- office and computing equipment, which tion jobs and weaker-than-usual sea- had accounted for most of the gains in sonal hiring in the retail trade sector. shipments since early 1991, was more A range of service industries recorded than offset by a considerable rise in further gains in employment, and the shipments of other items. Among other number of jobs in manufacturing indicators of spending for durable equipincreased after three months of sizable ment over the September-October declines. The civilian unemployment period, sales of heavy trucks rose rate fell further in November, to sharply, and business purchases likely 7.2 percent. accounted for some of the recent sizable Industrial production recorded increase in sales of light trucks; on the another advance in November. Motor other hand, shipments of complete airvehicle assemblies were about un- craft were weak. Nonresidential conchanged, but significant gains were evi- struction activity turned up on balance dent elsewhere, notably in the produc- in September and October, partly retion of business equipment, construction flecting a steadying of expenditures for supplies, and industrial materials. The office buildings, which had plunged duroutput of consumer goods rose slightly ing the summer. At the same time, confurther in November; all of the increase struction of other commercial structures was in the production of nondurable recovered from a sharp decline in goods. Reflecting the higher level of August, while outlays for industrial output, total utilization of industrial structures remained weak. A sharp capacity edged higher in November to a increase in drilling activity occurred in level slightly above that at the end of October, apparently in response to 1991. higher natural gas prices and the expira- Retail sales, buoyed by strong gains tion at year-end of a drilling subsidy. in disposable income and a marked Business inventories were drawn improvement in consumer attitudes, rose down appreciably further in October. In sharply in October and posted a further manufacturing, reductions in stocks increase in November. Sales of light were smaller in October than in Septemtrucks were up substantially in the ber. The ratios of stocks to shipments in October-November period, and sales of most industries were at or near the bota wide variety of other goods, both dura- tom of their recent ranges. In the trade ble and nondurable, also advanced con- sector, a sharp drop in stocks held by siderably. Single-family starts rose over auto dealers more than accounted for an October and November to their highest overall decline in retail inventories in level since February, but starts of multi- October. Aside from auto dealers, a family units remained at depressed lev- slight increase in retail stocks coupled els. Sales of new and existing homes with a strong increase in sales produced continued on an upward trend, although a small decline in inventory-to-sales Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 79th Annual Report, 1992 ratios. Wholesale inventories fell again than in the year-earlier period. Average in October, and the inventory-to-sales hourly earnings of private production or ratio for this sector was near the low end nonsupervisory workers also rose more of the range observed over the past two rapidly in November; the strongest gains years. were in the finance, insurance, and real The nominal U.S. merchandise trade estate category, but sizable increases deficit narrowed somewhat in October were recorded in several other sectors as from its average rate in the third quarter, well. Nevertheless, average hourly earnreflecting both a considerable increase ings rose more slowly over the twelve in the value of exports and a decline in months ended in November than over the value of imports. Most of the expan- the year-earlier period. sion in exports was in capital goods, At its meeting on November 17, the notably aircraft and industrial machin- Committee adopted a directive that ery, and consumer goods. The reduction called for maintaining the existing in imports was primarily in consumer degree of pressure on reserve positions goods and in passenger cars imported and that included some bias toward posfrom Canada. Recent indicators gener- sible easing during the intermeeting ally pointed to continued weakness in period. Accordingly, the directive indithe economies of the major foreign cated that in the context of the Commitindustrial countries. During the third tee's long-run objectives for price stabilquarter, economic activity contracted ity and sustainable economic growth, further in Japan and western Germany and giving careful consideration to ecoand expanded slowly in France and nomic, financial, and monetary develop- Canada. In the United Kingdom, activ- ments, slightly greater reserve restraint ity appeared to have changed little. might be acceptable or slightly lesser Producer prices of finished goods fell reserve restraint would be acceptable slightly in November, reflecting sharp during the intermeeting period. The condeclines in the prices of food, gasoline, templated reserve conditions were and fuel oil. Excluding the finished food expected to be consistent with growth and energy components, producer prices of M2 and M3 at annual rates of about edged higher and, for the twelve months 3x/2 and 1 percent respectively over the ended in November, rose at a consider- three-month period from September ably slower pace than in the comparable through December. year-earlier period. By contrast, at the Open market operations during the consumer level, prices of nonfood, non- intermeeting period were directed toenergy goods increased over October ward maintaining the existing degree of and November at a faster rate than in the pressure on reserve positions. One small previous several months. Consumer technical decrease was made during the prices of apparel, tobacco, and used cars period to expected levels of adjustment rose sharply in October, and airfares plus seasonal borrowing to reflect the surged in October and November as usual pattern of diminishing needs for domestic airlines sought to restore profit seasonal credit. Because of settlementmargins that had been squeezed by pro- day pressures, actual borrowing along motions over the summer. Even with with the federal funds rate tended to these upticks, however, the index of con- average a little above expected levels. sumer prices excluding food and energy Changes in other short-term interest increased considerably more slowly in rates were mixed over the intermeeting the twelve months ended in November period. In the market for Treasury secu- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 179 rities, bill rates were essentially un- bank officials that damped market changed while bond yields fell despite expectations of near-term monetary the emergence of a more robust eco- easing in Germany. The relative stability nomic picture. Tending to offset the of the dollar contrasted sharply with effects of the latter on long-term rates the rekindling of exchange rate preswas the tenor of statements emanating sures among a number of European from the incoming Administration, currencies. which were viewed by market partici- The growth of M2 slowed in Novempants as reducing the likelihood of a ber, and on average it had expanded at a large fiscal stimulus package. The recent moderate pace in recent months; the limstep-up in the size of bill auctions and ited available data indicated a further the potential for some shortening of the reduction in growth of this aggregate in maturity of Treasury debt issues under December. The recent behavior of M2 the new Administration also might have largely reflected a sharp falloff in the contributed to the flattening of the Trea- expansion of demand deposits associsury yield curve. Market expectations of ated with a backup in money market year-end pressures sharply boosted rates in previous months and a likely interest rates on very short-term private slowing in the rate of increase in mortpaper for a time; however, concerns gage refinancing activity. M3 expanded about year-end pressures subsequently at a relatively slow rate in November abated, and much of the rise in rates was and appeared to be declining in Decemretraced. Most three- to six-month pri- ber. For the year, both M2 and M3 vate rates fell on balance over the apparently grew at rates a little below period; the lower rates likely were asso- the lower ends of the annual ranges esciated with lessened expectations of tablished by the Committee. year-end pressures but also might have The staff projection prepared for this reflected perceptions of reduced credit meeting suggested a continuing expanrisks in a strengthening economy. sion in economic activity that would be Buoyed by the prospects for a stronger associated with gradual reductions in the economy and the declines that had margins of unemployed or underutilized occurred in bond yields, most major labor and capital resources. The pickup indexes of stock prices reached record in economic activity in recent months, highs. through its positive effects on confi- In foreign exchange markets, the dence and incomes, was expected to trade-weighted value of the dollar in provide greater momentum to the econterms of the other G-10 currencies was omy in the near term. However, this essentially unchanged on balance over impetus would in part be offset by the intermeeting period. The dollar weaker export demand as a result of moved moderately higher over the first slower growth abroad and the higher half of the period in response to incom- level of the dollar; the earlier backup in ing data suggesting that the prospects long-term interest rates, only part of for sustained economic growth in the which was retraced in recent weeks, also United States were improving while the would have a restraining effect. Coneconomic outlook for Japan and Ger- sumer spending, which had outpaced many was deteriorating somewhat. Later income growth in the second half of in the period, the dollar gave up its 1992, was projected to expand more in gains, partly as a result of strong anti- line with incomes in coming quarters. inflationary statements from Bundes- Residential construction was expected Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

180 79th Annual Report, 1992 to strengthen gradually as concerns surrounded by substantial uncertainty about employment security receded and with respect to the nature, size, and incomes improved. Spending increases timing of any fiscal initiatives and the on business equipment were expected longer-run consequences. On the negato be sustained in part by continuing tive side, many of the members stressed efforts to improve productivity, and what they regarded as a worsening outinvestment in industrial building and in look for U.S. exports; they also noted commercial structures other than office the continuing weakness in commercial buildings would begin to pick up in construction, defense spending, and the 1993. While recognizing the possibility retarding effects on employment of of a stimulative fiscal initiative in 1993, ongoing downsizing and restructuring the staff retained for this forecast the by many business and financial firms. assumption in several recent forecasts With regard to the outlook for inflation, that fiscal policy would be mildly re- some of the recent reports on prices and strictive. The persisting, though dimin- wages had been less favorable than ishing, slack in resource utilization over earlier. However, against the backthe forecast period was expected to be ground of continuing though diminishassociated with additional progress in ing slack in production resources, favorreducing inflation. able trends in productivity, and In the Committee's discussion of cur- restrained growth in the broad measures rent and prospective economic devel- of money, the members generally conopments, the members cited growing tinued to anticipate further progress indications of a somewhat stronger toward price stability over the forecast expansion than had seemed to be under horizon. way earlier and a marked improvement The statistical evidence of a stronger in business and consumer confidence, expansion was bolstered by anecdotal especially over the past month or two. reports of improving business condi- Although substantial uncertainties still tions across much of the nation. Confisurrounded the outlook, these develop- dence appeared to be rising in most ments provided encouraging support for areas and indeed seemed to be leading forecasts of continued economic growth the statistics. Some members observed, at a pace sufficient to reduce gradually however, that representatives of many margins of unutilized resources. The ex- larger business firms did not seem to pansion now seemed to have gathered share the ebullient mood of their smaller fairly broad-based momentum that business counterparts, possibly reflectmight be reinforced over the quarters ing the still active retrenchment efforts ahead by business efforts to build of many large firms and growing indicaup inventories in the context of gener- tions for some of weakening markets ally low inventory-to-sales ratios. More- abroad. There also were significant geoover, the improving financial condition graphic exceptions to the improving of many households and business firms, business climate, notably in areas that notably banking institutions, was a were substantially affected by cutbacks promising development that should in defense spending, business consolidareduce constraints on economic growth tion and cost-cutting activities, and over coming quarters. The possibility underlying weakness in the energy of expansionary fiscal measures was industry. On balance, regional weakness another source of potential short-term in parts of the country such as southern stimulus to the economy, though one California tended to be masked in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 181 overall economic statistics by what were to stabilize for the nation as a whole increasingly robust business conditions next year after declining in recent years. in the rest of the nation. In this connection, members drew some Personal consumption expenditures encouragement from anecdotal reports had posted relatively good gains over that prices, rental rates, and other terms the past several months, and retail sales relating to the value of commercial real were displaying considerable strength in estate seemed to be bottoming out in the ongoing holiday season according to several depressed markets, though a anecdotal reports from around the coun- turnaround involving significant new try. Further growth in consumer expen- construction was unlikely for an ditures was expected to provide a key extended period in many of those marunderpinning for continuing economic kets. The outlook for housing construcexpansion. A development that might tion was more promising, especially for well be buttressing consumer spending the single-family sector. Housing activwas the improvement in existing home ity had strengthened at least marginally sales and the related capital gains that in recent months in many parts of the were tending to supplement the recent country, and the conjunction of reduced strengthening in disposable incomes. mortgage rates and some projected Nonetheless, the contribution of the con- increase in incomes was expected to sumer sector was likely to be con- support at least a gradual uptrend in strained by a number of factors despite housing construction. the recent surge in consumer confi- With regard to fiscal policy, members dence. In particular, an already low sav- noted that the bond markets had ing rate and still substantial household responded favorably in recent weeks to debt burdens would tend to restrain the indications that the incoming Adminisgrowth in consumption expenditures. tration would give emphasis to reducing Moreover, it seemed likely that gains in the federal budget deficit over time. Inemployment would continue to be rela- deed, the prompt enactment of legislatively limited, owing to further business tion to achieve that objective restructuring activities and related undoubtedly would bolster business and improvements in productivity that consumer confidence as well as bond would tend to hold down the demand for markets, with favorable effects on the new workers. Even so, the pace of busi- economy. Some members cautioned, ness hiring could be expected to quicken however, that those effects would tend as existing workers were utilized more to be negated to the extent that lower fully and the practical limits to increas- federal spending was offset by legislated ing output through overtime work were increases in required spending by busireached. ness firms to finance worker benefits Continuing efforts to improve produc- and other programs; such spending tivity were seen as likely to stimulate would reduce profits and incentives to appreciable further expansion in busi- expand and ultimately would boost costs ness fixed investment. Much of that and prices. In any event, the course of expansion was expected to take the form fiscal legislation remained highly uncerof substantial further growth in outlays tain in terms of its size, structure, and for business equipment, especially if an timing and thus its near- and longerinvestment tax credit were to be en- term effects on the economy. acted. At the same time, investment in Many of the members saw a substannonresidential structures was projected tial risk that lagging exports could exert Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 79th Annual Report, 1992 a significant constraint on the domestic and the rise in the foreign exchange expansion. There were increasing indi- value of the dollar. Rapid increases in cations of a weaker economic perfor- the narrow measures of money and mance in many foreign countries, which reserves also were cited as possibly sigwere reinforced by recent anecdotal nifying a risk on the other side if such reports from contacts at domestic firms increases persisted—that is, that moneengaged in international business activi- tary policy might soon be accommodatties. However, while the risks for pro- ing renewed inflationary pressures. spective economic activity abroad In the Committee's discussion of seemed to be tilted to the downside, short-run policy for the period until the stimulative policy responses by foreign next meeting, all of the members authorities—some of which had already expressed a preference for maintaining been initiated—might well alter devel- an unchanged degree of pressure on oping trends. For now, though, diverg- reserve positions; all also indicated that ing business trends in the United States they could support a shift from the tilt and foreign nations in association with toward ease incorporated in recent directhe rise that had occurred in the dollar tives to a symmetrical directive that over the course of recent months pointed would not include any bias with regard to a worsening trade balance for the to possible adjustments to the degree of United States. reserve restraint during the intermeeting The members generally anticipated period. Improved prospects for moderfurther progress toward price stability, ate economic growth argued for mainalthough some now expected somewhat taining the Committee's current stance less improvement than they had earlier. in reserve markets, and they also war- In the view of many members, key fac- ranted a shift toward a more balanced tors underlying a favorable inflation out- approach to possible intermeeting look included the persisting, though changes in policy. At the same time, the decreasing, slack in the utilization of still considerable uncertainties surroundproduction resources associated with the ing the economic outlook, including moderate expansion expected in overall some lingering questions about the economic activity and the slow growth sustainability of the expansion, indicated that had occurred for an extended period the desirability of a cautious approach to in the broad measures of money. While any policy changes. In this connection, recent data on consumer prices and several members referred to the swings wages had a somewhat less favorable in the outlook that had characterized the tenor, price competition remained vigor- current expansion, including the recent ous in markets for many goods and reversal of sentiment regarding the developments in long-term debt markets strength of the expansion, and the assosuggested some shift in expectations ciated risks of premature or misdirected toward lower inflation. It also was noted policy moves. that ongoing cutbacks in work forces by The members observed that the next many employers, including widely pub- policy move might be in either direclicized reductions by some major corpo- tion. For example, the need for some rations, were tending to limit demands easing could not be ruled out should the for higher wages. Another important expansion again appear to be faltering. influence was the strong competition Substantial weakness in the monetary from foreign suppliers in the context of aggregates over coming months would sluggish demands in their own markets be one factor to be weighed in assessing Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 1 83 the economic outlook, though velocity given the concomitant and unusual rise developments also would have to be in their velocities, several members taken into account. On the other hand, a nonetheless expressed concern about the stronger economic performance might persistence of the lagging growth. A few raise questions as to the need for a tight- were more concerned about the behavening move at some point during the ior of the narrower measures of money year ahead as a means of maintaining such as Ml or the monetary base whose progress toward price stability while growth had been unsustainably rapid continuing to encourage maximum sus- over much of 1992, though these now tainable economic expansion. If a tight- gave some indications of moderating. ening move were to be needed, it would There was general agreement that the be desirable to implement such a move performance of the various monetary before inflation pressures showed aggregates should continue to be monithrough in the actual price statistics in tored with special care. order to avoid sharp and potentially dis- At the conclusion of the Committee's ruptive tightening actions later. One discussion, all of the members indicated member expressed concern about the their support of a directive that called risk of maintaining an overly stimula- for maintaining the existing degree of tive monetary policy for too long, with pressure on reserve positions and that adverse consequences for inflation; did not include a presumption about the while not prepared to tighten policy at likely direction of any adjustments to this point, he indicated a preference for policy during the intermeeting period. biasing the directive toward restraint. Accordingly, in the context of the Com- In the course of this discussion, the mittee's long-run objectives for price members took account of a staff analysis stability and sustainable economic that pointed to quite sluggish growth in growth, and giving careful consideration M2 and M3 over the months ahead and to economic, financial, and monetary to a marked slowing in the expansion developments, the Committee decided of Ml. The broader monetary aggre- that slightly greater or slightly lesser gates were expected to continue to be monetary restraint would be acceptable affected by the various factors that had during the intermeeting period. The inhibited their growth over the past two reserve conditions contemplated at this years and that had induced a substantial meeting were expected to be consistent diversion of credit flows from banking with M2 growth at an annual rate of institutions into capital market instru- about IV2 percent and with M3 about ments. Moreover, some special factors unchanged over the four-month period that had boosted the growth of the from November through March. broader aggregates in recent months, At the conclusion of the meeting, the such as the enlarged volume of mort- following domestic policy directive was gage refinancing activity, would tend to issued to the Federal Reserve Bank of dissipate in the months immediately New York: ahead, assuming no significant change in mortgage interest rates. While the The information reviewed at this meeting atypically slow growth of the broader suggests that economic activity has been rising appreciably in the current quarter. Total aggregates during the current economic nonfarm payroll employment has increased recovery did not under prevailing cirslightly since September, and the average cumstances have the usual implications workweek has moved higher. The civilian for the performance of the economy, unemployment rate fell further in November Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

184 79th Annual Report, 1992 to 7.2 percent. Industrial production posted In the implementation of policy for the solid gains in October and November. Retail immediate future, the Committee seeks to sales increased sharply in October and rose maintain the existing degree of pressure on further in November. Residential construc- reserve positions. In the context of the Comtion activity appears to have increased from mittee's long-run objectives for price stabilthe third-quarter pace. Indicators of business ity and sustainable economic growth, and fixed investment have been mixed recently, giving careful consideration to economic, but on balance they suggest further growth. financial, and monetary developments, The nominal U.S. merchandise trade deficit slightly greater reserve restraint or slightly narrowed somewhat in October from its lesser reserve restraint would be acceptable average rate in the third quarter. Recent data in the intermeeting period. The contemplated on wages and prices suggest on balance a reserve conditions are expected to be consispossible slowing in the trend toward lower tent with M2 growing at a rate of around inflation. 1 Vi percent and M3 about unchanged in the Changes in short-term interest rates have period from November through March. been mixed since the Committee meeting on November 17 while bond yields have edged Votes for this action: Messrs. Greenspan, lower. In foreign exchange markets, the Corrigan, Angell, Hoenig, Jordan, Kelley, trade-weighted value of the dollar in terms LaWare, Lindsey, Melzer, and Mullins, of the other G-10 currencies was essentially Ms. Phillips, and Mr. Syron. Votes against unchanged on balance over the intermeeting this action: None. • period. Over the course of recent months, M2 has expanded at a moderate pace, while M3 has continued to expand at a very slow rate. More recently, both aggregates have weakened somewhat. Both appear to have grown at rates a little below the lower ends of the ranges established by the Committee for the year. The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. In furtherance of these objectives, the Committee at its meeting on June 30-July 1 reaffirmed the ranges it had established in February for growth of M2 and M3 of 2Vi to 6V2 percent and 1 to 5 percent respectively, measured from the fourth quarter of 1991 to the fourth quarter of 1992. The Committee anticipated that developments contributing to unusual velocity increases could persist in the second half of the year. The monitoring range for growth of total domestic nonfinancial debt also was maintained at 4Vi to %Vi percent for the year. For 1993, the Committee on a tentative basis set the same ranges as in 1992 for growth of the monetary aggregates and debt measured from the fourth quarter of 1992 to the fourth quarter of 1993. The behavior of the monetary aggregates will continue to be evaluated in the light of progress toward price level stability, movements in their velocities, and developments in the economy and financial markets. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

185 Consumer and Community Affairs Concerns about possible discrimination staff commentary to Regulation Z. Other in mortgage lending and access to credit proposed amendments applicable to by minorities and low-income house- home equity lines were not adopted holds continued to receive special atten- • Provided an exception, pursuant tion from the Division of Consumer and to temporary authority granted by the Community Affairs in 1992. This chap- Depository Institutions Disaster Relief ter presents the efforts of the Board to Act of 1992, with regard to the right of address these concerns and to promote rescission—the three-day waiting period fair lending. It summarizes the Board's normally applicable to the disburseactions to enforce existing federal con- ment of funds in credit transactions sumer protection laws and to implement secured by a consumer's home. The new statutory protections. It also dis- exception allows borrowers in certain cusses the community affairs program disaster areas to waive their right of of the Board and Reserve Banks; reports rescission and permits creditors to use on the examination of institutions for preprinted waiver forms in these limited compliance with consumer laws—by the instances Federal Reserve and other regulatory • Amended Regulation CC (Expeditagencies—and on the System's handling ed Funds Availability) to permit instituof consumer complaints; details the tions, on an exception basis, to extend activities of the Board's Consumer holds on checks that usually require Advisory Council; and reports on next-day and second-day availability. congressional testimony on consumer The Board also finalized the hold schedaffairs issues. ule for deposits made at nonproprietary automated teller machines • Adopted Regulation DD, imple- Regulatory Matters menting the Truth in Savings Act The Board took these actions with (TISA), to require depository instituregard to consumer affairs regulations: tions to provide consumers with account • Proposed an amendment to Regula- disclosures. At year-end the Board pubtion B (Equal Credit Opportunity) giv- lished proposed changes after the Coning credit applicants the right to receive gress amended TISA by extending the copies of appraisal reports mandatory compliance date, changing a • Amended Regulation C (Home part of the advertising rules, and modi- Mortgage Disclosure) to expand the fying a notice provision coverage of the act and to implement a • Issued guidance through updates to small-institution exemption standard for the official staff commentaries to Regunondepository mortgage companies lations B and Z. • Revised Regulation Z (Truth in Lending) to provide a limited exception Regulation B that allows banks to include a demand (Equal Credit Opportunity) provision in home equity lines to executive officers and proposed comparable In December the Board issued proposed language for closed-end loans in the revisions to Regulation B (Equal Credit Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

186 79th Annual Report, 1992 Opportunity) to provide credit appli- of Housing and Urban Development cants the right, upon written request, to processed data covering the 1991 lendreceive copies of appraisal reports. The ing activity of more than 9,300 instirevisions to Regulation B implement tutions; and the FFIEC produced statutory amendments contained in the more than 25,900 individual disclosure Federal Deposit Insurance Corporation statements. Improvement Act. The proposed amend- The information now available under ments specify that the appraisal provi- HMDA has expanded the opportunities sion covers applications to be secured for analysis of home lending activity. by a lien on a residential structure con- Before 1989, HMDA data revealed taining one- to four-family units. They information only about the geographic also provide the time frames in which distribution of residential lending by applicants must request, and creditors covered institutions. Statutory amendmust give, a copy of an appraisal report. ments to HMDA, enacted in 1989, The proposal would require most credi- expanded disclosures to include the tors to notify applicants in writing of disposition of applications—approved, the right to receive a copy of an denied, withdrawn, or files closed for appraisal report unless a copy is pro- incompleteness—and the race or navided automatically. tional origin, income, and sex of applicants and borrowers. The amendments also expanded coverage to include inde- Regulation C pendent mortgage companies. (Home Mortgage Disclosure) The regulatory agencies use the Regulation C generally applies to mort- HMDA data in assessing lender compligage lenders that have assets of more ance with the Community Reinvestment than $10 million and are located in Act and the fair lending laws. These metropolitan areas. It requires disclo- data are also used by community organisure of data concerning home purchase zations, financial institutions, and the and home improvement loans. Lenders public to obtain a greater awareness and submit data—about loans they originate, understanding of residential lending about the disposition of other applica- activities in local communities. tions they receive, and about loans that Lenders make their HMDA disclothey purchase—to their supervisory sure statements available to the public. agencies, and the Federal Financial In- The FFIEC also prepares reports showstitutions Examination Council (FFIEC) ing the overall lending activity among uses the data to prepare HMDA disclo- all reporting lenders in each of the sure statements for individual institu- nation's 341 metropolitan areas. These tions.1 During 1992, the Board, the other reports and copies of the individual banking agencies, and the Department reports are available at central depositories. Data from the loan application register will be available on magnetic tape and personal computer diskettes from 1. The FFIEC consists of representatives from the FFIEC. the five financial regulatory agencies: the Board of Governors of the Federal Reserve System, the Like the HMDA data for 1990, the Federal Deposit Insurance Corporation (FDIC), data for 1991 indicate that rates of credit the National Credit Union Administration denial are higher for black and Hispanic (NCUA), the Office of the Comptroller of the loan applicants than for Asian and white Currency (OCC), and the Office of Thrift Supervision (OTS). applicants, even when applicants are in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 187 the same income bracket. Also, analysis In December the Board solicited comof the data shows that the rate of loan ments on a proposal requiring earlier denial generally increases with an public access to the HMDA data to increase in the proportion of minority implement an amendment to the act residents in a neighborhood. Income made by the Housing and Community levels account for some of the variation Development Act of 1992. Under the in loan-disposition rates among racial proposal, covered lenders will make disgroups. However, even after controlling closure statements available to the pubfor income, white applicants for conven- lic within three business days, instead of tional home loans in all income groups thirty days, after receiving the statehad lower rates of denial than black and ments from supervisory agencies. Also, Hispanic applicants. they will make a copy of their loan The HMDA data alone are not suffi- application register available to the pubcient to determine whether a lender is lic beginning March 31, 1993; to protect discriminating unlawfully. Specifically, the privacy of mortgage applicants and the data do not reflect the wide range of borrowers, they will delete certain financial and property-related factors items—the loan or application number, that lenders consider in evaluating loan the date of application, and the date applications. The data do provide a action was taken. means for targeting specific application The FFIEC issued a revised version files to review and for generating ques- of A Guide to HMDA Reporting, Getting tions to ask of the institution's manage- it Right, to assist institutions. The comment. Examiners evaluate targeted files prehensive guide discusses the law's by applying the lender's underwriting requirements, coverage, and managestandards to the application data to ment responsibilities; it also sets forth determine whether the applicant re- detailed directions for gathering data, ceived fair treatment. plus step-by-step instructions for com- In November the Board adopted an pleting the reporting form. amendment to Regulation C that will expand HMDA coverage of nondepository mortgage companies in metropoli- Regulation Z (Truth in Lending) tan areas. Previously such lenders, like depository institutions, were covered In July the Board adopted a final rule only if their assets exceeded $10 million regarding home equity disclosures and in the preceding calendar year. A statu- laws dealing with lines of credit to exectory provision contained in the Federal utive officers. The revision of Regula- Deposit Insurance Corporation Improve- tion Z resolved a conflict between the ment Act (FDICIA) directed the Board home equity disclosure rules and regulato set a new exemption standard for tions on loans to bank executive offimortgage companies comparable to the cers. A demand provision in loans to asset test for depository institutions. executive officers is required by the Fed- Under the revised regulation, nondepos- eral Reserve Act and Regulation O itory mortgage lenders continue to be (Loans to Executive Officers, Directors, covered by HMDA if their assets exceed and Principal Shareholders of Member $10 million; they are also covered if Banks), but a demand provision is genthey originated 100 or more home- erally prohibited by the home equity purchase loans in the preceding calendar rules in Regulation Z. To resolve the year. conflict, the final rule provides a limited Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 79th Annual Report, 1992 exception in Regulation Z for transac- expires one year from the enactment of tions involving bank officers. DIDRA (October 23, 1992) or from the Pursuant to the decision by the U.S. date the area was declared a disaster, Court of Appeals for the District of whichever is earlier. Columbia Circuit in Consumers Union of U.S., Inc. v. Board of Governors (938 F.2d 266), the Board reconsidered Regulation CC whether to require disclosure of the dis- (Expedited Funds Availability) counted initial rate and certain payment In August the Board issued final amendexamples for each payment option in ments to Regulation CC pursuant to prohome equity lines offered to consumvisions in FDICIA. The amendments ers.2 After further analysis and a review permit banks to extend, on an exception of comment letters, the Board left the basis, holds on checks that usually existing rules unchanged. The Board require next-day and second-day availconcluded that the current requirements ability, and permit one-time notices of provide the most useful information to exception holds in certain cases. The consumers and fulfill congressional Board also made permanent the availintent. ability schedules for deposits at nonpro- In November, the Board acted under prietary automated teller machines and authority granted by the Depository reaffirmed administrative enforcement Institutions Disaster Relief Act of 1992 authority of federal regulatory agencies (DIDRA), and created an exception to over U.S. offices and branches of forthe three-day delay period normally eign banks. applicable to disbursement of funds in In December the Board published a credit transactions (other than purchase pamphlet entitled Guide to Regulation money) secured by a consumer's home. CC Compliance. It identifies five areas The exception provides easier access to that pose problems for institutions and funds in emergency situations for transare frequently cited as violations: proactions that take place (or for creditors viding a specific availability-policy disthat are located) in areas of Florida, closure, training employees to ensure Hawaii, Louisiana, and Los Angeles compliance, posting the availability poldeclared to be disaster areas by the Presicy where employees accept deposits, ident. Lenders have the option to rouproviding the deposit availability notice tinely accept a consumer's waiver of the on preprinted deposit slips, and providright to rescind and are permitted to use ing next-day availability when required. preprinted waiver forms. The exception The pamphlet discusses these problems in detail to increase understanding of Regulation CC and to minimize compli- 2. Consumers Union challenged certain proviance problems. sions of the Home Equity Loan Consumer Protection Act. The U.S. District Court for the District of Columbia rendered a decision in favor of the Board on several aspects of the lawsuit {Consum- Regulation DD (Truth in Savings) ers Union of U.S., Inc. v. Board of Governors, 736 F. Supp. 337). On appeal by Consumers Union, In September the Board adopted Regulathe D.C. Circuit decided in favor of the Board on tion DD to implement the Truth in Savfour issues and remanded two other issues for ings Act (TISA). The act's effective date reconsideration by the Board. The Board proposed was originally set for March 21, 1993, amendments in response to the decision but did not adopt them. but in late 1992 was extended three Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 189 months by the Congress. The final regu- in the period, the interest earned, and the lation closely reflected the statutory pro- annual percentage yield earned. visions and addressed many of the con- Because the new regulation governs cerns raised by more than 1,400 advertising of deposit accounts, overlapcomment letters. The Board exercised ping rules in Regulation Q (Interest on its regulatory authority judiciously by Deposits) will be eliminated on June 21, creating exceptions when necessary to 1993—the mandatory compliance date further the purposes of the act. for Regulation DD. Any rate advertised Regulation DD requires depository must be stated as an annual percentage institutions to disclose to consumers yield, and no other rate except an interbefore they open an account the costs est rate may be shown. Other discloand other features related to the account, sures apply when the APY or a bonus is the interest rate, and the annual percent- stated in the advertisement. Limited age yield. Institutions must calculate exceptions from certain advertising interest on the full amount of principal disclosures apply to broadcast or elecon deposit in the account for each day tronic media, outdoor media, telephone and are prohibited from using a "low- response machines, or lobby boards. balance method" or "investable-balance Besides delaying the compliance date, method" to calculate interest. Account the Housing and Development Act disclosures are to state an annual per- amendments make a minor change to centage yield (APY), an interest rate, the advertising rules and modify a notice and the period of time that the interest provision. In December the Board rate will be in effect. Other disclosures issued proposed amendments to the regapply to the minimum balance required ulation to implement the changes, and to open the account, to avoid fees, or to proposed interpretations to provide obtain the APY; the balance computa- guidance on other issues raised by instition method; the name and description tutions since the Board released the final of any fees for maintaining the account; rule in September 1992. any limitations on the number or amount The Board is conducting a two-phase of withdrawals and deposits or on cost study of the law's effect. In Novemchecks that may be written on an ber 1992 the Board sent out more than account for any period; any early with- 4,000 surveys to financial institutions drawal penalties; and details regarding covering, for the first phase, prerenewal policies. implementation account practices and, For variable-rate accounts, disclo- for the second phase, start-up complisures will alert the consumer to potential ance costs and any changes in account rate changes and the frequency of such practices attributable to the regulation. changes. Special maturity notices will Replies for the second phase are anticibe given for time deposit accounts and pated in July 1993. The study will prowill differ for rollover and nonrollover vide an assessment of the effect of TIS A accounts. When a change in one of the on the financial industry and, in general, disclosed terms may reduce the APY or the extent of regulatory costs. adversely affect the consumer, the insti- In conjunction with the cost study, the tution is required to give advance notice. Board has arranged for the University Although periodic statements are not re- of Michigan to conduct a telephone surquired, if institutions provide statements vey among consumers in 1993. It will they must include information regarding assess consumer knowledge of deposit fees imposed, the total number of days accounts and bank practices before Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 79th Annual Report, 1992 Regulation DD goes into effect. Some The Board published a proposed poltime after the effective date, another sur- icy statement on branch closings to help vey will be taken. The two surveys will depository institutions comply with a be used to provide data on the benefits FDICIA requirement. Covered instiof the TISA to consumers. tutions must adopt a written branch closing policy and provide ninety days' notice of any proposed branch closing to Interpretations customers and to their federal regulator. In 1992 the Board continued to offer The notice to the regulator must detail legal interpretations and guidance the reasons behind the decision and give through official staff commentaries. supporting statistical information. A These commentaries, intended to help notice of the decision must be posted at financial institutions and others apply the branch thirty days before its closing. the regulations to specific situations, are updated periodically to address signifi- Community Affairs cant questions that arise. In April the Board issued revisions to Through its community affairs program, the staff commentary to Regulation B to the Federal Reserve System conducts clarify the relationship with Regulation outreach, education, and technical assis- C in regard to data collection. Both reg- tance activities to help financial instituulations require lenders to collect data tions and the public understand and on home loan applications about the race address community development and or national origin of applicants or bor- reinvestment issues. During 1992, the rowers. Loan brokers, correspondents, Reserve Banks increased the resources or others who are prohibited from col- devoted to community affairs activities lecting monitoring information under so that they could respond to an increase Regulation B will not be in violation in the number of requests from banks when they collect the data for a creditor and others for assistance and informathat is subject to Regulation C. tion on the Community Reinvestment In December the Board proposed Act (CRA), fair lending, and commurevisions to the commentary to Regula- nity development. The Reserve Banks tion Z. Disclosures about collateral also increased their efforts to work with securing a transaction need not specify financial institutions, banking associawhether the security interest is newly tions, governmental entities, businesses, acquired or existing. The proposed revi- and community groups to develop comsion also states that the model form for munity development lending programs rescission, when refinancing with an that help finance affordable housing, original creditor, adequately discloses small and minority businesses, and other the existence of a security interest when community revitalization projects. The a new one is acquired. Consistent with Federal Reserve's community affairs the rule applicable to home equity lines, program responded to several federal the proposed commentary would pro- and state legislative inquiries and initiavide that if an institution retains the tives involving the CRA and bank inability to demand payment of a loan in volvement in community development. its closed-end credit agreement with its Various community affairs initiatives executive officers to the extent required addressed growing concerns related to by federal law, the institution need not the availability of credit to minority borprovide demand disclosures. rowers and communities. The Federal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 191 Reserve Bank of Kansas City sponsored community development curriculum for a conference for bankers on "Credit bankers, and the Kansas City Reserve and the Economically Disadvantaged," Bank conducted a series of seminars on focusing on barriers faced by minority community development lending, priborrowers and steps banks can institute marily for bankers in smaller communito ensure that credit is offered on an ties. The Chicago and Minneapolis equitable basis. The Boston and New Reserve Banks cosponsored two semi- York Reserve Banks cosponsored a nars on rural community development. conference on credit issues affecting The San Francisco, Atlanta, and Phila- Native Americans, especially those liv- delphia Reserve Banks sponsored CRA ing on reservations, in pursuing eco- seminars targeted specifically to memnomic development programs. bers of boards of directors and senior Also, as part of the community affairs management of commercial banks. program, the Board updated its publica- Overall, the Reserve Banks' Commution, Directory: Bank Holding Company nity Affairs programs sponsored or Community Development Investments, cosponsored more than 110 conferences which presents profiles of community and seminars on fair lending, commudevelopment corporations (CDCs), lim- nity development, and reinvestment ited partnerships, and other community topics. Often in these programs, the development projects in which bank Reserve Banks worked with state bankholding companies have been allowed ers associations. Also, Community to invest. Community affairs staff mem- Affairs staff members of the Board bers responded to inquiries from banks and the Reserve Banks made more than and bank holding companies concerning 300 presentations at conferences, semiinvestments in CDCs and in limited nars, and meetings that were sponsored partnerships or equity pools for low- by banking, governmental, business, and income housing. Legislation authorizing community organizations. state member banks to make community In conjunction with outreach efforts, development investments, enacted in the Philadelphia, St. Louis, and San late 1992, is expected to stimulate addi- Francisco Reserve Banks developed tional interest. and published community profiles that Two Reserve Banks supported collab- identify key community and economic orative multibank approaches to lending development needs and describe reand investment to promote community source organizations in major communidevelopment. The Atlanta Reserve Bank ties in their Districts. These profiles are provided technical assistance to help available to banks and to community create consortium CDCs or loan funds and business organizations to help in Florida and Mississippi. The San stimulate collaborative approaches. The Francisco Reserve Bank assisted finan- Philadelphia Reserve Bank's profile cial institutions in San Diego to help covered community needs and opportucreate a multibank CDC that focuses on nities in the Vineland, New Jersey, area. small business financing and also Discussions with financial institutions worked with institutions in Nevada and serving that area led to the creation of the State of Washington to form state- a lenders council that addresses comwide reinvestment corporations. munity development and reinvestment Several Reserve Banks developed issues. new educational programs for bankers. Staff members of the Reserve Banks The Boston Reserve Bank created a new in community affairs continued to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

192 79th Annual Report, 1992 support the Federal Reserve's supervi- institution's working through minority sory responsibilities. Reserve Bank staff financial institutions to help serve the members were increasingly called on credit needs of low-income and minorfor direct technical assistance to help ity households. In April, the FFIEC individual institutions with less-than- updated the series of interagency quessatisfactory CRA ratings strengthen tions and answers that provides financial their CRA programs. Several Reserve institutions with guidance on how to Banks also assisted in conducting meet their CRA responsibilities. In June, HMDA analyses to help target institu- the FFIEC offered clarification on the tions and areas for educational and tech- level of recordkeeping and documentanical assistance activities related to the tion financial institutions need to main- CRA and fair lending. The Board's tain, along with the issuance of new community affairs staff, working with examination procedures for the CRA. Reserve Bank examiners, revamped and In the area of fair lending, the FFIEC conducted a one-week seminar on took several actions. In March, the agenadvanced CRA examination techniques cies distributed to the institutions they for consumer affairs examiners. The supervise a brochure, prepared jointly Board's staff also presented a special through the FFIEC, entitled Home Mortcourse segment for senior commer- gage Lending and Equal Treatment. The cial examiners on community develop- brochure identifies and cautions lenders ment lending and investment by banks. about lending standards and practices that may produce unintended discriminatory effects. It focuses on discrimina- FFIEC and Other Interagency tion based on race and includes exam- Activities ples of subtle forms of discrimination, The Board and the other banking agen- such as unduly conservative appraisal cies undertake certain initiatives to practices that may lead to rejection or ensure compliance with the CRA and reduced loan amounts for property in fair lending laws through the FFIEC, an minority areas; property standards, interagency body that prescribes uni- such as size and age, which may form principles, standards, and report exclude homes in minority and lowforms for the examination of financial income areas; and unrealistically high institutions at the federal level.3 minimum-loan amounts. The Federal Through the FFIEC, the agencies acted Reserve published a brochure in 1991, to refine and strengthen enforcement of entitled Home Mortgages: Understandfair lending laws, provide education and ing the Process and Your Right to Fair training in CRA responsibilities, and Lending, to inform consumers about the identify and promote successful tech- mortgage application process and about niques that ensure equal treatment of their rights under fair lending and conloan applicants. sumer protection laws. In December, the Regarding CRA responsibilities, the FFIEC contracted with an outside con- FFIEC took the following actions. In sultant for a review of the agencies' March 1992, the banking agencies examination procedures to enforce civil amended the CRA guidelines to clarify rights laws. The contractor will examine that examiners should view favorably an the existing training and other procedures and recommend improvements. In the meantime, the FFIEC's task force on 3. For the member-agencies of the FFIEC, see consumer compliance is revising an p. 186, note 1. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 193 interagency policy statement on the and ethnic groups and raised concerns enforcement of the ECOA and the Fair about possible discrimination in the Housing Act and is working on the mortgage lending process. The HMDA supervisory enforcement policy for the data for 1992 continued to show these two statutes. disparate lending patterns.4 Suggestions Federal financial regulators continue of possible discrimination were intensito pursue discussions with the Depart- fied by a major investigation of an ment of Justice, HUD, and the Federal Atlanta thrift institution completed in Trade Commission to strengthen 1992 by the Department of Justice and enforcement of civil rights laws with a research study by the Federal Reserve regard to lending. Amendments to the Bank of Boston, both reporting evidence Fair Housing Act in 1990 strengthened of disparate treatment of minorities by HUD's enforcement authority, and HUD lenders. and the banking regulators have entered into a memorandum of understanding to Findings from the Boston Study refer to each other, and to coordinate their investigation of, complaints alleg- During 1992 the Federal Reserve Bank ing fair housing violations. The banking of Boston undertook a detailed study of agencies are also exploring ways to lending in the Boston metropolitan area, work with the Department of Justice in in cooperation with the other federal detecting possible patterns of discrimi- banking agencies and HUD. The study nation against minority applicants. was initiated in response to the large Coordination among the regulatory differences in rates of denial of home agencies will generally enhance enforce- loan applications among whites, blacks, ment of fair lending laws and detection and Hispanics in Boston that were of possible discrimination and may pro- revealed by the 1990 HMDA data: a duce new techniques to uncover unlaw- ratio of nearly three rejections for black ful discrimination. and Hispanic applicants to one for white The agencies took further actions to applicants. The study sought to analyze improve enforcement of fair lending whether racial disparities in denial rates laws—through HMDA-based targeting for mortgages among surveyed lenders of institutions with questionable lending reflected the equal application of legitipatterns, revision of examination strate- mate credit standards. gies to identify possible discrimination, Because the only financial data coland preparation of education programs lected under HMDA are for income, the on fair lending practices for industry. Boston Reserve Bank collected thirty- The agencies also encouraged financial eight additional items of information institutions and their trade associations pertaining to financial characteristics, to strengthen their fair lending educa- employment experience, and credit tion for management, lending personnel, history—information that lenders volunand consumers. tarily provided from their files. The study revealed substantial differences based on financial and other economic Mortgage Lending Discrimination 4. See Glenn B. Canner and Dolores S. Smith, The data released under HMDA in Octo- "Expanded HMDA Data on Residential Lending: ber 1991 documented sharp contrasts in One Year Later," Federal Reserve Bulletin, the credit experience of various racial vol. 78 (November 1992), pp. 801-27. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

194 79th Annual Report, 1992 circumstances of typical white appli- amount of empirical data suggesting that cants and those of minority applicants. economic factors might not explain Statistical analysis also revealed, how- differences in denial rates. ever, that after controlling for significant economic factors, unexplained differ- Use of the Expanded HMDA ences remained in loan approval rates Data for black, Hispanic, and white applicants. Specifically, the model showed The HMDA data enable regulatory that minority applicants with the same agencies to select specific loan files to economic and property characteristics as review during on-site examinations and white applicants would be expected to also to target specific lenders for more experience a denial rate of 17 percent, extensive fair lending and CRA investias compared with an 11 percent rate for gations. Several of the supervisory agenwhite applicants. cies, as well as the Department of Jus- Racial or ethnic background was gen- tice, are using the new HMDA data to erally not found to be a factor in the case identify institutions to review, based of clearly qualified or clearly unquali- either on the large disparities in denial fied applicants. Disparities were evi- rates among different racial groups or on dent, however, among applicants with the low number of applications from some negative characteristics (such as minority households in relation to the high debt or income ratios) or weak- racial composition of the community. nesses in credit history. For such appli- Acting in concert, the agencies are cants, national origin or ethnic back- developing techniques using automated ground appeared to be a consideration. access to the data to detect evidence of The authors of the study suggest that differential treatment. Through these differences in treatment may arise from combined efforts, the agencies also seek differences in the level of assistance to identify the factors that underlie disreceived from loan officers. The degree parate lending patterns. to which the findings reflect outright A data analysis system recently im- . discrimination by individual loan offi- plemented by several of the agencies cers and financial institutions in the mar- seeks to maximize the usefulness of the ket is unclear. The findings do confirm, HMDA data by allowing examiners to however, that greater attention is needed formulate and test specific hypotheses to ensure the fairness of the mortgage regarding lenders' treatment of different lending process. groups. The data available about loan After the October release of the applicants' race or ethnic origin, sex, results of the Boston study, member and income—together with information agencies of the FFIEC issued a joint on the disposition of loan applications— statement that addressed the issue of provides an opportunity to focus on the disparate treatment. In this statement, accessibility of home purchase and the agencies attempted to shift the focus home improvement loans to certain from a debate about whether unequal groups of consumers. The analysis systreatment is occurring to an emphasis on tem enables examiners to determine initiatives that will ensure fair lending whether disposition patterns (for exampractices. The interagency statement ple, rates of loan denial) differ signifireiterated concerns about fair treatment cantly for one group of applicants comof applicants for mortgage loans. The pared with another. Examiners can also statement pointed to the increase in the use this evaluation technique to select Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 195 specific loan application files for on-site The expanded data provide opportunireview. ties for a more comprehensive assess- The Federal Reserve routinely uses ment of lending patterns. Over the past the expanded HMDA data to evaluate a two years, the Federal Reserve, in lender's geographic delineation of its consultation with the other banking local CRA service area. Although many agencies, has developed and implefactors affect the selection of the pri- mented a computer-based system for mary area a lender seeks to serve, the analysis of HMDA data. The system HMDA data help determine whether the uses both HMDA data and information geographic distribution both of home from the U.S. Census of Population and loans extended and of applications Housing. For example, one of the analyreceived are consistent with the bound- sis reports in the new system shows aries of the delineated community. If an examiners how the residential lending institution's home lending activity is performance of an institution compares substantially outside its delineated com- with the performance of other lenders munity, examiners will require the insti- serving the same local community. If tution to substantiate the low number of other institutions report significantly applications from the local community. larger numbers of applications and home In some instances, the lender may need loans per housing unit, the institution to consider revising the boundaries of being examined may be asked to focus their local service area, for example, by on determining how to meet the credit expanding the area to be more in line needs of its community, perhaps by reaswith the geographic pattern of the home sessing its marketing activities. loans they provide. (The Board and the The HMDA data are being used by FDIC have initiatives under way to financial institutions themselves to develop a computer-based mapping develop strategies and programs (includtechnology that will assist examiners ing a different mix of products) that will in matching a bank's lending activity help them address the credit needs of the with the boundaries of its delineated various segments of their communities. community.) The data are one source of information Historically, examiners have used the for assessing the geographic distribution HMDA data to assess lenders' compli- of their lending, as encouraged by the ance with the twelve assessment criteria agencies' policy statement on geoestablished by the regulations that graphic analysis. For community organiimplement the CRA. Among these crite- zations and other members of the public, ria, the HMDA data are used in evaluat- the HMDA data provide a basis for dising the following factors: cussing the record of the lending institu- • The geographic distribution of the tions in their local communities, and for institution's credit applications, exten- documenting protests of applications by sions, and denials banks for mergers and expansions. • The institution's record of originating or purchasing residential mortgage Other Uses of HMDA Data loans, housing rehabilitation credit, home improvement loans, and loans to Considerable information about the small businesses and farms within its home loan purchase and securitization community activities of secondary market insti- • Evidence of prohibited, discrimina- tutions, particularly governmenttory, or other illegal credit practices. sponsored enterprises, the Federal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

196 79th Annual Report, 1992 National Mortgage Association sight, the new secondary market regula- (FNMA), the Federal Home Loan Mort- tory agency established by statute. The gage Corporation (FHLMC), and the information can be used to help assess Government National Mortgage Associ- the success of efforts made by FNMA ation (GNMA), has long been publicly and FHLMC in reaching certain available. Before 1989, however, sec- statutory mandates for supporting loans ondary market data were produced to moderate-income homebuyers and mostly in aggregate form. With the 1989 properties located in central-city amendments to HMDA, covered lenders neighborhoods. are required to identify secondary market purchasers by type of entity. As a Compliance with Consumer consequence, the expanded HMDA data Regulations provide new opportunities to profile the characteristics of both the borrowers Data received from the five federal whose loans are purchased by secondary agencies that supervise financial institumarket entities and the neighborhoods tions and from other federal supervisory in which those borrowers reside. agencies indicate that compliance with A paper delivered at FNMA's annual the Expedited Funds Availability Act housing conference in May 1992 pre- decreased from 1991 levels, whereas sented the first assessment of the HMDA compliance with the Truth in Lending data as it pertains to secondary market Act, the Equal Credit Opportunity Act, activity. That study, which focused on and the Electronic Fund Transfer Act the 1990 HMDA data, revealed that the remained essentially unchanged. This secondary market's loan purchase distri- section summarizes these compliance butions, arranged by borrower and data for the reporting period July 1, neighborhood characteristics, generally 1991, to June 30, 1992.5 reflect those of loan origination patterns in the primary market. The borrower Equal Credit Opportunity Act and locational characteristics of loans (Regulation B) supported by GNMA guarantees accurately reflect that agency's specializa- The financial regulatory agencies retion in government-backed loans, ported that compliance with Regulation whereas the borrower and locational B remained about the same as in 1991. attributes of loans purchased or securi- In the 1992 reporting period, 57 percent tized by FNMA and FHLMC more of examined institutions were in compliclosely align with the characteristics of ance with the Equal Credit Opportunity borrowers relying on conventional home Act (ECOA) compared with 58 percent loans. The HMDA data also indicate for 1991. Four agencies that were able that in the primary market, a somewhat to provide the frequency of violations larger share of conventional home loans (the Board, the NCUA, the OCC, and is granted to borrowers whose incomes the OTS) reported that of the institutions are below the median family income for examined that were not in full complithe metropolitan area where they reside ance, 77 percent had between one and than is true for the loans purchased or securitized by FNMA and FHLMC 5. Not all the federal agencies that regulate The expanded HMDA data provide financial institutions use the same method to coman important database for HUD's Office pile compliance data. However, the data support of Federal Housing Enterprise Over- the general conclusions presented here. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 197 five violations—an improvement over compliance. The total number of violathe 73 percent reported for 1991. The tions decreased 8 percent from 1991 most frequent violations involved the levels. failure to take the following actions: The other agencies that enforce • Notify the applicant of the action ECOA—the Department of Transportataken within thirty days of the date tion, the Interstate Commerce Commisthat the creditor receives a completed sion, the Small Business Administraapplication tion, the Packers and Stockyards • Provide a written notice of adverse Administration of the Department of action that contains a statement of the Agriculture, and the Securities and action taken, the name and address of Exchange Commission—reported subthe creditor, the ECOA notice, and the stantial compliance by the institutions name and address of the federal agency they supervise. that enforces compliance • Provide the specific reasons for Electronic Fund Transfer Act adverse action (Regulation E) • Follow the prescribed form of the ECOA notice The financial regulatory agencies found • Request information for monitoring that, at 85 percent, the level of complipurposes about race or national origin, ance with Regulation E remained simisex, marital status, and age on credit lar to that in 1991. The following five applications primarily for the purchase rules were the most frequently violated or refinancing of a primary dwelling. provisions of Regulation E: The Board issued two written agree- • Provide, in a timely manner, a writments, one cease-and-desist order, and ten statement outlining the terms and one civil money penalty involving viola- conditions of the electronic fund transtions of Regulation B. The OTS issued fer (EFT) service. one cease-and-desist order and imposed • Provide a summary of a consumer's eighteen civil money penalties. The liability for unauthorized EFTs. FDIC issued three cease-and-desist • Provide a statement for each orders involving Regulation B. monthly cycle in which an EFT The Federal Trade Commission occurred, or at least quarterly if no trans- (FTC) obtained a consent judgment fer occurred. against a large mortgage company for • Provide a notice of the procedures the failure to retain records of rejected for resolving alleged errors at least once applications as required under Regula- each calendar year. tion B. The FTC also obtained consent • Investigate and resolve alleged judgments against related lenders in errors promptly. cases alleging age, sex, and marital The Board issued one written agreestatus discrimination. ment and one cease-and-desist order The Farm Credit Administration involving violations of Regulation E. (FCA) reported a satisfactory level of The OTS issued one cease-and-desist compliance with ECOA. As a result of order and imposed one civil money penexaminations and enforcement activi- alty. The FTC reported ongoing litigaties, the FCA took formal actions tion involving one telemarketing comagainst three institutions for violations pany that allegedly failed to obtain of Regulation Z or Regulation B or both. written authorization from consumers These institutions are now in substantial for preauthorized transfers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

198 79th Annual Report, 1992 Consumer Leasing (Regulation M) tion; and the general failure to provide Truth in Lending disclosures that accu- The financial regulatory agencies rerately reflected the terms of the legal ported substantial compliance with Regobligation. ulation M, which implements the con- The Board issued two written agreesumer leasing provisions of the Truth in ments, one cease-and-desist order, and Lending Act. More than 99 percent of one civil money penalty involving violaexamined institutions were in full comtions of Regulation Z. The OTS issued pliance with the regulation. The viofour cease-and-desist orders and imlations the agencies noted involved posed eighteen civil money penalties. the failure to provide disclosures that Under the Truth in Lending Policy were clearly written, conspicuously Guide and interagency enforcement poldisplayed, and presented in logical icy on Regulation Z, a total of 368 instisequence. tutions supervised by the Board, the FDIC, the OCC, and the OTS refunded $4.1 million on 23,967 accounts in Truth in Lending Act 1992, compared with roughly $5.7 mil- (Regulation Z) lion on 26,796 accounts in 1991. The data from the financial regulatory The FTC continued its Truth in Lendagencies show that, on average, 44 per- ing enforcement program and issued cent of examined institutions were in final consent orders in three cases full compliance with Regulation Z, up involving the understatement of credit slightly from 42 percent in 1991.6 The costs, including the APR and finance Board, the NCUA, and the OCC showed charge, in violation of Regulation Z. In increases in compliance, while the FDIC its enforcement efforts against telemarand the OTS reported declines. Four keting and other frauds on consumers agencies were able to provide the fre- regarding credit card overcharges, the quency of violations (the Board, the FTC entered a consent judgment against NCUA, the OCC, and the OTS); they an individual in the marketing of travel indicated that of the financial institu- certificates. The agency is litigating tions examined that were not in full another case regarding distribution compliance, 57 percent had between one of redress funds to consumers who and five violations (the lowest frequency purchased vacation packages from category), an improvement over the defendants. 53 percent reported for 1991. Educating consumers and businesses The most frequent violations of Regu- about their rights and responsibilities is lation Z observed by the five agencies an integral part of the FTC's enforcewere the failure to accurately disclose ment activities. In this effort, the FTC the finance charge, the annual percent- released a publication on reverse mortage rate (APR), the amount financed, gages and updated publications on refiand the number, amounts, and timing of nancing home mortgages and on exerpayments scheduled to repay the obliga- cising the right of rescission under Regulation Z. Other agencies found that the institu- 6. The percentage of institutions in full compli- tions they supervise were generally in ance with the regulations given in this report is compliance with Regulation Z. The calculated using a straight average of the percent- Department of Transportation reported a age of institutions in compliance as reported by the five financial regulatory agencies. satisfactory level of compliance with Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 199 Regulation Z by foreign and domestic • Analyses of CRA compliance when carriers. Consumer inquiries that were processing applications from bank and investigated resulted in no formal bank holding companies. enforcement proceedings for violations. Federal Reserve examiners review The FCA reported that violations had performance in fair lending, community decreased more than 16 percent from revitalization, and other relevant areas the 1991 reporting period. As a result of to assess CRA compliance. During the examinations and enforcement activi- 1991 reporting period (July 1, 1991, ties, the FCA took formal actions through June 30, 1992), they conducted against three institutions for violations 711 examinations for compliance with of Regulation Z or Regulation B or both. the consumer laws, including those that These institutions are now in substantial address fair lending, and 674 for complicompliance with the regulations. The ance with the CRA. During the report- Packers and Stockyards Administration ing period, 93 banks received outstandof the Department of Agriculture ing ratings for meeting community received no complaints and initiated credit needs, 523 received satisfactory no enforcement actions. It believes that ratings, 52 received "needs to improve" individuals and firms it regulates are in ratings, and 6 received "substantial nonsubstantial compliance. compliance" ratings. When appropriate, examiners suggested ways to improve CRA performance. In March the Board issued a policy Community Reinvestment Act statement to reiterate the need for insti- (Regulation BB) tutions to analyze the geographic distri- The Community Reinvestment Act bution of their lending patterns as part (CRA) requires the Board to encourage of the CRA planning process. The Board financial institutions under its jurisdic- encouraged institutions to document tion to help meet the credit needs of these analyses and to make them accestheir entire communities, including low- sible to examiners. Such analyses repreand moderate-income neighborhoods, in sent one of the twelve factors consida manner consistent with safe and sound ered by the agencies in assessing CRA banking practices. The Board, the OCC, performance. the FDIC, and the OTS assess the CRA In June, the FFIEC adopted revised performance of the institutions they CRA examination procedures. Although supervise during regular compliance the agencies expect a reasonable level of examinations and take the CRA record documentation of an institution's CRA into account, along with other factors, record, the new procedures emphasize when acting on certain applications. that the predominant concern under the The Federal Reserve System main- CRA is the degree to which an institutains a three-faceted program for enforc- tion is helping to meet the credit needs ing and fostering better bank perfor- in all areas of its community. The FFIEC mance under the CRA: also released A Citizen's Guide to the • Examination of institutions to CRA to increase awareness and underassess compliance standing of the act. The guide reviews • Dissemination of information on the background of the CRA, the policies community development techniques to and procedures of the enforcement agenbankers and the public through commu- cies, and the 1990 changes to the CRA. nity affairs offices at Reserve Banks As a part of the Financial Institutions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 79th Annual Report, 1992 Reform, Recovery and Enforcement Act the total count of forty-four for calendar of 1989 (FIRREA), effective July 1990, year 1992. At year-end, twenty-three of regulatory agencies were required to the protested applications had been make institutions' CRA ratings avail- approved and six were still pending. able to the public and to include public In March 1992, the Board approved discussion and involvement in the CRA an application by BankAmerica Corpoprocess. It describes the public role in ration to merge with Security Pacific the CRA process and how public opin- Corporation. The Board received almost ion is regarded in evaluating certain 350 comments on that application and types of applications. held four public meetings—in Califor- The examination procedures also nia, Washington, and Arizona—at which implement a provision contained in approximately 175 commenters pro- FDICIA relating to notice of branch vided testimony. closings and to giving favorable consid- The Board denied an application by eration in CRA evaluations to an institu- Gore-Bronson Bancorp, Incorporated, tion that donates, sells on favorable an Illinois corporation, to acquire inditerms, or makes available on a rent-free rectly 96.3 percent of the voting shares basis branch facilities in minority neigh- of Water Tower Trust and Savings Bank. borhoods to minority- or women-owned The Board denied the application based depository institutions. The Housing and on the CRA performance records of Community Development Act of 1992, Gore-Bronson's two bank subsidiaries enacted in October, adds another provi- and of Water Tower Trust and Savings sion, directing the agencies to give Bank, as well as on considerations of favorable consideration to certain insti- financial and future prospects. tutions. These institutions are those that have engaged in capital investments, Expedited Funds Availability Act loan participations, or other ventures in (Regulation CC) cooperation with minority- and womenowned institutions and low-income The financial regulatory agencies recredit unions to help meet the credit ported that the level of compliance with needs of the communities in which Regulation CC declined from 73 percent such institutions and credit unions are in the 1991 reporting period to 69 perchartered. cent in 1992. The four agencies that During calendar year 1992, adverse were able to provide the frequency of CRA ratings were at issue in forty-five violations (the Board, the NCUA, the applications from banks and bank hold- OCC, and the OTS) reported that of the ing companies received by the Federal institutions examined that were not in Reserve System, an increase over the full compliance, 85 percent had between number in previous years. Thirty-one one and five violations. The most fresuch applications posed CRA ratings quent violations of Regulation CC were issues in 1991, and forty-two in 1990. the failure to take the following actions: The number of applications that were • Provide next-day availability as protested because of CRA performance required for certain items also increased: twenty-nine applications • Provide a written notice when the were protested in 1992, compared with time is extended for the availability of twenty-four in 1991 and twenty-seven funds in 1990. Of the thirty, nine also con- • Provide two-day availability for tained ratings issues and are included in local checks Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 201 • Adequately train employees and increased about 13 percent, from provide procedures to ensure 535 million in 1991 to 605 million in compliance 1992. During the same period, the • Follow certain procedures for number of installed ATMs rose about exceptions for large deposits. 5 percent. The Board issued one written agree- Direct deposit is another widely used ment and one cease-and-desist order EFT service. More than 40 percent of all involving violations of Regulation CC. U.S. households receive direct deposit The OTS issued one cease-and-desist of funds into their accounts. Direct order and imposed seven civil money deposit is particularly widespread in the penalties. public sector, with 54 percent of social security payments and about two-thirds of federal salary and retirement pay- Economic Effects of the ments made by direct deposit. Although Electronic Fund Transfer Act direct deposit is less common in the In keeping with statutory requirements, private sector, there too it has grown the Board monitors the effect of the substantially in recent years. Electronic Fund Transfer Act on the Point-of-sale (POS) systems account compliance costs and consumer benefits for a small share of all EFT transactions, from EFT services. In 1992, there were but their use grew rapidly in 1992. The no new requirements or changes in the volume of transactions on POS systems regulation that altered the economic rose 31 percent, to 25.5 million a month; effect of the act. and the number of POS terminals rose A large number of consumer accounts 50 percent, to 117,000. and financial institutions are covered by The benefits of the law are difficult to the act. In 1992, about three-fourths of measure because they cannot be isolated all households in the United States had from consumer protections that are proone or more EFT features on accounts at vided even in the absence of regulation. financial institutions. About two-thirds The available evidence provides no indiof all banks and thrift institutions offered cation of serious consumer problems EFT services and were covered by the with electronic transactions. In 1992, act. Because of continued growth in the about 85 percent of depository instituavailability and use of EFT services, the tions examined by federal agencies were economic effect of the act increased in in full compliance with Regulation E. 1992. Statistics indicate that institutions that Automated teller machines (ATMs) are not in full compliance generally had are the most widely used EFT service in fewer than five violations. The violathe United States. Most of the nation's tions primarily involved the failure of depository institutions offer consumers institutions to provide one or more disaccess to ATMs, and more than half of closures to consumers. all households currently have ATM The Board's Consumer Complaint access cards. ATM services have Control System provides another source become more widely available with the of information on potential problems. In continuing expansion of shared net- 1992, fifty-two of the complaints proworks. Almost all ATM terminals in cessed involved electronic transactions. operation today participate in one or The Federal Reserve System forwarded more shared networks. The monthly twenty-five complaints that did not average number of ATM transactions involve state member banks to other Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 79th Annual Report, 1992 agencies for resolution. Of the remain- Complaints about State Member ing twenty-seven complaints, one Banks involved a violation of the act or regulation. The Board and the Federal Reserve The Board also obtains information Banks investigate complaints against about potential problems from consumer state member banks and forward to surveys carried out by the University of appropriate enforcement agencies Michigan. A December 1990 survey of complaints that involve other creditors consumer attitudes contained several or businesses. In 1992 the System Board-sponsored questions about con- received 2,586 complaints: 2,145 by sumer experience with EFT. The survey mail, 427 by telephone, and 14 in results suggest that EFT problems are person. The Federal Reserve investirelatively infrequent and that the vast gated the 1,002 complaints that majority of problems that do occur are were against state member banks (see resolved satisfactorily. Of the house- accompanying table). The System also holds that had accounts with EFT fea- received 1,778 oral and written inquiries tures, 7.5 percent reported having expe- about consumer credit and banking rienced EFT errors in the previous policies and practices. In responding to twelve months. This percentage is about these complaints and inquiries, staff of the same as that reported in surveys the Board and the Reserve Banks gave from 1981 and 1983. In 1990, 88.0 per- specific explanations of laws, regulacent of those experiencing problems had tions, and banking practices and procomplained to the institution about the vided printed materials on the general error, and 87.8 percent of the complain- issues. ants reported that the error was resolved A second table summarizes the nature to their satisfaction. and resolution of the 1,002 complaints The incremental costs associated with against state member banks, eighty-one the EFTA are also difficult to quantify, of which were pending at year-end. again because the industry practices that About 63 percent involved loan funcwould have evolved in the absence of tions: 11 percent alleged discrimination the statutory requirements are unknown. on a prohibited basis, and 52 percent Consumer Complaints to the Federal Reserve System Regarding Financial Institutions, by Subject and Institution, 1992 Subject State b a m nk e s mber inst O itu th t e io r nsx Total Regulation B (Equal Credit Opportunity) 91 57 148 Regulation E (Electronic Fund Transfers) 27 25 52 Regulation Q (Interest on Deposits) 18 31 49 Regulation Z (Truth in Lending) 114 215 329 Regulation BB (Community Reinvestment) 1 4 5 Regulation CC (Expedited Funds Availability) 18 38 56 Fair Credit Reporting Act 21 72 93 Fair Debt Collection Practices Act 6 10 16 Fair Housing Act 7 4 11 Real Estate Settlement Procedures Act 0 4 4 Unregulated practices 699 1,124 1,823 Total 1,002 1,584 2,586 1. Complaints against these institutions were referred to the appropriate regulatory agencies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 203 concerned credit denial on nonprohib- cooperation in the investigation of comited bases (such as length of residency) plaints alleging violations of the Fair and other unregulated lending practices Housing Act. In early June 1992 the (such as release or use of credit infor- Board sent the Reserve Banks procemation). Approximately 25 percent dures for investigating complaints alleginvolved disputes about interest on ing violations of the act by state member deposits and general deposit account banks. As of December 1992 the Fedpractices. The remaining 12 percent eral Reserve had referred nine such concerned disputes regarding electronic complaints to HUD under the memoranfund transfers, trust services, and other dum; investigations completed by the miscellaneous bank practices. Federal Reserve in six of the complaints In May 1992 the member-agencies revealed no evidence of discrimination. of the FFIEC signed a memorandum Three of the investigations were pendof understanding with HUD regarding ing at year-end. Consumer Complaints Received by the Federal Reserve System, by Function, Institution, and Resolution, 1992 Function Ty a p n e d o r f e s in o s lu ti t t i u o t n ion Total Loans Electronic Trust Deposits fund Other Discrimi- Other transfers services nation Complaints about state member banks, by type Insufficient information! 25 1 13 8 0 0 3 Information furnished to complainant2 115 18 62 20 2 0 13 Bank legally correct No reimbursement or accommodation 447 59 232 107 17 4 28 Reimbursement or accommodation— goodwill3 170 10 113 33 j 1 12 Bank error No reimbursement 31 6 12 10 I 0 2 Reimbursement 62 1 29 19 2 0 11 Factual dispute 4 34 2 11 16 0 3 2 Possible bank violation5 9 1 5 0 1 0 2 Matter in litigation 6 13 0 5 4 3 0 1 Customer error 15 0 10 5 o o o Pending, December 31 81 13 29 28 0 10 Total, state member banks .... 1,002 111 521 250 27 9 84 Percent 100 11 52 25 3 1 8 Complaints referred to other agencies 1,584 69 957 323 25 26 184 Total 2,586 180 1,478 573 52 35 268 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. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

204 79th Annual Report, 1992 Unregulated Practices During 1992 the council considered a variety of topics including the Boston In 1992 the Board continued to monitor, Reserve Bank's survey of mortgage under section 18(f) of the Federal Trade lending practices in Boston, implemen- Commission Act, complaints about tation of the Truth in Savings Act, the banking practices not subject to existing possible application of Regulation E to regulations in order to focus on those electronic benefit transfer programs, a that may be unfair or deceptive. Three review of CRA performance evaluacategories each accounted for 10 pertions, lending patterns reflected by cent or less of the 1,823 complaints: Home Mortgage Disclosure Act data, refinancings of real estate loans (182); and other matters. denial of credit applications based on In March the council discussed credit history (84); and debt collection amendments to the Equal Credit Opportactics (55). Each of these categories tunity Act giving mortgage loan appliaccount for a small number (7 percent cants the right to receive copies of or less) of all consumer complaints appraisal reports on properties associreceived by the System. ated with their loans. The mortgage refinancing complaints In June, the council adopted a resolucovered a wide variety of practices, tion that urged the lending industry and including alleged delays by lenders in the regulatory community to conclude processing applications; lenders not the debate about whether discrimination refunding application fees in instances exists in mortgage lending and to begin where refinancing applications were focusing on how best to detect and remdenied; and alleged failure by lenders to edy the problem. The committee also honor their lock-in commitments. Many introduced a list of suggestions for how of the complaints about credit denials regulators, HUD, and mortgage lenders based on credit history indicated that the might strive to combat discrimination in applicant underestimated the importance lending. lenders give to a poor credit history or A roundtable discussion, known as a lack of borrowing experience when the Members Forum, gives council assessing the applicant's creditworthimembers the opportunity to offer their ness. The complaints about debt collecviews on a variety of topics. During tion tactics were usually about the meth- 1992 the council discussed matters such ods lenders employed to collect late as whether there were any visible signs payments or outstanding debts. of an economic recovery within their industries or local economies and Consumer Advisory Council whether there was any evidence that The Consumer Advisory Council met in obtaining a loan was becoming easier. March, June, and October to advise the During the year, the council also con- Board on its responsibilities under the sidered the following issues: consumer credit protection laws and on • The burdens and benefits of conother issues dealing with financial ser- sumer protection rules and the merits of vices to consumers. The council's thirty possible actions that could be taken to members come from consumer and reduce the regulatory burden associated community-based organizations, finan- with them cial institutions, academia, and state and • Concerns about the consistency and local government. Council meetings are quality of the publicly available CRA open to the public. performance evaluations for individual Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 205 institutions within and among the bank- ered by the Consumer Leasing or Truth ing agencies, and the type of informa- in Lending laws. The lessee's ability to tion contained in the reports, including a terminate the lease removes the leasestatutory directive that examiners dis- purchase transaction from coverage cuss the data they use to reach a conclu- under Truth in Lending, and the monthsion about an institution's CRA efforts. to-month feature distinguishes it from the leases covered by the Consumer Lease Act, which covers leases of more Testimony and Legislative than four months. Recommendations In its testimony, the Board noted that, The Board testified on matters relating with the high level of state legislation, it to the 1990 HMDA data and to disclo- is not clear whether federal legislation is sures and substantive requirements for warranted. In 1983, the Board offered a lease-purchase transactions. legislative recommendation for amending the Consumer Leasing Act to expand its coverage of lease-purchase trans- Matters Relating actions, but the Congress did not enact to the 1990 HMDA Data the amendments. Since then, more In May the Board testified in a joint than thirty states have enacted leasehearing before the Subcommittee on purchase laws containing provisions Housing and Community Development similar to the bill introduced in 1983. and the Subcommittee on Consumer The Board made substantive and tech- Affairs and Coinage, addressing con- nical recommendations for revising the cerns raised by the release of the 1990 bill in the event federal legislation was HMDA data. The Board joined other deemed appropriate. The Board also agencies in discussing how best to suggested that, inasmuch as it has address the disturbing statistics reflected no supervisory role with the parties in the rejection rates for Hispanic and engaged in lease-purchase transactions, black mortgage applicants compared the Congress may find it more appropriwith white applicants applying for mort- ate to designate another agency to issue gage loans. The Board provided infor- the implementing rules. mation on how HMDA data would be used to strengthen fair lending enforce- Recommendations ment and CRA activities. of Other Agencies Each year the Board asks those agencies Disclosures and Substantive that have enforcement responsibilities Requirements for Lease-Purchase under Regulations B, E, M, Z, and CC Transactions for recommendations of changes to the The Board testified in June before a regulations or the underlying statutes. In House banking subcommittee about the 1992 the Department of Transportation proposed Lease-Purchase Agreement (DOT) offered a recommendation re- Act, which would impose disclosure and garding Truth in Lending. In its recomsubstantive requirements on "lease- mendation, the DOT noted that U.S. purchase" transactions, also known as travel agents and carriers participating rental-purchase or rent-to-own arrange- in the Airline Reporting Corporation ments. Lease-purchase transactions are (ARC) maintain a weekly sales and distinguishable from transactions cov- refund system. The short time frame of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

206 79th Annual Report, 1992 this system ensures compliance with a section of Regulation Z that requires a creditor to submit a credit card refund within seven business days. Because of documented financial losses by carriers resulting from the short processing requirement, however, ARC instituted new procedures for reporting, processing, and settling credit card refunds. The processing time for credit card refunds under the new procedures may exceed seven business days. If the Board determines that the new procedures fail to comply with Regulation Z, the DOT recommends that the Board amend the section or grant a waiver or exemption to allow the airline industry to retain the ARC procedures. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

207 Litigation During 1992, the Board of Governors ber 4, 1990), petitioner sought review of was named in seventeen lawsuits, com- a Board order requiring Citicorp to terpared with twenty-seven in 1991. Seven minate certain insurance activities by a new lawsuits were filed in 1992, one of nonbank subsidiary of Citicorp's subsidwhich raised questions under the Bank iary bank in Delaware (76 Federal Holding Company Act. As of Decem- Reserve Bulletin 977). On June 10, ber 31, 1992, nine cases were pending. 1991, the Court of Appeals vacated the Board's order (936 F.2d 66). A petition for certiorari filed by the Independent Bank Holding Companies— Insurance Agents of America was Antitrust Action denied on January 13, 1992 (112 S.Ct. In United States v. Society Corp., No. 869). 92-CV0525 (N.D. Ohio, filed In First Interstate BancSystem of March 13, 1992), the Department of Jus- Montana, Inc. v. Board of Governors, tice challenged the acquisition by Soci- No. 91-1525 (D.C. Circuit, filed ety Corporation, a bank holding com- November 1, 1991), petitioner sought pany, of Ameritrust Corporation under review of a Board order dated Octothe antitrust laws. The Board had ber 7, 1991, denying on Community approved the transaction on Feb- Reinvestment Act grounds petitioner's ruary 13, 1992 (78 Federal Reserve Bul- application under section 3 of the Bank letin 302). The case was settled. Holding Company Act to merge with Commerce Bancshares of Wyoming, (77 Federal Reserve Bulletin 1007). On Bank Holding Company Act— December 14, 1992, the court dismissed Review of Board Actions the action on the parties' joint motion. In Synovus Financial Corporation v. In State of Idaho, Department of Board of Governors, No. 89-1394 (D.C. Finance v. Board of Governors, No. 92- Circuit, filed June 21, 1989), petitioner 70107 (9th Circuit, filed February 24, sought review of a Board order dated 1992), petitioner sought review of a May 22, 1989, approving the appli- Board order determining, in accordance cation of SouthTrust Corporation to with Synovus v. Board of Governors, acquire a national bank in Georgia by 952 F.2d 426 (D.C. Circuit 1991), that relocating an Alabama national bank no application is required for a bank subsidiary across state lines pursuant to holding company to relocate its subsidi- 12 U.S.C. §30 (75 Federal Reserve Bul- ary bank across state lines. The case is letin 516). On December 20, 1991, the pending. Court of Appeals held that the Board has no authority over interstate relocations and vacated the Board's order (952 Litigation Under the Financial F.2d 426). Synovus's petition for a re- Institutions Supervisory Act hearing was denied on March 27, 1992. In Citicorp v. Board of Governors, In Board of Governors v. Pharaon, No. No. 90-4124 (2d Circuit, filed Octo- 91-CIV-6250 (S.D. New York, filed Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

208 79th Annual Report, 1992 September 17, 1991), the Board sought parties filed a stipulation of dismissal to freeze the assets of an individual without prejudice. pending administrative adjudication of a In CBC, Inc. v. Board of Governors, civil money penalty assessment by the No. 92-9572 (10th Circuit, filed Decem- Board. On September 17, 1991, the ber 2, 1992), petitioners seek review of court issued an order temporarily a civil money penalty assessment restraining the transfer or disposition against a bank holding company and of the individual's assets. The order has three of its officers and directors for been extended by agreement. failure to comply with reporting require- In Board of Governors v. Shoaib, No. ments. The case is pending. CV 91-5152 (CD. California, filed September 24, 1991), the Board sought to Other Actions freeze the assets of an individual pending administrative adjudication of a civil In Fields v. Board of Governors, No. money penalty assessment by the Board. 3:91CV7069 (N.D. Ohio, filed Febru- On October 15, 1991, the court issued a ary 5, 1991), the plaintiff appeals the preliminary injunction restraining the denial of a request for information under transfer or disposition of the individu- the Freedom of Information Act. The al's assets. The case is pending. Board's motion for summary judgment In Greenberg v. Board of Governors, was granted in part and its motion to No. 91-4200 (2nd Circuit, filed Novem- dismiss was denied on June 23, 1992. ber 22, 1991), petitioners sought review The case is pending. of a Board order dated October 28, In In Re Subpoena Served Upon the 1991, prohibiting former national bank Board of Governors of the Federal officials from banking. The Board's Reserve System, Nos. 91-5427 and 91orders were affirmed on June 19, 1992 5428 (D.C. Circuit, filed December 27, (968 F.2d 164). 1991), the Board appealed from an order In Davis v. Board of Governors, No. of the U.S. District Court requiring the 91-6972 (U.S. Supreme Court, filed Board and the Office of the Comptroller December 4, 1991), petitioner sought of the Currency to comply with a subreview of Burke v. Board of Governors, poena issued in a shareholder derivative 940 F.2d 1360 (10th Circuit 1991), in suit against the Fleet/Norstar Financial which the court of appeals upheld Board Group seeking bank examination and orders assessing civil money penalties deliberative information. On June 26, and issuing orders of prohibition. The 1992, the Court of Appeals affirmed Supreme Court denied the petition for the District Court order in part, and certiorari on May 18, 1992 (112 S.Ct. remanded for further consideration of 1957). issues related to the privilege issue (967 In Board of Governors v. bin Mah~ F.2d 630). On August 6, 1992, the Disfouz, No. 92-CIV-5096 (S.D. New trict Court ordered the matter held in York, filed July 8, 1992), the Board abeyance pending settlement of the sought to freeze an individual's assets underlying action. pending the administrative adjudication In Zemel v. Board of Governors, No. of civil money penalty assessment by 92-1057 (D. District of Columbia, filed the Board. On July 8, 1992, the court May 4, 1992), the plaintiff alleges disissued a temporary order restraining the criminatory practices under the Age Distransfer or disposition of the individ- crimination in Employment Act. The ual's assets. On October 30, 1992, the case is pending. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 209 In Castro v. Board of Governors, No. 92-1764 (D. District of Columbia, filed July 29, 1992), plaintiff appealed the denial of his request under the Freedom of Information Act. The action was dismissed on plaintiff's motion on November 30, 1992. In Fields v. Board of Governors, No. 92-3920 (6th Circuit, filed September 14, 1992), plaintiff brought a Federal Tort Claims Act complaint alleging misrepresentation during the application process. The District Court for the Northern District of Ohio granted the Board's motion to dismiss on August 10, 1992. Plaintiff's appeal to the Sixth Circuit was voluntarily dismissed on December 18, 1992. In DLG Financial Corporation v. Board of Governors, No. 392 Civ. 2086-G (N.D. Texas, filed October 9, 1992), plaintiffs seek to enjoin the Board and the Federal Reserve Bank of Dallas from taking certain enforcement actions, and seek money damages on a variety of tort and contract theories. On October 9, 1992, the court denied plaintiffs' motion for a temporary restraining order. The case is pending. In U.S. Check v. Board of Governors, No. 92-2892 (D. District of Columbia, filed December 30, 1992), plaintiff seeks review of the denial of its request for information under the Freedom of Information Act. The case is pending. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

211 Legislation Enacted In 1992 the Congress enacted four financial institutions may permit, under pieces of legislation directly affecting specified conditions, certain insured the Federal Reserve or the institutions it depository institutions located in a major regulates: the Depository Institutions disaster area to subtract qualified assets Disaster Relief Act of 1992, the Federal attributable to the deposit of insurance Reserve Bank Branch Modernization proceeds from total assets in determin- Act, the Futures Trading Practices Act ing the institutions' leverage ratios. of 1992, and the Housing and Commu- • For 180 days after enactment, the nity Development Act of 1992. appropriate regulatory agencies may take actions with respect to depository institutions, other regulated entities, or Depository Institutions Disaster transactions in a major disaster area Relief Act of 1992 without complying with certain require- The Depository Institutions Disaster ments of the Administrative Procedures Relief Act of 1992, Public Law 102- Act; the agencies may also exempt such 485, was enacted on October 23, 1992. institutions from publication require- The major provisions of the act are as ments relating to the establishment of follows: branches or for other purposes. • When the President designates a The act also authorizes state member major disaster area, any of the federal banks to make community development agencies that regulate financial institu- investments to promote the public weltions may exempt such institutions, for fare to the extent permissible under state up to three years, from the real estate law and subject to regulation by the appraisal requirements of the Financial Board. The Board generally may permit Institutions Reform, Recovery, and a state member bank to invest up to Enforcement Act of 1989 with respect 5 percent of its capital in community to property in the disaster area if the development projects and may permit agency determines that the exemption an adequately capitalized state member would facilitate recovery from the disas- bank to invest up to 10 percent of its ter and would be consistent with safety capital in such projects if the Board and soundness. determines that the higher investment • For 180 days after enactment, the will not pose a significant risk to the Board may make exceptions to the Truth insurance fund. in Lending Act and the Expedited Funds Availability Act with respect to transactions or depository institutions in a Federal Reserve Bank Branch disaster area, with the exceptions expir- Modernization Act ing no later than the earlier of October 23, 1994, or one year following the The Federal Reserve Bank Branch Mod- President's determination of a disaster ernization Act, Public Law 491, was area. enacted on October 24, 1992. The act • For eighteen months after enact- removes a statutory $140 million cumument, the federal agencies that regulate lative ceiling on expenditures for all Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

212 79th Annual Report, 1992 Branch buildings of Federal Reserve • The provisions of the Real Estate Banks and substitutes a requirement of Settlement Procedures Act (RESPA) that Board approval for the acquisition or prohibit the payment of "kickbacks" or construction of Branch buildings. other fees with respect to the provision of settlement services are to be understood as also applying to services relat- Futures Trading Practices Act of ing to the origination and processing of 1992 mortgage loan applications. The Futures Trading Practices Act of • The coverage of RESPA is 1992, Public Law 102-546, was enacted extended to refinancings and second on October 28, 1992. The act reautho- mortgages. rizes the Commodity Futures Trading • By amendment of the Community Commission (CFTC) for two years and Reinvestment Act, federal bank contains a variety of measures relating regulatory agencies may consider certo the regulation of the trading of futures tain ventures undertaken by a depository and options contracts. institution in cooperation with financial Title V of the act directs any contract institutions owned by minorities or market in stock index futures or options women and low-income credit unions as on stock index futures to submit to the a factor in determining whether the Board any rule establishing or changing depository institution is meeting the levels of either initial or maintenance credit needs of local communities. margin on such contracts. The Board • The Board must, in consultation may request an exchange to set margins with the other federal regulators of on stock index contracts at levels that depository institutions, submit within the Board believes are appropriate to one year of the law's enactment a report preserve the financial integrity of the to the Congress comparing residential, exchange and its clearing system or to small business, and commercial lending prevent systemic risk. The Board also by insured depository institutions in may direct an exchange to amend its low-income, minority, and distressed rules to effect the requested margin lev- areas to such lending in other areas. els. The act permits the Board to dele- • For any precomputed consumer gate to the CFTC its authority over mar- credit transaction with a term of more gin levels for stock index contracts. than sixty-one months that is consummated after September 30, 1993, lenders must refund in full any unearned interest Housing and Community charged to a consumer that has prepaid Development Act of 1992 the obligation, and it prohibits the use of The Housing and Community Develop- the "rule of 78s" and other methods that ment Act of 1992, Public Law 102-550, are unfavorable to the consumer when was enacted on October 28, 1992. The calculating unearned interest. act addresses housing, community Subtitle A also amends the Home development, crime, and other issues. Mortgage Disclosure Act of 1975 (HMDA) as follows: • Depository institutions must make Title IX the information in loan application reg- Title IX, Subtitle A, of the act clarifies isters available upon request, subject to or amends a variety of regulatory and regulations of the Board concerning forother programs as follows: mat and appropriate deletions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 213 • Depository institutions must main- company from insider lending limits tain and disclose the information in loan placed on shareholders of a depository application registers according to time- institution. tables in the act, and depository institu- • By amendment of FDICIA, regulations may charge a reasonable fee for tions concerning safety and soundness providing copies of the information. required by FDICIA may not set spe- • Depository institutions must make cific levels or ranges on compensation HMDA disclosure statements available of directors, officers, or employees of to the public no later than three business insured depository institutions. days after receipt of the statements from • By amendment of the Truth in the Federal Financial Institutions Exam- Savings Act, the effective date for comination Council. pliance with regulations implementing • A timetable in the act shortens the that act are delayed and on-premises period before initial public disclosure of displays that include interest rate inforloan application information statements mation are excluded from disclosure and HMDA disclosure statements. requirements if the displays include the Subtitle B of Title IX contains the annual percentage yield and indicate that following provisions: further information can be obtained con- • By amendment of RESPA, lenders cerning terms of the account. need not provide a loan applicant with a good faith estimate of real estate settle- Title XV ment costs and consumer information concerning settlement costs when the Title XV of the act contains the application is denied within three days Annunzio-Wylie Anti-Money Launderof its receipt; ing Act. Portions of Subtitle A relate • Existing requirements for the estab- to insured depository institutions, as lishment of a maximum interest rate follows: on any adjustable rate mortgage are to • The Federal Deposit Insurance Corbe understood as applying only to con- poration (FDIC) may appoint itself as sumer loans. conservator or receiver for any insured • Federal regulators of financial insti- state depository institution that has been tutions may establish a limit below convicted of money laundering. which an appraisal by a state-licensed • The FDIC must consider revoking or state-certified appraiser would not be the insurance of an insured state deposirequired for real estate lending transac- tory institution convicted of money tions by insured depository institutions, laundering, and it may consider revocabut the regulator must certify that estab- tion of insurance for an insured state lishment of the threshold does not repre- depository institution convicted of sent a threat to the safety and soundness offenses related to the reporting of cash of the financial institutions it regulates. transactions. • By amendment of the Federal • The Office of the Comptroller of Deposit Insurance Corporation Improve- the Currency (OCC) must consider ment Act of 1991 (FDICIA), the Board revoking the franchise of any national may exclude transactions from the lim- bank or federal branch or agency of a its on extensions of credit to insiders, if foreign bank convicted of money launthe Board determines such transactions dering, and the OCC may consider revopose a minimal risk, and it may exclude cation for any national bank or federal a depository institution's bank holding branch or agency of a foreign bank con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

214 79th Annual Report, 1992 victed of offenses related to the report- sale funds transfer systems have a high ing of cash transactions. degree of usefulness in criminal, tax, or • The Board must consider terminat- regulatory investigations or proceedings, ing a state agency, uninsured state the agencies may jointly prescribe regubranch, or state commercial lending lations concerning the maintenance of company subsidiary of a foreign bank if such records by insured depository any of these entities, or the foreign bank institutions itself, is convicted of money laundering • The Board and Treasury—after or offenses related to the reporting of considering the degree of usefulness of cash transactions. records of payment orders that are • A federal regulator of financial related to international transactions in institutions may consider removing an criminal, tax, or regulatory investigainstitution-affiliated party who has vio- tions or proceedings and the effect that lated requirements related to the report- such recordkeeping will have on the cost ing of cash transactions or had knowl- and efficiency of the payment system— edge of certain violations concerning must jointly prescribe regulations conmoney laundering. cerning the maintenance of records of • A federal regulator of financial such transfers made through wholesale institutions may suspend or prohibit an transfer systems or on the books of an institution-affiliated party charged with insured depository institution or a busimoney laundering if continued service ness that provides check cashing or participation by such party poses a services, money transmittal services, or threat to the depository institution, and issuance or redemption of money orders, the regulator must remove or prohibit travelers' checks, or similar instruments. any institution-affiliated party convicted • Treasury may require a financial of money laundering. institution to report any suspicious trans- • A person convicted of money laun- action; the financial institution must not dering cannot participate in the affairs of disclose the existence of such reports to an insured depository institution except the parties involved in the transaction; with the permission of the FDIC. and the institution is immune from po- Portions of Subtitle B of Title XV tential liability under any law for reportrelate to insured depository institutions ing the transaction without notifying the and other financial institutions, as parties to the transaction. follows: • Treasury may require financial • The Department of the Treasury institutions to carry out programs to must prescribe regulations requiring deter and detect money laundering. depository institutions to identify cus- Subtitle F of Title XV authorizes tomers that are defined as financial insti- Treasury to require insured depository tutions under the rules for reporting cash institutions to request copies of cash transactions. transaction reports from any finan- • A depository institution must not cial institution, other than another disclose the existence of Treasury or- depository institution, that engages ders subjecting the institution to special in any reportable transactions with the rules for recording and reporting cash depository institution with respect to transactions. any earlier transactions involving the • When the Board and Treasury same coin, currency, or monetary determine that records of payment instruments. • orders transferring funds through whole- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

215 Banking Supervision and Regulation The past year was in many respects a cies and practices, in part in response to transitional period for the U.S. banking the losses associated with some laxities system and for the Federal Reserve's in the 1980s. Anecdotal evidence indibanking supervision and regulation cated that the move to tighten standards activities. After having experienced was caused, in part, by concerns that weak profitability and a rise in problem examiners were being overly critical in assets for several years, the commercial evaluating loans. Building on earlier banking industry in 1992 reported its policy statements, the Federal Reserve highest profitability in more than a during the year further addressed possidecade, and problem assets decreased. ble disincentives to prudent bank lend- These achievements were possible in ing. These efforts included continuing large part because of declining market clarification of Federal Reserve policies interest rates. The industry's capital to examiners and other supervisory staff ratios also improved significantly from members to promote realistic loan eval- 1991, with the equity capital ratio reach- uation procedures. ing its highest point since 1966. Bank- The industry's recent problems gave ing organizations drove up their capital rise in late 1991 to major legislation ratios mainly by retaining a greater share designed to improve banking and bank of their profits and by issuing record supervisory practices, generally with the amounts of new equity; these actions purpose of reducing potential costs to were taken in anticipation of the full the public. The Federal Deposit Insurphase-in of the international capital stan- ance Corporation Improvement Act of dards and in preparation for domestic 1991 (FDICIA) contained numerous banking legislation that went into effect provisions covering broad aspects of at the end of 1992. bank lending and operating standards. One consequence of this overall Developing regulations to implement improvement was that the number of this statute was a major activity of the bank failures during 1992 was lower division during 1992 and will remain than had been anticipated. Nonetheless, one throughout much of 1993. FDICIA the number of troubled and failed insti- specifies supervisory policies and tutions remained high, and problem actions for all banks, especially for those commercial real estate loans continued that are undercapitalized. The statute to stress much of the industry. Earlier also directs the banking and thrift regefforts by banking organizations and the ulatory agencies to more formally regulatory agencies to address the indus- address noncredit risks in bank capital try's problems and to strengthen lending standards and gives the Federal Reserve standards had led to concerns about the broader supervisory authority over foravailability of bank loans to credit- eign banks operating in the United worthy borrowers; those concerns per- States. Many provisions of FDICIA sisted throughout 1992. Surveys of require the issuance of uniform rules by senior lending officers indicated that the banking and thrift regulatory agenbanks had generally taken measures to cies; as a consequence, the amount of adopt more conservative lending poli- interagency coordination on supervisory Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

216 79th Annual Report, 1992 issues increased significantly during tem. In its supervision of the general 1992. operations of these organizations, the The Congress enacted as part of Federal Reserve primarily seeks to pro- FDICIA the Foreign Bank Supervision mote their safety and soundness and Enhancement Act of 1991 (FBSEA). their compliance with laws and regula- This legislation expanded the authority tions, including the Bank Secrecy Act of the Federal Reserve to regulate and and consumer and civil rights laws.1 The supervise foreign banks conducting Federal Reserve also reviews the followbusiness in the United States. To imple- ing specialized activities of these institument the act, the Board issued interim tions: electronic data processing, fiduamendments to Regulation K relating to ciary activities, government securities the international banking operations of dealing and brokering, municipal securiforeign banking organizations in the ties dealing and clearing, and securities United States. In November 1992 the underwriting and dealing through sec- Board approved the final regulations. tion 20 subsidiaries. The Department of the Treasury and the The Federal Reserve is responsible Board also completed two joint studies for the supervision of (1) all Edge Act required by FBSEA. The first study corporations and agreement corporafound that the Basle risk-based capital tions, (2) the international operations of framework provides an appropriate basis state member banks and U.S. bank holdfor evaluating the capital equivalency of ing companies, and (3) the operations U.S. and foreign banks. The second of foreign banking companies in the study concluded that foreign banks United States.2 In addition, the FBSEA should continue to operate branches in increased the Federal Reserve's authorthe United States pursuant to the Inter- ity over branches, agencies, commercial national Banking Act of 1978, as lending subsidiaries, and representative amended, and FBSEA, as opposed to offices of foreign banks in the United operating only through subsidiaries. States with respect to the establishment, To meet its additional responsibilities, examination, and termination of such the Division of Banking Supervision and offices. Regulation was reorganized in July, and the Division's authorized staff level was 1. The Board's Division of Consumer and increased. Several new sections of the Community Affairs is responsible for coordinatdivision were created to coordinate ing the Federal Reserve's supervisory activities issues dealing with Federal Reserve with regard to the compliance of banking organi- Bank supervisory procedures, industry zations with consumer and civil rights laws. To carry out this responsibility, institutions are examaccounting practices, computerized ined by specially trained Reserve Bank examiners. information, enforcement activities, and The chapter of this REPORT covering consumer foreign bank supervision. and community affairs describes these regulatory responsibilities. Compliance with other statutes and regulations, which is treated in this chapter, is Scope of Responsibilities for the responsibility of the Board's Division of Bank- Supervision and Regulation ing Supervision and Regulation and the Reserve Banks, whose examiners check for safety and The Federal Reserve is the primary fed- soundness. eral supervisor and regulator of all U.S. 2. Edge Act corporations are chartered by the Federal Reserve, and agreement corporations are bank holding companies and of statechartered by the states, to provide all segments of chartered commercial banks that are the U.S. economy with a means of financing intermembers of the Federal Reserve Sys- national trade, especially exporting. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 217 The Federal Reserve also exercises State Member Banks important regulatory influence over At the end of 1992, 957 state-chartered the entry into, and the structure of, the banks belonged to the Federal Reserve U.S. banking system through its admin- System, 25 fewer than at year-end 1991. istration of the Bank Holding Company These banks represented about 8 percent Act, the Bank Merger Act, and the of all insured commercial banks and Change in Bank Control Act for bank held about 17 percent of all insured holding companies and state member commercial bank assets. banks. Also, the Federal Reserve is Federal Reserve guidelines call for all responsible for regulatory margin re- state member banks to be examined at quirements on securities transactions. least annually by either a Reserve Bank The Federal Reserve coordinates its or state banking agency. Large or trousupervisory activities with other federal bled banks must be examined at least and state regulatory agencies and with annually by a Reserve Bank. Since the bank regulatory agencies of other December 19, 1992, FDICIA has nations. required an on-site, full scope examination during each twelve-month period for all depository institutions; however, Supervision for Safety well-capitalized and well-managed instiand Soundness tutions with assets of less than $100 million may be examined every eighteen To ensure the safety and soundness of months. banking organizations, the Federal In conformance with Federal Reserve Reserve conducts on-site examinations, guidelines, all state member banks were visitations, and inspections and off-site examined at least once in 1992 except surveillance and monitoring, and it unfor five healthy, well-managed banks dertakes enforcement and other superviwhose examinations were deferred into sory actions. the first quarter of 1993. Altogether, the Reserve Banks conducted 815 examina- Examinations and Inspections tions (some of them jointly with state The on-site review of operations is an agencies), and state banking departintegral part of ensuring the safety and ments conducted 368 independent soundness of financial institutions. examinations. Also in conformance with Examinations of state member banks, of Federal Reserve guidelines, Reserve branches and agencies of foreign banks, Bank officials held 261 meetings with and of Edge Act and agreement corpora- directors of large state member banks tions, as well as inspections of bank as well as with directors of state memholding companies and their subsidi- ber banks that displayed significant aries, entail (1) an appraisal of the qual- weaknesses. ity of the institution's assets, (2) an evaluation of management, including internal policies, operations, and proce- Bank Holding Companies dures, (3) an assessment of the key At year-end 1992 the number of bank financial factors of capital, earnings, holding companies totaled 6,348, 93 asset and liability management, and fewer than at year-end 1991. These liquidity, and (4) a review for com- organizations controlled about 8,500 pliance with applicable laws and insured commercial banks and held regulations. approximately 93 percent of the assets Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

218 79th Annual Report, 1992 of all insured commercial banks in the penalties. Of these, 96 cases involving United States. 176 actions were completed by year- Federal Reserve guidelines call for end, including the assessment and colannual inspections of large bank holding lection of more than $230 million in companies and smaller companies with civil money penalties. In addition to significant nonbank assets. Small com- these enforcement actions, the staffs of panies (those with assets of less than the Board of Governors and several $150 million) that do not appear to have Reserve Banks during 1992 continued problems are inspected on a sample their investigation, the most extensive basis, and medium-sized companies that ever conducted by the Federal Reserve, do not appear to have problems are regarding activities of the Bank of inspected on a three-year cycle. Credit and Commerce International The inspection focuses on the opera- (BCCI) in the United States and other tions of the parent holding company and countries. As a result of the investigaits nonbank subsidiaries. In judging the tion, which was continuing at year-end, condition of subsidiary banks, Federal the Board in 1992 initiated 43 actions. Reserve examiners consult the examina- By year-end 1992, several of the BCCI tion reports of the federal and state actions had been completed, with the banking authorities that have primary Board assessing more than $230 million responsibility for the supervision of in fines. these banks. In 1992, 2,119 bank hold- All final enforcement actions issued ing companies were inspected, 2,006 by by the Board of Governors and all writ- Federal Reserve examiners and 113 by ten agreements executed by the Federal state examiners. The assignment of Reserve Banks in 1992 are available to some examiners to work on other indus- the public. In addition to formal enforcetry problems and major mergers and ment actions, the Federal Reserve Banks acquisitions in 1992 required the initiated and worked on 356 informal deferment to 1993 of 38 bank holding enforcement actions and completed 336 company inspections. During 1992, of them through instruments such as Reserve Bank officials held 575 meet- memoranda of understanding with state ings with the boards of directors of member banks, bank holding compabank holding companies to discuss nies, and foreign financial institutions supervisory concerns. subject to the jurisdiction of the Federal Reserve. The staff of the Board of Governors also obtained approximately $475 thousand in restitution to, and Enforcement Actions, more than $9.4 million in capital infu- Civil Money Penalties, and sions into, state member banks and bank Significant Criminal Referrals holding companies through informal ac- In 1992 the Federal Reserve Banks rec- tions that were taken in lieu of the issuommended, and members of the Board's ance of formal enforcement orders or staff initiated and worked on, 255 for- agreements. mal enforcement cases involving 634 In 1992 the Division of Banking separate actions dealing with unsafe or Supervision and Regulation forwarded unsound practices and violations of law. 393 criminal referrals to the Fraud The actions included written agree- Section of the Criminal Division of the ments, cease-and-desist orders, removal Department of Justice for inclusion in and prohibition orders, and civil money its significant referral tracking system. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 219 Specialized Examinations On-site examinations are essential to ensure the safety and soundness of The Federal Reserve conducts special- financial institutions that have fiduciary ized examinations in the following areas operations. The scope of these examinaof bank activity: electronic data process- tions includes (1) an evaluation of maning, fiduciary activities, dealing and agement, policies, audit procedures, and brokering in government and municipal risk management, (2) an appraisal of the securities, and underwriting and dealing quality of trust assets, (3) an assessment in securities through section 20 securi- of earnings, (4) a review for conflicts of ties subsidiaries. The Federal Reserve interest, and (5) a review for compliance also reviews state member banks and with laws, regulations, and general fidubank holding companies that act as ciary principles. transfer agents. During 1992, Federal Reserve examiners conducted 200 on-site trust examinations of state member banks and trust Electronic Data Processing companies engaged in fiduciary activi- Under the Interagency EDP Examinaties. The institutions examined in 1992 tion Program, the Federal Reserve held more that $2.2 trillion in fiduciary examines the electronic data processing assets. activities of state member banks, Edge Act and agreement corporations, and independent data centers that provide Government Securities Dealers EDP services to these institutions. In and Brokers 1992 the Federal Reserve System also The Federal Reserve is responsible for assumed supervisory responsibility for examining state member banks and examining data centers associated with some foreign banks that are government U.S. branches and agencies of foreign securities dealers and brokers for their banks. The Federal Reserve conducted compliance with the Government Secu- 364 on-site EDP reviews for the year. rities Act of 1986 and with regulations The Federal Reserve also was the of the Department of the Treasury. agency-in-charge on 4 examinations of Forty-four state member banks, three 13 large, independent data service prostate branches of foreign banks, and one viders conducted jointly with the Fedstate agency of a foreign bank have notieral Deposit Insurance Corporation fied the Board that that they are govern- (FDIC), the Office of the Comptroller of ment securities dealers or brokers that the Currency (OCC), and the Office of are not otherwise exempt from Treasury Thrift Supervision (OTS). regulations. During 1992 the Federal Reserve conducted twenty-six exam- Fiduciary Activities inations of broker-dealer activities in The Federal Reserve has supervisory government securities at state member responsibility for institutions that hold banks and foreign banks. more than $3.6 trillion of discretionary and nondiscretionary assets in various fiduciary capacities. This group of insti- Municipal Securities Dealers tutions includes 317 state-chartered and Clearing Agencies member banks and trust companies and The Securities Act Amendments of 1975 53 nonmember trust companies that are made the Board responsible for supersubsidiaries of bank holding companies. vising state member banks and bank Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 79th Annual Report, 1992 holding companies that act as municipal porate and sovereign debt securities, and securities dealers or as clearing agen- two received authorization to commence cies. Registered with the Board are equity underwriting and dealing in forty-three banks that act as municipal equity securities. securities dealers and three clearing At year-end 1992, thirty foreign and agencies that act as custodians of securi- domestic banking organizations had ties involved in transactions settled by so-called section 20 subsidiaries authobookkeeping entries. In 1992 the Fed- rized to underwrite and deal in ineligible eral Reserve examined all three of the securities. Of these subsidiaries, eight clearing agencies and twenty-two of the could underwrite all debt or equity secubanks that deal in municipal securities. rities; three could underwrite all debt securities; and eighteen could underwrite only the types of debt securities Securities Subsidiaries of Bank Holding approved by the Board in 1987. The Companies Federal Reserve uses specialized inspec- Section 20 of the Banking Act of 1933, tion procedures in reviewing operations commonly known as the Glass-Steagall of these securities subsidiaries. During Act, prohibits the affiliation of a member 1992 the Federal Reserve conducted bank with a company that is "engaged twenty-four inspections of section 20 principally" in underwriting or dealing subsidiaries. in securities. The Board in 1987 approved proposals by banking organi- Transfer Agents zations to underwrite and deal on a lim- Federal Reserve examiners conduct sepited basis in specified classes of bank arate reviews of state member banks and "ineligible" securities (that is, commerbank holding companies that act as cial paper, municipal revenue bonds, transfer agents. Transfer agents counterconventional residential mortgagesign and monitor the issuance of securirelated securities, and securitized conties, register their transfer, and exchange sumer loans) in a manner consistent with or convert them. During 1992, System the Glass-Steagall Act and the Bank examiners reviewed 82 of the 177 banks Holding Company Act. At that time the and bank holding companies registered Board limited revenues from these with the Board as transfer agents. newly approved activities to no more than 5 percent of total revenues for each securities subsidiary. This limit was sub- Surveillance and Monitoring sequently increased in September 1989 to 10 percent. The Federal Reserve monitors the finan- In January 1989 the Board approved cial condition and performance of indiapplications by five U.S. bank holding vidual banking organizations and the companies to underwrite and deal in cor- banking system as a whole to identify porate and sovereign debt and equity areas of supervisory concern. Autosecurities, subject in each case to mated screening systems are used to reviews of managerial and operational identify organizations with poor or deteinfrastructure and other conditions and riorating financial profiles and to idenrequirements specified by the Board. tify adverse trends affecting the banking Four of these organizations subse- system. Information from these systems quently received authorization to com- are then used in decisions to allocate mence underwriting and dealing in cor- examination resources or take other Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 221 appropriate supervisory actions. Among U.S. economy with a means of financing the automated systems used by the Fed- international trade, especially exports. eral Reserve to monitor banking organi- An agreement corporation is a company zations is the System to Estimate Exam- that enters into an agreement with the ination Ratings (SEER), which is used Board not to exercise any power that is to track the overall financial condition impermissible for an Edge Act corporaof individual organizations. SEER statis- tion. In 1992 the Federal Reserve examtically estimates an institution's super- ined all ninety-four Edge Act and agreevisory rating based on its quarterly ment corporations, which held about Reports of Condition and Income. A $30 billion in total assets at year-end. number of supplementary screening systems are used to monitor specific areas of supervisory interest. Another auto- Foreign-Office Operations of U.S. mated system tracks examinations and Banking Organizations inspections and summarizes the results The Federal Reserve examines the interand supervisory actions. national operations of state member To assist supervisory staff in evaluat- banks, Edge Act corporations, and bank ing individual bank holding companies, holding companies, principally at the the Federal Reserve produces and dis- U.S. head offices of these organizations, tributes the quarterly Bank Holding where the ultimate responsibility for Company Performance Report, which their foreign offices lies. In 1992 the provides detailed financial information Federal Reserve conducted full-scope on the condition and performance of and targeted-scope examinations of ten each bank holding company. The Fed- foreign branches of state member banks eral Reserve also produces several and forty-nine foreign subsidiaries of aggregate reports on the national and Edge Act corporations and bank holding regional performance and condition of companies. All of the examinations the banking industry. abroad were conducted with the cooper- Automated monitoring systems rely ation of the supervisory authorities of heavily on the information in regulatory the countries in which they took place; reports filed by banking organizations. when applicable, the examinations were To ensure the timeliness and accuracy of coordinated with the Office of the the reports, the Federal Reserve main- Comptroller of the Currency. Also, tains the Regulatory Reports Monitoring examiners made eighty-five visits to the System to track domestic and foreign overseas offices to obtain current finanbanking organizations that file late or cial and operating information and, in inaccurately. some instances, to evaluate their compliance with corrective measures or testcheck their adherence to safe and sound International Activities practice. The Federal Reserve is responsible for supervising international activities through various vehicles. U.S. Activities of Foreign Banks Foreign banks continue to be significant Edge Act and Agreement Corporations participants in the U.S. banking system. Edge Act corporations are international As of year-end 1992, 288 foreign banks banking organizations chartered by the from 57 countries operated 502 state- Board to provide all segments of the licensed branches and agencies, of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

222 79th Annual Report, 1992 which 33 are insured by the FDIC. Reserve to terminate the operations of These foreign banks also operated 76 foreign banks in the United States under branches and agencies licensed by the certain conditions. In addition, the legis- OCC, of which 7 have FDIC insurance. lation requires Federal Reserve approval Foreign banks also operated approxi- to establish foreign bank branches, mately 240 representative offices and agencies, commercial lending subsididirectly owned 14 Edge Act corpora- aries, and representative offices in the tions and 13 commercial lending compa- United States. Applications by two Tainies. In addition, foreign banks held an wanese banks to establish a branch and interest of at least 25 percent in 117 U.S. agency respectively were approved in commercial banks. Altogether, these December 1992. foreign banks control approximately 21 percent of banking assets in the United States. Supervisory Policy The Federal Reserve has broad During 1992 the Federal Reserve underauthority to supervise and regulate fortook several major supervisory and regeign banks that engage in banking and ulatory policy initiatives. Most of these related activities in the United States initiatives involved the implementation through branches, agencies, commerof actions required under FDICIA. cial lending companies, representative Other initiatives included several offices, Edge Act corporations, banks, amendments to the Board's risk-based and certain nonbanking companies. In capital guidelines and other rules and 1992, 314 such offices were examined policies, as well as the continuation of a by the Federal Reserve together, in some review of internal supervisory policies cases, with state or other federal regularelated to the availability of credit. tory authorities. Before the December 1991 passage of FBSEA, the Federal Reserve had resid- Federal Deposit Insurance ual authority to examine all branches, Corporation Improvement agencies, and commercial lending sub- Act of 1991 sidiaries of foreign banks in the United States. The International Banking Act of In 1992 the Board issued final rules to 1978 instructed the Federal Reserve to implement various sections of FDICIA, use, to the extent possible, the examina- as required by the Congress. In addition, tion reports of other state and federal the Board initiated proposals in 1992 to regulators. The FBSEA amended the implement sections of FDICIA that had International Banking Act and increased statutory deadlines during 1993. The the Federal Reserve's authority with major Board actions of 1992 to implerespect to these foreign bank operations, ment FDICIA as it relates to supervisory including representative offices. The policy covered the following sections of Federal Reserve has acted to ensure that the law: all branches and agencies licensed by • Section 122: On November 17 the the state or federal government are banking and thrift regulatory agencies, examined on-site at least once during working under the auspices of the Fedeach twelve-month period. These exam- eral Financial Institutions Examination inations are usually coordinated with Council (FFIEC), approved regulatory other state and federal regulators. The reporting changes to gather information FBSEA also authorizes the Federal on lending to small businesses and small Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 223 farms; the changes will become effec- lation F to limit the exposure of insured tive as of the June 30, 1993 report date. depository institutions to the exposure • Section 131: On September 18 the of any other depository institution. This Board issued a final rule implementing rule will be phased in and will become the provisions pertaining to prompt cor- fully effective on June 19, 1995. rective action, which became effective The more significant of these FDICIA on December 19, 1992. provisions and the Board actions taken • Section 132: On September 14, the in connection with them are discussed in Board issued an advance notice of pro- more detail below along with other sigposed rulemaking requesting public nificant policy initiatives on which the comment on safety and soundness stan- Board acted in 1992. dards with regard to operations, management, credit underwriting, asset quality, earnings, stock valuations, and Risk-Based Capital Standards employee compensation. Final regula- at Year-End 1992 tions are to be issued by August 1, 1993, On December 31, 1992, the two-year and are to become effective by Decem- phase-in period for the risk-based capiber 1, 1993. tal standards ended. At that time, the • Section 304: On December 2 the minimum standard of total capital to Board adopted a rule with regard to real risk-adjusted assets that banking organiestate standards that matched rules zations were expected to maintain was issued separately by the other banking raised from 7.25 percent to 8 percent. and thrift regulatory agencies. The rules The risk-based capital standards were will become effective on March 19, developed in conjunction with the FDIC 1993. and OCC to implement the Basle • Section 305: On August 8 the bank- Accord, which is a risk-based capital ing regulatory agencies issued an inter- framework proposed by the Basle Comagency advance notice of a proposed mittee on Banking Regulations and rulemaking, requesting comment on the Supervisory Practices and endorsed by incorporation of interest rate risk and the central bank governors of the Group the risks of portfolio concentrations and of Ten countries in July 1988. nontraditional activities into the risk- During 1992 the Board adopted the based capital framework. A proposed following amendments to its risk-based rulemaking is expected to be issued in capital guidelines: early 1993, and final rules are required • On January 17 the Board amended to be issued by mid-June 1993. the guidelines to remove the limit on the • Section 306: On April 22 the Board amount of noncumulative perpetual preadopted amendments to Regulations O ferred stock a bank holding company and Y to provide safeguards against may include in its tier 1 capital. The insider abuse; the amendments apply a guidelines for bank holding companies new aggregate lending limit applicable continue to limit cumulative perpetual to all of a bank's insiders and expand preferred stock to 25 percent of tier 1 the application of existing lending limits capital. under Regulation O to loans to directors • The Congress, as part of the Resoand their related interests. These lution Trust Corporation Refinancing, changes became effective on May 18. Restructuring, and Improvement Act of • Section 308: On November 20 the 1991, required that the federal banking Board approved an amendment to Regu- agencies lower the risk weight from Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

224 79th Annual Report, 1992 100 percent to 50 percent on two types the commercial banking industry's of loans: (1) those for multifamily hous- favorable experience in adapting to ing and (2) those to finance the construc- changing rate environments. tion of presold one- to four-family residential properties. On April 10 the Board issued a proposal to lower the Prompt Corrective Action risk weight for multifamily housing Section 131 of FDICIA established a loans meeting certain criteria. On regime of "prompt corrective action" December 29 the Board adopted an that provides for successively more interim rule, effective immediately, to stringent regulatory actions as an lower the risk weight for presold one- to insured depository institution's capital four-family residential construction deteriorates through five capital categoloans. Final rules covering these ries: well-capitalized, adequately capichanges were to be adopted in 1993. talized, undercapitalized, significantly • In early 1992 the Board and the undercapitalized, and critically underother banking and thrift regulatory agencapitalized. The final rule, which was cies, as part of an interagency effort to developed in conjunction with the three achieve uniformity in their risk-based other banking and thrift regulatory agencapital guidelines, proposed revisions to cies, specifies minimum levels of capital the guidelines to provide explicit guidfor those categories. ance on the types and amounts of intan- The relevant capital measures estabgible assets that may be included in lished for the four highest categories capital. The Board approved a final rule consist of the total, the tier 1 risk-based on December 9, which became effective capital measures, and the tier 1 leverage in February 1993. ratio. After an opportunity for a hearing, • The Board lowered the risk weight an institution may be downgraded to the from 20 percent to zero for certain colnext lower category (but not into the lateralized transactions such as certain critically undercapitalized category) if indemnified securities lending arrangethe appropriate regulatory agency has ments. This change, which became determined that the institution is in an effective on December 30, 1992, recogunsafe or unsound condition or if it has nizes the minimal risk in such transacreceived a less-than-satisfactory rating tions and is consistent with the Basle for asset quality, management, earnings, Accord. or liquidity in its most recent report of examination. An institution is deemed to be critically undercapitalized if its ratio Interest Rate Risk of tangible equity to total assets is 2 per- With regard to interest rate risk, the cent or less. proposal set forth in the notice of proposed rulemaking issued in accordance with section 305 would require some additional reporting by all banks but Real Estate Lending Standards would impose additional capital require- In accordance with section 304, a reguments on only those institutions having lation issued jointly by the four agencies exceptionally high measures of risk. prescribes real estate lending standards This approach seeks to balance the regu- that require each insured depository latory burden associated with more pre- institution to adopt and maintain a comcise measures of interest rate risk with prehensive written real estate lending Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 225 policy. These policies must be consis- Small Business and Farm Information tent with safe and sound banking prac- The reporting requirements approved by tices and must be appropriate to the size the FFIEC pursuant to section 122 of of the institution and the nature and FDICIA generally require insured scope of the institution's operations. banks, thrift institutions, and U.S. They also must address certain lending branches of foreign banks to report considerations, including loan-to-value annually on the number and amount of limits; loan administration procedures; currently outstanding nonfarm nonresiportfolio diversification standards; and dential real estate loans, commercial documentation, approval, and reporting loans, and agricultural real estate and requirements. The agencies also issued agricultural loans in various size catethe Interagency Guidelines for Real gories. These reporting requirements Estate Lending Policies to be used in will become effective with the filings of conjunction with the regulation, which Reports of Condition and Income beginwas scheduled to become effective on ning on June 30, 1993. March 19, 1993. Real Estate Appraisals Credit Availability The 1987 interagency guidelines for real The Federal Reserve continued to work estate appraisals were revised to incorin a number of policy and supervisory porate the requirements of the Board's areas to ease problems related to the real estate appraisal regulation, which availability of bank credit. The policy was issued in 1990. The revised guidechanges that were implemented phased lines were developed by an interagency out the reporting of highly leveraged working group, and each of the banking transactions and made adjustments to and thrift regulatory agencies have risk-based capital definitions, to treat- issued separate, but similar, guidelines. ment of intangible assets, and to exami- The Board's guidelines, which were nation and reporting procedures. In issued in September 1992, provide addition, the Federal Reserve continued information on evaluations for real to work with other supervisors of depos- estate related financial transactions that itory institutions to ensure that supervi- do not require the services of a state sory policies and practices are not certified or licensed appraiser and on encouraging overly cautious lending requirements for administering an policies at depository institutions that institution's appraisal and evaluation could deter lenders from meeting the programs. financial needs of creditworthy borrow- In November 1992 the Board in coners. In an effort to gauge the effect of junction with the other banking and these and other changes, the Federal thrift regulatory agencies issued an order Reserve initiated or participated in a granting relief from certain real estate number of surveys and held several appraisal requirements for several major meetings across the country to further disaster areas, in particular, those determine the causes of credit availabil- affected by Hurricanes Andrew and ity problems and work toward appropri- Iniki, and for the Los Angeles civil ate solutions. In this regard, System offi- unrest. The Board acted under provicials also testified before the Congress sions of the Depository Institutions on a number of occasions on the actions Disaster Relief Act of 1992 (DIDRA). undertaken to alleviate these problems. DIDRA gives the regulatory agencies Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

226 79th Annual Report, 1992 the authority to waive the appraisal transactions by banking organizations requirements of title XI of the Financial after the June 30, 1992, reporting date. Institutions Reform, Recovery, and Nonetheless, the agencies will continue Enforcement Act of 1989 (FIRREA) for to closely review all highly leveraged transactions involving property located credits during the examination process, in major disaster areas. The Board and and examiners will continue to use guidthe other agencies also adopted uniform ance previously issued by the agencies policies pursuant to DIDRA that will be in the assessment of individual credits to followed in granting similar relief in finance corporate restructurings and the future major disaster areas. evaluation of internal processes for initiating and reviewing such credits. Highly Leveraged Transactions Staff Training The Federal Reserve, together with the other banking and thrift regulatory agen- The training of System staff members cies, decided to phase out the super- emphasizes analytical and supervisory visory definition of highly-leveraged themes common to the four areas transactions and to discontinue regula- of supervision and regulation— tory reporting requirements for such examinations, inspections, applications, Training Programs for Banking Supervision and Regulation, 1992 Number of sessions Program Total Regional Schools or seminars conducted by the Federal Reserve Banking I (after March, examiner training school I) 12 5 Banking II 12 7 Banking III 5 1 Credit analysis 12 10 Abbreviated cash flow seminar 3 3 Real estate lending seminar 6 3 Senior lending seminar 2 Senior forum for current banking and regulatory issues 2 Bank operations school 4 3 Effective writing for banking supervision staff 16 16 Management skills school 5 3 Conducting meetings with management 18 18 Bank holding company applications 1 Bank holding company inspection 7 Advanced EDP examinations 1 Basic entry-level trust 1 Advanced trust school 1 Consumer compliance examination I 2 Consumer compliance examination II 2 Advanced CRE examination techniques 1 Seminar for senior supervisors of foreign central banks • 3 Other agencies conducting courses2 Federal Financial Institutions Examination Council 22 Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency Federal Bureau of Investigation3 ' 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 227 and surveillance—and stresses the rities Activities."3 The statement, which interdependence of these areas. During became effective on February 10, 1992, 1992 the Federal Reserve conducted a supersedes the "Supervisory Policy variety of schools and seminars, and Concerning Selection of Securities Federal Reserve staff members partici- Dealers and Unsuitable Investment pated in several courses offered by, or Practices," issued in 1988. The new cosponsored with, other agencies, as policy statement addresses the selection shown in the accompanying table. In of securities dealers and requires depos- 1992 the Federal Reserve trained itory institutions to establish prudent 2,167 students in System schools, 881 in policies and strategies for securities FFIEC schools, and 108 in other transactions. The statement also defines schools, for a total of 3,156 students, securities trading or sales practices that including 154 representatives from are viewed by the agencies as being foreign central banks. unsuitable when conducted in an The Federal Reserve System also pro- investment portfolio, indicates characvided scholarship assistance to the states teristics of loans held for sale or tradfor training their examiners in Federal ing, and establishes a framework for Reserve and FFIEC schools. Through identifying when certain mortgagethis program, 570 state examiners were derivative products are high-risk trained; 304 in Federal Reserve courses, mortgage securities, which must be 246 in FFIEC programs, and 20 in other reported as securities held for sale or for courses. trading. Five new schools were added to the Under the auspices of the FFIEC, the training program during the year: Real Board and the three other agencies dur- Estate Lending Seminar, Senior Lending ing 1992 continued their study of appro- Seminar, Bank Operations School, Man- priate regulatory reporting and capital agement Skills, and Advanced EDP treatments to be applied to recourse Examinations. arrangements for depository institutions During 1992 the Federal Reserve and bank holding companies; they also began integrating its core supervision continued their review of guidance on schools with those of the FDIC. In the allowance for loan and lease losses. March the introductory school was An interagency policy statement on the merged, and six sessions of the joint allowance is expected to be published in school were offered during the year. In early 1993. November and December, the pilot ses- The Federal Reserve continued its sions of the joint second school were participation in the work of the FFIEC's held. Appraisal Subcommittee. The subcommittee was established in November 1989, pursuant to title XI of FIRREA, to monitor the overall implementation of Federal Financial Institutions real estate appraisal reform. The sub- Examination Council The Board and the three other banking 3. The FFIEC consists of representatives from and thrift regulatory agencies, pursuant the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporato the recommendation of the FFIEC, tion, the National Credit Union Administration, issued on January 10, 1992, a revised the Office of the Comptroller of the Currency, and "Supervisory Policy Statement on Secu- the Office of Thrift Supervision. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

228 79th Annual Report, 1992 committee is working with the state 28 issued a request for public comment appraisal regulatory agencies to imple- on possible regulatory treatments for ment programs to license and certify deferred tax assets. After it evaluated appraisers. During 1992 the staff mem- these comments and held further bers of the subcommittee completed 20 interagency discussions, the FFIEC state field reviews. Pursuant to title XI, announced on December 23, that, for the subcommittee has developed a na- regulatory purposes, federally supertional registry of appraisers licensed and vised banks and thrift associations certified by the states. As of the end of should report deferred tax assets in the year, the database included 35,000 accordance with generally accepted appraisers from 36 states. accounting principles. At the same time, Pursuant to section 221 of FDICIA, the FFIEC recommended that the bankthe FFIEC on December 8 approved for ing and thrift regulatory agencies amend submission to the Congress its Study on their regulatory capital standards to limit Regulatory Burden. Done in consulta- the amount of deferred tax assets that tion with insured depository institutions can be included in capital. and consumer and community groups, The FFIEC also approved a number the study reviewed policies, procedures, of revisions to the Reports of Condition and requirements of the banking and and Income (Call Report), which are thrift regulatory agencies. It identified filed quarterly by all insured commerrule changes that could reduce unneces- cial banks. These revisions will become sary regulatory burden without dimin- effective as of the March 31, 1993, reishing compliance with, or enforcement porting date. Some of these revisions— of, consumer laws and without endan- including those pertaining to the collecgering the safety and soundness of tion of data on loans to small businesses insured institutions. and small farms, off-balance sheet items, During 1992 the FFIEC took several deposits in lifeline accounts, preferred actions with regard to regulatory report- deposits, and insured and uninsured ing requirements. On May 22 the FFIEC deposits—implement certain reportingissued a policy statement concerning the related requirements of FDICIA. Other frequency and timing of changes in reg- revisions adopted in 1992 relate to intanulatory reporting requirements. Under gible assets that are grandfathered for this advance notification policy, the regulatory capital purposes and to pastagencies, subject to certain exceptions, due and nonaccrual loans and leases that will announce before the end of each are wholly or partially guaranteed by the year all reporting changes that will take U.S. government. effect in the following year. The policy In November 1992 the FFIEC should ensure that depository institu- adopted a supplement to the Report of tions have at least ninety days' notice of Assets and Liabilities of U.S. Branches changes in their regulatory reporting and Agencies of Foreign Banks to obtain requirements and, accordingly, should improved data for supervisory purposes lessen the regulatory burden associated and for the analysis of U.S. credit and with reporting changes. deposit flows in connection with inter- In response to a new accounting stan- national indebtedness. The supplement dard regarding income taxes, issued was proposed for public comment at the in February 1992 by the Financial end of 1991, and the final version was Accounting Standards Board (FASB scheduled to be implemented on Statement No. 109), the FFIEC on July March 31, 1993. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 229 Regulation of the U.S. Banking approved 194 proposals to organize Structure bank holding companies and denied 2; approved 85 proposals to merge existing The Board administers the Bank Holdbank holding companies; approved 217 ing Company Act, the Bank Merger Act, bank acquisitions by existing bank holdand the Change in Bank Control Act for ing companies and denied 1; approved bank holding companies and state mem- 594 requests by existing companies to ber banks. In doing so, the Federal acquire nonbank firms engaged in activ- Reserve acts on a variety of proposals ities closely related to banking and that directly or indirectly affect the denied 3; and approved 23 other applicastructure of U.S. banking at the local, tions. Data on these applications are regional, and national levels. The Board shown in the accompanying table. also has primary responsibility for regu- Included in the totals are applicalating the international operations of tions related to the sale of failed thrift domestic banking organizations and the institutions by the Resolution Trust overall U.S. banking operations of for- Corporation. eign banks, whether conducted directly through a branch or agency or indirectly through a subsidiary commercial lend- Bank Merger Act ing company. In addition, the Board has The Bank Merger Act requires that all established regulations for the interstate proposed mergers of insured depository banking activities of these foreign banks institutions be acted upon by the approand for foreign banks that control a U.S. priate federal banking agency. If the subsidiary commercial bank. institution surviving the merger is a state member bank, the Federal Reserve has primary jurisdiction. Before acting on a Bank Holding Company Act proposed merger, the Federal Reserve By law, a company must obtain the Fed- considers the financial and managerial eral Reserve's approval if it is to form a resources of the applicant, the future bank holding company by acquiring prospects of the existing and combined control of one or more banks. Moreover, institutions, the convenience and needs once formed, a bank holding company of the community to be served, and the must receive the Federal Reserve's competitive effects of the proposal. The approval before acquiring additional Federal Reserve must also consider the banks or nonbanking companies. views of certain other agencies on the In reviewing an application filed by a competitive factors involved in the bank holding company, the Federal transaction. Reserve considers the financial and During 1992 the Federal Reserve managerial resources of the applicant, approved 120 merger applications. As the future prospects of both the appli- required by law, each merger is cant and the firm to be acquired, the described in this REPORT (in table 16 of convenience and needs of the commu- the Statistical Tables chapter). nity to be served, the potential public When the OCC, the FDIC, or the benefits, and the competitive effects of OTS has jurisdiction over a merger, the the proposal. Federal Reserve is asked to comment on In 1992 the Federal Reserve acted on the competitive factors to assure compa- 1,119 bank holding company and related rable enforcement of the antitrust proviapplications. The Federal Reserve sions of the act. The agencies have Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

230 79th Annual Report, 1992 adopted standard terminology for as- The appropriate federal banking agensessing competitive factors in merger cies are required to publish notice of cases to assure consistency in adminis- each proposed change in control and to tering the act. The Federal Reserve invite public comment, particularly from submitted 763 reports on competitive persons located in the markets served by factors to the other federal banking the institution to be acquired. The fedagencies in 1992. eral banking agencies are also required to assess the qualifications of each per- Change in Bank Control Act son seeking control; the Federal Reserve routinely makes such a determination The Change in Bank Control Act and verifies information contained in the requires that persons seeking control of proposal. a bank or bank holding company obtain In 1992 the Federal Reserve acted approval from the appropriate federal on 145 proposed changes in control of banking agency before the transaction state member banks and bank holding occurs. Under the act, the Federal companies. Reserve is responsible for reviewing changes in the control of state member Public Notice of Federal Reserve banks and of bank holding companies. Decisions In so doing, the Federal Reserve must review the financial condition, compe- Each decision by the Federal Reserve tence, experience, and integrity of the that involves a bank holding company, acquiring person; consider the effect on bank merger, change in control, or interthe financial condition of the bank or national banking proposal is effected by bank holding company to be acquired; an order or announcement. Orders state and determine the effect on competition the decision along with the essential in any relevant market. facts of the application and the basis for Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1992 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 7 2 0 0 3 184 0 196 Merger of holding company 17 0 0 0 7 61 0 85 Retention of bank 0 0 0 0 0 00 0 Acquisition Bank 34 1 0 0 17 166 0 218 Nonbank 132 3 71 0 36 327 92 597 Bank service corporation ... 0 0 0 0 10 4 5 Other 0 0 18 0 0 0 0 18 Total 190 6 25 0 64 738 96 1,119 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

Banking Supervision and Regulation 231 the decision; announcements state only Reserve Banks and to expedite the prethe decision. All orders and announce- acceptance review of applications. In ments are released immediately to the 1992, 80 percent of applications were public; they are subsequently reported acted on under delegated authority. in the Board's weekly H.2 statistical release and in the monthly Federal Board Policy Decisions Reserve Bulletin. The H.2 release also and Developments lists applications and notices received in Bank Related Activities by the Federal Reserve during the preceding week. In July 1992 the Board requested public comment on alternative methods to adjust the 10 percent revenue test that Timely Processing of Applications limits underwriting and dealing in ineli- The Federal Reserve maintains target gible securities by section 20 subsididates and procedures for the processing aries of bank holding companies. The of applications. These target dates pro- matter was still under consideration at mote efficiency at the Board and the year-end. Reserve Banks and reduce the burden on applicants. The time allowed for a Proposals to Engage in New decision is sixty days; during 1992, Nonbanking Activities 93 percent of the decisions met this In 1992 the Board expanded the list of standard. generally permissible nonbanking activities for bank holding companies to Delegation of Applications include (1) combined investment advisory and securities brokerage activities, Historically, the Board has delegated (2) additional financial advisory activicertain regulatory functions—including ties, and (3) higher-residual-value leasthe authority to approve, but not to deny, ing activities. The Board also approved certain types of applications—to the certain modifications to its investment Reserve Banks, to the Director of the advisory policy statement to permit bank Board's Division of Banking Superholding companies to recommend and vision and Regulation, and to the Secbroker shares of mutual funds when the retary of the Board. The delegation of mutual fund is advised by the bank holdresponsibility for applications permits ing company or one of its subsidiaries. staff members at both the Board and the At year-end, the Board was consider- Reserve Banks to work more efficiently ing a proposal by a foreign bank to by removing routine cases from the engage in a new activity that will Board's agenda. involve the clearing of futures transac- In the fall of 1992, in an effort to tions that generally have been executed increase efficiency and reduce regulaby other pre-approved execution groups. tory burden in the applications process, the Board greatly expanded the number of applications that may be acted upon Other Pending Rulemakings by the Reserve Banks under delegated Three other rulemakings were under authority. In addition, the Board consideration at year-end. The first proapproved procedural changes to stream- posal would ease the restrictions on the line the review of certain proposals by underwriting and dealing activities of both Board staff members and the bank holding companies to permit cer- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

232 79th Annual Report, 1992 tain joint marketing activities and the increases the debt of the bank holding employment of management officials company and simultaneously decreases working in both the holding company its equity. Relatively larger purchases and in the securities subsidiary. The sec- may undermine the financial condition ond proposal would rescind an existing of a bank holding company and its bank rule that permits bank holding compa- subsidiaries. The Federal Reserve may nies to establish or acquire indirectly, object to stock repurchases by holding through their state-chartered bank sub- companies that fail to meet certain stansidiaries, nonbank operations subsidi- dards, including the Board's capital aries engaged in activities that may be guidelines. conducted by the parent bank. The third In the past, the Board's regulations proposal would permit bank holding have required all bank holding compacompanies to engage in real estate nies to give advance notice of repurinvestment activities within certain chases that retire 10 percent or more of limitations. the company's consolidated equity capital. During the second half of 1992 the Board approved modification of the Applications by State Member regulation that would exempt "well- Banks capitalized" banking holding companies State member banks must obtain the per- from having to give advance notice. mission of the Federal Reserve to open In 1992 the Federal Reserve reviewed new domestic branches, to make invest- eighty-eight proposed stock repurchases ments in bank premises that exceed by bank holding companies, eighty-six 100 percent of capital stock, and to add of which were acted on by the Reserve to their capital bases from sales of sub- Banks on behalf of the Board. ordinated debt. During the year, the Board substantially reduced the filing International Activities of U.S. requirements for creating new domestic Banking Organizations branches and approved modification of the regulation governing the establish- The Board has several statutory responment of bank premises. In addition, the sibilities in supervising the international Board reduced the prior review require- operations of U.S. banking organizaments for new debt instruments of state tions. The Board must provide authomember banks that are intended to qual- rization and regulation of foreign ify as capital. State member banks must branches of member banks; of overseas still give six months' notice of their investments by member banks, Edge intention to withdraw from membership Act corporations, and bank holding in the Federal Reserve, although the companies; and of investments by bank notice period may be shortened or elim- holding companies in export trading inated in specific cases. companies. In addition, the Board is required to charter and regulate Edge Act corporations and their investments. Stock Repurchases by Bank Holding Companies Foreign Branches of Member A bank holding company sometimes Banks purchases its own shares from its shareholders. If the company borrows the Under provisions of the Federal Reserve money to buy the shares, the transaction Act and of Regulation K (International Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 233 Banking Operations), member banks in tal to weighted risk assets of 10 percent most cases must seek Board approval to effective January 1, 1993. establish branches in foreign countries. In reviewing proposed foreign branches, Foreign Investments the Board considers the requirements of the law, the condition of the bank, and Under authority of the Federal Reserve the bank's experience in international Act and the Bank Holding Company business. In 1992 the Board approved Act, U.S. banking organizations may the opening of three foreign branches. engage in activities overseas with the By the end of 1992, 120 member authorization of the Board. Significant banks were operating 774 branches in investments require prior review by the foreign countries and overseas areas of Board, although pursuant to Regulation the United States; 88 national banks K, most foreign investments may be were operating 660 of these branches, made under general-consent procedures and 32 state member banks were operat- that involve only after-the-fact notificaing the remaining 114 branches. tion to the Board. Edge Act and Agreement Export Trading Companies Corporations In 1982 the Bank Export Services Act Under sections 25 and 25(a) of the Fedamended Section 4 of the Bank Holding eral Reserve Act, Edge Act corporations Company Act to permit bank holding and agreement corporations may engage companies, their subsidiary Edge Act or in international banking and foreign agreement corporations, and bankers' financial transactions. These corporabanks to invest in export trading compations, which are usually subsidiaries nies, subject to certain limitations and of member banks, may (1) conduct a after Board review. The purpose of this deposit and loan business in states other amendment was to allow effective parthan that of the parent, provided that the ticipation by bank holding companies in business is strictly related to internathe financing and development of export tional transactions and (2) make foreign trading companies. The Export Trading investments that are broader than those Company Act Amendments of 1988 of member banks because they can provide additional flexibility for bank invest in foreign financial organizations, holding companies engaging in export such as finance companies and leasing trading company activities. In 1992, one companies, as well as in foreign banks. new export trading company was In 1992 the Federal Reserve approved approved; since 1982 the Federal one new agreement corporation. At Reserve has acted affirmatively on notiyear-end, there were ninety-four Edge fications by forty-eight bank holding Act and agreement corporations, which companies to establish export trading together had forty-four branches. The companies. Board requires each Edge Act corporation that is engaged in banking to maintain a ratio of equity to risk assets of at Enforcement of Other Laws least 7 percent. In line with the 1991 and Regulations revision of Regulation K, this ratio of equity to risk assets was replaced with a The Board is also responsible for the minimum ratio of qualifying total capi- enforcement of various laws, rules, and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

234 79th Annual Report, 1992 regulations other than those specifically Securities Regulation related to bank safety and soundness and the integrity of the banking Under the Securities Exchange Act of structure. 1934, the Board is responsible for regulating credit in certain transactions involving the purchase or carrying of Bank Secrecy Act securities. The Board limits the amount of credit that may be provided by securi- The Currency and Foreign Transactions ties brokers and dealers (Regulation T), Reporting Act of 1970 (the Bank by banks (Regulation U), and by other Secrecy Act) was originally aimed at lenders (Regulation G). Regulation X identifying and tracking proceeds of extends these credit limitations, or marillegal activity by creating records of gin requirements, to certain borrowers various financial transactions that other- and to certain credit extensions, such as wise would not be identifiable. These credit obtained from foreign lenders by records are also useful for determining U.S. citizens. the safety and soundness of financial Several regulatory agencies enforce institutions. Through regular examina- compliance with the securities credit tions, the Federal Reserve monitors regulations. The Securities and compliance with the Bank Secrecy Act Exchange Commission, the National by the institutions it supervises. Association of Securities Dealers, and During 1992 the Federal Reserve the national securities exchanges examsignificantly increased the number of ine brokers and dealers for compliance targeted examinations of financial insti- with Regulation T. The federal banking tutions to determine compliance with agencies examine banks under their the Bank Secrecy Act. In addition the respective jurisdictions for compliance Federal Reserve enhanced its enforce- with Regulation U. The compliance of ment actions related to the act, which other lenders with Regulation G is included the issuance of civil money examined by the Board, the Farm Credit penalties and cease-and-desist orders. Administration, the National Credit Over the last year, the Federal Reserve Union Administration, and the Office of has on numerous occasions assisted Thrift Supervision, according to the law enforcement agencies conducting jurisdiction involved. At the end of criminal investigations of financial insti- 1992, 605 lenders were registered under tutions suspected of Bank Secrecy Act Regulation G, and 363 came under the violations and related violations. Board's supervision. Of these 363, the In the area of training, the Federal Federal Reserve regularly inspects 231 Reserve trains all new examiners every second or third year according in the provisions of the Bank Secrecy to the type of credit they extend. The Act and in the detection of money others are exempted from periodic laundering and gives refresher courses on-site inspections by the Federal in these areas to more seasoned exam- Reserve, which instead monitors them iners. The Federal Reserve has also through the periodic regulatory reports participated in numerous programs to they file. During 1992, Federal Reserve inform the financial community about examiners inspected 64 lenders for comthe Federal Reserve's belief in strict pliance with Regulation G. compliance with the Bank Secrecy The Federal Reserve monitors the Act. market activity of all OTC stocks to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 235 determine which of them are subject to In 1992 the Securities Regulation the Board's margin regulations. The Section of the Board's Division of Board publishes the resulting List of Banking Supervision and Regulation Marginable OTC Stocks quarterly. In issued forty-seven interpretations of the 1992 the OTC list was revised in Febru- margin regulations. Those interpretaary, May, August, and November. The tions that presented sufficiently impor- November OTC list contained 3,110 tant or novel issues were published in stocks. the Securities Credit Transactions Pursuant to a 1990 amendment to Handbook, which is part of the Federal Regulation T, the Board publishes a list Reserve Regulatory Service. These of foreign stocks that are eligible for interpretations serve as a guide to the margin treatment at broker-dealers on margin regulations. the same basis as domestic margin securities. In 1992 the foreign list was Financial Disclosure by State revised in February, May, August, and Member Banks November. The November foreign list contained 301 foreign stocks. State member banks must disclose cer- In April 1992 the Board announced tain information of interest to investors, that it is conducting a review of Regula- including financial reports and proxy tion T to consider whether any provi- statements, if they issue securities regissions of the regulation need updating. In tered under the Securities Exchange Act August 1992 the Board requested com- of 1934. By statute, the Board's finanment in connection with an advance cial disclosure rules must be substannotice of proposed rulemaking that iden- tially similar to those issued by the tified areas scheduled for review and Securities and Exchange Commission. invited comment on all areas of Regula- At the end of 1991, thirty-seven state tion T. member banks, most of which are small Under section 8 of the Securities or medium-sized, were registered with Exchange Act, a nonmember domestic the Board under the Securities Exchange or foreign bank may lend to brokers or Act. dealers posting registered securities as collateral only if the bank has filed an Loans to Executive Officers agreement with the Board that it will comply with all the statutes, rules, and Under Section 22(g) of the Federal regulations applicable to member banks Reserve Act, state member banks must regarding credit on securities. The include in each quarterly Report of Con- Board processed no new agreements in dition all extensions of credit made by 1992. the bank to its executive officers since Loans by State Member Banks tctheir Executive Officers, 1991-92 Range of interest Period Number Amount (dollars) rates charged (percent) October 1-December 31, 1991 744 15,293,000 5.5-21.0 January 1-March 31, 1992 796 22,589,000 5.0-21.0 April 1-June 30, 1992 838 21,485,000 5.0-21.0 July 1-September 30, 1992 758 17,543,000 4.5-21.0 SOURCE. Report of Condition. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

236 79th Annual Report, 1992 the date of the bank's previous report of condition. The accompanying table summarizes this information. Federal Reserve Membership At the end of 1992, 4,619 banks were members of the Federal Reserve System, a decrease of 219 from the previous year-end. Member banks operated 35,469 branches on December 31, 1992, a net increase of 659 for the year. Member banks accounted for 39 percent of all commercial banks in the United States and for 66 percent of all commercial banking offices, the same percentages as at year-end 1991. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

237 Regulatory Simplification In 1978 the Board of Governors estab- tions Examination Council (FFIEC) lished the Regulatory Improvement under section 221 of the Federal Deposit Project in the Office of the Secretary to Insurance Corporation Improvement Act help minimize the burdens imposed by of 1991. Section 221 requires the FFIEC regulation. In 1986 the Board reaffirmed to complete four tasks: (1) review the its commitment to regulatory improve- policies, procedures, recordkeeping ment, renaming the project the Regula- practices, and documentation requiretory Review Section and creating a sub- ments used to monitor and enforce comcommittee of the Board called the pliance with all laws under the jurisdic- Regulatory Policy and Planning Com- tion of the banking agencies and laws mittee. The purpose of the regulatory affecting depository institutions under simplification function is to ensure that the jurisdiction of the Secretary of the the economic effect of regulation on Treasury; (2) determine whether such small business is considered, to afford policies, procedures, and requirements interested parties the opportunity to par- impose unnecessary burdens on insured ticipate in designing regulations and to depository institutions; (3) identify any comment on them, and to ensure that opportunities to reduce unnecessary burregulations are written in simple and dens without diminishing the effectiveclear language. Board staff members ness of consumer laws or endangering continually review regulations for their the safety and soundness of insured adherence to these objectives. institutions; (4) report these opportuni- During 1992 the Board took several ties to the Congress within one year. actions to reduce the regulatory burden The Regulatory Planning and Review on supervised institutions. Some of Section was responsible for organizing these actions were responses to legisla- and drafting the study for the FFIEC. tion; others were internal initiatives. The section drafted the final report after it coordinated the work of an interagency task force, which held public Reviews of Regulatory Burden hearings in Kansas City, San Francisco, and Washington. The FFIEC submitted During 1992 the Board participated in the 281-page report to the Congress on two reviews of Federal Reserve regula- December 17, 1992. Congressional tions. Early in the year, the Board com- hearings on the report's findings were pleted an internal review of all regula- expected to be held in early 1993. tions and recommended changes to them that would reduce unnecessary regulatory burden. Initiatives were established, Reserve Requirements including simplified application procedures, and these initiatives were imple- In August the Board adopted amendmented over the course of the year. ments to Regulation D, Reserve Re- The Federal Reserve also participated quirements of Depository Institutions, to in the Study on Regulatory Burden, simplify the procedure used by deposirequired of the Federal Financial Institu- tory institutions to calculate reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

238 79th Annual Report, 1992 requirements. One amendment short- In July the Board announced an ened the lag in counting vault cash for amendment to an interpretive rule required reserves by two weeks. This regarding investment advisory activities action synchronizes movements in of bank holding companies. The amendrequired reserves and vault cash, which ment provides that a bank holding comimproves the ability of depository insti- pany and its nonbank subsidiaries may tutions to manage their required reserve broker shares in an investment company balances. A second amendment gave that is also advised by the bank holding institutions more flexibility to manage company or any of its subsidiaries. The reserves from one maintenance period amended rule also provides that a bank to another by doubling the carryover holding company and its nonbank suballowance for reserve balances to the sidiaries may give investment advice to larger of $50,000 or 4 percent of the customers regarding the purchase and sum of required reserves and required sale of shares of an investment company clearing balances. that is also advised by an affiliate of the bank holding company. In either case, the bank holding company engaging in these activities must disclose the poten- Bank Holding Companies tial for conflict of interest or adverse During 1992 the Board announced a effects. series of changes in its Regulation Y, Bank Holding Companies and Change Application Procedures in Bank Control, to expand permissible activities of bank holding companies In June the Board adopted amendments and their subsidiaries. to Regulation Y to streamline certain In April the Board approved an procedural requirements in the applicaamendment to add non-full-payout leas- tions process that would make filing of ing to the leasing activities that are gen- applications for mergers and acquisierally permissible for bank holding com- tions less burdensome. The amendments panies. The amendment raises the increased the size of nonbank compamaximum estimated residual value of nies that bank holding companies may leased personal property to up to acquire under the expedited fifteen-day 100 percent of the acquisition cost of notice procedures; they increased the the leased property, subject to certain relative size of nonbank assets that bank conditions. holding companies may acquire in the In April the Board also approved an ordinary course of business without amendment to Regulation Y to permit prior approval; and they described the the provision of financial advisory ser- criteria for determining the waiver of an vices to financial and nonfinancial insti- application with certain bank mergers. tutions and to individuals with high net worth under certain conditions, and the Policy on Disaster Relief offering of investment advisory services and securities brokerage services on a In November the federal agencies that combined basis under certain condi- regulate financial institutions announced tions. This amendment enables Federal several regulatory changes to facilitate Reserve Banks to expedite the applica- recovery in major disaster areas such as tions process for bank holding compa- those areas affected by hurricanes and nies to engage in these activities. civil unrest. The agencies developed the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Regulatory Simplification 239 policies in response to the regulatory flexibility permitted by the Depository Institutions Disaster Relief Act of 1992. The agencies' changes covered the following points: • A waiver, by all of the agencies, of real estate appraisal requirements of Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 • A Federal Reserve order to permit an exception to the rules in Regulation Z regarding consumer waiver of the right to cancel certain home-secured loans • An extension of an interagency statement concerning reduced examiner criticism of restructured debts and extended repayment terms—so long as the efforts are consistent with safe and sound banking practices • An indication that the agencies will give positive consideration, under the Community Reinvestment Act, to financial institutions that actively participate in programs to meet the needs of communities that are devastated by disasters—even if the low- and moderate-income neighborhoods aided are outside an institution's delineated community. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

241 Federal Reserve Banks During 1992 the Federal Reserve Banks By December 1992 the Federal made significant progress in preparing Reserve Banks of Richmond and Dallas for consolidation of their mainframe had moved their data processing operadata processing operations. Currently, tions to FRAS computing equipment. Of each of the twelve Banks maintains a the remaining Banks, all but New York general purpose data processing center. plan to move their electronic payment Eventually, the twelve centers, together applications to FRAS by 1994 and all with four backup facilities, will be other mainframe workloads to FRAS by consolidated at three "consolidation 1995. The New York Bank plans to centers"—the Reserve Bank head move its electronic payment applicaoffices in Richmond and Dallas and the tions to FRAS during the first half of New York Bank's East Rutherford 1996. Operations Center in New Jersey. The objectives of automation consolidation Developments in Federal include greater reliability, increased con- Reserve Services trol of payment system risk in a national banking environment, improved secu- The Monetary Control Act of 1980 rity of the total automation environment, requires the Federal Reserve System to enhanced responsiveness to changing recover all the costs it incurs in providbusiness requirements, and greater ing services to depository institutions. efficiency. In 1992, income from priced services The Federal Reserve Automation totaled $938.6 million and costs totaled Services (FRAS) organization, which $892.7 million, resulting in net income was established to plan and manage the of $44.8 million and a recovery rate of automation consolidation effort and to 105.1 percent. In 1991 the System operate the consolidated data centers, is recovered 102.9 percent of its priced headquartered at the Federal Reserve services costs.1 Bank of Richmond. FRAS reports to the Richmond Bank's board of directors Check Collection through an oversight committee composed of senior Reserve Bank offi- The Federal Reserve's operating excials. Major FRAS accomplishments penses and imputed costs for commerduring 1992 include preparing facili- cial check collection in 1992 totaled ties, hiring staff, installing the computer equipment needed to support the Reserve Banks that will be moving 1. For a detailed breakdown of revenue, cost, their mainframe processing to FRAS and net revenue, see the first pro forma income during 1993, acquiring software, and statement at the end of this chapter. Revenue is the planning interoffice communication sum of income from services and investment connections. Also during 1992 the income. Cost is the sum of operating expenses, imputed costs, earnings credits, imputed income Federal Reserve Banks developed plans taxes, and the targeted return on equity. Net revefor moving mainframe workloads to nue is net income less the targeted return on FRAS. equity. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

242 79th Annual Report, 1992 $545.7 million (see the second pro of adjustment requests via Fedline. Sigforma income statement for priced ser- nificant progress was made in developvices, at the end of this chapter). Check ing medium- and high-speed digital imoperations for the year generated age applications for check collection. A $576.0 million in revenue and a net high-speed image archival system for of $2.4 million in other income and Treasury checks is scheduled for testing expenses. Income from operations after in 1993. imputed costs was $30.3 million. The Federal Reserve Banks handled 19.1 billion checks, an increase of 1.7 percent Automated Clearinghouse over 1991 volume. In October the Board approved sev- In 1992 the operating expenses and eral modifications to the Reserve Banks' imputed costs of providing commercial check collection service. After a thor- automated clearinghouse (ACH) serough evaluation of service levels, the vices totaled $60.5 million; income from Board approved new minimum service the service was $60.1 million. The Fedstandards, effective January 1, 1993. eral Reserve Banks processed 1,327 mil- The new standards are designed to speed lion commercial transactions during the interdistrict check collection, to improve year, an increase of 18.5 percent over deadlines and availability, and to pro- 1991 volume. vide more uniform service nationwide. By the end of 1992, 92 percent of all The Board also approved a service depository institutions that originate or option that allows depository institu- receive commercial ACH transactions tions to mix returned checks with through the Federal Reserve Banks had forward-collection checks, effective established electronic connections. By January 1, 1993. The latter action was July 1, 1993, all institutions using this based on the results of a pilot project in service must convert to electronic conwhich three Federal Reserve Districts nections. The use of electronic connecaccepted intermingled deposits of re- tions will enable the Banks to improve turned and forward-collection checks the ACH service significantly by speedand in turn presented intermingled cash ing delivery of ACH payments and letters to participating depository institu- reducing the associated risk. In August tions. (Normally, the items are deposited 1992 the Treasury Department requested separately.) The pilot project indicated public comment on a proposal that that intermingling contributes to cost would require all government-only ACH savings and improves quality for both receivers to establish electronic connecthe Reserve Banks and participating tions to the Reserve Banks by July 1, institutions. 1994. Final action on the proposal is During 1992 the Federal Reserve con- expected in early 1993. tinued to explore technological improvements that would enhance check processing. Pilot projects were begun to test Funds Transfer interdistrict truncation, in which depositing financial institutions in one district The operating expenses and imputed can truncate physical checks and for- costs of providing funds transfer serward the items electronically to the dis- vices in 1992 totaled $69.2 million, and trict where the paying bank is located, income was $85.6 million. The number and intra- and interdistrict transmission of Fedwire funds transfers originated Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 243 increased 4.3 percent over the 1991 clearing house and check payments, volume, to 69.8 million transfers. respectively. The Chexs settlement In October the Board requested pub- arrangement was approved by the Board lic comment on a proposal to change the in April 1992. The majority of local opening time for the Fedwire funds arrangements are check clearinghouses. transfer service from 8:30 a.m. to In 1992, about 650,000 net settlement 6:30 a.m. eastern time (ET). Comment entries were processed by the Reserve was also invited on changing the open- Banks for local netting arrangements; ing time of the book-entry securities the value of these entries was about transfer service to 6:30 a.m. ET, should $640 billion. An estimated $2.3 trillion the funds transfer service start to open in net settlements were processed earlier. The earlier openings are believed through special Fedwire settlement likely to facilitate efforts to strengthen accounts for national arrangements in settlements of futures and options trans- 1992. Cost and revenue data for the net actions among banks and bank custom- settlement activity are combined with ers. The Board also requested comment data for the funds transfer service. on a longer-term objective of further lengthening Fedwire operating hours Securities and Fiscal Agency and possibly moving to round-the-clock Services operations. The Board indicated that expanding Fedwire operating hours has The Federal Reserve provides bookthe potential to reduce risks and to sup- entry securities services for debt issues port payments and settlements related to of the U.S. Treasury and for certain fedinternational financial activity. erally sponsored agencies, such as the Federal Home Loan Mortgage Corporation and the Student Loan Marketing Net Settlement Association. Only the services related to The Federal Reserve provides net settle- federal agency securities are priced by ment services to four national and the Federal Reserve. In 1992, operating numerous local netting arrangements. expenses and imputed costs totaled These arrangements settle their partici- $11.6 million and earned income was pants' net positions either via Fedwire $13.1 million. The Federal Reserve profunds transfers using special settlement cessed 3.3 million government agency accounts at the Federal Reserve or via securities transfers during the year, a accounting entries to their settling par- 16.6 percent increase over 1991 volume. ticipants' reserve or clearing accounts at The Federal Reserve continues to the Federal Reserve. operate Treasury Direct, the book-entry Two of the national arrangements, the securities safekeeping system for indi- Clearing House Interbank Payments viduals who invest in Treasury securi- System and the Participants Trust Com- ties and use the Treasury Department as pany, process and net large-dollar trans- custodian. Treasury Direct has grown to actions associated with interbank funds more than 1.1 million accounts with a transfers and payments related to the total par value of $62.5 billion. During settlement of mortgage-backed securi- 1992, the Reserve Banks processed ties transactions, respectively. The other 2.1 million applications to purchase two national arrangements, Visa and securities, issued 6.4 million payments Chexs, process and net small-dollar related to Treasury Direct, and handled transactions associated with automated more than 1.2 million telephone and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

244 79th Annual Report, 1992 written inquiries from Treasury Direct most of its noncash collection operaaccount holders. tions at the Cleveland Bank and the Also during 1992 the Federal Reserve Jacksonville Branch of the Atlanta Bank of New York developed the Trea- Bank. sury Automated Auction Processing System (TAAPS) for the Treasury De- Currency and Coin partment. When TAAPS becomes available in the second quarter of 1993, it In its currency and coin operations, the will enable bidders for new issues of Federal Reserve continued to focus on Treasury securities, after having estab- effectiveness of controls, efficiency of lished electronic connections with a processing, and maintenance of quality Federal Reserve Bank, to submit their in circulating currency. bids electronically instead of on paper In 1992, income from priced cash serand will facilitate the Federal Reserve's vices was $12.9 million, and the cost review of bids. was $12.3 million. Three Federal All Federal Reserve Banks have fully Reserve Districts provided transportaimplemented the Regional Delivery Sys- tion of cash by armored carrier; the San tem (RDS) for issuance of over-the- Francisco District discontinued this sercounter savings bonds. In 1992 the vice during the year. Three Districts pro- System printed more than 67 million vided wrapped coin to depository instisavings bonds, including over-the- tutions, and two Districts provided counter and other types of savings nonstandard packaging of currency bonds. The System is now preparing to orders and deposits and nonstandard consolidate savings bonds operations at frequency of access to cash services. five sites, down from the current twelve In March the Federal Reserve began sites; consolidation should be completed distributing a new series of $50 note within three years. with two new features—a security thread and microprinting—to discourage photocopied counterfeits. The new Definitive Securities Safekeeping series of $10 and $20 notes—also incorand Noncash Collection porating the new features—were distrib- The operating expenses and imputed uted during the fourth quarter, and districosts of providing priced definitive secu- bution of a new series of $5 note is rities safekeeping and noncash collec- scheduled for 1993. A new series of tion services in 1992 totaled $12.8 mil- $1 note incorporating the new security lion, and income was $10.6 million. The features is not planned. In June the average number of definitive securities Bureau of Engraving and Printing began issues and receipts maintained in priced producing $1 notes using the web-fed safekeeping accounts at the Federal intaglio currency press, which prints Reserve Banks decreased 28.1 percent both sides of the note in a single pass during 1992, to 41,472. The number through the press. of noncash collection items processed The first production machine for decreased 27.1 percent, to 1.6 million. the System's new currency-processing The Board has announced that equipment (ISS-3000) was delivered to because of declining volumes in both the New York Bank's new processing services, the System will, by the end of center in October, and training for use of 1993, discontinue its priced definitive the equipment was conducted throughsafekeeping service and consolidate out the year. The new equipment will be Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 245 installed throughout the System by tions are reported to the management 1997. and directors of the respective Banks The Federal Reserve System contin- and to the Board of Governors. ued to work with the Treasury Depart- To assess conformance with policies ment and other agencies to deter established by the Federal Open Market counterfeiting and laundering of U.S. Committee (FOMC), the Division of currency. Reserve Bank Operations and Payment Systems also annually audits the accounts and holdings of the System Float Open Market Account at the Federal Federal Reserve float increased to a Reserve Bank of New York and the daily average of $417 million in 1992, foreign currency operations conducted from $348 million in 1991. The costs of by that Bank. The Division furnishes Federal Reserve float associated with copies of these reports to the FOMC. priced services are recovered each year. All examination procedures used by the Division are reviewed each year by a public accounting firm. Examinations The Federal Reserve Act, section 21, Income and Expenses requires the Board of Governors to "order an examination of each Federal The accompanying table summarizes the Reserve Bank" at least once a year. The income, expenses, and distribution of responsibility is assigned to the Board's net earnings of the Federal Reserve Division of Reserve Bank Operations Banks for 1992 and 1991. and Payment Systems. In 1992 the Income was $20,235 million in 1992, Board also engaged a certified public compared with $22,553 million in 1991. accounting (CPA) firm to examine one Expenses totaled $1,604 million of the twelve Federal Reserve Banks; in ($1,298 million in operating expenses, 1993, two Banks will be examined by a $177 million in earnings credits CPA firm. The findings of all examina- granted to depository institutions, and Income, Expenses, and Distribution of Net Earnings of Federal Reserve Banks, 1992 and 1991 ' Millions of dollars Item 1992 1991 Current income 20,235 22,553 Current expenses 1,475 1,429 Operating expenses2 1,298 1,265 Earnings credits granted 177 164 Current net income 18,760 21,124 Net addition to (deduction from) current net income -959 496 Cost of unreimbursed services to Treasury 29 90 Assessments by the Board of Governors 424 371 For expenditures of Board 129 110 For cost of currency 295 261 Net income before payments to Treasury 17,348 21,158 Dividends paid 172 153 Payments to Treasury (interest on Federal Reserve notes) 16,774 20,778 Transferred to surplus 402 228 1. Details may not sum to totals because of rounding. pension costs of $141 million in 1992 and $83 million in 2. Operating expenses include a net periodic credit for 1991. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

246 79th Annual Report, 1992 $129 million in assessments for expen- statement for each Bank for 1914-92. A ditures by the Board of Governors). The detailed account of the assessments and cost of currency was $295 million. expenditures of the Board of Governors Income from financial services was appears in the next chapter—Board of $758 million. Governors Financial Statements. The profit and loss account showed a net deduction of $959 million, primarily Holdings of Securities and Loans a result of realized and unrealized losses on assets denominated in foreign curren- Average daily holdings of securities and cies. Dividends paid to member banks, loans during 1992 were $283,104 milas required by law, totaled $172 million, lion, an increase of $26,175 million over $19 million more than in 1991. The rise 1991 (see accompanying table). Averreflects an increase in the capital and age daily holdings of U.S. government surplus of member banks and a conse- securities increased $26,368 million quent increase in the paid-in capital over 1991, and average daily holdings stock of the Federal Reserve Banks. of loans decreased $193 million. The Payments to the U.S. Treasury in the average rate of interest on holdings of form of interest on Federal Reserve U.S. government securities decreased notes totaled $16,774 million, compared from 7.51 percent in 1991 to 6.13 perwith $20,778 million in 1991. The pay- cent in 1992, and the average rate of ments consist of all net income after interest on loans decreased from deduction of dividends and deduction of 5.73 percent to 3.43 percent. the amount necessary to bring the surplus of the Banks to the level of capital Volume of Operations paid in. In the Statistical Tables chapter of Table 9, in the Statistical Tables chapter, this report, table 6 details income and shows the volume of operations in the expenses of each Federal Reserve Bank principal departments of the Federal for 1992, and table 7 shows a condensed Reserve Banks for the years 1988-92. Securities and Loans of Federal Reserve Banks, 1990-92 Millions of dollars, except as noted U.S. Item and year Total government Loans2 securities' Average daily holdings 3 1990 237,444 236,523 921 1991 256,929 256,559 370 1992 283,104 282,927 177 Earnings 1990 20,067 19,995 73 1991 19,283 19,262 21 1992 17,342 17,336 6 Average interest rate (percent) 1990 8.45 8.45 7.88 1991 7.51 7.51 5.73 1992 6.13 6.13 3.43 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 247 Federal Reserve Bank Premises Table 8, in the Statistical Tables chapter, shows the cost and book values of Construction of the new East Ruther- premises owned or occupied by the Fedford, New Jersey Operations Center for eral Reserve Banks and the cost of other the Federal Reserve Bank of New York real estate owned by the Reserve Banks. and the new headquarters building for the Federal Reserve Bank of Dallas was essentially completed by June, and the Banks began moving staff and operations into the buildings at that time. Operations are now underway at both facilities, and complete conversion of all operations is planned for early 1993. In June the Board authorized the Federal Reserve Banks of Richmond and Dallas to renovate their head offices and the Federal Reserve Bank of New York to construct an addition to and to renovate its East Rutherford Operations Center—all to accommodate the new Federal Reserve Automation Services. The modifications at all three facilities had progressed sufficiently by October to allow installation of the first phase of the automation equipment. Construction at all three sites is planned to be completed during 1993. Design work for the new head offices of the Federal Reserve Banks of Cleveland and Minneapolis continued during 1992. In November the Board approved the site selection for the new head office for the Minneapolis Bank. Other facility projects approved by the Board during 1992 include renovation of the check processing facility at the Federal Reserve Bank of Richmond and a multiyear renovation program for the Federal Reserve Bank of San Francisco's Salt Lake City Branch. In the Federal Reserve Bank Branch Modernization Act (enacted on October 24, 1992), the Congress eliminated the funding ceiling on Branch facilties. The action will enable the Banks to address deficiencies at several Branch buildings and to improve the effectiveness and efficiency of the Branch facilities. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

248 79th Annual Report, 1992 Pro Forma Balance Sheet for Priced Services, December 31, 1992 and 1991 Millions of dollars Item 1992 1991 Short-term assets2 Imputed reserve requirement on clearing balances 699.2 453.8 Investment in marketable securities 5,127.8 3,328.2 Receivables 66.6 63.4 Materials and supplies 6.5 5.7 Prepaid expenses 12.3 13.1 Items in process of collection 4,062.4 4,167.4 Total short-term assets 9,974.7 8,031.7 Long-term assets3 Premises 378.5 360.1 Furniture and equipment 176.2 163.5 Leases and leasehold improvements 51.3 22.0 Prepaid pension costs 141.7 97.3 747.6 642.9 Total long-term assets 10,722.4 8,674.5 Total assets Short-term liabilities Clearing balances and balances arising from early 8,820.7 4,576.0 credit of uncollected items 1,068.8 3,373.4 Deferred-availability items 85.3 82.3 Short-term debt Total short-term liabilities 9,974.7 8,031.7 Long-term liabilities Obligations under capital leases 1.2 1.2 Long-term debt 192.3 173.1 Total long-term liabilities 193.5 174.3 Total liabilities 10,168.3 8,206.0 Equity 554.1 468.6 Total liabilities and equity4 10,722.4 8,674.5 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 1992 the Reserve Banks recognized a credit to shown as investment in marketable securities. Receiv- expenses of $53.5 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. to be recovered under the Monetary Control Act is the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 249 Pro Forma Income Statement for Federal Reserve Priced Services, Calendar Years 1992 and 1991 l Millions of dollars Item 1992 1991 Income from services provided to depository institutions2 758.4 737.5 Operating expenses3 606.1 611.9 Income from operations 152.3 125.6 Imputed costs4 Interest on float 14.5 19.0 Interest on debt 19.8 19.4 Sales taxes 11.2 9.9 FDIC insurance 8.9 54.4 6.3 54.6 Income from operations after imputed costs 97.9 71.0 Other income and expenses5 Investment income 180.2 175.0 Earnings credits 177.8 2.4 162.3 12.7 Income before income taxes 100.3 83.7 Imputed income taxes6 29.5 25.5 Net income 70.8 58.1 MEMO Targeted return on equity7 24.9 32.5 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 $1.9 million means. As-of adjustments and direct charges are midin 1992 and $2.0 million in 1991. The credit to expenses week closing float and mterterritory 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 1992. funds transfers. 5. Investment income is on clearing balances and rep- Interest is imputed on debt assumed necessary to resents the average coupon-equivalent yield on threefinance 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 1992 in millions of dollars: adjusted for the net effect of reserve requirements on clearing balances. Total float 521.1 6. Calculated at the effective tax rate derived from the Unrecovered float -42.5 PSAF model. Float subject to recovery 563.6 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 61.0 business firm, as derived from the PSAF model. This As-of adjustments 209.3 amount is adjusted to reflect the deferral of $1.1 million Direct charges 128.8 for 1992 automation consolidation, an amount that the Per-item fees 164.5 Reserve Banks plan to recover, along with a finance charge, by the end of 1999. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

250 79th Annual Report, 1992 Pro Forma Income Statement for Federal Reserve Priced Services, by Service, 1992l Millions of dollars Definitive Com- Funds Com- safekeeping Bookmercial transfer Cash Item Total mercial and entry check and net services collection settlement ACH noncash securities collection Income from services ... 758.4 576.0 85.6 60.1 10.6 13.1 12.9 Operating expenses 606.1 501.9 64.4 56.6 11.9 10.7 12.3 Income from operations . 152.3 74.1 21.3 3.5 -1.3 2.5 .6 Imputed costs2 54.4 43.8 4.8 3.9 .9 9 .0 Income from operations after imputed costs . 97.9 30.3 16.5 -.4 -2.2 1.6 .6 Other income and expenses, net3 2.4 2.4 .0 .0 .0 .0 .0 Income before income taxes 100.3 32.7 16.4 -.4 -2.2 1.6 .6 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 acbalance sheet, note 3) is reported only in the "total" cording to the ratio of operating expenses less shipping column in this table and has not been allocated to indi- expenses for each service to the total expenses for all vidual 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 allo- 2. Includes interest on float, interest on debt, sales cated to each service based on the ratio of income from taxes, and the FDIC assessment. Float costs are based on each service to total income. Activity in Federal Reserve Priced Services, Calendar Years 1992, 1991, and 19901 Thousands of items, except as noted Percent change Service 1992 1991 1990 1992-91 1991-90 Funds transfers 69,803 66,921 62,559 4.3 7.0 Commercial ACH 1,326,632 1,119,073 915,257 18.5 22.3 Commercial checks 19,052,928 18,742,950 18,594,652 1.7 .8 Securities transfers 3,266 2,800 2,555 16.6 9.6 Definitive safekeeping 41 57 82 -28.1 -30.5 Noncash collection 1,636 2,243 2,854 -27.1 -21.4 Cash transportation 282 338 330 16.6 2.4 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

Federal Reserve Banks 251 Income and Expenses for Locally Priced Federal Reserve Services, by District, 1992] Millions of dollars Total Operating Float Total Net District expense expense expense revenue Commercial check collection Boston 35.3 33.8 .7 34.5 .8 New York 69.6 65.0 .6 66.6 3.0 Philadelphia .. 31.2 27.5 .1 28.6 2.6 Cleveland .... 32.0 28.4 .1 29.5 2.5 Richmond 54.9 48.5 .6 50.1 4.8 Atlanta 76.4 64.0 .7 65.7 10.7 Chicago 76.6 62.6 .9 64.5 12.1 St. Louis 24.0 19.9 .0 20.9 3.1 Minneapolis .. 31.3 26.7 .4 27.1 4.2 Kansas City .. 36.8 30.7 .8 31.5 5.3 Dallas 41.9 35.5 1.4 36.9 5.0 San Francisco 66.2 59.5 .8 60.3 5.9 System total . 576.0 502.1 14.1 516.2 60.0 Definitive safekeeping and noncash collection Boston .5 .8 .8 -.3 New York 2.3 2.2 2.2 .1 Philadelphia .. .8 .8 .8 .0 Cleveland .... 1.3 1.2 1.2 .1 Richmond .5 .8 .8 -.3 Atlanta 1.9 2.0 2.0 -.1 Chicago 1.6 1.7 1.7 -.1 St. Louis .6 .5 .5 .1 Minneapolis .. .1 .1 .1 .0 Kansas City .. .4 .8 .8 -.4 Dallas .7 1.0 1.0 -.3 San Francisco * * * * System total . 10.6 11.9 .0 11.9 -1.2 Cash services Boston New York .... Philadelphia .. 1.7 1.7 Cleveland .... 1.9 Richmond .... Atlanta Chicago .5 .5 .0 St. Louis .1 .1 .0 Minneapolis .. 2.9 2.6 .3 Kansas City .. .6 .5 .1 Dallas * San Francisco 5.1 5.1 System total . 12.3 12.9 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 improjects are reported at the System level, and therefore puted 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

253 Board of Governors Financial Statements The financial statements of the Board independent public accountants, for were audited by Coopers & Lybrand, 1992 and 1991. 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, 1992 and 1991, 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, 1992 and 1991, 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, 1993 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

254 79th Annual Report, 1992 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BALANCE SHEET As of December 31, 1992 1991 ASSETS CURRENT ASSETS Cash $ 9,853,172 $ 4,498,138 Accounts receivable 2,543,876 1,227,367 Prepaid expenses and other assets 1,462,101 778,485 Total current assets 13,859,149 6,503,990 PROPERTY, BUILDINGS AND EQUIPMENT, NET (Note 3) 48,968,026 50,338,953 Total assets $62,827,175 $56,842,943 LIABILITIES AND FUND BALANCE CURRENT LIABILITIES Accounts payable $ 5,311,460 $ 3,609,392 Accrued payroll and related taxes 1,978,051 1,120,332 Accrued annual leave 5,612,406 5,057,365 Unearned revenues and other liabilities 1,366,877 1,257,442 Total current liabilities 14,268,794 11,044,531 COMMITMENTS (Note 5) — — FUND BALANCE 48,558,381 45,798,412 Total liabilities and fund balance $62,827,175 $56,842,943 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 255 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENT OF REVENUES AND EXPENSES AND FUND BALANCE For the years ended December 31, 1992 1991 BOARD OPERATING REVENUES Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $128,955,300 $109,631,000 Other revenues (Note 4) 6,795,747 4,855,384 Total operating revenues 135,751,047 114,486,384 BOARD OPERATING EXPENSES Salaries 81,981,637 75,391,334 Retirement and insurance contributions 13,106,634 11,590,355 Contractual services and professional fees 7,527,562 3,113,853 Depreciation and net losses on disposals 6,079,387 5,682,355 Travel 3,953,838 3,542,401 Repairs and maintenance 3,757,815 2,877,050 Postage and supplies 3,687,785 3,344,444 Utilities 3,607,431 3,286,946 Software 2,751,537 2,478,238 Printing and binding 2,089,901 2,059,165 Other expenses (Note 4) 4,447,551 3,709,310 Total operating expenses 132,991,078 117,075,451 BOARD OPERATING REVENUES OVER (UNDER) EXPENSES 2,759,969 (2,589,067) ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES Assessments levied on Federal Reserve Banks for currency costs 295,400,650 261,316,379 Expenses for currency printing, issuance, retirement, and shipping 295,400,650 261,316,379 CURRENCY ASSESSMENTS OVER (UNDER) EXPENSES — — TOTAL REVENUES OVER (UNDER) EXPENSES 2,759,969 (2,589,067) FUND BALANCE, Beginning of year 45,798,412 48,387,479 FUND BALANCE, End of year $ 48,558,381 $ 45,798,412 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

256 79th Annual Report, 1992 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENT OF CASH FLOWS Increase (Decrease) in Cash For the years ended December 31, 1992 1991 CASH FLOWS FROM OPERATING ACTIVITIES Board operating revenues over (under) expenses $ 2,759,969 $(2,589,067) Adjustments to reconcile operating revenues over (under) expenses to net cash provided by operating activities: Depreciation and net losses on disposals 6,079,387 5,682,355 Increase in accounts receivable, and prepaid expenses and other assets (2,000,125) (31,932) Increase in accrued annual leave .' 555,041 296,852 Increase (Decrease) in accounts payable 1,702,068 (599,325) Increase (Decrease) in payroll payable 857,719 (2,552,920) Increase in unearned revenue and other liabilities 109,435 215,275 Net cash provided by operating activities 10,063,494 421,238 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposals of furniture and equipment 15,104 36,156 Capital expenditures (4,723,564) (5,215,541) Net cash used in investing activities (4,708,460) (5,179,385) NET INCREASE (DECREASE) IN CASH 5,355,034 (4,758,147) CASH BALANCE, Beginning of year 4,498,138 9,256,285 CASH BALANCE, End of year $ 9,853,172 $ 4,498,138 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 257 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 $708,030 in 1992 and $674,700 in 1991. Board Operating Revenues and Expenses—Assessments 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 $3,419,000 in 1992 and $2,696,800 in 1991. Issuance and Redemption of Federal Reserve Notes— The Board incurs expenses and assesses the Federal The Board also provides certain health benefits for Reserve Banks for the costs of printing, issuing, shipping, retired employees. The cost of providing the benefits is and retiring Federal Reserve Notes. These assessments recognized by expensing the insurance premiums which and expenses are separately reported in the statements of were $554,195 in 1992 and $479,476 in 1991. 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 four to ten years for furniture As of December 31, and equipment and from ten to fifty years for building 1992 1991 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 63,856,738 63,726,137 gain or loss is recognized. Furniture and Reclassification—Certain amounts from prior years equipment 38,550,995 35,146,359 have been reclassified to conform with current year 103,709,047 100,173,810 Less accumulated presentation. depreciation .. 54,741,021 49,834,857 Total property, (2) RETIREMENT BENEFITS buildings, and Substantially all of the Board's employees participate equipment $ 48,968,026 $ 50,338,953 in either the Retirement Plan for Employees of the Federal Reserve System or the Civil Service Plan. The System's Plan is a multiemployer plan which covers employ- (4) OTHER REVENUES AND OTHER EXPENSES ees of the Federal Reserve Banks, the Board, and the Plan The following are summaries of the components of Administrative Office. Employees of the Board who Other Revenues and Other Expenses. entered on duty before 1984 are covered by a contributory defined benefits program under the Plan. Employees For the years of the Board who entered on duty after 1983 are covered ended December 31, by a non-contributory defined benefits program under the 1992 1991 Plan. The Civil Service Plan is a defined contribution Other Revenues plan. Data processing Contributions to the System's Plan are actuarially revenue $2,737,073 $2,364,284 determined and funded by participating employers at Subscription amounts prescribed by the Plan's administrator. No sepa- revenue 1,537,013 1,744,775 rate accounting is maintained of assets contributed by the Reimbursement participating employers and net pension cost for the of regulatory period is the required contribution for the period. As of investigation December 31, 1992, actuarial calculations showed that costs 1,500,000 Reimbursable the fair value of the assets of the System's Plan exceeded services to the projected benefit obligations. Based on these calcula- other agencies ... 471,590 334,922 tions and similar calculations performed for 1991, it was Miscellaneous 550,071 411,403 determined that employer funding contributions were not Total other required for the years 1992 and 1991 and the Board was revenues $6,795,747 $4,855,384 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

258 79th Annual Report, 1992 (4) OTHER REVENUES AND OTHER EXPENSES—Cont. Other Expenses Cafeteria operations, net $ 765,478 $ 783,362 Tuition, registration, and membership fees 866,965 692,131 Equipment and facility rentals 873,672 682,962 Subsidies and contributions ... 735,835 638,975 Miscellaneous 1,205,601 911,880 Total other expenses $4,447,551 $3,709,310 (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, 1992, are as follows: 1993 $ 1,915,444 1994 2,225,724 1995 1,946,477 1996 1,854,642 1997 1,837,538 after 1997 569,226 $10,349,051 Rental expenses under these operating leases were $644,609 and $635,100 in 1992 and 1991, 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 1992 and 1991, the Board paid $324,300 and $241,040, respectively, in assessments for operating expenses of the Council. These amounts are included in subsidies and contributions for 1992 and 1991. • 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

260 79th Annual Report, 1992 1. Detailed Statement of Condition of All Federal Reserve Banks Combined, December 31, 19921 Thousands of dollars ASSETS Gold certificate account 11,055,613 Special drawing rights certificate account 8,018,000 Coin 446,078 Loans and securities Loans to depository institutions 674,690 Federal agency obligations Bought outright 5,412,625 Held under repurchase agreement 631,000 U.S. Treasury securities Bought outright Bills 141,794,280 Notes 118,179,154 Bonds 35,037,172 Total bought outright 295,010,606 Held under repurchase agreement 7,463,000 Total securities 302,473,606 Total loans and securities 309,191,921 Items in process of collection Transit items 7,770,112 Other items in process of collection 1,141,236 Total items in process of collection 8,911348 Bank premises Land 157,201 Buildings (including vaults) 758,056 Building machinery and equipment 208,635 Construction account 156,148 Total bank premises 1,122,839 Less depreciation allowance 254,306 868,533 Bank premises, net 1,025,734 Other assets Furniture and equipment 922,125 Less depreciation 534,813 Total furniture and equipment, net 387,312 Denominated in foreign currencies2 21,513,571 Interest accrued 3,259,086 Premium on securities 2,918,509 Overdrafts 239,164 Prepaid expenses 492,823 Suspense account 103,377 Real estate acquired for banking-house purposes 28,363 Other 309,792 Total other assets 29,251,996 Total assets 367,900,690 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 261 1.—Continued LIABILITIES Federal Reserve Notes Outstanding (issued to Federal Reserve Banks) 363,479,179 Less held by Federal Reserve Banks 49,271,395 Total Federal Reserve notes, net 314,207,783 Deposits Depository institutions 32,078,917 U.S. Treasury, general account 7,491,659 Foreign, official accounts 205,745 Other deposits Officers' and certified checks 24,214 International organizations 124,960 Other3 222,461 Total other deposits 371,635 Deferred credit items 5,561,352 Other liabilities Discount on securities 1,766,442 Sundry items payable 69,775 Suspense account 14,312 All other 25,826 Total other liabilities 1,876,354 Total liabilities 361,793,445 CAPITAL ACCOUNTS Capital paid in 3,053,622 Surplus 3,053,622 Other capital accounts4 0 Total liabilities and capital accounts 367,900,690 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 $7,889.5 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 December 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

262 79th Annual Report, 1992 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1992 and 1991 Millions of dollars' Total Boston Item 1992 1991 1992 1991 ASSETS Gold certificate account 11,056 11,059 705 747 Special drawing rights certificate account 8,018 10,018 511 711 Coin 446 528 19 34 Loans To depository institutions 675 218 Other 0 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 5,413 6,045 346 409 Held under repurchase agreements 631 553 0 0 U.S. Treasury securities Bought outright2 295,011 266,486 18,843 18,041 Held under repurchase agreements 7,463 15,345 0 0 Total loans and securities 309,192 288,647 19,189 18,450 Items in process of collection 8,911 8,286 634 464 Bank premises 1,026 987 90 89 Other assets Denominated in foreign currencies3 21,514 27,626 794 1,111 Allother 7,738 5,911 376 303 Interdistrict Settlement Account 0 0 -1,634 -1,287 Total assets 367,901 353,061 20,683 20,623 LIABILITIES Federal Reserve notes 314,208 287,906 18,572 18,350 Deposits Depository institutions 32,079 29,413 1,442 U.S. Treasury, general account 7,492 17,697 0 Foreign, official accounts 206 968 5 Other 372 1,706 21 Total deposits 40,148 49,783 1,468 Deferred credit items 5,561 7,259 311 1,876 2,810 115 Other liabilities and accrued dividends4 61,793 347,758 20,466 Total liabilities CAPITAL ACCOUNTS 3,054 2,652 Capital paid in 3,054 2,652 Surplus 0 0 Other capital accounts Total liabilities and capital accounts 367,901 353,061 20,683 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes outstanding (issued to Bank) Less: Held by Bank Federal Reserve notes, net Collateral for Federal Reserve notes Gold certificate account Special drawing rights certificate account Other eligible assets U.S. Treasury and federal agency securities Total collateral For notes see end of table. o o OO OO O 1,391 0 6 81 1,478 443 156 20,428 99 98 0 20,623 363,479 366,468 21,432 23,044 49,271 78,562 2,860 4,693 314,208 287,906 18,572 18,350 11,056 11,059 8,018 10,018 0 0 295,134 266,829 314,208 287,906 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 263 2.—Continued New York Philadelphia Cleveland Richmond 1992 1991 1992 1991 1992 1991 1992 1991 4,042 3,914 347 318 658 692 941 948 2,808 3,395 303 319 556 645 652 961 13 16 24 40 26 30 95 99 0 7 592 45 0 0 0 105 0 0 0 0 0 0 0 0 2,106 2,382 165 160 341 378 423 478 631 553 0 0 0 0 0 0 114,769 105,022 8,979 7,041 18,569 16,674 23,068 21,079 7,463 15,345 0 0 0 0 0 0 124,969 123,309 2,736 7,246 18,909 17,052 23,492 21,662 1,352 969 538 592 442 354 760 608 137 127 45 44 36 34 128 123 6,258 7,606 852 1,312 1,308 1,428 1,383 1,688 3,421 2,918 199 146 375 350 876 374 -19,514 -12,000 2,183 3,172 1,420 1,766 -220 321 123,485 130,253 14,227 13,189 23,731 22,352 28,106 26,784 105,028 100,834 11,341 10,872 21,680 19,950 25,083 23,426 7,531 6,461 2,207 1,470 1,341 1,572 2,025 2,210 7,492 17,697 0 0 0 0 0 0 107 859 6 7 9 8 9 9 195 642 8 74 15 88 32 66 15,324 25,658 2,221 1,551 1,364 1,667 2,068 2,285 629 866 368 490 220 270 392 541 733 1,353 62 66 114 143 144 191 121,715 128,710 13,992 12,979 23,378 22,029 27,686 26,443 885 771 117 105 176 161 210 171 885 771 117 105 176 161 210 171 0 0 0 0 0 0 0 0 125,485 130,253 14,227 13,189 23,731 22,352 28,106 26,784 119,266 128,066 13,058 13,068 23,683 23,151 29,944 31,583 14,238 27,231 1,717 2,196 2,003 3,201 4,861 8,158 105,028 100,834 11,341 10,872 21,680 19,950 25,083 23,426 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

264 79th Annual Report, 1992 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1992 and 1991—Continued Millions of dollars! Atlanta Chicago Item 1992 1991 1992 1991 ASSETS Gold certificate account 503 479 1,270 1,370 Special drawing rights certificate account 318 303 1,036 1,336 Coin 38 46 30 53 Loans To depository institutions 13 Other 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 184 202 670 760 Held under repurchase agreements 0 0 0 0 U. S. Treasury securities Bought outright2 10,043 8,912 36,537 33,486 Held under repurchase agreements 0 0 0 0 Total loans and securities 10,229 9,115 37,210 34,259 Items in process of collection 1,305 895 923 799 Bank premises 57 57 112 112 Other assets Denominated in foreign currencies3 1,971 2,799 2,603 3,420 All other 326 205 in 599 Interdistrict Settlement Account 3,833 1,987 -3,444 237 Total assets 18,579 15,887 40,517 42,183 LIABILITIES Federal Reserve notes 13,232 11,426 35,485 37,207 Deposits Depository institutions 4,083 2,970 3,422 3,102 U.S. Treasury, general account 0 0 0 0 Foreign, official accounts 13 15 17 19 Other 5 117 49 211 Total deposits 4,101 3,102 3,489 3,332 Deferred credit items 600 792 621 702 67 81 231 301 Other liabilities and accrued dividends4 8,000 15,401 39,825 41,542 Total liabilities CAPITAL ACCOUNTS 290 243 346 321 Capital paid in 290 243 346 321 Surplus 0 0 0 0 Other capital accounts 18,579 15,887 40,517 42,183 Total liabilities and capital accounts FEDERAL RESERVE NOTE STATEMENT 17,318 17,196 38,700 41,660 Federal Reserve notes outstanding (issued to Bank) 4,086 5,771 3,215 4,452 Less: Held by Bank Federal Reserve notes, net 13,232 11,426 35,485 37,207 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 Digitizedb foourg hFtR baAcSk EunRd er matched sale-purchase transactions. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 265 2.— Continued St. Louis Minneapolis Kansas City Dallas San Francisco 1992 1991 1992 1991 1992 1991 1992 1991 1992 1991 304 328 195 171 329 370 463 515 1,299 1,207 168 307 186 172 199 334 377 463 904 1,072 25 29 16 14 36 31 27 43 98 94 5 25 1 0 5 9 0 3 69 11 0 0 0 0 0 0 0 0 0 0 132 160 84 78 146 168 199 237 616 633 0 0 0 0 0 0 0 0 0 0 7,218 7,058 4,598 3,445 7,981 7,386 10,823 10,456 33,583 27,886 0 0 0 0 0 0 0 0 0 0 7,356 7,243 4,683 3,523 8,131 7,563 11,021 10,695 34,268 28,528 294 275 415 544 482 515 418 773 1,349 1,498 30 29 33 32 51 53 161 141 146 147 531 724 566 782 807 1,055 1,717 2,105 2,724 3,597 152 128 120 77 169 136 282 192 667 482 5,311 -1,609 2,555 2,640 5,062 -810 2,314 1,600 2,134 3,983 14,171 7,453 8,768 7,955 15,266 9,247 16,781 16,526 43,589 40,608 12,824 6,035 7,458 6,691 13,544 7,145 14,082 13,530 35,878 32,440 952 914 721 653 1,079 1,313 1,808 1,646 5,466 5,713 0 0 0 0 0 0 0 0 0 0 3 4 4 4 5 6 11 11 18 20 3 42 5 38 6 60 27 97 6 192 958 960 730 695 1,090 1,379 1,846 1,754 5,490 5,924 204 255 390 399 362 458 356 722 1,108 1,321 44 73 29 31 53 68 73 96 212 251 14,031 7,322 8,608 7,816 15,049 9,049 16,357 16,103 42,688 39,936 70 66 80 70 109 99 212 211 450 336 70 66 80 70 109 99 212 211 450 336 0 0 0 0 0 0 0 0 0 0 14,171 7,453 8,768 7,955 15,266 9,247 16,781 16,526 43,589 40,608 14,440 8,883 8,191 8,117 15,086 9,618 16,914 17,683 45,448 44,400 1,617 2,848 733 1,427 1,542 2,473 2,831 4,152 9,570 11,961 12,824 6,035 7,458 6,691 13,544 7,145 14,082 13,530 35,878 32,440 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

266 79th Annual Report, 1992 3. Federal Reserve Open Market Transactions, 1992l 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 1,628 Exchanges 26,750 Redemptions 1,600 Others within 1 year Gross purchases 0 Gross sales 0 Maturity shift 1,174 Exchanges -989 Redemptions 0 1 to 5 years Gross purchases 0 Gross sales 0 Maturity shift -1,050 Exchanges 539 5 to 10 years Gross purchases 0 Gross sales 0 Maturity shift -124 Exchanges 451 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 123 505 0 0 24,435 21,674 0 0 0 0 0 0 6,020 2,552 -2,742 -2,512 0 0 1,027 1,425 0 0 -6,020 -2,552 2,292 2,512 0 0 96 300 0 0 -96 150 0 1,150 1,628 0 1,600 0 136,922 123,000 136,282 124,654 21,412 9,824 33,228 13,353 oooo oooo 0 0 27,526 0 0 0 877 -1,863 0 0 0 -654 1,484 0 0 -223 379 1,930 0 0 128,230 126,673 48,758 46,953 oooo ooo 125,999 128,149 18,432 20,237 -15,684 -725 2,178 345 0 0 85 390 808 -503 16,186 ooo 571 706 -135 -860 ooo 0 0 49 1,640 224 1,640 224 0 -A9 2,178 295 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. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 267 3.—Continued May June July Aug. Sept. Oct. Nov. Dec. Total 4,110 306 0 271 595 4,072 1,064 3,669 14,714 0 0 0 0 0 0 0 0 1,628 24,275 22,028 30,755 25,041 22,277 28,907 25,468 29,562 308,699 0 0 0 0 0 0 0 0 1,600 0 285 0 0 350 0 461 0 1,096 0 0 0 0 0 0 0 0 0 2,459 3,447 985 4,448 2,753 2,010 7,160 2,777 36,662 -5,225 -1,854 -1,669 -4,617 -1,905 -982 -4,615 -1,570 -30,543 0 0 0 0 0 0 0 0 0 200 1,993 0 400 3,500 200 4,172 200 13,118 0 0 0 0 0 0 0 0 0 -2,113 -3,447 -514 -4,036 -2,753 -1,762 -6,800 -2,777 -34,478 4,311 1,854 1,478 3,567 1,905 884 3,415 1,570 25,811 0 597 0 195 750 0 1,176 100 2,818 0 0 0 0 0 0 0 0 0 -346 0 -471 -412 0 -248 -187 0 -1,915 614 0 191 700 0 97 800 0 3,532 0 655 0 0 731 0 947 0 2,333 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -173 0 -269 300 0 0 350 0 0 400 0 1,200 4,310 3,836 0 866 5,927 4,272 7,820 3,969 34,079 0 0 0 0 0 0 0 0 1,628 0 0 0 0 0 0 0 0 1,600 118,972 126,977 127,051 103,708 116,331 116,024 115,020 144,232 1,482,467 117,524 129,216 126,137 101,410 115,579 114,917 117,020 142,578 1,480,140 38,777 10,792 12,224 39,484 68,697 18,698 42,373 48,904 378,374 38,533 11,036 12,224 31,868 59,628 35,383 39,117 44,697 386,257 3,107 5,831 -914 6,184 14,244 -13,520 13,075 6,521 20,642 ooo 0 0 0 0 0 0 0 0 40 85 54 37 1,281 402 94 601 3,222 1,281 402 94 548 1,800 -160 -40 -85 -1 1,385 2,946 5,791 -1,000 6,183 15,629 ooo 1,778 3,253 -1,475 -14,995 ooo 0 0 0 0 121 632 2,760 1,601 14,565 2,506 1,224 14,486 254 256 -554 13,329 6,777 20,089 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

268 79th Annual Report, 1992 4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities, December 31, 1990-92l Millions of dollars Increase or December 31 decrease (-) Description 1992 1991 1990 1992 1991 U.S. Treasury securities, total 302,474 281,831 252,103 20,643 29,728 By term 1-15 days2 12,824 21,109 22,530 -8,285 -1,421 16-90 days 70,610 66,759 57,538 3,851 9,221 91 days to 1 year 103,582 90,655 75,428 12,927 15,227 1-5 years 68,750 64,299 58,749 4,451 5,550 5-10 years 18,903 14,469 13,121 4,434 1,348 More than 10 years 27,805 24,540 24,736 3,265 -196 By type of holding Held outright Treasury bills3 141,794 132,635 112,520 9,159 20,115 Treasury notes 118,179 101,520 91,407 16,659 10,113 Treasury bonds 35,037 32,331 31,163 2,706 1,168 Held under repurchase agreements 7,463 15,345 17,013 -7,882 -1,668 Federal agency obligations, total 5,413 6,045 6^42 -632 -297 By term 1-15 days 190 200 200 -10 0 16-90 days 810 811 737 74 91 days to 1 year 1,064 1,329 1,639 -265 -310 1-5 years 2,511 2,508 2,555 3 -47 5-10 years 696 1,008 1,022 -312 -14 More than 10 years 142 188 188 -46 0 By type of holding Held outright Federal Farm Credit Banks 1,296 1,440 1,560 -144 -120 Federal Home Loan Banks 1,766 2,029 2,161 -263 -132 Federal Land Banks 66 66 108 0 -42 Federal National Mortgage Association 2,167 2,342 2,346 -175 -4 U.S. Postal Service 0 37 37 -37 0 Washington Metropolitan Area Transit Authority 117 117 117 0 0 General Services Administration 0 12 12 -12 0 Held under repurchase agreements 631 553 1,341 78 -788 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 agreements). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 269 5. Number and Salaries of Officers and Employees of Federal Reserve Banks, December 31, 1992 President Other officers Employees Total Federal Reserve Bank (including) Annual Annual Number Annual Annual branches salary Num- salaries salaries Num- salaries (dollars) ber (dollars) Full- Part- (dollars) ber (dollars) time time Boston 172,400 55 5,125,500 1,232 252 47,400,373 1,540 52,698,273 New York 257,700 175 18,147,325 3,994 68 149,316,167 4,238 167,721,192 Philadelphia 180,000 63 5,759,350 1,326 130 41,693,141 1,520 47,632,491 Cleveland 160,000 62 5,438,350 1,229 74 36,357,531 1,366 41,955,881 Richmond 199,200 81 6,763,500 1,941 124 55,810,045 2,147 62,772,745 Atlanta 206,800 75 6,236,200 2,288 60 67,044,427 2,424 73,487,427 Chicago 216,300 97 8,401,650 2,405 45 78,809,730 2,548 87,427,680 St. Louis 186,200 52 3,975,400 1,074 110 31,256,076 1,237 35,417,676 Minneapolis 170,100 48 4,082,300 1,046 110 33,047,797 1,205 37,300,197 Kansas City 153,000 57 4,815,000 1,568 41 47,019,381 1,667 51,987,381 Dallas 155,600 57 4,745,650 1,562 51 47,340,298 1,671 52,241,548 San Francisco 224,000 95 9,338,625 2,364 74 83,027,160 2,534 92,589,785 Federal Reserve Automation Service 23 2,205,775 203 0 9,461,880 226 11,667,655 Total 2,281,300 940 85,034,625 22,232 1,139 727,584,006 24,323 814,899,931 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

270 79th Annual Report, 1992 6. Income and Expenses of Federal Reserve Banks, 1992 Dollars Item1 Total Boston New York Philadelphia Cleveland CURRENT INCOME Loans 6,067,617 151,445 992,253 343,370 51,177 U.S. Treasury and federal agency securities 17,336,350,446 1,121,372,762 6,824,747,348 504,283,274 1,083,681,615 Foreign currencies 2,122,018,858 78,725,876 615,293,854 85,045,492 127,851,245 Priced services 758,392,481 44,676,475 106,480,551 41,061,467 43,856,163 Other 12,198,537 361,601 7,104,890 263,036 284,196 Total 20,235,027,938 1,245,288,159 7,554,618,896 630,996,639 1,255,724,397 CURRENT EXPENSES Salaries and other personnel expenses 845,649,640 53,598,166 174,461,911 47,560,571 46,745,596 Retirement and other benefits 65,803,906 12,733,411 41,466,468 12,025,524 11,616,831 Fees 25,490,088 4,784,742 2,248,141 728,888 2,075,464 Travel 37,213,324 1,986,917 5,458,686 1,905,612 2,347,623 Software expenses 35,874,992 1,921,494 8,016,353 1,656,512 1,645,050 Postage and other shipping costs 85,468,987 4,718,052 11,032,923 4,633,677 6,201,564 Communications 10,016,433 511,418 2,125,978 473,529 728,499 Materials and supplies 55,069,920 3,225,555 9,536,278 3,261,890 2,903,058 Building expenses Taxes on real estate 23,289,904 3,147,448 4,662,387 1,870,149 1,366,691 Property depreciation 38,762,965 3,142,836 5,401,142 1,841,677 1,874,174 Utilities 29,299,069 2,304,715 4,974,857 3,155,158 1,776,957 Rent 28,103,045 626,580 18,716,964 232,748 351,764 Other 22,049,349 712,127 3,285,944 1,150,650 775,648 Equipment Purchases 6,635,049 369,833 173,868 347,233 165,912 Rentals .....:;;. 21,507,097 798,771 5,165,035 800,371 761,219 Depreciation ..; 96,803,422 5,135,673 18,590,193 3,892,074 6,410,854 Repairs and maintenance 54,879,234 3,202,914 9,124,858 2,763,498 3,777,792 Earnings-credit costs 177,076,512 10,285,795 36,530,922 19,217,932 7,166,749 Other 38,436,737 2,540,311 6,128,698 1,668,530 2,374,800 Shared costs, net3 0 (715,064) (2,589,340) 3,214,578 2,097,431 Recoveries (39,890,532) (9,285,111) (3,885,810) (2,976,430) (3,505,458) Expenses capitalized4 (2,555,498) (316,949) (5,760) (71,472) (383,494) Total 1,654,983,643 105,429,634 360,620,696 109^52,899 99,274,725 Reimbursements (180,453,120) (9,155,026) (37,712,388) (19,326,840) (16,428,504) Net expenses 1,474,530,523 96,274,608 322,908,308 90,026,059 82,846,221 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 271 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 336,934 231,213 403,053 840,557 1,300,667 554,580 180,646 681,722 1,353,341,163 584,086,217 2,145,434,724 432,402,201 255,108,267 470,007,424 645,882,649 1,916,002,802 136,035,263 195,621,407 257,123,513 52,606,311 56,065,690 79,665,515 168,875,236 269,109,456 65,425,789 92,977,699 99,463,226 30,872,707 40,733,402 48,337,755 53,344,955 91,162,291 312,604 692,820 952,994 253,027 449,419 107,338 290,689 1,125,923 1,555,451,752 873,609,356 2,503,377,510 516,974,803 353,657,445 598,672,612 868,574,175 2,278,082,194 72,117,094 77,324,778 90,838,796 37,067,307 37,950,193 54,919,567 55,690,342 97,375,319 17,770,550 20,375,430 22,449,851 9,195,081 8,560,144 14,616,290 12,944,810 22,857,247 8,038,001 1,636,053 955,689 817,399 1,424,007 689,009 932,340 1,160,355 4,011,529 3,735,201 4,222,085 1,948,207 2,266,213 2,591,317 2,387,032 4,352,902 5,198,745 2,325,782 4,334,676 1,556,991 2,073,586 1,502,577 2,171,104 3,472,122 7,519,064 10,509,949 9,594,569 4,053,560 5,738,104 5,983,218 4,869,062 10,615,245 698,383 1,112,598 989,319 589,922 457,643 750,176 911,293 667,675 5,888,751 5,754,751 6,140,565 3,262,950 2,161,529 3,345,383 3,920,803 5,668,407 2,167,950 1,768,180 1,276,525 467,756 923,326 842,022 2,377,097 2,420,373 4,312,079 3,104,326 4,649,505 1,845,743 1,244,003 3,210,652 2,471,471 5,665,357 2,620,658 2,327,123 2,518,235 1,583,692 939,176 1,518,966 2,053,148 3,526,384 1,801,945 1,229,812 2,016,872 414,712 517,921 307,044 1,633,386 253,296 2,547,807 2,458,119 5,067,774 826,055 648,959 912,063 1,538,706 2,125,497 775,373 820,731 1,071,816 210,073 651,398 280,921 668,144 1,099,748 1,517,480 2,057,272 3,285,886 454,140 687,087 2,341,675 1,280,452 2,357,709 15,749,986 7,408,769 13,106,225 3,133,021 4,456,801 2,674,234 5,887,544 10,358,048 5,624,074 5,962,848 8,825,071 1,911,667 2,672,577 1,952,564 2,853,256 6,208,115 11,456,445 13,536,275 28,964,791 4,140,554 4,131,376 9,186,372 11,216,676 21,242,624 4,386,618 4,416,321 4,843,183 1,507,238 1,566,178 2,109,684 2,658,805 4,236,371 (8,550,309) 1,128,205 (5,715,685) 2,763,260 428,788 3,226,170 2,730,578 1,981,387 (5,202,261) (2,693,365) (3,369,408) (1,295,976) (996,350) (917,480) (1,756,557) (4,006,326) (274,157) (308,927) (102,070) (77,447) (241,946) (355,804) (343,938) (73,534) 160,175,805 165,990,231 205,964,270 76^75,905 78,260,713 111,686,620 119,095,555 203,564^21 (11,519,875) (14,092,111) (19,557,478) (10,000,764) (6,856,866) (11,819,229) (8,862,605) (15,121,434) 148,655,930 151,898,120 186,406,792 66,375,141 71,403,847 99,867,391 110,232,950 188,442,887 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

272 79th Annual Report, 1992 6. Income and Expenses of Federal Reserve Banks, 1992—Continued Dollars Item1 Total Boston New York Philadelphia Cleveland PROFIT AND LOSS Current net income 18,760,497,416 1,149,013,550 7,372,518,318 540,970,580 1,172,878,177 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 (298,078,707) (12,504,152) (99,700,683) (15,346,861) (22,242,170) Total additions 199,819,309 8,255,461 47,400,973 3,504,528 7,609,888 Total deductions (1,158,895,231) (39,878,680) (314,525,769) (42,771,873) (65,595,821) Net additions to or deductions (-) from current net income (959,075,922) (31,623,219) (267,124,796) (39,267,344) (57,985,932) Cost of unreimbursed Treasury services 28,711,766 1,256,859 2,522,156 1,413,181 1,751,905 Assessments by Board Board expenditures6 128,955,300 4,699,200 37,396,200 5,135,700 7,795,200 Cost of currency 295,400,650 18,350,965 101,456,057 10,548,662 18,485,886 Net income before payment to U.S. Treasury 17,348,353,778 1,093,083,307 6,964,019,109 484,605,693 1,086,859,253 Dividends paid 171,762,927 6,096,633 49,868,773 6,856,094 10,100,417 Payments to U.S. Treasury (interest on Federal Reserve notes) 16,774,476,501 1,076,527,924 6,800,550,135 465,532,198 1,061,696,036 Transferred to surplus 402,114,350 10,458,750 113,600,200 12,217,400 15,062,800 Surplus, January 1 2,651,507,750 97,852,000 771,420,400 105,100,500 161,155,750 Surplus, December 31 3,053,622,100 108,310,750 885,020,600 117,317,900 176,218,550 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 $140,870,731. 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 273 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 1,406,795,823 721,711,236 2,316,970,718 450,599,662 282,253,598 498,805,221 758,341,226 2,089,639,308 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 (24,906,389) (34,608,612) (47,538,468) 66,769,209 (11,894,065) (15,328,997) (28,086,690) (52,690,830) 9,525,397 4,098,044 15,088,647 81,246,999 1,852,516 3,314,363 4,569,522 13,352,971 (69,481,045) (98,902,259) (130,557,878) (104,836,552) (28,487,784) (40,892,351) (86,117,364) (136,847,856) (59,955,648) (94,804,215) (115,469,230) (23,589,553) (26,635,268) (37,577,988) (81,547,843) (123,494,885) 2,891,351 3,010,027 3,240,033 1,669,383 1,957,630 2,582,431 2,317,745 4,099,064 8,474,000 11,888,400 15,443,600 3,183,400 3,431,000 4,810,500 10,274,600 16,423,500 25,527,479 15,152,205 33,248,750 7,170,003 6,643,480 7,858,863 14,354,345 36,603,955 1,309,947,345 596,856,389 2,149,569,105 414,987,323 243,586,220 445,975,439 649,846,693 1,909,017,904 11,464,752 16,384,793 19,888,622 4,091,876 4,681,827 6,210,600 13,076,651 23,041,886 1,258,927,693 533,630,395 2,104,451,832 406,545,547 228,761,942 430,257,039 636,266,342 1,771,329,417 39,554,900 46,841,200 25,228,650 4,349,900 10,142,450 9,507,800 503,700 114,646,600 170,507,100 242,799,000 320,864,550 65,582,350 69,826,350 99,312,100 211,439,600 335,648,050 210,062,000 289,640,200 346,093,200 69,932,250 79,968,800 108,819,900 211,943,300 450,294,650 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

274 79th Annual Report, 1992 7'. Income and Expenses of Federal Reserve Banks, 1914-921 Dollars Assessments by Net additions Board of Governors Federal Reserve Bank Current Net or and period 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 ^,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 275 7.—Continued Payments to U.S. Treasury Transferred Transferred Dividends Interest on to surplus to surplus paid Franchise Under Federal Reserve (section 13b) (section 7) tax section 13b notes 217,463 1,742,775 6,804,186 1,134,234 1,134,234 5,540,684 48,334,341 5,011,832 2,703,894 70,651,778 5.654,018 60,724,742 82,916,014 6,119,673 59,974,466 15,993,086 6,307,035 10,850,605 -659,904 6.552.717 3.613.056 2,545,513 6,682,496 113,646 -3,077,962 6,915,958 59,300 2,473,808 7,329,169 818,150 8,464,426 7,754,539 249,591 5,044,119 8,458,463 2,584,659 21,078,899 9,583,911 4,283,231 22,535,597 10,268,598 17,308 -2,297,724 10,029,760 -7,057,694 9,282,244 2,011,418 11,020,582 8,874,262 -916,855 8,781,661 -60,323 6,510,071 8,504,974 297,667 27,695 607,422 7,829,581 227,448 102,880 352,524 7,940,966 176,625 67,304 2,616,352 8,019,137 119,524 -419,140 1,862,433 8,110,462 24,579 -425,653 4,533,977 8,214,971 82,152 -54,456 17,617,358 8,429,936 141,465 -4,333 570,513 8,669,076 197,672 49,602 3,554,101 8,911,342 244,726 135,003 40,327,237 9,500,126 326,717 201,150 48,409,795 10,182,851 247,659 262,133 81,969,625 10,962,160 67,054 27,708 81,467,013 11,523,047 35,605 75,283,818 86,772 8,366,350 11,919,809 166,690,356 18,522,518 12,329,373 193,145,837 21,461,770 13,082,992 196,628,858 21,849,490 13,864,750 254,873,588 28,320,759 14,681,788 291,934,634 46,333,735 15,558,377 342,567,985 40,336,862 16,442,236 276,289,457 35,887,775 17,711,937 251,740,721 32,709,794 18,904,897 401,555,581 53,982,682 20,080,527 542,708,405 61,603,682 21,197,452 524,058,650 59,214,569 22,721,687 910,649,768 -93,600,791 23,948,225 896,816,359 42,613,100 25.569,541 687,393,382 70,892,300 27,412,241 799,365,981 45,538,200 28,912,019 879,685,219 55,864,300 30,781,548 1,582,118,614 -465,822,800 32,351,602 1,296,810,053 27,053,800 33,696,336 1,649,455,164 18,943,500 35,027,312 1,907,498,270 29,851,200 36,959,336 2,463,628,983 30,027,250 39,236,599 3,019,160,638 39,432,450 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

276 79th Annual Report, 1992 7. Income and Expenses of Federal Reserve Banks, 1914-92—Continued Dollars Assessments by Net additions Board of Governors Federal Reserve Bank Current Net or and period income expenses deductions (-) Board Costs expenditures of currency 1970 3,877,218,444 276,571,876 11,441,829 21,227,800 23,573,710 1971 3,723,369,921 319,608,270 94,266,075 32,634,002 24,942,528 1972 3,792,334,523 347,917,112 (49,615,790) 35,234,499 31,454,740 1973 5,016,769,328 416,879,377 (80,653,488) 44,411,700 33,826,299 1974 6,280,090,965 476,234,586 (78,487,237) 41,116,600 30,190,288 1975 6,257,936,784 514,358,633 (202,369,615) 33,577,201 37,130,081 1976 6,623,220,383 558,128,811 7,310,500 41,827,700 48,819,453 1977 6,891,317,498 568,851,419 (177,033,463) 47,366,100 55,008,163 1978 8,455,309,401 592,557,841 (633,123,486) 53,321,700 60,059,365 1979 10,310,148,406 625,168,261 (151,148,220) 50,529,700 68,391,270 1980 12,802,319,335 718,032,836 (115,385,855) 62,230,800 73,124,423 1981 15,508,349,653 814,190,392 (372,879,185) 63,162,700 82,924,013 1982 16,517,385,129 926,033,957 (68,833,150) 61,813,400 98,441,027 1983 16,068,362,117 1,023,678,474 (400,365,922) 71,551,000 152,135,488 1984 18,068,820,742 ,102,444,454 (412,943,156) 82,115,700 162,606,410 1985 18,131,982,786 ,127,744,490 1,301,624,294 77,377,700 173,738,745 1986 17,464,528,361 156,867,714 1,975,893,356 97,337,500 180,779,673 1987 17,633,011,623 ,146,910,699 1,796,593,9172 81,869,800 170,674,979 1988 19,526,431,297 ,205,960,134 (516,910,320) 84,410,500 164,244,653 1989 22,249,275,725 ,332,160,712 1,295,622,583 89,579,700 175,043,736 1990 23,476,603,651 ,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 1992 20,235,027,938 1,474,530,523 (959,075,921) 128,955,300 295,400,650 Total, 1914-92 327,024,393,711 23,327,575,426 5,033,440,856 1,702,932,908 2,892,278,773 Aggregate for each Bank, 1914-92 Boston 17,510,241,589 1,536,760,720 176,817,307 62,076,686 176,277,091 New York 100,942,121,779 4,654,600,297 1,362,089,342 449,498,786 819,473,971 Philadelphia 12,539,376,489 1,258,714,306 266,817,425 80,985,118 119,237,918 Cleveland 21,509,043,278 1,524,890,436 229,623,399 122,500,690 182,276,473 Richmond 25,954,044,920 1,883,930,090 287,133,942 93,295,676 262,910,197 Atlanta 13,965,150,283 2,089,230,229 459,027,806 135,671,160 160,222,932 Chicago 45,637,643,168 3,043,175,507 614,195,126 233,842,672 391,886,858 St. Louis 10,694,638,342 1,205,707,159 131,115,614 51,026,272 101,612,154 Minneapolis 5,895,288,860 1,097,323,678 160,304,365 50,138,415 51,246,620 Kansas City 13,370,608,835 1,505,093,970 205,601,031 71,027,509 124,278,758 Dallas 17,884,398,161 1,401,811,145 417,928,983 115,730,973 159,995,511 San Francisco 41,121,838,008 2,506,681,750 762,807,515 237,138,951 342,860,290 Total 327,02433,711 23,327,575,4264 5,033,440,856 1,702,932,908 2,892,278,773 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 $3,182,294,299 transferred to surplus was re- ing a balance of $3,053,622,100 on December 31, 1992. 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 277 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 20,777,552,290 228,356,150 171,762,924 16,774,476,500 402,114,350 2,754,989,793 149,138,300 2,188,893 297,784,105,648 (3,657) 3,182,294,2993 111,081,103 7,111,395 280,843 15,662,542,654 135,411 118,405,575 752,463,230 68,006,262 369,116 94,981,347,191 (433,412) 922,277,171 142,267,053 5,558,901 722,406 10,994,765,084 290,661 131,648,122 209,452,772 4,842,447 82,930 19,478,514,975 (9,906) 189,452,343 146,788,151 6,200,189 172,493 23,613,223,232 (71,517) 215,941,808 205,293,997 8,950,561 79,264 11,509,424,416 5,491 294,906,740 370,919,941 25,313,526 151,045 41,798,035,964 11,682 361,421,954 84,089,294 2,755,629 7,464 9,292,522,213 (26,515) 75,072,878 77,740,274 5,202,900 55,615 4,678,449,297 64,874 83,846,013 112,663,153 6,939,100 64,213 11,624,491,429 (8,674) 112,959,850 176,895,747 560,049 102,083 16,217,311,054 55,337 216,220,778 365,335,077 7,697,341 101,421 37,933,478,137 (17,089) 460,162,067 2,754,989,793 149,138,300 2,188,893 297,784,105,648 (3,657) 3,182,294,299 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

278 79th Annual Report, 1992 Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks and Branches, December 31, 1992l 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 83,813,108 5,675,602 111,562,211 89,589,840 NEW YORK 20,354,440 93,625,754 42,251,939 156,232,132 132,903,040 887,844 3,303,946 2,749,659 6,941,449 4,183,960 Buffalo 2,251,556 55,005,678 5,903,704 63,160,938 45,093,745 PHILADELPHIA . 1,074,281 10,045,664 6,858,976 17,978,922 12,775,360 1,224,363 CLEVELAND .... 2,246,599 14,413,715 7,623,142 24,283,455 11,936,230 Cincinnati 1,658,376 8,905,759 4,341,196 14,905,331 11,228,347 Pittsburgh RICHMOND 5,812,396 69,596,875 18,390,034 93,799,305 65,404,897 Baltimore 6,476,335 26,826,903 3,842,189 37,145,427 29,676,789 Charlotte 3,129,645 27,402,251 4,737,485 35,269,381 32,659,481 ATLANTA 1,209,360 12,167,223 4,319,451 17,696,034 13,209,887 13,086,575 Birmingham 3,197,830 1,905,770 1,074,511 6,178,112 4,148,312 Jacksonville 1,665,439 16,589,720 2,363,391 20,618,549 18,345,872 944,483 Miami 3,717,791 12,783,499 2,223,399 18,724,690 14,457,087 Nashville 592,342 1,474,678 1,645,209 3,712,230 1,594,679 New Orleans 3,087,693 3,505,766 1,581,930 8,175,389 5,259,297 292,710 CHICAGO 4,565,008 109,377,091 19,008,997 132,951,095 103,770,536 Detroit 797,734 4,702,524 5,087,151 10,587,408 8,263,699 ST. LOUIS 700,378 15,270,459 5,298,206 21,269,043 18,226,743 Little Rock 1,148,492 2,148,507 1,003,022 4,300,021 2,509,188 Louisville 700,075 2,859,819 1,131,238 4,691,132 3,839,645 Memphis 1,135,623 4,274,152 2,280,473 7,690,248 5,220,981 MINNEAPOLIS... 1,394,384 27,701,819 7,851,532 38,947,735 21,540,113 Helena 1,954,514 9,036,528 486,396 11,477,438 11,051,196 KANSAS CITY... 1,829,420 15,376,497 11,593,946 28,799,863 22,076,231 149,948 Denver 3,187,962 4,451,952 3,185,925 10,825,839 8,422,717 Oklahoma City.... 646,386 3,630,988 861,305 6,138,679 3,880,159 Omaha 6,534,583 10,987,009 1,401,083 18,922,675 17,046,319 1,412,500 DALLAS 29,565,708 120,896,877 0 150,462,585 149,224,965 11,252,712 El Paso 262,477 1,458,093 404,946 2,125,516 2,048,477 Houston 2,205,500 3,295,695 1,126,030 6,627,225 6,207,363 San Antonio 482,284 2,674,490 1,581,919 4,738,694 3,704,407 SAN FRANCISCO 15,599,928 68,246,884 17,739,084 101,585,896 78,444,830 Los Angeles 3,891,887 51,126,648 8,398,066 63,416,601 54,877,791 Portland 415,924 5,682,337 1,254,537 7,352,798 6,163,927 Salt Lake City .... 480,222 4,903,818 1,467,539 6,851,579 3,964,109 Seattle 324,772 2,686,325 1,891,936 4,903,032 2,792,471 Total 157,258,687 914,154,822 208,635,149 1,280,048,658 1,025,742,686 28,363,291 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 279 9. Operations in Principal Departments of Federal Reserve Banks, 1989-92 Operation 1992 1991 1990 1989 Millions of pieces (except as noted) Loans (thousands) 8 11 15 22 Currency received and counted 20,166 19,711 19,462 19,857 Currency verified and destroyed 7,506 6,254 6,561 6,319 Coin received and counted 8,660 9,462 12,072 12,668 Checks handled U.S. government checks 493 503 547 541 Postal money orders 181 166 162 147 All other 19,054 18,743 18,595 18,014 Issues, redemptions, and exchanges of U.S. Treasury and federal agency securities 76 52 44 40 Transfer of funds 68 65 63 60 Automated clearinghouse transactions Commerciall 1,327 1,119 915 741 Government 531 521 520 441 Food stamps redeemed 4,183 3,439 2,875 2,334 Millions of dollars Loans 29,427 64,597 194,538 229,358 Currency received and counted 277,681 265,473 252,430 246,598 Currency verified and destroyed 96,744 77,496 65,863 59,985 Coin received and counted 1,275 1,354 1,734 1,828 Checks handled U.S. government checks 588,311 610,106 623,008 635,064 Postal money orders 20,188 17,716 16,485 14,284 All other 13,241,785 12,164,175 12,514,201 12,321,576 Issues, redemptions, and exchanges of U.S. Treasury and federal agency securities 142,768,966 119,114,811 102,332,172 98,130,603 Transfer of funds 199,175,034 192,254,895 199,067,200 182,575,303 Automated clearinghouse transactions Commerciall 7,597,811 6,188,185 4,173,667 3,840,462 Government 859,774 723,426 486,809 391,463 Food stamps redeemed 21,452 17,888 14,517 11,714 1. Data for years preceding 1991 do not include items 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

280 79th Annual Report, 1992 10. Federal Reserve Bank Interest Rates, December 31, 1992 Loans to depository institutions Bank Extended credit3 Adjustment Seasonal credit1 credit2 First 30 days After 30 days of borrowing of borrowing4 All Federal Reserve Banks 3.0 3.2 3.0 3.7 1. Adjustment credit is available on a short-term basis 3. Extended credit is available to depository institutions, to help depository institutions meet temporary needs for if similar assistance is not reasonably available from other funds that cannot be met through reasonable alternative sources, when exceptional circumstances or practices sources. After May 19,1986, the highest rate established involve only a particular institution or when an institution for loans to depository institutions may be charged on is experiencing difficulties adjusting to changing market adjustment credit loans of unusual size that result from a conditions over a longer period of time. See section major operating problem at the borrower's facility. 201.3(b)(2) of Regulation A. 2. Seasonal credit is available to help smaller deposi- 4. Extended-credit loans outstanding more than thirty tory institutions meet regular, seasonal needs for funds days ordinarily will be charged a flexible rate somewhat that cannot be met through special industry lenders and above rates on market sources of funds; however, the rate that arise from a combination of expected patterns of will always be at least fifty basis points above the dismovement in their deposits and loans. The discount rate count rate applicable to adjustment credit. In no case will on seasonal credit takes into account rates on market the rate be less than the basic discount rate plus fifty basis sources of funds and ordinarily is reestablished on the points. The flexible rate is reestablished on the first busifirst business day of each two-week reserve maintenance ness day of each two-week reserve maintenance period. period; however, it is never lower than the discount rate At the discretion of the Federal Reserve Bank, the flexible applicable to adjustment credit. See section 201.3(b)(l) of rate may be charged on extended-credit loans that are Regulation A. outstanding less than thirty days. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 281 Reserve Requirements of Depository Institutions] Requirements Type of deposit2 Percent of deposits Effective date Net transaction accounts3 $0 million-$46.8 million 3 12/15/92 More than $46.8 million 10 12/15/92 Nonpersonal time deposits4 0 12/27/90 Eurocurrency liabilities5 0 12/27/90 1. Reserve requirements in effect on December 31, making payments to third persons or others. However, 1992. Required reserves must be held in the form of money market deposit accounts (MMDAs) and similar deposits with Federal Reserve Banks or vault cash. Non- accounts subject to the rules that permit no more than six member institutions may maintain reserve balances with a preauthorized, automatic, or other transfers per month, of Federal Reserve Bank indirectly on a pass-through basis which no more than three can be checks, are not transacwith certain approved institutions. For previous reserve tion accounts (such accounts are savings deposits). requirements, see earlier editions of the Annual Report or The Monetary Control Act of 1980 requires that the the Federal Reserve Bulletin. Under provisions of the amount of transaction accounts against which the 3 per- Monetary Control Act, depository institutions include cent reserve requirement applies be modified annually by commercial banks, mutual savings banks, savings and 80 percent of the percentage change in transaction loan associations, credit unions, agencies and branches of accounts held by all depository institutions, determined as foreign banks, and Edge corporations. of June 30 each year. Effective December 15, 1992 for 2. The Garn-St Germain Depository Institutions Act institutions reporting quarterly and December 22, 1992 of 1982 (Public Law 97-320) requires that $2 million of for institutions reporting weekly, the amount was inreservable liabilities of each depository institution be creased from $42.2 million to $46.8 million. subject to a zero percent reserve requirement. The Board 4. For institutions that report weekly, the reserve reis to adjust the amount of reservable liabilities subject to quirement on nonpersonal time deposits with an original this zero percent reserve requirement each year for the maturity of less than 1 xh years was reduced from 3 persucceeding calendar year by 80 percent of the percentage cent to 1 Vi percent for the maintenance period that began increase in the total reservable liabilities of all depository December 13, 1990, and to zero for the maintenance institutions measured on an annual basis as of June 30. period that began December 27, 1990. The reserve re- No corresponding adjustment is to be made in the event quirement on nonpersonal time deposits with an original of a decrease. On December 15, 1992, the exemption was maturity of 1 xh years or more has been zero since Octoraised from $3.6 million to $3.8 million. The exemption ber 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 1V2 years was reduced from 3 per- The exemption applies only to accounts that would be cent to zero on January 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 \xh years (see note 4). transfers in excess of three per month for the purpose of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

282 79th Annual Report, 1992 12. Initial Margin Requirements under Regulations T, U, G, and X1 Percent of market value Short sales, Effective date Tonly2 1934, Oct. 1 .... 25^45 1936, Feb. 1 .... 25-55 Apr. 1 .... 55 1937, Nov. 1.... 40 50 1945, Feb. 5 .... 50 50 July 5 .... 75 75 1946, Jan. 21 ... 100 100 1947, Feb. 21... 75 75 1949, Mar. 3.... 50 50 1951, Jan. 17 ... 75 75 1953, Feb. 20... 50 50 1955, Jan. 4 60 60 Apr. 23 ... 70 70 1958, Jan. 16 ... 50 50 Aug. 5.... 70 70 Oct. 16 ... 90 90 1960, July 28 ... 70 70 1962, July 10 ... 50 50 1963, Nov. 6.... 70 70 1968, Mar. 11... 70 50 70 June 8.... 80 60 80 1970, May 6.... 65 50 65 1971, Dec. 6.... 55 50 55 1972, Nov. 24... 65 50 65 1974, Jan. 3 .... 50 50 50 1. These regulations, adopted by the Board of Gover- 30 percent of the current market value of the stock nors pursuant to the Securities Exchange Act of 1934, underlying the option. On September 30, 1985, the Board limit the amount of credit to purchase and carry "margin changed the required margin on individual stock options, securities" (as defined in the regulations) when such allowing it to be the same as the option maintenance value (100 percent) and the maximum loan value of credit margin required by the appropriate exchange or selfis collateralized by securities. Margin requirements on regulatory organization; such maintenance margin rules securities other than options are the difference between must be approved by the Securities and Exchange Comthe market value (100 percent) and the maximum loan mission. Effective June 6, 1988, the SEC approved new value of collateral as prescribed by the Board. Regulation maintenance margin rules, permitting margins to be the T was adopted effective October 15, 1934; Regulation U, current market value of the option plus 20 percent of the effective May 1, 1936; Regulation G, effective March 11, market value of the stock underlying the option. 1968; and Regulation X, effective November 1, 1971. 2. From October 1, 1934, to October 31, 1937, the On January 1, 1977, the Board of Governors for the requirement was the margin "customarily required" by first time established in Regulation T the initial margin the brokers and dealers. required for writing options on securities, setting it at Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 283 13. Principal Assets and Liabilities and Number of Insured Commercial Banks, by Class of Bank, June 30, 1992 and 1991' Asset and liability items shown in millions of dollars Member banks Nonmember Item Total banks Total National State June 30, 1992 Loans and investments 2,486,738 1,798,362 1,441,254 357,107 688,376 Gross loans 1,799,154 1,320,465 1,073,000 247,464 478,689 Net loans 1,790,741 1,315,292 1,068,991 246,301 475,449 Investments 687,584 477,897 368,254 109,643 209,687 U.S. Treasury and federal agency securities 549,931 386,690 300,265 86,425 163,240 Other 137,654 91,207 67,989 23,218 46,447 Cash assets, total 189,728 147,810 119,433 28,377 41,917 Deposits, total 2,319,688 1,662,383 1,345,048 317,335 657,305 Interbank 48,564 41,470 30,253 11,217 7,094 Other transaction 669,774 493,715 396,573 97,142 176,060 Other nontransaction 1,858,303 1,304,338 1,065,272 239,066 553,965 Equity capital 243,416 174,633 136,537 38,097 68,783 Number of banks 11,623 4,638 3,689 949 6,985 June 30, 1991 Loans and investments 2,446,295 1,775,794 1,437,167 338,627 670,500 Gross loans 1,850,168 1,369,674 1,122,113 247,561 480,495 Net loans 1,839,449 1,362,474 1,116,269 246,205 476,976 Investments 596,126 406,121 315,054 91,067 190,006 U.S. Treasury and federal agency securities 453,556 310,837 244,436 66,400 142,719 Other 142,571 95,284 70,618 24,666 47,287 Cash assets, total 191,698 147,153 120,294 26,859 44,545 Deposits, total 2,294,866 1,646,375 1,342,707 303,668 648,491 Interbank 45,049 38,180 29,268 8,912 6,870 Other demand 604,250 444,835 360,547 84,288 159,415 Other time and savings 1,868,539 1,316,914 1,080,994 235,920 551,625 Equity capital 221,957 157,296 123,632 33,664 64,661 Number of banks 12,085 4,889 3,902 987 7,196 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

284 79th Annual Report, 1992 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-92, and Month-End 1992l Millions of dollars Factors supplying reserve tunds Federal Reserve Bank credit outstanding Spe- U.S. Treasuryand cial Treafederal agency securities draw- sury Period ing cur- Other Gold u 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 ri e g r h ti t f s - r o en u c t- y Total o B u o tr u i g g h h t t r c e h p a u s r e - assets4 ic a a c t - e s i t n an g d 6 agree- count ment 1918 239 239 0 1,766 199 294 0 2,498 2,873 1,795 1919 300 300 0 2,215 201 575 0 3,292 2,707 1,707 1920 287 287 0 2,687 119 262 0 3,355 2,639 1,709 1921 234 234 0 1,144 40 146 0 1,563 3,373 1,842 1922 436 436 0 618 78 273 0 1,405 3,642 1,958 1923 134 80 54 723 27 355 0 1,238 3,957 2,009 1924 540 536 4 320 52 390 0 1,302 4,212 2,025 1925 375 367 8 643 63 378 0 1,459 4,112 1,977 1926 315 312 3 637 45 384 0 1,381 4,205 1,991 1927 617 560 57 582 63 393 0 1,655 4,092 2,006 1928 228 197 31 1,056 24 500 0 1,809 3,854 2,012 1929 511 488 23 632 34 405 0 1,583 3,997 2,022 1930 739 686 43 251 21 372 0 1,373 4,306 2,027 1931 817 775 42 638 20 378 0 1,853 4,173 2,035 1932 1,855 1,851 4 235 14 41 0 2,145 4,226 2,204 1933 2,437 2,435 2 98 15 137 0 2,688 4,036 2,303 1934 2,430 2,430 0 7 5 21 0 2,463 8,238 2,511 1935 2,431 2,430 1 5 12 38 0 2,486 10,125 2,476 1936 2,430 2,430 0 3 39 28 0 2,500 11,258 2,532 1937 2,564 2,564 0 10 19 19 0 2,612 12,760 2,637 1938 2,564 2,564 0 4 17 16 0 2,601 14,512 2,798 1939 2,484 2,484 0 7 91 11 0 2,593 17,644 2,963 1940 2,184 2,184 0 3 80 8 0 2,274 21,995 3,087 1941 2,254 2,254 0 3 94 10 0 2,361 22,737 3,247 1942 6,189 6,189 0 6 471 14 0 6,679 22,726 3,648 1943 11,543 11,543 0 5 681 10 0 12,239 21,938 4,094 1944 18,846 18,846 0 80 815 4 0 19,745 20,619 4,131 1945 24,252 24,252 0 249 578 2 0 15,091 20,065 4,339 1946 23,350 23,350 0 163 580 1 0 24,093 20,529 4,562 1947 22,559 22,559 0 85 535 1 0 23,181 22,754 4,562 1948 23,333 23,333 0 223 541 1 0 24,097 24,244 4,589 1949 18,885 18,885 0 78 534 2 0 19,499 24,427 4,598 1950 20,778 20,725 53 67 1,368 3 0 22,216 22,706 4,636 1951 23,801 23,605 196 19 1,184 5 0 25,009 22,695 4,709 1952 24,697 24,034 663 156 967 4 0 25,825 23,187 4,812 1953 25,916 25,318 598 28 935 2 0 26,880 22,030 4,894 1954 24,932 24,888 44 143 808 1 0 25,885 21,713 4,985 1955 24,785 24,391 394 108 1,585 29 0 26,507 21,690 5,008 1956 24,915 24,610 305 50 1,665 70 0 26,699 21,949 5,066 1957 24,238 23,719 519 55 1,424 66 0 25,784 22,781 5,146 1958 26,347 26,252 95 64 1,296 49 0 27,755 20,534 5,234 1959 26,648 26,607 41 458 1,590 75 0 28,771 19,456 5,311 1960 27,384 26,984 400 33 1,847 74 0 29,338 17,767 5,398 1961 28,881 30,478 159 130 2,300 51 0 31,362 16,889 5,585 1962 30,820 28,722 342 38 2,903 110 0 33,871 15,978 5,567 1963 33,593 33,582 11 63 2,600 162 0 36,418 15,513 5,578 1964 37,044 36,506 538 186 2,606 94 0 39,930 15,388 5,405 Digitized for FRASER http://fraseFr.osrt nloouteiss fseeed l.aosrtg tw/ o pages of table. Federal Reserve Bank of St. Louis

Tables 285 14.—Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with reserves8 Federal Reserve Banks Other Cur- Re- Trea- Other Federal rency quired sury Federal Reserve in clearcash Reserve liacir- ing With Curc t u io la n - h in o g ld s7 - T s r u e r a y - F ei o g r n - Other co a u c n - ts4 bal- c b a i a p li n i t t d i a e l s 4 R Fe e d se e r r v a e l re a n n c d y qu R ir e e - d 10 Ex- Banks 4,951 288 51 96 25 118 0 0 1,636 0 1,585 51 5,091 385 51 73 28 208 0 0 1,890 0 1,822 68 5,325 218 57 5 18 298 0 0 1,781 0 0 0 4,403 214 96 12 15 285 0 0 1,753 0 1,654 99 4,530 225 11 3 26 276 0 0 1,934 0 0 0 4,757 213 38 4 19 275 0 0 1,898 0 1,884 14 4,760 211 51 19 20 258 0 0 2,220 0 2,161 59 4,817 203 16 8 21 272 0 0 2,212 0 2,256 -44 4,808 201 17 46 19 293 0 0 2,194 0 2.250 -56 4,716 208 18 5 21 301 0 0 2,487 0 2,424 63 4,686 202 23 6 21 348 0 0 2,389 0 2,430 -41 4,578 216 29 6 24 393 0 0 2,355 0 2,428 -73 4,603 211 19 6 22 375 0 0 2,471 0 2,375 96 5,360 222 54 79 31 354 0 0 1,961 0 1,994 -33 5,388 272 8 19 24 355 0 0 2,509 0 1,933 576 5,519 284 3 4 128 360 0 0 2,729 0 1,870 859 5,536 3,029 121 20 169 241 0 0 4,096 0 2,282 1,814 5,882 2,566 544 29 226 253 0 0 5,587 0 2,743 2,844 6,543 2,376 244 99 160 261 0 0 6,606 0 4,622 1,984 6,550 3,619 142 172 235 263 0 0 7,027 0 5,815 1,212 6,856 2,706 923 199 242 260 0 0 8,724 0 5,519 3,205 7,598 2,409 634 397 256 251 0 0 11,653 0 6,444 5,209 8,732 2,213 368 1,133 599 284 0 0 4,026 0 7,411 6,615 11,160 2,215 867 774 586 291 0 0 12,450 0 9,365 3,085 15,410 2,193 799 793 485 256 0 0 13,117 0 11,129 1,988 20,499 2,303 579 1,360 356 339 0 0 12,886 0 11,650 1,236 25,307 2,375 440 1,204 394 402 0 0 14,373 0 12,748 1,625 28,515 2,287 977 862 446 495 0 0 15,915 0 14,457 1,458 28,952 2,272 393 508 314 607 0 0 16,139 0 15,577 562 28,868 1,336 870 392 569 563 0 0 17,899 0 16,400 1,499 28,224 1,325 1,123 642 547 590 0 0 20,479 0 19,277 1,202 27,600 1,312 821 767 750 106 0 0 16,568 0 15,550 1,018 27,741 1,293 668 895 565 714 0 0 17,681 0 16,509 1,172 29,206 1,270 247 526 363 746 0 0 20,056 0 19,667 389 30,433 1,270 389 550 455 111 0 0 19,950 0 20,520 -570 30,781 761 346 423 493 839 0 0 20,160 0 19,397 763 30,509 796 563 490 441 907 0 0 18,876 0 18,618 258 31,158 767 394 402 554 925 0 0 19,005 0 18,903 102 31,790 775 441 322 426 901 0 0 19,059 0 19,089 -30 31,834 761 481 356 246 998 0 0 19,034 0 19,091 -57 32,193 683 358 272 391 1,122 0 0 18,504 0 18,574 -70 32,591 391 504 345 694 841 0 0 18,174 310 18,619 -135 32,869 377 485 217 533 941 0 0 17,081 2,544 18,988 637 33,918 422 465 279 320 1,044 0 0 17,387 2,544 18,988 96 35,338 380 597 247 393 1,007 0 0 17,454 3,262 20,071 645 37,692 361 880 171 291 1,065 0 0 17,049 4,099 20,677 471 Digitized f3o9r, 6F1R9ASE6R12 820 229 321 1,036 0 0 18,086 4,151 21,663 574 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

286 79th Annual Report, 1992 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items- Year-End 1918-92 and Month-End 1992l—Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasuryand cial Treafederal agency securities draw- sury Period ing cur- Total o B ut o ri u g g h h t t 12 r u c H e h n p e a d u l s e d r e r - Loans Float2 ot A he ll r3 R F a O e e s s s d th e e e r e t r v s a r 4 e l Total s G to o c l k d 5 c r i i e c a g r a c h t t i - t e f s - s r i t e o a n n u n g c t d - 6 y 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 in 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 1992 308,518 300,424 8,094 675 3,350 0 30,278 342,820 11,056 8,018 21,503 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 in 1960, figures reflect a minor change in well as any gold in excess of the gold certificates issued concept; see Federal Reserve Bulletin, vol. 47 (February to the Reserve Bank. 1961), p. 164. 8. Beginning in November 1979, includes reserves of 3. Principally acceptances and, until August 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 November 13, 4. For the period before April 16, 1969, includes the 1980, includes reserves of all depository institutions. total of Federal Reserve capital paid in, surplus, other 9. Between December 1, 1959, and November 23, capital accounts, and other liabilities and accrued divi- 1960, part was allowed as reserves; thereafter all was dends, less the sum of bank premises and other assets, allowed. and was reported as "Other Federal Reserve accounts" ; 10. Estimated through 1958. Before 1929, data were thereafter, "Other Federal Reserve assets" and "Other available only on call dates (in 1920 and 1922 the call Federal Reserve liabilities and capital" are shown date was December 29). Beginning on September 12, separately. 1968, the amount is based on close-of-business figures for 5. Before January 30, 1934, includes gold held in the reserve period two weeks before the report date. Federal Reserve Banks and in circulation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 287 14.—Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with reserves8 Federal Reserve Banks Other Cur- Re- Trea- Other Federal rency quired sury Federal Reserve in clearcash Reserve liacir- ing With Curhold- ac- bilities c t u io la n - ings7 T s r u e r a y - F ei o g r n - Other counts4 bal- ca a p n it d al4 R Fe e d se e r r v a e l re a n n c d y qu R ire e d - 1( Ex- Banks 42,056 760 668 150 355 211 0 0 18,447 4,163 22,848 -238 44,663 1,176 416 174 588 -147 0 0 19,779 4,310 24,321 -232 47,226 1,344 1,123 135 563 -773 0 0 21,092 4,631 25,905 -182 50,961 695 703 216 747 -1,353 0 0 21,818 4,921 27,439 -700 53,950 596 1,312 134 807 0 0 0 22,085 5,187 28,173 -901 57,903 431 1,156 148 1,233 0 0 1,986 24,150 5,423 30,033 -460 61,068 460 2,020 294 999 0 0 2,131 27,788 5,743 32,496 1,035 66,516 345 1,855 325 840 0 0 2,143 25,647 6,216 32,044 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 4,1% 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 ,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 k i i 197,488 550 9,351 480 ,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 ,027 0 1,687 7,129 40,097 247,649 395 8,656 347 548 0 1,605 7,683 37,742 n.a. n.a. n.a. 260,453 450 6,217 589 ,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 ,706 o :5,955 8,113 25,458 334,757 508 7,492 206 372 0 i5,901 7,984 26,178 r f f 11. Beginning December 1, 1966, includes federal 14. For the period before July 1973, includes certain agency obligations held under repurchase agreements and deposits of domestic nonmember banks and foreignbeginning September 29, 1971, includes federal agency owned banking institutions held with member banks and issues bought 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 December 12, 1974, the amount of voluntary sale-purchase transactions. nonmember bank and foreign-agency and branch deposits 13. Beginning with week ending November 15, 1972, at Federal Reserve Banks that are associated with marincludes $450 million of reserve deficiencies on which ginal reserves are no longer reported. However, two Federal Reserve Banks are allowed to waive penalties for amounts are reported: (1) deposits voluntarily held as a transition period in connection with bank adaptation to reserves by agencies and branches of foreign banks oper- Regulation J as amended, effective November 9, 1972. ating in the United States and (2) Eurodollar liabilities. Allowable deficiencies are as follows (beginning with 15. Adjusted to include waivers of penalties for refirst statement week of quarter, in millions): 1973—Ql, serve deficiencies, in accordance with change in Board $279; Q2, $172; Q3, $112; Q4, $84; 1974—Ql, $67; Q2, policy effective November 19, 1975. $58. The transition period ended with the second quarter of 1974. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

288 79th Annual Report, 1992 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-92, and Month-End 1992'—Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasuryand cial Treafederal agency securities draw- sury Period ing cur- Total o B ut o r u ig g h h t t 12 r u c H e h n p e a d u l s e d r e r - Loans Float2 ot A h l e l r3 R F a O e e ss d s th e e e r t e r s v a r 4 e l Total s G to o c l k d 5 c r i i e c a g r a c h t t i - t e f s - s r i t o e a n n u n g c t d - 6 y agree- count ment 1992 Jan. .. 272,243 268,579 3,664 112 246 0 34,051 306,651 11,058 10,018 21,060 Feb. .. 271,383 271,383 0 62 294 0 32,040 303,779 11,058 10,018 21,099 Mar. .. 273,561 271,756 1,805 52 634 0 32,512 306,759 11,058 10,018 21,138 Apr. .. 273,855 273,855 0 115 548 0 31,175 305,694 11,057 10,018 21,175 May .. 276,802 276,558 244 150 387 0 29,021 306,360 11,057 10,018 21,210 June .. 282,593 282,593 0 1,359 484 0 31,030 315,466 11,060 10,018 21,257 July .. 281,594 281,594 0 256 398 0 31,860 314,107 11,059 10,018 21,286 Aug. .. 287,777 280,108 7,669 244 530 0 31,230 319,780 11,059 10,018 21,298 Sept. . 301,868 287,066 14,802 299 301 0 33,000 335,467 11,058 10,018 21,342 Oct. .. 288,411 288,411 0 80 567 0 31,111 320,169 11,060 10,018 21,377 Nov. .. 301,740 298,230 3,510 35 -285 0 29,424 330,914 11,059 10,018 21,433 Dec. .. 308,518 300,424 8,094 675 3,350 0 30,278 342,820 11,056 8,018 21,503 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 289 14.—Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with reserves8 Federal Reserve Banks Other Cur- Re- Trea- Other Federal rency quired sury Federal Reserve in clearcash Reserve liacir- ing With Curhold- ac- bilities c t u io la n - ings7 T s r u e r a y - F ei o g r n - Other counts4 bal- ca a p n it d al4 R Fe e d se e r r v a e l re a n n c d y qu R ir e e - d 10 Banks 299,879 684 10,828 321 251 0 4,275 7,629 24,920 301,374 698 5,477 264 231 0 4,381 7,222 26,307 303,212 711 6,846 262 364 0 4,458 8,098 25,023 306,373 705 4,692 206 260 0 4,756 7,906 23,046 309,719 682 5,583 217 224 0 5,152 8,716 18,351 310,935 612 13,630 219 249 0 5,194 9,416 17,546 314,338 578 6,923 264 220 0 5,275 8,846 20,027 316,136 539 6,232 297 254 0 5,472 9,275 23,950 317,314 522 21,297 438 275 0 5,606 8,275 24,159 320,363 505 4,413 415 317 0 5,615 7,271 23,724 327,281 525 6,985 229 296 0 5,682 7,759 24,667 334,757 508 7,492 206 372 0 5,901 7,984 26,178 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

290 79th Annual Report, 1992 15. Changes in Number of Banking Offices in the United States, 19921 Commercial banks2 State-chartered savings Type of office Total Member Nonmember banks4 and change Total Non- Non- Total National State Insured insured3 Insured insured Banks, Dec. 31, 1991 .. 12,629 12,269 4,838 3,809 1,029 7,159 272 360 0 Changes during 1992 New banks 94 94 49 43 6 29 16 0 0 Ceased banking operation -180 -157 -71 -51 -20 -62 -24 -23 0 Banks converted into branches -420 -416 -207 -165 -42 -208 -1 -4 0 Other5 111 25 10 -22 32 -2 17 86 0 Net change -395 -454 -219 -195 -24 -243 8 59 0 Banks, Dec. 31,1992 .. 12,234 11,815 4,619 3,614 1,005 6,916 280 419 0 Branches and additional offices, Dec. 31, 1991 .... 55,921 53,000 34,810 28,315 6,495 18,080 110 2,921 0 Changes during 1992 De novo 1,677 1,560 1,074 856 218 483 3 117 0 Banks converted into branches 420 414 255 197 58 159 0 6 0 Discontinued -1,313 -1,192 -935 -810 -125 -238 -19 -121 0 Sale of branch 0 30 -93 -130 37 123 0 -30 0 Other5 -264 -68 358 -365 723 -419 -7 -196 0 Net change5 520 744 659 -252 911 108 -23 -224 0 Branches and additional offices, Dec. 31,1992 .... 56,441 53,744 35,469 28,063 7,406 18,188 87 2,697 0 1. Preliminary. Final data will be available in the 3. As of Dec. 31, 1988, includes noninsured national Annual Statistical Digest, 1992, forthcoming. trust companies. 2. Includes stock savings banks, nondeposit trust com- 4. Formerly called mutual savings banks. panies, private banks, industrial banks, and nonbank 5. Includes interclass changes. banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 291 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1992 Crestar Bank, Richmond, Virginia to acquire SUMMARY REPORT BY THE ATTORNEY GENERAL the assets and liabilities of twenty-four branches Request for report dispensed with as authorized by of Perpetual Savings Bank, FSB, McLean, Vir- the Bank Merger Act. ginia, through its wholly owned subsidiary, BASIS FOR APPROVAL BY THE FEDERAL RESERVE CRFC VA Interim Federal Savings Bank, Rich- (1/30/92) mond, Virginia1 The applicant has assets of $1.7 billion; the target SUMMARY REPORT BY THE ATTORNEY GENERAL institution has assets of $21.2 million. The State No report received. Request for report on the has recommended immediate action by the Fedcompetitive factors was dispensed with, as autho- eral Reserve System to prevent the probable failrized by the Bank Merger Act, to permit the Fed- ure of Atlantic Trust. eral Reserve System to act immediately to safeguard the depositors of the branches of Perpetual Savings Bank.2 Clear Lake Bank and Trust, Clear Lake, Iowa BASIS FOR APPROVAL BY THE FEDERAL RESERVE to acquire the assets and liabilities of the Garner, (1/10/92) Iowa, branch of Home Federal Savings and The applicant has assets of $10.3 billion; the target Loan Association, Algon, Iowa institutions have assets of $1.9 billion. The OTS SUMMARY REPORT BY THE ATTORNEY GENERAL has recommended immediate action by the Fed- Request for report dispensed with as authorized by eral Reserve System to prevent the probable fail- the Bank Merger Act. ure of Perpetual Savings Bank. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (1/31/92) Wesbanco Bank Wheeling, Wheeling, West Vir- The applicant has assets of $83.7 million; the ginia to merge with Bank of Follansbee, Follans- target institution has assets of $6.7 million. The bee, West Virginia OTS has recommended immediate action by the Federal Reserve System to prevent the proba- SUMMARY REPORT BY THE ATTORNEY GENERAL (12/16/91) ble failure of Home Federal Savings and Loan The proposed transaction would not be signifi- Association. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE Iowa Trust and Savings Bank, Emmetsburg, (1/10/92) Iowa to acquire the Emmetsburg, Iowa, branch The applicant has assets of $302.9 million; the of Home Federal Savings and Loan Associatarget institution has assets of $18.0 million. The tion, Algona, Iowa parties operate in the same market. The banking factors and considerations relating SUMMARY REPORT BY THE ATTORNEY GENERAL to the convenience and needs of the community Request for report dispensed with as authorized by the Bank Merger Act. are consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE Fleet Bank-NH, Nashua, New Hampshire to (1/31/92) merge with Atlantic Trust Company, Newing- The applicant has assets of $43 million; the target ton, New Hampshire institution has assets of $6 million. The OTS has recommended immediate action by the Federal Reserve System to prevent the probable failure of Home Federal Savings and Loan Association. 1. The institution or group of institutions named before the italicized words is referred to subsequently as the applicant, and the institution or group of institutions named after the italicized words is referred to subse- Rapides Bank & Trust Company, Alexandria, quently as the target institution or target institutions. Louisiana to acquire the assets and liabilities of 2. Hereafter, the entry for the summary report by the the Alexandria and Pineville branches of Peli- Attorney General will read, "Request for report dis- can Homestead Savings Association, Metairie, pensed with as authorized by the Bank Merger Act," for Louisiana cases in which the Attorney General's report on the competitive factors was dispensed with, as authorized by SUMMARY REPORT BY THE ATTORNEY GENERAL the Bank Merger Act, to permit the Federal Reserve Request for report dispensed with as authorized by System to act immediately to safeguard depositors. the Bank Merger Act. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

292 79th Annual Report, 1992 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1992—Continued BASIS FOR APPROVAL BY THE FEDERAL RESERVE target institutions have assets of $181.0 million. (1/31/92) The parties operate in the same market. The applicant has assets of $422.4 million; the The banking factors and considerations relating target institutions have assets of $1.5 billion. The to the convenience and needs of the community RTC has recommended immediate action by the are consistent with approval. Federal Reserve System to prevent the probable failure of Pelican Homestead Savings Association. The Provident Bank of Kentucky, Alexandria, Titonka Savings Bank, Titonka, Iowa to acquire Kentucky to merge with Peoples Federal Savthe Forest City, Iowa, branch of Home Federal ings & Loan Association of Bellevue, Bellevue, Savings and Loan Association, Algona, Iowa Kentucky, through Provident Bank of Boone County, Bellevue, Kentucky, a wholly owned SUMMARY REPORT BY THE ATTORNEY GENERAL Request for report dispensed with as authorized by subsidiary; and with Suburban Federal Savthe Bank Merger Act. ings & Loan Association of Covington, Kentucky, through Provident Bank of Kenton BASIS FOR APPROVAL BY THE FEDERAL RESERVE County, Covington, Kentucky, a wholly owned (1/31/92) subsidiary The applicant has assets of $49 million; the target institution has assets of $4 million. The RTC has SUMMARY REPORT BY THE ATTORNEY GENERAL recommended immediate action by the Federal (1/28/92) Reserve System to prevent the probable failure of The proposed transaction would not be signifi- Home Federal Savings and Loan Association. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (2/28/92) Bank of Suffolk, Suffolk, Virginia to acquire the The applicant has assets of $79.6 million; the assets and liabilities of the Whaleyville, Virginia, target institutions have assets of $116 million. The branch of Sovran Bank, N.A., Richmond, parties operate in the same market. Virginia The banking factors and considerations relating SUMMARY REPORT BY THE ATTORNEY GENERAL to the convenience and needs of the community (1/14/92) are consistent with approval. The proposed transaction would not be significantly adverse to competition. The State Bank and Trust Company, Defiance, BASIS FOR APPROVAL BY THE FEDERAL RESERVE Ohio to acquire the assets and liabilities of the (2/5/92) Delta, Lyon, and Wauseon branches of The The applicant has assets of $51.3 million; the Society Bank and Trust Company, Toledo, Ohio target institution has assets of $9.3 million. The parties operate in the same market. SUMMARY REPORT BY THE ATTORNEY GENERAL The banking factors and considerations relating (1/28/92) to the convenience and needs of the community The proposed transaction would not be signifiare consistent with approval. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/3/92) Chemical Bank, New York, New York, to The applicant has assets of $183.7 million; the acquire four branches of Anchor Savings Bank, target institutions have assets of $42.4 million. FSB, Hewlett, New York, through its wholly The parties operate in the same market. owned subsidiary CBC Interim Federal Sav- The banking factors and considerations relating ings Bank 2, New York, New York to the convenience and needs of the community SUMMARY REPORT BY THE ATTORNEY GENERAL are consistent with approval. (11/25/91) The proposed transaction would not be significantly adverse to competition. CivicBank of Commerce, Oakland, California BASIS FOR APPROVAL BY THE FEDERAL RESERVE to acquire the assets and liabilities of the Walnut (2/5/92) Creek and Fremont branches of American The applicant has assets of $107.9 billion; the Bank & Trust Company, San Jose, California Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 293 16.—Continued SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (2/4/92) (3/6/92) The proposed transaction would not be signifi- The applicant has assets of $72.9 million; the cantly adverse to competition. target institution has assets of $9.7 million. The RTC has recommended immediate action by the BASIS FOR APPROVAL BY THE FEDERAL RESERVE Federal Reserve System to prevent the probable (3/5/92) failure of CorEast Federal Savings Bank. The applicant has assets of $349 million; the target institutions have assets of $37.9 million. The parties operate in the same market. Central Fidelity Bank, Richmond, Virginia to The banking factors and considerations relating acquire the assets and liabilities of the Blacksto the convenience and needs of the community burg, Virginia, branch of CorEast Federal Savare consistent with approval. ings Bank, Richmond, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL Centura Bank, Rocky Mount, North Carolina Request for report dispensed with as authorized by to merge with First Federal Savings Association, the Bank Merger Act. Raleigh, North Carolina BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/6/92) SUMMARY REPORT BY THE ATTORNEY GENERAL Request for report dispensed with as authorized by The applicant has assets of $6.7 billion; the target the Bank Merger Act. institution has assets of $16.8 million. The parties operate in the same market. The RTC has recom- BASIS FOR APPROVAL BY THE FEDERAL RESERVE mended immediate action by the Federal Reserve (3/6/92) System to prevent the probable failure of CorEast The applicant has assets of $2.5 billion; the target Federal Savings Bank. institution has assets of $87.4 million. The parties do not operate in the same market. The banking factors and considerations relating First Virginia Bank-Southwest, Roanoke, Virto the convenience and needs of the community ginia to acquire the assets and liabilities of eight are consistent with approval. branches of CorEast Federal Savings Banks, Richmond, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL First Virginia Bank of Augusta, Staunton, Vir- Request for report dispensed with as authorized by ginia to acquire the assets and liabilities of the the Bank Merger Act. Staunton branch of CorEast Federal Savings Bank, Richmond, Virginia BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/6/92) SUMMARY REPORT BY THE ATTORNEY GENERAL The applicant has assets of $345.1 million; the Request for report dispensed with as authorized by target institutions have assets of $236.0 million. the Bank Merger Act. The RTC has recommended immediate action by BASIS FOR APPROVAL BY THE FEDERAL RESERVE the Federal Reserve System to prevent the proba- (3/6/92) ble failure of CorEast Federal Savings Bank. The applicant has assets of $73.5 million; the target institution has assets of $13.4 million. The First Virginia Bank-Piedmont, Lynchburg, Vir- RTC has recommended immediate action by the ginia to acquire the assets and liabilities of three Federal Reserve System to prevent the probable Lynchburg, Virginia, branches of CorEast Fedfailure of CorEast Federal Savings Bank. eral Savings Bank, Richmond, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL Central Virginia Bank, Powhatan, Virginia to Request for report dispensed with as authorized by acquire the assets and liabilities of the Powhatan the Bank Merger Act. branch of CorEast Federal Savings Bank, Rich- BASIS FOR APPROVAL BY THE FEDERAL RESERVE mond, Virginia (3/6/92) SUMMARY REPORT BY THE ATTORNEY GENERAL The applicant has assets of $170.3 million; the Request for report dispensed with as authorized by target institutions have assets of $57.8 million. the Bank Merger Act. The RTC has recommended immediate action Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

294 79th Annual Report, 1992 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1992—Continued by the Federal Reserve System to prevent the Virginia, branch of CorEast Federal Savings probable failure of CorEast Federal Savings Bank. Bank, Richmond, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL Request for report dispensed with as authorized by First Virginia Bank-Franklin County, Lynchthe Bank Merger Act. burg, Virginia to acquire the assets and liabilities of the Hardy, Virginia, branch of CorEast Fed- BASIS FOR APPROVAL BY THE FEDERAL RESERVE eral Savings Bank, Richmond, Virginia (3/6/92) The applicant has assets of $46.8 million; the SUMMARY REPORT BY THE ATTORNEY GENERAL Request for report dispensed with as authorized by target institution has assets of $7.9 million. The the Bank Merger Act. RTC has recommended immediate action by the Federal Reserve System to prevent the probable BASIS FOR APPROVAL BY THE FEDERAL RESERVE failure of CorEast Federal Savings Bank. (3/6/92) The applicant has assets of $121.6 million; the target institution has assets of $5.8 million. The First State Bank of Arkansas, Trumann, Arkan- RTC has recommended immediate action by the sas to acquire the assets and liabilities of the Federal Reserve System to prevent the probable Trumann, Arkansas, branch of United Federal failure of CorEast Federal Savings Bank. Savings and Loan Association, Jonesboro, Arkansas The State Bank of the Alleghenies, Covington, SUMMARY REPORT BY THE ATTORNEY GENERAL Virginia to acquire the assets and liabilities of the Request for report dispensed with as authorized by Clifton Forge, Virginia, branch of CorEast Fed- the Bank Merger Act. eral Savings Bank BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/13/92) SUMMARY REPORT BY THE ATTORNEY GENERAL Request for report dispensed with as authorized by The applicant has assets of $32.8 million; the the Bank Merger Act. target institution has assets of $3.4 million. The RTC has recommended immediate action by the BASIS FOR APPROVAL BY THE FEDERAL RESERVE Federal Reserve System to prevent the probable (3/6/92) failure of CorEast Federal Savings Bank. The applicant has assets of $74.5 million; the target institution has assets of $17.8 million. The RTC has recommended immediate action by the Commercial Bank of Florida, Miami, Florida to Federal Reserve System to prevent the probable acquire the assets and liabilities of the South failure of CorEast Federal Savings Bank. Dixie, Bird Road, and Sunset West branches of Professional Federal Savings Bank First Virginia Bank-Highlands, Covington, Vir- SUMMARY REPORT BY THE ATTORNEY GENERAL ginia to acquire the assets and liabilities of the Request for report dispensed with as authorized by Covington, Virginia, branch of CorEast Fed- the Bank Merger Act. eral Savings Bank, Richmond, Virginia BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (3/13/92) Request for report dispensed with as authorized by The applicant has assets of $144.5 million; the the Bank Merger Act. target institutions have assets of $119.5 million. The State has recommended immediate action by BASIS FOR APPROVAL BY THE FEDERAL RESERVE the Federal Reserve System to prevent the proba- (3/6/92) ble failure of Professional Federal Savings Bank. The applicant has assets of $115.1 million; the target institution has assets of $10 million. The RTC has recommended immediate action by the Chemical Bank, New York, New York to merge Federal Reserve System to prevent the probable with Central Federal Savings Bank, Mineola, failure of CorEast Federal Savings Bank. New York SUMMARY REPORT BY THE ATTORNEY GENERAL Regency Bank, Richmond, Virginia to acquire Request for report dispensed with as authorized by the assets and liabilities of the Richmond, the Bank Merger Act. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 295 16.—Continued BASIS FOR APPROVAL BY THE FEDERAL RESERVE RTC has recommended immediate action by the (3/13/92) Federal Reserve System to prevent the probable The applicant has assets of $138.9 million; the failure of Augusta Federal Savings Association. target institution has assets of $485 million. The parties operate in the same market. SouthTrust Bank of Pinellas County, St. Peters- The banking factors and considerations relating burg, Florida to acquire the assets and liabilities to the convenience and needs of the community of the New Port Richey branch of Mid State are consistent with approval. Federal Savings Bank, Hudson, Florida SUMMARY REPORT BY THE ATTORNEY GENERAL Minden Bank & Trust Company, Minden, Lou- Request for report dispensed with as authorized by isiana to merge with Webster Bank & Trust the Bank Merger Act. Company, Minden, Louisiana BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (3/16/92) (1/7/92) The applicant has assets of $305.2 million; the The proposed transaction would not be signifi- target institution has assets of $13.3 million. The cantly adverse to competition. RTC has recommended immediate action by the BASIS FOR APPROVAL BY THE FEDERAL RESERVE Federal Reserve System to prevent the probable (3/13/92) failure of Mid State Federal Savings Bank. The applicant has assets of $124.1 million; the target institution has assets of $35.9 million. The Meridian Bank, Reading, Pennsylvania to parties operate in the same banking market. merge with Bell Federal Savings Bank, Upper The banking factors and considerations relating Darby, Pennsylvania to the convenience and needs of the community SUMMARY REPORT BY THE ATTORNEY GENERAL are consistent with approval. Request for report dispensed with as authorized by the Bank Merger Act. Plaza Bank of Miami, Miami, Florida to acquire the assets and liabilities of the Coral Gables and BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/20/92) Sunshine branches of Professional Federal Sav- The applicant has assets of $9.7 billion; the target ings Bank, Coral Gables, Florida institution has assets of $471.0 million. The RTC SUMMARY REPORT BY THE ATTORNEY GENERAL has recommended immediate action by the Fed- Request for report dispensed with as authorized by eral Reserve System to prevent the probable failthe Bank Merger Act. ure of Bell Federal Savings Bank. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/13/92) The Provident Bank to merge with Merit Sav- The applicant has assets of $60.1 million; the ings Association through Merit Savings Bank, target institutions have assets of $18.2 million. both of Cincinnati, Ohio The RTC has recommended immediate action by SUMMARY REPORT BY THE ATTORNEY GENERAL the Federal Reserve System to prevent the proba- (3/11/92) ble failure of Professional Federal Savings Bank. The proposed transaction would not be significantly adverse to competition. First Virginia Bank-Central Maryland, Bel Air, BASIS FOR APPROVAL BY THE FEDERAL RESERVE Maryland to acquire the assets and liabilities of (3/20/92) the Catonsville, Maryland, branch of Augusta The applicant has assets of $3.4 billion; the target Federal Savings Association, Baltimore, institution has assets of $107.9 million. Applicant Maryland and Thrift operate in the same market. SUMMARY REPORT BY THE ATTORNEY GENERAL The banking factors and considerations relating Request for report dispensed with as authorized by to the convenience and needs of the community the Bank Merger Act. are consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/13/92) The Provident Bank, Cincinnati, Ohio to merge The applicant has assets of $274.4 million; the with Thrift Savings and Loan Co., Cincinnati, target institution has assets of $9.9 million. The Ohio Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

296 79th Annual Report, 1992 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1992—Continued SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/20/92) (4/29/92) The proposed transaction would not be signifi- The applicant has assets of $3.2 billion; the target cantly adverse to competition. institution has assets of $971.6 million. The parties operate in the same market. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/20/92) The banking factors and considerations relating to the convenience and needs of the community The applicant has assets of $3.4 billion; the target are consistent with approval. institution has assets of $132.2 million. The parties operate in the same market. First Source Bank, South Bend, Indiana to The banking factors and considerations relating merge with Farmers State Bank of Wyatt, to the convenience and needs of the community Wyatt, Indiana are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (4/7/92) Mercantile Bank of Kansas City, Kansas City, The proposed transaction would not be signifi- Missouri to acquire the assets and liabilities of cantly adverse to competition. the Independence Center branch of Home BASIS FOR APPROVAL BY THE FEDERAL RESERVE Federal Savings Association of Kansas City, (5/7/92) Missouri The applicant has assets of $1.2 billion; the target SUMMARY REPORT BY THE ATTORNEY GENERAL institution has assets of $83 million. The parties Request for report dispensed with as authorized by operate in the same market. the Bank Merger Act. The banking factors and considerations relating BASIS FOR APPROVAL BY THE FEDERAL RESERVE to the convenience and needs of the community (3/20/92) are consistent with approval. The applicant has assets of $552 million; the target institution has assets of $72 million. The OTS has Mercantile Bank of Kansas City to merge with recommended immediate action by the Federal American Bank, Kansas City, and American Reserve System to prevent the probable failure of Bank of Platte County, both of Kansas City, Home Federal Savings Association. Missouri SUMMARY REPORT BY THE ATTORNEY GENERAL Peoples State Bank of Plainview, Plainview, (4/14/92) Minnesota to merge with Eastwood Bank St. The proposed transaction would not be signifi- Charles, St. Charles, Minnesota cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (5/18/92) (3/20/92) The applicant has assets of $552 million; the target The proposed transaction would not be signifiinstitutions have assets of $352 million. The parcantly adverse to competition. ties operate in the same market. BASIS FOR APPROVAL BY THE FEDERAL RESERVE The banking factors and considerations relating (3/23/92) to the convenience and needs of the community The applicant has assets of $42.6 million; the are consistent with approval. target institution has assets of $8.9 million. The parties operate in the same market. Comerica Bank, Detroit, Michigan to merge The banking factors and considerations relating with Manufacturers Bank, N.A., Detroit, to the convenience and needs of the community Michigan are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (5/6/92) Valley Bank of Nevada to merge with Security The proposed transaction would not be signifi- Pacific Bank Nevada, N.A., both of Las Vegas, cantly adverse to competition. Nevada BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (5/19/92) (3/20/92) The applicant has assets of $12.2 billion; the target The proposed transaction would not be signifi- institution has assets of $12.0 billion. The parties cantly adverse to competition. operate in the same market. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 297 16.—Continued The banking factors and considerations relating of American Savings Bank, White Plains, New to the convenience and needs of the community York, and three branches of Riverhead Savings are consistent with approval. Bank, Riverhead, New York SUMMARY REPORT BY THE ATTORNEY GENERAL Commercial Trust and Savings Bank, Mitchell, Request for report dispensed with as authorized by South Dakota to merge with Sanborn County the Bank Merger Act. Bank, Woonsocket, South Dakota BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (6/12/92) The proposed transaction would not be signifi- The applicant has assets of $37.3 million; the cantly adverse to competition. target institutions have assets of $691 million. The BASIS FOR APPROVAL BY THE FEDERAL RESERVE State has recommended immediate action by the (5/27/92) Federal Reserve System to prevent the probable The applicant has assets of $141.6 million; the failure of American Savings Bank and Riverhead target institution has assets of $17.9 million. The Bank. parties do not operate in the same market. Johnstown Bank & Trust Company, The banking factors and considerations relating Johnstown, Pennsylvania to merge with People to the convenience and needs of the community Bank One, West Lebanon, Pennsylvania are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL Manufacturers and Traders Trust Company, (6/21/92) Buffalo, New York to merge with Central Trust The proposed transaction would not be signifi- Company, Rochester, New York, and Endicott cantly adverse to competition. Trust Company, Endicott, New York BASIS FOR APPROVAL BY THE FEDERAL RESERVE (7/1/92) SUMMARY REPORT BY THE ATTORNEY GENERAL (4/16/92) The applicant has assets of $530.4 million; the The proposed transaction would not be signifi- target institution has assets of $18 million. The cantly adverse to competition. parties do not operate in the same market. The banking factors and considerations relating BASIS FOR APPROVAL BY THE FEDERAL RESERVE to the convenience and needs of the community (6/1/92) are consistent with approval. The applicant has assets of $7.0 billion; the target institutions have assets of $1.4 billion. The parties The Bank of Hampton Roads, Chesapeake, operate in the same market. Virginia to merge with Coastal Virginia Bank, The banking factors and considerations relating Virginia Beach, Virginia to the convenience and needs of the community are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (5/5/92) The proposed transaction would not be signifi- Banco Popular de Puerto Rico, New York, New cantly adverse to competition. York to acquire the assets and liabilities of American Savings Bank, New York, New York BASIS FOR APPROVAL BY THE FEDERAL RESERVE (7/9/92) SUMMARY REPORT BY THE ATTORNEY GENERAL The applicant has assets of $50.5 million; the Request for report dispensed with as authorized by target institution has assets of $17.4 million. The the Bank Merger Act. parties operate in the same market. BASIS FOR APPROVAL BY THE FEDERAL RESERVE The banking factors and considerations relating (6/12/92) to the convenience and needs of the community The applicant has assets of $8.9 million; the target are consistent with approval. institution has assets of $622.1 million. The State has recommended immediate action by the Fed- Central Fidelity Bank, Richmond, Virginia to eral Reserve System to prevent the probable fail- merge with Investors Federal Savings Bank, ure of American Savings Bank. Richmond, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL Bank of New York, New York, New York to Request for report dispensed with as authorized by acquire the assets and liabilities of six branches the Bank Merger Act. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

298 79th Annual Report, 1992 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1992—Continued BASIS FOR APPROVAL BY THE FEDERAL RESERVE The banking factors and considerations relating (7/10/92) to the convenience and needs of the community The applicant has assets of $6.8 billion; the target are consistent with approval. institution has assets of $875.4 million. The RTC has recommended immediate action by the Fed- The George Mason Bank, Fairfax, Virginia to eral Reserve System to prevent the probable failmerge with The Washington Bank, Falls ure of Investors Federal. Church, Virginia City Center Bank of Colorado, Denver, Colo- SUMMARY REPORT BY THE ATTORNEY GENERAL rado to merge with Security Bank of Colorado, Request for report dispensed with as authorized by Aurora, Colorado the Bank Merger Act. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (7/21/92) (9/18/92) The proposed transaction would not be signifi- The applicant has assets of $266.2 million; the cantly adverse to competition. target institution has assets of $23.8 million. The State has recommended immediate action by the BASIS FOR APPROVAL BY THE FEDERAL RESERVE Federal Reserve System to prevent the probable (8/5/92) failure of The Washington Bank. The applicant has assets of $18.8 million; the target institution has assets of $10.9 million. The parties operate in the same market. Demotte State Bank, Demotte, Indiana to The banking factors and considerations relating acquire the assets and liabilities of the Knox, to the convenience and needs of the community Indiana, branch of Ameritrust National Bank, are consistent with approval. Elkhart, Indiana Old Kent Bank & Trust Company, Grand SUMMARY REPORT BY THE ATTORNEY GENERAL (9/2/92) Rapids, Michigan to acquire the assets and liabil- The proposed transaction would not be signifiities of five branches of Great Lakes Bancorp, cantly adverse to competition. Lansing, Michigan BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (9/29/92) (8/3/92) The applicant has assets of $104 million; the target The proposed transaction would not be signifiinstitution has assets of $6.5 million. The parties cantly adverse to competition. do not operate in the same market. BASIS FOR APPROVAL BY THE FEDERAL RESERVE The banking factors and considerations relating (8/28/92) to the convenience and needs of the community The applicant has assets of $3.8 billion; the target are consistent with approval. institutions have assets of $66 million. Applicant and Branches operate in the same market. The banking factors and considerations relating Mellon Bank (MD), Rockville, Maryland to to the convenience and needs of the community acquire the assets and liabilities of eight branches are consistent with approval. of Standard Federal Savings Bank, Gaithersburg, Maryland Merrill Merchants Bank, Bangor, Maine to ac- SUMMARY REPORT BY THE ATTORNEY GENERAL quire the assets and liabilities of seven branches (9/8/92) of Fleet Bank of Maine, Portland, Maine The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. (8/27/92) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (10/2/92) cantly adverse to competition. The applicant has assets of $257 million; the target BASIS FOR APPROVAL BY THE FEDERAL RESERVE institutions have assets of $313.6 million. The (9/15/92) parties operate in the same market. The applicant, a de novo bank, and the target The banking factors and considerations relating institutions have assets of $73.6 million. The par- to the convenience and needs of the community ties operate in the same market. are consistent with approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 299 16.—Continued Centura Bank, Rocky Mount, North Carolina ida; Barnett Bank of Pasco County, Holiday, to acquire the assets and liabilities of the South Florida; Barnett Bank of Pinellas County, Glen Burnie Road branch of People Federal St. Petersburg, Florida; Barnett Bank of Polk Savings Bank, Wilmington, North Carolina County, Lakeland, Florida; Barnett Bank of Southwest Florida, Sarasota, Florida; Barnett SUMMARY REPORT BY THE ATTORNEY GENERAL Bank of Tallahassee, Tallahassee, Florida; Bar- (10/5/92) nett Bank of Volusia County, Deland, Florida; The proposed transaction would not be signifiand Barnett Bank of West Florida, Pensacola, cantly adverse to competition. Florida to acquire the assets and liabilities of BASIS FOR APPROVAL BY THE FEDERAL RESERVE branches of First Florida Bank, N.A., Tampa, (10/7/92) Florida The applicant has assets of $2.6 billion; the target institution has assets of $2.7 million. The parties SUMMARY REPORT BY THE ATTORNEY GENERAL operate in the same market. None received. The banking factors and considerations relating BASIS FOR APPROVAL BY THE FEDERAL RESERVE to the convenience and needs of the community (10/28/92) are consistent with approval. The applicants have assets of $9.2 billion; the target institutions have combined assets of Custer County Bank, Westcliffe, Colorado to $2.1 billion. In each case, the acquiring bank and acquire the assets and liabilities of the Fountain the branches whose assets and liabilities were to branch of Green Mountain Bank, Lakewood, be acquired operate in the same market. Colorado In each case, the banking factors and considerations relating to the convenience and needs of the SUMMARY REPORT BY THE ATTORNEY GENERAL community are consistent with approval. (9/8/92) The proposed transaction would not be significantly adverse to competition. Farmers State Bank of Worden, Worden, Montana to merge with The First National Bank in BASIS FOR APPROVAL BY THE FEDERAL RESERVE Hysham, Hysham, Montana (10/9/92) The applicant has assets of $8 million; the target SUMMARY REPORT BY THE ATTORNEY GENERAL institution has assets of $10 million. The parties (10/1/92) operate in the same market. The proposed transaction would not be signifi- The banking factors and considerations relating cantly adverse to competition. to the convenience and needs of the community BASIS FOR APPROVAL BY THE FEDERAL RESERVE are consistent with approval. (10/29/92) The applicant has assets of $12.7 million; the Meridian Bank, Reading, Pennsylvania to target institution has assets of $8.9 million. The merge with The Peoples National Bank of Leba- parties operate in the same market. non, Lebanon, Pennsylvania The banking factors and considerations relating to the convenience and needs of the community SUMMARY REPORT BY THE ATTORNEY GENERAL are consistent with approval. (10/5/92) The proposed transaction would not be significantly adverse to competition. Centura Bank, Rocky Mount, North Carolina to merge with Brevard Federal Savings and BASIS FOR APPROVAL BY THE FEDERAL RESERVE Loan Association, Brevard, North Carolina (10/26/92) The applicant has assets of $10.3 billion; the target SUMMARY REPORT BY THE ATTORNEY GENERAL institution has assets of $142.8 billion. The parties (9/8/92) do not operate in the same market. The proposed transaction would not be signifi- The banking factors and considerations relating cantly adverse to competition. to the convenience and needs of the community BASIS FOR APPROVAL BY THE FEDERAL RESERVE are consistent with approval. (11/18/92) The applicant has assets of $2.6 billion; the target Barnett Bank of Highlands County, Sebring, institution has assets of $130.9 million. The par- Florida; Barnett Bank of Naples, Naples, Flor- ties do not operate in the same market. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

300 79th Annual Report, 1992 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1992—Continued The banking factors and considerations relating SUMMARY REPORT BY THE ATTORNEY GENERAL to the convenience and needs of the community (9/27/92) are consistent with approval. The proposed transaction would not be significantly adverse to competition. The Merchants Bank of New York, New York, New York to merge with First New York Bank BASIS FOR APPROVAL BY THE FEDERAL RESERVE for Business, New York, New York (11/27/92) The applicant has assets of $218.7 million; the SUMMARY REPORT BY THE ATTORNEY GENERAL target institution has assets of $45.3 million. The Request for report dispensed with as authorized by parties do not operate in the same market. the Bank Merger Act. The banking factors and considerations relating BASIS FOR APPROVAL BY THE FEDERAL RESERVE to the convenience and needs of the community (11/13/92) are consistent with approval. The applicant has assets of $683 million; the target institution has assets of $418 million. The State Equibank, Pittsburgh, Pennsylvania to acquire has recommended immediate action by the Fed- Integra National Bank/Pittsburgh, Pittsburgh, eral Reserve System to prevent the probable fail- Pennsylvania ure of First New York Bank for Business. SUMMARY REPORT BY THE ATTORNEY GENERAL Old Kent Bank, Elmhurst, Illinois to merge with The proposed transaction would not be signifi- UnibancTrust/Dupage, Chicago, Illinois, and cantly adverse to competition. First Federal of Elgin, FSA, Elgin, Illinois BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (11/30/92) (10/21/92) The applicant has assets of $2.8 billion; the target The proposed transaction would not be signifi- institution has assets of $5.3 billion. The parties cantly adverse to competition. operate in the same market. BASIS FOR APPROVAL BY THE FEDERAL RESERVE The banking factors and considerations relating (11/17/92) to the convenience and needs of the community The applicant has assets of $1.2 billion; the target are consistent with approval. institutions have assets of $263.4 million. The parties operate in the same market. Fifth Third Bank, Cincinnati, Ohio to acquire The banking factors and considerations relating the assets and liabilities of the Chillicothe and to the convenience and needs of the community Oxford, Ohio, branches of Home Savings Bank are consistent with approval. of America, FSB, Irwindale, California The Bank of New York, New York, New York to SUMMARY REPORT BY THE ATTORNEY GENERAL acquire the assets and liabilities of the retail oper- The proposed transaction would not be signifiations of Barclays Bank of New York, New cantly adverse to competition. York, New York BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (12/8/92) (10/7/92) The applicant has assets of $5.6 billion; the target The proposed transaction would not be signifi- institutions have assets of $400 million. The parcantly adverse to competition. ties do not operate in the same market. The banking factors and considerations relating BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11/4/92) to the convenience and needs of the community The applicant has assets of $41.3 billion; the target are consistent with approval. operations have assets of $2.1 billion. The parties operate in the same market. Bank of Neosho, Neosho, Missouri to merge with The banking factors and considerations relating Anderson State Bank, Anderson, Missouri, and to the convenience and needs of the community Citizens State Bank, Granby, Missouri are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL The Peoples Bank and Trust Company, Selma, (12/2/92) Alabama to merge with The Citizens Bank, The proposed transaction would not be signifi- Prattville, Alabama cantly adverse to competition. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 301 16.—Continued BASIS FOR APPROVAL BY THE FEDERAL RESERVE The banking factors and considerations relating (12/16/92) to the convenience and needs of the community The applicant has assets of $92.8 million; the are consistent with approval. target institutions have assets of $213 million. The parties operate in the same market. First United Bank, Aurora, Colorado to merge The banking factors and considerations relating with The Bank of Parker, Parker, Colorado to the convenience and needs of the community SUMMARY REPORT BY THE ATTORNEY GENERAL are consistent with approval. (12/1/92) The proposed transaction would not be signifi- Belcaro Bank, Glendale, Colorado to merge with cantly adverse to competition. Denver Tec Bank, Denver, Colorado, and The Professional Bank of Colorado, Englewood, BASIS FOR APPROVAL BY THE FEDERAL RESERVE Colorado (12/23/92) The applicant has assets of $29.8 million; the SUMMARY REPORT BY THE ATTORNEY GENERAL target institution has assets of $19.2 million. The (11/24/92) parties operate in the same market. The proposed transaction would not be signifi- The banking factors and considerations relating cantly adverse to competition. to the convenience and needs of the community BASIS FOR APPROVAL BY THE FEDERAL RESERVE are consistent with approval. (12/16/92) The applicant has assets of $40.6 million; the Mergers Approved Involving Wholly Owned target institutions have assets of $24.9 million. Subsidiaries of the Same Bank Holding The parties operate in the same market. Company The banking factors and considerations relating to the convenience and needs of the community The following transactions involve banks that are subsidiaries of the same bank holding company. In are consistent with approval. each case, the summary report by the Attorney General indicates that the transaction would not Peoples Bank, Bloomington, Illinois to merge have a significantly adverse effect on competition with Lexington Bank, Lexington, Illinois because the proposed merger is essentially a cor- SUMMARY REPORT BY THE ATTORNEY GENERAL porate reorganization. The Board of Governors, (12/15/92) the Federal Reserve Bank, or the Secretary of the The proposed transaction would not be signifi- Board of Governors, whichever approved the cantly adverse to competition. application, determined that the competitive BASIS FOR APPROVAL BY THE FEDERAL RESERVE effects of the proposed transaction, the financial (12/21/92) and managerial resources and prospects of the The applicant has assets of $356.6 million; the banks concerned, as well as the convenience and target institution has assets of $93.6 million. The needs of the community to be served were consisparties operate in the same market. tent with approval. Assets Institution! (millions Date of approval of dollars) Chemical Bank, New York, New York 107,888 1/30/92 Merger Chemical Bank Delaware, Wilmington, Delaware 1,754 Old Kent Bank and Trust Company, Grand Rapids, Michigan 3,500 1/29/92 Merger Old Kent Bank of Lansing, N.A., Lansing, Michigan 48 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

302 79th Annual Report, 1992 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1992—Continued Assets Date of Institution' (millions approval of dollars) Eastern Michigan Bank, Croswell, Michigan (formerly State Bank of Croswell) 93 2/11/92 Merger Sanilac County Bank, Deckerville, Michigan 38 Texas State Bank, McAllen, Texas 186 2/24/92 Merger Mid Valley Bank, Weslanco, Texas 92 Harlingen State Bank, Harlingen, Texas 101 Tri-State Bank, Denver, Colorado 50 3/10/92 Merger Boulder Tri-State Bank, Boulder, Colorado 16 First of America Bank-Ann Arbor, Ann Arbor, Michigan 742 4/13/92 Merger First of America Bank-Livingston, Howell, Michigan 157 Citizens Fidelity Bank and Trust Co., Louisville, Kentucky 5,630 4/22/92 Merger Citizens Fidelity Bank and Trust Co. of Hardin County, Elizabethtown, Kentucky 218 Caliber Bank, Phoenix, Arizona 245 5/15/92 Merger Bank of America Arizona, Phoenix, Arizona (30 branches) 1,400 Security Pacific Bank Arizona, Phoenix, Arizona (10 branches) 554 Farmers State Bank & Trust Company of Superior, Superior, Nebraska 44 5/22/92 Merger Hardy State Bank, Hardy, Nebraska 8 First of American Bank, Ann Arbor, Michigan 904 5/29/92 Merger First of America Bank-Plymouth, N.A., Plymouth, Michigan .. 119 Vectra Bank, Denver, Colorado 24 7/16/92 Merger Vectra Bank, Denver, Colorado 21 Vectra Bank of Lakewood, Lakewood, Colorado 17 Vectra Bank of Thornton, Thornton, Colorado 12 Vectra Bank of Wheat Ridge, Wheat Ridge, Colorado 9 Vectra Bank of Federal Heights, Federal Heights, Colorado ... 14 Citizens Fidelity B&T Company, Louisville, Kentucky 5,930 7/17/92 Merger Citizens Fidelity B&T Company, LaGrange, Kentucky 137 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 303 16.—Continued Assets Institutionl (millions Date of approval of dollars) Farmers State Bank of Western Illinois, New Windsor, Illinois 46 7/27/92 Merger Bank of Alexis, Alexis, Illinois 16 City Center Bank of Colorado, Aurora, Colorado 20 8/5/92 Merger Security Bank of Colorado, Aurora, Colorado 11 Fleet Bank of New York, Albany, New York 5,910 8/21/92 Merger Fleet Bank of New York, N.A., Buffalo, New York 3,951 Bank One Champaign-Urbana, Monticello, Illinois 209 9/3/92 Merger Bank One Monticello Monticello Illinois 88 Cole Taylor Bank Chicago Illinois 1 258 10/9/92 Merger Cole Taylor Bank/Yorktown, Lombard, Illinois 119 First Interstate Bank of Commerce, Billings, Montana (the successor of First Interstate Bank of Billings, Montana) ... 296 10/26/92 Merger First Interstate Bank of Missoula, N.A., Missoula, Montana 195 First Interstate Bank of Hardin, Hardin, Montana 46 First Interstate Bank of Miles City, Miles City, Montana 40 First Interstate Bank of Billings Heights, Billings, Montana 34 First Interstate Bank of West Billings, Billings, Montana 45 First Interstate Bank of Colstrip, Colstrip, Montana 12 First Interstate Bank of South Missoula, Missoula, Montana (a de novo bank) Community Bank and Trust Company, Forest City, Pennsylvania ... 176 12/17/92 Merger First National Bank of Nicholson, Nicholson, Pennsylvania 122 1. Each proposed transaction was to be effected under include the acquisition of only certain assets and liabilithe charter of the first named bank. The entries are in ties of the affiliated bank. chronological order of approval. Some transactions Mergers Approved Involving a Nonoperating sition of the surviving bank by the holding com- Institution with an Existing Bank pany, the merger would have no effect on competition. The Board of Governors, the Federal The following transactions have no significant Reserve Bank, or the Secretary of the Board, effect on competition; they merely facilitate the whichever approved the application, determined acquisition of the voting shares of a bank (or that the proposal would, in itself, have no adverse banks) by a holding company. In such cases, the competitive effects and that the financial factors summary report by the Attorney General indicates and considerations relating to the convenience that the transaction will merely combine an and needs of the community were consistent with existing bank with a nonoperating institution; approval. in consequence, and without regard to the acqui- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

304 79th Annual Report, 1992 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1992—Continued Assets Date of Institution' (millions of dollars)2 approval Interim Central Bank, Claysburg, Pennsylvania 2/26/92 Merger Central Bank, Claysburg, Pennsylvania 228 Orange Interim Bank, Rocky Mount, North Carolina 9/24/92 Merger Centura Banks, Rocky Mount, North Carolina 2,600 The KSB Bank, Killbuck, Ohio 10/22/92 Merger The Killbuck Savings Bank Company, Killbuck, Ohio 125 1. Each proposed transaction was to be effected under 2. Where no assets are listed, the bank is newly orga'the 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

306 79th Annual Report, 1992 Board of Governors of the Federal Reserve System December 31,1992 Members Term expires ALAN GREENSPAN of New York, Chairmanl January 31, 2006 DAVID W. MULLINS, JR., of Arkansas, Vice Chairman1 January 31, 1996 WAYNE D. ANGELL of Kansas January 31, 1994 SUSAN M. PHILLIPS of Iowa January 31, 1998 LAWRENCE B. LINDSEY of Virginia January 31, 2000 JOHN P. LAWARE of Massachusetts January 31, 2002 EDWARD W. KELLEY, JR., of Texas January 31, 2004 Officers 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, Associate Director for Federal Reserve System Affairs Dolores S. Smith, Associate Director Bob Stahly Moore, Special Assistant Maureen P. English, Assistant Director to the Board McNulty, Assistant Director Irene s Lynn Fox, Special Assistant to the Board DIVISION OF BANKING SUPERVISION Diane E. Werneke, Special Assistant AND REGULATION to the Board Richard Spillenkothen, Director Stephen C. Schemering, Deputy Director LEGAL DIVISION °°" E- ^ ^ ^ c i a te Director , ... .. .. . . „ .„ , Frederick M. Struble, Associate Director J. Virgil Mattingl y, TJr., General Counsel ___.„. . _ , . . . _. !, , . „ , William A. Ryback, Associate Director Sc coutt G.A 1Alvarez, Associate General __ , . _/ _ Counsel Herbert A. Biern, Deputy Associate Richard M. Ashton, Associate _ ire(LO1L . ^ ^. A General Counsel R°ger T- Cole' DePu*y Associate Director Oliver Ireland, Associate General James L Gamer' DePuty Associate Director Counsel Howard Amer, Assistant Director Kathleen M. O'Day, Associate General Gerald A. Edwards, Jr., Assistant Director Counsel James D. Goetzinger, Assistant Director MaryEllen A. Brown, Assistant Laura M. Homer, Assistant Director to the General Counsel . Houpt, Jr., Assistant Director James v Jack P. Jennings, Assistant Director OFFICE OF THE SECRETARY Michael G. Martinson, Assistant Director William W. Wiles, Secretary Rhoger H Pugh, Assistant Director Jennifer J. Johnson, Associate Secretary Sidney M. Sussan, Assistant Director Barbara R. Lowrey, Associate Secretary Molly S. Wassom, Assistant Director Ellen Maland, Assistant Secretary 1. The designations as Chairman and Vice Chairman expire on March 2, 1996, and July 22, 1995, respectively, unless the service of these members of the Board shall have terminated sooner. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 307 DIVISION OF INTERNATIONAL FINANCE DIVISION OF HUMAN Edwin M. Truman, Staff Director RESOURCES MANAGEMENT Larry J. Promisel, Senior David L. Shannon, Director Associate Director John R. Weis, Associate Director Charles J. Siegman, Senior Anthony V. DiGioia, Assistant Director Associate Director Joseph H. Hayes, Jr., Assistant Director Dale W. Henderson, Associate Director Fred Horowitz, Assistant Director David H. Howard, Senior Adviser Donald B. Adams, Assistant Director OFFICE OF THE CONTROLLER Peter Hooper III, Assistant Director George E. Livingston, Controller Karen H. Johnson, Assistant Director Stephen J. Clark, Assistant Controller Ralph W. Smith, Jr., Assistant Director Darrell R. Pauley, Assistant Controller DIVISION OF RESEARCH DIVISION OF SUPPORT SERVICES AND STATISTICS Robert E. Frazier, Director Michael J. Prell, Director George M. Lopez, Assistant Director Edward C. Ettin, Deputy Director David L. Williams, Assistant Director William R. Jones, Associate Director Thomas D. Simpson, Associate Director Lawrence Slifman, Associate Director DIVISION OF INFORMATION David J. Stockton, Associate Director RESOURCES MANAGEMENT Martha Bethea, Deputy Stephen R. Malphrus, Director Associate Director Bruce M. Beardsley, Deputy Director Peter A. Tinsley, Deputy Marianne M. Emerson, Assistant Director Associate Director Po Kyung Kim, Assistant Director Myron L. Kwast, Assistant Director Raymond H. Massey, Assistant Director Patrick M. Parkinson, Assistant Director Edward T. Mulrenin, Assistant Director Martha S. Scanlon, Assistant Director Day W. Radebaugh, Jr., Assistant Director Joyce K. Zickler, Assistant Director Elizabeth B. Riggs, Assistant Director John J. Mingo, Adviser Richard C. Stevens, Assistant Director Levon H. Garabedian, Assistant Director (Administration) DIVISION OF FEDERAL RESERVE BANK OPERATIONS AND PAYMENT SYSTEMS DIVISION OF MONETARY AFFAIRS Clyde H. Farnsworth, Jr., Director Donald L. Kohn, Director David L. Robinson, Deputy Director David E. Lindsey, Deputy Director Charles W. Bennett, Assistant Director Brian F. Madigan, Assistant Director Jack Dennis, Jr., Assistant Director Richard D. Porter, Assistant Director Earl G. Hamilton, Assistant Director Normand R.V. Bernard, Special Assistant Jeffrey C. Marquardt, Assistant Director to the Board John H. Parrish, Assistant Director Louise L. Roseman, Assistant Director OFFICE OF STAFF DIRECTOR Florence M. Young, Assistant Director FOR MANAGEMENT S. David Frost, Staff Director OFFICE OF THE INSPECTOR GENERAL William C. Schneider, Jr., Project Director, Brent L. Bowen, Inspector General National Information Center Barry R. Snyder, Assistant Inspector Portia W. Thompson, Equal Employment General Opportunity Programs Officer Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

308 79th Annual Report, 1992 Federal Open Market Committee December 31,1992 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 THOMAS M. HOENIG, President, Federal Reserve Bank of Kansas City JERRY L. JORDAN, President, Federal Reserve Bank of Cleveland EDWARD W. KELLEY, JR., Board of Governors JOHN P. LAWARE, Board of Governors LAWRENCE B. LINDSEY, Board of Governors THOMAS C. MELZER, President, Federal Reserve Bank of St. Louis DAVID W. MULLINS, JR., Board of Governors SUSAN M. PHILLIPS, Board of Governors RICHARD F. SYRON, President, Federal Reserve Bank of Boston Alternate Members EDWARD G. BOEHNE, President, Federal Reserve Bank of Philadelphia SILAS KEEHN, President, Federal Reserve Bank of Chicago ROBERT D. MCTEER, JR., President, Federal Reserve Bank of Dallas JAMES H. OLTMAN, First Vice President, Federal Reserve Bank of New York GARY H. STERN, President, Federal Reserve Bank of Minneapolis Officers DONALD L. KOHN, RICHARD G. DAVIS, Secretary and Economist Associate Economist NORMAND R.V. BERNARD, THOMAS E. DAVIS, Deputy Secretary Associate Economist JOSEPH R. COYNE, DAVID E. LINDSEY, Assistant Secretary Associate Economist GARY P. GILLUM, ALICIA H. MUNNELL, Assistant Secretary Associate Economist J. VIRGIL MATTINGLY, LARRY J. PROMISEL, 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, DAVID J. STOCKTON, Economist Associate Economist JOHN M. DAVIS, Associate Economist WILLIAM J. MCDONOUGH, Manager of the System Open Market Account MARGARET L. GREENE, Deputy Manager for Foreign Operations, System Open Market Account JOAN E. LOVETT, Deputy Manager for Domestic Operations, System Open Market Account During 1992 the Federal Open Market Com- Policy Actions of the Federal Open Market Digitized for FRASER mittee held eight meetings (see Record of Committee in this REPORT.) http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 309 Federal Advisory Council December 31,1992 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, JR., 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—EUGENE A. MILLER, Chairman, President, and Chief Executive Officer, Comerica Incorporated, Detroit, Michigan District 8—DAN W. MITCHELL, Chairman and Chief Executive Officer, Old National Bancorp, Evansville, Indiana District 9—JOHN F. GRUNDHOFER, Chairman, President, and Chief Executive Officer, First Bank System, Inc., Minneapolis, Minnesota District 10—DAVID A. RISMILLER, Chairman, President, and Chief Executive Officer, FirsTier Financial, Inc., Omaha, Nebraska District 11—RONALD G. STEINHART, Chairman and Chief Executive Officer, Team Bank, Dallas, Texas District 12—RICHARD M. ROSENBERG, Chairman and Chief Executive Officer, Bank of America, San Francisco, California Officers RONALD G. STEINHART, President TERRENCE A. LARSEN, Vice President HERBERT V. PROCHNOW, Secretary WILLIAM J. KORSVIK, Associate Secretary Directors CHARLES S. SANFORD, JR. JOHN B. MCCOY E. B. ROBINSON, JR. The Federal Advisory Council met on Febru- from each of the twelve Federal Reserve ary 13-14, May 7-8, September 10-11, and Districts, is required by law to meet in Wash- November 5-6, 1992. The Board of Gover- ington at least four times each year and is nors met with the council on February 4, authorized by the Federal Reserve Act to May 8, September 11, and November 6, consult with, and advise, the Board on all 1992. The council, which is composed of matters within the jurisdiction of the Board, one representative of the banking industry Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

310 79th Annual Report, 1992 Consumer Advisory Council December 31,1992 Members BARRY A. ABBOTT, Partner, Morrison & Foerster, San Francisco, California JOHN R. ADAMS, Corporate Vice President and Compliance Officer, CoreStates Financial Corporation, Philadelphia, Pennsylvania JOHN A. BAKER, Senior Vice President, Equifax, Inc., Atlanta, Georgia VERONICA E. BARELA, Executive Director, NEWSED Community Development Corporation, Denver, Colorado MULUGETTA BIRRU, Executive Director, Urban Redevelopment Authority of Pittsburgh, Pittsburgh, Pennsylvania GENEVIEVE BROOKS, Deputy Borough President, Office of the Bronx Borough President, Bronx, New York TOYE L. BROWN, Director, Massachusetts Bay Transportation Authority, Boston, Massachusetts CATHY CLOUD, Enforcement Program Director, National Fair Housing Alliance, Washington, D.C. MICHAEL D. EDWARDS, President, Prairie Security Bank, Yelm, Washington GEORGE C. GALSTER, Visiting Senior Research Associate, The Urban Institute, Washington, D.C. 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 GARY S. HATTEM, Vice President, Community Development Group, Bankers Trust Company, New York, New York JULIA E. HILER, Executive Vice President, Sunshine Mortgage Corporation, Marietta, Georgia HENRY JARAMILLO, JR., President, Ranchers State Bank, Belen, New Mexico KATHLEEN E. KEEST, Staff Attorney, National Consumer Law Center, Boston, Massachusetts EDMUND MIERZWINSKI, Consumer Advocate, U.S. Public Interest Research Group, Washington, D.C. BERNARD F. PARKER, JR., Executive Director, Community Resource Projects, Detroit, Michigan JEAN POGGE, Vice President, Development Deposits, South Shore Bank, Chicago, Illinois JOHN V. SKINNER, President and Chief Executive Officer, Jewelers Financial Services, Inc., Irving, Texas NANCY HARVEY STEORTS, President, Nancy Harvey Steorts and Associates, Dallas, Texas LOWELL N. SWANSON, President (Retired), United Finance Company, Portland, Oregon MICHAEL W. TIERNEY, Program Director, Local Initiatives Support Corporation, Washington, D.C. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 311 Consumer Advisory Council—Continued Officers COLLEEN D. HERNANDEZ, Chairman DENNY D. DUMLER, Vice Chairman Executive Director, Kansas City Senior Vice President, Colorado Neighborhood Alliance, Kansas City, National Bank, Denver, Missouri Colorado 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 26, June 11, and October 29, 1992. 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 31,1992 Members DANIEL C. ARNOLD, Director, Farm & Home Financial Corporation, Houston, Texas JAMES L. BRYAN, President and Chief Executive Officer, TEXINS Credit Union, Richardson, Texas VANCE W. CHEEK, President and Chief Executive Officer, Home Federal Bank, FSB, Johnson City, Tennessee BEATRICE D'AGOSTINO, Chairman, President, and Chief Executive Officer, New Jersey Savings Bank, Somerville, New Jersey LYNN W. HODGE, President and Chief Executive Officer, United Savings Bank, Inc., Greenwood, South Carolina THOMAS J. HUGHES, President, Navy Federal Credit Union, Merrifield, Virginia 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, Chairman and Chief Executive Officer, The Dime Savings Bank of New York, FSB, New York, New York THOMAS R. RICKETTS, Chairman, President, and Chief Executive Officer, Standard Federal Bank, Troy, Michigan 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 LYNN W. HODGE, President DANIEL C. ARNOLD, 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 6, May 29, August 14, and Board on issues pertaining to the thrift indus- November 13, 1992. The council, which try and on various other matters within the Digitized ifso rc FomRApSosEeRd of representatives from credit Board's jurisdiction. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

312 79th Annual Report, 1992 Officers of Federal Reserve Banks, Branches, and Offices December 31,19921 BANK, Chairman2 President Vice President Branch, or 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.... Ellen V. Futter E. Gerald Corrigan Maurice R. James H. Oltman Greenberg Buffalo Herbert L. Washington James O. Aston Peter A. Benoliel Edward G. Boehne PHILADELPHIA. Jane G. Pepper William H. Stone, Jr. John R. Miller Jerry L. Jordan CLEVELAND3... A. William William H. Reynolds Hendricks Marvin Rosenberg Charles A. Cerino4 Cincinnati Robert P. Bozzone Harold J. Swart4 Pittsburgh RICHMOND3... Anne Marie Robert P. Black Whittemore Jimmie R. Henry J. Faison Monhollon Baltimore John R. Hardesty, Jr. Ronald B. Duncan4 Charlotte. Anne M. Allen Walter A. Varvel4 Culpeper JohnG. Stoides4 ATLANTA Edwin A. Huston Robert P. Forrestal Donald E. Nelson4 Leo Benatar Jack Guynn Birmingham Nelda P. Stephenson Fred R. Herr4 Jacksonville Lana Jane Lewis-Brent James D. Hawkins4 Miami Michael T. Wilson James T. Curry III Nashville Harold A. Black Melvyn K. Purcell New Orleans Victor Bussie Robert J. Musso CHICAGO3 Richard G. Cline Silas Keehn Robert M. Healey William C. Conrad Detroit J. Michael Moore Roby L.Sloan4 ST. LOUIS H. Edwin Trusheim Thomas C. Melzer Robert H. Quenon James R. Bowen Little Rock James R. Rodgers Karl W. Ashman Louisville Daniel L. Ash Howard Wells Seymour B. Johnson Raymond Laurence Memphis Delbert W. Johnson Gary H. Stern MINNEAPOLIS. Gerald A. Thomas E. Gainor Rauenhorst J. Frank Gardner John D. Johnson Helena Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 313 BANK, Chairman2 President Vice President Branch, or facility Deputy Chairman First Vice President in charge of Branch KANSAS CITY Burton A. Dole, Jr. Thomas M. Hoenig Herman Cain Henry R. Czerwinski Denver Barbara B. Grogan Kent M. Scott Oklahoma City Ernest L. Holloway David J. France Omaha Sheila Griffin Harold L. Shewmaker DALLAS Leo E. Linbeck, Jr. Robert D. McTeer, Jr. Cece Smith Tony J. Salvaggio El Paso Alvin T. Johnson Sammie C. Clay Houston Judy Ley Allen Robert Smith III4 San Antonio Roger R. Thomas H. Robertson Hemminghaus SAN FRANCISCO James A. Vohs Robert T. Parry Robert F. Erburu Patrick K. Barron Los Angeles Donald G. Phelps John F. Moore 4 Portland William A. Hilliard E. Ronald Liggett4 Salt Lake City Gary G. Michael Andrea P. Wolcott Seattle George F. Russell, Jr. Gordon R. G. Werkema4 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 Thomas C. Melzer, President of the Federal Reserve Bank of St. Louis, served as The Chairmen of the Federal Reserve Banks Chairman of the Conference in 1992, and are organized into the Conference of Chair- Robert T. Parry, President of the Federal men, which meets to consider matters of Reserve Bank of San Francisco, served as its common interest and to consult with, and Vice Chairman. Frances E. Sibley, of the advise, the Board of Governors. Such meet- Federal Reserve Bank of St. Louis, served as ings, attended also by the Deputy Chairmen, its Secretary, and Robert L. Feinberg, of the were held in Washington on May 27 and 28, Federal Reserve Bank of San Francisco, and on December 3 and 4, 1992. served as its Assistant Secretary. The members of the Executive Committee On October 26, 1992, the Conference of the Conference of Chairmen during 1992 elected Robert T. Parry as its Chairman for were Anne Marie Whittemore, Chairman; 1993-94 and Richard E Syron, President of Delbert W. Johnson, Vice Chairman; and the Federal Reserve Bank of Boston, as its Richard N. Cooper, member. Vice Chairman. On December 4, 1992, the Conference elected its Executive Committee for 1993, naming Delbert W. Johnson as Chairman, Conference of First Ellen V. Futter as Vice Chairman, and Vice Presidents Burton A. Dole, Jr., as the third member. Conference of Presidents The Conference of First Vice Presidents of the Federal Reserve Banks was organized in The presidents of the Federal Reserve Banks 1969 to meet periodically for the considerare organized into the Conference of Presi- ation of operations and other matters. dents, which meets periodically to consider William H. Hendricks, First Vice Presimatters of common interest and to consult dent of the Federal Reserve Bank of Clevewith, and advise, the Board of Governors. land, served as Chairman of the Conference Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

314 79th Annual Report, 1992 for 1992, and William H. Stone, First Vice board of directors and Federal Reserve President of the Federal Reserve Bank of Agent of each District Bank and appoints Philadelphia, served as its Vice Chairman. another Class C director as deputy chairman. Creighton R. Fricek, of the Federal Reserve Federal Reserve Branches have either five Bank of Cleveland, served as its Secretary, or seven directors, a majority of whom are and Milissa Tadeo of the Federal Reserve appointed by the parent Federal Reserve Bank of Philadelphia, served as its Assistant Bank; the others are appointed by the Board Secretary. of Governors. One of the directors appointed On October 13, 1992, the Conference by the Board is designated annually as chairelected William H. Stone, First Vice Presi- man of the board of that Branch in a manner dent of the Federal Reserve Bank of Phila- prescribed by the parent Federal Reserve delphia, as its Chairman for 1993, and James Bank. H. Oltman, First Vice President of the Fed- For the name of the chairman and deputy eral Reserve Bank of New York, as its Vice chairman of the board of directors of each Chairman. Reserve Bank and of the chairman of each Branch, see the preceding table, "Officers Directors of Federal Reserve Banks, Branches, and Offices." The following list of directors of Federal Reserve Banks and Branches shows for each director the class of directorship, the director's principal business affiliation, and the date the director's term expires. Each Federal Reserve Bank has nine members on its board of directors: three Class A and three Class B directors, who are elected by the stockholding member banks, and three Class C directors, who are appointed by the Board of Governors of the Federal Reserve System. 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 315 Term expires Dec. 31 DISTRICT 1—BOSTON Class A Terrence Murray Chairman of the Board, President, and Chief 1992 Executive Officer, Fleet/Norstar Financial Group, Inc., Providence, Rhode Island David A. Page President, Ocean National Bank of Kennebunk, 1993 Kennebunk, Maine Robert M. Silva President, Chief Executive Officer, and Director, 1994 The Citizens National Bank, Putnam, Connecticut Class B 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 Edward H. Ladd Chairman and Ch^f Executive Officer, Standish, 1994 Ayer and Wo a, Inc., Boston, Massachusetts Class C 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 Jerome H. Grossman Chairman of the Board and Chief Executive 1994 Officer, New England Medical Center, Inc., Boston, Massachusetts DISTRICT 2—NEW YORK Class A 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 Thomas G. Labrecque Chairman and Chief Executive Officer, 1994 The Chase Manhattan Bank, N.A., New York, New York Class B 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

316 79th Annual Report, 1992 Term expires Dec. 31 DISTRICT 2, Class B— Continued Rand V. Araskog Chairman, President, and Chief Executive 1993 Officer, ITT Corporation, New York, New York Robert E. Allen Chairman and Chief Executive Officer, 1994 American Telephone and Telegraph Company, Basking Ridge, New Jersey Class C Cyrus R. Vance Presiding Partner, Simpson Thacher & Bartlett, 1992 New York, New York Ellen V. Futter President, Barnard College, New York, New York 1993 Maurice R. Greenberg Chairman and Chief Executive Officer, 1994 American International Group, Inc., New York, New York BUFFALO BRANCH Appointed by the Federal Reserve Bank Wilbur F. Beh President, Atlanta National Bank, 1992 Atlanta, New York Susan A. McLaughlin General Credit Manager, Eastman Kodak 1993 Company, Rochester, New York Charles M. Mitschow Senior Executive Vice President, Regional 1994 Banking, Marine Midland Bank, N.A., Buffalo, New York Richard H. Popp Operating Partner, South view Farm, 1994 Castile, New York Appointed by the Board of Governors 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 Donald L. Rust Plant Manager, General Motors Powertrain 1994 Division, Tonawanda Engine Plant, Buffalo, New York DISTRICT 3—PHILADELPHIA Class A 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, United 1993 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 317 Term expires Dec. 31 DISTRICT 3, Class A—Continued H. Bernard Lynch President and Chief Executive Officer, 1994 The First National Bank of Wyoming, Wyoming, Delaware Class B David W Huggins President, RMS Technologies, Inc., 1992 Marlton, New Jersey James M. Mead President, Capital Blue Cross, 1993 Harrisburg, Pennsylvania James A. Hagen Chairman, President, and Chief Executive 1994 Officer, Consolidated Rail Corporation, Philadelphia, Pennsylvania Class C Peter A. Benoliel Chairman of the Board, Quaker Chemical 1992 Corporation, Conshohocken, Pennsylvania Jane G. Pepper President, The Pennsylvania Horticultural 1993 Society, Philadelphia, Pennsylvania Donald J. Kennedy Business Manager, International Brotherhood of 1994 Electrical Workers, Local Union No. 269, Trenton, New Jersey DISTRICT 4—CLEVELAND Class A Frank Wobst Chairman of the Board and Chief Executive 1992 Officer, Huntington Bancshares Incorporated, Columbus, Ohio Alfred C. Leist Chairman, President, and Chief Executive 1993 Officer, Apple Creek Banking Company, Apple Creek, Ohio William T. McConnell President, The Park National Bank, Newark, Ohio 1994 Class B Laban P. Jackson, Jr. Chairman, Clearcreek Properties, 1992 Lexington, Kentucky Verna K. Gibson Business Consultant, Columbus, Ohio 1993 Douglas E. Olesen President and Chief Executive Officer, Battelle 1994 Memorial Institute, Columbus, Ohio Class C A. William Reynolds Chairman and Chief Executive Officer, GenCorp, 1992 Fairlawn, Ohio John R. Hodges President, Ohio AFL-CIO, Columbus, Ohio 1993 John R. Miller Former President and Chief Operating Officer, 1994 The Standard Oil Company (Ohio), Cleveland, Ohio Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

318 79th Annual Report, 1992 Term expires Dec. 31 DISTRICT 4—Continued CINCINNATI BRANCH Appointed by the Federal Reserve Bank 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 Marvin J. Stammen President and Chief Executive Officer, Second 1994 National Bank, Greenville, Ohio Appointed by the Board of Governors Eleanor Hicks Hicks & Kinley, Cincinnati, Ohio 1992 Marvin Rosenberg Partner, Towne Properties, Ltd., Cincinnati, Ohio 1993 Raymond A. Bradbury Chairman, Martin County Coal Corporation, 1994 Inez, Kentucky PITTSBURGH BRANCH Appointed by the Federal Reserve Bank William F. Roemer Chairman and Chief Executive Officer, 1992 Integra Financial Corporation, Pittsburgh, Pennsylvania George A. Davidson, Jr. Chairman and Chief Executive Officer, 1993 Consolidated Natural Gas Company, Pittsburgh, Pennsylvania I. N. Rendall Harper, Jr. President and Chief Executive Officer, 1993 American Micrographics Company, Inc., Monroeville, Pennsylvania David S. Dahlmann President and Chief Executive Officer, 1994 Southwest National Corporation, Greensburg, Pennsylvania Appointed by the Board of Governors Robert P. Bozzone President and Chief Executive Officer, 1992 Allegheny Ludlum Corporation, Pittsburgh, Pennsylvania Sandra L. Phillips Executive Director, Pittsburgh Partnership for 1993 Neighborhood Development, Pittsburgh, Pennsylvania Jack B. Piatt Chairman of the Board, Millcraft Industries, Inc., 1994 Washington, Pennsylvania Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 319 Term expires Dec. 31 DISTRICT 5—RICHMOND Class A A. Pierce Stone Chairman, President, and Chief Executive 1992 Officer, Virginia Community Bank, Louisa, Virginia James G. Lindley Chairman, President, and Chief Executive 1993 Officer, South Carolina National Bank, Columbia, South Carolina Webb C. Hayes IV President, The Palmer National Bank, 1994 Washington, D.C. Class B 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 L. Newton Thomas, Jr. Retired Senior Vice President, ITT/Carbon 1994 Industries, Inc., Charleston, West Virginia Class C Henry J. Faison President, Faison Associates, 1992 Charlotte, North Carolina Stephen Brobeck Executive Director, Consumer Federation of 1993 America, Washington, D.C. Anne Marie Whittemore Partner, McGuire, Woods, Battle & Boothe, 1994 Richmond, Virginia BALTIMORE BRANCH Appointed by the Federal Reserve Bank 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 Thomas J. Hughes President, Navy Federal Credit Union, 1994 Vienna, Virginia F. Levi Ruark Chairman of the Board and President, 1994 The National Bank of Cambridge, Cambridge, Maryland Appointed by the Board of Governors John R. Hardesty, Jr. President, Preston Energy, Inc., 1992 Kingwood, West Virginia Michael R. Watson President, Association of Maryland Pilots, 1993 Annapolis, Maryland Rebecca Hahn Windsor Chairman and Chief Executive Officer, Hahn 1994 Transportation, Inc., New Market, Maryland Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

320 79th Annual Report, 1992 Term expires Dec. 31 DISTRICT 5—Continued CHARLOTTE BRANCH Appointed by the Federal Reserve Bank David B. Jordan Vice Chairman, Chief Executive Officer, and 1992 Director, Security Capital Bancorp, Salisbury, North Carolina Jim M. Cherry, Jr. President and Chief Executive Officer, 1993 Williamsburg First National Bank, Kingstree, South Carolina Dorothy H. Aranda President, Dohara Associates, Inc., 1994 Hilton Head Island, South Carolina L. Glenn Orr, Jr. Chairman, President, and Chief Executive 1994 Officer, Southern National Corporation, Lumberton, North Carolina Appointed by the Board of Governors Anne M. Allen President, Anne Allen & Associates, Inc., 1992 Greensboro, North Carolina William E. Masters President, Perception, Inc., 1993 Easley, South Carolina Harold D. Kingsmore President and Chief Operating Officer, 1994 Graniteville Company, Graniteville, South Carolina DISTRICT 6—ATLANTA Class A 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 Simpson Russell Chairman and Chief Executive Officer, 1994 The First National Bank of Florence, Florence, Alabama Class B J. Thomas Holton President, Sherman International Corporation, 1992 Birmingham, Alabama Andre M. Rubenstein Chairman of the Board and Chief Executive 1993 Officer, Rubenstein Brothers, Inc., New Orleans, Louisiana Victoria B. Jackson President and Chief Executive Officer, 1994 DSS/ProDiesel, Nashville, Tennessee Class C Leo Benatar Chairman of the Board and President, Engraph, 1992 Inc., Atlanta, Georgia Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 321 Term expires Dec. 31 DISTRICT 6, Class C— Continued Edwin A. Huston Senior Executive Vice President-Finance, Ryder 1993 System, Inc., Miami, Florida Hugh M. Brown President and Chief Executive Officer, BAMSI, 1994 Inc., Titusville, Florida BIRMINGHAM BRANCH Appointed by the Federal Reserve Bank 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 Marlin D. Moore, Jr. Chairman, Pritchett-Moore, Inc., 1994 Tuscaloosa, Alabama Columbus Sanders President, Consolidated Industries, Inc., 1994 Huntsville, Alabama Appointed by the Board of Governors 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 Shelton E. Allred Chairman of the Board, President, and Chief 1994 Executive Officer, Frit Incorporated, Ozark, Alabama JACKSONVILLE BRANCH Appointed by the Federal Reserve Bank 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 Perry M. Dawson President and Chief Executive Officer, Suncoast 1994 Schools Federal Credit Union, Tampa, Florida Arnold A. Heggestad William H. Dial Professor and Director, College 1994 of Business Administration, University of Florida, Gainesville, Florida Appointed by the Board of Governors Lana Jane Lewis-Brent President, Paul Brent Designer, Inc., 1992 Panama City, Florida Joan Dial Ruffier Member, Florida Board of Regents, Orlando, Florida 1993 Samuel H. Vickers President, Chairman, and Chief Executive Officer, 1994 Design Containers, Inc., Jacksonville, Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

322 79th Annual Report, 1992 Term expires Dec. 31 DISTRICT 6— Continued MIAMI BRANCH Appointed by the Federal Reserve Bank E. Anthony Newton President, Island National Bank of Palm Beach, 1992 Palm Beach, Florida Steven C. Shimp President, O-A-K/Florida, Inc., Fort Myers, Florida 1993 Pat L. Tornillo, Jr. Executive Vice President, United Teachers of 1993 Dade, Miami, Florida Roberto G. Blanco Vice Chairman and Chief Financial Officer, 1994 Republic National Bank of Miami, Miami, Florida Appointed by the Board of Governors 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 Dorothy C. Weaver Executive Vice President, Intercap Investments, Inc., 1994 Coral Gables, Florida NASHVILLE BRANCH Appointed by the Federal Reserve Bank James D. Harris President and Chief Executive Officer, Brentwood 1992 National Bank, Brentwood, Tennessee Williams E. Arant, Jr. President and Chief Executive Officer, 1993 First National Bank of Knoxville, Knoxville, Tennessee William Baxter Lee III Chairman and President, Southeast Services 1994 Corporation, Knoxville, Tennessee Marguerite W. Sallee President and Chief Executive Officer, 1994 Corporate Child Care Management Services, Nashville, Tennessee Appointed by the Board of Governors Harold A. Black Professor and Head, Department of Finance, 1992 College of Business Administration, University of Tennessee, Knoxville, Tennessee Vacancy 1993 James R. Tuerff President and Chief Executive Officer, American 1994 General Life and Accident Insurance Company, Nashville, Tennessee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 323 Term expires Dec. 31 DISTRICT 6—Continued NEW ORLEANS BRANCH Appointed by the Federal Reserve Bank Earl W. Lundy Chairman of the Board and Chief Executive 1992 Officer, First National Bank of Vicksburg, Vicksburg, Mississippi Howard C. Gaines Chairman, President, and Chief Executive 1993 Officer, First National Bank of Commerce, New Orleans, Louisiana Joel B. Bullard, Jr President, Joe Bullard Automotive Companies, 1994 Mobile, Alabama Kay L. Nelson Managing Director, Nelson Capital Corporation, 1994 New Orleans, Louisiana Appointed by the Board of Governors Lucimarian Tolliver Roberts President, Mississippi Coast Coliseum 1992 Commission, Pass Christian, Mississippi Victor Bussie President, Louisiana AFL-CIO, 1993 Baton Rouge, Louisiana Jo Ann Slay don President, Slay don Consultants and Insight 1994 Productions and Advertising, Baton Rouge, Louisiana DISTRICT 7—CHICAGO Class A 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 Stefan S. Anderson Chairman, President, and Chief Executive 1994 Officer, First Merchants Bank, N.A., Muncie, Indiana Class B 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 Thomas C. Dorr President and Chief Executive Officer, Dorr's 1994 Pine Grove Farm Co., Marcus, Iowa Class C Richard G. Cline Chairman, President, and Chief Executive Officer, 1992 NICOR, Inc., Naperville, Illinois Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

324 79th Annual Report, 1992 Term expires Dec. 31 DISTRICT 7, Class C— Continued Robert M. Healey President, Chicago Federation of Labor and 1993 Industrial Union Council, AFL-CIO, Chicago, Illinois Duane L. Bumham Chairman and Chief Executive Officer, Abbott 1994 Laboratories, Abbott Park, Illinois DETROIT BRANCH Appointed by the Federal Reserve Bank 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 Daniel R. Smith Chairman and Chief Executive Officer, 1994 First of America Bank Corporation, Kalamazoo, Michigan Appointed by the Board of Governors J. Michael Moore Chairman of the Board and Chief Executive 1992 Officer, Invetech Company, Detroit, Michigan Beverly A. Beltaire President, PR Associates, Inc., Detroit, Michigan 1993 John D. Forsyth Executive Director, University of Michigan 1994 Hospitals, Ann Arbor, Michigan DISTRICT 8—ST. LOUIS Class A W. E. Ayres Chairman of the Board, Simmons First National 1992 Bank of Pine Bluff, Pine Bluff, Arkansas Ray U. Tanner Chairman, Director, and Chief Executive 1993 Officer, Jackson National Bank, Jackson, Tennessee Henry G. River, Jr. President and Chief Executive Officer, 1994 First National Bank in Pinckneyville, Pinckneyville, Illinois Class B Frank M. Mitchener, Jr. President, Mitchener Farms, Inc., 1992 Sumner, Mississippi Warren R. Lee President, W. R. Lee & Associates, Inc., 1993 Louisville, Kentucky Sandra B. Sanderson-Chesnut President and Chief Executive Officer, 1994 Sanderson Plumbing Products, Inc., Columbus, Mississippi Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 325 Term expires Dec. 31 DISTRICT 8—Continued Class C H. Edwin Trusheim Chairman and Chief Executive Officer, General 1992 American Life Insurance Company, St. Louis, Missouri Janet McAfee Weakley President, Janet McAfee, Inc., St. Louis, Missouri 1993 Robert H. Quenon Mining Consultant, St. Louis, Missouri 1994 LITTLE ROCK BRANCH Appointed by the Federal Reserve Bank Patricia M. Townsend President, Townsend Company, Stuttgart, Arkansas 1992 James V. Kelley 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 Barnett Grace Chairman and Chief Executive Officer, 1994 First Commercial Bank, N.A., Little Rock, Arkansas Appointed by the Board of Governors James R. Rodgers Airport Manager, Little Rock Regional Airport, 1992 Little Rock, Arkansas L. Dickson Flake President, Barnes, Quinn, Flake & Anderson, Inc., 1993 Little Rock, Arkansas Robert Daniel Nabholz, Jr. ..Chief Executive Officer, Nabholz Construction 1994 Corporation, Conway, Arkansas LOUISVILLE BRANCH Appointed by the Federal Reserve Bank Morton Boyd Chairman and Chief Executive Officer, 1992 First Kentucky National Corporation, Louisville, Kentucky Robert M. Hall Owner, Mike Hall Farm, Seymour, Indiana 1993 Charles D. Storms President and Chief Executive Officer, Red Spot 1993 Paint and Varnish Company, Inc., Evansville, Indiana Douglas M. Lester Chairman, President, and Chief Executive 1994 Officer, Trans Financial Bancorp, Inc., Bowling Green, Kentucky Appointed by the Board of Governors Daniel L. Ash President, Louisville Energy and Environment 1992 Corporation, Louisville, Kentucky Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

326 79th Annual Report, 1992 Term expires Dec. 31 DISTRICT 8, LOUISVILLE BRANCH Appointed by the Board of Governors—Continued John A. Williams Chairman and Chief Executive Officer, 1993 Computer Services, Inc., Paducah, Kentucky Laura M. Douglas Legal Director, Metropolitan Sewer District, 1994 Louisville, Kentucky MEMPHIS BRANCH Appointed by the Federal Reserve Bank 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 Lewis F. Mallory, Jr. President and Chief Executive Officer, 1994 National Bank of Commerce of Mississippi, Starkville, Mississippi Appointed by the Board of Governors M. Rita Schroeder President, St. Francis Hospital, Memphis, Tennessee 1992 Seymour B. Johnson Owner, Kay Planting Company, Indianola, Mississippi 1993 Vacancy 1994 DISTRICT 9—MINNEAPOLIS Class A 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 William W Strausburg Chairman and Chief Executive Officer, First 1994 Bank Montana, N.A., and General Manager, First Bank-Regional Banking Group, Billings, Montana Class B Bruce C. Adams Partner, Triple Adams Farms, Minot, North Dakota 1992 Earl R. St. John, Jr. President, St. John Forest Products, Inc., 1993 Spalding, Michigan Duane E. Dingmann President, Trubilt Auto Body, Inc., 1994 Eau Claire, Wisconsin Class C Gerald A. Rauenhorst Chairman of the Board and Chief Executive Officer, 1992 Opus Corporation, Minneapolis, Minnesota Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 327 Term expires Dec. 31 DISTRICT 9, Class C— Continued Delbert W. Johnson President and Chief Executive Officer, Pioneer 1993 Metal Finishing, Minneapolis, Minnesota Jean D. Kinsey Professor, Consumption and Consumer 1994 Economics, Department of Agricultural and Applied Economics, University of Minnesota, St. Paul, Minnesota HELENA BRANCH Appointed by the Federal Reserve Bank Donald E. Olsson, Jr. Executive Vice President, Ronan State Bank, 1992 Ronan, Montana Nancy M. Stephenson Executive Director, Neighborhood Housing 1992 Services, Great Falls, Montana Beverly D. Harris President, Empire Federal Savings and Loan 1993 Association, Livingston, Montana Appointed by the Board of Governors J. Frank Gardner President, Montana Resources, Inc., 1992 Butte, Montana James E. Jenks Jenks Farms, Hogeland, Montana 1993 DISTRICT 10—KANSAS CITY Class A 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 Charles I. Moyer Chairman and Chief Executive Officer, 1994 The First National Bank of Phillipsburg, Phillipsburg, Kansas Class B Frank A. McPherson Chairman of the Board and Chief Executive 1992 Officer, Kerr-McGee Corporation, Oklahoma City, Oklahoma Don E. Adams Buffalo, Oklahoma 1993 Frank J. Yaklich, Jr President and Chief Executive Officer, CF & I 1994 Steel Corporation, Pueblo, Colorado Class C Herman Cain President and Chief Executive Officer, 1992 Godfather's Pizza, Inc., Omaha, Nebraska Thomas E. Rodriguez President and General Manager, Thomas E. 1993 Rodriguez & Associates, P.C., Aurora, Colorado Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

328 79th Annual Report, 1992 Term expires Dec. 31 DISTRICT 10, Class C— Continued Burton A. Dole, Jr. Chairman of the Board and President, 1994 Puritan-Bennett Corporation, Overland Park, Kansas DENVER BRANCH Appointed by the Federal Reserve Bank Henry A. True III Partner, True Companies, Casper, Wyoming 1992 Peter R. Decker President, Decker & Associates, Denver, Colorado 1993 Clifford E. Kirk President, First National Bank of Gillette, 1994 Gillette, Wyoming Richard I. Ledbetter President and Chief Executive Officer, 1994 First National Bank of Farmington, Farmington, New Mexico Appointed by the Board of Governors 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 Barbara B. Grogan President, Western Industrial Contractors, Inc., 1994 Denver, Colorado OKLAHOMA CITY BRANCH Appointed by the Federal Reserve Bank Gordona Duca President and Owner, Gordona Duca, Inc., 1992 Realtors, Tulsa, Oklahoma John Wm. Laisle President and Chief Executive Officer, MidFirst 1992 Bank, SSB, Oklahoma City, Oklahoma C. Kendric Fergeson Chairman of the Board and Chief Executive 1993 Officer, The National Bank of Commerce, Altus, Oklahoma Appointed by the Board of Governors Victor R. Schock Executive Director, Credit Counseling Services 1992 of Oklahoma, Inc., Tulsa, Oklahoma Ernest L. Holloway President, Langston University, Langston, Oklahoma 1993 OMAHA BRANCH Appointed by the Federal Reserve Bank John R. Cochran President and Chief Executive Officer, Norwest 1992 Bank Nebraska, N.A., Omaha, Nebraska Donald A. Leu President and Chief Executive Officer, Consumer 1993 Credit Counseling Service, Omaha, Nebraska Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 329 Term expires Dec. 31 DISTRICT 10, OMAHA BRANCH Appointed by the Federal Reserve Bank—Continued Thomas H. Olson President and Chief Executive Officer, Lisco 1993 State Bank, Lisco, Nebraska Appointed by the Board of Governors Sheila Griffin Special Advisor to the Governor of the State of 1992 Nebraska for International Trade, Lincoln, Nebraska LeRoy W. Thorn President, T-L Irrigation Company, Hastings, Nebraska 1993 DISTRICT 11—DALLAS Class A 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 Eugene M. Phillips Chairman of the Board and President, The First 1994 National Bank of Panhandle, Panhandle, Texas Class B Gary E. Wood President, Texas Research League, Austin, Texas 1992 J. B. Cooper, Jr. Farmer, Roscoe, Texas 1993 Peyton Yates President, Yates Drilling Company and 1994 Executive Vice President, Yates Petroleum Corporation, Artesia, New Mexico Class C Leo E. Linbeck, Jr. Chairman of the Board and Chief Executive 1992 Officer, Linbeck Construction Corporation, Houston, Texas Vacancy 1993 Cece Smith General Partner, Phillips-Smith Specialty Retail 1994 Group, Dallas, Texas EL PASO BRANCH Appointed by the Federal Reserve Bank Wayne Merritt Chairman of the Board and President, Texas 1992 National Bank of Midland, Midland, Texas Veronica K. Callaghan Vice President and Principal, KASCO Ventures, 1993 Inc., El Paso, Texas Ben H. Haines, Jr. President and Chief Operating Officer, First 1993 National Bank of Dona Ana County, Las Cruces, New Mexico Hugo Bustamante, Jr. Owner and Chief Executive Officer, ProntoLube, 1994 El Paso, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

330 79th Annual Report, 1992 Term expires Dec. 31 DISTRICT 11, EL PASO BRANCH—Continued Appointed by the Board of Governors 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 Alvin T. Johnson Senior Vice President, Management Assistance 1994 Corporation of America, El Paso, Texas HOUSTON BRANCH Appointed by the Federal Reserve Bank 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 Tieman H. Dippel, Jr. Chairman of the Board and President, Brenham 1994 Bancshares, Inc., Brenham, Texas Appointed by the Board of Governors Judy Ley Allen Partner and Administrator, Allen Investments, 1992 Houston, Texas Milton Carroll Chairman of the Board and Chief Executive 1993 Officer, Instrument Products, Inc., Houston, Texas Isaac H. Kempner III Chairman of the Board, Imperial Holly 1994 Corporation, Sugar Land, Texas SAN ANTONIO BRANCH Appointed by the Federal Reserve Bank 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., Progreso, Texas 1993 T. Jack Moore III Owner and Manager, T.J. Moore Lumber Inc., 1994 Ingram, Texas Appointed by the Board of Governors Lawrence E. Jenkins Vice President (Retired), Lockheed Missiles and 1992 Space Company, Inc., Austin, Texas Erich Wendl President and Chief Executive Officer, Maverick 1993 Markets, Inc., Corpus Christi, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 331 Term expires Dec. 31 DISTRICT 11, SAN ANTONIO BRANCH Appointed by the Board of Governors—Continued Roger R. Hemminghaus Chairman, President, and Chief Executive 1994 Officer, Diamond Shamrock, Inc., San Antonio, Texas DISTRICT 12-SAN FRANCISCO Class A Warren K. K. Luke President and Director, Hawaii National 1992 Bancshares, Inc., and Vice Chairman of the Board and Chief Executive Officer, Hawaii National Bank, Honolulu, Hawaii Richard L. Mount Chairman, President, and Chief Executive 1993 Officer, Saratoga Bancorp, Saratoga, California William E. B. Siart President, First Interstate Bancorp, 1994 Los Angeles, California Class B E. Kay Stepp Advisor to the Chairman, Former President, and 1992 Chief Operating Officer, Portland General Electric, Portland, Oregon John N. Nordstrom Co-Chairman of the Board, Nordstrom, Inc., 1993 Seattle, Washington William L. Tooley Chairman, Tooley & Company, Investment 1994 Builders, Los Angeles, California Class C Robert F. Erburu Chairman of the Board and Chief Executive 1992 Officer, The Times Mirror Company, Los Angeles, California James A. Vohs Chairman and Chief Executive Officer (Retired), 1993 Kaiser Foundation Health Plan, Inc., and Kaiser Foundation Hospitals, Oakland, California Judith M. Runstad Partner and Managing Director, Foster Pepper 1994 and Shefelman, Seattle, Washington Los ANGELES BRANCH Appointed by the Federal Reserve Bank Fred D. Jensen Executive Director, Long Beach Local 1992 Development Corporation, Long Beach, California Anita Landecker Regional Vice President, Local Initiatives 1993 Support Corporation, Los Angeles, California Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

332 79th Annual Report, 1992 Term expires Dec. 31 DISTRICT 12, Los ANGELES BRANCH Appointed by the Federal Reserve Bank—Continued Antonia Hernandez President and General Counsel, Mexican 1994 American Legal Defense and Educational Fund, Los Angeles, California William S. Randall Chief Executive Officer, Southwest Region, First 1994 Interstate Bank, Phoenix, Arizona Appointed by the Board of Governors Anne L. Evans Owner, Developer, and Operator, Evans Hotels, 1992 San Diego, California Donald G. Phelps Chancellor, Los Angeles Community College 1993 District, Los Angeles, California David L. Moore President and Chief Executive Officer, Western 1994 Growers Association, Irvine, California PORTLAND BRANCH Appointed by the Federal Reserve Bank Elizabeth K. Johnson President, TransWestern Helicopters, Inc., 1992 Scappoose Industrial Airpark, Scappoose, Oregon Cecil W. Drinkward President, Hoffman Construction Company, 1993 Portland, Oregon Stephen G. Kimball Chairman, President, and Chief Executive Officer, 1993 Baker Boyer Bancorp, Walla Walla, Washington Stuart H. Compton Chairman, Pioneer Trust Bank, N.A., Salem, Oregon 1994 Appointed by the Board of Governors Wayne E. Phillips, Jr Vice President, Phillips Ranch, Inc., Baker, Oregon 1992 Ross R. Runkel Professor of Law, Willamette University 1993 Center for Dispute Resolution, Salem, Oregon William A. Hilliard Editor, The Oregonian, Portland, Oregon 1994 SALT LAKE CITY BRANCH Appointed by the Federal Reserve Bank Ronald S. Hanson Director of the Board and Member of the 1992 Executive Committee, Zions First National Bank, 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 Consulting Group, 1993 Salt Lake City, Utah Gerald R. Sherratt President, Southern Utah University, 1994 Cedar City, Utah Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 333 Term expires Dec. 31 DISTRICT 12, SALT LAKE CITY BRANCH—Continued Appointed by the Board of Governors 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 H. Roger Boyer Chairman of the Board, The Boyer Company, 1994 Salt Lake City, Utah SEATTLE BRANCH Appointed by the Federal Reserve Bank H. H. Larison President and Chief Executive Officer, Columbia 1992 Paint & Coatings, Spokane, Washington B. R. Beeksma Chairman of the Board, InterWest Savings 1993 Bank, Oak Harbor, Washington Gerry B. Cameron President and Chief Executive Officer, U.S. Bank of 1993 Washington, N.A., Seattle, Washington Robert P. Gray President, National Bank of Alaska, 1994 Anchorage, Alaska Appointed by the Board of Governors Emilie A. Adams President and Chief Executive Officer, Better 1992 Business Bureau, Seattle, Washington George F. Russell, Jr. Chairman, Frank Russell Company, 1993 Tacoma, Washington William R. Wiley Senior Vice President, Technology 1994 Management; and Director, Pacific Northwest Division, Battelle Memorial Institute, Richland, Washington Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

334 79th Annual Report, 1992 Maps of the Federal Reserve System 1 9 BOSTON MINNEAPOLIS • 2 " 7 12 ^ HNEW YORK CHICAGO • • SANFRANCISCO 10 CLEVELAND PHILADELPHIA KANSAS CITYB 4 ST. LOUIS RICHMOND 8 5 6. 11 • ATLANTA DALLAS ALASKA HAWAII LEGEND Both pages Facing page • Federal Reserve Bank city • Federal Reserve Branch city D 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 District 12, the Seattle Branch wealth of the Northern Mariana Islands. serves Alaska, and the San Francisco The maps show the boundaries within Bank serves Hawaii. the System as of year-end 1992. The System serves commonwealths 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 335 1-A 2-B 3-C 4-D 5_E Baltimore Pittsburgh NY J CT Charlotte • Cincinnati Buffalo • ^ / KY BOSTON NEW YORK PHILADELPHIA CLEVELAND RICHMOND 6"F • Nashville 7-G 8-H N Birmingham J AL Detroit • ATLANTA CHICAGO 9-1 • Helena MINNEAPOLIS 10-J 12-L Omaha • Denver Oklahoma City KANSAS CITY 11-K Salt Lake City • Los Angeles SAN FRANCISCO Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

336 Index Advanced EDP examinations, 227 Board of Governors (See also Federal Agriculture during 1992, 11 Reserve System) Airline Reporting Corporation, 205 Banking supervision and regulation, 215 Annunzio-Wylie Anti-Money Laundering Consumer and community affairs, 185 Act, enacted, 213 Federal Reserve Banks, 241 Appraisal Committee, FFIEC, 227 Federal Reserve decisions, public notice, Assets and liabilities 230 Banks, by class, 283 Financial statements, 253 Board of Governors, 254 Legislation enacted, 211 Federal Reserve Banks, 262 Litigation, 207 Automated clearinghouses, 242 Members and officers, 306 Publications (See Publications in 1992) Bank Export Services Act, 233 Recommendations from other agencies, Bank Holding Company Act of 1956 (See 205 also Regulations: Y) Record of policy actions, 95 Banking structure regulation, 229 Regulatory simplification, 237 Securities subsidiaries, supervision, 220 Salaries, 269 Supervision and regulation, 217 Testimony and legislative Bank Holding Company Performance recommendations, 205 Report, 221 Bureau of Engraving and Printing, Bank holding companies Department of the Treasury, 244 Applications Business spending and investment, 12, 51, Delegation, 231 75 Procedures, 238 Timely processing of, 231 Capital accounts Regulatory simplification, 238 Banks, by class, 278 Stock repurchases, 232 Federal Reserve Banks, 261, 262, 264 Supervision and regulation of, 217 Capital adequacy guidelines, change in Bank Merger Act treatment of intangible assets, 98 Banking structure regulation, 229 Cash flows, statement, 256 Supervision and regulation, 217 Census of Population and Housing, U.S., Bank mergers and consolidations, 291 195 Bank of Credit and Commerce Chairmen, presidents, and vice presidents International, 218 of Federal Reserve Banks Bank Operations School, 227 Conferences, 313 Bank Secrecy Act, 216, 234 List, 312 BankAmerica Corporation merger with Salaries of presidents, 269 Security Pacific Corporation, 200 Change in Bank Control Act Bankers acceptances, Federal Reserve Banking structure regulation, 230 Bank holdings, 262 Supervision and regulation, 217 Banking offices, changes in number, 290 Check clearing and collection Banking Supervision and Regulation, Federal Reserve Banks, 241 Board's Division of, reorganization, Policy statement to reduce risk in the 216 payments system, 98 Banking supervision and regulation, 215 Volume of operations, 279 Basle Accord, 223 Citicorp, 207 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 337 Citizen's Guide to the CRA, publication of Depository institutions, reserves and related the FFIEC, 199 items, 284 Clearing House Interbank Payments Deposits (See also Regulations: Q) System, 243 Banks, by class, 283 Commerce, Department of, 11 Federal Reserve Banks, 262, 284 Commodity Credit Corporation, monetary Time, as transaction accounts, 96 policy, 53 Directors, Federal Reserve Banks and Commodity Futures Trading Commission, Branches, list, 314 212 Directory: Bank Holding Company Community Reinvestment Act Community Development Investments, Compliance, 199 publication, 191 Home mortgage disclosure, 186 Disaster relief, policy, 238 Housing act amendment, 212 Dividends, Federal Reserve Banks, 272, Member bank responsibilities, 192 274 Policy statement, 105 Comptroller of the Currency, Office of the, Earnings of Federal Reserve Banks, 245, 97, 105, 192, 198, 213, 219, 221, 223 270 Condition statements of Federal Reserve East Rutherford Operations Center, 247 Banks, 260 Economy Conference Board, confidence index, 50 Business, 10 Conferences of chairmen, presidents, and Government spending, 13 vice presidents of Federal Reserve Households, 8 Banks, 313 Labor markets, 15 Construction activity, government spending Overview of 1992, 3, 7 on, 10, 13, 14, 49 Performance of, in 1991, 48 Consumer Advisory Council, 204, 310 Performance of, in 1992, 73 Consumer and community affairs Price developments, 17 Applicants right to receive copies of Edge Act and agreement corporations, appraisal reports, 185 international activities, 233 Community Reinvestment Act, 199 Electronic data processing, supervision, 219 Consumer leasing compliance, 198 Electronic Fund Transfer Act Expedited Funds Availability Act, Compliance with in 1992, 197 compliance, 200 Economic effects, 201 Home mortgage disclosure, 186 Employee compensation, government Truth in Lending Act, compliance, 198 spending on, 14 Consumer Complaint Control System, 201 Employment in 1992, 3, 15 Consumer energy prices, 18 Equal Credit Opportunity Act (See also Consumer leasing, compliance, 198 Regulations: B) Consumer price index, 17, 47, 58, 82 Compliance with in 1992, 196 Consumer regulations, compliance, 196 Interagency policy statement, 193 Consumer spending in 1992, 8 Examinations, inspections, regulations, and Consumer survey, 189, 201 audits Credit availability, supervisory policy, 225 Federal Reserve Banks, 245 Currency and coin, 244 Specialized, 219, 220, 227 Currency and Foreign Transactions Expedited Funds Availability Act (See also Reporting Act of 1970, 234 Regulations: CC) Compliance in 1992, 196, 200 Defense Cooperation Account, Depository Institutions Disaster Relief contributions to, 53 Act of 1992, exceptions in, 211 Definitive securities safekeeping, 244 Extension of holds on checks, 188 Depository Institutions Disaster Relief Act FDIC Improvement Act, amendments in, of 1992, 188,211,225,239 103 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

338 79th Annual Report, 1992 Export Trading Company Act Amendments Federal Reserve Act, 187 of 1988, 233 Federal Reserve Automation Services, 241, Export trading companies, 233 247 Federal Reserve Bank Branch Fair Housing Act, 193 Modernization Act, 211, 247 Farm Credit Administration, 199, 234 Federal Reserve Banks Federal Advisory Council, 309 Assessments for expenses of Board of Federal agency securities Governors, 272, 274 Federal Reserve Bank holdings and Bank premises, 260, 262, 278 earnings, 262, 284 Branches Federal Reserve open market Bank premises, 278 transactions, 1989, 266 Directors, list, 314 Repurchase agreements, 261, 262, 266, Salt Lake City, 247 268 Vice presidents in charge, 312 Federal Deposit Insurance Corporation, 97, Capital accounts, 261, 262 105, 192, 198, 213, 219, 223 Chairmen and deputy chairmen, 312 Federal Deposit Insurance Corporation Condition statement, 260 Improvement Act of 1991 Bank supervision and regulation, 215 Conferences of chairmen, presidents, and Housing act amendment, 213 vice presidents, 313 Interim rules to implement, 99 Deposits, 261, 262 Regulation B, revisions to implement, Directors, list, 314 186 District Banks Regulation CC, amendment to Atlanta implement, 103 Community development Regulation to limit risk to insured corporations, 191 institutions, 97 Community Reinvestment Act, Supervisory policy, 222 seminars, 191 Truth in Savings Act, 104 Boston Federal Financial Institutions Examination Creation of community development Council curriculum, 191 Housing act amendment, 213 Credit issues affecting Native Regulation B, amendment, 186 Americans, conference, 191 Regulatory activities, 192 Discrimination in mortgage lending, Regulatory burden study, 237 research study, 193 Reports to condition and income, Chicago, rural community revisions to, 228 development, seminars, 191 Small businesses and small farms, Cleveland, new head office, designed, information on, 222 247 Supervision and regulation, 227 Federal Home Loan Mortgage Corporation, Dallas Data processing center, 241 196, 243 Federal Housing Enterprise Oversight, New head office, designed, 247 Office of, Department of Housing and Kansas City Urban Development, 196 Community development lending Federal National Mortgage Association, seminars, 191 195, 196 Credit and the Economically Federal Open Market Committee Disadvantaged, conference, 191 Meetings, 114, 125, 133, 141, 151, 159, Minneapolis 167, 176 New head office, designed, 247 Members and officers, list, 308 Rural community development, Policy actions, record, 109 seminars, 191 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 339 Federal Reserve Banks—Continued Federal Reserve notes District Banks—Continued Condition statement data, 262 New York Cost of issuance and redemption, 257, Credit issues affecting Native 272 Americans, conference, 191 Federal Reserve System (See also Board of East Rutherford Operations Center, Governors) 241, 247 Capital adequacy guidelines, change in Treasury Automated Auction treatment of intangible assets, 98 Processing System, 244 Fees, Federal Reserve services to Philadelphia depository institutions Community profiles created to Automated clearinghouse, 242 establish community needs, Check clearing and collection, 241 191 Currency and coin, 244 Community Reinvestment Act, Definitive securities safekeeping, 244 seminars, 191 Fiscal agency services, 243 Richmond, 247 Float, 245 Data processing center, 241 Funds transfer, 242 St. Louis, created community profiles Net settlement, 243 to establish community needs, Securities, U.S., 243 191 Map, 334 San Francisco Membership, 236 Community development Security and loan holdings, 246 corporations, 191 Staff training, 226 Community profiles created to Federal Trade Commission, 193, 198 establish community needs, Federal Trade Commission Act, 204 191 Fed wire (See also Regulations: J), 242 Community Reinvestment Act, Fees, Federal Reserve services to seminars, 191 depository institutions Salt Lake City Branch, 247 Automated clearinghouse, 242 Dividends paid, 272, 275, 277 Check clearing and collection Enforcement actions, 218 Federal Reserve Banks, 241 Examinations, inspection, regulation, and Payments system, policy statement to audits, 217, 227, 245 reduce risk, 98 Fiscal agency services, 243 Currency and coin, 244 Interest rates, 280 International activities, 221 Definitive securities safekeeping, 244 Loans and securities, 260, 262, 268, 270, Fiscal agency services, 243 284, 286, 288 Float, 245 Officers and employees, number and Funds transfer, 242 salaries, 269 Net settlement, 243 Operations, volume, 279 Prices services, withdrawal, 106 Payments to the U.S. Treasury, 275, 277 Pricing of, 270 Premises, 247 Securities, U.S., 243 Presidents and first vice presidents, 269, Fiduciary activities, supervision, 219 312 Financial Accounting Standards Board, 228 Priced services, table, 284 Financial Institutions Reform, Recovery, Specialized examinations, 219, 227 and Enforcement Act of 1989, 199, Supervision and regulation, 211,226 responsibilities, 216 Financial Institutions Supervisory Act, Surveillance and monitoring, 220 litigation, 207 Federal Reserve Board (See Board of Financial statements, Board of Governors, Governors) 253 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

340 79th Annual Report, 1992 First Interstate BancSystem of Montana, Home Mortgage Disclosure Act Inc., 207 of 1975—Continued Fiscal agency services, Federal Reserve Data, FRB testimony, 205 Banks, 243 Housing and Community Development Float (See also Check clearing and Act, 212 collection), 245 Use of data, 194 Foreign Bank Supervision Enhancement Home Mortgage Lending and Equal Act of 1991, 99, 216 Treatment, brochure, 192 Foreign currencies Home Mortgages: Understanding the Federal Reserve income on, 270 Process and Your Right to Fair Operations, 41 Lending, publication, 193 Foreign economies during 1992, 36 Household spending, 8, 49, 73 Foreign investments, 233 Housing and Community Development Act Fraud Section, Criminal Division, of 1992, 187, 200, 212 Department of Justice, 218 Housing and Urban Development, Funds transfer (See also Regulations: J), Department of, 186, 193 242 Hurricane Andrew, 9, 11, 18, 225 Futures Trading Practices Act of 1992, Hurricane Iniki, 225 enacted, 212 Idaho, State of, Department of Finance, Garn-St Germain Depository 207 Institutions Act of 1982, 96 Income and expenses Gasoline prices, 18 Board of Governors, 255 Glass-Steagall Act, 220 Federal Reserve Banks, 245, 270 Gold certificate accounts of Reserve Banks Income growth during 1992, 8 and gold stock, 262, 286, 288 Industrial production, 10 Gore-Bronson Bancorp, Inc., application to Insured commercial banks acquire Water Tower Trust and Assets and liabilities, by class of bank, Savings Bank, 200 283 Government National Mortgage Banking offices, changes in number, 290 Association, 196 Number, by class of bank, 283 Government Securities Act of 1986, 219 Interagency Guidelines for Real Estate Government securities dealers and brokers, Lending Policies, 225 219 Interagency regulatory activities, 192 Government spending, 52, 77 Interest rates Guide to HMDA Reporting, Getting it Federal Reserve Banks Right, FFIEC publication, 187 Discount rates, 4, 106 Guide to Regulation CC Compliance, Risk, supervisory policy, 224 publication, 188 Table, 280 In 1992, 21, 36 Highly leveraged transactions International Banking Act of 1978, 222 Change in reporting requirements, 226 International banking activities (See also Policy statement, 105 Regulations: K) Home equity loans Edge Act corporations and agreement Consumer Protection Act, 103 corporations, 221 Disclosures, 187 Foreign-office operations of U.S. banking To bank officials, amendment to organizations, 221 Regulation Z, 103 Supervision and regulation, 232 Home mortgage disclosure (See U.S. activities of foreign banks, 221 Regulations: C) International developments in monetary Home Mortgage Disclosure Act of 1975 policy, 35, 54, 78 Amendment to, 186 Interpretations of regulations, 190 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 341 Interstate Commerce Commission, 197 Management skills, training class, 227 Investments Margin requirements, 282 Federal Reserve Banks, 260, 262 Medicaid and Medicare, 14 State member banks, 283 Member banks (See also Depository institutions) Justice, Department of, 193 Assets, liabilities, and capital accounts, 283 Labor markets, 15, 56, 80 Banking offices, changes in number, 290 LaWare, John P., concerns about adoption Number, 283 of Regulation DD, 104 Reserve requirements, 281 Lease-Purchase Agreement Act, FRB Members Forum, Consumer Advisory testimony, 205 Council, 204 Lease-purchase transactions, testimony, Michigan, University of, telephone 205 consumer survey, 189, 201 Litigation involving the Board of Monetary aggregates, growth in 1992, 4 Governors Monetary policy Antitrust action Credit markets, 26, 59, 86 Society Corporation, 207 Developments during 1991, 59 Financial Institutions Supervisory Act Developments during 1992, 84 bin Mahfouz, 208 Financial markets relative to, 21 CBC, Inc., 208 Implementation of, 60, 85 Davis, 208 Objectives for 1992-93, 70 Greenberg, 208 Reports to the Congress Pharaon, 207 February 19, 1992, 43 Shoaib, 208 July 20, 1992, 67 Other actions Money market mutual funds, activity in Castro, 209 1992, 31 DLG Financial Corporation, 209 Mortgage lending discrimination, 193 Federal Reserve System, subpoena, Mortgage lending, refinancing complaints, 208 204 Fields, 209 Mullins, David W., Jr., concerns about U.S. Check, 209 adoption of Regulation DD, 104 Zemel, 208 Multiple savings accounts, 95 Review of Board actions Municipal securities dealers and clearing Citicorp, 207 agencies, 219 First Interstate BancSystem of Mutual funds, activity in 1992, 31 Montana, Inc., 207 Mutual savings banks, 290 Idaho, State of, Department of Finance, 207 National Association of Securities Synovus Financial Corporation, 207 Dealers, 234 Loans National Credit Union Administration, 192, Banks, by class, 283 198, 234 Executive officers of state member banks Net settlement, 243 (See also Regulations: O), 187 Nonmember depository institutions Federal Reserve Banks Assets and liabilities, 283 Depository institutions, 260, 262, 270, Banking offices, changes in number, 290 286, 288 Number, 283 Holdings and income, 260, 262, 286, 288 Office of Thrift Supervision, 97, 105, Interest rates, 280 191, 198, 219, 234 Volume of operations, 279 Officers of Federal Reserve Banks, Los Angeles civil unrest, 225 Branches, and Offices, 312 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

342 79th Annual Report, 1992 Oil prices, 18, 82 Real estate—Continued Operation Desert Storm/Shield {See Persian Lending Seminar, 227 Gulf war) Lending standards, supervisory policy, Over-the-Counter Marginable Stocks, list, 224 235 Sales during 1992, 8, 9 Settlement Procedures Act, 212 Packers and Stockyards Administration, Recommendations to the Board from other Department of Agriculture, 197, 199 agencies, 205 Participants Trust Company, 243 Regional Delivery System, issuance of Payments system, policy statement to over-the-counter bonds, 244 reduce risk, 98 Regulation of the U.S. banking structure Persian Gulf war, 35, 39, 53, 55, 77 Bank Holding Company Act, 229 Point-of-sale systems, 201 Policy actions Bank Merger Act, 229 Board of Governors, 95 Change in Bank Control Act, 230 Bank related activities, 231 Regulations Statements and other actions B, Equal Credit Opportunity Community Reinvestment Act, 105 Applicants right to receive copies of Highly leveraged transactions, 105 appraisal reports Priced services, withdrawal, 106 Interpretations, 190 Federal Open Market Committee C, Home Mortgage Disclosure Authorization for domestic open Disclosure of data concerning home market operations, 109 purchases and improvements, 186 Authorization for foreign currency D, Reserve Requirements of Depository operations, 111 Institutions Domestic policy directive, 111 Increase in transaction balances to Foreign currency directive, 113 which lower reserve requirement Procedural instructions, foreign applies, 96 currency operations, 113 Reduction in reserve requirements, 95 Price developments, 3, 17, 18, 58, 82 Reduction of seasonal variation in Priced services required reserves, 95 Federal Reserve, 270 Reserve requirements, prevent evasion Withdrawal by Reserve Banks, 106 of on transaction accounts, 95 Profit and loss, Federal Reserve Banks, 272 Simplify calculations of reserve Publications in 1992, Board of Governors requirements, 237 Directory: Bank Holding Company F, Limitations on Interbank Liabilities Community Development Limit risk to insured institutions from Investments, 191 depository institution failures, 97 Guide to Regulation CC Compliance, H, Membership of State Banking 188 Institutions in the Federal Reserve Home Mortgages: Understanding the System Process and Your Right to Fair Lending, 193 Capital adequacy guidelines, change in Over-the-Counter Marginable Stocks, treatment of intangible assets, 98 list, 235 Prompt corrective action to financially Securities Credit Transactions troubled institutions, 97 Handbook, Federal Reserve J, Collection of Checks and Other Items Regulatory Service, 235 by Federal Reserve Banks and Funds Transfers through Fedwire Real estate Policy statement to reduce risks in the Appraisals, supervisory policy, 225 payments system, 98 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 343 Regulations—Continued Regulations—Continued K, International Banking Operations CC—Continued Federal Deposit Insurance Corporation Federal Deposit Insurance Corporation Improvement Act of 1991, Improvement Act of 1991, amendment to implement amendment to implement provisions, 99 provisions, 103 Foreign Bank Supervision DD, Truth in Savings Enhancement Act of 1991, Truth in Savings Act of 1991, new amendment to implement regulation to implement provisions, 99 provisions, 104 O, Loans to Executive Officers, Truth in Savings Act of 1991, Directors, and Principal regulation to amend, 188 Shareholders of Member Banks Regulatory burden Federal Deposit Insurance Corporation Reviews, 237 Improvement Act of 1991, Study on, 228 amendment to implement Regulatory Reports Monitoring System, provisions and make technical 221 revisions to clarify rules, 100 Report of Assets and Liabilities of U.S. Home equity loans to bank officials, Branches and Agencies of Foreign amendment to Regulation Z, 103 Banks, supplement, 228 Loans to executive officers, 187 Q, Prohibition against the Payment of Reserve requirements (See also Interest on Demand Deposits Regulations: D) Truth in Savings Act of 1991, Depository institutions, table, 281 conforming changes of new Reduction in percent of, 95 regulation DD to implement Reduction in seasonal variation of provisions, 104 required reserves, 95 Y, Bank Holding Companies and Change Regulatory simplification, 237 in Bank Control Reserves and related items, 284 Brokerage and financial advisory Resolution Trust Corporation activities, amendment, 101 Banking structure regulation, 229 Capital adequacy guidelines, change in Credit markets, 26 treatment of intangible assets, 98 Economy and funding during 1992, 14 Expand activities, 238 Monetary policy, 45, 53, 78 Federal Deposit Insurance Corporation Resolution Trust Corporation Refinancing, Improvement Act of 1991, Restructuring, and Improvement Act implementation, 99, 100 of 1991, 223 Financial advisory services permitted, Risk-based capital standards, 223 238 Foreign Bank Supervision Safety and soundness, supervision of, 217 Enhancement Act of 1991, Salaries amendment to implement Board of Governors, 255 provisions, 99 Federal Reserve Banks, 269 Streamline burden of filing for merger, Saving and investment rates during 1992, 9 238 Z, Truth in Lending Section 20 subsidiaries, supervision, 220 Home equity disclosures and loans to Securities executive officers, 103, 187 Credit, 282 Interpretations, 190 Government securities dealers and CC, Availability of Funds and Collection brokers, 219 of Checks Municipal, dealers and clearing agencies, Extension of holds on checks, 188 219 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

344 79th Annual Report, 1992 Securities—Continued Teller's checks, 95 Regulation, 234 Thrift Institutions Advisory Council, 311 Section 20 subsidiaries, supervision, 220 Thrift Supervision, Office of, 192, 198, U.S. government 219, 234 Federal Reserve services, 243 Time deposits, 95 Holdings by Federal Reserve, 246 Training, Federal Reserve System staff, 226 Securities and Exchange Commission, 197, Transfer agents, supervision, 220 234 Transfers of funds {See also Fees and Securities Credit Transactions Handbook, Regulations: E) Federal Reserve Regulatory Service, Federal Reserve operations, volume, 279 publication, 235 Priced services, Federal Reserve, 270 Securities Exchange Act of 1934, 234 Transportation, Department of, 197, 198, Security Pacific Corporation merger with 205 BankAmerica Corporation, 200 Treasury Automated Auction System, 244 Senior Lending Seminar, 227 Treasury Direct, 243 Small Business Administration, 197 Treasury securities Society Corporation, 207 Bank holdings, by class of bank, 283 Special drawing rights, 260, 262, 284, 286, Federal Reserve Banks 288 Holdings, 260, 262, 268, 284, 286, State member banks {See also Member 288 banks) Income, 270 Amendment requiring prompt corrective Open market transactions, 266 action to financially troubled Repurchase agreements Tables, 260, 262, 266, 268, 284, 286, institutions, 97 288 Applications, 232 Treasury, Department of the, 197, 214, Assets and liabilities, 283 216, 219, 242, 245 Banking offices, changes in number, 290 Truth in Lending {See also Regulations: Z) Compliance complaints, 202, 203 Recommendation of Department of Depository Institutions Disaster Relief Transportation, 205 Act of 1992, 211 Truth in Lending Act Financial disclosure, 235 Compliance, 196, 198 Foreign branches, 232 Depository Institutions Disaster Relief Loans to executive officers, 235 Act of 1992, exceptions, 211 New regulation to limit risk from Truth in Lending Policy Guide, 198 depository institution failures, 97 Truth in Savings {See Regulations: DD) Number, by class of bank, 283 Truth in Savings Act of 1991, new Supervision and regulation of, 217 Regulation DD, to implement Student Loan Marketing Association, 243 provisions, 104 Study on Regulatory Burden, FFIEC publication, 228, 237 Water Tower Trust and Savings Bank, Supervision and regulation, responsibilities, application to be acquired by 216 Gore-Bronson Bankcorp, Inc., 200 Supervisory Policy Concerning Selection of West Texas intermediate, 18, 82 Securities Dealers and Unsuitable Investment Practices, 227 Yankee CD, 65, 89 . Supervisory Policy Statement on Securities Activities, 227 Survey Research Center, index on consumer sentiment, 50 Synovus Financial Corporation, 207 System to Estimate Examination Ratings, 221 FRB1/1-12500-0493C Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis