Annual Report of the Federal Reserve Board, 1993

ort \£_^ 1993 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 the Board of Governors of the Federal Reserve System, Publications Services, Mail Stop 127, Washington, DC 20551. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Letter ofTransmittal BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Washington, D.C., April 15, 1994 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 Eightieth Annual Report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 1993. 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 1993 3 INTRODUCTION 5 THE ECONOMY IN 1993 6 The household sector 8 The business sector 11 The government sector 13 Labor market developments 15 Price developments 19 MONETARY POLICY AND FINANCIAL MARKETS IN 1993 19 The implementation of monetary policy 23 Money and credit flows 29 INTERNATIONAL DEVELOPMENTS 30 Foreign economies 33 U.S. international transactions 35 Foreign exchange markets 35 Foreign currency operations 37 MONETARY POLICY REPORTS TO THE CONGRESS 37 Report on February 19, 1993 64 Report on July 20, 1993 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Part 2 Records, Operations, and Organization 91 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS 91 Regulation A (Extensions of Credit by Federal Reserve Banks) 91 Regulation B (Equal Credit Opportunity) 92 Regulation C (Home Mortgage Disclosure) 92 Regulation D (Reserve Requirements of Depository Institutions) 93 Regulation H (Membership of State Banking Institutions in the Federal Reserve System), Regulation K (International Banking Operations), and Regulation Y (Bank Holding Companies and Change in Bank Control) 93 Regulation H and Regulation Y 93 Regulation O (Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks) 94 Regulation DD (Truth in Savings) and Regulation Q (Interest on Deposits) 94 Rules of procedure 95 Rules regarding delegation of authority 95 Rules regarding equal opportunity 95 Policy statements and other actions 98 1993 discount rates 101 MINUTES OF FEDERAL OPEN MARKET COMMITTEE MEETINGS 102 Authorization for domestic open market operations 103 Domestic policy directive 103 Authorization for foreign currency operations 105 Foreign currency directive 106 Procedural instructions with respect to foreign currency operations 106 Meeting held on February 2-3, 1993 125 Meeting held on March 23, 1993 135 Meeting held on May 18, 1993 145 Meeting held on July 6-7, 1993 158 Meeting held on August 17, 1993 166 Meeting held on September 21, 1993 176 Meeting held on November 16, 1993 187 Meeting held on December 21, 1993 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

199 CONSUMER AND COMMUNITY AFFAIRS 199 Regulatory matters 204 Community affairs 206 FFIEC and other interagency activities 207 Economic effects of the Electronic Fund Transfer Act 209 Compliance examinations 210 Compliance with consumer regulations 214 Applications 215 Complaints about state member banks 217 Unregulated practices 218 Consumer Advisory Council 219 Testimony and legislative recommendations 220 Recommendations of other agencies 221 LITIGATION 221 Bank Holding Company Act—review of Board actions 221 Litigation under the Financial Institutions Supervisory Act 222 Other actions 225 LEGISLATION ENACTED 225 Government Securities Act Amendments of 1993 227 North American Free Trade Agreement Implementation Act 228 Omnibus Budget Reconciliation Act of 1993 228 Unclaimed insured deposits 229 Depository Institutions Disaster Relief Act of 1993 231 BANKING SUPERVISION AND REGULATION 232 Scope of responsibilities for supervision and regulation 238 Supervisory policy 244 Regulation of the U.S. banking structure 248 International activities of U.S. banking organizations 249 Enforcement of other laws and regulations 251 Federal Reserve membership 253 REGULATORY SIMPLIFICATION 253 Loans to officers, directors, and principal shareholders 253 Consumer leasing 255 FEDERAL RESERVE BANKS 255 Developments in Federal Reserve services 260 Examinations 260 Income and expenses Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

I • - i-U ^<-h' ' T;,^ N \S ^ i minued 261 Holdings of securities and loans 261 Volume of operations 262 Federal Reserve Bank premises 263 Financial statements for priced services 2W HOARD OF GOVERNORS FINANCIAL STATEMENTS 275 STATISTICAL TABLES 276 1. Detailed statement of condition of all Federal Reserve Banks combined, December 31,1993 278 2. Statement of condition of each Federal Reserve Bank, December 31, 1993 and 1992 282 3. Federal Reserve open market transactions, 1993 284 4. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities, December 31, 1991-93 285 5. Number and salaries of officers and employees of Federal Reserve Banks, December 31, 1993 286 6. Income and expenses of Federal Reserve Banks, 1993 292 7. Income and expenses of Federal Reserve Banks, 1914-93 296 8. Acquisition costs and net book value of premises of Federal Reserve Banks and Branches, December 31, 1993 297 9. Operations in principal departments of Federal Reserve Banks, 1990-93 298 10. Federal Reserve Bank interest rates, December 31, 1993 299 11. Reserve requirements of depository institutions 300 12. Initial margin requirements under Regulations T, U, G, and X 301 13. Principal assets and liabilities and number of insured commercial banks, by class of bank, June 30, 1993 and 1992 302 14. Reserves of depository institutions, Federal Reserve Bank credit, and related items—year-end 1918-93, and month-end 1993 308 15. Changes in number of banking offices in the United States, 1993 309 16. Mergers, consolidations, and acquisitions of assets or assumptions of liabilities approved by the Board of Governors, 1993 *21 FEDERAL RESERVE DIRECTORIES AND MEETINGS 322 Board of Governors of the Federal Reserve System 324 Federal Open Market Committee 325 Federal Advisory Council 326 Consumer Advisory Council 327 Thrift Institutions Advisory Council 328 Officers of Federal Reserve Banks, Branches, and Offices 329 Conferences of chairmen, presidents, and first vice presidents 330 Directors 350 MAPS OF THE FEDERAL RESERVE SYSTEM 352 INDEX Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Parti Monetary Policy and the US. Economy in 1993 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction Nineteen ninety-three was a favorable pace, and the unemployment rate year for the U.S. economy, with notable dropped almost a percentage point over gains in real output, declines in jobless- the year. Measured by the consumer ness, and a further small drop in the rate price index, the rate of inflation edged of inflation. Financial conditions condu- lower in 1993, with the rise in prices cive to growth prevailed throughout the over the four quarters of the year year and gave considerable impetus to amounting to only 23A percent. The peractivity. With the Federal Reserve keep- formance of the U.S. economy stood in ing reserve market pressures unchanged, sharp contrast to the continued sluggish short-term interest rates held steady dur- growth in many of the other industrial ing the year at unusually low levels, countries and helped to buoy the tradeespecially when measured relative to weighted value of the dollar on foreign inflation or inflation expectations. In exchange markets. addition, long-term rates declined fur- The strength in spending was supther, partly in response to actions taken ported by increased borrowing by both by the Congress and the Administration households and businesses. Continuing to put the federal deficit on a more declines in a number of interest rates, favorable trend. which sparked considerable refinancing Against this backdrop, households of existing obligations, helped to trim and businesses were able to take further debt service burdens for both sectors, steps to reduce their burden of debt undoubtedly facilitating the pickup in service, and more expansive attitudes borrowing and spending. Indicators of toward spending and the use of credit financial stress, including loan default seemed to take hold. Spending in the rates and bankruptcy filings, took a interest-sensitive sectors of the econ- decided turn for the better in 1993. Boromy surged ahead, with particularly rowing by households was robust large advances in residential investment, enough to raise the ratio of debt to disbusiness outlays for fixed capital, and posable income; business debt, held consumer durable goods. The growth of down in part by equity issuance, dereal gross domestic product picked up clined relative to income. All told, the sharply in the second half, and the debt of the nonfinancial sectors is estiincreases for all of 1993 cumulated to mated to have grown 5 percent, the same about 3V* percent according to prelimi- as in 1992, as a diminution of the net nary estimates. In the labor market, funding needs of the federal government employment moved up at a moderate was about offset by the pickup in private demand. This growth placed the debt aggregate in the lower half of its 4 percent to 8 percent monitoring range. NOTE. The discussion here and in the following two chapters is adapted from Monetary Policy The growth of M2 slowed in 1993, Report to the Congress Pursuant to the Full albeit considerably less than the deceler- Employment and Balanced Growth Act of 1978 ation in nominal GDP. For the year, M2 (Board of Governors, February 1994). Data cited advanced 1 xh percent, placing it a little here and in the next three chapters are those available as of mid-March 1994. above the lower bound of its 1 percent Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80th Annual Report, 1993 to 5 percent annual growth cone. M3 generation. In addition, labor productivexpanded Vi percent, the same pace as ity, the ultimate source of rising living in 1992, and a bit above the lower bound standards, appears to be trending up at a of its 0 percent to 4 percent annual stronger pace than it did through much range. The ranges had been adjusted of the 1970s and 1980s. down by the Federal Open Market Com- The prospects for sustained growth mittee during 1993. The adjustments also have been bolstered by government were technical in nature and reflected actions in the areas of fiscal policy and the Committee's judgment as to the trade policy. In the fiscal area, steps that extent of the ongoing distortions of were taken in 1993 have been helpful in financial flows relative to historical pat- bringing about a decline in the federal terns and of consequent increases in budget deficit and reducing the growth velocities—that is, the ratios of nominal of federal debt, thereby freeing up a GDP to money. greater portion of the nation's limited The special factors shaping the saving for use in financing investment growth of the monetary aggregates and growth. In the trade area, the naincluded a marked preference by bor- tion's long-standing support of an open rowers for capital market financing, world trading system was reaffirmed by rather than bank loans, and a configura- the passage of the North American Free tion of market returns that enticed inves- Trade Agreement and the agreement in tors away from the traditional financial the Uruguay Round—actions that will products offered by depositories. Bond yield important benefits over time not and stock mutual funds were the pri- only to the United States but also to its mary beneficiaries of this shift, with trading partners. inflows into such funds in 1993 setting a In the area of monetary policy, the new record. This continuing redirection strategies pursued in recent years have of credit flows has rendered the move- been instrumental in achieving progress ments of the broad monetary aggregates against inflation and promoting condiless representative of the pace of nomi- tions favorable to economic growth. The nal spending than was evident in the challenge ahead is to build on that favorlonger historical record. In 1993, nomi- able performance in an economy that nal GDP grew about 5Vi percent, or will likely be operating at higher levels 4 percentage points above the rate of of resource utilization than it has in expansion of M2 and nearly 5 percent- recent years. With success in keeping age points above that of M3. In light the economy on course toward the longof uncertainties about the relationship run goal of price stability, the prospects between money and nominal income, for sustained expansion will be greatly the Federal Reserve continued to rely enhanced. • heavily on a variety of financial and economic indicators in formulating policy. Along with the immediate economic gains achieved in 1993 came further progress in putting the economy on sounder footing for the long haul. With the slowing of price increases of recent years, the underlying rate of inflation has been reduced to the lowest level in a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1993 The economy recorded significant gains and capital accounts of state and local in 1993, lifted, as in 1992, by a surge in governments increased further. activity in the latter part of the year. Job Growth of the economy continued to creation picked up, and the unemploy- be significantly influenced in 1993 by ment rate fell appreciably. Inflation con- the changing patterns of transactions tinued to trend lower. with foreign economies. The weakness The rise in real gross domestic prod- of activity in a number of foreign counuct over the year amounted to about tries that are major trading partners of 3% percent, according to preliminary the United States tended to limit the data from the Department of Commerce. gains in U.S. exports of goods and ser- For a second year, the growth of activity vices. At the same time, a significant was propelled chiefly by rapid gains in portion of the rise in domestic spending the investment outlays of households in this country continued to translate and businesses. Households boosted into rapid increases in imports. Net their purchases of homes and motor exports of goods and services thus fell vehicles considerably, and spending for for the second year in a row, after a run household durables also rose rapidly. of several years in which real export Business investment in computers con- growth had outpaced the growth of real tinued to grow at an extraordinary pace imports by a considerable margin. in 1993, and outlays for other types of The CPI rose 2.7 percent over the capital equipment strengthened. Invest- four quarters of 1993, after increases ment in nonresidential structures, which of about 3 percent in both 1991 and had gone through a protracted decline in 1992. Price increases were damped last the latter part of the 1980s and early 1990s, rose moderately. Bolstered by the gains in these sectors, the four-quarter Chanee in Real GDP rise in the final purchases of households Percent, annual rate and businesses amounted to 5 percent in real terms in 1993, matching the large 1992 rise. Not since the 1983-84 period had private final purchases exhibited a comparable degree of strength. I The increase in private spending in 1993 was augmented by a pickup in the spending of state and local governments, especially for construction. By contrast, real federal purchases of goods and services—the part of federal spending that is included in GDP—fell sharply, as outlays for national defense continued to trend lower. The federal budget defi- 1989 1990 1991 1992 1993 cit declined somewhat in fiscal 1993, The data are seasonally adjusted and come from the Department of Commerce; they are measured in terms of but the combined deficit in the operating 1987 dollars. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80th Annual Report, 1993 year by falling oil prices, near-stable Expenditures for a number of other prices for non-oil imports, and a further types of durable goods also rose rapidly rise in labor productivity, which held in 1993. Outlays for furniture and applidown production costs in the domestic ances scored further hefty gains, in coneconomy. junction with sharp increases in sales of new and existing homes. Consumer purchases of home computers and other The Household Sector electronic equipment remained on a Consumer spending recorded a second steep uptrend. In total, outlays for durayear of brisk growth in 1993. Support ble goods other than motor vehicles for the rise in expenditures came from increased more than 9 percent over the declines in interest rates and moderate year, after a rise of 10 percent in 1992. increases in real incomes. Household Other types of consumer expenditures, balance sheets continued to strengthen which typically exhibit less cyclical in 1993 and debt servicing burdens variation than do outlays for durables, diminished, easing the financial strains rose moderately, on balance, during that had inhibited spending earlier in the 1993. Consumer purchases of nondura- 1990s. ble goods increased about 2 percent, In real terms, the 1993 advance in after a jump of more than 3V£ percent in personal consumption expenditures 1992. Spending for services rose nearly (fourth quarter to fourth quarter) 3 percent during 1993, an increase of amounted to about 3lA percent. After roughly the same magniture as that of surging in late 1992, growth of real out- the previous year. lays slowed in the first quarter of 1993. Real income continued to advance in Whatever tendency there may have been 1993, although its trend was masked by for a "payback" after a period of unusu- tax considerations that caused a sizable ally rapid growth was reinforced by a volume of bonuses that would have been severe late-winter storm on the East Coast, which temporarily hurt retail sales. Thereafter, spending proceeded at Change in Real Inco*~~ "^ a relatively strong pace over the remain- Percent, annual rate ing three quarters of the year. Consumer expenditures for motor vehicles increased 6 percent in real terms over the four quarters of 1993, after rising 9 percent the previous year. The advance in expenditures continued to come partly from the replacement needs of individuals who had put off buying vehicles earlier in the 1990s, as well as from growth in consumers' desired stock of vehicles. Increasingly, I buyers have opted for vans, light trucks, is and other vehicles instead of cars, and annual sales of these vehicles in 1993 1989 1990 1991 1992 1993 reached the highest level on record. Car sales also rose, but they remained well The data are seasonally adjusted and come from the Department of Commerce; they are measured in terms of below previous highs. 1987 dollars. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1993 paid to workers in early 1993 to be holds have been holding part of their shifted into the latter part of 1992. saving in the form of consumer dura- Abstracting from these shifts in timing, bles, which, at the time of purchase, are the beneficial effects of continued eco- counted fully as consumption in the nomic expansion showed through in national accounts, but which in reality most categories of income, much as they will yield households a flow of services had in 1992. Wage and salary accruals, a over time. measure of income as it is earned rather Household wealth rose further in than as it is disbursed, rose about 1993. As in 1992, the total nominal AlA percent in nominal terms over the value of household assets increased at a four quarters of 1993, considerably out- pace moderately faster than the rate of pacing the rate of inflation for the sec- inflation. Large increases in stocks and ond year in a row. Further gains also bonds boosted the nominal holdings of were reported over the course of 1993 in financial assets, more than offsetting a dividends and in the income of propri- reduction in the aggregate holdings of etors, both farm and nonfarm. Transfer deposits and credit market instruments. payments, which tend to vary inversely The nominal value of tangible assets with the state of the economy, slowed in was lifted by heavy investment in con- 1993 after rising at rates of 10 percent or sumer durables and residential strucmore in each of the four previous years. tures and by a rise in the average price Interest income, which had declined on of existing residential properties. With a net in 1991 and 1992, edged up slightly jump in the growth of consumer credit over the four quarters of 1993. Because and a slight pickup in the growth of of the shift in timing of bonuses, growth home mortgage debt, household liabiliof real disposable income in 1993 was ties rose somewhat faster than in 1992. noticeably less than in 1992. However, Nonetheless, net worth appears to have the cumulative gain over the two-year increased in both real and nominal period was about 6 percent, a clear terms. The incidence of financial stress step-up from the performance of the among households diminished further in three previous years, when real income 1993, as delinquency rates on various growth had averaged less than 1 percent types of household debt continued to per year. decline, in some cases to the lowest The personal saving rate—measured levels since the first half of the 1970s. as the percentage of nominal after-tax According to survey data, households' income disbursements that are not used own assessments of their financial situafor consumption or other outlays— tions improved, on net, with some surdeclined nearly 2 percentage points, on vey readings the most upbeat in more net, over the course of 1993. However, than three years. the saving rate in late 1992 had been Residential investment increased temporarily elevated by the aforemen- nearly 8 percent in real terms over the tioned speedup of bonus payments. four quarters of 1993, building on the Looking through that blip of late 1992, a 18 percent rise of 1992. As in 1992, downward drift still is evident in the most of the advance came from saving rate from mid-1992 to the end of increased construction of new single- 1993. Such a pattern is not uncommon family homes. The construction of when economic recovery is taking hold multifamily housing continued to be and consumer purchases of durable adversely affected by a persistent overgoods are rising rapidly. In effect, house- hang of vacant rental units. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 80th Annual Report, 1993 In the single-family market, the impe- goes back to 1968). Although sales of tus for activity continued to come new homes proceeded more erratically mainly from declines in mortgage inter- from month to month, their increase est rates, which by autumn had dropped over the four quarters of the year to their lowest levels in more than two amounted to nearly 25 percent. Housdecades. Fairly sharp declines in mort- ing construction also strengthened. The gage interest rates took place early in number of single-family starts increased the year, but the effect on housing activ- about 18 percent over the year, reaching ity was apparently short-circuited for the highest quarterly level since 1979. a time by a number of influences. A According to survey data, consumers' severe blizzard on the East Coast in assessments of home-buying conditions mid-March temporarily waylaid the continued to be very upbeat at year-end, start-up of construction in that region, as were builders' ratings of market and a huge run-up in lumber prices dur- conditions. ing late winter also may have discour- Activity in the multifamily housing aged some new construction for a while. market remained depressed in 1993. In Concerns about the possible loss of jobs the mid-1980s, tax incentives and the perhaps continued to deter some poten- relatively easy availability of credit tial homebuyers. Other buyers may sim- encouraged overbuilding in many ply have been holding back, waiting to locales. The proportion of multifamily see how far rates eventually would fall. rental units that were vacant soared and In any event, the effects of the drop in has remained high even as the construcmortgage rates began to show through tion of multifamily units has dwindled. with greater force over the summer and Starts of these units reached the lowest fall, and considerable strength had levels on record early in 1993, and emerged by year-end in all the major they picked up only slightly thereafter, indicators of single-family housing despite restoration of tax credits for lowactivity. Sales of existing homes rose income units. without interruption from April on. By the fourth quarter they had climbed to The Business Sector the highest level on record (the series The year saw appreciable gains in most important barometers of business activ- Private Housing Starts Millions of units, annual rate ity. Output of the nonfarm business sector increased more than 4 percent, slightly more than during 1992. Profits rose further, business balance sheets continued to strengthen, and capital spending surged. In the industrial sector, production rose 4lA percent, the largest advance in 0.5 six years. The production gain was at least moderate in each quarter, and in the final quarter it was quite large—on the order of 63A percent at an annual rate. Output of business equipment held 1987 1989 1991 1993 to a strong uptrend throughout the year, The data are seasonally adjusted and come from the Department of Commerce. as did the production of materials that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1993 are used as inputs in the durable goods and the interest rates on their assets; industries. The output of construction insurers' profits suffered less drag from supplies rose moderately in the first half natural disasters than in 1992, the year of the year and at a stronger pace in the of hurricane Andrew. The profits of nonsecond half. Motor vehicle assemblies financial corporations moved up slightly also rose appreciably, with strength further over the first three quarters, early in 1993 and in the year's final boosted by the rise in the volume of quarter more than offsetting a stretch of output over that period. Operating sluggishness through the middle part profits per unit of output held fairly of the year. By contrast, output of con- steady, close to the high level reached in sumer goods other than motor vehicles the final quarter of 1992. Although nonrose only a small amount, and produc- financial corporations raised their prices tion of defense and space equipment fell by only a small amount over those three 9Vi percent further, extending a down- quarters, they were able to maintain unit ward trend that began in 1987. profit margins through continued tight The amount of spare capacity in the control over costs. Gains in productivity industrial sector continued to diminish. restrained the rise in unit labor costs, The utilization rate in December, and net interest expenses per unit of 83.0 percent, was up more than 2 per- output continued to edge lower. centage points from the level of a year Business fixed investment increased earlier and was at the highest level since 15 percent in real terms over the four the summer of 1989. In manufactur- quarters of 1993, after a rise of IVi pering, capacity use in primary-processing cent in 1992. A spectacular increase in industries was above its long-run aver- outlays for office and computing equipage throughout 1993, and the rate ment accounted for about half of the of utilization in advanced-processing 1993 gain. Business expenditures for industries had moved up almost into line these items increased more than 25 perwith its long-run average by year-end. cent in nominal terms over the year, the Corporate profits, which had surged steepest annual gain since 1984, and the in 1992, increased an additional 6V2 per- rise in real terms was greater still. The cent over the first three quarters of 1993 latest computers are far more powerful and appear to have risen further in the than those that were at the forefront only year's final quarter. Financial institutions in general continued to benefit in 1993 from the persistence of a relatively Corporate Profits before Taxes wide margin between their cost of funds Percentage of nominal product Industrial Production Index, 1987 = 100 1987 1989 1991 1993 Profits of nonfinancial corporations from domestic operations, with adjustments for inventory valuation and capital consumption, divided by GDP of nonfinancial 1989 1990 1991 1992 1993 corporate sector. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

10 80th Annual Report, 1993 a few years ago, and highly competitive worst of the decline in office construcmarket conditions have kept prices on tion might be over. The rate at which a downward course. The many busi- real outlays fell in 1993 was much nesses eager to boost labor productivity smaller than the declines of the three and overall operating efficiency pro- previous years. In addition, the national vided a huge market for the new vacancy rate for office buildings, while products. still quite high, moved down somewhat; Excluding office and computing the improvement was most noticeable equipment, outlays for capital equip- in suburban areas, where vacancy rates ment increased about MVi percent in previously had been the highest. The real terms during 1993, the biggest rise value of contracts for construction of in ten years. Business expenditures for office buildings firmed over the course motor vehicles advanced about 14 per- of the year. cent, as investment in trucks, which had Investment increased for most other strengthened considerably in 1992, types of structures. Outlays for indusclimbed further. Factories producing trial structures, which had declined heavy trucks were operating at or near sharply in 1991 and 1992, rose about full capacity at year-end. Spending for 9Vi percent, on net, over the four quarcommunication equipment also ad- ters of 1993. Outlays for commercial vanced sharply, as did real outlays for structures other than office buildings many other types of machinery and increased sharply for a second year; by equipment. Diminished slack in many the fourth quarter, they had retraced industries and expectations of continued nearly half of the steep decline that took business expansion were among the place during 1990 and 1991. Investment chief factors giving rise to the increase in drilling also rose as incentives from in these outlays. Internal cash flow pro- rising prices for natural gas apparently vided a ready source of finance. offset the disincentives associated with Commercial aircraft was the most falling oil prices. Spending for other notable exception to the general upward types of structures rose by a small trend in equipment spending. Outlays amount in the aggregate. for aircraft plunged in the second half of 1993, and survey data pointed to continued weakness in 1994. The reductions in Change in Real Business Fixed Investment outlays had been foreshadowed by ear- Percent, annual rate lier declines in new orders, and producers of aircraft have been scaling back their operations for some time. 20 Business investment in structures rose about 5Vi percent, the first annual 10 increase since 1989. Declines in the + intervening years had cumulated to 0 about 18 percent. Within the sector, divergent trends were evident once 10 again. Outlays for the construction of office buildings fell for the sixth consecutive year, to a level two-thirds below 1989 1990 1991 1992 1993 the peak of the mid-1980s. Several indi- The data are seasonally adjusted and come from the Department of Commerce; they are measured in terms of cators suggested, however, that the 1987 dollars. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1993 \\ Swings in business inventory invest- and cut deeply into yields of the crops ment played only a small role in the that were planted. Inventories of some 1993 economy. Inventory accumulation major field crops tightened markedly. in the nonfarm business sector picked Farmers whose crops were hurt by up in the early part of the year but weather suffered income losses in 1993, slowed thereafter. Accumulation for the while the producers whose crops were year as a whole was of only modest not hurt benefited from rising prices. proportions, especially when compared Total net farm income appears to have with the rates of buildup seen during held in the range of other recent years, previous business expansions. Conceiv- at a level well within the extremes of ably, the usual cyclical patterns in inven- either boom or bust. tory change have been tempered to some Trends in business finance remained degree by the more sophisticated inven- favorable for sustained expansion. Busitory control procedures that have ness expenditures for fixed capital and become widespread in the business sec- inventories were financed almost entor in recent years. Toward year-end, tirely with funds generated internally, inventories appeared to be comfortably and, in the aggregate, the relatively little aligned with sales in most industries and external financing that did take place were lean in some. Most notable among came partly from positive net issuance the latter were the stocks of motor vehi- of equity. Debt rose slowly, both in cles, which were drawn down by pro- absolute terms and relative to the rapid duction delays through the summer and pace seen in the 1980s. With little strength in sales through the latter part growth in debt and interest rates down, of the year. In view of those develop- the portion of business cash flow rements, producers of motor vehicles quired for the repayment of principal scheduled a hefty rise in production for and interest declined further. the first quarter of 1994. In the farm sector, inventories declined. Stocks were pulled down by The Government Sector weather-related reductions in crop output, especially in parts of the Midwest, Federal purchases of goods and serwhere the worst flood of the century vices, the portion of federal outlays that took millions of acres out of production are included in GDP, fell 6V2 percent in real terms over the four quarters of 1993. Real outlays for national defense, C Billions of 1987 dollars, annual rate Change in Real Federal Purchases Percent Q4 to Q4 30 15 + 0 15 1989 1990 1991 1992 1993 1989 1990 1991 1992 1993 Total nonfarm sector. The data are seasonally adjusted and come from the Department of Commerce. The data are from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

12 80th Annual Report, 1993 which have been trending down since Taken together, the slowing of federal 1987, declined nearly 9 percent. Non- outlays and the pickup of receipts led to defense outlays fell slightly, on net, a decline in the size of the federal budafter rising fairly rapidly in each of the get deficit in fiscal 1993, after three three previous years. The level of real years of sharp increases. The 1993 defifederal purchases in the fourth quarter cit amounted to $255 billion and was of 1993 was down more than 10 percent equal to 4.0 percent of nominal GDP. from the peak of six years earlier. Real The previous year, the deficit had defense purchases dropped about 20 per- amounted to $290 billion and was equal cent over that six-year stretch. to 4.9 percent of nominal GDP. In fiscal Total federal outlays, measured in 1989, toward the end of the last econominal terms in the unified budget, nomic expansion, the size of the deficit rose 2 percent in fiscal 1993, the small- relative to nominal GDP had reached a est increase in six years. Outlays for cyclical low of 2.9 percent. defense fell about 2Vi percent in nomi- In the state and local sector, receipts nal terms, and net interest payments moved up about in step with the growth were down slightly—the first decline in of nominal GDP in 1993, but state and that category since 1961. Net expendi- local expenditures rose still faster. In tures for deposit insurance, which had nominal terms, the increases in spending been slightly positive in 1992, were neg- cumulated to a rise of about 7 percent ative in fiscal 1993, held down in part over the four quarters of the year. State by delays in funding the activities of the and local transfer payments to persons Resolution Trust Corporation. Federal slowed from the extraordinary rates of spending for income security slowed increase seen in the early 1990s, a refrom the rapid pace of 1991 and 1992, flection of improvement in the economy as economic expansion led to a reduc- and intensified efforts among state and tion in outlays for unemployment local governments to tighten control compensation and a less rapid rate of over these types of outlays. Nonetheincrease in outlays for food stamps. The less, the rate of rise in these payments growth in federal expenditures for Medi- remained above 10 percent in 1993. care and other health programs also Nominal purchases of goods and serslowed, but the rate of increase contin- vices rose moderately but at a pace ued to exceed the growth of nominal somewhat faster than that of 1992. The GDP by a considerable margin. The growth of federal receipts picked up a bit in fiscal 1993, to a pace roughly Federal Buadget Deficit n matching that of nominal GDP growth. Billions of dollars Combined receipts from individual income taxes and social insurance taxes, 300 which account for about 80 percent of total federal receipts, rose about 5Vi perl cent, after a gain of 3 percent in fiscal 1992. Receipts from corporate income taxes, which account for about half of the remaining receipts, increased 1989 1990 1991 1992 1993 more than 17 percent in fiscal 1993, The data are for fiscal years. They are on a unified after only a small gain in the previous budget basis and are from the Department of the fiscal year. Treasury. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1993 13 deficit in the combined operating and terms, the same as in 1992. Employment capital accounts of state and local gov- in the state and local sector again grew ernments widened further during the slowly by historical standards, and first three quarters of the year, from an increases in hourly compensation were end-of-1992 level that already was quite relatively small. State and local pursizable; in the fourth quarter, the deficit chases of goods rose moderately in real apparently shrank, but not by enough to terms. fully retrace the earlier increases. In real terms, purchases of goods and Labor Market Developments services by state and local governments increased nearly 3!/2 percent over the The labor market strengthened in 1993, four quarters of 1993, after gains of as economic expansion began to transabout l!/2 percent per year in both 1991 late more forcefully into increased job and 1992. State and local expenditures creation. Payroll employment, a meafor structures rose almost 12 percent in sure of jobs that is derived from a real terms over the year, according to monthly survey of establishments, rose preliminary data. Some of the spending more than 2 million over the twelve went for the repair or replacement of months of the year. Although this gain structures that had been damaged in was only moderate when compared with recent natural disasters, such as the increases in many years of the 1970s summer flooding in the Midwest. In and 1980s, it was about twice the addition, the efforts of state and local increase of 1992. governments to cope with the needs Hiring picked up in most major secof growing populations prompted tors in 1993. The number of jobs in increased investment in schools, high- retail and wholesale trade increased ways, and other state and local facilities. more than one-half million, the largest Low interest rates probably convinced annual rise since 1988. The number of state and local officials to undertake jobs in finance, insurance, and real more of this new construction in 1993 estate picked up a bit, after a five-year than they would have otherwise. Growth period that had encompassed three years in other types of state and local pur- of sluggish growth and two years of chases continued to be fairly restrained. unprecedented reductions. Construction Employee compensation, which makes employment rose 200,000, after three up nearly two-thirds of state and local years of sharp declines. purchases, rose about 1 lA percent in real The services industry added about 1.2 million new jobs in 1993. More than one-third of the increase came at firms Change in Real State and Local Purchases that supply services to other businesses; Percent, Q4 to Q4 in that group, the most rapid growth by far was in personnel supply firms— companies that essentially lease the services of their employees to other businesses, usually on a temporary basis. Many companies requiring additional labor apparently have been attracted by the flexibility of such arrangements, as well as by cost advantages, at least over 1989 1990 1991 1992 1993 the short run. The data are from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 80th Annual Report, 1993 Elsewhere in the services industry, Labor Market Conditions health services continued to generate Millions of jobs, annual rate a substantial number of new job oppor- Net change, total nonfarm payroll employment tunities in 1993, even though the gain was not quite as large as those of other recent years. Small to moderate employment gains also were reported during the year at firms supplying a wide variety of other types of services. Manufacturing employment continued to decline in 1993, but at a slower pace than in any of the three previous years. Although manufacturers boosted Percent output considerably, the gain was Civilian unemployment rate achieved mainly through another sizable rise in factory productivity. Labor input in manufacturing reportedly increased only slightly and only in the form of a lengthened workweek rather than increased hiring. By the latter part of the year, the average workweek in manufacturing had reached 41% hours, the longest since World War II. Hiring did pick Percent, Dec. to Dec. up late in the year, however. Reliance by manufacturers on workers from per- Change in employment cost index sonnel supply firms reportedly has Total compensation, private industry increased in recent years; because these workers are carried on the payrolls of 11|jg j1gjjg 1gg| |1n 11 the personnel firms, actual labor input in manufacturing in 1993 was greater than the data indicate. Like the survey of establishments, the monthly survey of households showed significant improvement in labor market Percent, Q4 to Q4 conditions in 1993. The measure of employment that is derived from this Change in output per hour Nonfarm business sector survey rose 2Vi million over the twelve months of 1993, after an increase of about Wi million during the previous year. At the same time, the number of unemployed persons fell more than 1 million over the course of 1993, and the civilian unemployment rate declined nearly a full percentage point, to a yearend level of 6.4 percent. 1987 1989 1991 1993 Growth of the civilian labor force— The data are from the Department of Labor. the sum of persons who are employed and those who are looking for work— Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1993 15 was relatively sluggish again in 1993. compensation growth held steady in The rise over the four quarters of the service occupations and edged down in year was 1.2 percent, only slightly faster some blue-collar occupations in which than the rate of growth of the working- fewer specialized skills are required. age population. Over the four years The overall rise in hourly compensation ended in 1993, labor force growth aver- during 1993 exceeded the rise in conaged less than 1 percent per year, and sumer prices by about 1 percentage the labor force participation rate edged point. Hourly wage gains more than kept down slightly, on net. The number of pace with inflation, and the value of individuals who desired work but did benefits provided to workers by their not seek it because of a perceived lack employers continued to rise rapidly in of job openings changed little over the real terms. course of 1993. In addition, the number Labor productivity continued to of individuals outside the labor force increase in 1993, albeit less rapidly than and not wanting a job rose about 0.8 per- in the earlier stages of the cyclical excent during the year, pulled up, in part, pansion. According to preliminary data, by a sharp increase in the number of output per hour in the nonfarm business retirees. Workers whose careers were sector rose 1.9 percent during the year, cut short by business restructurings and after increases of 2.2 percent in 1991 defense cutbacks probably augmented and 3.6 percent in 1992. Part of the gain the normal flow of workers into retire- over this three-year period is no doubt a ment. Growth in the number of persons reflection of normal cyclical processes. not wanting a job because of attendance The data, however, also seem to suggest in school also increased during 1993. To that the longer-run trend in productivity the extent that these individuals have is tilting up a bit more sharply than in been building their job skills, their lack the 1970s and 1980s, a result of heavy of current participation in the labor force investment by business in new inforcould turn into a positive factor for the mation technologies, the rising skill of economy over the longer run. workers in exploiting those technolo- The slowing of nominal increases in gies, and, perhaps, the more quiescent hourly compensation came to a halt in inflation environment of recent years. 1993. The employment cost index for With gains in labor productivity offsetprivate industry—a labor cost measure ting part of the 1993 increase in comthat includes wages and benefits and pensation per hour, unit labor costs in covers the entire nonfarm business the nonfarm business sector increased sector—increased 3.6 percent from just 0.9 percent, the smallest rise in ten December 1992 to December 1993, years. about the same as the rise of the previous year. Wages rose 3.1 percent over Price Developments the year, V2 percentage point more than in 1992, and the growth of benefits Inflation edged down a bit further in slowed only a little, to 5.0 percent. Com- 1993. The 2.7 percent rise in the CPI pensation gains picked up for workers in over the four quarters of the year was some white-collar occupations, notably the smallest increase since 1986, and the sales workers and managers. Slightly four-quarter rise of 3.1 percent in the bigger gains than in 1992 also were CPI excluding food and energy was the realized by workers in some blue-collar smallest increase in that measure in occupations. By contrast, the rate of more than twenty years. At the same Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

16 80th Annual Report, 1993 time, however, progress toward lower might have been in store for 1993 even inflation was sporadic during the year, had weather conditions been no worse and the slowing of price increases was than average. In the event, the weather less widespread than it had been in was unusually bad. Severe winter 1992. Scattered upward price pressures weather disrupted livestock production showed up in the commodity markets early in the year; drought in the eastern from time to time during 1993; late in states hurt crop production in that region the year these increases became more during the summer; and flooding of widespread. historic severity in the Missouri and The patterns of price change for items Mississippi river basins cut deeply into other than food and energy were more the production of major field crops. At checkered in 1993 than they had been in retail, effects of the various supply dis- 1992, a year when deceleration was ruptions showed through in the prices of widespread among both commodities meats, poultry, and fresh produce. Price and services. The CPI for commodities increases for other foods, which repreother than food and energy rose only sent by far the larger share of Votal food 1.6 percent over the four quarters of in the CPI, showed almost no accelera- 1993, 1 percentage point less than in 1992. Within this category, the CPI for tobacco fell 5 percent, after many years Change in Prices of large increases, and the price of Percent, Q4 to Q4 apparel rose less than 1 percent, an even Consumer smaller increase than in 1992. By contrast, the prices of motor vehicles moved up somewhat faster than in 1992; the price rise for trucks was the largest in recent years. The CPI for non-energy services increased 3.8 percent over the four quarters of 1993, about the same as the rise during the previous year. The index for medical care services slowed for the third year in a row, but airfares rose sharply for a second year. Price Consumer excluding food and energy increases for other services generally were little different from those in 1992, with a small deceleration for some items iiiiin and a small acceleration for others. Food prices picked up in 1993. The consumer price index for food increased 2.7 percent over the four quarters of the year, an acceleration of about 1 percentage point from the pace of the two previous years. Because price increases in those two previous years had been held 1987 1989 1991 1993 down, in part, by unusually favorable supply developments in agriculture, Consumer price index for all urban consumers. The data are seasonally adjusted and are from the Department some pickup of food price inflation of Labor. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1993 17 tion in 1993; most of the value added in imports and further increases in labor production of these other foods comes productivity in manufacturing were from nonfarm inputs. important elements in pricing restraint. Consumer energy prices declined The prices of intermediate materials 0.4 percent over the four quarters of excluding food and energy rose 1.5 per- 1993 after rising only moderately in cent over the four quarters of 1993, a 1992. With world oil production out- small step-up from the pace of the prestripping demand, crude oil prices fell vious year. sharply during the last three quarters of In the markets for raw commodities 1993, to levels in December that were and other primary inputs, scattered about 25 percent below those of a year upward price pressures emerged from earlier. Gasoline prices, after increasing time to time during the first three quarin the early part of 1993, turned down in ters of 1993, and fairly widespread March and fell for six additional months increases were reported in the year's thereafter. The string of declines was final quarter. The producer price index interrupted in October when federal for crude materials excluding food and gasoline taxes were raised, but they energy thus moved up sharply over the resumed in November and continued year, by more than 10 percent in all. The through year-end. Average pump prices weight of these inputs in GDP is quite for the fourth quarter were about 4 per- small, however, and in the absence of cent below the level of a year earlier. more general cost pressures, increases in Fuel oil prices fell about 3 percent over their prices usually do not impart much the same period. Prices of the service upward thrust to the prices of finished fuels—electricity and natural gas— goods. increased during 1993. The rise for elec- Inflation expectations, as reported in tricity amounted to 1.7 percent, slightly various surveys of consumers and other less than the increase posted in 1992. respondents, flared up for a time during Natural gas prices rose nearly 5 percent 1993 but retreated in the latter part of for the second year in a row; consump- the year. The most pronounced swing in tion of natural gas has picked up in expectations was reported in the survey recent years, after trending lower conducted by the University of Michithrough much of the 1970s and a large gan Survey Research Center, in which part of the 1980s. the rate of price increase expected one The producer price index for finished year into the future moved up from an goods, which includes both consumer average of 3.8 percent in the final quargoods and capital equipment and covers ter of 1992 to an average of 4.7 percent only the prices received by domestic in the third quarter of 1993; the rise was producers, increased just 0.2 percent fully reversed in the fourth quarter, howover the four quarters of 1993. An iden- ever. As in 1992, the surveys continued tical increase was reported in the PPI for to show one-year expectations of price finished goods other than food and change running somewhat higher than energy; the increase in this measure the actual increases of recent years. was the smallest in its history, which Longer-run expectations of price change goes back to 1974. As at retail, price remained higher still; for interviews increases for these domestically pro- conducted in the second half of 1993, duced goods were held down, in part, by the Survey Research Center's series on the sharp drop in prices of tobacco prod- average inflation rates that are expected ucts. More broadly, competition from over a five- to ten-year horizon ranged Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

18 80th Annual Report, 1993 from AV2 percent to 5 percent, down only slightly from the average rates reported earlier in the 1990s. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

19 Monetary Policy and Financial Markets in 1993 Financial repair continued in 1993 amid In assessing the incoming informaincreasing signs that borrowers and tion, the Federal Reserve judged that no lenders were more comfortable with change was needed in reserve and their balance sheet positions. House- money market conditions during 1993 holds, in particular, and firms, to a lesser to sustain the economic expansion withextent, stepped up their borrowing as out engendering inflationary pressure. the year progressed. Depository institu- With money market rates remaining in a tions, for their part, were sufficiently range not much, if at all, above the core encouraged by the stronger economy rate of inflation, however, the members and the improvement in their own finan- of the Committee believed that a tightcial conditions to ease the terms and ening in reserve conditions at some conditions of credit for businesses and point would likely be needed to avoid households. pressures on capacity and a pickup in Nonetheless, with efforts to inflation. strengthen financial positions continuing, financing remained concentrated in The Implementation capital markets, largely bypassing banks of Monetary Policy and thrift institutions. In part spurred by the higher returns available in those Most short-term interest rates ended markets, investors found bonds and 1993 where they had begun the year, at stocks to be more attractive alternatives quarter-century lows that had resulted than deposits, and flows into bond and from the substantial easing in reserve stock mutual funds were at record conditions engineered by the Federal levels. As a consequence, the monetary Reserve from 1989 to 1992. The rate aggregates continued to grow quite charged for adjustment borrowing at the slowly relative to the expansion of nom- discount window remained at 3 percent, inal income. Recognizing the ongoing and federal funds traded around the redirection of financial flows relative same rate. Despite the stability of shortto historical norms, the Federal Open term interest rates, longer-term interest Market Committee in February and rates fell as much as 1 percentage point July 1993 lowered the annual ranges for over the course of 1993, to settle at M2 and M3 for 1993 in two technical levels not seen on a sustained basis since adjustments totaling IV2 percentage the late 1960s. Investors apparently points for M2 and 1 percentage point for were encouraged by the prospects for M3. Uncertainty about the extent and low inflation and reduced federal budduration of the unusual change in get deficits. Helped by the decline in velocity meant that growth in the aggre- long-term rates and by brighter earnings gates could not be relied upon to guide reports, the stock market enjoyed strong changes in reserve conditions, and the gains. Committee continued to employ a wide In February 1993, the time of the first variety of information about financial Committee meeting of the year, incomand economic conditions for this ing information suggested that the econpurpose. omy had exhibited considerable strength Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

20 80th Annual Report, 1993 in the fourth quarter of 1992. Final esti- further. Readings on inflation sparked mates for that quarter put the increase in some concern about the potential for a real gross domestic product at a 53A per- buildup of inflationary momentum. With cent annual rate and the growth of nom- fundamental forces still suggesting furinal GDP in excess of 9 percent. Final ther disinflation, however, and with demand was seen to be strong, paced by those concerns not evident in capital household consumption and business market indicators, or in the exchange investment. With slack relative to value of the dollar, which remained relacapacity still considerable—the unem- tively steady, the Committee retained its ployment rate averaged IV* percent— symmetric directive. upward price pressures were not per- In May, Committee members were ceived to be near at hand. The expan- confronted with ambiguous indicators of sion of the monetary aggregates had economic activity, prices, and the finanfaltered around the turn of the year, but cial aggregates, which were all made special factors—importantly including a more confusing by a spell of bad decline of mortgage prepayments that weather that had distorted somewhat the constricted the level of transactions seasonal patterns of spending and prodeposits—seemed to account for some duction. As for the prices of goods and of the weakness. Against this backdrop, services, many analysts thought that the it appeared to the members of the Com- major indexes were distorted by diffimittee that unchanged reserve condi- culties in seasonal adjustment, but data tions would support economic expan- releases showing a variety of labor comsion and still be consistent with further pensation and price indexes on the high declines in inflation and inflation expec- side of investor expectations still roiled tations. Moreover, the situation did not financial markets. Slack in the economy seem to call for a presumption of the remained appreciable, which weighed likely direction of any intermeeting adjustment in reserve conditions; such a symmetric directive had been issued to Percent the Account Manager of the System Open Market Account at the end of the December 1992 meeting as well. Investor confidence in the longer-term 12 prospects in capital markets apparently strengthened in the weeks that followed, in part because of a growing perception that significant progress in reducing the path of future budget deficits might be in the offing. By the time of the March Committee meeting, bond yields had fallen appreciably, touching levels last observed in 1973, with the largest declines posted at the longest maturities. Indicators of real activity suggested 1982 1984 1986 1988 1990 1992 some slowing from the torrid fourth- The data are monthly averages. quarter pace, but, in labor markets, pay- The federal funds rate is from the Federal Reserve. roll employment had strengthened and The rate for three-month Treasury bills is the market rate on three-month issues on a coupon-equivalent basis the unemployment rate had moved down 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 21 against any pickup in inflation, but infla- ratcheting higher, with possible adverse tion expectations were in danger of consequences for inflation itself. Mean- Reserves. Money Stock, and Debt Aggregates Annual rate of change in percent, based on seasonally adjusted data except as notedl 1993 Item 1990 1991 1992 Year Ql Q2 Q3 Q4 Depository institution reserves2 Total 2.2 8.7 20.1 12.3 9.3 10.8 12.4 14.6 Nonborrowed 2.4 9.1 20.3 12.3 9.5 10.6 10.9 16.0 Required 1.8 9.4 20.3 12.6 8.7 12.4 12.3 14.6 Monetary base3 9.4 8.2 10.4 10.4 9.5 10.2 10.6 9.9 Concepts of money 4 Ml 4.2 7.9 14.3 10.5 8.3 10.7 12.0 9.4 Currency and travelers checks . 11.0 7.9 9.1 9.9 9.3 10.0 10.0 8.9 Demand deposits -.7 3.2 17.7 13.4 7.0 16.0 15.9 12.2 Other checkable deposits 3.5 12.3 15.6 8.4 8.6 6.5 10.0 7.3 M2 4.0 2.9 1.9 1.4 -1.3 2.2 2.6 2.1 Non-Mi components 4.0 1.2 -2.4 -J2.3 -5.2 -1.4 -1.5 -1.2 MMDAs, savings, and smalldenomination time deposits 2.8 .9 -2.4 -2.9 -4.6 -2.3 -2.4 -2.2 General-purpose and broker-dealer money market mutual fund assets 12.0 4.6 -4.2 -1.8 -7.7 .1 -1.8 2.1 Overnight RPs and Eurodollars (n.s.a.) ... 2.3 -3.8 4.8 9.7 -15.3 -5.6 30.6 29.9 M3 1.7 1.2 .5 .6 -3.2 2.1 1.1 2.4 Non-M2 components -7.1 -6.0 -6.3 -3.5 -12.8 1.6 -6.6 3.9 Large-denomination time deposits -9.7 -12.8 -15.7 -6.8 -17.4 -2.1 -7.0 -1.4 Institution-only money market mutual fund assets 21.5 33.4 18.4 -5.4 -17.6 -2.2 -10.4 8.8 Term RPs (n.s.a.) -12.4 -20.2 8.3 16.9 9.4 37.2 24.3 -5.8 Term Eurodollars (n.s.a.) -13.6 -10.7 -22.6 -1.1 -2.6 7.7 -32.8 25.6 Domestic nonflnancial sector debt . 6.6 4.6 5.0 5.0 4.0 4.5 5.7 5.2 Federal 10.2 11.3 10.7 8.4 7.6 10.4 9.2 5.5 Nonfederal 5.5 2.6 3.1 3.7 2.7 2.4 4.5 5.1 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

22 80th Annual Report, 1993 while, the latest readings on the mone- agreed that it was necessary to remain tary aggregates showed a burst of especially alert to the potential for a growth in early May, but tax-induced pickup in inflation. As a result, the distortions and a surge in prepayments Committee decided to retain the current of mortgage-backed securities made this degree of restraint in the reserve market information particularly difficult to and an asymmetric directive toward interpret. In the view of a majority of tightening. the members of the Committee, wage At the time of the August meeting of and price developments were suffi- the Committee, readings on inflation ciently worrisome to warrant position- were encouraging: Consumer prices had ing policy for a move toward restraint changed little, and producer prices had should signs of mounting inflation pres- fallen over recent months. Data on sures continue to multiply. Although spending and production had a weakish they saw no immediate need to alter the cast, and the persistence of the sluggishdegree of reserve pressure, they agreed ness in the second quarter had become that current conditions made it easier to more apparent. These data releases had envisage a tightening rather than an eas- bolstered investor confidence in the ing over the intermeeting period, a sense prospects for continued disinflation, and that was embodied in an asymmetric the recently passed legislation on the policy directive. federal budget offered the promise of In advance of the July meeting of the meaningful cuts in the deficit over the Committee, the unemployment rate had next several years. Accordingly, longermoved back up to 7 percent, and indus- term yields fell about 40 basis points. trial production had changed little over the preceding few months. The surge in the monetary aggregates in May apparently had not marked a trend toward Percent more rapid expansion in broad measures of money. Overall, the evidence pointed toward a sustained economic expansion and some ebbing of the recent upsurge 16 in inflationary pressures. News in that vein, along with progress in the Congress toward adoption of a deficitreduction package, had fostered a drop in longer-term bond yields in the days leading up to the meeting. The durability of that improvement in market sentiment remained an open question, however. Monetary policy could be viewed as relatively expansive in light of the behavior of a variety of other indicators, 1982 1984 1986 1988 1990 1992 including the growth in narrow mea- The data are monthly averages. sures of the monetary aggregates and The rate for conventional mortgages is the weighted average for thirty-year fixed-rate mortgages with level reserves and the low levels of money payments at major financial institutions and is from the market interest rates in both nominal Federal Home Loan Mortgage Corporation. and, in particular, real terms. In such The rate for U.S. government bonds is their market yield adjusted to thirty-year constant maturity by the an environment, Committee members Department of the Treasury. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 23 The resulting capital gains apparently with reserves ample and money-market added to the allure of stock and bond rates at the low end of the range of mutual funds, thereby weakening M2, experience over the past three decades, which moved up only slightly in July. the next move in policy would be to At this meeting, policymakers saw exist- tighten, but the members of the Commiting reserve conditions as consistent with tee agreed that until trends became their goals. Moreover, the dissipation of clearer, the current stance of policy the inflation threat and the encouraging should be maintained. The prospects of downward tilt to expectations of infla- heightened credit demands and forecasts tion suggested to members of the Com- of looming capacity pressures pushed mittee that the risks were more evenly up longer-term interest rates over the balanced than of late. As a result, the latter part of the year; by year-end, long- Committee reverted to a symmetric term rates were about 3/s percentage directive—instructions that carried no point from their yearly lows set in presumption as to the direction of an mid-October. Over that same span, the intermeeting move—which was retained dollar showed notable strength on for the remainder of 1993. foreign exchange markets. In the period leading up to the September Committee meeting, the unem- Money and Credit Flows ployment rate had edged lower, to 6.7 percent, housing starts had declined, The long expansion of the 1980s was and retail sales were flat in real terms. associated with growth of total debt of Substantial drags on economic growth domestic nonfinancial sectors that was remained: cutbacks in the defense sec- about Vh times the pace of nominal tor, uncertainties regarding the effects of GDP growth. In the wake of this other government policies that had the phenomenal leveraging, the recession potential to raise labor and production together with the tepid economic recovcosts, and slow growth on average in the ery from 1990 to 1992 was importantly foreign industrial economies. However, a balance sheet phenomenon that was sources of stimulus were also apparent: reflected in a slowing in debt growth. In the cumulative spur to spending pro- retrospect, the deceleration in debt was vided by low interest rates, especially at longer maturities; the lessening of balance sheet constraints on households Trillions of dollars and firms; and the improving financial condition of the depository sector, which was making credit more available. Given these conflicting influences on spending, the Committee deter- 12.5 mined that leaving reserve conditions unchanged would be most consistent with maintaining sustainable economic 12.0 growth. The incoming data in advance of the final two Committee meetings of 1993 indicated a robust near-term expansion 1992 1993 in activity with no immediate inflation- The range was adopted by the FOMC for the period ary pressure. There was a sense that from 1992:Q4 to 1993:Q4. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

24 80th Annual Report, 1993 one symptom of the general dissatisfac- refinance existing obligations, pushing tion of both borrowers and lenders with the gross issuance of public debt by their financial conditions, a concern that nonfinancial firms above $190 billion. also led to some restraint on spending Earlier efforts to restructure balance and asset accumulation. Nineteen sheets, along with the opportunities ninety-three saw some lessening of this afforded by lower long-term rates to restraint, and the growth of the debt of refinance existing obligations, apparthe nonfinancial sectors expanded 5 per- ently put households in a better position cent, close to the pace of nominal GDP to take on new debt in 1993. With debtgrowth. This performance put the debt service burdens holding at about 16 peraggregate in the lower portion of its cent of income, or about 2XA percentage 4 percent to 8 percent monitoring range, points below the peak set at the end a range that had been set at the first of the previous decade, and loan rates meeting of the year. declining substantially, households The debt of the nonfederal sectors assumed new liabilities rapidly enough, (nonfinancial businesses, households, on net, to push up the ratio of their total and state and local governments) ex- liabilities to disposable income to just panded 33/4 percent last year. For non- under 90 percent in 1993. The largest financial corporations, a pickup in fixed swing was in the consumer credit cateinvestment and inventory investment gory, as households evidently became outpaced increases in internally gener- more confident of the sustainability of ated funds, pushing the financing gap the economic expansion and made preinto positive territory after two years of viously delayed purchases of durable negative readings; as those firms sought outside funds, they turned in the main to long-term debt markets, but net equity Household Sector Finances issuance remained sizable as well. The Percent debt markets in 1993 saw far more Debt activity, however, than the net requirements for external funds implied. Low longer-term rates induced many firms to Financing Gap of the Nonfinancial Corporate Sector Percent 17 15 1975 1980 1985 1990 1975 1980 1985 1990 Percentage of disposable personal income. Debt is total Percentage of gross domestic product. Financing gap is credit market debt of the household sector. Debt service capital expenditures less internal funds arising from is a staff estimate of scheduled payments of principal and domestic operations. 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 25 goods, especially autos. The record extending credit in the early 1990s. But volume of mortgage originations mostly by 1993, commercial banks had made involved refinancings, but with a pickup substantial strides in improving their in construction activity and some capital standing. About three-quarters of cashing out of equity in the process of the assets at commercial banks were on refinancing, home mortgages expanded the books of well-capitalized instituabout 7 percent, on net, last year. tions as of September 1993, 2Vi times Overall, this pickup in liabilities was the proportion at the end of 1990. Partly dwarfed by a substantial expansion of as a consequence, banks reported on the asset side of the household balance Federal Reserve surveys a substantial sheet last year, raising net worth to a easing of terms and standards on busilevel about 43A times that of disposable ness and consumer loans during the income. In the allocation of their assets, year. Borrowers, however, endeavoring households continued to shun deposits to lock in longer-term funds, which are in favor of the investment products of not typically supplied by banks, continnonbank intermediaries, notably mutual ued to rely heavily on capital markets, funds and insurance companies. As a keeping the need of depositories to fund result, deposits shrank to less than asset expansion subdued. Depository 20 percent of total household assets, a credit did expand moderately in 1993, low for the period since World War II. marking a substantial rebound from the Much of the declining role for deposits declines posted in the previous three probably was attributable to the pat- years. The increase in depository credit tern of financial returns: investors, confronted by a steep yield curve, sought out the higher yields provided by longer Changes in Debt of maturity instruments, which were the Domestic Nonfn mostly available from outside the depos- and in Depository C itory sector. Percent Depository institutions, pressed by their own balance sheet problems, were 16 Debt unaggressive in seeking deposits and 12 B Percent 1960 1970 1980 1990 Domestic nonfinancial debt covers borrowing by households, farm businesses, nonfarm noncorporate businesses, corporate nonfinancial businesses, state and local governments, and the federal government. 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 1975 1980 1985 1990 the end of the previous quarter from the level at the end of Deposits of the household sector at all depository a given quarter (flow) and dividing by the level at the end institutions in the United States and in money market of the previous quarter. The quarterly percentage changes mutual funds, as a percentage of household assets. are then used in computing four-quarter moving averages. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

26 80th Annual Report, 1993 exceeded the growth of deposit funds, the fourth quarter of 1992 to the fourth as depositories made extensive use of quarter of 1993, M3 grew xh percent, equity, subordinated debt, and other ending the year a little above the lower nondeposit funds to finance the expan- bound of its annual range of 0 percent to sion of depository balance sheets. Bank 4 percent. This range had been adjusted credit increased 5 percent last year, after down for technical reasons to acknowltwo years of growth around 3Vi percent, edge the appreciable upward trend to while thrift credit contracted only a bit. M3 velocity over the past few years, Indeed, thrift credit is estimated to have which accompanied the shrinking role expanded in the second half of the year, of depositories in intermediating funds. pulled up by extensions of loans by The part of M3 exclusive to that aggrecredit unions that outweighed continu- gate declined 3!/2 percent, fourth quarter ing, albeit slackening, runoffs at savings to fourth quarter, being pulled down by and loans. a steep drop in institution-only money The slow expansion of depository market mutual funds. Overall, M3 credit, together with the increased reli- velocity rose nearly 5 percent in 1993, ance by banks on nondeposit funds, down about 1 Vi percentage points from damped the growth of M3 in 1993. From the previous year. Monetary Velocities j*pH Opportunity Costs Stock of M3 kaiio vjak: Percentage points, ratio scale Billions of dollars 6.5 Range 4.5 Opportunity cost 4,300 1.7 - 4,200 1992 1993 The range was adopted by the FOMC for the period 14 from 1992:Q4 to 1993:Q4. 7.0 ; 10 Stock of M2 Billions of dollars Range 5% 3,650 1984 1986 1988 1990 1992 • 3,550 The velocity of each aggregate is the ratio of gross 1% domestic product, measured in current dollars, to the stock of the aggregate. The opportunity cost of M2 is a two-quarter moving average of the three-month Treasury bill rate less the weighted average return on assets 1992 1993 included in M2. The calculation of the opportunity cost of The range was adopted by the FOMC for the period M1 corresponds to that of M2 and assumes a zero return from 1992:Q4 to 1993:Q4. on demand deposits. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 27 The velocity of M2 rose 4 percent in market rally trimmed as much as 1 per- 1993 after increasing nearly 5 percent in centage point from longer-term yields, 1992. The rise in velocity was posted the term structure still retained an abnoreven as the return on many competing mally steep tilt through all of 1993. short-term assets remained relatively Some investors were willing to expose constant, and it was this ongoing drift themselves to the greater price risk upward in the ratio between nominal inherent in capital market mutual funds GDP and the aggregate that led the in the pursuit of higher average returns. FOMC to reduce the annual growth Commercial banks took some measures range for M2 from the spread of 2 per- to keep those customers, if not their cent to 6 percent that was set in Febru- deposits: Many banks made it possible ary to the 1 percent to 5 percent range to buy stock and bond mutual funds that was ultimately in effect. In the in their lobbies. Promotion of these event, M2 grew \xh percent from the services picked up, and some banks fourth quarter of 1992 to the fourth sponsored their own mutual funds quarter of 1993, slowing slightly from or established exclusive marketing the 2 percent growth rate in 1992. Even arrangements with mutual fund comthis anemic expansion was accounted panies; these developments undoubtedly for in part by special factors. In particu- encouraged the diversion of deposits to lar, foreign demands for currency were mutual funds. strong, and transactions deposits were At the end of 1993, assets in stock boosted late in the year by the surge in and bond mutual funds totaled about mortgage refinancings that followed a %\xh trillion, up $400 billion from yeardrop in mortgage rates to levels not seen end 1992. About one-half of the Decemin a generation. Refinancings are associ- ber 1993 total was held by institutions ated with the temporary parking of funds and in retirement accounts—two categoin highly liquid deposit accounts. ries generally not in M2. M2 plus the Especially after taking account of remainder of stock and bond funds such special factors, the growth of M2 expanded at around a 5V2 percent annual was quite subdued in 1993, in large part rate in 1993, a pace roughly in line with because of the attractiveness of capital that of nominal GDP over the period. market instruments. Although the bond Ml grew 10!/2 percent in 1993, spurred on by sizable increases in currency and demand deposits. As noted above, the former was importantly aiiu DUIIU jvuuuai runus Percent boosted by foreign demands, while the latter was closely related to swings Billions of dollars M2 . // i S* 1,150 " •^ 10% 1,100 —~-**> 1,050 1985 1987 1989 1991 1993 Mutual fund data exclude institutional holdings and IRA and Keogh balances. 1992 1993 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

28 80th Annual Report, 1993 in mortgage refinancing. Ml velocity a result, the average maturity of the declined AV2 percent despite the relative Treasury securities held by the Federal stability of money market interest rates. Reserve moved up slightly over 1993, to In contrast, the narrow aggregate's 3.2 years. • velocity had followed the path of short rates down during the easing of monetary policy from 1989 to 1992. Altogether, the drop in Ml velocity in recent years illustrates both its sensitivity to interest rates and the fairly loose relationship of Ml with interest rates and income. With the rapid expansion of transactions deposits, total reserves grew at a 121/4 percent annual rate last year, down from the 20 percent pace posted in 1992. Adding the increase in currency resulted in 10V£ percent growth for the monetary base in 1993, the same performance as in the previous year. Confronted with this rapid expansion in transaction deposits, and therefore required reserves, and directed by the FOMC to keep reserve market pressures unchanged over all of 1993, the Domestic Desk at the Federal Reserve Bank of New York added about $35 billion of securities, on net, to the System Open Market Account over the course of the year. In keeping with previous FOMC instructions, those purchases were weighted more heavily than in the past toward longer-maturity instruments. As Mniiiriiv of Tivnsurv Dt^bt Years 1960 1970 1980 1990 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

29 f Ip *™ational Developments Economic activity in the major foreign can countries helped raise output growth industrial countries remained weak in there. In addition, stimulative policies 1993 and unemployment increased. pushed up the pace of economic activity These conditions kept increases in con- in Brazil. But in Mexico, authorities sumer prices low; on average, inflation responded to signs of overheating and in the foreign G-10 economies was only adopted policies that slowed growth to about 2lA percent.1 Foreign authorities nearly zero. responded to the ongoing economic Stagnant economic activity in several slack by easing money market condi- important U.S. export markets contribtions and by adopting stimulative fiscal uted to a further widening in the U.S. measures where scope to do so existed. merchandise trade deficit. U.S. exports In contrast, many developing coun- were limited to a rate of growth of tries experienced another year of strong only about half that of U.S. imports, economic growth. Continued rapid ex- which increased rapidly as the U.S. ecopansion of trade among Asian countries, nomic expansion continued. Net service especially with China, contributed to and investment receipts, held down by growth in this region. Ongoing eco- the slow growth abroad, remained at nomic reforms in several Latin Ameri- about the same level as in 1992, and net unilateral transfers did not change, so 1. The Group of 10 consists of Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, Exchange Value of the Dollar and the United States. Unless otherwise indicated, and Interest Rate Differential growth rates and inflation rates are calculated from !JOJ- Ratio scale, March 1973 = 100 the fourth quarter of 1992 to the fourth quarter of 1993, and averages for groups of countries are Price-adjusted weighted by the gross domestic products of the exchange value countries as valued after adjusting for differences of the dol in the purchasing power of their currencies. !!ar • 80 December 1992= 100 Canadian dollar 1975 1980 1985 1990 110 German mark The exchange value of the U.S. dollar is its weighted average exchange value in terms of the currencies of the 100 other Group of 10 (G-10) countries using 1972-76 total trade weights. Price adjustments are made using relative consumer prices. 90 The interest rate differential is the rate on long-term U.S. government bonds minus the rate on comparable foreign securities, both adjusted for expected inflation esti- 1993 mated by a thirty-six-month moving average of actual consumer price inflation or by staff forecasts where needed. Foreign currency units per dollar. The data are weekly. The data are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

30 80th Annual Report, 1993 the current account deficit worsened at a for economic reform crumbled, output pace about in line with that of the trade continued to contract. deficit. Labor-market conditions in most for- The value of the dollar rose about eign industrial countries worsened in 6 percent from December 1992 to 1993, raising concerns that structural December 1993 in terms of a trade- conditions as well as cyclical factors weighted average of the other G-10 cur- may be responsible for recent increases rencies. The dollar's appreciation was in unemployment. By the end of the slightly greater after adjustment for year, unemployment rates in France and changes in consumer price levels here Italy had moved up to 11% percent and and abroad because U.S. consumer price 14!/4 percent respectively. Although inflation exceeded the average rate of unemployment rates in Switzerland, inflation in the other G-10 countries by Sweden, the Netherlands, and other about xh percentage point. The main factor behind the increase in the dollar's value appears to have been the weak- Changes in GDP, Demand, and Prices ening of activity abroad during the Percent, from previous year strengthening of activity in the United States. This divergence in economic per- Gross domestic product Constant prices formance was associated with a substantial decline in foreign interest rates relative to U.S. rates. Foreign Economies Real output in both Japan and western Germany moved erratically in 1993 and Total domestic demand Constant prices gave little indication of sustained nearterm recovery. In addition, weakness was widespread elsewhere in continental Europe, with recoveries stalled in France, Italy, and many of the smaller countries. However, clear signs of expansion began to emerge in the United Consumer price index Kingdom, and Canada continued to make steady progress, although only at a moderate pace; activity in these countries was boosted by lower-valued currencies and firmer growth of export demand, especially from the United States. 1989 1991 1993 In Poland, Hungary, and the Czech Data for the foreign G-10 countries are weighted by the Republic, output stabilized, and further countries' GDP as valued after adjusting for differences in the purchasing power of their currencies; the data are progress was made in installing marketfrom foreign official sources. based economies. In Russia, however, Data for the United States are from the Departments of where average monthly inflation ex- Commerce and Labor. For GDP and domestic demand, the data are quarterly; ceeded 20 percent and political support for consumer prices, the data are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 31 smaller European countries with tradi- and the burden of promoting recovery tionally lower unemployment did not fell increasingly on monetary policy. reach the double-digit range, they too Money market conditions generally increased. In eastern Germany, the rate continued to ease in 1993; foreign shortof unemployment stabilized near 15 per- term interest rates, measured by a tradecent, and in western Germany it moved weighted average, fell about 300 basis up to 8 percent. Even in Japan, where points. German short-term interest rates measured unemployment has been were cautiously lowered in several very low historically, the unemploy- steps, to 6 percent; these moves were ment rate was nearly 3 percent at the accompanied by declines in interest end of 1993; more sensitive indicators, rates in the countries that held their cursuch as the ratio of job offers to appli- rencies well within the widened bands cants, also showed further deterioration of the European Monetary System's of labor market conditions. The excep- exchange rate mechanism (ERM).2 Free tions to the overall picture were Canada from ERM constraints, Italian authoriand the United Kingdom, where unem- ties and, to a lesser extent, U.K. authoriployment rates edged down from high ties maintained the downward movelevels. ment in short-term rates that they had Slack labor markets and wide gaps aggressively begun after leaving the between actual and potential output ERM in 1992. Short-term rates were moderated inflation pressures in the for- lowered about 300 basis points in eign G-10 countries. Italy's inflation Canada. In Japan, the discount rate was rate, 4 percent, was the lowest in nearly cut twice during the year, to a historic 25 years, even though the lira's external low of P/4 percent, and at year-end value declined significantly. In France, short-term interest rates were close to downward pressure on unit labor costs 2 percent. Although the growth of key helped keep inflation near 2 percent. In monetary aggregates remained subdued Japan, recession and the deflationary in most countries, it did pick up in the effect of a sizable appreciation in the United Kingdom. The Bundesbank's yen kept consumer price inflation to most closely watched monetary aggreonly \lA percent. Even in Canada and gate, M3, remained above its target the United Kingdom, where output gaps range of 4Vz percent to 6V2 percent narrowed somewhat and currencies throughout 1993, a development that depreciated, inflation remained below German authorities found worrisome in 3 percent. In western Germany, inflation their efforts to limit inflationary prespicked up to about 33/4 percent in 1993 sures. mainly because of the effect on con- The combined current account sursumer prices of additional indirect taxes; plus of the foreign G-10 countries without tax effects, inflation remained at widened nearly $60 billion in 1993, to about 3lA percent. $110 billion. This development was in Government budget deficits increased large part due to domestic demand, in response to cyclical factors in all foreign G-10 countries in 1993, and some foreign authorities, most notably in 2. The countries that continued to participate in Japan, took expansionary actions that the exchange rate mechanism after the departure further enlarged their deficits. Accord- of Italy and the United Kingdom in 1992 were Belgium, Denmark, France, Germany, Ireland, ingly, scope for additional fiscal mea- Luxembourg, the Netherlands, Portugal, and sures narrowed in most G-10 countries Spain. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

32 80th Annual Report, 1993 which grew more slowly in these econo- after the authorities adopted more stimumies than it did in key trading partners lative fiscal and monetary policies. in Asia and North America. In Japan, Large-scale privatizations lent credibilthe slump in the domestic economy and ity to the permanence of ongoing monetemporary valuation effects from the tary and fiscal reforms in Argentina, strengthening of the yen contributed to a where real output rose 6 percent, and $13 billion widening of the surplus. The in Chile, where it rose 5 percent. These lower-valued lira was a key factor in a two countries have seen a substantial $30 billion swing to a small surplus in influx of foreign capital and related Italy, while France's improved competi- real investment in recent years, in tiveness helped widen its surplus about sharp contrast to the conditions associ- $7 billion. ated with the depressed rate of capital The rate of growth of real output in inflows recorded directly after the developing countries as a group was debt crisis. In Mexico, policies designed 5J/2 percent in 1993, essentially the same to limit increases in the current account as in 1992.3 In Asian countries, real deficit and to reduce inflation coneconomic activity was particularly tributed to a further slowing in the strong and even accelerated about growth of output, from 2Vz percent in Vi percentage point, to a rate of growth 1992 to Vi percent in 1993. Political of 73/4 percent. Gross domestic product uncertainty and rising inflation in Venein China increased 13 percent for the zuela may have contributed to a slight second consecutive year despite a fall in gross domestic product there in new economic retrenchment program 1993, after three years of substantial announced in the middle of the year. growth. Hong Kong, Korea, Taiwan, and The expansion of economic activity Singapore, the so-called newly industri- in the Middle East fell from 10 percent alizing Asian economies, expanded their in 1992 to 3Vi percent in 1993 as the collective output 5*/2 percent in 1993, early stages of recovery from the Gulf about matching their 1992 performance. War were completed and as a modera- These economies benefited from the tion in the demand for oil in industrial strong demand elsewhere in Asia and in countries helped push down its price the United States for their exports of about 20 percent. electronic gear and other high tech- Patterns of merchandise trade in nology equipment. Growth in some developing countries varied consider- Asian countries was also stimulated by ably among regions. The merchandise increased real investment associated exports of Asian countries expanded with large capital inflows, which were rapidly, while their merchandise imattracted by recent financial liberaliza- ports, stimulated by the rapidly rising tions and, in China, by the fast growing level of overall economic activity, market. increased at an even faster pace. Else- The growth of output in Latin Amer- where, demand for imports decelerated ica increased slightly in 1993, reaching markedly, primarily because of the suba rate of 3*/4 percent. Brazil's gross stantial slowing of economic activity domestic product expanded 5 percent in Mexico and Venezuela. But weak demand in many trading partners of Latin American countries also severely 3. The growth of output in developing counlimited the expansion of exports from tries is calculated by comparing measures of total these economies. annual output rather than fourth-quarter figures. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 33 L.LJ. itional Transactions U.S. merchandise exports increased 6 percent in real terms over the four The U.S. current account deficit exquarters of 1993. Exports, which panded from $66 billion in 1992 to changed little over the first three quar- $109 billion in 1993. The nominal merters of the year, strengthened in the chandise trade deficit, measured on a fourth quarter with the rise in shipments balance of payments basis, widened of machinery and automotive products $37 billion, to $133 billion, while other to Canada and Mexico. The very rapid elements of the current account balance expansion in the volume of computer changed little. Imports rose much faster exports that has been observed in than exports, partly because economic recent years slowed somewhat but still expansion continued in the United States amounted to 20 percent in 1993. Agriwhile economic growth in many U.S. cultural exports declined, in part beexport markets remained slow. The apcause U.S. crop output was reduced by preciation in the real value of the dollar, flooding in the Midwest and drought in which began in August 1992, also the Southeast. Most of the 1993 increase tended to depress U.S. real net exports. in merchandise exports went to Canada. Shipments to the sluggish economies in continental Europe flattened, but exports to Mexico and developing Billions of dollars countries in Asia increased at a healthy Balances pace. Exports to OPEC countries, whose revenues have been depressed by declin- Current account ing oil prices, increased only marginally. Merchandise imports rose about 13 percent in real terms during 1993. This increase was spread fairly evenly among import categories. Rising de- Ratio scale, billions of 1987 dollars mand for computers accounted for one- Merchandise trade third of the import expansion measured in real terms, but imports of other Total imports machinery, industrial supplies, consumer goods, and automotive products also rose rapidly. Low inflation abroad and the appreciation of the dollar held import prices in check during 1993. The average price of imports other than oil Ratio scale, 1987= 100 rose only slightly and was more than GDP fixed-weight price index offset by a sharp drop in the price of oil 120 Non-oil imports imports. Recorded net capital inflows balanced 110 only part of the substantial U.S. current account deficit in 1993. The statistical 100 discrepancy was positive and large. One significant cause of this discrepancy is 1989 1991 1993 the shipments of U.S. currency to for- The data are from the Department of Commerce; they eigners that are not recorded in U.S. are quarterly at annual rates and seasonally adjusted. The 1993 data are preliminary. international accounts. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

34 80th Annual Report, 1993 Net official inflows amounted to net purchases of foreign securities, $71 billion in 1993. Part of these inflows which were about evenly divided represented funds acquired by G-10 between stocks and bonds, reached a countries as the consequence of inter- record $125 billion. Net purchases from vention in foreign exchange markets. market participants in Europe, Canada, Other sources were the authorities in and Japan increased sharply and, as some Latin American and other devel- usual, constituted the bulk of these oping countries, where the sterilization transactions. However, net purchases of large private capital inflows added from entities in other countries, particusubstantially to official dollar holdings. larly emerging markets, increased even Although gross inflows and outflows more rapidly in 1993. Foreign private of private capital were close to balanced net purchases of U.S. government secuin 1993, flows in both directions contin- rities and corporate bonds also remained ued to expand with broadening opportu- strong, and foreign holdings of U.S. cornities for cross-border transactions. U.S. porate stocks once again showed a net US. International Transactions' Billions of dollars, seasonally adjusted Quarter Year Transaction 1992 1993 P 1992 1993 P Q4 Ql Q2 Q3 Q4 Merchandise trade, net -96 -133 -26 -29 -34 -36 -33 Exports 440 457 114 112 113 112 120 Imports 536 589 140 141 148 148 153 Services, net 56 56 13 15 15 14 13 Receipts 180 187 45 47 47 47 47 Payments 123 131 32 32 32 33 34 Investment income, net 6 0 -1 0 0 2 -1 Direct investment, net 48 46 10 11 12 13 11 Portfolio investment, net -42 ^6 -11 -11 -12 -11 -12 Unilateral transfers, private and government, net -33 -33 -10 -7 -8 -10 Current account balance -66 -109 -24 -22 -27 -28 -32 Private capital flows, net 36 13 2 3 -5 10 6 Bank-related capital, net (outflows, -) 44 47 -5 9 4 33 * US. net purchases (-) of foreign securities -48 -125 -17 -27 -24 -46 -29 Foreign net purchases (+) of U.S. securities Treasury securities 37 24 21 14 -1 3 Corporate and other non-Treasury bonds 35 61 9 6 15 15 26 Corporate stocks -4 18 4 4 * 3 12 U.S. direct investment abroad -35 -50 -12 -9 -12 -8 -21 Foreign direct investment in United States 2 32 3 9 10 3 10 Other corporate capital flows, net 5 6 -2 -3 2 7 n.a. Foreign official assets in United States (increase, +) 41 71 6 11 18 19 23 U.S. official reserve assets, net (increase, -) 4 2 -1 1 -1 -1 U.S. government foreign credits and other claims, net -2 1 Total discrepancy -12 27 15 9 14 Seasonal adjustment discrepancy 0 0 1 6 1 -7 Statistical discrepancy -12 27 14 3 13 7 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 35 gain. Moreover, capital inflows from change, the dollar thereafter rose about foreign direct investors in the United the same amount in terms of the remain- States resumed in 1993, while capital ing ERM currencies as it did versus the outflows by U.S. direct investors abroad mark. The other countries participating surged to a record level. in the ERM did not make use of their greater exchange rate leeway to lower interest rates faster than Germany did. Foreign Exchange Markets By contrast, authorities in Italy sharply Measured against the major European lowered short-term interest rates, and currencies and the Canadian dollar, the the dollar rose about 20 percent in terms external value of the dollar rose in 1993, of the lira. Political uncertainties and but it fell in terms of the yen. massive budget deficits also weighed on The value of the dollar increased the exchange value of the lira. Similar 8 percent relative to the German mark in concerns, although on a smaller scale, 1993. During the first half of the year, contributed to the Canadian dollar's the mark-dollar exchange rate fluctuated depreciation of nearly 5 percent relative in response to revisions in expectations to the U.S. dollar. U.K. authorities also about the pace of Bundesbank easing. It pushed down short-term interest rates, peaked in late July, when German but more slowly than the Bundesbank, authorities were widely thought to be on and the dollar moved up only about the verge of easing monetary conditions 4 percent versus sterling. aggressively because of weak economic Japan's rising external surplus activity. Pressures on currency arrange- strengthened the view of many market ments in Europe also contributed to the participants that an appreciation of the strength of the dollar at this time. When yen would be needed to reduce the sur- German easing did not materialize, the plus. From January through mid-August, dollar's value began to decline, and its the yen rose 17 percent relative to the slide continued until the Bundesbank dollar. After U.S. officials expressed lowered its official interest rates in mid- concern in mid-August over the dollar's September. Over this period, the dollar's weakness and initiated U.S. intervention value fell 8V2 percent relative to the in the market for yen, the dollar's slide mark. From mid-October, the dollar halted. As economic activity in Japan appreciated in response to further Ger- continued to stagnate over the remainman interest rate reductions and an der of the year, the dollar appreciated, improving U.S. economy; by late partially offsetting its earlier decline. December, the dollar had again attained Overall, the yen rose 12 percent relative its level of late July in terms of the to the dollar in 1993. mark. Stresses on currency arrangements in Foreign Currency Operations Europe, which resulted in an exchange rate crisis in the fall of 1992, re-emerged U.S. monetary authorities intervened in during the first half of 1993 and intensi- foreign exchange markets on a moderate fied during the summer. To reduce pres- scale in 1993. As the dollar depreciated sures, the fluctuation margins for curren- relative to the yen during the spring, cies participating in the exchange rate U.S. authorities, in cooperation with Japmechanism of the European Monetary anese authorities, sold $1,268 million of System were widened to 15 percent in yen; mid-August sales of $165 million early August. Despite this dramatic of yen brought the total for the year to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

36 80th Annual Report, 1993 $1,433 million. The sales were split evenly between the Federal Reserve System and the Treasury. At year-end, the System held $22,345 million of foreign currencies valued at current exchange rates, almost entirely in marks and yen. No Treasury balances were warehoused with the System during 1993. The System realized $172 million in profits on sales of foreign currency during 1993 and recorded a translation gain of $93 million on foreign currency balances. Intervention in dollars by fifteen major foreign central banks amounted to net purchases of about $34 billion in 1993. There was no activity involving the Federal Reserve swap network during the year. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

37 Monetary Policy Reports to the Congress Given below are reports submitted to over the four quarters of the year the Congress on February 19 and July amounted to 2.9 percent. This was the 20, 1993, pursuant to the Full Employ- largest gain in output since 1988, and, ment and Balanced Growth Act of 1978. while far from robust by the standards of past cyclical upswings in activity, it was a much stronger performance than many analysts—inside and outside Report on February 19, 1993 government—had thought likely, given the extraordinary headwinds with which the economy had to contend. Indeed, the Monetary Policy and performance of the U.S. economy stands the Economic Outlook for 1993 in sharp contrast to that of a number of Last July, when the Federal Reserve major foreign industrial economies that Board presented its semiannual mone- appear still to be laboring to regain fortary policy report to the Congress, there ward momentum. was considerable uncertainty about the Employment has grown since the prospects for the economy in the second middle of last year, but at only a gradual half of 1992. After a promising start at pace. Hiring has been damped by the the beginning of the year, growth of the ability of firms to meet their output economy had slowed once again in the objectives through hefty increases in spring, and various structural adjust- productivity. The unemployment rate, ments that had been impeding the pace which had risen in the first half of 1992 of the expansion retained considerable in conjunction with a surge in the share force. However, with drag from the of the working-age population in the structural adjustments expected to di- labor force, turned down thereafter as minish gradually over time and with the labor force participation fell back. The economy continuing to benefit from the unemployment rate in January of this substantial easing of money market con- year was 7.1 percent, more than half a ditions that the System had implemented percentage point below the peak rate of over the years, the most likely prospect last summer. for the economy was thought to be one Price developments remained favorof moderate growth in the second half of able in the second half of 1992, and the the year. rise in the consumer price index over the In the event, economic growth did four quarters of the year amounted to indeed proceed at an improved pace in about 3 percent, matching the low rate the second half of 1992, although the achieved in the previous year. Consumer pickup did not start to become evident energy prices turned back up in 1992, in the incoming economic data until but the prices of other goods and serwell into the autumn. Fueled by strong vices that enter into the CPI generally increases in household and business rose less rapidly than they had in 1991. spending, real gross domestic product Although the CPI spurted Vi percent this rose at an annual rate of 3.6 percent in past month, the underlying trends in the second half of the year. The increase labor costs and prices remain encourag- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

38 80th Annual Report, 1993 ing. The success to date in keeping infla- below the 2l/i percent lower end of its tion in check, while restoring growth, target range. M3 also came in under its has had highly salutary effects on 1 percent to 5 percent target range, financial markets and on the process of growing only 0.5 percent. The Federal financial reconstruction, the continuing Reserve did not make greater efforts progress of which is essential to the to boost growth to within these ranges achievement of renewed and sustainable because, as the year went on, it became 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 last year, 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 exceeded that of M2 by against inflation, prompted the Federal 3V2 percentage points last year and that Reserve to ease monetary conditions of M3 by 43/4 percentage points. Not three times, bringing short-term rates only did data on spending itself show a down another full percentage point over firming trend over the year, but narrow the year. The discount rate was reduced money (Ml) and reserves were expandto 3 percent, and short-term rates gener- ing rapidly—suggesting to some that ally are now at their lowest levels since liquidity was quite ample—and the the early 1960s. growth of debt, while restrained, was Long-term rates also fell, on balance. considerably in excess of that of the Declines were limited at times, how- broader monetary aggregates. ever, by concerns about prospective fed- Nominal GDP growth last year, which eral budget deficits and about the possi- picked up to 5.4 percent from 3.5 perbility that inflation might begin to move cent in 1991, was fueled by spending higher as the expansion proceeded. that was financed largely outside banks Notable decreases in long rates were and other depositories, whose liabilities registered in late 1992 and early 1993, constitute the lion's share of the moneas inflation remained subdued and as tary aggregates. Spurred in part by adstatements by Administration officials vances in equity prices and by declines suggested that they would seek only lim- in longer-term interest rates, businesses ited near-term fiscal stimulus and that and households strengthened their balproposals to make substantial cuts in the ance sheets by raising funds in bond, federal budget deficit over time were mortgage, and equity markets and under serious consideration. The trade- repaying bank loans and other shortweighted foreign exchange value of the term debt. This shift in the focus of dollar in terms of the other Group of Ten financing efforts toward the capital marcurrencies appreciated on balance over kets, a process that has been in progress the course of 1992 and rose further dur- for the last couple of years, has helped ing the first weeks of 1993. The dollar to redress financial distortions that benefited from the improved perfor- accompanied the buildup of debt and the mance of the U.S. economy relative to rapid rise in some asset prices in the conditions in other industrial countries. 1980s. Growth of the monetary aggregates The low level of credit demanded slowed last year despite an acceleration from depositories has meant that these in nominal spending and income. For institutions have not needed to seek the year, M2 advanced 1.9 percent, large volumes of deposits. As a conse- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 39 Decisions to strengthen balance quence, rates paid on deposits have been sheets had a smaller but significant adjusted downward rapidly as shortterm market rates have declined. Savers, effect on debt growth. The debt of nonfireacting to the lower deposit rates and to nancial sectors is estimated to have attractive returns on bonds and equity, expanded 4.6 percent, only slightly have shifted funds from M2 deposits faster than in 1991 and just above the into the capital marked- One method lower end of its monitoring range. With savers have useH *° capture these higher debt growing less rapidly than income capital market yields has been the pur- and with declines in market interest rates chase of bond and stock mutual funds, allowing higher-cost debt to be rolled which are not included in the monetary over at lower rates, households and busiaggregates and which together experi- nesses made substantial further progress enced record inflows in 1992. Moreover, in reducing debt-service burdens. consumer loan rates have fallen by less than deposit rates, and households appear to be using M2 assets to repay Monetary Objectives for 1993 consumer debt or restrain its growth. The aim of the Federal Open Market The combination of rate incentives, Committee in 1993 is to promote finandesires to strengthen balance sheets, and cial conditions that will help to maintain the greater availability at low transac- the greater momentum that the economy tion cost of a broadened array of savings developed in 1992 and to consolidate vehicles beyond traditional deposits the trend toward lower inflation. The appear to have distorted, at least for objectives for the monetary aggregates a time, the traditional relationship in 1993 were set with that aim in mind. between levels of M2 and M3 assets and At its July 1992 meeting, the Comgiven levels of spending. mittee had provisionally chosen the Although growth of M2 and M3 was same ranges for 1993 as it was confirmvery weak last year, Ml accelerated to ing for 1992—2!/2 percent to 6!/2 per- 14.3 percent, the second fastest annual cent for M2 and 1 percent to 5 percent increase recorded in the official series, for M3, with a monitoring range for the which begins with 1959. This pickup nonfinancial debt aggregate of 4V£ perowed in part to the expansion of spend- cent to SVi percent. At that time, the ing, but it mainly reflected the tendency Committee noted that the extent and for rates on liquid deposits to adjust duration of deviations of money growth downward less rapidly than those on from historical relationships remained time deposits. In response, savers shifted substantial volumes of funds from ma- Ranges for Growth of Monetary turing time deposits to NOW accounts. and Debt Aggregates] In addition, businesses boosted their de- Percent mand deposits substantially. To support this growth in transactions deposits, the Aggregate 1991 1992 1993 Federal Reserve added substantial volumes of reserves in 1992. Total reserves M2 21/2-6l/2 2Vi-&h 2-6 M3 1-5 1-5 V2-AV2 increased 20 percent last year, and the Debt2 Wi-Vh 4V2-SV2 41/2-81/2 monetary base, which includes currency 1. Change from average for fourth quarter of precedoutstanding as well as reserves, ing year lo average lot \ourtn qoanei vft ^e*a vm$hsraRwfc. increased 10.5 percent, the highest rate Ranges for monetary aggregates are targets; range for debt is a monitoring range. ever registered in the official series. 2. Domestic nonfinancial sector. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

40 80th Annual Report, 1993 highly uncertain and that the actual set- growth ranges for M2 and M3, reducing ting, in February, of 1993 ranges consis- the upper and lower ends of each range tent with the basic policy objectives by V2 percentage point. would need to be made in light of addi- The strength of the influences deprestional experience and analysis. sing money growth relative to income At its February meeting, in reviewing remains somewhat uncertain, however. the ranges provisionally chosen for If they persist in 1993 to the same extent 1993, the Committee noted that nom- as in 1992, growth of M2 and M3 in the inal spending had accelerated consider- lower portions of their reduced target ably in 1992 despite the quite-sluggish ranges would be consistent with subgrowth of M2 and M3 throughout stantial further growth of nominal the year. The Committee viewed this spending. Alternatively, the upper ends development as underscoring the of the target ranges would accommodate importance that special, and historically ample provision of liquidity to support anomalous, forces have had in restrain- further economic expansion, even if the ing the growth of broad money relative growth of money and income were to to spending. Although the intensity of begin coming into more normal alignsome of these forces might diminish in ment and the recent high rate of increase 1993, as borrowers and lenders achieve in velocity were to slow. The Commitmore comfortable balance sheet posi- tee will continue to examine money tions, the forces are unlikely to disap- growth as the year unfolds for evidence pear. For example, the substantial vol- on developing economic and financial ume of liquid securities on banks' conditions. As in the past, the Federal balance sheets suggested that banks will Reserve will also be guided by a careful not become vigorous bidders for depos- assessment of a wide variety of other its in 1993 even if, as expected, lending financial and economic indicators. The picks up. In addition, the yield curve, Committee's primary concern, as in although it had begun to flatten a bit 1992, will remain fostering financial early in the new year, is likely to conditions conducive to sustained ecocontinue to provide savers an incentive nomic expansion and a noninflationary to shift funds out of monetary assets environment. and into capital markets—a process For debt growth, which has been less facilitated by the growing availability damped by special forces than has the of mutual funds at banks and thrift expansion of the broader monetary aginstitutions. gregates, last year's range was retained Given that these and other forces for 1993. Federal debt growth again is tending to channel funds around deposi- likely to be substantial. Growth of the tory institutions and hence to raise debt of nonfederal sectors is expected to velocity (the ratio of nominal GDP to accelerate somewhat as borrowers' balmoney) seem likely to persist in 1993, a ance sheets continue to improve, as interdownward adjustment of the money mediaries become more willing to lend, ranges is appropriate to take account of and as the economy expands. Neverthethe expected atypical behavior of veloc- less, the growth of nonfederal debt is ity: Money growth lower than normally expected to remain below that of nomiexpected would be sufficient to support nal GDP, a development the Committee substantial growth in income. With this sees as contributing to building the in mind, the Committee made a techni- sound financial foundation crucial to a cal downward adjustment in the target sustained economic expansion. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 41 Economic Projections for 1993 struction, business investment, and con- Although the economy and the financial sumer durables clearly are benefiting markets continue to face difficult adjust- from the declines that have occurred in ments, the governors and Bank presi- interest rates. dents think that the most likely prospect However, impediments to more rapid for 1993 is that economic growth will expansion are still present. Government proceed at a moderate pace. The growth spending for defense appears likely to of output probably will be supported by continue to decline for some time to further gains in productivity, the come. More broadly, balance sheet reultimate source of increased real income pair and business restructuring, which and improved living standards over have exerted major restraint on ecothe long run. In addition, increases in nomic activity in recent years, are still employment are expected to be large in process, despite the apparent imenough to bring further gradual declines provement in business finances in 1992. in the unemployment rate over the Indeed, the new year has brought course of 1993. Inflation is expected to additional announcements of business remain subdued, boding well for sus- restructurings in a variety of industries, tained expansion in 1993 and beyond. both defense-related and other. These The governors' and Bank presidents' changes are leading to an economy that forecasts of real GDP growth over the is more productive and competitive, but four quarters of 1993 span a range of at the cost of some dislocation and dis- 2Vi percent to 4 percent, with the central ruption in the short run. The magnitude tendency of the forecasts in a range of of structural changes like these is a 3 percent to VA percent. In considering special uncertainty in the economic outthe possible outcomes for 1993, the gov- look for the remainder of the year. With ernors and Bank presidents cited the regard to the external sector, many fordegree of momentum that appears to eign industrial countries are experienchave developed in the economy in the ing prolonged economic weakness. latter part of 1992 and early 1993. The Under the circumstances, the growth of various balance sheet problems that U.S. exports, while remaining positive, apparently retarded growth of the may well fall short of the growth of economy during the early phases of the imports again in 1993, exerting a drag current expansion, while by no means on real GDP in contrast to the substanfully resolved, seem to be receding. In tial impetus in the period up to early addition, such sectors as residential con- 1991. Economic Projections of FOMC Members and Nonvoting Reserve Bank Presidents for 1993 Percent Central MEMO Measure Range tendency 1992 actual Change, fourth quarter to fourth quarter' Nominal GDP 5V+-&A 5Vi-6 5.4 Real GDP 2V2-A 3-314 2.9 Consumer price index2 2Vi-3 2»/2-23/4 3.1 Average level, fourth quarter Unemployment rate3 6»/2-7 63/4-7 7.3 1. Change from average for fourth quarter of preced- 2. All urban consumers. ing year to average for fourth quarter of year indicated. 3. Civilian labor force. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

42 80th Annual Report, 1993 Despite the job cutbacks at some large spective size of future federal budget companies, other firms, especially deficits could yield a very direct and smaller ones, are adding to payrolls, meaningful payoff in the form of lower albeit cautiously, and total employment long-term interest rates than otherwise has been rising modestly. The governors would prevail. Such action would and Bank presidents expect this pattern encourage capital investment and would to persist, with net gains in employment go far toward relieving anxieties that during 1993 likely to be sufficient to many of the nation's citizens still have bring the unemployment rate down about longer-run economic prospects. somewhat further over the year. The central tendency of the unemploy- The Performance of ment rate forecasts for the fourth quarter of 1993 extends from 63A percent to the Economy in 1992 7 percent; the remaining forecasts of the The economy began to exhibit renewed System officials range down to about firmness in 1992, overcoming a host of 61/2 percent. impediments that have been working to The governors' and Bank presidents' retard the growth of activity. With the forecasts of the rise in the consumer strengthening of growth in the second price index over the four quarters of half, to a 3.6 percent rate, the rise in real 1993 extend from a low of 2Vi percent GDP over the year cumulated to 2.9 perto a high of 3 percent. Within that range, cent, the strongest gain since 1988. a large majority of the forecasts are Employment also picked up in 1992, but clustered in the span of 2Vz percent to rather slowly; the unemployment rate 23/4 percent. The considerable progress continued to move up in the first half of that has been made in bringing down the year, but thereafter followed a course inflation during the past decade is pro- of gradual decline. Inflation continued viding one of the essential underpin- to trend lower in 1992, with most broad nings for the sustained growth of real price indexes showing increases that living standards over the long run. were among the smallest since the mid- However, achieving a satisfactory 1960s. economic performance in 1993—and in The growth of household and busithe years thereafter—will depend on ness expenditures picked up appreciably initiatives in many types of policy other in 1992. Households, for their part, than monetary policy. In coming began to spend more freely on motor months, the Congress and the new vehicles and other goods, and their pur- Administration will be grappling with a chases of homes also strengthened, spurhost of issues, including those related to ring additional gains in residential confiscal policy, regulatory policy, and for- struction. Businesses began investing eign trade policy. Farsighted approaches more heavily in new equipment; much are needed in all those areas if the econ- of the gain went for computers and other omy is to perform at its full potential electronic equipment embodying new over the long haul. In framing regula- technologies. Business outlays for nontory policy and foreign trade policy, the residential construction declined, on net, Congress and the Administration will over the year, but by a much smaller need to keep an eye on potential costs amount than in 1991. In total, the final and rigidities that could sap the vigor of purchases of households and businesses a market economy. With regard to fiscal rose about 4V4 percent in real terms in 1QQ? after declining in each of the two Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 43 previous years; the 1992 gain matched a stop-and-go pattern through midsumthat of 1988 and otherwise was the larg- mer, but the gains thereafter were est in eight years. By contrast, govern- steadier and fairly sizable overall. ments at all levels continued to be bur- Spending for residential investment also dened by huge budget deficits in 1992, advanced over the year, by a considerand for a second year their combined able amount in total. purchases of goods and services The aggregate wealth of households changed little in real terms. In addition, appears to have increased further during export growth was slowed by weakness 1992. With stock prices increasing, the of activity in several foreign industrial value of households' financial assets economies; despite improvement in the rose moderately, and the value of resisecond half, the rise in real exports of dential real estate also moved up, on goods and services over the year, average. On the liability side, house- 3J/2 percent, was only about half as large holds remained cautious in taking on as the annual gains in 1990 and 1991. new debt in 1992, and the burden of Meanwhile, the faster growth of domes- carrying debt continued to ease, owing tic spending pushed up the growth in both to slow growth in the volume of imports of goods and services to debt outstanding and to the further 9V4 percent in 1992. reductions in interest rates, which facili- Further progress was made in reduc- tated the ongoing substitution of new, ing inflation last year. The consumer lower-cost debt for old, higher-cost obliprice index excluding food and gations. The incidence of households energy—a measure widely used in gaug- experiencing loan-repayment difficulties ing the underlying trend of inflation— diminished over the year. increased about 3lA> percent over the Income growth picked up moderately four quarters of 1992; this was a full in 1992. Wages and salaries rose about percentage point less than the increase AlA percent in nominal terms, after a during 1991. The total CPI rose about gain of only 2lA percent in 1991. In 3 percent over the four quarters of 1992, addition, proprietors' incomes benefited the same as in the previous year; energy from the strengthening of economic prices, which had fallen sharply in 1991, activity, and, with corporate profits on turned up slightly this past year, while the rise, the dividends paid to shareincreases in food prices were quite small holders more than reversed their decline for the second year in a row. Except for of the previous year. Transfer pay- 1986, when the CPI was pulled down by ments, which had soared as the econa collapse of world oil prices, the omy softened in 1990 and 1991, continincreases of the past two years are the ued to grow rapidly in 1992. By consmallest in a quarter century. trast, interest income trended sharply lower, as the rates of return on household deposits and other financial assets The Household Sector fell further. Total after-tax income The financial condition of households got a temporary boost in 1992 from improved in 1992. Income growth an adjustment of federal tax withholdpicked up a little in the aggregate, the ings that took effect at the start of strains on household balance sheets March. With inflation low, real diseased a bit, and the spirits of consumers posable personal income increased brightened markedly toward year-end. nearly 2Vi percent over the year— Growth in consumer spending followed not a large gain by past cyclical stan- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

44 80th Annual Report, 1993 dards, but nonetheless the biggest since and real expenditures for apparel 1988. climbed at nearly a 10 percent rate. In Real personal consumption expendi- total, spending for consumer durables tures rose about 3lA percent over the other than motor vehicles grew about four quarters of 1992, after essentially 9 percent in real terms over the four no gain over the two previous years. quarters of 1992, after declining in each For a considerable part of 1992, the of the two previous years. Real outlays increases in spending were interspersed for nondurables, which also had fallen with stretches of sluggishness. A surge in both 1990 and 1991, rose almost in consumer expenditures early in the 3 percent in the latest year. Real expenyear was followed by listlessness during ditures for services increased about the spring, and a second jump in spend- 2 percent during 1992, slightly faster ing around midyear was followed by than in other recent years. still another bout of slow growth during The personal saving rate—the share the summer. However, the last few of disposable income not used for conmonths of the year brought fairly sizable sumption or other outlays—rose moderadvances, boosting the growth of con- ately in the first half of the year, when sumption expenditures to a rate of more concerns of households about the than 4 percent in the fourth quarter. prospects for the economy apparently Consumer expenditures for motor led them to adopt more cautious attivehicles increased about 9 percent over tudes toward spending. The rate then the four quarters of 1992. More than turned down in the second half of the half the gain came in the fourth quarter, year as consumers began to spend more when sales of new vehicles were freely. The fourth-quarter rate was boosted by special promotional incen- slightly below the average for 1992, but tives and, apparently, by a growing per- it was well within the range of quarterly ception among consumers that better observations seen over the past several economic conditions lay ahead. At the years. start of 1993, after some of the more Real outlays for residential investhighly publicized promotional programs ment rose 15 percent during 1992, had ended, sales of cars and light trucks climbing to a fourth-quarter level nearly fell sharply for a brief time, but they 25 percent above their recession low of since appear to have regained strength. early 1991. Most of the 1992 rise in res- More than likely, some fundamental idential investment came in the form of support for sales is coming from the increased construction of single-family replacement needs of persons who had housing units, which benefited from the put off buying new vehicles during the further net reduction in mortgage interrecession and the early phases of the est rates over the course of the year. recovery. Outlays for home improvements, which Spending picked up during the sec- make up about one-fifth of total residenond half of 1992 for many items other tial investment, also increased in 1992, than motor vehicles, with notable gains after declining in each of the three previin categories in which an element of ous years; repair of the damage caused discretion typically enters into house- by Hurricane Andrew accounted for holds' purchasing decisions. Real out- part of that gain. By contrast, multilays for furniture and household equip- family housing remained depressed; ment rose at an annual rate of nearly high vacancy rates and unfavorable 15 percent in the second half of 1992, demographic trends continued to be big Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 45 obstacles to new construction activity in broadly, recent demographic trends have that portion of the market. been less favorable to growth in the As with consumer spending, the gains demand for single-family housing than in single-family housing activity tended were the trends of the mid-1980s. The to come in intermittent bursts through declines in house prices in a number of much of 1992. Sales of new homes regions in recent years—and the more surged early in the year, weakened in general lack of any real price appreciathe spring, surged again during the sum- tion to speak of—also may have affected mer, and then fell back just a touch in demand to some extent; certainly, housthe fourth quarter; on net, the increase ing is no longer viewed by potential over the year amounted to 12 percent. buyers as the sure-fire, high-yield Mortgage interest rates, although lower investment that it was once thought than in 1991, exhibited some mild to be. swings during 1992, and these swings Builders, for their part, have remained appear to have contributed to the fluctu- a little cautious, as have the lenders ations in home sales. Proposals early in who finance new construction. In many the year for a tax credit for first-time cases, houses are being started only homebuyers also may have affected the when a buyer is lined up; eagerness to timing of purchases to some degree. build in anticipation of future sales is Construction activity in the single- not widely apparent. family sector also had its ups and downs In the multifamily sector, the number in 1992, influenced by unusual weather of units started in 1992 was about patterns as well as by the fluctuations in 75 percent below the peak rates of the sales. Nonetheless, the trend over the mid-1980s; the sector accounted for year as a whole was decidedly upward, only 6 percent of total residential investand the average level of starts in the ment this past year. The overbuilding fourth quarter was about 20 percent that occurred in the multifamily sector above that of a year earlier. In January, in the mid-1980s led to high vacancy single-family starts fell back some- rates that have stymied activity ever what; volatility in the monthly data on since. In that regard, little progress was starts is not unusual at this time of year, made in reducing vacancy rates for however. multifamily rental units in 1992, despite Despite the large gains seen in 1992, the greatly diminished level of new constarts in the single-family sector have struction. The speed at which the excess retraced only part of the decline that supply of space can be worked off is took place in the late 1980s and early being limited by declines in the popula- 1990s. Strong impetus for recovery has tion of young adults, as well as by the come from declines in mortgage interest slow rate of depreciation of these longrates, which have been considerably lived structures. lower this past year than they were in 1986, when single-family starts were at their most recent annual peak. However, The Business Sector a number of other developments have The past year brought moderate continued to retard the recovery of hous- increases in activity in the business secing activity. Uncertainties about job tor of the economy. Production, sales, prospects no doubt have deterred some and orders rose, on net, over the year, buyers from taking advantage of the and business profits continued to swing lower rates on home mortgages. More back up from the recession lows of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

46 80th Annual Report, 1993 1991. Many businesses continued to tight control over costs has led to undertake major structural changes increases in profits per unit of output. designed to cut costs and enhance effi- Unit labor costs of nonfinancial corporaciency. The changes were manifest both tions have risen only slightly since the through reorganization of existing start of the current economic expansion, operations and through investment in and their net interest costs have declined new technologies. Businesses also con- sharply, owing to lower interest rates tinued to shore up their finances, trim- and restraint in the use of debt. The ming away debt and building equity. domestic profits of financial corpora- Financial pressures persisted in the busi- tions were strong in the first half of 1992 ness sector in 1992, but, in general, but were severely depressed in the third they seemed to become less acute as the quarter by the unprecedented losses that year progressed. insurance companies suffered in the Industrial output rose nearly 3 percent wake of Hurricane Andrew; in the from December 1991 to December absence of the hurricane, profits in the 1992. Production fell in the first month financial sector would have increased in of 1992 but then picked up, rising about the third quarter. l/i percent per month from February The economic condition of smaller through May. During the summer, the companies also seemed to improve expansion of activity seemed to be los- somewhat in 1992. The past year's estiing momentum; orders and shipments mated rise in the profits of nonfarm profell slightly, on net, from May to prietors was the largest annual gain August, factory inventories backed up a since the mid-1980s; increases had been little, and industrial production essen- relatively small over the three previous tially flattened out over a four-month years. stretch. However, orders and shipments The net income of farm proprietors began moving up once again in Septem- turned back up in 1992 after a moderate ber, and they increased considerably in decline in 1991. Farm output rose to a the fourth quarter. Industrial production record high in 1992, with strong gains also picked up once again in the fourth for both crops and livestock. Prices, quarter, and a further gain, amounting to meanwhile, lagged year-earlier levels 0.4 percent, was recorded in January of through much of 1992, but most of that this year. slippage in farm prices already had Business profits, which had taken a taken place by the start of the year; the turn for the better late in 1991, im- average level of farm prices in Decemproved further during 1992. The operat- ber 1992 actually was about the same as ing profits earned by nonfinancial corpo- that a year earlier. Farm production rations from their domestic operations expenses edged down for a second year rose 18 percent from the final quarter of as farm operators, like their nonfarm 1991 to the third quarter of 1992, and a counterparts, continued to maintain tight further gain seems implicit in the avail- control over costs. able data for the fourth quarter. (An Business investment in fixed capital actual estimate of fourth-quarter profits rose about 8 percent in real terms during will not be published by the Commerce 1992, more than reversing the decline of Department until late March.) Profits of the previous year. Spending for equipthese firms have been lifted, in part, by ment increased in each quarter of 1992, increases in the volume of output since and the gains cumulated to nearly the end of the recession. In addition, 12 percent by the fourth quarter; with Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 47 spare capacity still extensive in most unused industrial capacity and by the industries in 1992, much of the gain in ongoing trend toward tighter control of equipment spending over the year prob- inventories and concomitant reductions ably was a result of the desire of busi- in needed storage space. Annual outlays nesses to modernize their operations. for oil and gas drilling also fell further Meanwhile, nonresidential construction in 1992; a rise in drilling in the year's spending, which had plunged 14 percent final quarter probably was prompted in 1991, fell by a much smaller amount mainly by a year-end phaseout of cerin 1992—IVi percent according to the tain tax incentives, although some drillestimate in the most recent GDP report. ers may also have been responding to an Spending for computers was at the upturn in natural gas prices over the forefront of the rise in equipment out- year. lays in 1992. In terms of annual aver- Other types of construction activity ages, the nominal outlays for office and fared better in 1992. Spending for comcomputing equipment rose about 17 per- mercial structures other than office cent; the gains in real terms were much buildings moved up over the year, after greater still, as technological advances sharp declines in both 1990 and 1991, and competitive market conditions com- and the outlays of utilities rose appreciabined to continue driving down the price bly, boosted by environmental requireof real, effective computing power. ments as well as by further moderate Businesses also boosted their outlays for additions to capacity. Increases in contelecommunications equipment, espe- struction spending also were reported cially in the second half of 1992. Spend- for various types of institutional strucing for motor vehicles strengthened tures, such as religious facilities and in 1992, and investment in industrial hospitals. equipment edged up after three years of decline. Spending for aircraft traced out a volatile pattern during 1992 and, for The Government Sector the year as a whole, was down only Government purchases of goods and moderately from the high level of 1991; services, the portion of government however, these outlays closed out the spending that is included in GDP, year on a weak note, and prospects for increased slightly in real terms over the 1993 are not encouraging, given the course of 1992, after declining slightly losses that have been experienced by during 1991. Federal purchases fell airline companies and the related cancel- xh percent in real terms over the year, as lations and stretch-outs of orders. a further decline in real defense pur- The small decline in nonresidential chases more than offset another year of construction outlays during 1992 re- increase in real nondefense purchases. flected some widely divergent trends State and local purchases of goods and across the various types of construction services increased about IV2 percent activity. Spending for new office build- during 1992, a rise slightly larger than ings fell sharply further during the year, in 1991 but still well below the rates of to a fourth-quarter level that was about increase seen through much of the 60 percent below the peak of the mid- 1980s. 1980s. In addition, real outlays for Governments at all levels continued industrial structures declined in 1992 for to be plagued by severe budgetary the second year in a row, influenced, no imbalances in 1992. At the federal level, doubt, by the current high levels of the unified budget deficit rose about Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

48 80th Annual Report, 1993 $20 billion in fiscal year 1992, to a level dollar terms, the combined rise in outof $290 billion. With the economy grad- lays for health care and income secuually strengthening, the rate of increase rity amounted to about $60 billion. in federal receipts picked up a little, to Increased expenditures for social secuy/2 percent, from only 2XA percent in rity added almost another $20 billion. fiscal 1991. However, spending once Combined spending for all other proagain rose faster than receipts; total fed- grams rose only slightly in fiscal year eral outlays were up AV2 percent in fiscal 1992. Within that broad and diverse 1992, after a rise of nearly 53/4 percent grouping, defense outlays fell sharply in in the previous fiscal year. nominal terms, once adjustment is made The rates of growth in total spending for the allied contributions, but some in 1991 and 1992 may well understate nondefense functions posted large the degree of upward momentum in fed- increases in outlays. eral outlays in those years. In 1991, total State and local governments saw no spending was held down considerably relief from budgetary pressures in 1992. by a convention used in the federal bud- The combined deficit in their operating get to account for the flow of contribu- and capital accounts, net of social insurtions to the United States from its allies ance funds, widened a bit over the first in the Gulf War. Those contributions three quarters of the year, reversing the were counted as negative defense out- small improvement that had been lays rather than additions to receipts. achieved in the latter part of 1991. As is Additional contributions from the allied true at the federal level, a rapidly rising countries were received in fiscal year level of mandated transfer payments to 1992, but they were much smaller than individuals for health and income supin 1991. Another important factor at port is at the core of the budget difficulwork in 1992, however, was a delay in ties 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 about contributions on reported levels of de- 3Vi percent over the four quarters of the fense spending, federal expenditures year. Spending for highways increased rose about 6V2 percent in nominal terms considerably in 1992, and outlays for in fiscal year 1992, after an increase of buildings other than schools were strong nearly 9 percent in fiscal year 1991. in the first half of the year. Construction Spending for entitlements, especially of educational facilities, which has been those related to health care and income boosted by increases in the school-age support, continued to grow very rapidly population in recent years, rose further in 1992. In the health area, federal out- in 1992, but the increase was small, both lays for Medicaid increased nearly 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 of security was boosted in 1992 by further state and local expenditures was relarge increases in unemployment bene- strained. Compensation of employees, fits and food stamp disbursements. In which accounts for more than half of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 49 total state and local expenditures, growth abroad. Over the summer, howincreased about 1V2 percent in real terms ever, the dollar declined to a point below over the four quarters of 1992; in nomi- the previous year's low as growth of the nal terms, the rise over the year U.S. economy was perceived to be more amounted to about AV2 percent, similar sluggish than expected and as the Fedto that of 1991 but much less than the eral Reserve eased short-term interest nominal increases seen in the years rates further. The dollar reversed direcbefore 1991. Restraint on wage growth tion again in the fall, strengthening was widespread in the state and local sharply in the wake of turmoil in the sector in 1992, and although total em- European Monetary System and, more ployment in the sector grew a little faster important, on evidence of increased than in 1991, hiring freezes, furloughs, momentum in the U.S. economic expanand layoffs continued to be reported in sion and sluggish conditions in foreign some hard-pressed jurisdictions. State industrial economies. The dollar's rise and local purchases of durable and non- continued into the early weeks of 1993. durable goods—such things as equip- On a bilateral basis, the net rise in the ment and supplies—apparently grew lit- weighted average dollar over 1992 pritle in real terms over the course of 1992. marily reflected sharp increases in the Real purchases of services from outside dollar's value against several European suppliers apparently edged down for the currencies and against the Canadian third year in a row. dollar. Denmark's rejection of the Maas- Many states and localities have imple- tricht Treaty in early June called into mented tax increases in recent years in question the future of European monean effort to bolster receipts. In addition, tary and political union and led to presgrants-in-aid from the federal govern- sures on the exchange rate mechanism ment have been rising rapidly, and, in (ERM) of the European Monetary Sys- 1992, improvement in the economy tem. In September, those pressures helped boost receipts to some degree. In intensified enough to force Italy and the total, state and local receipts rose United Kingdom to withdraw from the IV2 percent in annual average terms in ERM, and their currencies depreciated 1992, outpacing the growth of nominal sharply. For the year as a whole, the GDP by a considerable amount. How- dollar appreciated against those two curever, for the third year in a row, the rencies by 19 percent and 18 percent increase in receipts fell short of the respectively. Several other European annual rise in nominal expenditures, currencies, including those of Spain, which amounted to 8 percent in 1992. Portugal, and the Scandinavian countries, also depreciated sharply against the dollar in the autumn. The parity of The External Sector the French franc with the German mark The trade-weighted foreign exchange was maintained within the ERM, but at value of the U.S. dollar, measured in the cost of relatively high French shortterms of the other G-10 currencies, rose term interest rates in the face of a nearly 6 percent on balance from sluggish French economy and rising December 1991 to December 1992. The unemployment. dollar increased over the first three The dollar fell more than 7 percent months of 1992 amid expectations of against the German mark from Decemstrengthening economic recovery in the ber 1991 to August 1992, as German United States and slowing economic monetary policy, responding to rela- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

50 80th Annual Report, 1993 tively high German money growth and these transfers had reduced the current inflation, remained tight longer than account deficit by $42 billion in 1991, market participants had expected. That but they reduced it by only about $2 bildecline of the dollar was more than lion at an annual rate during the first reversed during the fall and winter, how- three quarters of 1992. Excluding these ever, as it became clear that German transfers, the current account deficit economic activity had turned signifi- weakened somewhat less than the trade cantly downward and as German mone- deficit, owing to a strengthening of net tary policy was eased somewhat. By service receipts. mid-February 1993, the dollar was about U.S. merchandise exports grew 5 percent higher against the mark than it AV2 percent in real terms over the four had been in December 1991. quarters of 1992. Most of the increase The dollar depreciated about 6 per- occurred in the second half of the year cent on balance against the Japanese yen and consisted largely of stronger shipduring 1992 and early 1993, despite a ments of agricultural goods, computers, noticeable decline in Japanese GDP dur- other machinery, and automotive proding the second and third quarters and a ucts. Excluding agricultural products significant reduction in Japanese interest and computers, the quantity of exports rates. The net strengthening of the yen grew only 1 percent in 1992, compared probably can be attributed, at least in with a rise of 6V2 percent in 1991; the part, to market reactions to a substantial slowdown was mainly a reflection of widening of Japan's external surplus. sluggish demand in key industrial coun- The U.S. merchandise trade deficit tries. By region of the world, most of the widened to about $84 billion in 1992, increase in exports during 1992 went to compared with $65 billion in 1991 areas that continued to register moderate (Census basis). Imports grew about to fairly strong rates of economic twice as fast as exports as the U.S. eco- growth—primarily developing countries nomic recovery gained some momen- in Asia and Latin America. Exports to tum, while economic growth in U.S. Japan and to European countries, whose markets abroad was sluggish on aver- growth rates probably averaged less than age. Early in the year, the deficit nar- 1 percent when weighted by the shares rowed somewhat when a drop in oil of those countries in U.S. exports, actuprices lowered the value of imports. The ally declined in 1992. deficit widened sharply in the second Merchandise imports grew IOV2 perquarter, however, when imports surged cent in real terms during 1992. Two and exports remained about unchanged. categories—oil and computers, the latter During the second half of 1992, imports of which includes peripherals and continued to expand somewhat more parts—accounted for a significant porrapidly than exports, and the deficit tion of that rise. Oil imports rose 13 perincreased further. cent over the four quarters of 1992 as The current account balance wors- U.S. consumption of petroleum products ened substantially more than the trade recovered from depressed levels in 1991 deficit, moving from near balance in and as domestic oil production resumed 1991 to a deficit of $51 billion at an its long-run downtrend. U.S. domestic annual rate over the first three quarters sales of computers were very strong of 1992. However, one-time cash trans- beginning in the summer, fueled by fers associated with the Gulf War price wars and by a push on the part of accounted for most of the difference; U.S. businesses to upgrade PCs and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 51 workstations to take advantage of in the United States. During the same improvements in software. Most of the period, foreigners added substantially to sales were at the lower end of the spec- their holdings of U.S. government and trum of computer products—items that corporate bonds; however, they made often are imported. Imports of products net sales of U.S. equities. other than oil and computers increased U.S. direct investment abroad was 5lA percent in 1992 as domestic demand very strong in the first three quarters of in the United States picked up. The 1992. Outflows to Europe remained strongest increases were in a wide range high, while outflows to Latin America of consumer goods, especially from and Asia grew. In contrast, foreign China and various other developing direct investment in the United States countries in Asia. Imports of telecom- fell further, producing a net outflow. The munications equipment, electric machin- rate of new foreign direct investment in ery, and other types of machinery also the United States has declined dramatishowed significant increases in 1992, cally in recent years from large inflows for the first time since 1988. recorded during the latter part of the For the first three quarters of 1992, 1980s, partly reflecting the sharp drop in the substantial current account deficit mergers and acquisitions in the U.S. was more than matched by recorded net business sector. In addition, the very capital inflows, both official and private. low rates of return reported by foreign Net official inflows amounted to more direct investors on their holdings in the than $30 billion at an annual rate, United States in recent years may have despite substantial net outflows associ- helped discourage new investment. ated with intervention sales of dollars by major foreign industrial countries. Net private inflows were almost as large, Labor Market Developments with banks accounting for a large part The labor market remained relatively of these inflows. The agencies and sluggish in 1992. Some large companies branches of Japanese-based banks used continued to undergo major restructurfunds from abroad to substitute for a ings or reorganizations, and these runoff in CDs outstanding in the United changes led in many cases to permanent States, while other foreign-based banks work force reductions at those firms. used funds from abroad to help finance More generally, businesses remained asset expansion in the United States. A hesitant to take on new workers, even as reduction in the holdings of Euro- the recovery progressed. The stilldeposits by U.S. residents also contrib- sluggish pace of output growth in the uted to the net private capital inflow first half of the year tended to limit labor during the first three quarters of the year, requirements during that period. Later but that reduction was partially reversed on, when firms started to expand output in the fourth quarter. more rapidly, they were able to do so Although securities transactions con- without making major long-term hiring tributed little to the net inflow of capital commitments. Needs for additional in the first three quarters of 1992, the workers were met, in many cases, continued impact of the globalization of through use of temporary-help firms, financial markets was apparent. U.S. net rather than through permanent additions purchases of foreign stocks and bonds to companies' own payrolls. were very strong, accompanied by a Nonetheless, the tilt of the overall near-record pace of foreign bond issues employment trend was positive, rather Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

52 80th Annual Report, 1993 than negative as it had been in 1990 and in January, as the rise in jobs reported in 1991. Payroll employment, a measure the payroll survey in that month was that is derived from a monthly survey of accompanied by a decline in the housebusiness establishments, was up about hold measure of employment. 600,000 during 1992 and an additional The number of unemployed persons 100,000 in January. The number of jobs increased in the first half of 1992, to in manufacturing fell further in 1992, a peak in June of nearly 9.8 million. but not as much as in either of the two Job losses—many of them apparently previous years; small increases in the permanent—continued to mount in the number of factory jobs were reported first half of the year, and new job opportoward year-end and in early 1993. In tunities did not open up fast enough to addition, employment in construction fully absorb either those workers or changed little in 1992, after two years of others entering the work force for the sharp decline. first time. As a result, the unemploy- About 900,000 new jobs were created ment rate rose more than Vi of a percentin the service-producing sector of the age point in the first half of the year, to a economy in 1992. The number of jobs June level of 7.7 percent. in retail trade turned up a little, on net, The second-half outcome was more after dropping about one-half million favorable. The number of unemployed over the two previous years. In addition, persons declined about one-half million firms that provide services to other busi- from June to December, and the unemnesses recorded strong employment ployment rate moved down over that growth in 1992; more than likely, these period, to a level of 7.3 percent at yearfirms were the ones that benefited most end. Some of the workers who had been from the tendency of businesses to pur- laid off temporarily were recalled in the chase labor and services from other second half of the year. In addition, the firms rather than hire additional workers number of unemployed workers not of their own. Employment in health ser- expecting to be recalled—the so-called vices, which had remained on a strong permanent job losers—also declined; upward trend right through the reces- presumably, these workers either found sion, continued to grow rapidly in 1992. new jobs elsewhere in the economy or The employment measure that is dropped out of the labor force altoderived from the monthly survey of gether. A similar story applied to households was stronger than the pay- unemployed new entrants, a category of roll measure in 1992; it showed an jobless workers whose ranks were a increase of about IV2 million in the little thinner at the end of 1992 than they number of persons holding jobs and by had been at midyear. In January of this year-end had moved back close to the year, the number of unemployed persons previous cyclical peak of mid-1990. fell further, and the unemployment rate Reasons for the stronger performance of edged down to 7.1 percent. the household series are not entirely In the aggregate, the civilian labor clear. Differences in coverage between force—the sum of those persons who the household survey and the payroll are employed and those who are looking survey accounted for only a small part for work—rose sharply in the first half of the 1992 gap, and other possible of 1992 but changed relatively little explanations are little more than conjec- thereafter. Its level in January of 1993 ture at this point. A portion of the gap was up about one million from that of between the two series was eliminated a year earlier. The labor force partici- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 53 pation rate—the proportion of the 1990, and the increase in 1989 had been working-age population that is in the barely positive. labor force—fell over the second half of Sustained increases in real living stanthe year and into January of 1993, leav- dards depend ultimately on achieving ing it about where it had been at the end advances in the productivity of the of 1991. work force, and on that score the econ- Against a backdrop of slack in labor omy performed well in 1992. Output per markets and in the context of reduced hour worked in the nonfarm business inflation, the rate of rise in workers' sector jumped 3 percent over the year, hourly compensation continued to slow the largest annual gain since 1975. in 1992. The employment cost index for Although a portion of this large rise is private industry—a measure of labor no doubt a reflection of normal cyclical cost that includes both wages and bene- tendencies, longer-range improvement fits and that covers the entire nonfarm in productivity growth also may be in business sector—increased 3Vi percent progress. The jump in output per hour from December of 1991 to December in 1992, combined with the slowing of 1992. The index had risen nearly of compensation gains, held the 4V2 percent in the previous twelve- annual increase in unit labor costs to month period, and as recently as mid- just 0.7 percent. 1990 its twelve-month rate of change had exceeded 5 percent. The employment cost index for wages and salaries Price Developments increased only 2.6 percent during 1992; The consumer price index rose 3 percent this was the smallest annual rise ever over the four quarters of 1992, the same reported in this measure, which dates as in the previous year. Energy prices, back to 1975. The rate of rise in the cost which had fallen in 1991, turned up a of benefits provided by firms to their little in 1992, but price increases elseemployees also slowed in 1992, but the where in the economy were generally size of the increase—5lA percent—was smaller than those of the previous year. still relatively large. Many firms, both The limited rise in labor costs in 1992 large and small, continued to be pres- was one important factor exerting resured by the rising cost of medical care straint on the rate of price increase. In for their employees and by the increased addition, the cost of materials used in cost of workers compensation insurance; production rose only moderately over the difficulty of bringing these costs the year, as did the prices of goods under control may well have been a imported from abroad. Although inflaserious deterrent to increased hiring in tion expectations, as reported in various 1992. surveys of consumers and business offi- Despite the further slowdown in nom- cials, have remained a step or so above inal compensation per hour in 1992, the actual inflation rates, they too appear to purchasing power of an hour's labor have moved lower over time. On averappears to have risen in real terms, as age, their recent levels are about in line the nominal increase in hourly wages with—or, according to some surveys, and benefits, as measured by the em- less than—the lower bound of the range ployment cost index, outpaced the rise of inflation expectations reported during in consumer prices for the second year the 1980s. In view of these recent trends in a row. Real compensation, computed in prices, labor costs, and inflation in this manner, had declined sharply in expectations, the January rise of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

54 80th Annual Report, 1993 0.5 percent in the CPI appears to be in response to a somewhat tighter something of an aberration. supply-demand balance than had ex- The CPI for food increased a bit less isted over the previous year or so. than P/4 percent in 1992, the same as in The CPI excluding food and energy 1991. Not since the 1960s has there rose 3.4 percent over the four quarters been a two-year period in which the of 1992, a percentage point less than it cumulative increase in food prices was had risen in 1991. The slowdown was so small. This low rate of food price widespread among the various categoinflation in 1991 and 1992 was, in part, ries of goods and services that are a reflection of the same factors that were included in this measure of core inflaworking to pull inflation down in other tion. The rate of rise in the cost of parts of the economy. In addition, food shelter—the single most important cateprices have been restrained by favorable gory in the CPI, with a weight equal to supply conditions in the farm sector. more than one-fourth of the total— Meat production rose further in 1992, slowed further in 1992; rents for both and the output of crops soared. Dryness apartments and houses apparently were in some regions imparted temporary vol- damped by the large amount of vacant atility to crop prices in late spring. housing that was available in many parts Thereafter, growing conditions turned of the country. The prices of other serexceptionally favorable and remained so vices that are included in the CPI— through the summer and into early which collectively make up another oneautumn. Unusually wet conditions in fourth of the total index—also slowed some regions later on in the autumn appreciably in 1992; nonetheless, their apparently made only a small dent in the overall rate of increase remained relaeventual size of the harvest. tively high. The costs of medical care The rise in consumer energy prices services and tuition continued to rise over the four quarters of 1992 amounted much faster than prices in general in to about 2Vi percent. The previous year, 1992, and airfares rebounded from their energy prices had fallen 8 percent. With 1991 decline. The CPI for commodities no major supply or demand shocks other than food and energy rose 2lA perspringing up in world oil markets in cent during 1992, after an increase of 1992, the price of West Texas Intermedi- more than 4 percent over the four quarate stayed in the relatively narrow trad- ters of 1991. Price increases for this ing range of about $18 to $23 per barrel; broad category of goods were restrained the price has remained in that range in by the cost and price developments in the early part of 1993. At the retail level, manufacturing: Unit labor costs in manprice changes for petroleum products ufacturing actually declined in 1992, were mixed in 1992; the price of gaso- and the producer price index for finished line rose about 3 percent, while fuel oil goods rose less than 2 percent. prices declined moderately. The CPI for After falling sharply from mid-1990 natural gas rose about 5 percent in 1992, to the end of 1991, the prices of indusconsiderably more than in other recent trial commodities generally changed lityears. Although much of that rise in gas tle, on balance, during 1992. By the end prices came in the second half of the of 1992, however, prices for some indusyear in the wake of supply disruptions trial metals had begun to tilt up, consiscaused by Hurricane Andrew, prices of tent with the pickup in the pace of indusgas at the wellhead had already moved trial expansion toward year-end, and up considerably before the hurricane hit, additional price increases have been Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 55 reported in some of these markets in economic activity was held back to an early 1993. The prices of lumber and unusual degree by the efforts of houseplywood—following a path consider- holds, nonfinancial businesses, and ably different from that of most other some key providers of credit to the commodities—rose substantially during economy, including commercial banks, 1992, and further steep increases have to strengthen their balance sheets. These been evident in early 1993. The surge in forces have tended to alter the normal prices of these products appears to be a relations between financial flows— reflection of the uptrend in single-family particularly those reflected in movehousing construction, weather-related ments in M2 and M3—and the behavior supply disturbances in some timber re- of the economy. Under the circumgions, and adjustment of the logging stances, the Federal Reserve has had to industry to environmental restrictions take a flexible approach to the use of that have been implemented in some money and credit aggregates as intermeareas of the country. Prices of some diate policy targets; specifically, in light other wood products, such as pulp, also of evidence that expansion in ecorose sharply at the producer level in nomic activity was being financed to 1992. an unusual extent in capital markets The recent increases in prices of these rather than through banks and other raw materials have shown through to depositories, the System tolerated shortsome extent to broader measures of pro- falls of M2 and M3 from their target ducer prices. For example, the producer ranges. price index for intermediate materials The Federal Reserve judged it approexcluding food and energy—a price priate to ease reserve conditions on three index that encompasses a wide range of occasions in 1992, when financial and production materials—rose 1 percent economic data suggested that the econduring 1992 after declining about 3A of a omy might be losing momentum. The percentage point during 1991, and the extent of the easings last year was conpast couple of months have seen some siderably less than in 1991, however, as further pickup in that measure of price the underlying trend of the economy change. From an economywide perspec- overall was more positive. Partly as a tive, however, that pickup in materials result of the cumulative effect of the prices has not been sufficient to domi- monetary easings of recent years, econate the deceleration in labor costs, nomic activity accelerated in 1992 to its which account for a far greater share of fastest pace since 1988. This pickup was total production costs. achieved even as various measures of inflation evidenced further slowing, with the "core" inflation rate falling to levels Monetary and Financial last seen in the early 1970s. Thus, 1992 Developments in 1992 was a year not only of financial repair, Federal Reserve policy in 1992 was but also of improved aggregate ecodirected at promoting and extending the nomic performance in the United States. recovery from the 1990-91 recession, in the context of continued progress toward price stability. The difficulty of The Implementation of Monetary Policy designing and implementing construc- The year 1992 began with short-term tive monetary policies during this period interest rates at their lowest levels in has been exceptional. In 1992, as earlier, more than a quarter of a century, follow- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

56 80th Annual Report, 1993 ing a series of actions by the Federal rates and partly to special factors— Reserve in the latter part of 1991 that above-average tax refunds and a jump in reduced the discount rate and the level mortgage refinancing, which results in around which the federal funds rate was funds being held temporarily in demand expected to trade to 31/2 percent and deposits. Underlying money growth re- 4 percent respectively. Long-term rates mained very weak, however, and well were also at lower levels, reflecting the below that consistent with expectations policy actions and a weakening of eco- based on the historical relationship of nomic activity in the final quarter of money with income, deposit rates, and 1991. market interest rates. In March, as the Evidently in the expectation that these influence of the special factors abated, rate cuts would revive the recovery, the M2 was about flat and M3 contracted. stock market began the year with strong The economy seemed to be improvupward momentum, and the dollar ing during much of the first quarter: appreciated. However, other evidence Retail sales and housing starts were that the economy was picking up re- strong, industrial production turned up, mained scanty in the initial part of the and confidence levels of the business year, despite the significant monetary and household sectors were rising, as stimulus already in place and the posi- was the quality of their balance sheets. tive developments in equity and capital The signs of recovery and the market markets. Apart from rising housing view that the prospects for further nearstarts, a phenomenon in part related to term monetary ease had faded caused special weather and tax factors, the long-term interest rates to increase, and economy appeared sluggish and confi- the dollar rose on foreign exchange mardence levels were low. Spending by kets as well. Increases in private interest households and businesses seemed to be rates were less than increases in rates on restrained by efforts to strengthen finan- Treasuries, likely reflecting perceived cial positions, and banks had done little reductions in the riskiness of private to reverse the substantial tightening of debt as the economy strengthened lending standards that occurred in 1990 coupled with concerns about enlarged and 1991. In view of the still-tentative Treasury demands on credit markets nature of the recovery and the solid stemming from discussions of possible progress against inflation that had been fiscal stimulus. Areas of weakness in the made to that point, the Federal Open economy remained, however—some Market Committee at its first meeting of attributable to the substantially overbuilt 1992 instructed the Manager of the commercial real estate sector and some Open Market Account at the Federal to the transition to a smaller defense Reserve Bank of New York to remain sector. In addition, the backup in longespecially alert to evidence that money term interest rates threatened to slow the market conditions might need to be pace of balance sheet adjustment and eased before the next scheduled meeting could damp housing and its related of the Committee. Such a policy stance industries as well as business investbiased toward ease had prevailed over ment spending, and the outlook for much of 1991. 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 owing partly to stronger income and ear- taken on indications that the monetary lier sharp declines in short-term interest aggregates, already at the bottom of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 57 their target ranges after their flat perfor- Data becoming available over subsemance in March, were beginning to quent weeks, however, suggested that contract, that the balance of evidence the forces restraining economic expanwas beginning to suggest a slowing of sion continued to be quite strong. The the economic expansion, and that infla- contraction of consumer credit accelertion was continuing to recede. Short- ated, and bank loans more generally term interest rates fell more than the began to run off. With the forces that lA percentage point drop in the trading had been constraining money growth level of the federal funds rate, as market intensifying, all three monetary aggreparticipants judged the economy suffi- gates contracted in June. ciently weak to make further near-term Nonfinancial data confirmed that the monetary easing moves likely. The eas- economy remained slack. Although ing buoyed the stock market, but long- both nonfarm payroll employment and term rates showed a limited response industrial production increased in May and remained well above year-end for the fourth straight month, the levels. unemployment rate rose sharply, owing In the weeks following the easing, the to a rising labor force participation economy appeared to improve a bit, but rate. Moreover, homebuying and retail the evidence continued to be mixed. sales, other than of automobiles, slowed Single-family housing starts, which had from the pace earlier in the year, and contracted in March, fell considerably demand for U.S. exports was held down further in April, and retail sales were as growth in some foreign industrial little changed on balance between Feb- countries slowed or turned negative ruary and April. On the other hand, while other countries struggled to nonfarm payroll employment and indus- recover from their downturns in 1991 or trial production continued to expand. remained in recession. Weakness in the monetary aggregates With the tenor of incoming economic persisted into April, but concerns on news having become distinctly negative, this front were allayed to some degree long-term Treasury rates, which had by evidence that this was importantly been little changed over most of May related to the ongoing rechanneling of and June, turned down around midyear, credit away from depository institutions although they remained above year-end and into capital markets, and by expec- lows. In light of these developments, tations that this rechanneling and other and with the downward trend in inflafinancial restructuring would continue tion continuing, the System reinstated to damp money growth considerably its bias toward ease at its midyear meetmore than economic activity. Moreover, ing. Immediately after that meeting, on what restraint balance sheet restructur- July 2, with evidence of a weakening ing was exerting on spending was seen economy confirmed by a further rise in as likely to abate in view of the consid- the unemployment rate, to 13A percent erable progress that by then had been in June, the Federal Reserve reduced made in this area, both by the borrowing both the discount rate and the federal sectors and by depository institutions, as funds rate by Vi percentage point, to banks added rapidly to capital. At its 3 percent and 3lA percent respectively. mid-May meeting, the Committee deter- Banks lowered their prime rate, also by mined that its bias toward ease in assess- V2 percentage point, to 6 percent, leaving possible intermeeting policy changes ing its unusually wide spread over marwas no longer appropriate. ket rates intact. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

58 80th Annual Report, 1993 Long-term interest rates fell in re- With short-term interest rates in the sponse to the employment data and the United States lower, the monetary monetary easing, and they moved down aggregates continued to expand in Sepfurther into early August as the incom- tember. The implications of the strength ing economic news continued to be of M2 were difficult to assess, however, poor. The drop in yields brought long- because it reflected to an uncertain determ rates to the lowest levels since the gree the impact of mortgage refinancing early 1970s, and the dollar continued to on demand deposits as well as strong retreat from its peak levels reached in foreign demands for U.S. currency. April. Stronger income also appeared to be In early September, with another contributing to money growth, as priweak labor report and in the context of vate employment edged up and the contracting industrial production and unemployment rate declined in Sepexpansion in the monetary and credit tember. Nevertheless, the outlook for aggregates that, while now positive, was the economy remained uncertain. Final weaker than had been expected, reserve demand seemed weak and was being conditions were eased further and the met in part through higher imports, federal funds rate fell to around 3 per- holding down industrial production and cent. Shorter-term market rates dropped employment, and business and conon this action, bringing them to the sumer sentiment remained relatively neighborhood of zero in real terms. depressed. Despite the poor economic news and In these circumstances, the Commitexpectations that further easing moves tee established a strong bias toward ease were in the offing, long-term rates, at its early October meeting. In the although they initially declined, drifted event, however, an improvement in ecoback up on renewed concerns that the nomic indicators immediately after the federal deficit would be enlarged by meeting, along with evidence of some fiscal actions taken to stimulate the strength in M2 and bank credit, stayed economy. any further easing actions. Because Throughout the late summer and early anticipation of further easing had been fall, policy was conducted against a built into the structure of interest rates, background of tension in foreign ex- short-term rates backed up after the change markets; a strong deutsche mark meeting. Rates also rose at the long end, had caused several European countries responding to growing expectations that to raise interest rates sharply to preserve fiscal stimulus could follow the upcomfixed exchange rate relationships with ing presidential election, as well as and within the exchange rate mecha- to the indications of improved econism of the European Monetary System nomic performance. at a time when aggregate demand in Evidence of greater economic these countries was slowing or sluggish. strength continued to accumulate in a The dollar continued to decline into variety of indicators of production early September but then began to and spending over the fourth quarter. firm. The rise in long-term rates contrib- Although this news initially put further uted to the reversal, as did actions by upward pressures on longer-term interseveral European countries to devalue est rates, these came to be muted and their currencies, in some cases dropping then reversed as the better economic out of the ERM, and to lower interest prospects, along with statements and rates. actions of the incoming Administration, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 59 began to be viewed as reducing the like- cially, on money growth—a much lihood of outsized fiscal stimulus. Also greater effect than they had on spending helping to lower longer-term rates was itself. Growth of the debt of nonfinancontinuing good news on inflation. cial borrowers other than the federal These factors, buttressed by an increas- government edged up only lA percenting focus in public discourse on reduc- age point from 1991, to 2lA percent, as ing the federal deficit, continued to play businesses and households restrained an important role as long-term rates fell borrowing by financing spending out further into the new year. of cash flow and equity issuance and With the better economic news, the by limiting accumulation of financial Federal Reserve kept reserve conditions assets. The expansion of federal debt and short-term interest rates unchanged slowed slightly to a still- rapid IO3A peras the year ended, and the Committee at cent, held down by the lack of activity its December meeting decided to move by the Resolution Trust Corporation back to a symmetric policy stance. (RTC) after April, when it exhausted its Reflecting the improved economic out- legislative authority to fund losses at look, a stock market rally developed that savings and loans. Reflecting the slowrivaled in strength the rally at the begin- down in the activities of the RTC and ning of the year, and the dollar rose the improving health of depositories, further. federal outlays attributable to deposit Although the monetary aggregates insurance activity fell from around strengthened a bit in the fourth quarter, $50 billion in 1991 to nil last year. the depressing effects of balance sheet The total nonfinancial debt aggregate restructuring continued to be important, expanded about AVi percent last year, at a fact that became clearer once the hard- the lower end of its monitoring range. to-measure temporary boost to deposits The sluggishness in credit and money deriving from higher mortgage refinanc- growth last year appeared to represent ing abated after October. The velocities mainly weak demand, rather than any of both M2 and M3 rose significantly new tightening of credit supply terms. further in the final quarter of the year, At banks, loan flows were depressed, contributing to the exceptional velocity and, in the absence of appreciable credit increases posted by both measures for demands, bank asset growth mainly took the year as a whole. the form of security acquisitions. Some have argued that the shift to government securities over recent years has been Monetary and Credit Flows motivated by the Basle risk-weighted Credit flows again were quite damped in capital standards, which require capital 1992, and money growth was exception- against loans but not against many govally weak. Despite an appreciable ernment securities. However, the effect pickup in nominal GDP growth last of these standards appears to be relayear, the broad monetary aggregates tively minor. As in 1990 and 1991, decelerated further, and expansion of the banks that had already achieved adenonfinancial debt aggregate edged up quate capital positions were the major only a bit. As had been the case for the purchasers of U.S. Treasury and agency last couple of years, considerable efforts securities last year, and loan flows were by key sectors of the economy to depressed at these banks as well. Moreimprove balance sheets had a significant over, other regulatory factors may be restraining effect on credit and, espe- contributing to a reduction in willing- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

60 80th Annual Report, 1993 ness to take deposits and make loans, from an abundance of bad loans and including rising deposit insurance pre- remain saddled with poor-quality commiums and the tighter regulations and mercial real estate loans. Such firms requirements of new laws governing have been limiting acquisitions primabanks and thrift institutions in recent rily to high-quality, easily marketable years. A similar pattern of asset growth assets, meaning that, as in 1991, some concentrated in government securities medium-sized, below-investment-grade occurred at credit unions, which are not companies found credit from life insursubject to the Basle capital standards. ance companies difficult to obtain in Although loan growth at banks remained 1992. Some business finance companies lackluster, it strengthened in the final also have experienced high and rising quarter of the year as the economy levels of nonperforming loans, many of began to expand more rapidly. At the which were secured by commercial real same time, the growth of bank holdings estate, with effects on their willingness of government securities, which had to make new loans. been very rapid all year, slowed. Downgradings of the manufacturing To be sure, the pickup of bank lend- parents of automobile sales finance coming toward year-end seemed primarily panies have led to some increases in related to stronger demand. Banks gave their funding costs. To date, however, little indication in Federal Reserve sur- there has been little or no effect on the veys that they had begun to ease the cost or availability of consumer credit, tighter lending standards and terms that as these finance companies have they had put in place in 1990 and 1991, increased the volume of loans they have and the unusually wide spread of the securitized. The availability of credit at prime rate over market rates persisted. thrift institutions likely improved a bit Banks do seem better positioned to meet last year. Reflecting the declines in interincreases in demand than they were a est rates, profits of private sector savings few years ago. Not only has their liquid- and loan associations had reached a ity improved with the acquisition of record level as of the third quarter, susgovernment securities, but they have tained by a wide spread between interest made substantial progress in improving earned on assets and the cost of funds as capital positions, including leverage well as by a decline in the industry's ratios—which are unaffected by asset still high level of troubled assets. composition—as both profits and debt Weak credit demand and constraints and equity issuance reached record on some sources of supply have prolevels in 1992. Moreover, the quality of duced generally sluggish borrowing in their assets showed some scattered signs each major nonfinancial sector other of improvement last year; the delin- than the federal government. Overall quency rate for bank loans, though still household borrowing accelerated high, began to turn down, as did the rate slightly but continued moderate, as of charge-offs. demand was depressed by insecurity Other financial intermediaries also about employment as well as by efforts have taken steps to strengthen balance to restructure balance sheets. Declines sheets, and the availability of credit in mortgage rates promoted only about a from these lenders also remains some- V2 percentage point boost to net home what constrained—though probably not mortgage growth, but they spurred a more so than in 1991. Life insurance substantial volume of refinancing. Some companies, for example, have suffered of the proceeds of mortgage refinanc- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 61 ings likely were used to pay down rate net interest payments as a percenthigher-cost consumer credit. Consumer age of cash flow fell for the second year. credit also was held down last year as As declining interest rates allowed firms households apparently used funds that to reduce debt burdens, and as the econotherwise would have been held in low- omy advanced, corporate debt ratings yielding deposits to reduce high-cost began to improve and quality spreads debt. narrowed. With the pace of debt accumulation The state and local sector also beneby the household sector damped, and fited from the rate declines last year, with rates on consumer debt falling and with large amounts of debt being refimortgage debt being refinanced at lower nanced, including a large volume that rates, the ratio of debt-servicing pay- was called. Net debt growth continued ments to household income declined to be moderate, however, as this sector's considerably further last year. Another spending remained constrained. sign of improving household financial Although balance sheet restructuring conditions has been recent trends in has damped credit flows and spending, delinquency rates. Consumer loan its greatest impact has been on the mondelinquency rates mostly fell last year, etary aggregates, as an unusually high although they remain at high levels. proportion of spending in recent years Home mortgage delinquency rates were has been financed outside the depository little changed on balance last year and system, whose liabilities make up the still somewhat above their pre-recession bulk of the monetary aggregates. Some levels, but well below those of the mid- of this spending has been supported 1980s. through sources other than borrowing, Business debt grew only slightly last for example, by issuing equity or reyear as internally generated funds ex- straining the accumulation of liquid ceeded investment spending. Taking assets. Depository credit expanded last advantage of the strong stock and bond year, following two years of contraction, markets, nonfinancial corporations but it continued to shrink as a share of stepped up their equity issuance and nonfinancial debt as borrowers concenrefinanced large volumes of longer-term trated their credit demands in long-term debt at more favorable rates. In part, the securities markets—bonds for corpoproceeds of these issues were used to rations and fixed-rate mortgages for pay down short-term debt, particularly households. bank loans, thereby lengthening liability The sluggish expansion of depository structures. credit was echoed in M3, which com- The hospitality of the capital markets prises most—though not all—of the extended even to lower-graded business instruments depositories use to finance borrowers, which issued substantially their credit extensions. In fact, growth more bonds than in recent years. Overall of M3 slowed last year to Vi percent public gross bond issuance by nonfinan- despite the pickup in depository credit, cial corporations was well above the as depositories relied much more on 1991 level. Likewise, gross equity issu- equity issuance and sales of subordiance by nonfinancial corporations also nated debt, which are not in M3. Large rose from the already high pace of 1991 time deposits at banks and thrift instituand was four times that of the late 1980s tions fell rapidly. The tendency for and early 1990s. As a result of debt spending to be financed outside of refinancing and sales of equity, corpo- depositories, along with the latter's reli- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

62 80th Annual Report, 1993 ance on non-M3 funds, produced a siz- to the unattractiveness of holding funds able increase in M3 velocity last in M2 assets relative to other possible year—at a rate far above that of recent uses of savings. years. The rise in velocity of M3 would Contributing to the relative attractivehave been even greater had it not been ness of nonmonetary assets was the for strong inflows into institution-only rapidity with which banks adjusted money funds over the first three quarters down offering rates on retail deposits as of the year. The attractiveness of these market rates declined last year. Banks' funds increases when short-term interest unaggressive pricing of deposits rerates are falling, a phenomenon caused flected substantial paydowns of bank by the fact that the funds do not mark to debt by households and businesses, market, so that their yields tend to which kept loan demand low and banks' exceed market rates when those rates need for funds to finance them quite are declining. limited. In addition, banks and thrift M2 increased about 2 percent last institutions have been discouraged from year, below the 2Vi percent lower end of going after deposits by the rising cost of its target range. M2 registered modest issuing deposits to make loans; among growth in the first and last quarters of the factors accounting for this increase the year but was about flat over the have been increases in deposit insurance middle quarters. The underlying weak rates and higher capital ratios occamoney growth appeared to stem from sioned by market and regulatory forces. several important factors, many related The prompt declines and low level of deposit rates have combined with several other factors to induce savers to cut Growth oi Money and Debt back on holdings of assets in M2. One Percent important influence was the unprece- Domestic dented steepness of the yield curve, Measurement non- Ml M2 M3 which was pulling deposit funds into period financial debt capital markets. An important method Year1 for accomplishing this portfolio shift 1980 7.4 8.9 9.5 9.5 was mutual funds, which experienced 1981 . . . 5.4 9.3 12.3 10.0 (2.5 2) record inflows last year. Not only were 1982 8.8 9.1 9.9 9.3 yields on these funds attractive, but they 1983 10.4 12.2 9.9 11.4 1984 5.5 8.1 10.8 14.3 have become increasingly available 1985 12.0 8.7 7.6 13.8 through banks and thrift institutions. 1986 15.5 9.3 8.9 14.0 1987 6.3 4.3 5.8 10.1 Assets in bond and equity mutual funds 1988 4.3 5.3 6.4 9.2 (apart from those held by institutions 1989 .6 4.7 3.7 8.1 1990 4.3 4.0 1.8 6.9 and those in IRA and Keogh accounts) 1991 . . . 8.0 2.8 1.1 4.3 increased $125 billion last year, up from 1992 14.3 1.9 .5 4.6 $117 billion in 1991 and an average of Quarter (annual rate)3 $30 billion over the previous five years. 1992: 1 15.5 3.3 2.0 4.3 In 1991 and 1992 for the first time, 2 10.6 .6 -.3 5.4 3 11.6 .8 .1 4.2 increases in mutual fund assets exceeded 4 16.8 2.9 .2 4.2 increases in M2. Money growth has also weakened as 1. From average for fourth quarter of preceding year to average for fourth quarter of year indicated. consumer loan rates have moved down- 2. Adjusted for shift to NOW accounts in 1981. ward less rapidly than deposit rates. As 3. From average for preceding quarter to average for quarter indicated. a consequence, households face a con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 63 siderable interest rate incentive, particu- dropped by less, providing an incentive larly after taking account of changes in to shift assets from market instruments the tax deductibility of consumer inter- to deposits and depressing velocity. est payments, to use funds in deposit However, because of the unusual configaccounts to pay down, or limit the accu- uration of forces discussed above, these mulation of, debt. In fact, the rise in incentives to hold M2 have not followed consumption has been accompanied by their usual pattern in the current cycle. an unusually small increase in debt, As noted, despite the drop in short-term implying that consumption has been interest rates, a combination of the steep financed to a large extent by reducing or yield curve, sluggish adjustment of loan limiting holdings of financial assets. rates, and other factors has decreased, The cuts in bank deposit rates were not increased, the incentives to hold M2 particularly evident for larger (and in the last year. In other words, the presumably more interest sensitive) opportunity cost—the earnings given accounts and at longer maturities. Small up—in holding M2 actually has widtime deposits ran off throughout the ened, rather than narrowed as has hapyear. Some of these funds appeared to pened in the past when market interest flow into more-liquid deposit accounts, rates fell, and this helps to explain why as rates on small time deposits fell faster M2 velocity has risen atypically. than those on savings and checkable Another indication of the unusual deposits. General purpose and broker- behavior of the velocity of M2 is the dealer money market mutual funds recent performance of the Board staff's (MMMFs) also contracted over the year, P* model in predicting inflation. The despite the yield advantage these assets model is premised on reasonably stable offered vis-a-vis other money market M2 velocity over time and under this rates in an environment of declining premise predicts the price level and yields. This appeared to be another inflation rates that are consistent with example of the attraction that bond and M2 growth. If the velocity of M2 is equity mutual funds and other capital rising atypically, slow growth of M2 market instruments provided to inves- would not be associated with the degree tors last year. MMMFs grew in October of disinflationary pressures that would and November, however, perhaps re- be predicted by the P* model, which flecting capital losses in bond funds assumes normal velocity behavior. In resulting from the rise in long-term rates fact, consistent with the notion that in September and October. velocity is behaving abnormally, the The overall effect of the unusual model, using actual M2 growth, underforces that have been influencing M2 is predicted inflation in 1992. summed up by the behavior of its veloc- The growth of M2 over the year was ity, which accelerated for the second entirely attributable to its currency and year in a row, to a V/i percent rate, transactions deposit components, as Ml despite the sharp downward trend in growth surged to about 141A percent in short-term interest rates over this period. 1992. This performance reflected the Over previous decades, the velocity of advance in income growth but stemmed M2 and short-term rates had moved mainly from declines in both short- and together in a reasonably predictable long-term interest rates. Long-term rate way. This occurred because deposit rates declines prompted large volumes of lagged market rates. When, for example, mortgage-rate refinancings, particularly short-term rates fell, deposit rates in the first and last quarters. Because a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

64 80th Annual Report, 1993 large portion of prepayments are held 1993 would be a good year for growth in demand deposits until the mortgage and would also see further progress servicer remits the funds, the level of toward price stability. demand deposits is temporarily boosted As the year has unfolded, however, by mortgage refinancings. Falling short- the economy's performance has fallen term rates boosted demand deposits by short of these expectations. Economic lowering the opportunity cost of holding growth has slowed appreciably from the them and by increasing the amount of pace late last year; in part, this has deposits businesses needed to hold reflected a retreat in business and conunder compensating balance arrange- sumer confidence and the effects on our ments. In addition, NOW accounts were trade balance of weakness in a number boosted by funds shifted from small of other industrial countries. Like most time deposits, as rates on the latter fell private forecasters, the Board members faster than those offered on the former. and Bank presidents generally have Growth in NOW accounts last year trimmed their projections of growth in accelerated from the already brisk pace real gross domestic product for the year of 1991, and demand deposits posted the as a whole, although they continue to largest increase since at least 1959. foresee increases in output large enough To accommodate the growth in trans- to extend the reduction in the unemployactions deposits associated with the pro- ment rate that began last summer. cess of easing reserve conditions, the Events on the price side also have been Federal Reserve supplied large volumes disappointing. The inflation rate in the of new reserves in 1992. Total reserves first part of this year was higher than in grew at around 20 percent, more than late 1992. There is evidence that some twice the rate of increase in 1991. Cur- of the pickup in the consumer price rency growth also was rapid, in part index may have reflected difficulties in owing to shipments abroad, and as a seasonal adjustment, and price data for consequence the monetary base the past couple of months have been increased 10V6 percent last year—the much more favorable. Nonetheless, a highest growth rate in the Board's offi- broad array of indicators points to a cial series, which begins in 1959. leveling out of the underlying inflation trend. In this circumstance, and with short- Report on July 20, 1993 term interest rates unusually low, especially when compared with inflation, the Monetary Policy and Federal Reserve recognized a need to be the Economic Outlook alert to the possibility that the balance of for 1993 and 1994 risks in the economy could shift soon in In February, when the Federal Reserve a direction dictating some firming of prepared its monetary policy plans for policy; failure to act in a timely manner 1993, the broad trends in the economy could lead to a buildup of inflationary appeared favorable. After a hesitant pressures, to adverse reactions in finanbeginning, the economic expansion had cial markets, and ultimately to the dispicked up steam in the latter part of ruption of the growth process. To this 1992, while inflation seemed still to be point, however, the moderate thrust of headed downward. Most members of the aggregate demand and considerable Federal Open Market Committee and slack in the economy, taken together nonvoting presidents anticipated that with the more subdued price data of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 65 late, do not suggest that a sustained having posted solid gains over the preupswing in inflation is at hand. Accord- ceding seven months, is estimated to ingly, the Federal Reserve has not ad- have declined somewhat over May and justed its monetary policy instruments. June. The pace of economic growth in the Broad measures of inflation picked up final quarter of 1992 was not expected in early 1993, with monthly increases to be sustained, but the slowing in the through April in the upper part of the first quarter of 1993 was surprisingly range of the past couple of years. sharp. With the exception of business Although readings on consumer and fixed investment, the slowdown cut producer prices were much more favoracross the major categories of final able in May and June, the cumulative demand. After stepping up their spend- price and wage data for the year to date ing in late 1992, consumers became suggest that underlying inflation has more pessimistic about their economic flattened out, after having trended down prospects and more cautious in their over the preceding two years. Excluding spending decisions; the uncertainty sur- the especially volatile food and energy rounding the efforts to reduce the fed- components, the twelve-month change eral deficit may have been a factor in the in the CPI has held in the range of 3lA to weakening of household sentiment. 3Vi percent since the summer of 1992. Housing activity, which also had been In financial markets, short-term interexceptionally strong late last year, hit a est rates have changed little so far in lull—even before the March blizzard on 1993, while intermediate- and long-term the East Coast—and real defense pur- interest rates have fallen 3A to 1 percentchases plunged. Moreover, net exports age point, reaching their lowest levels in deteriorated sharply, as exports declined more than twenty years. The decline in and imports surged; the drop in exports longer-term rates seems largely to have was attributable in part to continued been a response to the enhanced prosweak growth in some other industrial pects for credible fiscal restraint, though countries and in part was an adjustment the slower pace of economic expansion to the big increase in late 1992. may also have played a role. Falling The more recent statistical indicators, interest rates have helped stock market taken together, point to a resumption of indexes set new records. Despite a moderate growth in real GDP in the decline in the dollar versus the yen, the second quarter. Most notably, on the average value of the dollar on a tradepositive side, the increase in aggregate weighted basis relative to G-10 currenhours worked for the quarter as a cies has risen, on balance, since the end whole—a useful indicator of movements of 1992. Although foreign intermediatein overall output—was the largest of the term interest rates have been down, on current expansion. Sales of motor vehi- average, about as much as U.S. interest cles also exhibited considerable vigor. rates, short-term rates abroad have But other key indicators were less decreased substantially relative to U.S. robust. In particular, after allowing for rates, as foreign monetary authorities the effects of the blizzard, consumer have taken steps to bolster weak spending on items other than motor economies. vehicles was lackluster, and housing Declining U.S. market interest rates activity improved only modestly. In the contributed to robust growth in narrow manufacturing sector, orders generally measures of money and in reserves over remained soft, and factory output, after the first half of the year, but broad Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

66 80th Annual Report, 1993 monetary aggregates were very weak itors, for their part, have continued to and their velocities continued to show shift funds into capital markets, attracted exceptional increases. Credit demands by still-high returns in these markets on depositories remained quite subdued relative to earnings on deposits. Inflows relative to spending, considerable depos- into bond and equity mutual funds have itory credit was funded from nonmone- run at record levels this year, and banks tary sources, and savers continued to have facilitated investing in mutual fund demonstrate a marked preference for products by increasingly offering them capital market instruments over money in their lobbies. As a consequence of stock assets. these various forces, M2 increased at In part because of the drop in bond only a 3A percent annual rate from its and stock yields, as well as the desire to fourth-quarter 1992 average through strengthen balance sheets, corporate bor- June, while M3 fell slightly. The sum of rowers have continued to concentrate M2 and estimated household holdings credit demands on long-term securities of long-term mutual funds grew at about markets, using the proceeds in part to a 43/4 percent rate from the fourth quarrepay bank loans; business loans at ter through June, a pace little changed banks have not grown this year, from that of recent years. although there were tentative signs of a Debt growth has edged up this year, pickup over May and June. Total lend- despite a deceleration in nominal spending and credit growth at banks has risen ing, perhaps buoyed by improvements only slightly from the depressed pace of in financial positions achieved over the 1992, and these institutions have there- past few years by both borrowers and fore not needed to pursue deposits. lenders. Investment outlays are esti- Thrifts have continued to contract but at mated to have exceeded the internal a much slower pace than in recent years. funds of corporations for the first time in Banks have eased lending standards two years, while household borrowing for smaller firms for several quarters, has picked up relative to spending. In and they recently relaxed standards for addition, Treasury financing needs have medium- and large-sized firms as well. remained heavy. Nevertheless, nonfi- An increased willingness to lend on the nancial debt has grown at only a 5 perpart of banks has been associated with cent rate this year. considerably more comfortable capital positions. Banks have continued to Monetary Objectives strengthen their balance sheets by issufor 1993 and 1994 ing large volumes of equity and subordinated debt while retaining a substantial In reviewing the annual ranges for the amount of earnings. As a result, the monetary aggregates in 1993, the Fedportion of the industry that is well- eral Open Market Committee (FOMC) capitalized (taking account of supervi- noted that the relationship of broadly sory ratings as well as capital ratios) defined money to income has continued increased from about one-third at the to depart from historical patterns. The end of 1991 to more than two-thirds by annual velocities of these aggregates last March 1993. fell in 1986, and their prolonged upward In turning to equity and other non- movements since then strongly suggest deposit funds, banks have reduced breaks from previous long-run trends the share of depository credit that is of flat velocity for M2 and slowly financed by monetary liabilities. Depos- decreasing velocity for M3. The rise in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 67 the velocity measures has been particu- ued progress toward price stability. With larly surprising in the last four years, a further substantial increases in velociperiod of declining interest rates, nor- ties, continued sluggish expansion of mally associated with a reduction in M2 and M3, which are now at the lower velocity. ends of their revised ranges, would be In February, anticipating that further consistent with an acceptable track for balance sheet restructuring and portfolio the economy. Also at the July meeting, shifts from deposits to mutual funds the annual monitoring range for the would result in further increases in domestic nonfinancial debt aggregate velocity, the FOMC lowered the 1993 was reduced by Vi percentage point, to growth ranges for M2 and M3 by V2 per- 4 to 8 percent; growth in this aggregate centage point from the provisional is likely to continue to be roughly in line ranges set in July 1992. In fact, veloci- with that of nominal GDP. ties of the broad monetary aggregates Although the future behavior of the have been especially strong; in the first velocities of broad money aggregates quarter of 1993, the velocities of M2 was recognized to be difficult to predict and M3 posted substantial increases of with precision at a time of ongoing 6V4 percent and 8 percent, respectively, structural changes in the financial sector, and appear to have recorded additional, it appeared likely that the forces contribbut smaller, gains in the second quarter. uting to the unusual strength in veloci- As a consequence, at its meeting this ties would continue for some time, and month, the Committee reduced the 1993 the FOMC carried forward the revised range for M2 by an additional percent- 1993 ranges for the monetary and debt age point and the range for M3 by aggregates to 1994 as well. With conanother Vi percentage point, leaving siderable uncertainty persisting about them at 1 to 5 percent for M2 and 0 to the relationship of the monetary 4 percent for M3. aggregates to spending, the behavior of The reductions of these growth ranges the aggregates relative to their annual represented further technical adjust- ranges will likely be of limited use in ments in response to actual and antici- guiding policy over the next eighteen pated increases in velocity and not a months, and the Federal Reserve will shift in monetary policy, which remains continue to utilize a broad range of focused on fostering sustainable eco- financial and economic indicators in nomic expansion while making contin- assessing its policy stance. Ranges tor Growth of Monetary and Debt Aggregates ! Percent 1993 Aggregate 1992 1994 As of As of February July M2 21/2-61/2 2-6 1-5 1-5 M3 1-5 Vi^Vi 0-4 0-4 Debt2 41/2-8l/2 41/2-81/2 4-8 4-8 1. Change from average for fourth quarter of preced- 2. Domestic nonfinancial sector. ing year to average for fourth quarter of year indicated. Ranges for monetary aggregates are targets; range for debt is a monitoring range. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

68 80th Annual Report, 1993 Economic Projections for 1993 and 1994 large enough to result in a four-quarter The members of the Board of Governors change in real gross domestic product in and the Reserve Bank presidents, all of the range of 2lA percent to 23/4 percent; whom participate in the deliberations of for 1994, the central tendency of the the FOMC, generally anticipate that forecasts spans a range of 2Vi to 3lA pereconomic activity will strengthen in the cent. The civilian unemployment rate, second half of 1993 and continue to which averaged 7 percent in the second expand moderately in 1994. The growth quarter of 1993, is projected to fall to of output is likely to be accompanied the area of 63A percent by the fourth by further gains in productivity, but quarter of this year and to drop slightly increases in employment are projected further over the course of 1994. to be large enough to keep the unem- Recent developments in the financial ployment rate moving down. Inflation is sphere should be conducive to the susnot expected to change materially over tained increases in spending projected this period. for the quarters ahead. The financial The economic growth forecasted by positions of many households and busithe Board members and Reserve Bank nesses have continued to improve, and presidents for 1993 is somewhat weaker banks are showing signs of greater than that forecasted in February, mainly willingness to make loans. Short-term because of the shortfall in real growth in interest rates are relatively low, and the the first quarter. Most expect output appreciable declines in long-term intergains over the balance of the year to be est rates over the past several months should further the process of balance sheet adjustment and are anticipated to Economic Projections of FOMC Members provide considerable impetus to busiand Nonvoting Reserve Bank Presidents for ness investment and residential con- 1993 and 1994 struction. It is likely that business Percent investment also will continue to be bol- Central stered by the ongoing push to improve Measure Range tendency products and boost efficiency through 1993 the use of state-of-the-art equipment. Moreover, with at least a moderate Change, fourth quarter to pickup in average growth in foreign fourth quarterx Nominal GDP 43/4-6!/4 5-53/4 industrial countries, the external sector C R o ea n l s u G m D e P r price index 2 2 3- - 3 3 ' V /2 i 2V 3 4 - - 3 2 3 » / / 4 4 should be exerting a less negative influence on economic activity in the United Average level, fourth quarter Unemployment rate3 61/2-7 63/4 States. Despite the improvement in financial 1994 conditions, there are reasons to be Change, fourth quarter to cautious about the near-term outlook. fourth quarterl Efforts this year to bring the federal Nominal GDP 4«/2-63/4 5-6V2 Real GDP 2-3»/4 21/2-31/4 budget deficit under control already Consumer price index2 2-4'/4 2-3V4 have helped to ease pressures on long- Average level, fourth quarter term interest rates, and a successful Unemployment rate3 6»/4-7 61/2-63/4 agreement to reduce deficits signifi- 1. Change from average for fourth quarter of preced- cantly will produce substantial benefits ing year to average for fourth quarter of year indicated. over the longer run. But such actions 2. All urban consumers. also are expected to exert some restraint 3. Civilian labor force. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 69 on aggregate demand this year and next. tantly on a monetary policy that remains Government outlays for defense will committed to fostering further progress continue to contract, extending the dis- toward price stability. The performance locations and disruptions that have been of prices and the economy also will evident for some time in industries and depend on government policies in other regions that depend heavily on military areas. Namely, a sound fiscal policy, a spending. Prospects for higher taxes judicious approach to foreign trade may already be influencing the behavior issues, and regulatory policies that preof some households and businesses, and serve flexibility and minimize the costs the constraint is likely to intensify in they impose are crucial to reestablishing 1994. In addition, uncertainties about the disinflation trend of the past couple prospective federal policies reportedly of years and allowing the economy to are weighing on businesses and con- perform at its full potential. sumers; although the outcome of the The Administration has not yet congressional budget deliberations will released the mid-year update to its ecobe known shortly, uncertainties about nomic and budgetary projections. Howhealth care reform are not anticipated to ever, statements by Administration offibe resolved fully for some time. cials suggest that the revised forecasts Most Board members and Bank presi- for real growth and inflation in 1993 and dents expect the rise in the consumer 1994 are not likely to differ significantly price index over the four quarters of from those of the Federal Reserve. 1993 to be in the range of 3 percent to 3lA percent, about the same as the The Performance of increase over the four quarters of 1992. the Economy in 1993 At this stage, the food and energy sectors are not expected to have much Economic activity has continued to effect, on balance, on the broad price advance in fits and starts. After posting measures in 1993, but the flooding in robust gains in the second half of 1992, the Midwest raises the risk of higher real GDP rose at an annual rate of less food prices in the quarters ahead. For than 1 percent in the first quarter of 1994, the central tendency forecast is 1993. The slowing in activity was evifor CPI inflation in the range of 3 to dent in a broad range of production and 3x/2 percent, not much different than in spending indicators. The more recent 1992 and 1993. data suggest that the economy expanded The fundamentals remain consistent at a firmer pace in the second quarter, with additional disinflation; businesses although growth probably was not as continue to focus on controlling costs, rapid as in the second half of last year. and slack in labor and product markets To some extent, the slackening in ecois anticipated to decrease only gradually nomic activity in the first quarter of in the period ahead. However, the disap- 1993 can be interpreted as a payback pointing price performance in the first after two quarters of strong growth. In half of the year suggests that further particular, much of the slowing was in progress will not come easily—in part consumer spending, where large gains perhaps because inflation expectations in the second half of 1992 had outpaced remain high. Lowering inflation and income growth by a substantial margin. inflation expectations over time, and In addition, there was a sharp contracachieving sustained reductions in long- tion in defense spending; although real term interest rates, will depend impor- defense purchases clearly will remain Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

70 80th Annual Report, 1993 on a downtrend for some time, the first- pattern in early 1993: It hit a lull in the quarter plunge followed a spurt in the first quarter after surging in the second second half of 1992 and is not likely to half of 1992. Averaging through the be repeated in coming quarters. In the quarterly data, consumption grew at external sector, exports declined in the about a 3 percent annual rate over those first quarter after a big increase late last three quarters, and available data point year, while imports rose markedly. to a moderate increase in the second Activity was also depressed, especially quarter. Housing activity appears to in the housing sector, by unusually bad have revived in recent months, after sagweather last winter. ging earlier in the year. Moderate growth in real GDP appears Consumer spending increased only to have resumed in the second quarter. about 1 percent at an annual rate in real Nonetheless, experience thus far in 1993 terms in the first quarter. Outlays for has underscored that the impediments to goods were especially weak, down at a more rapid pace of economic expan- about a 2 percent annual rate; although a sion over the near term remain sizable. part of the drop was probably attribut- Besides defense cutbacks, the process of able to the severe blizzard on the East balance sheet adjustment goes on, as do Coast in March, signs of some retreat in the restructuring efforts under way at spending had already appeared in Janumany large firms. Moreover, the contin- ary and February. Meanwhile, spending ued disappointing economic perfor- on services remained on the moderate mance of some major foreign industrial uptrend that had been evident for the countries is taking a toll on U.S exports. past few years. Finally, uncertainties about prospective Spending rose appreciably in April, federal policies on a variety of fronts, spurred by a post-blizzard bounce-back although difficult to measure, are report- in outlays for motor vehicles and other edly making some businesses and con- goods. Demand for motor vehicles sumers reluctant to make major hiring remained strong through June, resulting and spending commitments. in an average sales pace for the quarter News on the price side was also wor- of almost 14V2 million units (annual risome in the first half of the year. rate)—the highest since early 1990. Month-to-month movements in prices Sales were boosted by the replacement were on the high side through April, but needs of households that put off buying they moderated in May and June. The vehicles during the 1990-91 recession more favorable recent data helped to and the early recovery period. In addiease concerns that a significant pickup tion, price increases—at least for modin inflation was under way. Nonetheless, els with domestic nameplates, which the disinflation process seemingly has have accounted for almost all of the rise stalled, with underlying inflation, as in sales this year—have been relatively measured by the twelve-month change small, and financing terms favorable. in the CPI excluding food and energy, Meanwhile, real spending on goods holding in a narrow band between other than motor vehicles appears to 3VA percent and 3Vi percent since last have posted a moderate gain for the summer. quarter as a whole, and outlays for services rose slowly through May. The Household Sector The downshift in overall spending Growth of consumer spending on goods growth this year does not appear to be and services continued in a stop-and-go attributable to any worsening of the cur- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 71 rent trends in household incomes and Household financial positions have financial positions, but it has coincided continued to show signs of improvewith a deterioration in consumer confi- ment. The value of household assets has dence. In contrast to the ebullience evi- been buoyed by the rising stock market, dent last fall, surveys conducted by the while debt growth has remained moder- University of Michigan and the Confer- ate. Moreover, reductions in interest ence Board this year have found respon- rates have continued to lower debtdents more pessimistic about their job servicing burdens; when measured in and income prospects. Spending may relation to disposable income, the repayalso have been crimped by smaller-than- ment burden has fallen back to the levels usual tax refunds—or larger tax bills— of the mid-1980s. The incidence of this year. Although the change in with- financial stress among households also holding schedules in March 1992 raised appears to have eased further. Delinworkers' take-home pay, and thus pro- quency rates on consumer loans genervided the wherewithal to fund additional ally dropped again in the first quarter purchases last year, many households and are down significantly from their may well have found themselves less recent peaks, and delinquencies on liquid than usual in early 1993. More home mortgages are at the low end of fundamentally, the slowing in spending the range of the past decade. appears to reflect a return to trend after a Housing activity turned surprisingly surge that outstripped the rise in real soft in the first quarter, after a burst at disposable income in the second half of the end of 1992. However, the most last year. Indeed, after having risen recent monthly indicators suggest that somewhat over the preceding couple of the sector remains on a path of gradual years, the personal saving rate dropped expansion. In the single-family area, from 5lA percent in the second quarter both starts and sales of new homes fell of 1992 to 4V2 percent in the fourth back at the beginning of the year and quarter, in the lower part of the range of remained below trend through March. recent years. The saving rate retraced Single-family starts rebounded in April some of that decline in the first quarter, and edged up further in May, lifting the but it appears to have fallen back in the average level for the two months about spring. 5 percent above the first-quarter pace; Real disposable income has remained new home sales gyrated in the spring on the moderate uptrend that has been but also were higher, on average, than in evident for the past several quarters: In the first quarter. May, it stood about 2lA percent above Undoubtedly, some of the recent imthe level of a year earlier. Growth in provement reflects a reversal of transiwages and salaries has stayed relatively tory factors that damped homebuilding sluggish despite the firmer pace of in the first quarter. The East Coast blizemployment growth this year. Mean- zard delayed both builders and their while, transfer payments have continued customers in March; in addition, the to expand, although recent increases weather for the nation as a whole was have been diminished by a drop in slightly worse than usual in January and unemployment insurance benefits as the February. Lumber prices ran up sharply number of unemployed has declined. between October and March: As mea- Interest income, which fell appreciably sured by the producer price index, prices over 1992, has only edged down thus far rose about one-third over that period, this year. and spot market quotes for some lumber Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

72 80th Annual Report, 1993 products more than doubled. The jump total residential investment expendiin lumber costs, which has since been tures, compared with a figure of about reversed, seems not to have left much of 15 percent in the mid-1980s. Despite the a mark on the prices recorded in sales reduced production in the past several transactions; indeed, the inability of years, vacancy rates and rents have not builders to pass along the cost increases yet shown clear signs of tightening for may have accounted for some of the the nation overall. By contrast, improvedisruption in construction activity. ments to all existing housing units have In any event, low mortgage rates trended up over the past year and now clearly are helping to stimulate housing account for nearly one-fourth of total demand. Interest rates on fixed-rate residential construction expenditures. home mortgages, like most other longterm interest rates, fell to near their The Business Sector twenty-year lows last winter and have Developments in the business sector since declined further; initial rates on generally were favorable in the first half adjustable-rate mortgages have been the of 1993. Business fixed investment, lowest since these loans first became which continued to grow briskly, was widely available at the beginning of the boosted by ample profits and cash flow, 1980s. Given the trends in house prices, the relatively low cost of capital, and these interest rates have pushed the cost ongoing efforts to improve productivity. of home purchase—as measured by the Meanwhile, business balance sheets share of household income needed to strengthened further as growth of busimake the mortgage payments on an ness debt remained relatively slow and average home—to the lowest levels many firms continued to take advantage since the mid-1970s. of lower bond yields and high stock Nonetheless, the trends in house prices to enhance liquidity by funding prices this year—small rises in some out short-term liabilities. markets, declines in others—have not Real business fixed investment been a uniform positive for demand, increased at a 13 percent annual rate in mainly because they have muted the the first quarter of 1993. Real outlays investment motive for owning a home. for equipment posted another healthy Moreover, although most respondents to gain, and investment in structures, the Michigan survey in recent months which had been on a protracted decline reported that it was a good time to buy a for some time, was about unchanged for house, only about one-third of those a second quarter. The indicators in hand who already owned homes thought it suggest that real business fixed investwas a good time to sell. In fact, industry ment remained strong in the second reports suggest that first-time homebuy- quarter. ers have accounted for an unusually Equipment spending has continued to large share of all home purchases in the be a mainstay of economic growth. It past two years, and that sales and prices rose at an annual rate of about 18 perin many localities have been strongest at cent in real terms in the first quarter, the lower end of the market. after a MV2 percent rise over the course Construction of multifamily housing of 1992. Real outlays for computers and this year has been at its lowest level related devices have continued to soar; since the 1950s. These structures—most since early 1991, they have roughly of which are intended for rental use— doubled, boosted by product innovanow account for less than 5 percent of tions, extensive price-cutting by com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 73 puter manufacturers, and the ongoing since the middle of 1991, rose considerefforts of businesses to achieve efficien- ably last winter and spring. Although cies through the utilization of new the buildup early in the year was likely information-processing technologies. motivated in part by the need to replen- However, demand for other, more tradi- ish stocks drawn down by surprisingly tional types of equipment also began to strong sales in late 1992, some of the grow around the middle of 1992 and recent increase may be attributable to continued to expand in early 1993. softer-than-expected sales. Notably, Domestic purchases of aircraft spurted the inventory-sales ratio for non-auto in the first quarter; but, given the finan- retail stores remained in May around the cial problems besetting the airlines, this high end of the range of recent years. By increase will likely be reversed in com- contrast, inventories at factories and at ing quarters. wholesale trade establishments gener- Investment in nonresidential struc- ally seem to be reasonably well aligned tures appears to be stabilizing after sev- with sales. eral years of steep declines. Construc- After advancing markedly over the tion outlays were essentially flat in real course of 1992, economic profits of U.S. terms over the fourth and first quarters, corporations were little changed overall and the advance indicators suggest that in the first quarter of 1993. The pretax the bottom has been reached or is close profits earned by nonfinancial corporaat hand. Trends within the construction tions on their domestic operations weaksector have been divergent. In the office ened after a fourth-quarter surge, but sector, the excess of unoccupied space they still stood nearly 35 percent above remains huge, and spending continues to the cyclical low reached in 1991; the contract. However, spending for com- upswing in these profits over the past mercial structures other than office two years has reflected primarily a combuildings, which also had fallen sharply bination of moderation in labor costs over the past several years, has appar- and reductions in net interest expenses. ently turned the corner because of both Domestic profits of financial corporathe stronger pace of retail sales over the tions have been buffeted in recent quarpast year and the ongoing shift of retail- ters by the losses that insurance compaing activity to large suburban stores. nies sustained from major natural Outlays for industrial construction have disasters; without such losses, domestic not exhibited the normal cyclical financial profits in the first quarter would rebound—mainly because utilization of have surpassed the high reached in the existing capacity has tightened only first quarter of 1992. gradually—but they seem, at least, to be The farm economy has been beset by leveling out. Meanwhile, activity in the numerous weather disruptions so far this public utilities sector has continued to year. In the first quarter, severe weather trend up, mainly because of capacity in some regions retarded livestock proexpansion at electric utilities but also duction and damaged fruit and vegebecause of the installation of pollution table crops. In many regions, spring abatement technology, which the Clean planting was hampered by wet weather, Air Act requires be in place by 1995. and, in parts of the Midwest, continued In contrast, drilling activity remains heavy rains around mid-year caused depressed. major flooding. Because of the planting Nonfarm business inventories, which delays and the floods, uncertainties had shown only small changes, on net, about acreage and yields are consider- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

74 80th Annual Report, 1993 ably greater than usual for this time of a sharp swing in net outlays for deposit year, and farmers in the flooded regions insurance that was attributable largely obviously have suffered financial losses. to the improved health of depository Despite the weather-related supply institutions. In fact, so far this year, disruptions, farm income and farm receipts from insurance premiums and financial conditions for the nation as a proceeds from sales of assets taken over whole seem to have held up reasonably by the government have exceeded by well in the first half of 1993. On aver- $181/2 billion the gross outlays to age, farm prices in the first half were resolve troubled institutions. Defense slightly above those of a year earlier, spending was also quite weak in the first with declines for farm crops being offset eight months of fiscal 1993. Outlays for by higher prices for livestock. Farm sub- Medicare and Medicaid continued to sidies, which have been running well rise rapidly; however, the increase so far above their 1992 pace, have been lifting this year—about 10 percent—was only farm income and cash flow, and farm half as large as the one in the preceding investment in new machinery has picked year. The deceleration in health care up. The recent jump in crop prices—a spending appears to stem, in part, from consequence of the flooding—will boost federal regulations issued in 1992 that the incomes of the many farm producers limit the states' ability to shift Medicaid whose crops are still in good condition. costs to the federal government. Federal purchases of goods and services—the part of federal spending The Government Sector included directly in gross domestic Governments at all levels continue to product—declined at an annual rate of struggle with budgetary difficulties. At 18 percent in real terms in the first quarthe federal level, the unified budget def- ter of 1993. A sharp decrease in defense icit over the first eight months of fiscal spending more than accounted for the year 1993—the period from October to drop. Real defense purchases have been May—totaled $212 billion, somewhat falling noticeably since early 1991, but less than during the comparable period the decline has been erratic; at least part of fiscal 1992. However, excluding of the first-quarter plunge can be interdeposit insurance and adjusting for the preted as a correction after a few quarinflow of contributions to the Defense ters of surprisingly strong spending. Cooperation Account in fiscal 1992, the Meanwhile, real nondefense purchases eight-month deficit was about $230 bil- have been almost flat over the past lion in both fiscal years. In the main, the couple of quarters. underlying deficit has failed to drop Federal receipts in the first eight because the restraint in discretionary months of fiscal 1993 were about 5 perspending that was legislated in 1990 and cent greater than in the same period of a the deficit-closing effects of stronger year earlier; the rise was roughly the economic activity have been offset by same as that in nominal GDP. Boosted continued large increases in spending by the upswing in business profits, corfor entitlement programs. porate taxes rose sharply. However, they In total, federal outlays in the first account for less than one-tenth of total eight months of fiscal 1993 were only receipts, and growth in other categories about 2 percent higher than during the was only moderate in the aggregate. same eight months of fiscal 1992. Out- States and localities continue to face lay growth was damped significantly by sizable budget deficits: As measured Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 75 in the national income and product bases, have grown only moderately over accounts (NIPA), the combined deficit the past year. Also, these governments (net of social insurance funds) in the have lately been reluctant to raise taxes, sector's operating and capital accounts after the sizable hikes they enacted in has been stuck around $40 billion since 1990 and 1991. All told, the sector's late 1990. These outsized deficits have own-source general receipts, which persisted despite ongoing efforts by comprise income, corporate, and indimany governments to adjust spending rect business taxes, rose 5 percent over and taxes. As at the federal level, deficit the four quarters ended in the first quarreduction has been complicated by the ter of 1993, an increase about the same upsurge in payments to individuals for as that in nominal GDP. health and income support; in the first quarter of 1993, state and local transfer payments for Medicaid and Aid to Fam- The External Sector ilies with Dependent Children (in nomi- Since December 1992, the tradenal terms) were nearly 20 percent above weighted foreign exchange value of the those of a year earlier. dollar has risen about 5 percent, on bal- The deficit-reduction efforts of state ance, in terms of the currencies of the and local governments in recent quarters other Group of Ten (G-10) countries. have been concentrated on the spending This net increase has reflected much side. Their purchases of goods and ser- larger movements in the dollar's value vices were nearly flat in real terms in the against individual currencies: In particufirst quarter of 1993 and have changed lar, a sharp decline against the Japanese little, on net, since early 1992. Outlays yen was more than offset by substanfor construction, which fell at an annual tial increases against major European rate of 7 percent, on average, in the currencies. fourth and first quarters, have been espe- Relative to the monthly average for cially weak. For all major categories December 1992, the dollar has declined except sewer and water, outlays in nearly 15 percent against the yen to recent months have been running signif- record lows, prompting heavy Japanese icantly below year-earlier levels. State official purchases of dollars and moderand local employment has continued to ate dollar purchases by U.S. authorities. expand at the somewhat slower pace The strengthening of the yen has that has been evident since 1991, while occurred despite the weak performance these governments have continued to of the Japanese economy and market hold the line on wages and benefits. The expectations that Japanese short-term approximately 3Vi percent increase in interest rates will remain near historistate and local compensation rates over cally low levels over the next year; it the year ended in March was similar to seems to be based largely on the percepthe rise for workers in private industry; tion that Japan's external surplus, which by contrast, in the 1980s, state and local has grown rapidly over this period, is workers received increases that, on aver- not sustainable. age, were more than 1 percentage point Against the German mark, the dollar per year greater than those in private has risen almost 10 percent since industry. December, reflecting a substantial eas- Receipts of state and local govern- ing of German interest rates and the ments, restrained by the relatively tepid expectation of further declines in light cyclical upswing in the sector's tax of the sharp contraction in German Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76 80th Annual Report, 1993 economic activity. The dollar has also 1992 high in April and May. Shipments appreciated against other European to developing countries, which had risen currencies, and it has remained little sharply over 1992, dropped back during changed against the Canadian dollar. the January-to-May period. In the aggre- Economic activity in the major for- gate, exports to industrial countries rose eign industrial countries generally has somewhat in the first five months of been sluggish so far this year. The 1993, but Canada and the United Kingrecovery in Canada now seems to be dom accounted for most of the increase. reasonably well established, and real Real merchandise imports, extending GDP in the United Kingdom has been the rapid pace of growth recorded over growing slowly. However, continental the four quarters of 1992, rose sharply Europe remained in recession in the first over the first five months of 1993. Trade quarter, with a sizable reduction in real in computers continued to soar and was GDP in western Germany; recent indi- responsible for about one-third of the cators point to continued weakness in increase in merchandise imports. More the second quarter. After falling for broadly, imports were boosted by the much of 1992, Japanese real GDP rapid growth of U.S. domestic final advanced in the first quarter, a rise in demand in the second half of 1992 large part reflecting the effects of earlier and inventory restocking this year. In fiscal measures; however, indicators for addition, the prices of non-oil imports, the second quarter are mixed, and the reflecting the lagged effects of the appreappreciation of the yen will likely result ciation of the dollar during the last quarover time in a drag on net exports. ter of 1992, fell somewhat in the first Unemployment rates have continued quarter; much of that decline appears to to rise (into the double-digit range in have been reversed in the second quarmany instances) in the countries still in ter. The price of oil imports fluctuated in recession; even in the countries showing a relatively narrow range over the first signs of recovery, unemployment has half of 1993. Mild weather and strong remained high. Partly as a consequence, OPEC production pushed oil prices wage pressures have ebbed, and under- down early in the year, but prices subselying inflation has continued to deceler- quently retraced the decline on signs ate, on average. A notable exception is that OPEC would effectively curb western Germany, where the CPI rose production. Recently, oil prices have more than 4 percent over the twelve dropped on Kuwait's decision not to months ended in June, partly because of participate in OPEC's quota allocations an increase in the value-added tax early for the third quarter and speculation that this year and large increases in the prices Iraq may be allowed to resume exportof housing services. ing sooner than had been expected. In contrast to the overall weakness of The merchandise trade deficit widactivity in foreign industrial countries, ened to $116 billion (at an annual rate) real growth so far this year in major in the first quarter of 1993, nearly developing countries, especially in Asia, $10 billion greater than in the second appears to have remained at around the half of 1992; it increased somewhat strong pace of 1992. further in April and May, on average. After expanding rapidly at the end of With moderate increases in net income 1992, real merchandise exports declined from direct investments and a slight furduring the first quarter of 1993, but they ther widening of the surplus on net serbounced back to their fourth-quarter vice transactions, the deficit in the cur- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 77 rent account deficit rose somewhat less Nonetheless, job gains have continthan the trade deficit, to $89 billion ued to fall far short of the norms set (annual rate) in the first quarter, com- by earlier business cycle expansions. pared with $83 billion in the second half For example, only in May did payroll of 1992. employment return to its pre-recession Net capital inflows recorded in the peak, two years after the cyclical trough; first quarter of 1993 were largely attrib- by contrast, recessionary job losses typiutable to substantial increases in foreign cally have been reversed within the first official assets held in the United States, year of the expansion. Job growth has particularly in those of some newly continued to be restrained by the temindustrializing Asian economies and of perate pace of economic activity and certain Latin American countries. Net employers' ongoing efforts to improve private capital inflows were relatively productivity. In addition, firms are consmall. Private foreigners added signifi- fronting cost pressures associated with cantly to their holdings of U.S. securi- sizable increases in health insurance preties, particularly Treasury bonds. How- miums and in other fringe benefits; ever, U.S. net purchases of foreign bonds uncertainties about the future course of reached record levels, and net purchases government policies may also be conof foreign stocks, although down from tributing to the reluctance of some firms peak levels reached in the last half of to expand their permanent full-time 1992, remained heavy. New bond issues work forces. by foreigners in the United States also Moreover, firms are relying increaswere very strong. ingly on temporary workers, in part Capital inflows associated with for- because doing so affords them greater eign direct investment in the United flexibility in responding to fluctuations States recovered substantially in the first in demand for their products. Indeed, quarter but remained far below the peaks employment at personnel supply firms, reached in 1989. Foreign direct invest- which consist largely of temporary-help ment in the United States apparently has agencies, rose more than 150,000 been deterred by unfavorable returns between December and June. Over the realized on earlier investments and past two years, the increase has been by financial market conditions less about 500,000; thus, although these favorable to acquisitions. In contrast, firms currently account for less than capital outflows associated with U.S. 2 percent of total payroll employment, direct investment abroad remained they are responsible for one-quarter of strong. the increase in total employment over this period. Job gains in the first half of 1993 also Labor Market Developments reflected a continuation of the steady The labor market showed signs of uptrend in employment in health serimprovement in the first half of 1993. vices. In addition, gains occurred at According to the payroll survey, trade establishments, construction payemployment increased about 1 million; rolls improved with the recent stronger this number compares with a rise of housing activity, and there were scatabout 600,000 over the second half of tered increases in services other than last year and brings the total increase health and personnel supply. since the cyclical low in 1991 to about Meanwhile, manufacturing employ- 2 million. ment declined further, on balance, over Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78 80th Annual Report, 1993 the first six months of the year. 1 xh percent in the first quarter, echoing Although factory output increased the sharp deceleration in output. Nonesteadily through April, firms relied theless, the first-quarter drop followed a mainly on a combination of productivity string of sizable increases; all told, the improvements and longer workweeks to rise in productivity over the year ended meet their output objectives; in May and in the first quarter of 1993 was Wi per- June, output decreased somewhat. Job cent—smaller than the gains recorded losses in the first half were concentrated earlier in the economic expansion but in the durable goods sector, with partic- still noticeably larger than the norms for ular weakness at producers of aircraft the past decade. Productivity growth in and motor vehicles. Since its last peak the manufacturing sector, where downin January 1989, manufacturing employ- sizing and restructuring efforts have ment has fallen about PA million; lay- been under way for some time, has conoffs in defense-related industries (those tinued to be especially impressive, totalindustries that depend on defense expen- ing more than 5 percent over the past ditures for at least 50 percent of their year. output) have accounted for about one- Labor compensation has tilted up of fifth of the decrease in total factory late. The employment cost index for pripayrolls. vate industry—a measure that includes Employment as measured by the wages and benefits—rose at an annual monthly survey of households rose rate of 4lA percent over the first three about 900,000 over the first six months months of the year. Even so, the data are of the year—essentially the same as in volatile, and the total increase since the payroll series. The number of unem- March 1992 amounted to only 3J/2 perployed fell appreciably at the beginning cent; by contrast, this index had risen of the year, and the civilian unemploy- 4lA percent over the preceding twelve ment rate dropped from 7.3 percent in months, and, as recently as early 1990, December to 7.0 percent in February; it the twelve-month change had exceeded has shown little change since that time. 5 percent. The increase in wages over The civilian labor force expanded the past year was less than 3 percent, only moderately over the first six whereas the cost of fringe benefits, months of 1993—less than 1 percent at pushed up by the steep rise in the cost of an annual rate. Labor force growth con- medical insurance and by higher paytinued to be damped by the relatively ments for workers' compensation, rose small increase in the working-age popu- more rapidly. Primarily because of the lation. In addition, perceptions of mea- drop in productivity, unit labor costs ger employment opportunities evidently deteriorated markedly in the first quarcontinued to deter many potential job ter, but they still were up less than 2 perseekers. The labor force participation cent over the past year. rate, which measures the percentage of the working age population that is either employed or looking for work, spurted Price Developments in late spring; however, this spurt fol- Inflation exhibited considerable monthlowed a sharp decline earlier in the year, to-month volatility in the first half of the and the level at mid-year was about the year. Broad measures of inflation picked same as that in late 1992. up somewhat in early 1993, with Output-per-hour in the nonfarm busi- monthly readings through April in the ness sector declined at an annual rate of upper part of the range of the past Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 79 couple of years. However, price changes and dropped, on balance, in May and at the consumer and the producer levels June. Residential natural gas prices rose were small in May and June. Cutting considerably over the first half, in part through the monthly data, the disinfla- because of inventory adjustments assotion process evident in 1991 and 1992 ciated with last winter's colder-thanseems to have stalled, with underlying usual weather; although recent declines inflation, as measured by the twelve- in wellhead prices suggest that some of month change in the CPI excluding food the increase at the retail level may be and energy, holding in the range of retraced in coming months, over the 314 percent to 3!/2 percent that has pre- longer haul, natural gas prices are being vailed since last summer. The total CPI, supported by an ongoing shift toward held down by essentially flat energy the use of cleaner-burning fuels. prices, has risen 3 percent over the past All told, the CPI excluding food and twelve months. energy increased at an annual rate of The CPI for food increased at an 3lA percent over the first half of the annual rate of 2 percent in the first half year, after rising 3 percent over the secof 1993, a shade above the rate of ond half of 1992. The CPI for goods increase during 1992. Meat prices soared in January and February, with jumped sharply during the first few large increases reported for several months of the year as production fell items. Apparel prices jumped early in short of year-earlier levels. In addition, the year, in part because strong sales in the prices of fresh vegetables were late 1992 limited the need for postboosted during the spring by weather- Christmas markdowns. Some retailers related production setbacks in several may also have seen opportunities to regions of the country. By late spring, widen profit margins on other merchanthese supply problems had abated, and dise; the recent decrease in prices of the June CPI brought price declines in home furnishings, for example, suggests food categories where the sharpest that not all of these increases stuck. upward pressures previously had been Increases in prices of non-energy serevident. Since the end of June, however, vices were steadier but also somewhat farm crop prices have moved up in larger than in 1992. Part of the step-up response to the severe flooding in the was in shelter costs, which account for Midwest. The increases in crop prices about half of non-energy services and have already been reflected in the had posted some unsustainably small form of large advances in some com- increases last summer. However, the modity price indexes and have raised substantial deceleration in medical care the possibility that renewed upward prices (for both goods and services) that pressures on consumer food prices could has been in train over the past few years soon emerge. extended into 1993. In fact, the CPI for Consumer energy prices changed lit- medical care rose only about 6 percent tle, on net, over the first half of the year. over the twelve months ended in June; With world oil markets remaining rela- this increase was among the smallest of tively quiescent, the price of West Texas the past decade. intermediate generally fluctuated To some extent, the higher underlying between $18 and $20 per barrel but has CPI inflation rates in the first half of weakened recently. Retail prices for 1993 may be a statistical phenomenon refined petroleum products changed that will be reversed in the second half: fairly little on the whole through April Indeed, over the past several years, price Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80 80th Annual Report, 1993 increases early in the year have tended Monetary and Financial to exceed those for the year as a whole, Developments in 1993 even after seasonal adjustment by the Bureau of Labor Statistics. But, even Monetary policy in 1993 has been allowing for this phenomenon, inflation directed toward the goal of sustaining seems to have leveled out. The lack of the economic expansion while preservfurther deceleration is puzzling in light ing and extending the progress made of the considerable slack in labor and toward price stability in recent years. product markets. One possible expla- In the first half of the year, economic nation is that the pickup in economic activity slowed markedly from the very activity late last year may have trig- rapid pace of the fourth quarter, while gered a round of price increases; if so, inflation indicators fluctuated widely. some deceleration in prices is likely in Although inflation readings were a the wake of the subdued performance of source of concern for the Federal Open the economy in the first half. Another Market Committee, the intensification may be the apparent failure of inflation of price pressures did not seem likely to expectations, as measured by various be sustained over an extended period, surveys of consumers and business- and reserve conditions were kept men, to reflect fully the reduction in unchanged. With short-term rates actual inflation over the past few steady, prices of fixed-income securities years; although the survey measures were buoyed by prospects for significant vary considerably, respondents seem to fiscal restraint and by a slowing of the share a sense that inflation has bottomed economic expansion, although fears of a out. pickup in inflation at times prompted Prices received by domestic produc- partial reversals in bond rates. Yield ers have slowed in recent months, after spreads on private securities relative to undergoing a pickup earlier in the year. Treasury rates remained historically All told, the twelve-month change in the narrow, and stock price indexes set new producer price index for finished goods records. other than food and energy was less than The monetary aggregates have been 2 percent in June, down somewhat from sluggish this year, as both the share of a year earlier. At earlier stages of pro- depository institutions in overall debt cessing, where price movements tend to finance and the proportion of depository track cyclical fluctuations in demand, credit funded with monetary liabilities prices of intermediate materials (exclud- have fallen further. The reduced role ing food and energy) firmed a little early for depositories largely reflects weak in the year, but they subsequently mod- demands for loans and deposits by the erated; although the pattern was exag- public. Corporate borrowers have congerated by the spike in lumber prices, it tinued to issue heavy volumes of stocks was evident for some other materials as and bonds in part to pay down bank well. In commodity markets, prices of debt, while households have withdrawn precious metals have moved up sharply deposits to invest in bond and equity over the past couple of months, and funds that finance, among others, corposome scattered increases have been evi- rate issuers. After two years of no dent elsewhere. More broadly, however, growth, bank loans weakened further industrial commodity prices were down early this year, but increased fairly vigslightly, on net, over the first half of the orously in May and June, posting a year. small net gain for the first six months of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 81 the year. The growth of nonfinancial tors; such a directive, which implied no sector debt so far this year has edged up presumption in how quickly changes in from the subdued pace of 1992, despite operations should be made toward tighta deceleration of nominal spending, as ness or ease, had been instituted in investment spending is estimated to December, following directives that had have exceeded the internal funds of cor- been biased toward easing over much of porations, household borrowing has the previous two years. picked up relative to spending, and Economic activity appeared to decel- Treasury financing needs have remained erate in the early months of the year, heavy. however, in part because of adverse weather conditions, with softness in retail sales, housing starts, and nonresi- The Implementation dential construction. Bank credit was of Monetary Policy failing to expand significantly, while Early in the year, incoming data sug- broad money was declining because of gested that the faster pace of economic temporary factors and a weak underactivity that had emerged in the third lying trend. Although short-term interest quarter of 1992 had been maintained rates were little changed, bond markets through year-end. Indicators of indus- rallied further on weaker economic trial production, retail sales, business activity and improved prospects for fixed investment, and residential con- fiscal restraint, which would reduce the struction activity all posted solid gains. government's demand for credit. Long- Financial impediments to the expansion term rates fell to the lowest levels in appeared to be diminishing as the bal- almost twenty years in early March, ance sheets of households, business before backing up somewhat on reports firms, and financial institutions contin- of a second month of substantial ued to improve, although money and increases in consumer and producer credit growth remained weak. Wage and prices. The drop in interest rates buoyed price data suggested a continuing trend stock markets to record highs and toward lower inflation. Intermediate- contributed to a small decline in the and long-term interest rates had declined weighted-average value of the dollar. somewhat, in part reflecting a view that The dollar depreciated substantially the new Administration's fiscal stimulus against the yen, as market attention package was likely to be modest and focused on Japan's growing trade that material reductions in future deficits surplus. were in prospect. The economic outlook Signs of price pressures were a conremained clouded, however, by uncer- cern for the FOMC, but the fundamentainties regarding details of fiscal policy tals of continued slack in labor and capplans, continued restructuring and ital utilization, subdued unit labor costs, downsizing of large businesses, and and protracted weakness in credit and lingering restraints on credit supplies. broad money suggested that a higher At its early February meeting, the trend inflation rate was not setting in. FOMC decided that its directive to the With the economy slowing, reserve Federal Reserve Bank of New York pressures were kept unchanged and a regarding domestic open market opera- symmetric policy directive was retained tions should retain a symmetric stance at the meeting in March. regarding possible reactions over the After pausing in March, producer and intermeeting period to incoming indica- consumer prices leaped again in April. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

82 80th Annual Report, 1993 Long-term interest rates backed up long-term rates have fallen 3A to 1 perfurther in response; the price of gold centage point, reaching the lowest levels surged, and the dollar fell more rapidly. in more than twenty years. In particular, With the Japanese authorities buying the thirty-year Treasury bond has dollars in foreign exchange markets, the reached a low of 6.54 percent, while the U.S. Treasury and the Federal Reserve ten-year Treasury note has touched also purchased dollars for yen in late 5.71 percent, its lowest level since 1971. April. After extended weakness, the The interest rate on fixed-rate thirtymonetary aggregates jumped in early year mortgages has dropped to 7.16 per- May by more than could be explained cent, a record low in the twenty-two by temporary factors. year history of the series. The fall in At its May meeting, the FOMC was intermediate-term interest rates in the confronted with weak output growth and United States was roughly matched on intensified inflation readings. It was dif- average abroad, and the trade-weighted ficult to identify reasons for this juxtapo- value of the dollar in terms of G-10 sition. Price increases by business firms currencies has increased about 5 percent in early 1993 could have reflected opti- from its December average, as overseas mism engendered by strong demand economies weakened and foreign shortconditions in the second half of 1992 term rates declined substantially. or an upward adjustment of inflation expectations. However, considerable slack remained in labor and product Monetary and Credit Flows markets, and the pace of economic Growth of the broad money measures activity had slowed markedly. The Com- was quite slow over the first half of mittee concluded that no policy adjust- 1993, falling below the subdued pace of ment was needed at its meeting, but the 1992, and leaving them near the lower risks of increased inflation and inflation arms of the revised growth cones for expectations warranted a directive that 1993. This deceleration did not, howcontemplated a relatively prompt tight- ever, reflect a moderation in overall ening of reserve pressures if signs of credit flows or a tightening in financial intensifying inflation continued to conditions. Rather, it resulted from a multiply. further diversion of credit flows from The subsequent readings on inflation depository institutions as well as continfor May and June were subdued; more- ued financing of depository credit over, evidence of heightened inflation through capital accumulation rather than expectations did not emerge in markets deposits. Indeed, growth of the debt of for fixed-income securities. Conse- all nonfinancial sectors is estimated to quently, the stance of monetary policy have edged up this year—to 5 percent— was not changed following the May despite an apparent slowing in nominal FOMC meeting. The dollar rebounded GDP. Continued substantial demand for on foreign exchange markets in June credit by the federal government as well and early July in the wake of the fall of as more comfortable financial positions the Japanese government and evidence and consequent signs of a greater willthat economic conditions in Europe had ingness to borrow and lend by private deteriorated further. sectors likely supported debt expansion. On balance, since the beginning of Nevertheless, overall debt growth the year, short-term interest rates are remains in the lower portion of its little changed, while intermediate- and revised 4 to 8 percent annual range for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 83 1993. Nonfederal debt growth has local governments has grown only modexpanded at a still-modest 3lA percent erately again in 1993. The budgetary pace, after two years of even weaker situations of some state and local govgrowth. ernments have improved, as tax receipts Taking advantage of low long-term have been stronger than expected, but interest rates and the strong stock mar- severe financial problems remain in ket, businesses have issued an excep- other locales. tionally large volume of bonds and With corporate borrowers still relying equity; the proceeds have been used heavily on financing through capital mainly to refund other marketable debt markets, and depository lending spreads and repay bank loans. Stresses associ- over market rates remaining high, the ated with the restructuring of the econ- trend decline in the share of total credit omy and the earlier buildup of debt flows provided by depository institulinger. However, downgradings of cor- tions was extended through the first half porate debt by rating agencies have of 1993. From the fourth quarter of 1992 dropped well below the peak levels to June, bank credit expanded at a of a few years ago, and a growing num- 4lA percent annual rate, only a slight ber of firms have received upgradings, pickup from the sluggish pace of the as corporate cash flows have strength- previous two years. Securities acquisiened substantially relative to interest tions accounted for most of the expanexpenses. sion, as loans increased at only a Debt service burdens of households l3/4 percent rate. The growth of securialso have continued to decline relative ties portfolios at banks in part reflects to disposable income, as households additions to holdings of securitized have repaid high interest debt or taken mortgage and consumer loans; bank advantage of lower rates to refinance. financing of consumer spending and real Indeed, the decline in long-term interest estate transactions is thus stronger than rates during the year has brought a new indicated by bookings of loans in those surge of refinancings of mortgages. sectors. Although commercial and With balance sheets improved, house- industrial loans have been about flat on holds have become somewhat more balance so far this year, a few signs of willing to borrow, and consumer credit easing in bank lending terms and condihas begun growing moderately after two tions have recently emerged, and busiyears of weakness. Some of that growth, ness loans rebounded in May and June. though, may reflect heavy promotion Judging by business loan growth at of credit cards carrying special incen- smaller banks so far this year, a pickup tives for use in transactions, such as has occurred in lending to smaller non- "frequent-flier miles" or merchandise financial firms. Thus, the continuing discounts. Net mortgage debt is esti- weakness in overall business loan mated to have grown only a bit more growth does not appear to be driven than the low rate of 1992. primarily by restrictive supply condi- Gross issuance of state and local gov- tions but rather by the preference of ernment debt has been particularly larger firms to fund through capital robust this year. However, refunding markets. volume has accounted for nearly 70 per- Lower market interest rates over the cent of the offerings, compared with past few years have helped strengthen about 45 percent in 1992, a record year the financial positions of banks and for refundings. Net debt of state and thrifts. The lower rates have resulted in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

84 80th Annual Report, 1993 capital gains on securities and improved capital ratios and supervisory ratings interest margins—as deposit rates have high enough at the end of 1991 to be fallen more than lending rates. Lower considered well-capitalized, but more rates also have helped bank borrowers than two-thirds was so positioned by by decreasing interest expenses and early 1993. About $10 billion was added boosting economic activity, thereby to bank equity and subordinated debt reducing loan loss provisions for banks. during the first quarter, a pace about the Banks posted record earnings in 1992 same as that in 1992; data on new debt and remained very profitable in early and equity issues indicate another siz- 1993; prices of their shares on equity able gain over the second quarter. markets have risen substantially. Depositories have also recently relied Thrift institutions have continued to more heavily on other nondeposit contract in 1993, though at a much sources of funds. Weak economies and slower pace than over the past four credit demand abroad have prompted years. A lack of funding for the Resolu- the U.S. offices of foreign banks to draw tion Trust Corporation caused a hiatus more funding from overseas and the in the closure of institutions under its domestic offices of U.S. banks to reduce conservatorship. However, privately foreign lending this year. Overall shifts operated thrifts have not expanded and from deposits to other sources of fundthe industry continues to consolidate. ing may be driven partly by regulatory Slower growth in nominal GDP, mod- inducements—including higher insurerate demand for credit relative to ance premiums on deposits and incenspending, and the reduced share of tives to bolster capital. But changes in credit provided by depositories have all investor preferences from short-term contributed to the lack of significant depositsr to longer-term debt and equity growth in the broad monetary aggre- may also be playing a role in motivating gates this year. Another factor inhibiting the restructuring of bank and thrift money growth has been continued sub- sources of funds. stantial funding of bank and thrift assets Greater reliance by borrowers on capwith subordinated debt and equity issues ital markets has been facilitated by conas well as with retained earnings—all a current shifts in saving preferences away byproduct of ongoing efforts to build from monetary assets and into capital capital positions. Only about one-third market investments. Such portfolio of the industry (by asset volume) had realignments are evident in record inflows to bond and stock mutual funds, Distribution of Assets of Domestic and money balances were also likely Commercial Banks, by Adjusted invested directly in stocks and bonds. Capital Categoryl The incentives for what appears to be an Percent extraordinary adjustment of household portfolios are varied. Interest rates paid End of year Category March on retail time deposits, NOW accounts, 1993 1991 1992 and money market deposit accounts (MMDAs) have fallen well below any Well capitalized 34 68 70 Adequately capitalized . 45 22 20 rate offered since the inception of dereg- Undercapitalized 21 10 10 ulated deposits in the early 1980s, and 1. Capital categories adjusted for overall supervisory savings deposit rates are now the lowest rating according to the rule of thumb of downgrading a in more than thirty years. The shock bank by one category for a low examination rating by its effect of historically low deposit interest supervisory agency (CAMEL 3,4, or 5). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 85 rates caused many depositors to investi- inflows have surged since then, at the gate alternative investments. With the same time that accretions to M2 balyield curve extraordinarily steep, much ances have declined. A comparison of higher returns have been available in the quarterly growth rates of M2 and the recent years on longer-term investments. sum of M2 and bond and stock funds A bond or stock mutual fund offers shows that growth of the sum has not investors a chance to earn these higher weakened as dramatically as that of M2 yields and still enjoy liquidity features, over the last two and half years; it has including in some cases a check-writing averaged nearly a 5 percent annual rate, facility. However, investment in such a compared with less than 2 percent for mutual fund carries with it a higher risk M2. Although adding mutual funds and of loss as well, because unlike monetary M2 together captures some substitution assets, its principal value fluctuates with out of M2 in recent years, the total market prices. Indeed, the higher yield remains quite volatile, indicating that on bonds relative to short-term instru- other forces have affected both M2 and ments probably anticipates some capital mutual funds. Partly as a consequence, losses. Whether all households accu- the relationship of the total to aggrerately assess relative risks when compar- gate spending is subject to considerable ing returns recently earned on mutual uncertainty. Investments in bond and funds with those on money balances stock funds are themselves subject to remains an open question. potentially volatile capital gains and Shifts into mutual funds have become losses. More fundamentally, with the much easier and less costly for house- public's holdings of mutual funds now holds, most notably because many banks vastly expanded, its responses to a varihave begun offering mutual funds for ety of interest rate and stock price movesale in their lobbies. While many banks ments has yet to be tested. now offer discount brokerage services, a Because weakness in the demand for survey by the Federal Reserve found broad money has resulted largely from that larger banks have recently been shifts of portfolio preferences rather making special efforts to promote than changes in spending intentions, it mutual fund investments among their has not been reflected in comparable depositors. An increasing number of weakness in nominal GDP. Furthermore, banks have sponsored their own mutual the effects of a declining share for funds or entered into exclusive sales depositories in overall credit growth relationships with nonbank sponsors of have been substantially offset by funds. Some banks have promoted these increased funding through capital marproducts as a defensive measure to kets, where households now invest a retain long-run relationships with val- larger share of wealth. The velocity of ued depositors. In other cases, however, M2 has been subject to extraordinary banks have promoted funds as part of a and unpredictable surges that have strategy to earn fee income without reduced the value of M2 as a guide to booking assets, thereby avoiding the policy. Traditional models of velocity need to raise additional capital. based on the difference between short- Substitution between money and term market interest rates and interest long-term mutual funds appears to have rates on deposits and money market become evident in the aggregate data in mutual funds, and even broader models recent years. There was little increase in that take account of longer-term interest such funds from 1987 through 1990, but rates and after-tax loan rates faced by Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

86 80th Annual Report, 1993 households, cannot explain the full offsetting restraint to money growth in 4 percent rise in M2 velocity in 1992, April, as the buildup of balances nor what may be a somewhat faster rate required to pay taxes was smaller than of increase in the first half of 1993. that incorporated into seasonal factors. Money growth in the first quarter was Even excluding estimated effects of depressed in part by the effects of sev- these special factors, however, undereral temporary factors, including distor- lying growth of money through the first tions of seasonal factors and a lull in four months of the year was far weaker mortgage refinancing. A renewed surge than historical relationships would of mortgage refinancing began to bolster suggest. demand deposits and MMDAs in Despite continued heavy inflows to April, as mortgage servicers increased bond and equity funds in May, the monbalances temporarily before making etary aggregates surged, boosted in part remittances to investors in mortgage- by a reversal of the tax effects and an backed securities. The seasonal-factor intensification of mortgage refinancing distortions began to reverse that month activity. However, the aggregates decelas well. However, substantial shortfalls erated substantially in June, and by more in individual nonwithheld tax payments than might be suggested by a waning of relative to recent years produced an tax and mortgage refinancing effects. Growth of Money and Debt Percent Domestic nonfinancial debt Measurement period Ml M2 M3 Total Nonfederal Year* 1980 . . 7.4 8.9 9.5 9.5 9.0 1981 5.4 (2.52) 9.3 12.3 10.0 9.7 1982 8.8 9.1 9.9 9.3 7.4 1983 10.4 12.2 9.9 11.4 8.8 1984 5.5 8.1 10.8 14.3 13.9 1985 12.0 8.7 7.6 13.8 13.3 1986 15.5 9.3 8.9 14.0 13.7 1987 6.3 4.3 5.8 10.1 10.4 1988 4.3 5.3 6.4 9.2 9.6 1989 6 4.7 3.7 8.2 8.5 1990 4.3 4.0 1.8 6.8 5.9 1991 8.0 2.8 1.1 4.4 2.5 1992 14.3 1.8 .3 4.8 2.9 Half year (annual rate)3 1993 HI 8.7 .1 -.7 5.1 3.3 Quarter (annual rate)4 1993Q1 6.6 -2.0 3.8 4.4 3.0 Q2 10.6 2.2 2.4 5.7 3.6 Fourth quarter 1992 average to June 1993 average (annual rate)5 .... 9.5 .8 -.3 5.1 3.3 1. From average for fourth quarter of preceding year to 4. From average for preceding quarter to average for average for fourth quarter of year indicated. quarter indicated (for debt, estimated with data through 2. Adjusted for shift to NOW accounts in 1981. May). 3. From average for 1992:Q4 to average for 1993:Q2 5. For debt, to May 1993 average. (for debt, estimated with data through May). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 87 In 1993, household portfolio adjust- from the fourth quarter of 1992 through ments differed somewhat from their pre- June 1993, well below the lower end of vious pattern. In the past, the realign- its growth cone set in February. The ment of household wealth toward capital FOMC monitored the behavior of M2 market investments had mainly involved carefully over the first half of the year, shifts from money market mutual funds but in light of actual and expected and small time deposit accounts. At the strength of velocity, the Committee same time, outflows from those accounts determined that actions to boost M2 had also gone into NOW and savings growth were not needed to achieve its deposits, the interest rates on which underlying objectives for prices and the were falling only slowly as market rates economy. The aggregate is near the declined. This year, the sum of all these lower arm of the revised annual growth M2 balances has fallen at about the cone established in July, and if velocity same rate as in 1992, but a slower runoff continues to increase substantially, M2 of small time deposits and money funds may well come in toward the lower end has been offset by a sharp deceleration of the revised growth range for the year. in the growth of NOW and savings The non-M2 portion of M3 has deposits. Catch up declines in interest declined this year at nearly the same rates on liquid deposits may account for pace as that of the previous two years. part of their slower growth. Some non- Large time deposits have continued to transactions balances held in NOW and fall, and the halt in reductions in short- MMDA deposits have likely been term rates has ended the rapid growth of shifted into bond and equity funds. It institutional money funds, as their may be that some depositors who do not slower-adjusting yields have come down ordinarily shop for small rate advan- to their usual relationship to market intages have been induced to make basic terest rates. From the fourth quarter of portfolio adjustments because of the his- 1992 through June, M3 fell at about a torically low deposit interest rates and VA percent annual rate; it lies slightly the increased ease of making invest- below its revised annual growth cone. • ments in capital market instruments. Partly as a result, narrow measures of money have decelerated this year, but their expansion has remained rapid. Ml has grown at a 9V2 percent rate from the fourth quarter of 1992 through June, compared with 14V4 percent in 1992. Reserves, now held exclusively against transaction deposits, have grown at an 11 percent pace compared with 20 percent in 1992. The monetary base has slowed by much less, because of continued strong foreign demand for currency this year. With reduced strength in its Ml component, and in savings and MMDAs, as well as continued runoffs of small time deposits and retail money funds, M2 has grown at only a 3A percent annual rate 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

91 Record of Policy Actions of the Board of Governors Regulation A (Extensions of Credit may be payable to the Federal Deposit by Federal Reserve Banks) Insurance Corporation; define undercapitalized and critically undercapitalized insured depository institutions; clarify December 16, 1993—Amendments the term "viable" as it applies to an undercapitalized insured depository The Board approved amendments to institution; and provide for assessments Regulation A, effective January 30, on the Federal Reserve Banks for 1994, to carry out a provision of the amounts that the Board may be required Federal Deposit Insurance Corporation to pay the Federal Deposit Insurance Improvement Act of 1991 that set limits Corporation under section 142. The on Federal Reserve Bank credit. revised regulation will guide the Federal Reserve Banks in their dealings with Votes for this action: Messrs. Greenspan, undercapitalized and critically under- Mullins, Angell, Kelley, and Lindsey and Ms. Phillips. capitalized institutions and will advise those institutions and their banking supervisors of potential limitations on Section 142 of the Federal Deposit the availability of Federal Reserve Bank Insurance Corporation Improvement Act credit. The Board also approved several of 1991 amended section 10B of the technical and stylistic changes to update Federal Reserve Act to discourage and clarify the regulation. advances to undercapitalized and critically undercapitalized insured depository institutions. This amendment provides that after December 19, 1993, the Regulation B (Equal Credit Board may be financially liable to the Opportunity) Federal Deposit Insurance Corporation (FDIC) for certain losses incurred by the FDIC's insurance funds. Specifically, November 29, 1993—Amendments the Board is liable for excess losses attributable to advances after the expira- The Board approved amendments to tion of certain periods to undercapi- Regulation B to give credit applicants talized insured depository institutions the right to receive a copy of their that are not viable and to critically appraisal reports, effective Decemundercapitalized insured depository ber 14, 1993. institutions. The Board approved amendments to Votes for this action: Messrs. Greenspan, Regulation A to place limitations on Mullins, Angell, Kelley, LaWare, and Federal Reserve Bank credit to under- Lindsey and Ms. Phillips. capitalized and critically undercapitalized insured depository institutions; The Federal Deposit Insurance Cordescribe the calculation of amounts that poration Improvement Act of 1991 pro- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

92 80th Annual Report, 1993 vided credit applicants with a right to Regulation D (Reserve receive a copy of appraisal reports. The Requirements of Depository Board amended Regulation B to provide Institutions) alternative methods of compliance with the law. November 15, 1993—Amendments Under the amendments, creditors The Board amended Regulation D to could automatically provide a copy of increase the amount of transaction the appraisal report to each applicant for balances to which the lower reserve certain loans secured by dwellings or requirement applies. could provide a copy upon request, subject to certain other provisions in the Votes for this action: Messrs. Greenspan, rule. Angell, Kelley, LaWare, and Lindsey and For creditors who do not auto- Ms. Phillips. matically provide a copy of appraisal reports, the regulation includes limits on Under the Monetary Control Act of when applicants may request (and credi- 1980, depository institutions, Edge Act tors must provide) a copy of a report and and Agreement corporations, and U.S. a requirement that applicants be notified agencies and branches of foreign banks of the right to receive a copy. The are subject to reserve requirements set amendments are effective on Decem- by the Board. Initially, the Board set ber 14, 1993, but compliance with the reserve requirements at 3 percent of an regulatory requirements is optional until institution's first $25 million in trans- June 14, 1994. action balances and at 12 percent of balances above that amount. (Subsequently, the Board lowered the Regulation C (Home Mortgage maximum reserve requirement to Disclosure) 10 percent.) The act directs the Board to adjust annually the amount subject to the lower February 26, 1993—Amendments reserve requirement to reflect changes The Board amended Regulation C to in nationwide transaction balances. By implement statutory requirements for the beginning of 1993, that amount was disclosure of information, effective $46.8 million. Recent increases in trans- March 1, 1993. action balances warranted an increase of $5.1 million. The Board, therefore, Votes for this action: Messrs. Greenspan, amended Regulation D to increase to Angell, LaWare, and Lindsey and Ms. $51.9 million the amount of transaction Phillips. Absent and not voting: Messrs. balances to which the lower reserve Mullins and Kelley. requirement applies. The Garn-St Germain Depository The Board amended Regulation C to Institutions Act of 1982 established a implement statutory amendments requir- zero percent reserve requirement on ing that lenders release disclosure state- the first $2 million of an institutions's ments earlier than they previously had reservable liabilities. The act also probeen available and make their modified vides for annual adjustments to that loan application register data publicly exemption based on nationwide deposit available. The revised rules apply to growth. By the beginning of 1993, that data collected for 1992. amount had been increased to $3.8 mil- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 93 lion. Recent growth in deposits war- Regulation H (Membership ranted an increase to $4 million in Requirements for State-Chartered the amount of deposits subject to a Banks) and zero percent reserve requirement, and Regulation Y (Bank Holding the Board amended Regulation D Companies and Change in Bank accordingly. Control) The amendments are effective with the reserve computation period begin- April 20, 1993—Amendments ning December 21, 1993, for institutions reporting weekly, and Decem- The Board approved amendments of ber 14, 1993, for institutions reporting Regulations H and Y to adopt as final its quarterly. interim rule concerning the treatment of one- to four-family residential construction loans, effective April 26, 1993. Regulation H (Membership Votes for this action: Messrs. Greenspan, of Stale Banking Institutions in the Angell, Kelley, and La Ware and Ms. PhiliVdoral Rcvcivc Swcm:. lips. Absent and not voting: Messrs. Regulation h ; Intimation;!1 Mullins and Lindsey. Banking OrvratioT- .- '//.;.-: The Board adopted as final its interim Rtguiatkm \ . Ban* Hohiuw rule amending the risk-based capital ^nmparhc* ami Ohtn^J M- Bank guidelines for bank holding companies and state member banks to lower from 100 percent to 50 percent the risk weight May 26, 1993—Amendments assigned to certain loans to builders to finance the construction of presold resi- The Board amended Regulations H, K, dential (one- to four-family) properties. and Y to adopt a uniform multiagency The rule implements section 618(a) criminal referral form for domestic and of the Resolution Trust Corporation foreign financial institutions operating Refinancing, Restructuring, and Imin the United States, effective October 8, provement Act of 1991. 1993. Votes for this action: Messrs. Mullins, Regulation O (Loans to Executive Angell, Kelley, and Lindsey and Ms. Officers, Directors, and Principal Phillips. Absent and not voting: Messrs. Greenspan and LaWare. Shareholders of Member Banks) The Board adopted a final rule May 3, 1993—Amendments amending its Regulations H, K, and Y to The Board approved amendments to require that all domestic and foreign Regulation O to incorporate three excepbanking organizations supervised by the tions to the regulation's insider lending Board, including state member banks, limit, effective May 3, 1993. bank holding companies, Edge Act corporations, and certain U.S. branches and Votes for this action: Messrs. Greenspan, agencies of foreign banks, file criminal Mullins, Angell, Kelley, and LaWare referrals on a broad range of suspected and Ms. Phillips. Absent and not voting: criminal activities. Mr. Lindsey. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

94 80th Annual Report, 1993 The Housing and Community Devel- had been raised by institutions since opment Act of 1992 authorizes the publication of the regulation in Septem- Board to adopt exceptions to the defini- ber 1992. tion of "extension of credit" that pose In connection with this amendment, minimal risk to the lending bank. The the Board also amended Regulation Q Board amended Regulation O to except to delay by three months the deletion from the aggregate lending limit exten- of rules governing the advertising of sions of credit secured by obligations of deposit accounts. the United States or other obligations fully guaranteed as to principal and interest by the United States, extensions Rules of Procedure of credit to or secured by commitments or guarantees of a department or agency September 1, 1993—Amendments of the United States, and extensions of The Board approved an amendment to credit secured by a segregated deposit its Rules of Procedure to require that account with the bank. bank merger applicants publish notice of a proposed merger three times and made certain technical changes in the Regulation DD (Truth in Savings) regulation, effective September 30, and Regulation Q (Interest on 1993. Deposits) Votes for this action: Messrs. Greenspan, March 16, 1993—Amendments Mullins, Angell, Kelley, and LaWare. Vote against this action: Ms. Phillips. The Board amended Regulation DD, effective March 21, 1993, and Regula- The Bank Merger Act, section 18(c) tion Q, effective June 21, 1993, to make of the Federal Deposit Insurance Act, certain changes required by the Housing requires that notice of merger applicaand Community Development Act. tions be published at appropriate intervals during a period of at least thirty Votes for this action: Messrs. Greenspan, days. Since 1992, in an effort to reduce Mullins, and Angell and Ms. Phillips. Absent and not voting: Messrs. Kelley, regulatory burden, the Board had LaWare, and Lindsey. required the publication of only one notice of a proposed merger. Because The Housing and Community Devel- the act requires that notice of merger opment Act of 1992 extended the man- applications be published at appropriate datory date for compliance with the intervals, the Board approved amend- Truth in Savings Act by three months. ments to its Rules of Procedure to The act also modified the advertising require that bank merger applicants pubrules relating to signs on the premises of lish notice of a proposed merger three an institution and made a technical times over a thirty-day period. The change in the provision dealing with Board also approved certain other technotices required to be given to existing nical amendments to the regulation. account holders. The Board amended Ms. Phillips dissented from this Regulation DD to implement these action because she was concerned about changes. The Board also made two the economic impact of publication of minor changes in the regulation and pro- multiple notices. She would have supvided guidance on several issues that ported the publication of two notices but Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 95 felt that the publication of three notices Board's implementing regulation, Reguwould be excessive. lation DD. This authority matches the delegations already in place for the Truth in Lending Act, the Electronic Rules Regarding Delegation Fund Transfer Act, the Equal Credit of Authority Opportunity Act, the Home Mortgage Disclosure Act, and the regulations September 1, 1993—Amendment implementing those statutes. The Board amended its Rules Regarding Delegation of Authority to delegate to its ethics officer (the Board's General Rules Regarding Equal Counsel) the authority to grant certain Opportunity individual waivers under the federal conflicts of interest statute, effective February 10, 1993—Interim Rules September 1, 1993. The Board approved an interim rule revising its Rules Regarding Equal Votes for this action: Messrs. Greenspan, Mullins, Angell, Kelley, and LaWare and Opportunity, effective February 18, Ms. Phillips. 1993. The Board delegated to the General Votes for this action: Messrs. Greenspan, Counsel the authority to grant individual Mullins, Angell, Kelley, LaWare, and Lindsey and Ms. Phillips. waivers under the federal conflicts of interest statute in cases in which the The revised rules conform as closely employee's financial interest is not so as possible to a final regulation adopted substantial as to be likely to affect the by the Equal Employment Opportunity integrity of the employee's services to Commission governing the handling of the Board. complaints of discrimination in the federal sector. December 1, 1993—Amendment The Board amended its Rules Regarding Policy Statements and Delegation of Authority to delegate to Other Actions the Director of the Division of Consumer and Community Affairs authority January 26, 1993—Securities for determining inconsistencies between Activities of Section 20 state laws and the federal Truth in Subsidiaries of Bank Holding Savings law. Companies Votes for this action: Messrs. Greenspan, The Board approved an alternative Mullins, Angell, Kelley, LaWare, and method of adjusting the 10 percent reve- Lindsey and Ms. Phillips. nue test for ineligible securities held by section 20 subsidiaries of bank holding The Board delegated to the Director companies, effective January 26, 1993. of the Division of Consumer and Community Affairs the authority to deter- Votes for this action: Messrs. Greenspan, mine whether a state law is inconsistent Kelley, LaWare, and Lindsey and Ms. with (and, therefore, preempted by) the Phillips. Votes against this action: Messrs. federal Truth in Savings Act and the Mullins and Angell. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

96 80th Annual Report, 1993 The Board approved an alternative review of applications by staff members test to measure compliance with the of the Board and the Reserve Banks, 10 percent limit on the ineligible securi- urge all foreign bank applicants to meet ties that could be held by section 20 with such staff members before filing subsidiaries of bank holding companies. applications, require adherence to dead- Under the alternative test, revenue may lines in requesting information during be indexed to interest rate changes by the acceptance process, establish new comparing current interest rate changes internal guidelines for processing applifor various portfolio durations with rates cations after acceptance, and inform on corresponding durations in Septem- the public that information files on ber 1989, when the 10 percent limit home country supervision and bank sewas first adopted. Messrs. Mullins crecy laws are maintained and available and Angell thought that the indexed in the Board's Freedom of Information revenue test was unduly complex and Office. burdensome. March 10, 1993—Interagency March 8, 1993—Procedures for Policy Statement on Credit Processing Applications Filed Availability by Foreign Banks The Board approved issuance of an The Board adopted new procedures to interagency policy statement on credit be used in processing applications filed availability that would facilitate lending by foreign banks under the Foreign to creditworthy small and medium-sized Bank Supervision Enhancement Act of businesses, effective March 10, 1993. 1991. Votes for this action: Messrs. Greenspan, Votes for this action: Messrs. Greenspan, Mullins, Angell, Kelley, and LaWare and Mullins, Angell, Kelley, LaWare, and Ms. Phillips. Absent and not voting: Mr. Lindsey. Absent and not voting: Ms. Lindsey. Phillips. Problems with the availability of The Foreign Bank Supervision credit over the past few years have been Enhancement Act of 1991 establishes especially significant for small and uniform standards for all foreign banks medium-sized businesses and farms. In entering the United States and requires response to a request by President Clinthat they meet financial, managerial, ton, the Board, along with the Office of and operational standards equivalent to the Comptroller of the Currency, the those required of U.S. banking corpora- Federal Deposit Insurance Corporation, tions. A foreign bank may not estab- and the Office of Thrift Supervision, lish a branch, agency, representative of- issued an outline of a new program to fice, or commercial lending company help ensure that regulatory policies do without the advance approval of the not needlessly stand in the way of lend- Board. ing. The statement noted that loans to The new procedures were designed to creditworthy borrowers should be made expedite the processing of applications whenever possible as long as they are and to reduce the burden on applicants. consistent with safe and sound banking The procedures require simultaneous practices. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 97 March 15, 1993—Delegation In connection with the Interagency of Authority Policy Statement on Credit Availability issued on March 10, 1993, the Board The Board delegated to the Commodity approved issuance of an interagency Futures Trading Commission the authorpolicy statement aimed at eliminating ity to determine margins on stock index unnecessary and overly burdensome futures contracts and options on those documentation for loans to small and contracts, effective March 15, 1993. medium-sized businesses and farms. Votes for this action: Messrs. Greenspan, Mullins, Angell, Kelley, LaWare, and June 8, 1993—Interagency Policy Lindsey and Ms. Phillips. Statements on Credit Availability The Futures Trading Practice Act of The Board approved issuance of five 1992 gave the Board authority to set interagency policy statements on credit margin requirements on stock index availability, effective June 10, 1993. futures contracts and options on those contracts. The statute also allowed the Votes for this action: Messrs. Greenspan, Mullins, Angell, Kelley, LaWare, and Board to delegate any or all of its Lindsey and Ms. Phillips. authority under this provision to the Commodity Futures Trading Commis- To implement the credit-availability sion. Contract markets must submit all program announced by the five banking rules, other than those relating to levels agencies on March 10, 1993, the Board of margins, to the commission for approved issuance of five interagency approval. Because of the broad authority policy statements. The statements conof the commission over contract marcerned the definition of "special menkets and because margins are but one tion" assets, avoidance of the use of component of the risk-control systems liquidation values in the supervisory used by contract markets, the Board assessment of commercial real estate concluded that the commission was the loans, restoration of partially chargedmost appropriate entity to exercise the off loans to performing status, revision functions assigned to the Board. The of reporting and examination guidance Board delegated its authority under the on sales of Other Real Estate Owned, statute to the Commodity Futures Tradand revision of the in-substance foreing Commission until further notice. closure reporting rules. March 30, 1993—Interagency Loan June 9, 1993—Interagency Policy Documentation Policy Statement Statement on Credit Availability The Board approved issuance of an The Board approved issuance of an Interagency Policy Statement on Docu- interagency policy statement on credit mentation Required for Loans to Small availability, effective June 10, 1993. and Medium-Sized Businesses and Farms, effective March 30, 1993. Votes for this action: Messrs. Greenspan, Mullins, Angell, Kelley, LaWare, and Lindsey and Ms. Phillips. Votes for this action: Messrs. Greenspan, Mullins, Angell, Kelley, and Lindsey and Ms. Phillips. Absent and not voting: To implement the credit-availability Mr. LaWare. program announced by the five banking Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

98 80th Annual Report, 1993 agencies on March 10, 1993, the Board cent to 50 percent the risk weight for approved issuance of an interagency certain multifamily housing loans meetpolicy statement that outlines a program ing specified criteria. This amendment for coordinating examinations of insured implements section 618(b) of the Resodepository institutions and inspections lution Trust Corporation Refinancing, of their holding companies. Restructuring, and Improvement Act of 1991. August 11, 1993—Interagency Policy Statement on the Closing 1993 Discount Rates of Branches During 1993 the basic discount rate was The Board approved issuance of an left unchanged at 3 percent, the level interagency policy statement on the established by the Board in early July closing of branches by depository insti- 1992. Over the course of 1993, however, tutions, effective September 21, 1993. the Board approved numerous increases and decreases in the rates charged by the Votes for this action: Messrs. Greenspan, Mullins, Kelley, and LaWare and Ms. Reserve Banks for seasonal credit and Phillips. for extended credit; rates for both types of credit are set on the basis of market- The Board approved issuance of a related formulas. policy statement to implement section The reasons for Board decisions are 228 of the Federal Deposit Insurance reviewed below. Those decisions were Corporation Improvement Act of 1991, made in the context of the policy actions which requires that insured depository of the Federal Open Market Committee institutions give ninety days advance (FOMC) and the related economic and written notice of the closing of any financial developments that are covered branch to its primary federal regulator more fully in the Minutes of the Comand to branch customers, post a notice at mittee and in the Monetary Policy the branch site at least thirty days before Reports to the Congress, which are closing, and develop a policy on the printed elsewhere in this REPORT. closing of branches. Basic Discount Rate December 17, 1993—Risk-Based Capital Guidelines During the first quarter of 1993 the directors of ten Reserve Banks regularly The Board approved an amendment to proposed that the basic discount rate its risk-based capital guidelines for state remain unchanged at 3 percent. The dimember banks and bank holding comparectors of the other two Banks requested nies to permit them to lower the risk reductions of Vi percentage point at varweight assigned to certain multifamily ious times during the quarter. The Board housing loans. considered but took no action on these pending requests until late March. Data Votes for this action: Messrs. Greenspan, that became available during the first Mullins, Angell, Kelly, LaWare, and Lindsey and Ms. Phillips. quarter indicated that the economic expansion had slowed markedly from a The Board amended its risk-based very rapid pace in the closing months of capital guidelines to lower from 100 per- 1992, but the Board viewed policy as Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 99 already stimulative and recent develop- tions for short-term adjustment credit, ments as pointing on the whole toward while flexible, market-related rates gensustainable growth in economic activity. erally are charged on other types of Moreover, advances in consumer and credit. These flexible rates are changed producer prices were larger in early periodically, subject to Board approval. 1993 than those recorded in the latter Under the seasonal program, loans part of 1992. may be provided for periods longer than Against this background, the Board those permitted under adjustment credit on March 29 turned down a long- to assist smaller institutions in meeting standing request from the Federal regular needs arising from a clear pat- Reserve Bank of Cleveland to lower the tern of intra-yearly movements in their basic discount rate from 3 percent to deposits and loans. Since its introduc- 2Vi percent; a similar request from the tion on January 9, 1992, the flexible rate Federal Reserve Bank of Boston had charged on seasonal credit has been been withdrawn early in the year. closely aligned with short-term market The economic expansion picked up rates; it is never less than the basic rate some momentum during the spring, applicable to adjustment credit. while broad measures of prices contin- A different flexible rate is charged on ued to suggest a deteriorating inflation extended-credit loans, which are made picture. From mid-May to early August to depository institutions that are under the Federal Reserve Bank of Richmond sustained liquidity pressure and are not submitted recommendations to increase able to obtain funds from other sources. the basic discount rate from 3 percent to The rate for extended credit is 50 basis 3J/4 percent as a means of signaling the points higher than the seasonal rate and System's concern about inflation. The is at least 50 basis points above the basic Board took no action on this request, but discount rate. The first thirty days of in association with the unchanged pol- borrowing on extended credit may be at icy posture of the Federal Open Market the basic rate, but further borrowings Committee, it supported the requests ordinarily are charged the flexible rate. of the other eleven Banks to maintain Exceptionally large adjustment-credit the existing rate. In the Board's view, a loans that arise from computer breaksteady monetary policy remained desir- downs or other operating problems that able and provided an appropriate bal- are not clearly beyond the reasonable ance between the risks of inflation and control of the borrowing institution are those of a faltering economic expansion. assessed the highest rate applicable to By summer a broad array of price and any credit extended to depository instiwage indicators suggested some moder- tutions; under the current structure, that ation in the underlying rate of inflation, rate is the flexible rate on extended and the request of the Richmond Bank credit. At the end of 1993 the structure was withdrawn. No further recommen- of discount rates was as follows: a basic dations to change the basic discount rate rate of 3 percent for short-term adjustwere received from Federal Reserve ment credit, a rate of 3.10 percent for Banks over the balance of the year. credit under the seasonal program, and a rate of 3.60 percent for extended credit. During 1993 the flexible rate on sea- Structure of Discount Rates sonal credit ranged from a high of The basic discount rate is the rate 3.20 percent to a low of 3.00 percent, charged on loans to depository institu- and that on extended credit ranged Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

100 80th Annual Report, 1993 from a high of 3.70 percent to a low of 3.50 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. As shown below, the Board voted in late March to deny a request for a reduction in the basic rate, but other requests to change the rate were left pending and were withdrawn by the Reserve Banks as their evaluation of economic developments changed. Votes relating to the reestablishment of existing rates or for the updating of marketrelated rates under the seasonal and extended credit programs are not shown. All votes taken during 1993 on discount rates were unanimous. On March 29, 1993, the Board disapproved an action taken on March 25 by the directors of the Federal Reserve Bank of Cleveland to reduce the basic discount rate from 3 percent to 2V6 percent. Votes for this action: Messrs. Greenspan, Mullins, Angell, Kelley, LaWare, and Lindsey and Ms. Phillips. Votes against this action: None. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

101 MWUTC\ iff federal Open Mtvhji dmnautee Meetings The policy actions of the Federal Open information that was available to the Market Committee, contained in the Committee at the time of the meetings, minutes of its meetings, are presented in rather than on data as they may have the ANNUAL REPORT of the Board of been revised later. Governors pursuant to the requirements Members of the Committee voting for of section 10 of the Federal Reserve a particular action may differ among Act. That section provides that the themselves as to the reasons for their Board shall keep a complete record votes; in such cases, the range of their of the actions taken by the Board and views is noted in the record. When by the Federal Open Market Committee members dissent from a decision, they on all questions of policy relating to are identified in the record along with open market operations, that it shall a summary of the reasons for their record therein the votes taken in con- dissent. nection with the determination of open Policy directives of the Federal Open market policies and the reasons under- Market Committee are issued to the Fedlying each such action, and that it eral Reserve Bank of New York as the shall include in its annual report to Bank selected by the Committee to exethe Congress a full account of such cute transactions for the System Open actions. Market Account. In the past, the policy record for each In the area of domestic open market meeting was released simultaneously activities, the Federal Reserve Bank of with, but separately from, the minutes, a New York operates under two sets of few days after the next regularly sched- instruction from the Open Market Comuled meeting; only the policy record was mittee: an Authorization for Domestic subsequently published in the Federal Open Market Operations and a Domes- Reserve Bulletin and in the ANNUAL tic Policy Directive. (A new Domestic REPORT. At its March 23, 1993, meet- Policy Directive is adopted at each reguing, the Committee unanimously voted larly scheduled meeting.) to merge the policy record with the min- In the foreign currency area, the Comutes, beginning with the February 2-3 mittee operates under an Authorization meeting. The merged document (here- for Foreign Currency Operations, a Forafter, "the minutes") is published in the eign Currency Directive, and Procedural Bulletin and, for the meetings in 1993, Instructions with Respect to Foreign in this REPORT. Currency Operations. The minutes of the meetings contain These policy instruments are shown the votes on the policy decisions made below in the form in which they were in at those meetings as well as a resume of effect at the beginning of 1993. Changes the discussions that led to the decisions. in the instruments during the year are The summary descriptions of economic reported in the records for the individual and financial conditions are based on the meetings. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

102 80th Annual Report, 1993 Authorization for Domestic to the underlying goods; provided that the Open Market Operations aggregate amount of bankers acceptances held at any one time shall not exceed $100 million; In Effect January 1, 1993 (c) To buy U.S. Government securities, obligations that are direct obligations of, or 1. The Federal Open Market Committee fully guaranteed as to principal and interest authorizes and directs the Federal Reserve by, any agency of the United States, and Bank of New York, to the extent necessary prime bankers acceptances of the types to carry out the most recent domestic policy authorized for purchase under l(b) above, directive adopted at a meeting of the from dealers for the account of the Federal Committee: Reserve Bank of New York under agree- (a) To buy or sell U.S. Government ments for repurchase of such securities, oblisecurities, including securities of the Federal gations, or acceptances in 15 calendar days 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 compara- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings 1 03 ble to those available on such transactions in More recently, both aggregates have weakthe market; and (b) for New York Bank ened somewhat. Both appear to have grown account, when appropriate, to undertake with at rates a little below the lower ends of the dealers, subject to the conditions imposed on ranges established by the Committee for the purchases and sales of securities in para- year. graph l(c), repurchase agreements in U.S. The Federal Open Market Committee Government and agency securities, and to seeks monetary and financial conditions that arrange corresponding sale and repurchase will foster price stability and promote susagreements between its own account and tainable growth in output. In furtherance of foreign and international accounts main- these objectives, the Committee at its meettained at the Bank. Transactions undertaken ing on June 30-July 1 reaffirmed the ranges with such accounts under the provisions of it had established in February for growth of this paragraph may provide for a service fee M2 and M3 of 2Vi to 6V6 percent and 1 to when appropriate. 5 percent respectively, measured from the fourth quarter of 1991 to the fourth quarter of 1992. The Committee anticipated that Domestic Policy Directive developments contributing to unusual velocity increases could persist in the second half In Effect January 1, 19931 of the year. The monitoring range for growth of total domestic nonfinancial debt also was The information reviewed at this meeting maintained at AVi to Wi percent for the year. suggests that economic activity has been ris- For 1993, the Committee on a tentative basis ing appreciably in the current quarter. Total set the same ranges as in 1992 for growth of nonfarm payroll employment has increased the monetary aggregates and debt measured slightly since September, and the average from the fourth quarter of 1992 to the fourth workweek has moved higher. The civilian quarter of 1993. The behavior of the moneunemployment rate fell further in November tary aggregates will continue to be evaluated to 7.2 percent. Industrial production posted in the light of progress toward price level solid gains in October and November. Retail stability, movements in their velocities, and sales increased sharply in October and rose developments in the economy and financial further in November. Residential construc- markets. tion activity appears to have increased from In the implementation of policy for the the third-quarter pace. Indicators of business immediate future, the Committee seeks to fixed investment have been mixed recently, maintain the existing degree of pressure on but on balance they suggest further growth. reserve positions. In the context of the Com- The nominal U.S. merchandise trade deficit mittee's long-run objectives for price stabilnarrowed somewhat in October from its ity and sustainable economic growth, and average rate in the third quarter. Recent data giving careful consideration to economic, on wages and prices suggest on balance a financial, and monetary developments, possible slowing in the trend toward lower slightly greater reserve restraint or slightly inflation. lesser reserve restraint would be acceptable Changes in short-term interest rates have in the intermeeting period. The contemplated been mixed since the Committee meeting on reserve conditions are expected to be consis- November 17 while bond yields have edged tent with M2 growing at a rate of around lower. In foreign exchange markets, the 1 Vi percent and M3 about unchanged in the trade-weighted value of the dollar in terms period from November through March. of the other G-10 currencies was essentially unchanged on balance over the intermeeting period. Authorization for Foreign Over the course of recent months, M2 has Currency Operations expanded at a moderate pace, while M3 has continued to expand at a very slow rate. In Effect January 1, 1993 1. The Federal Open Market Committee 1. Adopted by the Committee at its meeting on authorizes and directs the Federal Reserve December 22, 1992. Bank of New York, for System Open Market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

104 80th Annual Report, 1993 Account, to the extent necessary to carry out System Open Market Account for periods up the Committee's foreign currency directive to a maximum of 12 months with the followand express authorizations by the Committee ing foreign banks, which are among those pursuant thereto, and in conformity with designated by the Board of Governors of the such procedural instructions as the Commit- Federal Reserve System under Section 214.5 tee may issue from time to time: of Regulation N, Relations with Foreign A. To purchase and sell the following Banks and Bankers, and with the approval of foreign currencies in the form of cable trans- the Committee to renew such arrangements fers through spot or forward transactions on on maturity: the open market at home and abroad, including transactions with the U.S. Treasury, with Amount the U.S. Exchange Stabilization Fund estab- Foreign bank (millions of lished by Section 10 of the Gold Reserve dollars equivalent) Act of 1934, with foreign monetary authorities, with the Bank for International Settle- Austrian National Bank 250 National Bank of Belgium 1,000 ments, and with other international financial Bank of Canada 2,000 institutions: National Bank of Denmark 250 Bank of England 3,000 Bank of France 2,000 Austrian schillings Italian lire German Federal Bank 6,000 Belgian francs Japanese yen Bank of Italy 3,000 Canadian dollars Mexican pesos Bank of Japan 5,000 Danish kroner Netherlands guilders Bank of Mexico 700 Pounds sterling Norwegian kroner Netherlands Bank 500 French francs Swedish kronor Bank of Norway 250 German marks Swiss francs Bank of Sweden 300 Swiss National Bank 4,000 Bank for International Settlements B. To hold balances of, and to have Dollars against Swiss francs 600 outstanding forward contracts to receive or Dollars against authorized European currencies other than Swiss francs 1,250 to deliver, the foreign currencies listed in paragraph A above. C. To draw foreign currencies and to Any changes in the terms of existing swap permit foreign banks to draw dollars under arrangements, and the proposed terms of any the reciprocal currency arrangements listed new arrangements that may be authorized, in paragraph 2 below, provided that draw- shall be referred for review and approval to ings by either party to any such arrangement the Committee. shall be fully liquidated within 12 months 3. All transactions in foreign currencies after any amount outstanding at that time undertaken under paragraph 1(A) above was first drawn, unless the Committee, be- shall, unless otherwise expressly authorized cause of exceptional circumstances, specifi- by the Committee, be at prevailing market cally authorizes a delay. rates. For the purpose of providing an invest- D. To maintain an overall open posi- ment return on System holdings of foreign tion in all foreign currencies not exceeding currencies, or for the purpose of adjusting $25.0 billion. For this purpose, the overall interest rates paid or received in connection open position in all foreign currencies is with swap drawings, transactions with fordefined as the sum (disregarding signs) of eign central banks may be undertaken at net positions in individual currencies. The non-market exchange rates. net position in a single foreign currency is 4. It shall be the normal practice to ardefined as holdings of balances in that cur- range with foreign central banks for the coorrency, plus outstanding contracts for future dination of foreign currency transactions. In receipt, minus outstanding contracts for making operating arrangements with foreign future delivery of that currency, i.e., as the central banks on System holdings of foreign sum of these elements with due regard to currencies, the Federal Reserve Bank of New sign. York shall not commit itself to maintain any 2. The Federal Open Market Committee specific balance, unless authorized by the directs the Federal Reserve Bank of New Federal Open Market Committee. Any York to maintain reciprocal currency ar- agreements or understandings concerning the rangements ("swap" arrangements) for the administration of the accounts maintained by Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings 105 the Federal Reserve Bank of New York with National Advisory Council on International the foreign banks designated by the Board Monetary and Financial Policies. of Governors under Section 214.5 of Regu- 8. Staff officers of the Committee are lation N shall be referred for review and authorized to transmit pertinent informaapproval to the Committee. tion on System foreign currency operations 5. Foreign currency holdings shall be to appropriate officials of the Treasury invested insofar as practicable, considering Department. needs for minimum working balances. Such 9. All Federal Reserve Banks shall particinvestments shall be in liquid form, and ipate in the foreign currency operations for generally have no more than 12 months System Account in accordance with pararemaining to maturity. When appropriate in graph 3 G(l) of the Board of Governors' connection with arrangements to provide Statement of Procedure with Respect to Forinvestment facilities for foreign currency eign Relationships of Federal Reserve Banks holdings, U.S. Government securities may be dated January 1, 1944. purchased from foreign central banks under agreements for repurchase of such securities within 30 calendar days. Foreign. Currency Directive 6. All operations undertaken pursuant to the preceding paragraphs shall be reported In Effect January 1, 1993 promptly to the Foreign Currency Subcommittee and the Committee. The Foreign 1. System operations in foreign currencies Currency Subcommittee consists of the shall generally be directed at countering dis- Chairman and Vice Chairman of the Com- orderly market conditions, provided that mittee, the Vice Chairman of the Board of market exchange rates for the U.S. dollar Governors, and such other member of the reflect actions and behavior consistent with Board as the Chairman may designate (or in the IMF Article IV, Section 1. the absence of members of the Board serv- 2. To achieve this end the System shall: ing on the Subcommittee, other Board Mem- A. Undertake spot and forward purbers designated by the Chairman as alter- chases and sales of foreign exchange. nates, and in the absence of the Vice B. Maintain reciprocal currency Chairman of the Committee, his alternate). ("swap") arrangements with selected for- Meetings of the Subcommittee shall be eign central banks and with the Bank for called at the request of any member, or at International Settlements. the request of the Manager for Foreign C. Cooperate in other respects with Operations, for the purposes of reviewing central banks of other countries and with recent or contemplated operations and of international monetary institutions. consulting with the Manager on other mat- 3. Transactions may also be undertaken: ters relating to his responsibilities. At the A. To adjust System balances in light request of any member of the Subcommittee, of probable future needs for currencies. questions arising from such reviews and con- B. To provide means for meeting Syssultations shall be referred for determination tem and Treasury commitments in particular to the Federal Open Market Committee. currencies, and to facilitate operations of the 7. The Chairman is authorized: Exchange Stabilization Fund. A. With the approval of the Commit- C. For such other purposes as may be tee, to enter into any needed agreement or expressly authorized by the Committee. understanding with the Secretary of the Trea- 4. System foreign currency operations sury about the division of responsibility for shall be conducted: foreign currency operations between the A. In close and continuous consulta- System and the Treasury; tion and cooperation with the United States B. To keep the Secretary of the Trea- Treasury; sury fully advised concerning System for- B. In cooperation, as appropriate, with eign currency operations, and to consult with foreign monetary authorities; and the Secretary on policy matters relating to C. In a manner consistent with the obliforeign currency operations; gations of the United States in the Interna- C. From time to time, to transmit tional Monetary Fund regarding exchange appropriate reports and information to the arrangements under the IMF Article IV. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

106 80th Annual Report, 1993 Procedural Instructions with A. Any operation that would result in a Respect to Foreign Currency change in the System's overall open position in foreign currencies exceeding $1.5 billion Operations since the most recent regular meeting of the Committee. In Effect January 1, 1993 B. Any swap drawing proposed by a foreign bank exceeding the larger of In conducting operations pursuant to the (i) $200 million or (ii) 15 percent of the size authorization and direction of the Federal of the swap arrangement. Open Market Committee as set forth in the 3. The Manager for Foreign Operations Authorization for Foreign Currency Opera- shall also consult with the Subcommittee or tions and the Foreign Currency Directive, the Chairman about proposed swap drawings the Federal Reserve Bank of New York, by the System, and about any operations that through the Manager for Foreign Operations, are not of a routine character. System Open Market Account, shall be guided by the following procedural understandings with respect to consultations and Meeting Held on clearance with the Committee, the Foreign February 2-3, 1993 Currency Subcommittee, and the Chairman of the Committee. All operations undertaken A meeting of the Federal Open Market pursuant to such clearances shall be reported Committee was held in the offices of promptly to the Committee. the Board of Governors of the Federal 1. The Manager for Foreign Operations Reserve System in Washington, D.C., shall clear with the Subcommittee (or with on Tuesday, February 2, 1993, at the Chairman, if the Chairman believes that 2:30 p.m. and was continued on consultation with the Subcommittee is not feasible in the time available): Wednesday, February 3, 1993, at A. Any operation that would result in a 9:00 a.m. change in the System's overall open position in foreign currencies exceeding $300 million Present: on any day or $600 million since the most Mr. Greenspan, Chairman recent regular meeting of the Committee. Mr. Corrigan, Vice Chairman B. Any operation that would result in a Mr. Angell change on any day in the System's net posi- Mr. Boehne tion in a single foreign currency exceeding Mr. Keehn $150 million, or $300 million when the oper- Mr. Kelley ation is associated with repayment of swap Mr. LaWare drawings. Mr. Lindsey C. Any operation that might generate a Mr. McTeer substantial volume of trading in a particular Mr. Mullins currency by the System, even though the Ms. Phillips change in the System's net position in that Mr. Stern currency might be less than the limits specified in l.B. Messrs. Broaddus, Jordan, Forrestal, D. Any swap drawing proposed by a and Parry, Alternate Members foreign bank not exceeding the larger of of the Federal Open Market (i) $200 million or (ii) 15 percent of the size Committee of the swap arrangement. 2. The Manager for Foreign Operations Messrs. Hoenig, Melzer, and Syron, shall clear with the Committee (or with the Presidents of the Federal Reserve Subcommittee, if the Subcommittee believes Banks of Kansas City, St. Louis, that consultation with the full Committee is and Boston respectively not feasible in the time available, or with the Chairman, if the Chairman believes that con- Mr. Kohn, Secretary and Economist sultation with the Subcommittee is not feasi- Mr. Bernard, Deputy Secretary ble in the time available): Mr. Coyne, Assistant Secretary Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 107 Mr. Gillum, Assistant Secretary Ms. Low, Open Market Secretariat Mr. Mattingly, General Counsel Assistant, Division of Monetary Mr. Patrikis,2 Deputy General Counsel Affairs, Board of Governors Mr. Prell, Economist Mr. Truman, Economist Messrs. Beebe, T. Davis, Dewald, Goodfriend, and Ms. Tschinkel, Messrs. R. Davis, Lang, Lindsey, Senior Vice Presidents, Federal Promisel, Rosenblum, Scheld, Reserve Banks of San Francisco, Siegman, Simpson, and Slifman, Kansas City, St. Louis, Richmond, Associate Economists and Atlanta respectively Mr. McDonough, Manager of the Mr. McNees, Vice President, Federal System Open Market Account Reserve Bank of Boston Ms. Greene, Deputy Manager for Mr. Gavin, Assistant Vice President, Foreign Operations Federal Reserve Bank of Ms. Lovett,3 Deputy Manager for Cleveland Domestic Operations Mr. Weber, Senior Research Officer, Federal Reserve Bank of Mr. Ettin, Deputy Director, Division of Minneapolis Research and Statistics, Board of Ms. Meulendyke, Manager, Open Governors Market Operations, Federal Mr. Stockton, Associate Director, Reserve Bank of New York Division of Research and Statistics, Board of Governors The Secretary reported that advices of Mr. Madigan, Assistant Director, the election of the Reserve Bank mem- Division of Monetary Affairs, bers and alternate members of the Fed- Board of Governors Mr. Brady,4 Section Chief, Division of eral Open Market Committee for the Monetary Affairs, Board of period commencing January 1, 1993, Governors and ending December 31, 1993, had Mr. Rosine,4 Senior Economist, been received and that these individuals Division of Research and had executed their oaths of office. The Statistics, Board of Governors elected members and alternate members Mr. Wiles,5 Secretary of the Board, were as follows: Office of the Secretary, Board of Governors Mr. Winn,5 Assistant to the Board, E. Gerald Corrigan, President of the Federal Office of Board Members, Reserve Bank of New York, with James Board of Governors H. Oltman, First Vice President of the Ms. Werneke,5 Special Assistant to the Federal Reserve Bank of New York, as Board, Office of Board Members, alternate; Board of Governors Edward G. Boehne, President of the Federal Mr. Siciliano,5 Special Assistant to the Reserve Bank of Philadelphia, with General Counsel, Legal Division, J. Alfred Broaddus, Jr., President of the Board of Governors Federal Reserve Bank of Richmond, as alternate; Silas Keehn, President of the Federal Reserve Bank of Chicago, with Jerry L. Jordan, President of the Federal Reserve 2. Attended Wednesday session only. Bank of Cleveland, as alternate; 3. Attended Tuesday session only. 4. Attended portion of meeting relating to the Robert D. McTeer, Jr., President of the Fed- Committee's discussion of the economic outlook eral Reserve Bank of Dallas, with Roband its longer-run objectives for monetary and ert P. Forrestal, President of the Federal debt aggregates. Reserve Bank of Atlanta, as alternate; 5. Attended portion of the meeting relating to Gary H. Stern, President of the Federal the release of FOMC information to the public. Reserve Bank of Minneapolis, with Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 80th Annual Report, 1993 Robert T. Parry, President of the Fed- capacities of Manager of the System eral Reserve Bank of San Francisco, as Open Market Account, Deputy Manager alternate. for Foreign Operations, System Open Market Account, and Deputy Manager By unanimous vote, the Committee for Domestic Operations, System Open elected the following officers of the Fed- Market Account respectively, on the eral Open Market Committee to serve understanding that their selection was until the election of their successors at subject to their being satisfactory to the the first meeting of the Committee after Federal Reserve Bank of New York. December 31, 1993, with the understanding that in the event of the discon- Secretary's note: Advice subsequently was tinuance of their official connection with received that the selections indicated above the Board of Governors or with a Fed- were satisfactory to the board of directors of eral Reserve Bank, they would cease to the Federal Reserve Bank of New York. have any official connection with the Federal Open Market Committee: On January 15, 1993, the continuing rules, regulations, authorizations, and Alan Greenspan Chairman other instruments of the Committee E. Gerald Corrigan Vice Chairman listed below were distributed with the advice that, in accordance with proce- Donald L. Kohn Secretary and dures approved by the Committee, they Economist were being called to the Committee's Normand R.V. Bernard Deputy Secretary attention before the February 2-3 orga- Joseph R. Coyne Assistant nization meeting to give members an Secretary opportunity to raise any questions they Gary P. Gillum Assistant might have concerning them. Members Secretary were asked to indicate if they wished to J. Virgil Mattingly, Jr. General Counsel have any of the instruments in question Ernest T. Patrikis Deputy General placed on the agenda for consideration Counsel at this meeting. No requests for substan- Michael J. Prell Economist tive consideration were received. Edwin M. Truman Economist At the meeting, the Committee voted Richard G. Davis, Richard W. Lang, unanimously to update the references to David E. Lindsey, Larry J. Promisel, the Management of the System Open Arthur J. Rolnick, Harvey Rosenblum, Market Account that were contained in Karl A. Scheld, Charles J. Siegman, the following: (1) Procedures for alloca- Thomas D. Simpson, and Lawrence tion of securities in the System Open Slifman, Associate Economists Market Account and (2) Program for Security of FOMC Information. Apart By unanimous vote, the Federal from the indicated updating of titles, all Reserve Bank of New York was of the instruments listed below remained selected to execute transactions for the in effect in their existing forms. System Open Market Account until the adjournment of the first meeting of the Committee after December 31, 1993. 1. Procedures for allocation of securities in the System Open Market Account By unanimous vote, William J. 2. Authority for the Chairman to appoint McDonough, Margaret L. Greene, and a Federal Reserve Bank as agent to operate Joan E. Lovett were selected to serve the System Account in case the New York at the pleasure of the Committee in the Bank is unable to function Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 109 3. Resolution of FOMC to provide for the ers and foreign accounts maintained at the continued operation of the Committee during Federal Reserve Bank of New York, on a an emergency; Resolution of FOMC autho- cash, regular, or deferred delivery basis, for rizing certain actions by Federal Reserve the account of the Federal Reserve Bank of Banks during an emergency New York at market discount rates, prime 4. Resolution relating to examinations of bankers acceptances with maturities of up to the System Open Market Account nine months at the time of acceptance that 5. Guidelines for the conduct of System (1) arise out of the current shipment of goods operations in federal agency issues between countries or within the United 6. Regulation relating to Open Market States, or (2) arise out of the storage within Operations of Federal Reserve Banks the United States of goods under contract of 7. Program for Security of FOMC sale or expected to move into the channels of Information trade within a reasonable time and that are 8. Federal Open Market Committee secured throughout their life by a warehouse Rules. receipt or similar document conveying title to the underlying goods; provided that the aggregate amount of bankers acceptances By unanimous vote, the Authorizaheld at any one time shall not exceed tion for Domestic Open Market Opera- $100 million; tions, as shown below, was reaffirmed: (c) To buy U.S. Government securities, obligations that are direct obligations of, or 1. The Federal Open Market Committee fully guaranteed as to principal and interest authorizes and directs the Federal Reserve by, any agency of the United States, and Bank of New York, to the extent necessary prime bankers acceptances of the types to carry out the most recent domestic policy authorized for purchase under l(b) above, directive adopted at a meeting of the from dealers for the account of the Federal Committee: Reserve Bank of New York under agree- (a) To buy or sell U.S. Government ments for repurchase of such securities, oblisecurities, including securities of the Federal gations, or acceptances in 15 calendar days Financing Bank, and securities that are direct or less, at rates that, unless otherwise obligations of, or fully guaranteed as to expressly authorized by the Committee, shall principal 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 commitments) at the close of business on the the open market. day of a meeting of the Committee at which 2. In order to ensure the effective conaction is taken with respect to a domestic duct of open market operations, the Federal policy directive shall not be increased or Open Market Committee authorizes and decreased by more than $8.0 billion during directs the Federal Reserve Banks to lend the period commencing with the opening of U.S. Government securities held in the business on the day following such meeting System Open Market Account to Governand ending with the close of business on the ment securities dealers and to banks particiday of the next such meeting; pating in Government securities clearing (b) When appropriate, to buy or sell in arrangements conducted through a Federal the open market, from or to acceptance deal- Reserve Bank, under such instructions as Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 80th Annual Report, 1993 the Committee may specify from time to lished by Section 10 of the Gold Reserve Act time. of 1934, with foreign monetary authorities, 3. In order to ensure the effective conduct with the Bank for International Settlements, of open market operations, while assisting and with other international financial in the provision of short-term investments institutions: for foreign and international accounts maintained at the Federal Reserve Bank of New York, the Federal Open Market Committee Austrian schillings Italian lire authorizes and directs the Federal Reserve Belgian francs Japanese yen Canadian dollars Mexican pesos Bank of New York (a) for System Open Danish kroner Netherlands guilders Market Account, to sell U.S. Government Pounds sterling Norwegian kroner securities to such foreign and international French francs Swedish kronor accounts on the bases set forth in paragraph German marks Swiss francs l(a) under agreements providing for the resale by such accounts of those securities B. To hold balances of, and to have within 15 calendar days on terms comoutstanding forward contracts to receive or parable to those available on such transacto deliver, the foreign currencies listed in tions in the market; and (b) for New York paragraph A above. Bank account, when appropriate, to under- C. To draw foreign currencies and to take with dealers, subject to the conditions permit foreign banks to draw dollars under imposed on purchases and sales of securities the reciprocal currency arrangements listed in paragraph l(c), repurchase agreements in in paragraph 2 below, provided that draw- U.S. Government and agency securities, and ings by either party to any such arrangement to arrange corresponding sale and repurchase shall be fully liquidated within 12 months agreements between its own account and after any amount outstanding at that time foreign and international accounts mainwas first drawn, unless the Committee, tained at the Bank. Transactions undertaken because of exceptional circumstances, spewith such accounts under the provisions of cifically authorizes a delay. this paragraph may provide for a service fee D. To maintain an overall open posiwhen appropriate. tion in all foreign currencies not exceeding $25.0 billion. For this purpose, the overall By unanimous vote, the Authoriza- open position in all foreign currencies is tion for Foreign Currency Operations defined as the sum (disregarding signs) of was amended to update the title of the net positions in individual currencies. The net position in a single foreign currency is Manager of the System Open Market defined as holdings of balances in that cur- Account. The Authorization, as rency, plus outstanding contracts for future amended, is shown below: receipt, minus outstanding contracts for future delivery of that currency, i.e., as the 1. The Federal Open Market Committee sum of these elements with due regard to authorizes and directs the Federal Reserve sign. Bank of New York, for System Open Market 2. The Federal Open Market Commit- Account, to the extent necessary to carry out tee directs the Federal Reserve Bank of the Committee's foreign currency directive New York to maintain reciprocal currency and express authorizations by the Committee arrangements ("swap" arrangements) for the pursuant thereto, and in conformity with System Open Market Account for periods up such procedural instructions as the Commit- to a maximum of 12 months with the followtee may issue from time to time: ing foreign banks, which are among those A. To purchase and sell the following designated by the Board of Governors of the foreign currencies in the form of cable trans- Federal Reserve System under Section 214.5 fers through spot or forward transactions on of Regulation N, Relations with Foreign the open market at home and abroad, includ- Banks and Bankers, and with the approval of ing transactions with the U.S. Treasury, with the Committee to renew such arrangements the U.S. Exchange Stabilization Fund estab- on maturity: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February l\\ erally have no more than 12 months remain- Amount of ing to maturity. When appropriate in con- Foreign ban. —nTof' nection with arrangements to provide dollars equivalent) investment facilities for foreign currency holdings, U.S. Government securities may be Austrian National Bank 250 National Bank of Belgium 1,000 purchased from foreign central banks under Bank of Canada 2,000 agreements for repurchase of such securities National Bank of Denmark 250 within 30 calendar days. Bank of England 3,000 Bank of France 2,000 6. All operations undertaken pursuant to German Federal Bank 6,000 the preceding paragraphs shall be reported Bank of Italy 3,000 promptly to the Foreign Currency Subcom- Bank of Japan 5,000 Bank of Mexico 700 mittee and the Committee. The Foreign Cur- Netherlands Bank 500 rency Subcommittee consists of the Chair- Bank of Norway 250 man and Vice Chairman of the Committee, Bank of Sweden 300 Swiss National Bank 4,000 the Vice Chairman of the Board of Gover- Bank for International Settlements nors, and such other member of the Board as Dollars against Swiss francs 600 the Chairman may designate (or in the Dollars against authorized European currencies other than Swiss francs 1,250 absence of members of the Board serving on the Subcommittee, other Board Members Any changes in the terms of existing swap designated by the Chairman as alternates, arrangements, and the proposed terms of any and in the absence of the Vice Chairman of new arrangements that may be authorized, the Committee, his alternate). Meetings of shall be referred for review and approval to the Subcommittee shall be called at the the Committee. request of any member, or at the request of 3. All transactions in foreign currencies the Manager of the System Open Market undertaken under paragraph 1(A) above Account, for the purposes of reviewing shall, unless otherwise expressly authorized recent or contemplated operations and of by the Committee, be at prevailing market consulting with the Manager on other matrates. For the purpose of providing an invest- ters relating to his responsibilities. At the ment return on System holdings of foreign request of any member of the Subcommittee, currencies, or for the purpose of adjusting questions arising from such reviews and coninterest rates paid or received in connection sultations shall be referred for determination with swap drawings, transactions with for- to the Federal Open Market Committee. eign central banks may be undertaken at 7. The Chairman is authorized: non-market exchange rates. A. With the approval of the Commit- 4. It shall be the normal practice to tee, to enter into any needed agreement or arrange with foreign central banks for the understanding with the Secretary of the Treacoordination of foreign currency transac- sury about the division of responsibility for tions. In making operating arrangements foreign currency operations between the Syswith foreign central banks on System hold- tem and the Treasury; ings of foreign currencies, the Federal B. To keep the Secretary of the Trea- Reserve Bank of New York shall not commit sury fully advised concerning System foritself to maintain any specific balance, unless eign currency operations, and to consult with authorized by the Federal Open Market the Secretary on policy matters relating to Committee. Any agreements or understand- foreign currency operations; ings concerning the administration of the C. From time to time, to transmit accounts maintained by the Federal Reserve appropriate reports and information to the Bank of New York with the foreign banks National Advisory Council on International designated by the Board of Governors under Monetary and Financial Policies. Section 214.5 of Regulation N shall be 8. Staff officers of the Committee are referred for review and approval to the authorized to transmit pertinent information Committee. on System foreign currency operations to 5. Foreign currency holdings shall be appropriate officials of the Treasury Departinvested insofar as practicable, considering ment. needs for minimum working balances. Such 9. All Federal Reserve Banks shall particinvestments shall be in liquid form, and gen- ipate in the foreign currency operations for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

112 80th Annual Report, 1993 System Account in accordance with para- In conducting operations pursuant to the graph 3 G(l) of the Board of Governors' authorization and direction of the Federal Statement of Procedure with Respect to For- Open Market Committee as set forth in the eign Relationships of Federal Reserve Banks Authorization for Foreign Currency Operadated January 1, 1944. tions and the Foreign Currency Directive, the Federal Reserve Bank of New York, By unanimous vote, the Foreign Cur- through the Manager of the System Open Market Account ("Manager"), shall be rency Directive, as shown below, was guided by the following procedural underreaffirmed: standings with respect to consultations and clearance with the Committee, the Foreign 1. System operations in foreign curren- Currency Subcommittee, and the Chairman cies shall generally be directed at countering of the Committee. All operations undertaken disorderly market conditions, provided that pursuant to such clearances shall be reported market exchange rates for the U.S. dollar promptly to the Committee. reflect actions and behavior consistent with 1. The Manager shall clear with the Subthe IMF Article IV, Section 1. committee (or with the Chairman, if the 2. To achieve this end the System shall: Chairman believes that consultation with the A. Undertake spot and forward pur- Subcommittee is not feasible in the time chases and sales of foreign exchange. available): B. Maintain reciprocal currency A. Any operation that would result in a ("swap") arrangements with selected for- change in the System's overall open position eign central banks and with the Bank for in foreign currencies exceeding $300 million International Settlements. on any day or $600 million since the most C. Cooperate in other respects with recent regular meeting of the Committee. central banks of other countries and with B. Any operation that would result in a international monetary institutions. change on any day in the System's net posi- 3. Transactions may also be undertaken: tion in a single foreign currency exceeding A. To adjust System balances in light $150 million, or $300 million when the operof probable future needs for currencies. ation is associated with repayment of swap B. To provide means for meeting Sys- drawings. tem and Treasury commitments in particular C. Any operation that might generate a currencies, and to facilitate operations of the substantial volume of trading in a particular Exchange Stabilization Fund. currency by the System, even though the C. For such other purposes as may be change in the System's net position in that expressly authorized by the Committee. currency might be less than the limits speci- 4. System foreign currency operations fied in 1(B). shall be conducted: D. Any swap drawing proposed by a A. In close and continuous consulta- foreign bank not exceeding the larger of tion and cooperation with the United States (i) $200 million or (ii) 15 percent of the size Treasury; of the swap arrangement. B. In cooperation, as appropriate, with 2. The Manager shall clear with the Comforeign monetary authorities; and mittee (or with the Subcommittee, if the C. In a manner consistent with the obli- Subcommittee believes that consultation gations of the United States in the Interna- with the full Committee is not feasible in the tional Monetary Fund regarding exchange time available, or with the Chairman, if the arrangements under the IMF Article IV. Chairman believes that consultation with the Subcommittee is not feasible in the time By unanimous vote, the Procedural available): Instructions with respect to Foreign Cur- A. Any operation that would result in a rency Operations were amended to change in the System's overall open position in foreign currencies exceeding $1.5 billion update the title of the Manager of the since the most recent regular meeting of the System Open Market Account. The Pro- Committee. cedural Instructions, as amended, are B. Any swap drawing proposed by a shown below: foreign bank exceeding the larger of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 113 (i) $200 million or (ii) 15 percent of the size The information reviewed at this of the swap arrangement. meeting indicated that economic activ- 3. The Manager shall also consult with ity rose appreciably further in the fourth the Subcommittee or the Chairman about quarter. Final demands were buoyed proposed swap drawings by the System, and about any operations that are not of a routine by strength in consumption, business character. spending for durable equipment, and residential construction. Manufacturing The Report of Examination of the activity also increased considerably, and System Open Market Account, con- employment appeared to be on a modest ducted by the Board's Division of upward trajectory, despite a continuing Reserve Bank Operations and Payment flow of announcements of layoffs by Systems as of the close of business on large corporations. Although recent data July 31, 1992, was accepted. on wages and prices had been mixed, on By unanimous vote, the minutes of balance they suggested that inflation was actions taken at the meeting of the Fed- trending gradually lower. eral Open Market Committee held on Total nonfarm payroll employment December 22, 1992, were approved. registered a small increase in December The Deputy Manager for Foreign for the fourth consecutive month. Ser- Operations reported on developments vice industries, notably business and in foreign exchange markets during the health services, and retail trade acperiod December 22, 1992, through counted for nearly all of the rise in jobs. February 2, 1993. There were no Manufacturing and construction payrolls System open market transactions in changed little, and government employforeign currencies during this period, ment fell as temporary election workers and thus no vote was required of the were dropped from payrolls. The civil- Committee. ian unemployment rate remained at The Manager of the System Open 7.3 percent, almost Vi percentage point Market Account reported on develop- below its midyear peak but slightly ments in domestic financial markets and above its level at the beginning of the on System open market transactions in year. government securities and federal Industrial production advanced furagency obligations during the period ther in December and was up consider- December 22, 1992, through Febru- ably over the fourth quarter as a whole. ary 2, 1993. By unanimous vote, the Motor vehicle assemblies rose sharply Committee ratified these transactions. during the quarter; strong gains also The Committee then turned to a dis- were registered in business equipment, cussion of the economic outlook, the partly reflecting a further jump in output ranges for the growth of money and debt of computers, and in nondurable conin 1993, and the implementation of sumer goods. By contrast, the producmonetary policy over the intermeeting tion of durable consumer goods other period ahead. A summary of the eco- than motor vehicles was lower on balnomic and financial information avail- ance after changing little over the third able at the time of the meeting and of quarter, and the output of defense and the Committee's discussion is provided space equipment remained on a downbelow, followed by the domestic policy ward trend. Total utilization of industrial directive that was approved by the Com- capacity increased significantly in the mittee and issued to the Federal Reserve fourth quarter and for the year as a Bank of New York. whole. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

114 80th Annual Report, 1993 Consumer spending was up substan- most of the buildup was limited to tially in the fourth quarter. Retail sales, machinery, motor vehicles, and miscelafter rising sharply in October and laneous nondurable goods. With stocks changing little in November, posted a rising in line with sales since September, further sizable increase in December. the stock-to-sales ratio in wholesaling The largest sales gains in the fourth remained at the low end of its range quarter were reported at automotive over the past year. Retail inventories dealers and at building material and sup- increased moderately further in Novemply outlets, but most other types of retail ber; the inventory-to-sales ratio for the stores also recorded higher sales. By sector was slightly below its average for contrast, consumer spending for ser- previous months of the year. vices, as indicated by data on personal The nominal U.S. merchandise trade consumption expenditures, rose more deficit widened slightly in November. slowly. Housing starts surged in Decem- For October and November together, ber, with single family starts reaching however, the deficit narrowed a little their highest level in nearly three years from its average rate in the third quarter, and multifamily starts picking up as the value of exports rose more than slightly from the very low levels of the value of imports. Most of the October and November. Sales of new increase in exports was in capital goods, and existing homes remained on a strong both machinery and aircraft, and in conupward trend in December. sumer goods. Passenger cars accounted Real outlays for business fixed invest- for a considerable part of the rise in ment apparently registered a notable imports, while the inflow of consumer gain in the fourth quarter, particularly goods eased from the very strong pace for producers' durable equipment. Ship- of the third quarter. Recent indicators ments of nondefense capital goods rose suggested that economic activity had in November and December after chang- remained weak in the major foreign ing little in October; for the quarter as industrial countries and that unemploya whole, shipments advanced substan- ment rates had increased further in most tially, with increases widespread by of those countries. The recovery in category. Business purchases of cars and Canada appeared to be continuing, but trucks were up sharply in the fourth the downturn in western Germany and quarter, while nonresidential construc- Japan evidently had persisted into the tion activity retraced a small part of a fourth quarter. third-quarter decline. A small November decline in pro- Business inventories expanded mod- ducer prices of finished goods was erately in November as a sizable drop in reversed in December, with a rebound in manufacturing inventories was more prices of finished foods outweighing a than offset by increases in wholesale further drop in energy prices. For finand retail inventories. At the manufac- ished items other than food and energy, turing level, the drawdown of stocks producer prices rose in December, but was associated with strong shipments the advance followed six months of no of durable goods, and inventory-to- change on balance; for 1992 as a whole, shipments ratios in most industries were this measure of prices increased by a at or near the bottom of their recent considerably smaller amount than in ranges. In the wholesale sector, sizable 1991. At the consumer level, the index inventory increases were reported in for prices of nonfood, non-energy items November for a second straight month; edged higher in December after some- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 115 what larger increases in the two preced- from the banking system. The federal ing months. The rise in this index in funds rate averaged close to expected 1992 was the smallest for any year since levels over the intermeeting period. the early 1970s, when wage and price However, the rate was somewhat volacontrols were in effect. Hourly compen- tile in late December as a result of sizsation of private industry workers able swings in market factors affecting advanced a little more rapidly in the reserves and of shifting market anticipafourth quarter than in the two previous tions regarding year-end pressures. quarters, but the rise in total compensa- Most other short-term interest rates tion over the year as a whole was con- declined somewhat over the intermeetsiderably smaller than in 1991. The ing period, in part reflecting the passing slowing of labor cost increases last year of year-end pressures. Intermediate- and occurred in both the wages and benefits long-term rates, including those on components. fixed-rate mortgages, also moved some- At its meeting on December 22, the what lower; the declines occurred in Committee adopted a directive that response to growing indications that any called for maintaining the existing proposed near-term fiscal stimulus degree of pressure on reserve positions would be quite moderate and that the and that did not include a presumption new Administration intended to recomabout the likely direction of any adjust- mend steps, possibly including new ments to policy during the intermeeting taxes, to lower the trajectory of the fisperiod. Accordingly, the directive indi- cal deficit appreciably over time. Broad cated that in the context of the Commit- indexes of stock prices exhibited mixed tee's long-run objectives for price stabil- results over the intermeeting period: ity and sustainable economic growth, Indexes giving heavy weight to large and giving careful consideration to eco- companies changed little, while those nomic, financial, and monetary develop- primarily reflecting smaller companies ments, slightly greater reserve restraint rose significantly. or slightly lesser reserve restraint would In foreign exchange markets, the be acceptable during the intermeeting trade-weighted value of the dollar in period. The reserve conditions associ- terms of the other G-10 currencies rose ated with this directive were expected to on balance over the intermeeting period. be consistent with expansion of M2 at Through early January, the dollar apprean annual rate of about 1 Vi percent and ciated against both the yen and the mark, with M3 remaining about unchanged on especially the latter, in response to balance over the four-month period from actual and expected further declines in November through March. interest rates in Japan and Germany. Open market operations during the Subsequently, the dollar's gains were intermeeting period were directed partially erased as the prospects for toward maintaining the existing degree near-term easing in Germany diminof pressure on reserve positions. Adjust- ished somewhat and perceptions grew ment plus seasonal borrowing was well that fiscal initiatives in the United States above expected levels in the first two would lower the deficit and reduce the full reserve maintenance periods in the chances that monetary policy might be intermeeting interval; borrowing was tightened in the months ahead. sizable over the long New Year's week- After expanding at a moderate pace end and also later when unusually heavy over the course of earlier months, M2 Treasury tax receipts drained reserves contracted in December and January. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

116 80th Annual Report, 1993 Some of the weakness reflected a slow- would be damped for some period of down in Ml growth associated with time by the appreciation of the dollar lower mortgage refinancing activity. since mid-1992, but an anticipated Within M2's nontransactions compo- pickup in growth abroad later this year nent, the expansion of savings and would begin to counteract the effects of money market deposit accounts slowed the higher dollar. Against the backabruptly, perhaps owing in part to the ground of considerable uncertainties wider spread that had developed during associated with still unannounced fiscal the fall between market rates and those policy initiatives, the staff retained for paid on these accounts, as well as to the this forecast the assumption contained use of monies in these accounts to fund in several previous forecasts that fiscal a step-up in consumer purchases and policy would remain mildly restrictive, nonwithheld tax payments. In addition, largely because of declining defense the continued attractiveness to investors outlays. The persisting slack in resource of bond and stock mutual funds might utilization over the forecast horizon was have contributed to a quickening of the expected to be associated with some runoff of holdings of money market additional progress in reducing inflation. mutual funds and to the persisting weak- In the Committee's discussion of curness in other M2 accounts. Appreciable rent and prospective economic developdeclines in M3 in December and Janu- ments, the members were encouraged ary reflected both the contraction in M2 by the mounting evidence of appreciable and reduced needs by banks for man- momentum in the economic expansion. aged liabilities at a time of weak overall On the whole, recent developments credit demand. From the fourth quarter tended to reinforce their forecasts of of 1991 to the fourth quarter of 1992, continuing growth at a moderate pace both M2 and M3 grew at rates some- over the year ahead, especially in light what below the lower ends of the Com- of the improvement in business and conmittee's annual ranges. Total domestic sumer confidence. The impact of some nonfinancial debt appeared to have retarding influences on the expansion, expanded at the lower end of the Com- notably various balance sheet adjustmittee's monitoring range for 1992. ment activities, appeared to be waning. The staff projection prepared for this In addition, while some major sectors of meeting suggested that economic activ- the economy such as defense spending ity would expand over the year ahead at and commercial construction remained a pace that would be sufficient to reduce weak, the economy was benefiting from gradually margins of unemployed labor considerable growth in consumer spendand capital. Recent declines in long- ing, from rising business expenditures term interest rates and more optimistic for producer equipment, and from attitudes on the part of businesses and increasing outlays for housing. In one households were expected to support view, the recent behavior of commodity further solid gains in business fixed prices also tended to indicate some investment and in homebuying. Con- strengthening in the economy's expantinuing progress in reducing debt ser- sion. Despite various indications of a vice burdens and a gradual lessening of more firmly established expansion, concerns regarding job security were however, the members felt that the projected to foster an expansion of con- outlook remained subject to a good deal sumer spending a shade faster than the of uncertainty, and some commented growth in incomes. Export demand that substantial deviations—in either Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 117 direction—from their current forecasts fourth quarter of 1993, the forecasts for could not be ruled out. It was noted in growth of real GDP had a central tenthis connection that the specifics of the dency of 3 to 3V4 percent within a full President's fiscal policy proposals were range of 2Vi to 4 percent. Projections of still unknown, and their reception by the the civilian rate of unemployment in the public and the Congress would have a fourth quarter of 1993 were concenmajor influence on confidence, interest trated in the upper half of a 6V2 to 7 perrates, and the performance of the cent range. For the CPI, the central teneconomy. Other sources of uncertainty dency of the forecasts for the period related to the outlook for further restruc- from the fourth quarter of 1992 to the turing activities that involved cutbacks fourth quarter of 1993 was centered on in operations and employment by many increases in a range of 2l/i to 23A perfirms, and the prospective lending poli- cent, and for nominal GDP the forecasts cies of banking institutions. With regard were clustered in a range of 5Vi to 6 perto the outlook for inflation, most of the cent for the year. members believed that some further In the course of the Committee's disprogress toward stable prices was likely cussion of various factors underlying the over the year ahead, given an economic outlook for economic activity, the memoutcome about in line with their fore- bers observed that on the whole the casts of continued, albeit reduced, mar- effects of a number of structural impedigins of unutilized or underutilized pro- ments to the expansion seemed to be ductive resources. Some members also diminishing as the financial condition of referred to the extended period of rela- households, business firms, and finantively sluggish growth in the broad mea- cial institutions continued to improve. sures of money as a favorable indicator Household and business debt-service in the outlook for inflation. burdens had eased substantially, but it In keeping with the practice at meet- remained difficult to predict to what ings when the Committee establishes its extent and for how long the ongoing long-run ranges for growth of the money balance sheet adjustments would conand debt aggregates, the Committee tinue to divert an unusual proportion of members and the Federal Reserve Bank cash flows from spending to balance presidents not currently serving as mem- sheet repair. Improved profitability and bers had prepared projections of eco- new capital-market issuance had nomic activity, the rate of unemploy- strengthened the capital positions of ment, and inflation for 1993. The central banking institutions, and in general they tendencies of the forecasts pointed to were now in a much better position to slightly faster economic growth this year augment their lending activities. Howthan currently seemed to have occurred ever, there were few indications thus far in 1992. The anticipated rate of eco- of any easing in terms or standards on nomic expansion would be at a pace that business loans, and the depressed and was rapid enough to reduce the rate of uncertain values of commercial mortunemployment a little further. None- gages and real estate held in bank porttheless, with some slack in productive folios might continue to exert an inhibitresources persisting, price and cost pres- ing effect on the willingness of banks to sures would remain subdued and modest lend. Another negative factor was the additional moderation in inflation was persistence of downsizing and other expected by most members. Measured restructuring activities by numerous from the fourth quarter of 1992 to the firms, notably large businesses. Such Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 80th Annual Report, 1993 restructuring activities had not fully run the expansion in business investment their course as many firms continued to spending, and members cited a number pare excess production capacity and to of factors that were expected to provide modernize production facilities to meet a favorable setting for sustained momenstrong competition in domestic and for- tum in such spending over the year eign markets. The resulting layoffs had ahead. These included the strengthening damped overall job growth. of final demands, the recent declines in Despite tepid job growth, retail sales intermediate- and long-term interest had strengthened markedly during the rates, the greater leeway for financial closing months of 1992, and several intermediaries to increase their lending members commented that such sales had to businesses, and a continuing desire by continued to display surprising vigor in business firms to improve their operatsome parts of the country during the ing efficiencies. Commercial construcearly weeks of 1993. Apart from the tion activity, however, was likely to improvement in consumer sentiment, remain quite sluggish. There were indiother favorable factors cited with regard cations that commercial real estate valto the outlook for consumer spending ues had stabilized in a number of areas, included lower debt-service burdens and but at low levels, and given the persisthe capital gains or enhanced cash flows tence of marked imbalances in numernow being realized as sales of homes ous real estate markets that were the picked up and mortgage refinancings result of several years of overbuilding, a again strengthened. Some members significant rebound in commercial buildnonetheless expressed a degree of con- ing activity for the nation as a whole cern about the sustainability of the gains might well be several years away. The in consumer spending unless there were outlook for housing construction was faster growth in employment and much more promising. Against the income to support such spending. background of a general upswing in con- Announcements by prominent firms of sumer confidence and the improved balcutbacks in their workforces had contin- ance sheets of many households, the ued into the new year, and while job declines that had occurred in mortgage gains at other firms, especially smaller interest rates had fostered a marked ones, were contributing to modest net strengthening in the demand for singlegrowth in overall employment, the pub- family housing as evidenced by reports licity surrounding the persisting job cut- from many parts of the country as well backs and a tendency for many new jobs as the overall statistics on housing. On to be lower-paying added an element of the basis of these developments, the caution to the outlook for consumer members anticipated a continuing impeexpenditures. On balance, with the mea- tus to the economic expansion from sured saving rate already at a low level, housing construction and from related though an argument could be made that industries over the year ahead. In addithe actual rate was somewhat higher tion, the current indications of generally than indicated by the currently pub- lean business inventories, associated in lished data, consumer spending seemed part with strong final demands over the likely to expand about in line with the past several months, suggested that the growth in consumer incomes over the prospects for further gains in overall coming year. spending were likely to stimulate efforts by business firms to build up inventories The growth in consumer incomes in over the quarters ahead. turn was likely to depend importantly on Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 119 The increasing signs of slow growth wage inflation would be sustained or recession in a number of foreign over the year ahead, and one memnations represented a greater downside ber observed that the disinflationary risk to the demand for U.S. exports than momentum in the economy might well had been apparent earlier. It was noted, be underestimated. Favorable developfor example, that firms engaged in busi- ments relating to the outlook for inflaness activities abroad were reporting tion included evidence of slowing substantial deterioration in markets for increases in labor costs and continued U.S. goods in many foreign countries. aggressive efforts by many business Growth in U.S. exports might remain firms to improve productivity and positive over the year ahead, but against reduce costs in the face of intense comthe background of a relatively expansive petition from domestic and foreign pro- U.S. economy and the dollar's recent ducers. Indeed, anecdotal reports from appreciation, the value of exports might around the country continued to suggest well fall increasingly short of that of little or no upward pressure on prices in imports with adverse effects on the many regions. In addition, the behavior growth of U.S. economic activity. of interest rates in longer-term debt Turning to the outlook for fiscal pol- markets was consistent with spreading icy, members were encouraged by the expectations of gradually diminishing prospect that the President would soon inflation. Some members believed, howpropose a program that would produce ever, that little or no further progress in substantial reductions in the federal def- reducing inflation was a more likely outicit over the years ahead. Such a deficit- come in the year ahead, though none reduction program, if deemed credible, anticipated higher inflation. Some comcould result in lower intermediate- and modity price indexes had edged higher long-term interest rates than would recently, apparently in response to growotherwise prevail—even before the pro- ing demands related to strengthening gram was enacted—with very positive activity in several sectors of the econimplications for interest-sensitive ex- omy. Lumber prices in particular had penditures. For the nearer term, the Pres- risen considerably in conjunction with ident was expected to announce some the uptrend in single-family housing modest fiscal stimulus relative to what construction and various constraints on was currently in train. However, the spe- lumber supplies. Some business concifics of the President's proposals were tacts reported for the first time in a long not yet known and there was little cur- while that they were experiencing or rent basis on which to judge prospective anticipated some upward pressure on public and congressional reactions. their raw materials prices. Further, while Members emphasized the critical need most business contacts saw or anticifor long-term deficit reduction, and pated little or no upward pressure on some expressed concern about the prices in their own industries, many conadverse effects on financial markets if tinued to expect rising inflation more fiscal stimulus measures were to be generally. The still relatively steep slope enacted for the short run without the of the yield curve and its implications assurance of further legislation to cut with regard to expectations of future federal deficits over time. increases in interest rates also suggested that investors remained concerned about With regard to the outlook for inflathe possibility of higher inflation over tion, most of the members anticipated the longer run, even though such conthat the trend toward lower price and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 80th Annual Report, 1993 cerns might have abated somewhat that they preferred somewhat different recently and did not appear to extend to ranges including the retention of the tenthe next year or two. In general, how- tative ranges, lowering the ranges by ever, the members viewed the inflation more than the proposal, and widening or outlook with considerable optimism on narrowing them. All the members were the presumption of favorable fiscal and in firm agreement that the purpose of the monetary policy developments. proposed reductions was not to signal or In keeping with the requirements of implement any change in monetary polthe Full Employment and Balanced icy or to convey any intention to move Growth Act of 1978 (the Humphrey- away from the Committee's commit- Hawkins Act), the Committee at this ment to maximum sustainable economic meeting reviewed the ranges for growth expansion. Rather, the reductions were of the monetary and debt aggregates in motivated by the persistence of marked 1993 that it had established on a tenta- shortfalls in the growth of M2 and M3 tive basis at its meeting on June 30- from their historical relationships with July 1, 1992. The tentative ranges various measures of aggregate economic included expansion of 2Vi to 6V2 percent performance; those shortfalls appeared for M2 and 1 to 5 percent for M3, mea- to be the technical result of forces that sured from the fourth quarter of 1992 to are altering the relationship between the fourth quarter of 1993. The monitor- money and income. Members of the ing range for growth of total domestic Committee urged that the Board's report nonfinancial debt had been set provi- to the Congress and the Chairman's sionally at AV2 to 8V2 percent for 1993. accompanying testimony make clear the All of these ranges were unchanged reasons for the unusual behavior of from those that the Committee had set money and its consequences for the for 1992 at its meeting in February of Committee's choice of ranges. last year and had reaffirmed at midyear. The deviations in monetary growth When the provisional ranges for money from historical norms reflected a numgrowth were established, the Committee ber of developments whose relative had noted that they were especially importance and intensity had shifted to tentative and subject to revision in the some extent over the course of recent latter part of 1992 or early 1993 owing years, but in general they had served to to the considerable uncertainty about rechannel funds away from depository the evolving relationship of money to institutions, and the associated weakincome. ness in deposit growth had raised In the event, the velocities of M2 and velocity—the ratio of nominal GDP to M3 had increased appreciably in the sec- money. The result was the need for ond half of 1992 and analysis of the lower money growth than in the past to factors behind this development sug- support a given rate of income growth. gested further increases in the year Among the developments that had ahead. Consequently, in the Commit- tended to retard the relative growth of tee's discussion, which tended to focus M2 and M3 was the unprecedented on M2, all the members indicated that steepness of the yield curve that had they could support a proposal to lower prompted large shifts of funds by savers the tentative ranges for growth of the from M2 accounts to higher-yielding broad monetary aggregates by V2 per- intermediate- and long-term assets. At centage point for 1993. At the same the same time, credit growth at bank and time, a number of members indicated thrift depository institutions had been Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 121 weak, partly as a result of efforts by tions of money growth relative to the these institutions to improve capital and Committee's ranges. Should the factors liquidity positions, and partly owing to influencing the behavior of the broad weak demand. As a consequence, they aggregates persist in holding down also had maintained relatively low offer- money growth to the extent seen in ing rates on deposits that had provided 1992, expansion of M2 and M3 in the consumers with an incentive to reduce lower portion of their reduced ranges or hold down their deposit holdings in would be consistent with considerable order to pay down relatively high-cost further growth in nominal spending. mortgages and other debts. In 1992, Indeed, a shortfall from the reduced sluggish growth of M2 and M3 had been ranges could not be ruled out, and one associated with a considerable accel- member felt that the potential for such a eration in nominal spending. Indeed, development warranted consideration of despite growth of both M2 and M3 at a somewhat larger reduction in the M2 rates below the Committee's ranges, the range; such a reduction also would sigexpansion of the economy had exceeded nal more clearly the Committee's commost forecasts. mitment to price stability. On the other The members generally anticipated hand, the upper portions of the reduced that the intensity of these forces might ranges would still accommodate an diminish in 1993 as borrowers and lend- ample provision of liquidity to support ing institutions achieved more comfort- further economic expansion even if the able balance sheet positions. Nonethe- growth of money and of income were less, the relative weakness in money to move toward a historically more norgrowth was seen as likely to persist to a mal alignment and velocity were to slow marked extent. The yield curve, while it from its high rate of increase. In one had flattened a bit recently, was still view, widening the tentative M2 range expected to provide a considerable by reducing its lower limit while retainincentive for many savers to shift funds ing its upper limit would help the Comout of M2 assets, especially as relatively mittee to convey its views regarding the high-yielding time deposits continued to potential for a continuing but acceptable mature. In addition, banks were likely to sluggishness in M2 growth while leavremain generally unaggressive in bid- ing room for the possibility of faster M2 ding for deposits, in part because their expansion should changing circumsubstantial earlier acquisitions of securi- stances foster diminishing strength in ties would permit them to accommodate velocity. Another member expressed a some of the anticipated growth in loan preference for narrowing the tentative demand by selling securities or limit- range by lowering only its upper limit as ing purchases. In these circumstances, a means of signaling the Committee's restrained money growth seemed likely intent to resist both inflationary and to remain consistent with relative recessionary developments. In light of strength in the economic expansion. the uncertainties that were involved, the informational content of the aggregates The members recognized that the probably had diminished and in any strength of the factors that were exevent the Committee would need to pected to continue to depress broad continue to evaluate monetary growth money growth in relation to income in developments in the context of a careful 1993 was still subject to considerable assessment of a wide variety of other uncertainty, and this implied the need financial, economic, and price developfor flexibility in assessing the implica- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 80th Annual Report, 1993 ments. In this connection, one member growth and velocity behavior of the observed that the uncertainties were of aggregates and ongoing economic and such a magnitude that, while plausible financial developments. Accordingly, by arguments could be made for a number unanimous vote, the following longerof different ranges, retention of the ten- run policy for 1993 was approved by the tative ranges would be appropriate in Committee for inclusion in the domestic light of the Committee's willingness to policy directive: review the ranges in the event that unanticipated developments were to unfold. The Federal Open Market Committee seeks monetary and financial conditions that All of the members agreed that it will foster price stability and promote suswould be desirable to retain the monitortainable growth in output. In furtherance of ing range of 4Vi to %Vi percent that the these objectives, the Committee at this meet- Committee had established on a pro- ing established ranges for growth of M2 and visional basis for the growth of total M3 of 2 to 6 percent and xh to \xh percent domestic nonfinancial debt in 1993. The respectively, measured from the fourth quarter of 1992 to the fourth quarter of 1993. The expansion in such debt had not been Committee expects that developments condamped by special forces to the same tributing to unusual velocity increases are extent as the broad monetary aggregates likely to persist during the year. The monitorin 1992. Over the year ahead, growth in ing range for growth of total domestic nonthe federal debt was likely to remain financial debt was set at \xh to 8V2 percent substantial, and the expansion of debt in for the year. The behavior of the monetary aggregates will continue to be evaluated the nonfederal sectors was projected to in the light of progress toward price level accelerate somewhat given the continstability, movements in their velocities, and ued improvement in borrower balance developments in the economy and financial sheets and an anticipated increase in the markets. willingness of financial institutions to lend as the economy continued to Turning to policy for the intermeeting expand. Nonetheless, in the context of period ahead, all of the members still cautious attitudes on the part of endorsed a proposal to maintain both borrowers and lenders, the growth unchanged conditions in reserve marof nonfederal debt probably would kets, and all indicated that they could remain below that of nominal GDP in accept a directive that did not incorpothe year ahead. rate any presumption with regard to the At the conclusion of the Committee's likely direction of possible intermeeting discussion, all of the members indicated adjustments to policy. While there was that they favored or could accept a tech- concern about the weakness in the monnical downward adjustment of Vi per- etary aggregates, the members generally centage point in the tentative ranges for agreed that recent economic developthe broader monetary aggregates for ments tended to reinforce the view that 1993 to rates of 2 to 6 percent for M2 monetary policy was on an appropriate and Vi to AVi percent for M3. It was course. The economy seemed to be on a agreed that there should be no change stronger growth track than earlier in the from the tentative range for total domes- expansion, and inflation remained quite tic nonfinancial debt. In keeping with subdued—only a bit above some estithe Committee's usual procedures under mates of price stability—and likely to the Humphrey-Hawkins Act, the ranges moderate further in coming quarters in would be reviewed at midyear, or sooner the view of most members. Some comif deemed necessary, in light of the mented that a further easing move at this Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 123 juncture might well have adverse effects ening of the System's anti-inflationary on inflation sentiment and on interest resolve and were to result in higher rates rates in intermediate- and long-term debt on intermediate- and long-term debt markets. A few referred to the recent securities. firming in some commodity prices and At the conclusion of the Committee's the consensus among private forecasters discussion, all of the members indicated that inflation could drift higher over the that they favored a directive that called next few years. In the view of one for maintaining the existing degree of member, these developments might pressure on reserve positions. They also argue for a tilt in the directive toward noted their preference for, or acceptance possible restraint, but they did not call of, a directive that did not include a for an immediate tightening in reserve presumption about the likely direction conditions. of any adjustment to policy over the A staff analysis prepared for this intermeeting period. Accordingly, in the meeting suggested a resumption of some context of the Committee's long-run growth in the broad measures of money objectives for price stability and sustainlater in the first quarter but a decline in able economic growth, and giving careboth M2 and M3 for the quarter as a ful consideration to economic, financial, whole. While part of the declines and monetary developments, the Comappeared to reflect difficulties with sea- mittee decided that slightly greater or sonal adjustments and the ebbing of spe- slightly lesser reserve restraint would be cial factors that previously had boosted acceptable during the intermeeting growth, the uncertainties surrounding period. The reserve conditions contemthe behavior of these aggregates tended plated at this meeting were expected to to reduce their role in current monetary be consistent with little change in the policy. Nevertheless, there was concern levels of M2 and M3 over the twoabout the persisting weakness in the month period from January through broad aggregates, including the likeli- March. hood that they would fall well short of By unanimous vote, the Federal the Committee's new ranges over the Reserve Bank of New York was authofirst part of the year. Some members rized and directed, until otherwise also noted that the growth of Ml, while directed by the Committee, to execute still fairly robust in December and Janu- transactions in the System Account in ary, was markedly below its pace over accordance with the following domestic most of 1992. On the other hand, bank policy directive: loans had increased in recent months, and the weakness in the monetary aggre- The information reviewed at this meeting gates did not appear to reflect under- indicates that economic activity rose appreciably further in the fourth quarter. Total lying softness in the economy. In these nonfarm payroll employment registered circumstances, a number of members another small increase in December, and the believed that any effort to stimulate civilian unemployment rate remained at monetary growth under immediately 7.3 percent. Industrial production posted prevailing economic conditions and solid gains over the closing months of the market expectations might well prove year. Retail sales were up substantially in the fourth quarter, and residential construction to be counterproductive. An easing activity increased sharply. Indicators of busiat this time could accelerate outflows ness fixed investment suggest a notable gain from interest-sensitive M2 assets if the in recent months, particularly for producers' easing were seen as signaling a weak- durable equipment. The nominal U.S. mer- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 80th Annual Report, 1993 chandise trade deficit narrowed slightly in tent with little change in M2 and M3 over October-November from its average rate in the period from January to March. the third quarter. Recent data on wages and prices have been mixed but they continue to At this meeting the Committee dissuggest on balance a trend toward lower cussed a preliminary report of a subcominflation. Interest rates have declined somewhat mittee that had been established to since the Committee meeting on Decem- examine various issues relating to the ber 22. In foreign exchange markets, the release of information about Committee trade-weighted value of the dollar in terms meetings and decisions. All of the memof the other G-10 currencies rose on balance bers agreed that the Committee should over the intermeeting period. keep the public as fully informed as M2 appears to have contracted in December and January, after expanding at a moder- possible about its monetary policy deciate pace over the course of previous months; sions and their rationale. Such informa- M3 is estimated to have declined appreciably tion could reduce uncertainty about the in both months. From the fourth quarter of stance of policy and about the factors 1991 to the fourth quarter of 1992, both M2 the Committee takes into account in and M3 grew at rates somewhat below the reaching its decisions. However, release lower ends of the Committee's annual ranges for 1992. Total domestic nonfinancial debt of information should not be allowed to appears to have expanded at the lower end of compromise the overriding objective of the Committee's monitoring range for the making and implementing the best posyear. sible decisions. In that regard, the Com- The Federal Open Market Committee mittee noted that its deliberative process seeks monetary and financial conditions that requires a free flow of ideas, including will foster price stability and promote susthe ability to advance or question tainable growth in output. In furtherance of these objectives, the Committee at this meet- hypotheses, to speculate on alternative ing established ranges for growth of M2 and outcomes, and to change opinions in M3 of 2 to 6 percent and V2 to AV2 percent response to the views expressed by other respectively, measured from the fourth members. The members also needed to quarter of 1992 to the fourth quarter of 1993. feel at liberty during meetings to use The Committee expects that developments a wide array of information that is contributing to unusual velocity increases are likely to persist during the year. The obtained on a confidential basis; at least monitoring range for growth of total domes- some of that information would no tic nonfinancial debt was set at AV2 to longer be provided to the Committee if 8V2 percent for the year. The behavior of the there were a risk of public disclosure. monetary aggregates will continue to be Moreover, the Committee wanted to evaluated in the light of progress toward give further consideration to the risk price level stability, movements in their velocities, and developments in the economy that the adoption of a different schedule and financial markets. for releasing information about policy In the implementation of policy for the decisions might have the effect, in diffiimmediate future, the Committee seeks to cult circumstances, of reducing its willmaintain the existing degree of pressure on ingness to make needed policy adjustreserve positions. In the context of the Comments promptly. No decisions were mittee's long-run objectives for price stability and sustainable economic growth, and made at this meeting concerning various giving careful consideration to economic, options for apprising the public more financial, and monetary developments, fully or promptly of the Committee's slightly greater reserve restraint or slightly actions, and it was understood that the lesser reserve restraint would be acceptable subcommittee would continue to study in the intermeeting period. The contemplated the matter. reserve conditions are expected to be consis- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 125 It was agreed that the next meeting of Siegman, Simpson, and Slifman, the Committee would be held on Tues- Associate Economists day, March 23, 1993. Mr. McDonough, Manager of the The meeting adjourned. System Open Market Account Ms. Greene, Deputy Manager for Donald L. Kohn Foreign Operations Secretary Ms. Lovett, Deputy Manager for Domestic Operations Mr. Ettin, Deputy Director, Division of Research and Statistics, Meeting Held on Board of Governors March "23, 1993 Mr. Winn, Assistant to the Board, Office of Board Members, A meeting of the Federal Open Market Board of Governors6 Committee was held in the offices of Mr. Madigan, Assistant Director, the Board of Governors of the Federal Division of Monetary Affairs, Reserve System in Washington, D.C., Board of Governors Mr. Hooper, Assistant Director, on Tuesday, March 23, 1993, at Division of International 9:00 a.m. Finance, Board of Governors Ms. Low, Open Market Secretariat Present- Assistant, Division of Monetary Mr. Greenspan, Chairman Affairs, Board of Governors Mr. Corrigan, Vice Chairman Mr. Angell Messrs. Beebe, T. Davis, Dewald, Mr. Boehne Goodfriend, and Ms. Tschinkel, Mr. Keehn Senior Vice Presidents, Federal Mr. Kelley Reserve Banks of San Francisco, Mr. LaWare Kansas City, St. Louis, Richmond, Mr. Lindsey and Atlanta respectively Mr. McTeer Mr. Mullins Ms. Browne, and Mr. Sniderman, Vice Ms. Phillips Presidents, Federal Reserve Banks Mr. Stern of Boston and Cleveland respectively Messrs. Broaddus, Jordan, Forrestal, Ms. Krieger, Manager, Open Market and Parry, Alternate Members Operations, Federal Reserve Bank of the Federal Open Market of New York Committee At the start of the meeting, the sub- Messrs. Hoenig, Melzer, and Syron, Presidents of the Federal Reserve committee established to review poli- Banks of Kansas City, St. Louis, cies relating to the release of Committee and Boston respectively information reported on its further deliberations and proposed a merging of the Mr. Bernard, Deputy Secretary current "Minutes of Actions" and the Mr. Coyne, Assistant Secretary "Record of Policy Actions" into a new Mr. Gillum, Assistant Secretary Mr. Mattingly, General Counsel document to be designated "Minutes of Mr. Patrikis, Deputy General Counsel the Federal Open Market Committee Mr. Prell, Economist Mr. Truman, Economist 6. Attended actions portion of meeting relating Messrs. R. Davis, Lang, Lindsey, to discussion of merging minutes of action and Rolnick, Rosenblum, Scheld, policy record into one document. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 80th Annual Report, 1993 Meeting." Merging the two documents equipment apparently remained on a would put in convenient form all the strong upward trajectory, sales of new information that is released pertaining to homes had slackened and consumer FOMC meetings, and the new document spending was rising less rapidly. Indicawould be made public on the same tors of production activity also were schedule as its predecessor documents. mixed: Industrial output had continued The Committee members endorsed the to post solid gains, but homebuilding subcommittee's proposal and by unani- had been less robust since year-end. mous vote the Committee approved the Payroll employment had strengthened, "Minutes of the Federal Open Market and the unemployment rate had moved Committee Meeting" held on Feb- down further. Increases in wages had ruary 2-3, 1993; this merged docu- remained subdued in recent months, but ment was scheduled to be released on advances in consumer and producer March 26, 1993. prices had been larger than those The Manager of the System Open recorded in the latter part of 1992. Market Account reported on develop- Total nonfarm payroll employment ments in foreign exchange markets since rose sharply in February, following the previous meeting on February 2-3, generally small advances in previous 1993. There were no System open mar- months, and the length of the average ket transactions in foreign currencies workweek remained at the fourthduring this intermeeting period, and thus quarter level. The strong job gains in no vote was required of the Committee. construction, services, and retail trade in The Deputy Manager for Domestic February apparently reflected to some Operations reported on developments in extent a partial reversal of the special domestic financial markets and on Sys- factors that had depressed reported emtem open market transactions in govern- ployment in these sectors in previous ment securities and federal agency obli- months. Since December, initial claims gations during the period February 3, for unemployment insurance had fluctu- 1993, through March 22, 1993. By ated in a range that was consistent with unanimous vote, the Committee ratified further modest growth in employment. these transactions. The civilian unemployment rate edged The Committee then turned to a dis- lower again in February, to 7.0 percent. cussion of the economic outlook and Industrial production continued to rise the implementation of monetary policy at a fairly brisk pace in January and over the intermeeting period ahead. A February. Changes in mining and utilisummary of the economic and financial ties were about offsetting on balance information available at the time of the over the two months, but increases in meeting and of the Committee's discus- manufacturing were fairly widespread. sion is provided below, followed by the Although motor vehicle assemblies fell domestic policy directive that was ap- in February from a relatively high Januproved by the Committee and issued to ary level, the production of consumer the Federal Reserve Bank of New York. durables and computers turned up The, information reviewed at this sharply. In addition, increases in output meeting suggested that economic activ- were recorded in several other categoity was expanding at a more moderate ries, including non-energy materials and pace in the early months of 1993 after construction supplies. Recent surveys increasing substantially in the fourth indicated that new orders for durable quarter. Although outlays for business goods increased further in February, and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 127 lean factory inventories coupled with for these goods was well above the averreports of lengthening delivery times age for the fourth quarter, suggesting suggested further gains in industrial out- that additional advances in shipments put in coming months. Total utilization might lie ahead. Nonresidential conof industrial capacity rose again in struction activity was down slightly February. further in January, reflecting persisting Retail sales advanced in February declines in office and industrial building after a fourth-quarter surge and a pause in an environment of excess supply and in January. Sales at automotive dealers some continuing, though perhaps lessenweakened in February. However, there ing, downward pressure on the prices of were sharp increases in sales of building such structures. materials and supplies, miscellaneous Business inventories appeared to have durable goods, and nondurable goods edged lower in January. In manufacturother than apparel. After registering siz- ing, factory stocks were drawn down able gains late last year, housing starts further, and most industries had relafell substantially in January and retraced tively low stocks-to-shipments ratios. only part of that decline in February. Among wholesalers, strong January The slowdown was concentrated in sales pulled down inventories at many single-family housing starts; multifam- types of establishments; in numerous ily starts were up in February from cases, a large accumulation of stocks a historically low level in January. in the fourth quarter was reversed. For Although mortgage interest rates had the wholesale sector as a whole, the dropped to the lowest levels in decades, inventories-to-sales ratio in January was sales of both new and existing homes near the bottom of the range of the past turned down in January from their high two years. Retail inventories rose some- December levels. what further in January after a large Incoming data on orders and ship- December increase. Stocks at automoments of nondefense capital goods sug- tive dealers accounted for all of the gested a further brisk advance in out- January accumulation. At retail stores lays for business equipment in coming other than auto dealers, the ratio of months. In January, a decline in ship- inventories-to-sales remained within the ments of nondefense capital goods only narrow range observed over the past partially reversed a large December rise, year. as a surge in shipments of computing The nominal U.S. merchandise trade equipment helped sustain the overall deficit widened slightly in January but level. Shipments of complete civilian was little changed from its average level aircraft posted a solid gain in January. in the fourth quarter. The value of both The increase appeared to be concen- exports and imports dropped sharply in trated in sales to foreign purchasers; in January from the December levels. The the domestic airline industry, intense decline in imports was spread widely competition was forcing cutbacks of among major trade categories, but the unprofitable routes and reductions in decrease in exports largely reflected a both the number of planes in service and reduction in shipments of aircraft after a orders for new planes. Shipments of strong December rise. Among the major durable equipment other than computers foreign industrialized countries, the and aircraft fell in January to about the level of real activity contracted further level of the fourth quarter. On the other in the fourth quarter in Japan, western hand, the January reading on new orders Germany, and France; for the first quar- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 80th Annual Report, 1993 ter, the limited data available were gen- be acceptable during the intermeeting erally weak for Japan and France but period. The reserve conditions associsomewhat more mixed for western ated with this directive were expected to Germany. By contrast, economic activ- be consistent with little change in the ity appeared to be increasing in Canada levels of M2 and M3 over the twoand the United Kingdom. month period from January through Producer prices of finished goods March. were up in January and February after Open market operations during the changing little over the fourth quarter. intermeeting period were directed Producer prices of finished foods toward maintaining the existing degree declined over the first two months of the of pressure on reserve positions. Adjustyear, but prices of finished energy prod- ment plus seasonal borrowing averaged ucts climbed rapidly, and prices of other only slightly above expected levels in finished items rose at a faster rate than the three full reserve maintenance periin 1992. At the consumer level, price ods in the intermeeting interval. For the increases in January and February also period as a whole, the federal funds rate were on the high side of the past year's remained close to the 3 percent level advances. Food prices jumped in Janu- that had prevailed in previous months. ary and rose slightly further in February, Other short-term interest rates while energy prices retraced most of a changed little over the intermeeting sharp January rise. Excluding food and period, while long-term rates fell appreenergy items, consumer prices advanced ciably on balance. Bond markets rallied at a substantially faster pace over the over most of the period, reflecting mar- January-February period than in 1992. ket assessments of improved prospects Increases in wages, as measured by for significant reductions in the federal average hourly earnings of production budget deficit in coming years and the or nonsupervisory workers, remained consequences for overall spending. subdued in recent months. The advance Prices of Treasury notes and bonds also in average hourly earnings slowed in were boosted by municipal defeasance February, and the rise over the twelve activity and by perceptions of heightmonths ended in February was consider- ened prepayment risks in mortgageably smaller than over the previous backed securities. In early March, intertwelve-month period. est rates on long-term Treasury bonds At its meeting on February 2-3, 1993, and conventional fixed-rate mortgages the Committee adopted a directive that reached their lowest levels since 1973, called for maintaining the existing but some of the decline in bond and degree of pressure on reserve positions mortgage rates subsequently was reand that did not include a presumption versed in response to increased appreabout the likely direction of any adjust- hension about inflation. Equity prices ments to policy during the intermeeting generally responded favorably to the period. Accordingly, the directive indi- drop in long-term interest rates, but concated that in the context of the Commit- cerns about future changes in governtee's long-run objectives for price stabil- ment policy toward a number of indusity and sustainable economic growth, tries, including health care, led to lower and giving careful consideration to eco- prices in some segments of the equities nomic, financial, and monetary develop- market. ments, slightly greater reserve restraint In foreign exchange markets, the or slightly lesser reserve restraint would trade-weighted value of the dollar in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 129 terms of the other G-10 currencies fell The staff projection prepared for this on balance over the intermeeting period. meeting suggested that economic activ- The dollar depreciated through late ity would grow over the year ahead at a February, partly in response to declines pace that would foster a further gradual in U.S. long-term interest rates and reduction in margins of unemployed incoming data that were seen as point- labor and capital. The projection incoring to some slowing of the expansion in porated the essential elements of the the United States. Subsequently, the fiscal proposals recently set forth by the dollar rebounded in the wake of unex- Administration; the effects on aggregate pectedly strong U.S. employment statis- demand, all other things equal, were tics, disappointing inflation numbers, expected to be small over the next sevand further signs of weakening eco- eral quarters. However, the appreciable nomic activity abroad. Near the end of declines in long-term interest rates the period, the dollar again dropped that had occurred in recent months— against the German mark and other evidently partly in response to antici- European currencies, following a cut by pations of intermediate-term deficit the Bundesbank of its discount rate that reduction—were expected to support apparently was less than market partici- substantial additional gains in business pants were expecting. On balance over and residential investment. Consumer the period, the dollar was marginally spending would be bolstered by the lower against the mark and other Euro- progress already achieved in reducing pean currencies, but it declined substan- debt-service burdens and by a gradual tially against the Japanese yen, reaching lessening of concerns regarding job an all-time low. security, although the higher personal M2 and M3 contracted in January and income taxes now envisioned for upper- February. Part of the weakness appar- income taxpayers were expected to be ently reflected temporary factors, such an inhibiting factor. Increases in export as distortions in seasonal adjustment demand would be limited in the near factors and a lull in prepayments of term by the continuing weakness in the mortgage-backed securities that reduced economies of the major industrialized deposits held in association with this countries. The persisting slack in activity. More fundamentally, relatively resource utilization was expected to be attractive returns on capital market associated with a return to more subinstruments continued to prompt house- dued price increases after a spurt earlier holds to shift large amounts of liquid this year. balances into market investments, such In the Committee's discussion of curas bond and stock mutual fund shares. rent and prospective economic condi- In addition, banks continued to issue tions, the members remained encoursubordinated debt and equity to improve aged by recent developments that they their balance sheets at a time when the viewed on the whole as tending to conexpansion of bank credit was slowing firm their forecasts of sustained econoticeably; in particular, bank lending to nomic expansion, though at a pace businesses had been depressed by pay- appreciably below that now indicated downs from the proceeds of heavy bond for the fourth quarter of 1992. If realand stock issuance by nonfinancial cor- ized, such economic growth would be porations. Total domestic nonfinancial associated over time with a further graddebt appeared to have expanded some- ual decline in unemployment. While the what further in January. expansion appeared to have generated Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 80th Annual Report, 1993 some momentum, a number of factors nonresidential construction. While busiwere likely to limit its strength, includ- ness sentiment was generally positive, ing ongoing balance sheet and business many business contacts were uncertain restructuring activities, the outlook for a about the outlook for demand in their more restrictive federal budget, and con- own industries or the potential strength tinuing weakness in key foreign mar- of the overall expansion, and recent kets. At the same time, greatly reduced fiscal policy developments appeared to interest rates and much improved, if have introduced a further note of caustill vulnerable, business and consumer tion. This uncertainty helped to account confidence were positive factors in the for the continuing reliance of numerous outlook. Some members cautioned that firms on overtime work to meet growing even though a moderate rate of eco- demand rather than incurring the considnomic growth could be viewed as the erable costs of adding new workers. most likely outcome over the forecast Even so, an increasing number of conhorizon, the current expansion differed tacts were reporting worker recalls or in important respects from earlier cycli- new hires. One member commented that cal recoveries, and in light of the atten- job growth could be viewed both as a dant uncertainties a considerably differ- measure of business sentiment and as a ent result—in either direction—could necessary element in building or mainnot be ruled out. With regard to the taining consumer confidence and thus outlook for inflation, the faster increases helping to ensure an enduring economic in consumer prices in recent months and expansion. a sharp upturn in the prices of certain The quickening recovery during producer materials tended to raise con- 1992, especially in the second half of cerns, or at least a degree of unease, the year, had received considerable with regard to underlying inflation impetus from consumer spending, and trends. While these developments might while growth in such spending could be well prove to be an aberration rather expected to moderate from its pace in than a signal of intensifying inflation, recent quarters, the consumer sector was they did suggest the need to reassess the viewed as likely to play a key role in likelihood of a further decline in infla- sustaining the expansion this year. Many tion and to be alert to further signs of a consumers had taken advantage of steep sustained upturn. For now, however, the declines in interest rates to strengthen favorable trends in underlying unit labor their balance sheets and reduce their costs, which were associated in turn debt-service burdens, and they were with ongoing gains in productivity and now in a much improved position to the absence of any firming in wage pres- finance further growth in their expendisures, led many members to conclude tures. The members took note of recent that recent price developments did not indications of a decline in consumer provide persuasive evidence of a change confidence and of some softening in in the inflation outlook. retail sales since early in the year. How- Members continued to report some- ever, the latter appeared to be in part the what uneven business conditions across result of recently adverse weather condithe nation. Steady economic growth tions in some major parts of the country, characterized many parts of the country, and consumer confidence was still much but business activity remained depressed improved on balance since earlier in the in some areas and industries, notably recovery. Accordingly, recent developthose related to defense, aerospace, and ments were not seen in themselves as Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 131 harbingers of a weakening consumer absence of progress in reducing the fedspending trend over the next several eral budget deficit. The outlook for a quarters. significant contraction in the federal Business spending on producers' deficit was subject to considerable durable equipment also was believed uncertainty, especially in light of the likely to continue to provide appreciable still pending decisions to be made with stimulus to the expansion, assuming that regard to health care programs and their the much reduced interest rates and financing. The members recognized that currently favorable business attitudes the direct effects of appreciable deficit would be sustained and that proposed reduction would tend to constrain ecoinvestment tax credit legislation eventu- nomic activity, as evidenced by the ally would be enacted. At the same time, impact in many areas of the defense business spending for nonresidential cutbacks that were already being structures probably would continue to implemented. Business contacts had be held back by weakness in office con- expressed concerns about the potential struction stemming from widespread effects on their industries and local overcapacity. While office building markets of various provisions in the activity was likely to be restrained for proposed legislation. Even so, a more an extended period, members saw some encompassing assessment of the effects positive signs that pointed to a degree of of deficit reduction needed to take stabilization in this sector, including the account of its favorable implications for leveling out or even a marginal pickup domestic interest rates. Moreover, insoin rents and occupancy rates in some far as the nearer-term outlook was conmarkets that previously had been cerned, the fiscal legislation now under severely depressed. A slow turnaround consideration included new spending in other building activity was reported initiatives and an investment tax credit in some regions, notably for industrial that were intended to provide some and retail structures. temporary stimulus to an economic While the available data on starts of expansion that, in the view of many single-family houses in January and observers, might still be in the process February were somewhat disappointing, of gathering sustainable momentum. On the members felt that housing construc- balance, substantial deficit reduction in tion activity had held up relatively well line with the currently proposed legthus far this year, after allowing for the islation was seen as likely to have a adverse weather conditions that had positive effect on business and consumer retarded construction in some areas. The confidence, financial markets, and the greatly reduced cost of mortgage financ- longer-term health of the economy. ing pointed to continuing gains in hous- Several members observed that the ing construction despite a rise in costs outlook for exports had worsened as associated with the sharp jump in lum- a result of weakening economic trends ber prices and a scarcity of finished in a number of major industrialized building lots in some areas. nations. Members also commented on The members agreed that the pros- the uncertainties in the outlook for forpects for overall spending on business eign trade associated with a variety of capital goods and housing were vulnera- political risks abroad and the persisting ble to shifts in attitudes that might be protectionism that currently was hightriggered, for example, by increases in lighted by strong opposition to key trade market interest rates associated with an agreements now under negotiation or Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 80th Annual Report, 1993 under consideration for ratification. erating inflation, including the consider- Anecdotal information from business able slack in the utilization of labor and contacts involved in export markets capital resources, strong competitive continued to suggest lagging foreign conditions in many markets, the absence demand for many U.S. goods; how- of significant lengthening in supplier ever, backlogs for other products, such delivery schedules, and an extended as labor-saving capital equipment, period of weak expansion in the broader remained sizable. monetary aggregates that now encom- The members devoted considerable passed some recent deceleration in Ml. attention to the discussion of various Nonetheless, the members acknowlfactors underlying the outlook for infla- edged that recent price developments tion. The consumer and producer price had raised a degree of unease in their indexes had been less favorable in Janu- minds, and their concerns would rise if ary and February than in the latter part the recent pace of price advances were of 1992. Also, prices of various indus- sustained in the months immediately trial and construction materials had ahead. One member observed that a firmed since the start of the year in somewhat faster economic expansion apparent response to rising production than currently was expected by most and, in some industries, to import or members might well serve to intensify environmental restrictions. Anecdotal inflation pressures. While price developreports of increasing costs and prices ments were notably difficult to predict, had begun to appear with somewhat most of the members concluded that the greater frequency in some areas, and evidence at this point did not confirm a pressures to widen profit margins report- resurgence in inflationary pressures, and edly were strong in a number of indus- some commented that further modest tries. In their evaluation of recent disinflation remained a reasonable inflation developments, however, the expectation for the next several quarters. members generally gave more weight to In the Committee's discussion of polthe behavior of unit labor costs, which icy for the intermeeting period ahead, indicated that much of the economy's most of the members endorsed a prounderlying cost structure did not reflect posal to maintain an unchanged degree any signs of a pickup in inflationary of pressure on reserve positions, while pressures. Moreover, from a financial two members supported an immediate perspective, extensions of credit and move to tighten reserve conditions. In growth in overall nonfinancial sector the majority view, the current degree of debt were not consistent with an econ- reserve pressure continued to represent omy that was generating significant a policy stance that was appropriately inflationary pressures, and the recent balanced in light of the opposing risks behavior of long-term debt markets sug- of a faltering economic expansion and a gested expectations of more subdued resurgence of inflation. Conditions in inflation. Against this background, the credit markets did not provide confirmrecent upturn in consumer and certain ing evidence of the emergence of greater commodity prices might well represent inflationary pressures and the need to a temporary development such as had restrain the growth in credit. Indeed, the occurred previously during the current continuation of balance sheet restructurcyclical upswing. In support of this ing activities by financial institutions view, members cited various fundamen- and the associated caution on the part of tals that seemed inconsistent with accel- these institutions with regard to extend- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 133 ing loans still appeared to be exerting stances, such continuing weakness in the a significantly inhibiting effect on the broader aggregates was not viewed as overall growth in spending and eco- indicating inadequate monetary stimunomic activity. Several members lus. Indeed, a number of members comacknowledged that a policy of maintain- mented that other indicators suggested ing unchanged reserve conditions and that current monetary policy was in fact an associated federal funds rate around quite accommodative as evidenced for current levels, which implied that real example by low short-term interest short-term rates were near zero or even rates, especially on an inflation-adjusted slightly negative, could have inflation- basis. Moreover, Ml, reserves, and the ary consequences in the event of a monetary base had continued to expand strengthening of the expansion and a in the first quarter, though at much sustained pickup in credit demands. The reduced rates. One member commented Committee would need to remain alert that the slowdown in these narrower to such a development. In present cir- monetary measures, which he viewed as cumstances, however, an unchanged important indicators of the thrust of policy stance seemed most consistent monetary policy, had favorable implicawith achieving sustained economic tions with regard to bringing inflation expansion in an environment of subdued under control. The members agreed that inflation. The members who favored a the considerable uncertainty that continprompt move toward restraint were per- ued to surround the outlook for broad suaded that a steady policy incurred an money relative to spending implied that unacceptable risk of halting the progress forming precise expectations for monetoward price stability and indeed of tary growth over the months ahead was intensifying inflation as the current not feasible. expansion matured. In this view, a pol- In the Committee's discussion of posicy tightening move at this point was sible intermeeting adjustments to the likely to counter the need for more sub- degree of reserve pressure, members stantial and potentially disruptive tight- who favored an unchanged policy stance ening actions later. also expressed a preference for retaining In the course of the Committee dis- the symmetry of the existing directive. cussion, the members took account of a Some observed that a policy change staff analysis that pointed to a resump- during the intermeeting period, if any, tion of M2 and M3 growth over the might well be in the direction of a tightmonths ahead. This analysis suggested ening move. However, because there that the temporary factors depressing the was no compelling case in the view of broader monetary aggregates likely most members for such a move at this would be reversing, but that the other time and any intermeeting adjustment influences causing a rechanneling of would be made in the light of emerging credit flows away from depository insti- developments, a symmetric directive tutions and boosting the velocity of was warranted. In this connection, one money undoubtedly would persist, member commented that, given the though probably with diminishing force. Committee's assessment of current eco- Accordingly, the staff foresaw moderate nomic and financial conditions, a tilt in growth of M2 and M3 that at midyear the directive toward restraint would give would leave these aggregates below the a misleading indication of the Commitlower ends of the Committee's ranges tee's current intentions. Members also for 1993. Under prevailing circum- noted that a change in policy, should Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 80th Annual Report, 1993 one be called for by intermeeting devel- 1993 after registering sizable gains late last opments, would represent a shift in the year. Incoming data on orders and shipments of nondefense capital goods suggest a further direction of policy and would be likely brisk advance in outlays for business equipto have an especially pronounced ment, while nonresidential construction has impact on financial markets. remained soft. The nominal U.S. merchan- At the conclusion of the Committee's dise trade deficit was essentially unchanged discussion, a majority of the members in January from its average level in the fourth quarter, but both exports and imports indicated that they favored a directive were substantially lower. Increases in wages that called for maintaining the existing have remained subdued, but recent advances degree of pressure on reserve positions. in consumer and producer prices have been These members also expressed a prefer- larger than those recorded in the latter part of ence for a directive that did not include 1992. a presumption about the likely direction Short-term interest rates have changed little since the Committee meeting in early of any adjustment to policy during the February while bond yields have fallen intermeeting period. Accordingly, in the appreciably on balance. In foreign exchange context of the Committee's long-run markets, the trade-weighted value of the dolobjectives for price stability and sustain- lar in terms of the other G-10 currencies able economic growth, and giving care- declined on balance over the intermeeting period. ful consideration to economic, financial, M2 and M3 contracted in January and and monetary developments, the Com- February, apparently reflecting transitory mittee decided that slightly greater or factors and further shifts into market investslightly lesser reserve restraint would be ments. Total domestic nonfinancial debt acceptable during the intermeeting appears to have expanded somewhat further period. The reserve conditions contem- in January. The Federal Open Market Committee plated at this meeting were expected to seeks monetary and financial conditions that be consistent with a resumption of modwill foster price stability and promote erate growth in M2 and M3 over the sustainable growth in output. In furtherance second quarter. of these objectives, the Committee at its meeting in February established ranges for At the conclusion of the meeting, the growth of M2 and M3 of 2 to 6 percent and Federal Reserve Bank of New York was Vi to 4!/2 percent respectively, measured authorized and directed, until instructed from the fourth quarter of 1992 to the fourth otherwise by the Committee, to execute quarter of 1993. The Committee expects that transactions in the System account in developments contributing to unusual velocaccordance with the following domestic ity increases are likely to persist during the year. The monitoring range for growth of policy directive: total domestic nonfinancial debt was set at 4V2 to 8V2 percent for the year. The behavior The information reviewed at this meeting of the monetary aggregates will continue to suggests that economic activity has increased be evaluated in the light of progress toward at a more moderate pace in the early months price level stability, movements in their of 1993 after expanding robustly in the velocities, and developments in the economy fourth quarter. Total nonfarm payroll and financial markets. employment registered a sharp increase in In the implementation of policy for the February following generally small advances immediate future, the Committee seeks to in previous months, and the civilian unem- maintain the existing degree of pressure on ployment rate edged down further to 7.0 per- reserve positions. In the context of the Comcent. Industrial production continued to post mittee's long-run objectives for price stabilsolid gains in January and February. Retail ity and sustainable economic growth, and sales increased somewhat further over the giving careful consideration to economic, first two months of the year after a fourth- financial, and monetary developments, quarter surge. Housing starts slipped in early slightly greater reserve restraint or slightly Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 135 lesser reserve restraint would be acceptable showing through in commodity and finin the intermeeting period. The contemplated ished goods prices. He believed that a reserve conditions are expected to be consisclear signal of the Committee's committent with a resumption of moderate growth ment to price level stability would stabiin the broader monetary aggregates over the second quarter. lize the price of gold along with the exchange value of the dollar and thereby Votes for this action: Messrs. Greenspan, provide a climate for further reductions Corrigan, Boehne, Keehn, Kelley, in long- and intermediate-term interest LaWare, McTeer, Mullins, Ms. Phillips, rates. Such an approach to policy not and Mr. Stern. Votes against this action: Messrs. Angell and Lindsey. only would assure a continuing disinflationary trend and eventual price stabil- Messrs. Angell and Lindsey indicated ity, with very favorable implications for that their concerns about the outlook for financial markets and economic growth, inflation prompted them to favor an but it would in his view preclude an immediate move to tighten reserve con- unsettling tendency for the debt markets ditions. In their view, such an action to weaken every time newly available was desirable not only to arrest the pos- data appeared to suggest that economic sible emergence of greater inflation but growth was strengthening and that furespecially to promote further disinfla- ther monetary policy tightening actions tion. They were persuaded that mone- therefore might be in the offing. In sum, tary policy currently was overly accom- such a policy would provide for the modative as suggested by various achievement of the Committee's objecindicators such as recent data on con- tive of sustaining progress toward price sumer and producer prices, the upswing stability, which he believed was necesin commodity prices, the low level of sary for maintaining recent higher labor real short-term interest rates, and what productivity, a permanently higher savin their judgment was a relatively ing rate, and a prolonged period of ecodepressed foreign exchange value of the nomic expansion. dollar given the comparative strength It was agreed that the next meeting of of the U.S. economy and international the Committee would be held on Tuesinterest rate trends. They noted that the day, May 18, 1993. current federal funds rate was probably The meeting adjourned. not sustainable in the long term and that a tightening move at this time might Normand Bernard well avoid the need for more sizable Deputy Secretary and potentially disruptive policy actions later. Meeting Held on Mr. Angell also emphasized the risks May 18, 1993 associated with any policy that did not A meeting of the Federal Open Market firmly maintain a disinflationary trend. Committee was held in the offices of the As he interpreted historical precedents, Board of Governors of the Federal the typical result of a policy that tolerated some inflation was an eventual rise Reserve System in Washington, D.C., in inflation leading to permanently on Tuesday, May 18, 1993, at 9:00 a.m. higher interest rates with adverse effects Present: on economic activity. Indeed, he sup- Mr. Greenspan, Chairman ported unpegging the federal funds rate Mr. Corrigan, Vice Chairman to counter incipient price pressures Mr. Angell Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

136 80th Annual Report, 1993 Mr. Boehne Ms. Low, Open Market Secretariat Mr. Keehn Assistant, Division of Monetary Mr. Kelley Affairs, Board of Governors Mr. LaWare Mr. Lindsey Messrs. T. Davis, Dewald, and Goodfriend, Mr. McTeer Senior Vice Presidents, Federal Reserve Mr. Mullins Banks of Kansas City, St. Louis, and Ms. Phillips Richmond respectively Mr. Stern Ms. Browne, Mr. Judd, and Messrs. Broaddus, Jordan, Forrestal, Mses. Rosenbaum and White, and Parry, Alternate Members Vice Presidents, Federal Reserve Banks of the Federal Open Market of Boston, San Francisco, Atlanta, and Committee New York respectively Messrs. Hoenig, Melzer, and Syron, Mr. Eberts, Assistant Vice President, Presidents of the Federal Reserve Federal Reserve Bank of Cleveland Banks of Kansas City, St. Louis, and Boston respectively By unanimous vote, the minutes for the meeting of the Federal Open Market Mr. Bernard, Deputy Secretary Committee held on March 23, 1993, Mr. Coyne, Assistant Secretary Mr. Gillum, Assistant Secretary were approved. Mr. Mattingly, General Counsel The Deputy Manager for Foreign Mr. Prell, Economist Operations reported on developments in foreign exchange markets and on Sys- Messrs. R. Davis, Lang, Lindsey, tem transactions in foreign currencies Promisel, Rolnick, Rosenblum, during the period March 23, 1993, Scheld, Siegman, and Slifman, Associate Economists through May 17, 1993. By unanimous vote, the Committee ratified these Mr. McDonough, Manager of the transactions. System Open Market Account The Manager of the System Open Ms. Greene, Deputy Manager for Market Account reported on develop- Foreign Operations ments in domestic financial markets and Ms. Lovett, Deputy Manager for Domestic Operations on System open market transactions Mr. Ettin, Deputy Director, Division of in government securities and federal Research and Statistics, Board of agency obligations during the period Governors March 23, 1993, through May 17, 1993. Mr. Madigan, Associate Director, By unanimous vote, the Committee rati- Division of Monetary Affairs, fied these transactions. Board of Governors The Committee then turned to a dis- Mr. Stockton, Associate Director, Division of Research and cussion of the economic outlook and the Statistics, Board of Governors implementation of monetary policy over Mr. Hooper, Assistant Director, the intermeeting period ahead. A sum- Division of International Finance, Board of Governors Mr. Small,7 Section Chief, Division of Monetary Affairs, Board of and the Conduct of Monetary Policy: Conference Governors Proceedings," edited by Marvin Goodfriend and David Small. This two-volume study has been designated Working Studies 1, Parts 1 and 2, of 7. Attended portion of meeting relating to a the Federal Reserve Board's Finance and Ecoreport on a study entitled "Operating Procedures nomic Discussion Series. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings May 137 y mary of the economic and financial Part of the recent sluggishness reflected information available at the time of the a decline in utility output following a meeting and of the Committee's discus- weather-related runup in February, but sion is provided below, followed by the manufacturing output also grew more domestic policy directive that was ap- slowly. In the transportation industry, proved by the Committee and issued to motor vehicle assemblies edged down the Federal Reserve Bank of New York. and production of civilian aircraft The information reviewed at this remained weak over March and April. meeting suggested that the pace of the Elsewhere, the output of consumer economic expansion had slowed in goods other than motor vehicles was recent months. Business outlays for about unchanged, and the continuing durable equipment had remained strong, strength in the computer industry conbut consumer spending had been quite trasted with sluggish production of other sluggish, reflecting limited gains in types of business equipment. Total utiliemployment and real labor income and zation of industrial capacity changed diminished optimism about near-term little over the two months. economic prospects. Additionally, U.S. Retail sales increased substantially in exports continued to be constrained by April, reversing the weather-related the disappointing performance of the decline in March; automotive dealers major foreign industrial economies. reported large sales gains in April, and Available data indicated relatively mod- expenditures at other retail outlets est growth in payroll employment and retraced part of the March decrease. For industrial production over recent the year to date, however, retail sales months. Despite the considerable slack had been lackluster after the strong in the economy, increases in wages and increases of the latter part of 1992. prices had been appreciably larger thus Housing starts picked up in April; both far in 1993 than in the second half of single-family and multifamily starts last year. rebounded from weather-depressed Total nonfarm payroll employment March levels. rose only slightly on balance over March Business fixed investment advanced and April after registering sizable further during the first quarter of 1993, increases in the first two months of the with another sizable rise in outlays for year. Strong job gains in the services equipment outweighing continued industry, notably in business and health weakness in nonresidential construction. services, were offset in considerable Shipments of nondefense capital goods measure by job losses in manufacturing during the first quarter were paced by and construction in March and April. In another sharp increase in shipments of manufacturing, reductions in payrolls office and computing equipment. By were widespread, with particularly large contrast, business spending for transpordeclines at manufacturers of transporta- tation equipment generally exhibited tion equipment. Construction employ- little strength; although sales of heavy ment recovered only partially in April trucks continued to trend up, outlays for from the weather-related decline in complete aircraft apparently edged March. The civilian unemployment rate down further. Recent data on orders for remained at 7.0 percent. nondefense capital goods other than air- Industrial production, after having craft suggested further expansion in posted solid gains in previous months, business spending for equipment in the was little changed in March and April. near term. Nonresidential construction Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

138 80th Annual Report, 1993 activity was mixed in the first quarter. weakness in economic activity in conti- Office construction declined consider- nental Europe and Japan through the ably further in response to the depres- first quarter. Elsewhere, the recovery in sing effects of a continuing overhang of the United Kingdom appeared to be unoccupied space. On the other hand, firming, and growth continued at a building activity in the public utilities modest pace in Canada. sector continued to trend up, and the Producer prices of finished goods rose construction of commercial structures more rapidly in March and April, partly other than office buildings increased for as a result of sharp increases in the a second consecutive quarter. prices of finished energy goods in March Business inventories appeared to have and in the prices of finished foods in risen in the first quarter. Manufacturing April. Excluding the food and energy inventories expanded in both February components, producer prices advanced and March after a series of declines that over the first four months of 1993 at a began early in the fall; much of the faster pace than in 1992. At the conrecent advance occurred in the durable sumer level, the increase in prices of goods sector, where shipments were nonfood, non-energy items over the strong, and the ratio of inventories to March-April period was smaller than shipments fell for manufacturing as a the outsized change over the first two whole. Wholesale inventories increased months of the year; nevertheless, averappreciably in March. However, the aging over the first four months of the inventory-to-sales ratio for the sector year, the rate of increase in consumer moved up only slightly, and it remained prices was higher than in 1992. The near the low end of its range over the deceleration of labor costs also appeared past two years. In the retail sector, avail- to have stalled in 1993. Average hourly able data indicated that inventories rose earnings of production or nonsuperviappreciably over January and February sory workers had grown more rapidly but that the inventory-to-sales ratio thus far this year than in 1992, and total remained in the narrow range that had hourly compensation of private industry prevailed over the preceding year. workers rose at a faster pace in the first The nominal U.S. merchandise trade quarter of 1993 than in any quarter of deficit in February was unchanged from last year. its January level, reflecting little change At its meeting on March 23, the Comin total exports and total imports. For mittee adopted a directive that called for January-February combined, however, maintaining the existing degree of presthe trade deficit was slightly below its sure on reserve positions and that did average level for the fourth quarter, with not include a presumption about the both exports and imports down consid- likely direction of any adjustments to erably from their fourth-quarter levels. policy during the intermeeting period. Much of the drop in exports reflected a Accordingly, the directive indicated that reversal of an earlier, largely transitory in the context of the Committee's longrunup in aircraft and automotive prod- run objectives for price stability and susucts. The decline in imports was spread tainable economic growth, and giving across all major trade categories; careful consideration to economic, imports of aircraft and miscellaneous financial, and monetary developments, industrial supplies dropped appreciably, slightly greater reserve restraint or and imports of consumer goods fell fur- slightly lesser reserve restraint would ther. Recent indicators pointed to further be acceptable during the intermeeting Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 139 period. The reserve conditions associ- ated considerably more against the Japaated with this directive were expected to nese yen than against the German mark. be consistent with a resumption of mod- A variety of factors contributed to the erate growth in M2 and M3 over the dollar's weakness, including indications second quarter. of renewed sluggishness in U.S. eco- Open market operations during the nomic activity, diminished prospects for intermeeting period were directed a fiscal stimulus package, and market toward maintaining the existing degree perceptions over much of the interof pressure on reserve positions. meeting period of limited official sup- Expected levels of adjustment plus sea- port for concerted actions to support the sonal borrowing were raised during the dollar against the yen. After falling to a period in anticipation of some increase historical low against the yen in late in seasonal borrowing. Adjustment plus April, the dollar tended to stabilize folseasonal borrowing was near or a little lowing Treasury Secretary Bentsen's above expected levels, except for a clarification of the Administration's surge at the end of the first quarter, and exchange rate policy and intervention the federal funds rate remained close to purchases of dollars against yen in a the 3 percent level that had prevailed for coordinated operation. Later in the an extended period. period, the dollar rose somewhat against Short-term interest rates changed European currencies as the outlook for little over the period since the March economic activity in Europe became meeting. Long-term rates rose consider- more pessimistic. ably early in the period when a sharp M2 contracted slightly on balance increase in average hourly earnings and over March and April, while M3 was some upward pressure on commodity unchanged over the two months; both prices sparked fears among market par- monetary aggregates increased substanticipants of a buildup in inflation pres- tially in early May. Much of the weaksures. Subsequently, despite growing ness in M2 over the March-April period doubts about the fate of the deficit owed to a smaller volume of nonwithreduction program, bond yields declined held tax payments in April of this year in response to a series of more favorable that reduced the need for a buildup readings on price behavior and to indi- in deposits to fund these payments. cations of a slowing of the economic Abstracting from this temporary depresexpansion. Adverse news about con- sant, weak underlying growth in M2 sumer and producer prices rekindled continued to reflect the relatively attracinflation concerns late in the period, and tive returns available on capital market bond rates once again moved higher. On instruments such as bond and stock balance, most long-term market rates mutual funds, which experienced heavy rose somewhat over the period. Despite inflows during the two-month period. unexpectedly favorable earnings reports Total domestic nonfinancial debt for many firms, major indexes of stock expanded somewhat further through prices were narrowly mixed over the March. period. The staff projection prepared for this In foreign exchange markets, the meeting suggested that economic activtrade-weighted value of the dollar in ity would grow at a moderate pace and terms of the other G-10 currencies that such growth would foster a gradual declined somewhat on balance over the reduction in margins of unemployed intermeeting period. The dollar depreci- labor and capital. The projection contin- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

140 80th Annual Report, 1993 ued to incorporate the essential elements The increase seemed to reflect tempoof the Administration's fiscal package, rary factors and a worsening in inflationexcluding that portion of the short-run ary expectations rather than any signifistimulus initiative that seemed unlikely cant change in economic fundamentals. to be enacted by the Congress. Although Accordingly, it was premature in the the outlook for fiscal policy now seemed view of many members to conclude that somewhat more contractionary than ear- the inflationary trend had tilted upward. lier, the sizable declines in long-term Even so, higher inflation expectations, interest rates that had occurred in recent if sustained, would be detrimental to months were expected to support sub- economic performance, and the risks of stantial additional gains in business and an uptrend in inflation clearly had residential investment. Moreover, the increased. increasingly favorable financial environ- In their review of business development associated with expected further ments across the nation, members coneasing of credit supply constraints and tinued to report uneven conditions rangthe ongoing strengthening of balance ing from apparently moderate gains in sheets would tend to buttress private some parts of the country to mixed or spending on housing, consumer dura- marginally declining activity in others. bles, and business equipment. Increases Business confidence had deteriorated in in export demand would be damped many areas and firms were trimming or in the near term by the continuing putting on hold new or expanded spendweakness in the economies of the major ing programs pending a resolution of industrialized countries. The persisting federal tax and spending proposals, slack in resource utilization was including prospective health care expected to be associated with a return reform, and the outcome of proposed to more subdued price increases after a tax legislation in some states as well. spurt earlier in the year. Cautious business attitudes were In the Committee's discussion of cur- reflected in continuing efforts to conrent and prospective economic condi- strain costs and to hold down or reduce tions, the members focused with some employment levels, notably of permaconcern on the evidence of a slower nent workers in light of the large noneconomic expansion and a higher rate of wage costs associated with full-time inflation since late 1992. While recent workers. Accordingly, while some job indicators of economic activity were dis- growth was occurring, especially outappointing, the expansion nonetheless side major firms and the defense sector, appeared to have sustainable momentum business firms generally appeared disand the members generally viewed mod- posed to continue to meet increases in erate growth in line with, or perhaps a demand through overtime work and bit below, their February forecasts as a temporary workers, and members anticireasonable expectation. At the same pated that such attitudes were likely time, several emphasized that the out- to persist in the absence of a major look was subject to substantial uncer- improvement in business confidence. tainty stemming to an important extent As reflected in the available data for from the unsettled course of legislation the national economy, anecdotal reports aimed at reducing the federal deficit. from around the country suggested gen- Members expressed particular concern erally lackluster retail sales over the first about the rise in various measures of four months of the year. To an extent, inflation over the past several months. this development probably involved Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 141 some retrenchment in consumer spend- and the associated prospect of little or ing following an unsustainable surge no growth in U.S. exports to such counduring the latter part of 1992. In some tries. While total U.S. exports might parts of the country, unusually severe continue to expand, reflecting sizable weather conditions also had served to gains in some parts of the world, imports hold down retail sales earlier this year, probably would grow at a somewhat and recovery from that slowdown had faster pace, given moderate expansion tended to be limited thus far, especially in domestic demand in line with the outside the automotive sector. Looking members' expectations. At the same ahead, the members continued to antici- time, members expressed concern about pate that consumer spending would pro- the potential impact of growing protecvide moderate support for a sustained tionist sentiment on current trade negotieconomic expansion. ations and on the longer-run outlook for Despite the cautious business atti- domestic industries and parts of the tudes about the economic outlook, country that relied on foreign trade. spending for business equipment had With regard to the inflation situation, continued to help maintain the expan- members commented that it remained sion. Encouraged in part by relatively difficult to find a satisfactory explalow interest rates, receptive financial nation for the faster-than-projected markets, and the more aggressive lend- increases in price measures thus far this ing policies of some depository institu- year. Although temporary anomalies tions, many firms were upgrading equip- seemed to be involved, including meament to reduce costs and improve their surement problems and special factors product offerings. Concurrently, how- boosting some prices, higher inflation ever, numerous firms reported that they expectations also might have been playwere holding off on making major new ing a key role. The latter seemed to have investment commitments and in some intensified in the last month or two, cases were revising down earlier expan- perhaps as a result of growing concerns sion plans in light of prevailing eco- that significant deficit-reduction legislanomic uncertainties, notably those gen- tion might not be enacted. Strong comerated by the current legislative debate petitive pressures in many markets, about federal taxes and spending. including competition from foreign Nonresidential construction remained producers, still appeared to be restrainuneven and on the whole relatively sub- ing or precluding price increases by dued across the nation. The construction many business firms, but efforts to of new office structures was likely to raise prices seemed to be encountering stay depressed in much of the country as somewhat less resistance recently than overcapacity continued to be worked earlier in the economic expansion. down, but members saw indications of Some price increases appeared to be some strengthening in industrial and associated with the earlier surge in commercial building activity and in pub- demand, and in the case of one key lic works projects in some areas. industry higher prices had been facili- Turning to the outlook for the tated by the implementation of import nation's trade balance, some members restrictions. The downtrend in labor referred to quite gloomy assessments compensation inflation also seemed to from business contacts and other sources have stalled in recent months. Against regarding current economic conditions this background, a considerable degree in a number of major industrial nations of uncertainty surrounded the outlook Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

142 80th Annual Report, 1993 for inflation and the members differed to unchanged degree of pressure on some extent with regard to the most reserve positions at this time. likely outcome. A number of members, In the course of the Committee's diswhile they did not rule out the possibil- cussion, the members took account of a ity of a more favorable result, stressed staff analysis that pointed to a considerthe risk that a faster rate of inflation able pickup in the growth of M2 and M3 might well tend to be sustained. Others over the months of May and June. Such gave more emphasis to the still consider- strengthening, which appeared to have able slack in labor and product markets emerged in early May, was associated and to the restrained growth in broad in part with the reversal of earlier taxmeasures of money and credit. In this related distortions and with a surge in view, an inflation rate in the quarters prepayments of mortgage-backed secuahead more in line with their earlier rities. Monetary growth was expected to forecasts was still a reasonable expecta- revert to a more modest pace over subtion even though the average rate for the sequent months, and the members recyear as a whole was likely to be higher ognized that in any event the interprethan they had forecast at the start of the tion of monetary growth rates needed to year. be approached with considerable cau- In the Committee's discussion of pol- tion in a period when traditional relaicy for the intermeeting period ahead, tionships of such growth to aggregate many of the members commented that measures of economic performance recent price and wage developments were not reliable. In present circumwere troubling but did not point per- stances, M2 and M3 no longer seemed suasively at this juncture toward an to be good barometers of underlying extended period of higher inflation. In liquidity, which appeared to be ample. light of underlying economic and finan- One member expressed the view that the cial conditions, the upturn in inflation relatively robust growth of Ml and expectations and the somewhat quick- reserves served as a better indicator of ened pace of inflation might well prove the thrust of monetary policy than did to be temporary. The economy was the broader monetary aggregates. expanding, but the pace had slowed in In the view of a majority of the memrecent months. On the other hand, the bers, wage and price developments over potential for a sustained increase in the recent months were sufficiently worrirate of inflation could not be dismissed. some to warrant positioning policy for a Waiting too long to counter any emerg- move toward restraint should signs of ing uptrend in inflation or further wors- intensifying inflation continue to multiening in inflationary expectations would ply. In addition to new information on exacerbate inflationary pressures and prices and costs, such signs could require more substantial and more dis- include developments in markets ruptive policy moves later. Indeed, in affected by inflation psychology, such as one view sensitive commodity prices those for bonds, foreign exchange, and and other key measures of inflation sensitive commodities, all of which already indicated the need for a prompt would need to be monitored carefully. move toward restraint, especially in the These members supported a directive context of the Committee's objective that incorporated a greater predilection of fostering progress toward price sta- to tighten than to ease over the interbility. However, the other members all meeting period. Given the special nature supported a proposal to maintain an of current inflation concerns and atten- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 143 dant uncertainties, however, the Com- to the emergence of higher inflation. mittee agreed with a proposal by the Nonetheless, all but one of these mem- Chairman that an intermeeting consulta- bers could accept an asymmetric direction would be appropriate in the event tive on the understanding that the Comthat a tightening move were to be con- mittee would have a chance to discuss templated during this period. If a policy any possible policy action. tightening action were not needed, an At the conclusion of the Committee's asymmetric directive would nonetheless discussion, all but two of the members underscore the Committee's concern indicated that they preferred or could about recent inflation readings and its accept a directive that called for mainjudgment that a policy to encourage taining the existing degree of pressure progress toward price stability would on reserve positions and that included a promote sustained economic growth. bias toward possible firming of reserve In the event that a tightening action conditions during the intermeeting became necessary, such action could period. Accordingly, in the context of help to moderate inflationary expecta- the Committee's long-run objectives for tions, with positive implications over price stability and sustainable economic time for long-term interest rates and the growth, and giving careful consideration performance of the economy. Monetary to economic, financial, and monetary policy would still be stimulative after a developments, the Committee decided modest tightening move in that such a that slightly greater reserve restraint move would leave short-term interest would be acceptable or slightly lesser rates close to or even below their year- reserve restraint might be acceptable ago levels in real terms, given the during the intermeeting period. The interim rise in inflation. reserve conditions contemplated at this Some members preferred to retain a meeting were expected to be consistent directive that did not incorporate a pre- with appreciable growth in the broader sumption about the likely direction of a monetary aggregates over the second change in policy, if any, during the inter- quarter. meeting period. They were concerned At the conclusion of the meeting, the that adopting a biased directive might Federal Reserve Bank of New York was prove to be an overreaction to tempo- authorized and directed, until instructed rary factors and to a short-lived upturn otherwise by the Committee, to execute in inflationary sentiment that was not transactions in the System account in warranted by underlying economic con- accordance with the following domestic ditions. They noted that, if called for policy directive: by intermeeting developments, a move toward restraint could be implemented The information reviewed at this meeting suggests that the economic expansion has from a symmetric directive. More funslowed in recent months. Total nonfarm paydamentally, they believed that the cirroll employment rose only slightly over cumstances surrounding the recent per- March and April after registering sizable formance of the economy and the increases earlier in the year, and the civilian uncertainties about price developments unemployment rate remained at 7.0 percent. suggested the need for considerable cau- Industrial production was little changed in March and April after posting solid gains in tion before any policy tightening was previous months. Retail sales increased subimplemented and that such a policy stantially in April but were about unchanged move should be carried out only in the on balance for the year to date. Housing light of information that pointed clearly starts picked up in April. Incoming data on Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 80th Annual Report, 1993 orders and shipments of nondefense capital growth in the broader monetary aggregates goods suggest a further brisk advance in over the second quarter. outlays for business equipment, while nonresidential construction has remained soft. Votes for this action: Messrs. Greenspan, The nominal U.S. merchandise trade deficit Corrigan, Keehn, Kelley, LaWare, Lindin January-February was slightly below its sey, McTeer, Mullins, Ms. Phillips, and average level in the fourth quarter. Increases Mr. Stern. Votes against this action: in wages and prices have been appreciably Messrs. Angell and Boehne. larger this year than in the second half of 1992. Mr. Angell dissented because he Short-term interest rates have changed little since the Committee meeting on believed that the persisting indications March 23 while bond yields have risen of rising inflation and the related deterisomewhat. In foreign exchange markets, the oration in inflationary psychology called trade-weighted value of the dollar in terms for a prompt move to tighten monetary of the other G-10 currencies declined somepolicy. In his view, low real interest what on balance over the intermeeting period. rates, a very steep yield curve, a surpris- After contracting during the first quarter, ingly weak exchange value of the dollar M2 was unchanged in April while M3 turned along with the confirming price behavup; both aggregates increased substantially ior of inflation-sensitive commodities in early May. Total domestic nonfinancial such as gold underscored the need for debt expanded somewhat further through Committee action to signal the System's March. The Federal Open Market Committee continuing commitment to the eventual seeks monetary and financial conditions that achievement of price stability. In his will foster price stability and promote sus- opinion, progress toward lower inflation tainable growth in output. In furtherance of was not likely in 1993 and 1994 in the these objectives, the Committee at its meetabsence of a monetary policy that was ing in February established ranges for sufficiently restrictive to check inflationgrowth of M2 and M3 of 2 to 6 percent and xh to AVi percent respectively, measured ary expectations. He added that history from the fourth quarter of 1992 to the fourth demonstrated that a monetary policy quarter of 1993. The Committee expects that focused primarily on developments in developments contributing to unusual velocthe real economy ran the risk of waiting ity increases are likely to persist during the too long to counter a worsening in inflayear. The monitoring range for growth of total domestic nonfinancial debt was set at tionary expectations and thus requiring 4V2 to 8V2 percent for the year. The behaviormore substantial and possibly more disof the monetary aggregates will continue to ruptive policy changes later. be evaluated in the light of progress toward Mr. Boehne supported a steady policy price level stability, movements in their velocities, and developments in the economy course, but he dissented because he and financial markets. objected to a directive that was biased In the implementation of policy for the toward tightening. Although recent immediate future, the Committee seeks to developments suggested that inflation maintain the existing degree of pressure on would be somewhat higher and real reserve positions. In the context of the Comgrowth somewhat lower during the year mittee's long-run objectives for price stability and sustainable economic growth, and than had been expected earlier, he did giving careful consideration to economic, not believe recent data indicated a funfinancial, and monetary developments, damental shift in the outlook for inflaslightly greater reserve restraint would or tion or the economy. He was concerned slightly lesser reserve restraint might be that adopting a biased directive might acceptable in the intermeeting period. The contemplated reserve conditions are prove to be an overreaction to tempoexpected to be consistent with appreciable rary factors affecting the inflation rate Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 145 and inflationary sentiment. In his view, Mr. Oltman9 underlying economic conditions did not Ms. Phillips Mr. Stern point toward an extended period of higher inflation. While the pace of Messrs. Broaddus, Jordan, Forrestal, economic growth conceivably could and Parry, Alternate Members of quicken, it seemed just as likely that the the Committee tempo of business and consumer spending could diminish in the face of uncer- Messrs. Hoenig, Melzer, and Syron, tainty about the stance of fiscal policy, Presidents of the Federal Reserve Banks of Kansas City, St. Louis, particularly with regard to potential tax and Boston respectively increases. Given these uncertainties, he had a strong preference for keeping an Mr. Kohn, Secretary and Economist open mind about possible Committee Mr. Bernard, Deputy Secretary action during the intermeeting period Mr. Coyne, Assistant Secretary and, accordingly, favored a balanced Mr. Gillum, Assistant Secretary Mr. Mattingly, General Counsel policy directive. Mr. Patrikis, Deputy General Counsel It was agreed that the next meeting of Mr. Prell, Economist the Committee would be held on Mr. Truman, Economist Tuesday-Wednesday, July 6-7, 1993. The meeting adjourned at 1:50 p.m. Messrs. R. Davis, Lang, Lindsey, Promisel, Rolnick, Rosenblum, Normand Bernard Scheld, Siegman, Simpson, and Slifman, Associate Economists Deputy Secretary Mr. McDonough, Manager of the Meeting Held on System Open Market Account Ms. Greene, Deputy Manager for July 6-7, 1993 Foreign Operations A meeting of the Federal Open Market Ms. Lovett, Deputy Manager for Domestic Operations Committee was held in the offices of the Mr. Madigan, Associate Director, Board of Governors of the Federal Division of Monetary Affairs, Reserve System in Washington, D.C., Board of Governors on Tuesday, July 6, 1993, at 2:30 p.m. Mr. Stockton, Associate Director, and continued on Wednesday, July 7, Division of Research and 1993, at 9:00 a.m. Statistics, Board of Governors Ms. Danker, Assistant Director, Division of Monetary Affairs, Present- Board of Governors Mr. Greenspan, Chairman Mr. Mullins 8 Messrs. Small,10 and Whitesell,n Section Chiefs, Division of Mr. Angell Mr. Boehne Mr. Keehn Mr. Kelley 9. First Vice President, Federal Reserve Bank Mr. LaWare of New York, attending as alternate member for Mr. Lindsey Mr. Corrigan. Mr. McTeer 10. Attended portion of meeting relating to a discussion of the uses of a broad monetary aggregate that includes bond and stock mutual funds. 11. Attended portion of meeting relating to the Committee's discussion of the economic outlook 8. Acting Vice Chairman in Mr. Corrigan's and its longer-run growth objectives for monetary absence. and debt aggregates. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 80th Annual Report, 1993 Monetary Affairs, Board of the economic and financial information Governors available at the time of the meeting and Ms. Kusko,11 Senior Economist, of the Committee's discussion is pro- Division of Research and vided below, followed by the domestic Statistics, Board of Governors Ms. Low, Open Market Secretariat policy directive that was approved by Assistant, Division of Monetary the Committee and issued to the Federal Affairs, Board of Governors Reserve Bank of New York. The information reviewed at this Messrs. Beebe, J. Davis, T. Davis, meeting provided a mixed reading on Goodfriend, and Ms. Tschinkel, the economy, but on balance the avail- Senior Vice Presidents, Federal Reserve Banks of San Francisco, able data suggested that the expansion Cleveland, Kansas City, had picked up somewhat during the sec- Richmond, and Atlanta ond quarter from the very slow pace of respectively the first quarter. Employment statistics, while tending to soften in June, pointed Mr. McNees, Vice President, Federal to considerable strength for the second Reserve Bank of Boston, Messrs. quarter as a whole, although recent Coughlin and Guentner, Assistant Vice Presidents, Federal Reserve spending indicators suggested a much Banks of St. Louis and New York more moderate expansion. Consumer respectively and producer price inflation slowed substantially in May, but prices had risen at By unanimous vote, the minutes for a faster rate over the first five months of the meeting of the Federal Open Market the year than over the second half of Committee held on May 18, 1993, were 1992. approved. Total nonfarm payroll employment The Manager of the System Open changed little in June after registering Market Account reported on develop- substantial gains in April and May. For ments in foreign exchange markets and the second quarter as a whole, the on System transactions in foreign cur- increase in employment matched that of rencies during the period May 18, 1993, the first quarter. Manufacturing employthrough July 6, 1993. By unanimous ment, which was about unchanged over vote, the Committee ratified these the first quarter, declined somewhat in transactions. June for a third straight month. Con- The Deputy Manager for Domestic struction payrolls edged lower after ris- Operations reported on developments in ing appreciably over the preceding two domestic financial markets and on Sys- months, and job gains in the services tem open market transactions in govern- industries were considerably smaller in ment securities and federal agency obli- June than those recorded earlier in the gations during the period May 18, 1993, year. The civilian unemployment rate through July 6, 1993. By unanimous backed up to 7.0 percent in June. vote, the Committee ratified these Industrial production increased in transactions. May at the relatively subdued rate The Committee then turned to a dis- recorded in March and April; for June, cussion of the economic outlook, the the limited data available suggested a ranges for the growth of money and debt modest decline in output. In May, in 1993 and 1994, and the implementa- assemblies of motor vehicles declined tion of monetary policy over the inter- after holding steady over the two previmeeting period ahead. A summary of ous months. Among other manufactured Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July HI goods, the production of business equip- ing rose over the two months, while ment, led by computers and industrial construction of non-office commercial equipment, recorded another brisk structures was little changed and indusadvance whereas the output of non-auto trial building activity was down sharply. consumer goods continued to expand Business inventories recorded another sluggishly. Total utilization of industrial appreciable rise in April, and available capacity was unchanged in May for a data pointed to a further increase in third straight month. May. In manufacturing, inventory accu- Real personal consumption expendi- mulation stepped up in April and May tures edged higher in May after a sizable after changing little in the first quarter; rebound in April from weather-related the ratio of stocks to shipments edged weakness. On balance, however, con- higher in each month and was only sumer spending had increased only slightly above the very low level slightly thus far this year. Outlays for reached early in 1993. In the wholesale new cars and light trucks advanced in trade sector, inventories advanced at a May to their highest level since January slower rate in May than in April, and the 1990 and apparently remained near that inventory-to-sales ratio fell to the low elevated level in June. In addition, end of the range for the past three years. spending for non-energy services had The buildup of retail inventories slowed increased substantially in recent months. considerably in April, and with sales By contrast, energy consumption had rebounding from the effect of March fallen from the especially high levels of storms, the inventory-to-sales ratio late winter, and outlays for nondurable declined for the retail sector. Nonethegoods in May were still below their less, the ratio still was near the high end fourth-quarter level. Housing starts of its range for the past several years. increased in April and May from a The nominal U.S. merchandise trade depressed first-quarter pace, with most deficit for April was unchanged from of the rise attributable to starts of single- March, with both imports and exports family dwellings. declining slightly. However, the April Shipments of nondefense capital deficit was substantially above the avergoods in May retraced only a portion age for the first quarter, reflecting sizof a sizable April decline. However, for able increases in imports of capital the two months combined, shipments of goods, automotive products, consumer such goods were above the average for goods, and oil. The value of exports in the first quarter and apparently remained April was only slightly above the firston an upward trend that began early in quarter average. Recent indicators 1992. The upward trajectory for spend- pointed to further weakness in economic ing on machinery and on electrical and activity in continental Europe thus far communications equipment seemed to this year. By contrast, economic recovhave reflected improved cash flows for ery appeared to be continuing in the the business sector and a declining cost United Kingdom and Canada. In Japan, of capital, and incoming data suggested economic activity was up appreciably in that outlays for business equipment the first quarter, but available data sugwould increase further over the months gested that this strength had not carried ahead. Nonresidential construction over to the second quarter. activity was unchanged over the first Changes in producer and consumer quarter but picked up slightly on bal- prices were small in May following sizance over April and May. Office build- able increases earlier in the year. Pro- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

148 80th Annual Report, 1993 ducer prices of finished goods were sonal borrowing during the period in unchanged in May, as declines in prices anticipation of stepped-up demand for of finished consumer food and energy seasonal credit during the crop-growing products offset small advances in prices season; borrowing averaged near of other finished goods. Excluding the expected levels over the period. The fedfood and energy components, producer eral funds rate remained close to 3 perprices had risen more rapidly thus far in cent over the period, although quarter- 1993 than they had in the second half of end pressures in money markets pushed 1992. At the consumer level, prices of the rate higher for a brief period at the items other than food and energy rose end of June. only slightly in May, but this measure of Other short-term interest rates also inflation also had risen faster this year were little changed on balance over the than in the second half of last year. period since the May meeting. Early in Labor costs likewise had evidenced a the period, unexpectedly robust employquickened pace of increases this year. ment data for May, coupled with media Average hourly earnings of production reports about the monetary policy stance or nonsupervisory workers rose substan- adopted at the May meeting, led to some tially in May after edging lower in April, upward pressure on money market interand these earnings had grown more rap- est rates. Subsequently, however, this idly over the first five months of 1993 pressure abated in response to the than over the preceding six months. release of data suggesting slower infla- At its meeting on May 18, the Com- tion and a somewhat weaker outlook for mittee adopted a directive that called the economy. These developments along for maintaining the existing degree of with the progress in the Congress pressure on reserve positions but that toward adoption of a deficit-reduction included a tilt toward possible firming package fostered a decline in bond of reserve conditions during the inter- yields; buoyed by the drop in yields, meeting period. Accordingly, the direc- major indexes of stock prices rose over tive indicated that in the context of the the intermeeting period in spite of disap- Committee's long-run objectives for pointing second-quarter earnings reports price stability and sustainable economic by several major companies. growth, and giving careful consideration In foreign exchange markets, the to economic, financial, and monetary trade-weighted value of the dollar in developments, slightly greater reserve terms of the other G-10 currencies restraint would be acceptable or slightly increased on balance over the intermeetlesser reserve restraint might be accept- ing period. After depreciating somewhat able during the intermeeting period. The through the end of May, the dollar reserve conditions associated with this recovered in early June when U.S. directive were expected to be consistent money market interest rates moved with appreciable growth of the broader higher. The dollar rose more strongly monetary aggregates over the second over the last half of June, principally in quarter. response to actual and expected mone- Open market operations were directed tary easing abroad. The rise in the dollar toward maintaining the existing degree over the intermeeting interval reflected of pressure on reserve positions through- sizable appreciations against European out the intermeeting period. Several currencies, especially the German mark. upward adjustments were made to The dollar continued to fall against the expected levels of adjustment plus sea- Japanese yen through the middle of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 149 June, in the process setting several new be buttressed by a favorable financial lows, before recovering a little over the environment associated with strengthremainder of the period. ened balance sheets and reduced debt After contracting during the first quar- burdens and by the apparently increaster, M2 and M3 expanded appreciably ing willingness of banking institutions over the second quarter. Most of this to make new loans. Export demand was growth, which was especially pro- likely to remain constrained over the nounced in May, reflected strength in near term by the weakness in the econo- Ml and occurred despite continued mies of several major industrial counheavy outflows to bond and equity tries, but some improvement in foreign funds. The May surge resulted in part demand was anticipated later as those from a strong pickup in mortgage economies started to strengthen. The refinancing activity and a reversal of the outlook for moderate growth and condepressing effect in April of relatively tinuing slack in resource utilization sugdamped individual nonwithheld tax pay- gested considerably more subdued price ments on the seasonally adjusted level increases than had occurred in the early of liquid deposits. The growth of the months of 1993. broader aggregates moderated substan- In the Committee's discussion, the tially in June, and by more than might members generally agreed that ongoing have been suggested by the waning of economic developments remained conthese mortgage and tax influences. For sistent with moderate but sustained the year through June, growth of both growth in economic activity. No sector M2 and M3 was below the lower ends of the economy seemed poised at this of the ranges for 1993 that the Commit- juncture to provide strong impetus to tee had established in February. This the expansion, but a promising basis for sluggishness reflected ongoing changes further growth was seen in the much in asset preferences and financing pat- improved financial condition of many terns rather than restrictive financial households and business firms. Lower conditions. The velocity of M2 was esti- long-term interest rates, which had conmated to have increased at a rate of tributed to the improvement in balance about 4V2 percent over the first half of sheets, were likely as well to bolster the year after a 4 percent rise in 1992. housing and business capital spending Total domestic nonfinancial debt ex- more directly. While the expansion now panded somewhat further through April. appeared to be firmly established, a The staff projection prepared for this number of members cautioned that it meeting suggested moderate growth in was subject to some downside risks, economic activity and modest reduc- notably those associated with the still tions in margins of unemployed labor uncertain outlook for government budand capital through 1994. The projec- get and other policies. The possibility of tion assumed the enactment of a federal higher taxes, associated with the deficit budget bill that implied a moderately reduction legislation currently under restrictive fiscal policy over the forecast consideration in the Congress and with horizon. As in earlier staff projections, the forthcoming proposals for national lower interest rates were expected to health care reform, was widely reported support appreciable gains in interest- to be damping spending. With regard to sensitive expenditures, including hous- the outlook for inflation, the most recent ing, consumer durables, and business data on prices offered some encourageequipment. Private spending also would ment that the earlier upturn in key mea- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 80th Annual Report, 1993 sures of inflation might prove to be cent in 1993 and 3 to 3V2 percent in temporary, especially in the context of 1994, reflecting little change in both still ample margins of unutilized labor years from the rate of inflation experiand other production resources. Even enced in 1992. so, given generally held expectations Members commented that the imamong the public that inflation was not proved prospects for significant reduclikely to decline and might in fact trend tions in the federal deficit had played an higher, many members concluded that important role in fostering the declines for now the disinflationary trend might in longer-term interest rates that had have been arrested or, at least, that fur- occurred since the latter part of 1992; ther progress toward price stability the lower rates were having positive would be quite difficult to achieve over effects on spending decisions in a numthe next several quarters. ber of interest-sensitive sectors of the In conformance with the usual prac- economy as well as on balance sheets tice at meetings when the Committee more generally. At the same time, the considers its longer-run objectives for prospects for higher taxes—accentuated growth of the monetary and debt aggre- by uncertainties about their size and gates, the members of the Committee incidence—were widely reported to be and the Federal Reserve Bank presi- inhibiting spending decisions by busidents not currently serving as members ness firms and might also be adding to provided individual projections of cautious consumer attitudes. Some of growth in real and nominal GDP, the the anecdotal evidence suggested that rate of unemployment, and the rate of uncertainties associated with the poteninflation for the years 1993 and 1994. In tial impact of the still unannounced prolight of the experience in the first half of posals for health care reform were makthe year, forecasts of real growth in 1993 ing many businesses especially cautious, had been revised down somewhat since notably in their hiring decisions. Adding February, while projections of inflation to the effects of anticipated federal legishad been raised. The central tendency of lation were concerns in various parts of the forecasts of the rate of expansion in the country about further cuts in defense real GDP in 1993 was now 2VA to spending and the impact of additional 23/4 percent for the year as a whole; for reductions in state and local expendi- 1994, these projections had a central tures or of increases in state and local tendency of 2Vi to 3V4 percent. With taxes. Some members observed that the regard to the expansion of nominal GDP, fiscal policy legislation before the Conthe forecasts converged on growth rates gress appeared to have generated a perof 5 to 53/4 percent for 1993 and 5 to haps exaggerated degree of concern, and 6V2 percent for 1994. Given the projec- passage of this legislation might have a tions of a moderate uptrend in economic generally favorable effect on business activity and expectations of some fur- and consumer sentiment. ther gains in labor productivity, the fore- Turning to the outlook for individual casts incorporated only a small decline sectors of the economy, members in unemployment to rates of around referred to indications of an upturn in 63/4 percent in the fourth quarter of 1993 consumer spending in recent months, and only slightly lower by the fourth but they also noted that survey results quarter of 1994. For the rate of inflation, and anecdotal reports still suggested as measured by the CPI, the projections generally cautious consumer attitudes. had a central tendency of 3 to 3VA per- The prospects for increased taxes might Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 1 51 be having some negative effect on the country. The prospects for housing consumer confidence, but consumers construction, though not ebullient, were remained especially concerned about the viewed as more promising particularly outlook for jobs and incomes as defense in light of the declines in mortgage cutbacks continued and many firms, interest rates to relatively low levels. notably larger business establishments, The improved financial position of many took further steps to restructure and potential homebuyers also provided a downsize their operations. To an impor- basis for anticipating stronger housing tant extent the improvement in retail markets. Despite these favorable facsales in the second quarter was associ- tors, however, overall housing activity ated with stronger sales of motor vehi- had improved only modestly in recent cles that, in the view of at least some months as homebuyers tended to remain members, appeared to reflect previously cautious, and at least in some areas postponed replacement demand rather housing developers continued to report than a major shift in consumer attitudes. that they were encountering difficulties In any event, moderate growth in con- in securing construction finance. On sumer spending was likely to be main- balance, housing construction seemed tained in the context of the improved likely to provide some impetus to the financial condition and the related expansion in coming quarters. reduction in debt-service burdens of Relatively weak economic conditions many households. Further growth in in a number of foreign industrial counoverall employment, in line with that tries were likely to continue to limit U.S. achieved in the first half of the year, exports, which had declined since the would if it persisted provide important end of 1992. Indeed, available data supsupport toward sustaining the expansion plemented by reports from a variety of of consumer spending and thus the contacts suggested that business condigrowth of the economy more generally. tions had remained quite weak or had With regard to the outlook for busi- worsened in a number of foreign indusness fixed investment, members reported trial nations. Even so, business contacts that many firms were scaling back or in some parts of the United States indiputting on hold their capital spending cated that foreign demand for their prodplans pending a resolution of the busi- ucts was still quite robust. Business ness tax proposals under consideration activity abroad, which already was in the Congress. Nonetheless, business trending higher in a few industrial spending for equipment still constituted nations, was viewed as likely to a relatively robust sector of the econ- strengthen more generally over the year omy, at least according to the data avail- ahead, with positive effects on overall able to date. To a considerable extent, U.S. exports. such spending reflected ongoing efforts Turning to the outlook for inflation, to improve the quality of products and members commented that despite favorthe efficiency of business operations able readings recently, a wide range of while holding down the number of price and wage data had suggested some employees, and the members saw this acceleration in the rate of inflation durtrend as likely to continue. In general, ing the early months of the year. To other business capital spending had some extent, the indications of intensiremained sluggish, although construc- fied inflation might have been the result tion activity other than office building of difficulties with seasonal adjustments appeared to have picked up in parts of or other temporary factors, but there Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

152 80th Annual Report, 1993 were reports of some successful efforts it had established in February for 1993, by business firms to raise prices follow- and it decided on tentative ranges for ing the spurt in demand and the rise in growth in those aggregates in 1994. The capacity utilization toward the end of current ranges for the period from the 1992. These price developments were fourth quarter of 1992 to the fourth disappointing and suggested to many quarter of 1993 included expansion of 2 members that the disinflationary trend to 6 percent for M2 and xh to 4Vi permight have been arrested, at least for cent for M3. A monitoring range for now, though the economic fundamentals growth of total domestic nonfinancial remained consistent with a resumption debt had been set at 4Vi to 8V2 percent of some further downward movement for 1993. in the rate of inflation. With regard to In the Committee's discussion, the those fundamentals, many members saw members focused on the issue of significant, albeit diminished, slack in whether or not to lower the ranges furlabor and product markets as likely to ther. In February, the ranges for M2 and persist over the forecast horizon, given M3 had been reduced by V2 percentage their current forecasts of moderate point in the expectation that continuing expansion in economic activity. Other rechanneling of credit demands and savfavorable factors in the inflation outlook ings flows into securities markets and included efforts by businesses to hold away from depository institutions would down costs and increase productivity by result in further increases in velocity, the restructuring their operations and invest- ratio of nominal GDP to monetary meaing in new, more productive equip- sures such as M2 or M3. In fact, the ment. Unfortunately, these favorable strength of these forces was underelements in the underlying economic estimated to some extent. Substantial situation seemed at odds with the appar- increases occurred in the velocity of ently widely held view by the public both M2 and M3, especially in the first that inflation would not diminish and quarter, that were reflected in weak bank indeed was likely to increase and that in credit and huge inflows into bond and any event current inflation levels were stock mutual funds. In the circumtolerable. Such expectations and atti- stances, the expansion of both aggretudes would tend to temper the gains gates through midyear was below the against inflation, if any, over the fore- lower ends of the reduced ranges estabcast horizon by their effects on the pric- lished by the Committee for the year. ing and wage behavior of business firms According to a staff analysis, the develand employees and the reactions of con- opments boosting M2 and M3 velocity sumers toward rising prices. This infla- could be expected to persist over the tionary climate underscored the impor- balance of 1993. Such an outcome tance of credible government policies— would imply monetary growth for the monetary, fiscal, trade, and regulatory— year as a whole slightly below the Comthat encouraged reduced inflation over mittee's current ranges, even if the time. growth of nominal GDP picked up in In keeping with the requirements of the second half of the year as implied by the Full Employment and Balanced the central tendency of the members' Growth Act of 1978 (the Humphrey- forecasts. Hawkins Act), the Committee at this In light of this expectation, many of meeting reviewed the ranges for growth the members indicated their support of in the monetary and debt aggregates that a proposal to lower the M2 and M3 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 153 ranges further for 1993 and on a tenta- and economic performance were to tive basis to retain the reduced ranges reemerge. for 1994. It was emphasized during the Many of these members commented discussion that the reductions were that the considerations underlying the intended solely as technical adjustments desirability of a technical adjustment to to reflect expected increases in velocity the ranges for this year applied to 1994 and that the lower ranges did not imply as well, and they therefore supported any tightening of monetary policy. extending the reduced ranges to 1994 on Rather, the reductions in the ranges a tentative basis subject to review early would serve to align them with mone- next year. Monetary growth outcomes tary growth rates that were more likely somewhat higher within these ranges to be associated with a satisfactory eco- might be anticipated in association with nomic performance. Indeed, M2 and M3 the somewhat faster economic growth growth consistent with most members' and essentially unchanged rate of inflaforecasts might still leave the expansion tion that most members had forecast for of those aggregates near the lower next year. ends of their reduced ranges for the year; Several members indicated that while at the same time, the probability of a they could accept reductions in the 1993 surge in monetary growth to levels ranges, they nonetheless preferred to above the new ranges appeared remote. retain the existing ranges. One reason In this connection, some members given for this preference was that the commented that the uncertainties sur- prospective performance of the broad rounding the behavior of M2 and M3 monetary aggregates in relation to might well persist for some time. The developments in the economy was not value of these aggregates in guiding sufficiently understood to warrant the policy seemed to have diminished in specification of new ranges. Indeed, a 1992 and 1993, and the Committee change might be misinterpreted as needed to continue to rely on its evalua- implying more knowledge about veloction of a broad array of other financial ity relationships than the Committee in and economic developments in its fact possessed and could set up expecassessment of an appropriate course tations that the Committee would put for monetary policy. The members did greater and, depending on emerging not rule out the possibility that a more circumstances, perhaps undesirable normal or predictable relationship emphasis on achieving monetary growth between money and economic activity within the new ranges. Moreover, to the might be restored once the current pro- extent that some observers interpreted cess of balance sheet adjustments was the ranges as the Committee's proxies completed, the yield curve flattened, and for presumed nominal GDP objectives, some stabilization in the intermediation an erroneous conclusion could be function of depository institutions reached that the Committee had decided emerged. In the view of a few members, on a reduced target level of nominal moreover, the lower range proposed for GDP even though the Committee had M2 might in fact be more consistent not in fact framed its objectives in terms with the rate of monetary growth that of GDP targets. On balance, while these would be needed over the long term to members did not view this choice as a sustain price stability and satisfactory matter of great consequence in current economic expansion, if the earlier rela- circumstances, they concluded that it tionships between broad money growth was marginally preferable to retain the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 80th Annual Report, 1993 ranges for this year, and if necessary, to anticipated that this debt aggregate accept and explain the reasons for a would continue to grow at a rate that shortfall once the latter were more was roughly in line with that of nominal clearly established. The members who GDP. The Committee approved the preferred to retain the current ranges following statement for inclusion in its agreed that there were plausible argu- domestic policy directive. ments on both sides of this issue and they could accept a proposal to reduce The Federal Open Market Committee the ranges for both 1993 and 1994. seeks monetary and financial conditions that will foster price stability and promote sus- In light of the limited reliance that the tainable growth in output. In furtherance of members felt they could place on the these objectives, the Committee at this meetbehavior of the current monetary aggreing lowered the ranges it had established in gates, the Committee at this meeting February for growth of M2 and M3 to ranges reviewed the possible advantages of a of 1 to 5 percent and 0 to 4 percent respecnewly constructed measure of money. tively, measured from the fourth quarter of 1992 to the fourth quarter of 1993. The Com- This measure involved the addition of mittee anticipated that developments contribbond and stock mutual funds to M2 as uting to unusual velocity increases would currently defined. There were indicapersist over the balance of the year and that tions that the shares of such funds had money growth within these lower ranges become closer substitutes for M2, and would be consistent with its broad policy large portfolio shifts into such funds objectives. The monitoring range for growth of total domestic nonfinancial debt also was seemed to account for much of the lowered to 4 to 8 percent for the year. weakness in M2 and its uncertain relationship to income and the longer-run Votes for this action: Messrs. Greenspan, behavior of prices. After examining the Mullins, Angell, Boehne, Keehn, Kelley, properties of this measure and review- LaWare, Lindsey, McTeer, Oltman, Ms. ing its past behavior in relation to key Phillips, and Mr. Stern. Votes against indicators of economic performance, the this action: None. Absent: Mr. Corrigan. members concluded that it would not (Mr. Oltman voted as alternate for Mr. Corrigan.) enhance the formulation or implementation of monetary policy, at least at this For the year 1994, the Committee point. However, the members agreed approved provisional ranges that were that mutual funds flows should continue unchanged from the reduced levels for to be monitored for their effects on M2 1993. Accordingly, the Committee voted and that the relevant data should be to incorporate the following statement made available to outside analysts. regarding the 1994 ranges in its domes- At the conclusion of its discussion, tic policy directive. the Committee voted to lower the M2 range that it had established in February For 1994, the Committee agreed on tentaby an additional 1 percentage point and tive ranges for monetary growth, measured to reduce the M3 range by another from the fourth quarter of 1993 to the fourth Vi percentage point, bringing the M2 quarter of 1994, of 1 to 5 percent for M2 and range to 1 to 5 percent and that for M3 0 to 4 percent for M3. The Committee provito 0 to 4 percent for 1993. The Commit- sionally set the monitoring range for growth of total domestic nonfinancial debt at 4 to tee also voted to reduce the annual mon- 8 percent for 1994. The behavior of the itoring range for growth of total domesmonetary aggregates will continue to be tic nonfinancial debt by Vi percentage evaluated in the light of progress toward point to 4 to 8 percent. The members price level stability, movements in their Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 155 velocities, and developments in the economy ends of their downward-revised ranges and financial markets. through September. Some members cautioned that despite Votes for this action: Messrs. Greenspan, the very sluggish behavior of the broad Mullins, Angell, Boehne, Keehn, Kelley, measures of money thus far this year, LaWare, Lindsey, McTeer, Oltman, Ms. monetary policy was relatively expan- Phillips, and Mr. Stern. Votes against this action: None. Absent: Mr. Corrigan. sive as evidenced by a variety of other (Mr. Oltman voted as alternate for Mr. indicators including the growth in nar- Corrigan.) row measures of money and reserves and the very low levels of money mar- In the Committee's discussion of pol- ket interest rates. Indeed, in the view of icy for the period until the next meeting, several members, in a period charactermost of the members indicated that they ized by indications of some worsening saw little or no reason to change mone- in inflationary expectations, a policy tary policy in either direction. The most course that maintained steady condirecent information on the performance tions in reserve markets could be said to of the economy was mixed, and this have become more accommodative as together with questions about the course the federal funds rate, in real terms after of fiscal policy contributed to consider- adjustment for expected inflation, able uncertainty about the outlook. Even moved down from an already low level. so, the members felt that the evidence Accordingly, while current monetary pointed on the whole to a sustained rate policy seemed likely to support further of economic expansion. The latest price economic expansion, the Committee statistics provided some encouragement needed to remain alert to the potential that the apparent intensification of infla- for intensifying inflation. At some point tion in earlier months of the year might the current policy stance could well have abated. For now, therefore, nearly begin to foster greater price pressures. all the members saw the balance of fac- One member urged a prompt move tors bearing on the course of economic toward restraint, given the prospect in activity and the outlook for inflation as his view that further progress toward calling for an unchanged degree of pres- price stability was unlikely with the cursure on reserve positions. rent, quite stimulative, stance of mone- According to a staff analysis prepared tary policy. for this meeting, the growth of M2 could A majority of the members, taking be expected to slow markedly in the account of the current stance of monemonths ahead from its pace over the tary policy, favored a proposal to retain second quarter. The projected decelera- the bias toward possible tightening that tion was mainly associated with some the Committee had adopted at the May unwinding of the second-quarter bulge meeting. In this connection, some comin mortgage refinancings along with fur- mented that while the need for any polther heavy inflows to bond and stock icy adjustment during the period ahead mutual funds. The expansion of M3 seemed somewhat remote, the next polappeared likely to be held down by icy move was more likely to be in the weaker bank credit extensions as alter- direction of some firming than toward native sources of funds in the capital easing. Other members suggested that a markets attracted more borrowers. On symmetrical directive might be more balance, modest growth of both M2 and consistent with current economic condi- M3 would keep them close to the lower tions and the related outlook for a steady Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 80th Annual Report, 1993 policy course over the near term. These transactions in the System account in members agreed, however, that a return accordance with the following domestic to symmetry so soon after the adoption policy directive: of a directive that was biased toward restraint could convey a misleading The information reviewed at this meeting impression that recent developments suggests that the economic expansion has had increased the Committee's concerns picked up somewhat in recent months from about the sustainability of the expansion the very slow pace of the first quarter. Total or that the Committee had become less nonfarm payroll employment changed little in June after registering substantial gains in committed to a disinflationary policy April and May, and the civilian unemploycourse. Accordingly, these members ment rate edged up to 7.0 percent in June. indicated that they could support an Industrial production has changed little on asymmetric directive at this point. Sev- balance over the last few months. Real coneral members observed that a number of sumer expenditures edged higher in May key economic measures were scheduled after a sizable rise in April but have increased only slightly thus far this year. for release during the intermeeting Housing starts turned up in April from a period and that the data in question depressed first-quarter pace and rose someshould provide a firmer basis for evalu- what further in May. Incoming data suggest ating the performance of the economy a continued brisk advance in outlays for and a desirable course for monetary business equipment, while nonresidential policy. construction has remained soft. The nominal U.S. merchandise trade deficit was about At the conclusion of the Committee's unchanged in April but substantially larger discussion, all but one of the members than its average rate in the first quarter. Conindicated that they preferred or found sumer and producer prices were about acceptable a directive that called for unchanged in May, but for the year to date inflation has been more rapid than in the maintaining the existing degree of second half of 1992. pressure on reserve positions and that Short-term interest rates have changed retained a bias toward possible firming little since the Committee meeting on of reserve conditions during the inter- May 18 while bond yields have declined meeting period. Accordingly, in the con- somewhat. In foreign exchange markets, the text of the Committee's long-run objec- trade-weighted value of the dollar in terms tives for price stability and sustainable of the other G-10 currencies increased on balance over the intermeeting period. economic growth, and giving careful After contracting during the first quarter, consideration to economic, financial, M2 and M3 expanded appreciably over the and monetary developments, the Com- second quarter. For the year through June, mittee decided that slightly greater growth of the two aggregates was below the reserve restraint would be acceptable lower ends of the ranges established by the or slightly lesser reserve restraint might Committee for 1993. Total domestic nonfinancial debt expanded somewhat further be acceptable during the intermeeting through April. period. The reserve conditions contem- The Federal Open Market Committee plated at this meeting were expected to seeks monetary and financial conditions that be consistent with modest growth in the will foster price stability and promote susbroader monetary aggregates over the tainable growth in output. In furtherance of third quarter. these objectives, the Committee at this meeting lowered the ranges it had established in At the conclusion of the meeting, the February for growth of M2 and M3 to ranges Federal Reserve Bank of New York was of 1 to 5 percent and 0 to 4 percent respecauthorized and directed, until instructed tively, measured from the fourth quarter of otherwise by the Committee, to execute 1992 to the fourth quarter of 1993. The Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 157 Committee anticipated that developments year. Given indications of worsening contributing to unusual velocity increases inflationary expectations, such as the would persist over the balance of the year substantial rise in the price of gold, as and that money growth within these lower well as projections of an increase in ranges would be consistent with its broad inflation, a policy that led to a steady policy objectives. The monitoring range for growth of total domestic nonfinancial debt federal funds rate in fact implied a furalso was lowered to 4 to 8 percent for the ther easing of an already stimulative year. For 1994, the Committee agreed on monetary policy. In these circumstances, tentative ranges for monetary growth, mea- a tightening of policy would not involve sured from the fourth quarter of 1993 to the any significant risk to the expansion but fourth quarter of 1994, of 1 to 5 percent for would foster changes in financial condi- M2 and 0 to 4 percent for M3. The Committee provisionally set the monitoring range for tions and the outlook for inflation that growth of total domestic nonfinancial debt at would be more consistent with renewed 4 to 8 percent for 1994. The behavior of the progress toward price stability in 1994 monetary aggregates will continue to be and later. Declining inflation around the evaluated in the light of progress toward world and a stronger trend of productivprice level stability, movements in their ity growth in the United States, among velocities, and developments in the economy and financial markets. other factors, were providing a favor- In the implementation of policy for the able environment for further disinflaimmediate future, the Committee seeks to tion, but those developments needed to maintain the existing degree of pressure on be supported and validated by approprireserve positions. In the context of the ate monetary policy action. Committee's long-run objectives for price stability and sustainable economic growth, At this meeting, the Committee and giving careful consideration to eco- reviewed its practices with regard to the nomic, financial, and monetary develop- release of information to the public. This ments, slightly greater reserve restraint review was undertaken in response to would or slightly lesser reserve restraint media reports of the purported results of might be acceptable in the intermeeting the May meeting before the Committee period. The contemplated reserve conditions are expected to be consistent with modest had made public any information about growth in the broader monetary aggregates that meeting. In its discussion, the Comover the third quarter. mittee reaffirmed its long-standing rules governing the confidentiality of FOMC Votes for this action: Messrs. Greenspan, information, including the schedule that Mullins, Boehne, Keehn, Kelley, La Ware, calls for releasing the minutes of a Com- Lindsey, McTeer, Oltman, Ms. Phillips, mittee meeting, along with an explanaand Mr. Stern. Vote against this action: Mr. Angell. Absent: Mr. Corrigan. tion of the Committee's decisions, a few (Mr. Oltman voted as alternate for Mr. days after the next meeting. These rules Corrigan.) are designed to safeguard the Committee's flexibility to make needed adjust- Mr. Angell dissented because he ments to policy and also to provide adefavored a prompt move to tighten pol- quate time to prepare a full report of the icy. In his view, monetary policy was context and rationale for its decisions. overly expansive at this point as evi- Committee members emphasized the denced by what he viewed as excessive potential for inadvertent leaks of inforliquidity in financial markets, the nega- mation in the course of general convertive level of real short-term interest sations with representatives of the news rates, and the disappointing lack of media or others concerning the memprogress toward lower inflation this bers' views about economic develop- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 80th Annual Report, 1993 ments or monetary policy. The members Mr. Patrikis, Deputy General Counsel agreed that particular care needed to be Mr. Prell, Economist taken for some period before and after Messrs. R. Davis, Promisel, each of its meetings. Rosenblum, Scheld, Siegman, It was agreed that the next meeting of Simpson, and Slifman, Associate the Committee would be held on Tues- Economists day, August 17, 1993. The meeting adjourned at 12:25 p.m. Ms. Greene, Deputy Manager for on Wednesday, July 7, 1993. Foreign Operations Ms. Lovett, Deputy Manager for Domestic Operations Donald L. Kohn Secretary Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors Meeting Held on Mr. Madigan, Associate Director, August 17, 1993 Division of Monetary Affairs, Board of Governors A meeting of the Federal Open Market Mr. Stockton, Associate Director, Committee was held in the offices of the Division of Research and Board of Governors of the Federal Statistics, Board of Governors Reserve System in Washington, D.C., Ms. Johnson, Assistant Director, on Tuesday, August 17, 1993, at Division of International Finance, 9:00 a.m. Board of Governors Ms. Low, Open Market Secretariat Assistant, Division of Monetary Present: Affairs, Board of Governors Mr. Greenspan, Chairman Mr. McDonough, Vice Chairman Messrs. Beebe, J. Davis, T. Davis, Mr. Angell Dewald, Goodfriend, and Mr. Boehne Ms. Tschinkel, Senior Vice Mr. Keehn Presidents, Federal Reserve Banks Mr. Kelley of San Francisco, Cleveland, Mr. LaWare Kansas City, St. Louis, Richmond, Mr. Lindsey and Atlanta respectively Mr. McTeer Mr. Mullins Ms. Phillips Messrs. McNees, Meyer, and Miller, Mr. Stern Vice Presidents, Federal Reserve Banks of Boston, Philadelphia, and Messrs. Broaddus, Jordan, Forrestal, Minneapolis respectively and Parry, Alternate Members of the Federal Open Market Ms. Meulendyke, Manager, Open Committee Market Operations, Federal Reserve Bank of New York Messrs. Hoenig, Melzer, and Syron, Presidents of the Federal Reserve By unanimous vote, the minutes for Banks of Kansas City, St. Louis, the meeting of the Federal Open Market and Boston respectively Committee held on July 6-7,1993, were Mr. Kohn, Secretary and Economist approved. Mr. Bernard, Deputy Secretary Mr. Coyne, Assistant Secretary Secretary's Note: Advice had been re- Mr. Gillum, Assistant Secretary ceived of the election of William J. McDon- Mr. Mattingly, General Counsel ough by the Board of Directors of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 159 Federal Reserve Bank of New York as a Employment remained on an uptrend, member of the Federal Open Market Com- and industrial production recently had mittee for the period commencing July 19, firmed somewhat. After rising at a faster 1993, and ending December 31, 1993, and rate in the early part of the year, conthat he had executed his oath of office. sumer prices had changed little and producer prices had fallen in recent months. By unanimous vote, the Committee Total nonfarm payroll employment, elected William J. McDonough as Vice after a small gain in June, expanded Chairman of the Committee to serve in July at a rate close to its average until the first meeting of the Committee advance in earlier months of the year. after December 31, 1993. The services industries, led by business The Deputy Manager for Foreign services, provided half of the July Operations reported on developments in increase. Elsewhere, considerable hiring foreign exchange markets during the was evident in wholesale and retail period since the July meeting. There trade, and construction employment were no System open market transac- moved up after a small decline in June. tions in foreign currencies during this In manufacturing, more jobs were lost, period, and thus no vote was required of although at a slower rate than earlier in the Committee. the year. The civilian unemployment The Deputy Manager for Domestic rate dropped to 6.8 percent in July. Operations reported on developments in Industrial production recovered in domestic financial markets and on Sys- July from small declines in May and tem open market transactions in govern- June. Manufacturing output rose in spite ment securities and federal agency obli- of a sizable cutback in motor vehicle gations during the period July 7, 1993, assemblies; utility production registered through August 16, 1993. By unani- a strong weather-related gain; and minmous vote, the Committee ratified these ing output declined further. Within mantransactions. ufacturing, the production of consumer The Committee then turned to a dis- durable goods other than automobiles cussion of the economic and financial and trucks rebounded in July, and the outlook and the implementation of output of business equipment advanced monetary policy over the intermeeting further. Total utilization of industrial period ahead. A summary of the eco- capacity edged higher in July, reflecting nomic and financial information avail- a substantial gain at electric utilities; able at the time of the meeting and of utilization of manufacturing capacity the Committee's discussion is provided was unchanged. below, followed by the domestic policy Retail sales increased slightly further directive that was approved by the Com- in July after a sizable rise in the second mittee and issued to the Federal Reserve quarter. Spending on automobiles was Bank of New York. down in July for a second straight The information reviewed at this month, but sales were strong at apparel, meeting suggested that economic activ- furniture and appliance, and general ity was expanding at a moderate pace. merchandise stores. Total housing starts, The limited data available on spending depressed by wet weather and floods in in the third quarter presented a mixed some areas of the country, were down picture but on balance pointed to contin- somewhat in July; however, permit issuued expansion in consumption, business ance moved up, suggesting that homefixed investment, and homebuilding. building activity remained in a mild Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

160 80th Annual Report, 1993 uptrend. In addition, consumer surveys than the deficits recorded in March and indicated that attitudes toward home- April; however, the deficit for April and buying continued to be strongly positive May combined was larger than the during July, and builders' assessments average rate for the first quarter. The of home sales improved substantially. value of exports rose slightly in May; Business fixed investment increased increases in sales abroad of industrial in the second quarter at about the rapid supplies, machinery, and consumer pace of the first quarter. Spending for goods offset declines in agricultural equipment remained strong, with solid products, civilian aircraft, and motor increases in purchases of motor vehi- vehicles and parts. A drop in the value cles, computers, and a wide range of of imports was spread across a wide machinery and equipment. However, range of products, particularly automooutlays for aircraft declined in the sec- tive products, consumer goods, and oil. ond quarter, retracing some of the sub- The economic performance of the major stantial first-quarter rise. The limited foreign industrial countries was mixed information available for the third in the second quarter. Output continued quarter pointed to some slowing of the to decline in western Germany, and ecogrowth of spending for equipment. In nomic activity in Japan appeared to have the second quarter, nonresidential build- stalled after modest growth in the first ing activity posted its largest advance in quarter. In contrast, economic recovery three years. Expenditures were up across continued in Canada and the United a broad array of categories, with invest- Kingdom. ment in institutional and public utilities Producer prices of finished goods structures being particularly strong. declined in July for a second consecu- Business inventories expanded mod- tive month. Prices of finished foods erately during the second quarter, and edged lower, and prices of finished inventory accumulation was broadly in energy goods, particularly gasoline and line with sales over the first half of the fuel oil, fell significantly; excluding the year. In manufacturing, stocks edged food and energy components, producer lower in June, reflecting a further prices edged up in July and to that point decline in inventories held by aircraft in the year had risen at a slightly lower producers. Outside of the aircraft indus- rate than was recorded in 1992. At the try, inventory changes were mixed. For consumer level, prices for nonfood, nonmanufacturing as a whole, the ratio of energy items were up slightly in both inventories to shipments fell in June to June and July and for the year to date one of the lowest levels in recent years. had increased a little more slowly than In the wholesale trade sector, inven- last year. Hourly compensation for pritories expanded modestly in June, and vate industry workers rose in the secwith sales lower, the inventory-to-sales ond quarter at about the rate seen last ratio for the sector increased slightly. year. Average hourly earnings of pro- Retail inventories, after changing little duction or nonsupervisory workers were in May, rose slightly more than sales in unchanged on balance over June and June, and the stocks-to-sales ratio for July, but for the year through July these the retail sector remained near the high earnings had increased at the same pace end of its range for the past several as in 1992. years. At its meeting on July 6-7, 1993, the The nominal U.S. merchandise trade Committee adopted a directive that deficit was considerably smaller in May called for maintaining the existing Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 161 degree of pressure on reserve positions passage of the deficit-reduction legislaand that retained a tilt toward possible tion. Major indexes of stock prices firming of reserve conditions during the increased somewhat over the intermeetintermeeting period. Accordingly, the ing period. directive indicated that in the context of In foreign exchange markets, the the Committee's long-run objectives for trade-weighted value of the dollar in price stability and sustainable economic terms of the other G-10 currencies was growth, and giving careful consideration about unchanged on balance over the to economic, financial, and monetary intermeeting period. The dollar strengthdevelopments, slightly greater reserve ened slightly against the German mark, restraint would be acceptable or slightly but it rose by significantly more against lesser reserve restraint might be accept- most other European currencies in the able during the intermeeting period. The Exchange Rate Mechanism in the afterreserve conditions associated with this math of a widening of the margins directive were expected to be consistent within which participating currencies with modest growth of the broader mon- are allowed to fluctuate relative to each etary aggregates over the third quarter. other. The widening, which was in Throughout the intermeeting period, response to massive selling pressures on open market operations were directed the French franc and several other curtoward maintaining the existing degree rencies, followed sharp increases in of pressure on reserve positions. Two short-term interest rates in the affected upward adjustments were made to countries. With exchange market particexpected levels of adjustment plus sea- ipants continuing to focus on Japan's sonal borrowing in anticipation of fur- trade surplus, the dollar fell substanther increases in demand for seasonal tially against the yen. credit. Borrowing averaged close to M2 expanded only slightly in July expected levels over most of the inter- after growing appreciably over the secmeeting interval, and the federal funds ond quarter. The continued strength of rate remained near 3 percent. inflows to bond and stock mutual funds Money market interest rates were suggested that households were still little changed on balance over the realigning their portfolios toward assets intermeeting period, while rates on outside the monetary aggregates. intermediate-term U.S. Treasury obliga- Through July, M2 was estimated to have tions and on fixed-rate mortgages grown at a rate close to the lower end of dropped slightly. Yields on long-term the Committee's range for the year. M3 Treasury and corporate bonds were contracted slightly in June and July, down by more, with the rate on the owing in part to a substantial drop in thirty-year Treasury bond falling below institution-only money market mutual 6V2 percent. Many market interest funds, whose returns had not kept pace rates moved higher after Chairman with the increase in money market rates Greenspan's congressional testimony on in late spring. In addition, depository July 20, which was perceived by market institutions placed greater reliance on participants as suggesting a greater like- various nondeposit sources of funds, lihood of some tightening of monetary including the issuance of equity and subpolicy in the future. Subsequently, inter- ordinated debt. Through July, M3 had est rates generally retreated in reaction declined a little and was slightly below to incoming economic data indicating its annual range. Total domestic nonfisubdued inflation pressures and to the nancial debt had expanded at a moderate Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

162 80th Annual Report, 1993 rate in recent months, and for the year and businesses, and the indications of a through June was estimated to have somewhat better availability of loans increased at a rate in the lower half of from financial intermediaries. In an the Committee's monitoring range. environment of moderate economic The staff projection prepared for this growth, the fundamentals bearing on the meeting suggested moderate growth in outlook for inflation were consistent economic activity and modest reduc- with further disinflation, and the memtions in margins of unemployed labor bers drew some encouragement from and capital through next year. The fiscal consumer and producer price developrestraint stemming from the recent legis- ments in recent months. Several caulation and uncertainty about other gov- tioned, however, that recent price meaernment policies would act as a drag on sures probably overstated the reduction the economy. On the other hand, lower in inflation, just as the surge in prices interest rates were expected to contrib- earlier in the year seemed to have overute to further gains in spending on con- stated the underlying inflation trend. sumer durables, housing, and business Members also referred to the persistence fixed investment. Continued expansion of inflationary expectations among busialso would be supported by further ness executives and consumers. Thus, improvements in the availability of while the rise in inflation appeared to credit, a small boost to production over have been arrested, any further progress the next several quarters associated with toward price stability was likely to be rebuilding activity in areas of the Mid- limited over the quarters ahead. west affected by the recent floods, and a Business contacts and other sources pickup in foreign demand resulting from of information suggested little change some strengthening in economic activity since the July meeting in the pace or abroad. The projected slack in labor and composition of economic activity in difproduct markets, coupled with some ferent parts of the country. Descriptions tempering of inflation expectations, was of economic performance varied from expected to foster modest further reduc- slow to moderate growth in most tions in wage and price inflation. regions, though business activity proba- In the Committee's discussion of pro- bly continued to weaken in some major spective economic conditions, members areas such as California. Despite suscommented that recent developments tained, if not ebullient, growth in sales had not materially altered the outlook to consumers and the relative strength in for moderate and sustained growth in business investment spending in the first economic activity. Despite widespread half of this year, business sentiment was indications of pessimistic consumer and widely described as cautious or negative business attitudes, overall consumer even in some regions whose economies spending and business investment were outperforming the nation as a appeared to be reasonably well main- whole. According to business contacts, tained. Likewise, the outlook for the recent enactment of deficit-reduction increased fiscal restraint associated with legislation had tended to mitigate conthe recently enacted deficit-reduction cerns about the size of future federal legislation needed to be weighed against deficits, but business executives were the favorable effects on spending of now focusing on the implications of reduced interest rates in intermediate- higher taxes and many were expressing and long-term debt markets, the apprehension about further though still improved balance sheets of consumers unannounced tax increases that might be Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 163 associated with health care reform. porary workers, and overtime work. Business sentiment and sales also were Some members also noted that the being affected adversely in many areas newly legislated taxes on higher by cutbacks in defense contracts and incomes would tend to curtail some conclosings of military installations and by sumer spending. The timing of that the weakness in foreign demand for effect was uncertain; tax liabilities had some products. already risen, but some payments on the With regard to developments and added tax liabilities were not due until prospects in key sectors of the economy, April of 1994 and 1995. members noted that despite further sur- Members anticipated that building vey indications of eroding consumer activity, notably housing construction, confidence, consumer expenditures had would provide some stimulus to the strengthened in recent months after a expansion. Although indicators of houspause earlier in the year. The pickup had ing activity were somewhat mixed for featured rising sales of motor vehicles, the nation as a whole, sales of new and and while the latter had slipped recently, existing homes were brisk in many a number of special factors such as regions and even sales of second homes shortages of popular models at the end were reported to be improving in some of the model year and the effects of areas. Prospective homebuyers continflooding in some parts of the Midwest ued to exercise considerable caution, but suggested the need to withhold judg- reductions in mortgage rates and generment on any downward shift in the ally improved affordability pointed to underlying demand for motor vehicles. rising housing sales and construction Tourism was reported to have strength- over the quarters ahead. In the nonresiened considerably in many areas this dential sector, there was growing evisummer, though there were major dence of some strengthening in the conexceptions. As had been true for an struction of commercial and institutional extended period, consumer attitudes structures, but overcapacity was likely continued to be inhibited by concerns to depress the construction of new office about employment opportunities, espe- buildings for an extended period in most cially given further reductions in parts of the country. In some areas, defense spending, the ongoing restruc- infrastructure and other rebuilding assoturing and related downsizing of many ciated with the recent floods was likely business operations, and the continuing to stimulate some construction activity efforts by business firms to limit the later this year. number of their permanent employees in With regard to the external sector of order to hold down the rising costs of the economy, the members again noted a health care and other nonwage worker somewhat mixed picture. Exporters benefits. Members noted, however, that from some parts of the country continthe growth in employment thus far this ued to report relatively brisk sales year, while tending to involve many abroad, but many domestic producers low-paying jobs, had greatly exceeded were expressing concerns about weak the rate of expansion in 1992. In the markets in key foreign nations. Against view of at least some members, appre- the background of more stimulative ciable further growth was likely as busi- economic policies in a number of those ness firms found it increasingly difficult countries, some overall strengthening in an expanding economy to meet grow- in the major foreign economies was ing demands through outsourcing, tem- viewed as a reasonable expectation, but Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

164 80th Annual Report, 1993 the overall growth in exports was likely holds indicated persisting expectations to lag the anticipated expansion in that inflation would rise at some point. imports over the projection horizon. The In this connection, however, passage of North American Free Trade Agreement the federal deficit-reduction legislation now under consideration in the Con- and the Committee's reaffirmation in its gress was a topic of active discussion directive and in congressional testimony among business contacts, and the uncer- of its commitment to price stability tain outcome of that treaty was a matter seemed to have had a constructive effect of concern in several parts of the on attitudes in financial markets and on country. long-term interest rates, and these devel- Members observed that the more opments could prove to be harbingers of favorable performance of key measures more favorable inflation attitudes more of prices in recent months had tended generally. to relieve earlier concerns about a pos- In the Committee's discussion of polsible worsening in inflation. However, icy for the intermeeting period ahead, because the recent price indexes proba- the members agreed that recent developbly overstated the improvement in the ments pointed to the desirability of a trend rate of inflation, it was too early to steady policy course. While economic determine whether they pointed to growth did not seem particularly robust, renewed disinflation. In any event, a neither was it clear that a disinflationary number of fundamental factors appeared trend had been reestablished. Many to have favorable implications for the members observed that real short-term inflation outlook, notably the prospect interest rates were at very low levels, that some slack in labor and capital indeed slightly negative by some calcuresources would persist in the context of lations, and while real intermediate- and projections that pointed to a relatively long-term interest rates were higher, it moderate rate of economic expansion. was apparent that monetary policy was Members continued to cite reports from in an accommodative posture. This connumerous business firms regarding their clusion was seen as reinforcing the view inability to raise prices because of the that monetary policy probably would highly competitive markets in which have to move in the direction of restraint those firms had to operate. Many busi- at some point to resist any incipient ness contacts also referred to the tendency for inflationary pressures to absence of significant increases—and intensify. For now, the relatively slow indeed to occasional decreases—in the economic expansion in the first half of costs of their outside purchases. Oil the year, the fiscal restraint associated price developments in world markets with the deficit-reduction legislation, and the ongoing competition from for- other obstacles to economic growth, and eign producers also were cited as favor- the encouraging inflation statistics for able elements in the outlook for infla- recent months argued against any neartion. On the negative side, adverse term policy adjustment. weather conditions in recent months Moreover, there was no compelling including severe floods in the Midwest evidence that current monetary policy appeared to have fostered some upward was fostering credit flows usually assopressure on food prices, and higher taxes ciated with speculative excesses or would raise gasoline prices in the fourth impending increases in price pressures. quarter. Perhaps of greater significance, Growth in the broad measures of money business contacts and surveys of house- and in the debt of nonfinancial sectors Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 165 remained fairly damped despite indica- toward possible tightening in order to tions of greater willingness to supply achieve those objectives. One member, credit by banks, other financial interme- while agreeing that a tightening move diaries, and investors in securities mar- would not be appropriate under current kets. With regard to the monetary aggre- circumstances, nonetheless believed that gates, low short-term interest rates monetary policy had been overly stimuundoubtedly were contributing to large lative for some time and that the Comshifts of funds from depository institu- mittee should move toward restraint at tions, notably from components of M2 the first favorable opportunity. and M3 to stock and bond mutual funds At the conclusion of the Committee's and to other financial instruments, and discussion, all the members expressed a thus to the sluggish behavior of the preference for a directive that called for broad measures of money. In this con- maintaining the existing degree of presnection, a staff analysis pointed to con- sure on reserve positions. They also tinuing slow growth in M2 over the near indicated their support of a directive that term and, on the assumption of little or did not include a presumption about the no change in the degree of pressure on likely direction of any adjustment to reserve positions, to growth for the year policy during the intermeeting period. at a rate around the lower end of the Accordingly, in the context of the Com- Committee's range. Growth in M3 was mittee's long-run objectives for price likely to fall marginally below the Com- stability and sustainable economic mittee's range for the year. On the other growth, and giving careful consideration hand, growth in Ml and various reserve to economic, financial, and monetary measures was expected to remain rela- developments, the Committee decided tively robust. that slightly greater or slightly lesser Turning to possible adjustments to reserve restraint might be acceptable policy during the intermeeting period during the intermeeting period. The ahead, the members endorsed a proposal reserve conditions contemplated at this to return to an unbiased intermeeting meeting were expected to be consistent instruction that did not incorporate any with modest growth in M2 and little net presumption with regard to the direction change in M3 over the balance of the of possible intermeeting policy changes. third quarter. The members agreed that the probability At the conclusion of the meeting, the of an intermeeting policy adjustment Federal Reserve Bank of New York was was relatively remote. Incoming data authorized and directed, until instructed on economic activity and prices had otherwise by the Committee, to execute reduced concerns that inflation and transactions in the System account in inflationary expectations might be accordance with the following domestic worsening. The Committee retained its policy directive: fundamental objectives of fostering economic expansion at a sustainable pace The information reviewed at this meeting that was consistent with further progress suggests that economic activity is expanding over time toward stable prices. How- at a moderate pace. Total nonfarm payroll ever, it now appeared less likely than at employment increased in July at a rate close to its average advance in earlier months of the time of the May and July meetings the year, and the civilian unemployment rate that the Committee needed to bias its declined to 6.8 percent. Industrial production consideration of responses to incoming turned up in July after posting small declines information in the intermeeting period in May and June. Retail sales edged higher Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

166 80th Annual Report, 1993 in July following a sizable rise in the second tee provisionally set the monitoring range for quarter. Housing starts were down somewhat growth of total domestic nonfinancial debt at in July, but permits moved up. Available 4 to 8 percent for 1994. The behavior of the indicators point to continued expansion in monetary aggregates will continue to be business capital spending. The nominal U.S. evaluated in the light of progress toward merchandise trade deficit declined in May, price level stability, movements in their but for April and May combined it was larger velocities, and developments in the economy than its average rate in the first quarter. After and financial markets. rising at a faster rate in the early part of the In the implementation of policy for the year, consumer prices have changed little immediate future, the Committee seeks to and producer prices have fallen in recent maintain the existing degree of pressure on months. reserve positions. In the context of the Com- Short- and intermediate-term interest rates mittee's long-run objectives for price stabilhave changed little since the Committee ity and sustainable economic growth, and meeting on July 6-7, while yields on long- giving careful consideration to economic, term Treasury and corporate bonds have financial, and monetary developments, declined somewhat. In foreign exchange slightly greater reserve restraint or slightly markets, the trade-weighted value of the dol- lesser reserve restraint might be acceptable lar in terms of the other G-10 currencies was in the intermeeting period. The contemplated about unchanged on balance over the inter- reserve conditions are expected to be consismeeting period. tent with modest growth in M2 and little net After expanding appreciably over the sec- change in M3 over the balance of the third ond quarter, M2 increased slightly further in quarter. July and M3 declined. For the year through July, M2 is estimated to have grown at a rate Votes for this action: Messrs. Greenspan, close to the lower end of the Committee's McDonough, Angell, Boehne, Keehn, range for the year, and M3 at a rate slightly Kelley, LaWare, Lindsey, McTeer, Mulbelow its range. Total domestic nonfinancial lins, Ms. Phillips, and Mr. Stern. Votes debt has expanded at a moderate rate in against this action: None. recent months, and for the year through June it is estimated to have increased at a rate in Donald L. Kohn the lower half of the Committee's monitor- Secretary ing range. The Federal Open Market Committee seeks monetary and financial conditions that Meeting Held on will foster price stability and promote sus- September 21, 1993 tainable growth in output. In furtherance of these objectives, the Committee at its meet- A meeting of the Federal Open Market ing in July lowered the ranges it had estab- Committee was held in the offices of the lished in February for growth of M2 and M3 Board of Governors of the Federal to ranges of 1 to 5 percent and 0 to 4 percent respectively, measured from the fourth quar- Reserve System in Washington, D.C., ter of 1992 to the fourth quarter of 1993. The on Tuesday, September 21, 1993, at Committee anticipated that developments 9:00 a.m. contributing to unusual velocity increases would persist over the balance of the year Present: and that money growth within these lower Mr. Greenspan, Chairman ranges would be consistent with its broad Mr. McDonough, Vice Chairman policy objectives. The monitoring range for Mr. Angell growth of total domestic nonfinancial debt Mr. Boehne also was lowered to 4 to 8 percent for the Mr. Keehn year. For 1994, the Committee agreed on Mr. Kelley tentative ranges for monetary growth, mea- Mr. LaWare sured from the fourth quarter of 1993 to the Mr. Lindsey fourth quarter of 1994, of 1 to 5 percent for Mr. McTeer M2 and 0 to 4 percent for M3. The Commit- Mr. Mullins Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September 167 Ms. Phillips Mr. Gavin, Assistant Vice President, Mr. Stern Federal Reserve Bank of Cleveland Messrs. Broaddus, Jordan, Forrestal, Ms. Krieger, Manager, Open Market and Parry, Alternate Members Operations, Federal Reserve Bank of the Federal Open Market of New York Committee By unanimous vote, the minutes for the meeting of the Federal Open Market Messrs. Hoenig, Melzer, and Syron, Committee held on August 17, 1993, Presidents of the Federal Reserve were approved. Banks of Kansas City, St. Louis, and Boston respectively By unanimous vote, Joan E. Lovett and Peter R. Fisher were selected to Mr. Kohn, Secretary and Economist serve at the pleasure of the Committee Mr. Bernard, Deputy Secretary in the capacities of Manager for Domes- Mr. Coyne, Assistant Secretary tic Operations, System Open Market Mr. Gillum, Assistant Secretary Account, and Manager for Foreign Mr. Mattingly, General Counsel Operations, System Open Market Mr. Patrikis, Deputy General Counsel Account respectively, on the understand- Mr. Prell, Economist Mr. Truman, Economist ing that their selection was subject to their being satisfactory to the Federal Messrs. R. Davis, Lang, Lindsey, Reserve Bank of New York. Promisel, Rolnick, Rosenblum, Scheld, Siegman, Simpson, and Secretary's Note: Advice subsequently Slifman, Associate Economists was received that the selections indicated above were satisfactory to the Federal Mr. Fisher, Manager for Foreign Reserve Bank of New York. Operations, System Open Market Account The Manager for Foreign Operations reported on developments in foreign Mr. Ettin, Deputy Director, Division of exchange markets and on System Research and Statistics, Board of transactions in foreign currencies during Governors the period August 17, 1993, through Mr. Madigan, Associate Director, Division of Monetary Affairs, September 20, 1993. By unanimous Board of Governors vote, the Committee ratified these Mr. Stockton, Associate Director, transactions. Division of Research and Ms. Betsy B. White, Vice President Statistics, Board of Governors for Domestic Operations of the Federal Ms. Low, Open Market Secretariat Reserve Bank of New York, reported on Assistant, Division of Monetary Affairs, Board of Governors developments in domestic financial markets and on System open market trans- Ms. Browne, Messrs. T. Davis, Dewald, actions in government securities and and Goodfriend, Senior Vice federal agency obligations during the Presidents, Federal Reserve Banks period August 17, 1993, through of Boston, Kansas City, St. Louis, September 20, 1993. By unanimous and Richmond respectively vote, the Committee ratified these transactions. Messrs. Judd, King, and Ms. White, The Committee then turned to a dis- Vice Presidents, Federal Reserve Banks of San Francisco, Atlanta, cussion of the economic and financial and New York respectively outlook and the formulation of mone- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 80th Annual Report, 1993 tary policy for the intermeeting period increase, as strikes damped mining ahead. A summary of the economic and production and utilities output was financial information available at the unchanged following large gains in time of the meeting and of the Commit- earlier months. Within manufacturing, tee's discussion is provided below, fol- the output of motor vehicles and parts lowed by the domestic policy directive was unchanged. Excluding the motor that was approved by the Committee vehicle component, another sharp gain and issued to the Federal Reserve Bank in computers and related electronic comof New York. ponents boosted the production of busi- The information reviewed by the ness equipment, while the output of con- Committee at this meeting suggested sumer goods declined as a result of a that economic activity, adjusted for the retrenchment in appliance production temporary depressing effects of the following the advance posted in July. flood in the Midwest, was continuing to Total utilization of manufacturing capacexpand at a moderate pace. Consumer ity edged up again in August. spending was up, and business pur- Total retail sales were little changed chases of durable equipment had in real terms in July and August. Derecorded further healthy gains. On the spite the recent sluggishness, however, other hand, housing activity had shown real spending for goods in July and a muted response to the declines in August was appreciably above the level mortgage rates that had occurred in the second quarter. In addition, real through the spring, and gains in manu- expenditures for services had grown facturing output and in employment had rapidly in July; this reflected both high been limited in recent months. After energy consumption associated with rising at an accelerated rate in the early unusually hot weather and robust spendpart of the year, consumer prices had ing for other services. The persistence of increased more slowly in recent months hot weather through August suggested and producer prices had fallen. that spending on energy services contin- Total nonfarm payroll employment ued at a high level for that month. After edged lower in August after a sizable a slight decline in July, housing starts gain in July. Hiring in the service- rose substantially in August. Singleproducing sectors, especially in health family starts accounted for all of the and business services, was down in August increase, as multifamily starts August from the pace of recent months, fell further and continued to hover and more jobs were lost in manufac- around their thirty-year low. turing. Construction employment also Growth in real business fixed investmoved lower, retracing part of the July ment appeared to be slowing in the third increase. On the other hand, the average quarter from the robust pace earlier in workweek rose to a relatively high level the year. Shipments of nondefense capiin August, and as a result, aggregate tal goods dropped substantially in July, hours worked by production or non- with all of the decline occurring in the supervisory workers were significantly volatile aircraft component. For capital above the second-quarter average. The goods other than aircraft and parts, shipcivilian unemployment rate declined to ments again moved higher in July; while 6.7 percent. the demand for computing equipment Industrial production posted a further strengthened after dropping off somemoderate gain in August. Manufactur- what in the second quarter, shipments of ing output more than accounted for the other types of durable equipment soft- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September 169 ened. In addition, heavy-truck sales quarter. In western Germany, real output were off substantially in July after rose in the second quarter, but much advancing steadily since late 1992, and of the gain apparently stemmed from fleet sales of light vehicles were down in unintended inventory accumulation. In July and August. Investment in nonresi- France and Italy, economic activity dential structures posted its largest appeared to have leveled out in the secadvance in three years in the second ond quarter after declining earlier. By quarter. However, construction activity contrast, both the United Kingdom and fell in July in reflection of a sharp Canada recorded further modest gains in decline in the construction of commer- economic activity. cial structures other than offices. Producer prices of finished goods fell Business inventories contracted sharply further in August; higher prices sharply in July after changing little in for consumer foods were more than off- June. The bulk of the July decline set by lower prices for the energy and occurred in the retail sector and re- the nonfood, non-energy components of flected drawdowns in inventories at the index. For finished goods other than automobile dealerships. Non-auto retail food and energy, producer prices inventories edged down in July; with increased over the twelve months ended sales flat, the ratio of non-auto inven- in August by a considerably smaller tories to sales remained near the high amount than in the previous twelveend of the range for the past several month period. Consumer prices rose a years. In the wholesale trade sector, little faster in August than in July, with stocks were trimmed somewhat further an increase in food prices counterbalin July, but the inventory-to-sales ratio ancing a decline in prices of consumer remained at the midpoint of its range energy goods. For nonfood, non-energy over the past three years. Manufacturing items, consumer prices advanced over stocks were unchanged in July after a the twelve months ended in August by small reduction in June. With shipments an amount comparable to that recorded down in July owing to weak shipments for the twelve months ended in August of aircraft and motor vehicles, the 1992. Average hourly earnings of prostocks-to-sales ratio rebounded but was duction or nonsupervisory workers were still at a low level. up in August after little change on bal- The nominal U.S. merchandise trade ance in June and July; the rise reflected deficit decreased in July, but it remained in part overtime earnings in manufacturessentially unchanged from its average ing. Over the twelve months ended in rate in the second quarter. The value of August, this measure of earnings exports edged lower in July, while the increased by about the same amount as value of imports fell by more, retracing in the previous twelve-month period. nearly all of the sizable June rise. The At its meeting on August 17, 1993, decline in imports was primarily in auto- the Committee adopted a directive that motive products, consumer goods, and called for maintaining the existing oil. The performance of the major for- degree of pressure on reserve positions eign industrial economies continued to and that, in contrast to the two previous present a mixed picture. Economic directives, did not include a tilt toward activity in Japan, after increasing possible firming of reserve conditions slightly in the first quarter, evidenced during the intermeeting period. Accordrenewed weakness in the second quarter ingly, the directive indicated that in that apparently persisted into the third the context of the Committee's long-run Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 80th Annual Report, 1993 objectives for price stability and sustain- Against the yen, the dollar rebounded able economic growth, and giving care- early in the intermeeting period from the ful consideration to economic, financial, historical low that occurred around the and monetary developments, slightly time of the Committee's August meetgreater reserve restraint or slightly lesser ing. The dollar was buoyed by joint reserve restraint might be acceptable central bank sales of yen against the during the intermeeting period. The dollar and by the accompanying public reserve conditions associated with this statement from the U.S. Treasury that directive were expected to be consistent was seen by market participants as sigwith modest growth of M2 and little net naling a new attitude toward any further change in M3 over the balance of the appreciation of the yen. On September third quarter. 21, the dollar rose sharply on news that Open market operations were directed President Yeltsin had dissolved the during the intermeeting period toward Russian Parliament. maintaining the existing degree of pres- Growth of M2 continued at a slow sure on reserve positions. The federal rate in August. The sluggishness in funds rate remained close to 3 percent this aggregate, which occurred despite over the period, while adjustment plus further rapid expansion in its Ml comseasonal borrowing averaged somewhat ponent, apparently reflected ongoing above anticipated levels, reflecting efforts by households to shift funds demand for adjustment credit by banks away from depository accounts in search experiencing temporary technnical of better returns. M3 turned up after difficulties. declining in June and July; however, Other short-term interest rates were expansion of this aggregate continued to little changed on balance over the be held down by declines in institutionintermeeting period, while yields on only money market funds. For the year intermediate- and long-term debt obliga- through August, M2 and M3 were estitions declined somewhat. The drop in mated to have grown at rates close to the longer-term yields appeared to be asso- lower ends of the Committee's ranges ciated with incoming data indicating for the year. Total domestic nonfinancial continuing sluggishness in economic debt had expanded moderately in recent activity and the more favorable perfor- months, and for the year through July it mance of broad measures of prices. was estimated to have increased at a rate Major indexes of stock prices increased in the lower half of the Committee's somewhat further over the intermeeting monitoring range. period, evidently reflecting lower bond The staff projection prepared for this yields and heavy inflows to stock meeting suggested moderate growth in mutual funds. economic activity and limited reduc- In foreign exchange markets, the tions in margins of unemployed labor trade-weighted value of the dollar in and capital through next year. Fiscal terms of the other G-10 currencies restraint, uncertainty about other govdepreciated on balance over the inter- ernment policies, and slow growth of meeting period. Much of the dollar's foreign industrial economies over the decline reflected the strength of the mark near term would act as a constraint on and other European currencies, which the economy. However, improving was related in part to the unexpectedly balance-sheet positions and credit supslow pace of monetary easing in ply conditions were lifting an unusual Germany and other European countries. constraint on spending, and the lower Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September 171 interest rates would encourage further ary trend, but the disparate factors bearincreases in consumer spending, hous- ing on the outlook for inflation as well ing construction, and business fixed as the swings in price performance investment. The continued slack in labor experienced in recent quarters argued and product markets, coupled with some for caution in assessing the future course tempering of inflation expectations, was of inflation. expected to foster further reductions in In their review of developments wage and price inflation. around the nation, members commented In the Committee's discussion of cur- that business conditions remained rent and prospective economic condi- uneven across local areas and industries, tions, members commented that recent but they characterized general economic developments had not altered their out- activity in most regions as ranging from look for moderate and sustained expan- little change to moderate growth since sion in economic activity. The members midsummer. However, business condiacknowledged that the interpretation of tions continued to be quite weak in some ongoing developments presented some areas, notably in California, and busiunusual problems, notably the difficulty ness sentiment appeared to have reof reconciling the appreciable growth in mained cautious in much of the nation. employment thus far this year with the One member emphasized uneven condislow expansion in measured output; the tions of a different kind. Relatively disassociated drop in measured productiv- advantaged members of the population, ity was especially surprising in light of often living in inner cities, had high and the business drive toward more efficient rising expectations about their economic operations. Moreover, the economic out- prospects. At the same time, however, look clearly remained subject to a vari- some traditional paths of upward mobilety of uncertainties, including potential ity were being cut back, such as the developments abroad that were espe- military and civil service within the cially difficult to predict. Nonetheless, government and office jobs more genwhile temporary factors were likely to erally. In addition, regulations aimed depress third-quarter expansion, the at correcting some problems in finanmembers saw little in the current statisti- cial institutions—such as real estate cal or anecdotal reports on the domestic appraisal and downpayment economy that pointed to the likelihood requirements—were having unintended of a significant deviation from a moder- adverse effects on lower-income busiate growth trend. It was noted in this nesses and households, and other proconnection that the inhibiting effects of posals aimed at promoting minority increased fiscal restraint and expected lending were in danger of promising further weakness in net exports needed more than they could deliver. An apparto be weighed against the favorable ently widening gap between economic effects on interest-sensitive spending of realities and aspirations might not have considerably reduced intermediate- and measurable implications for the macrolong-term interest rates and the much economic outlook over short periods of improved financial condition of many time, but they reflected a worrisome business firms and households. With trend in terms of the longer-run health regard to the outlook for inflation, some of the economy. members suggested that the prospects In other comments, members referred for continued slack in resource utiliza- to a number of financial developments tion were consistent with a disinflation- that had favorable implications for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

172 80th Annual Report, 1993 sustained economic expansion. Business increased income tax liabilities. Some firms and consumers had made substan- members expressed the view that more tial progress in strengthening their bal- vigorous growth in employment might ance sheets, and while the process of well occur as the expansion matured, adjusting balance sheets evidently was and such a development would be likely still under way, the material improve- to have a favorable effect on consumer ment accomplished thus far had dimin- attitudes and spending. ished financial risks and constraints on Cautious attitudes also appeared to spending. Banking institutions had bol- have held back housing demand and stered their capital positions and were construction activity despite declines in in a better position to accommodate mortgage interest rates. The combinaincreases in loan demand. Bond and tion of some further declines in mortstock markets had exhibited consider- gage interest rates recently and a tenable strength. In this connection, how- dency for house prices to stabilize or ever, a few members commented on the even to firm in some markets seemed to apparently growing concern in financial have induced appreciable and widemarkets that current equity prices were spread strengthening in demand for high relative to earnings and dividends. single-family housing. Indeed, despite A correction in U.S. equity markets persisting weakness in some areas, could trigger cumulative selling, espe- housing markets were described as cially by mutual funds, which had gar- quite strong in many parts of the counnered substantial new investors, some of try, and the overall improvement in whom might not fully appreciate the housing activity might not be captured risks of their new assets relative to in the latest statistics. Other construction deposits. On the positive side, there activity appeared on the whole to were good reasons for optimism on the have bottomed out and might have trajectory of business profits in an envi- begun to trend higher. Anecdotal reports ronment of low inflation and moderate suggested a pickup in the volume of growth. Moreover, some managers of commercial property transactions, mutual funds reportedly were taking though apparently not yet in the prices steps to strengthen the liquidity of their of commercial properties in most areas, portfolios, and members reported on and rising construction outlays were efforts to improve individual investor anticipated for commercial, industrial, awareness of the risks of equity and institutional facilities as economic investments. activity continued to expand. Office During their review of the prospec- construction was likely to remain gentive performance of key sectors of the erally depressed as excess capacity coneconomy, members gave somewhat tinued to be absorbed, but such conmixed reports on retail sales in recent struction might not decline further. weeks, but they generally anticipated Members also anticipated appreciable that consumer spending would provide further growth in business spending for continued if not strong support to sus- equipment, notably for the purpose of tained economic expansion. As had been enhancing productivity in an environtrue for an extended period, consumer ment of strong competitive pressures; attitudes remained hesitant in the con- concurrently, spending to expand capactext of concerns about employment and ity seemed likely to remain relatively income prospects and, in the case of limited unless consumer spending many consumers with higher incomes, gathered more momentum in coming Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September 173 quarters than was now anticipated. On Many members referred to the more balance, business fixed investment favorable price developments that had was expected to continue to provide occurred since the early part of the year considerable support to the economic when key measures of inflation had expansion. surged. While it was premature to con- The passage of deficit-reduction legis- clude that a distinct disinflationary trend lation in July implied increased fiscal had been reestablished, the members restraint but also appeared to have generally agreed that price pressures improved confidence in financial mar- were likely to remain subdued given kets and in the business community their projections of some continuing more generally regarding the ability of slack in resource utilization. Favorable the federal government to enact needed developments tending to support that legislation. At the same time, the new conclusion included the persistence of taxes stemming from that legislation and intensely competitive conditions in most a greater focus on the potential for markets for goods around the country. further legislation, notably health care The costs of materials purchased by reform and its implications for man- business firms generally were reported dated business costs, were a key factor to be rising only slowly, if at all. There in sustaining cautious attitudes among were indications of fairly tight labor business executives. Members also markets in some areas, but wage presreferred to the constraining effects in sures remained limited even in those many areas, and on the economy more markets. At the same time, the costs of generally, of current and prospective worker benefits continued to rise fairly cutbacks in defense expenditures, spend- rapidly and many business contacts were ing curbs by state and local govern- expressing concern about the possibility ments, and the outlook for further of further mandated cost increases tax increases by many of these related to the health care reform legisgovernments. lation. For the next several months, rela- The prospects for net exports also tively rapid increases in food prices were cited as a negative factor in the associated with weather-related crop economic outlook. Expectations of per- losses and an increase in the excise sisting weakness in some major foreign tax on gasoline would tend to boost economies implied relatively limited consumer prices. On balance, these growth in U.S. exports in a period when developments were not seen as inconmoderate expansion in this country was sistent with longer-run progress toward likely to foster somewhat more rapid price stability, though the inflation outincreases in U.S. imports. Some mem- look remained subject to considerable bers also commented that the controver- uncertainty. sial NAFTA legislation under consider- In the Committee's discussion of polation in the Congress continued to icy for the intermeeting period ahead, dominate business discussions in parts all of the members agreed that recent of the country. It was suggested that economic and financial developments whatever its eventual benefits for the pointed to the desirability of an three nations immediately involved unchanged policy stance. The members might be, a defeat of that legislation recognized that neither the pace of the could prove to be a setback for the economic expansion nor the uncertain GATT negotiations with dislocative progress toward price stability reflected implications for world trade. a wholly satisfactory economic perfor- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

174 80th Annual Report, 1993 mance, but at this point the present pos- would need to be firmed at some point. ture of monetary policy continued to These members stressed the need to offer the best promise in their view of remain especially alert to potential inflapromoting sustained economic growth tionary developments against the backin the context of subdued if not declin- ground of persisting inflationary expecing inflation. tations and uncertain progress toward From the perspective of a variety of price stability. Other members, while financial measures, the current monetary sharing this concern to an extent, gave policy continued to be quite accommo- some weight to the possibility that the dative. Short-term interest rates were expansion might remain quite sluggish low, indeed close to zero after adjust- for a period; under the circumstances, ment for inflation, and there had been they foresaw the need to maintain an appreciable further declines in longer- accommodative policy posture and term interest rates. Growth of M2 could not rule out the possibility that the remained slow, but it had picked up next policy move might have to be since earlier in the year, and M3 had toward greater monetary stimulus. expanded in August, albeit at a sluggish At the conclusion of the Committee's rate, after declining in previous months. discussion, all the members indicated One member observed that growth in their support of a directive that called M2, adjusted to include certain stock for maintaining the existing degree of and bond mutual funds, was estimated pressure on reserve positions and that to have accelerated since early spring to did not include a presumption about the a fairly healthy pace. Narrow measures likely direction of any adjustment to of money and reserves, though subject policy during the intermeeting period. to a variety of influences, were growing Accordingly, in the context of the at rates that suggested an ample provi- Committee's long-run objectives for sion of liquidity to the economy. price stability and sustainable economic In considering possible adjustments growth, and giving careful consideration to policy during the intermeeting period, to economic, financial, and monetary all of the members endorsed a proposal developments, the Committee decided to retain a symmetrical directive. While that slightly greater or slightly lesser current economic uncertainties were reserve restraint might be acceptable mirrored in uncertainties about the during the intermeeting period. Accordfuture course of monetary policy, the ing to a staff analysis, the reserve condimembers agreed that developments in tions contemplated at this meeting were the period until the next meeting in mid- expected to be consistent with modest November were not likely to call for any growth in M2 and M3 over the balance adjustment to policy. Beyond the nearer of the year. term, however, both the timing and, in At the conclusion of the meeting, the the view of at least some members, the Federal Reserve Bank of New York was direction of the next policy change could authorized and directed, until instructed not be foreseen at this time. While they otherwise by the Committee, to execute did not see convincing evidence that transactions in the System account in monetary policy was overly stimulative accordance with the following domestic at this point, some members were policy directive: concerned that the current stance, as reflected in short-term interest rates, was The information reviewed at this meeting quite accommodative and probably suggests that economic activity is continuing Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September 175 to expand at a moderate pace. Total nonfarm growth of total domestic nonfinancial debt payroll employment edged down in August also was lowered to 4 to 8 percent for the after a sizable gain in July, but the average year. For 1994, the Committee agreed on workweek rose to a relatively high level tentative ranges for monetary growth, meaand the civilian unemployment rate declined sured from the fourth quarter of 1993 to the to 6.7 percent. Industrial production has fourth quarter of 1994, of 1 to 5 percent for advanced moderately over recent months. M2 and 0 to 4 percent for M3. The Commit- Retail sales changed little in real terms in tee provisionally set the monitoring range for July and August after increasing appreciably growth of total domestic nonfinancial debt at in the second quarter. Housing starts were 4 to 8 percent for 1994. The behavior of the down slightly in July but rose substantially monetary aggregates will continue to be in August. Available indicators suggest a evaluated in the light of progress toward slowing in the expansion of business capital price level stability, movements in their spending from a robust pace earlier in the velocities, and developments in the economy year. The nominal U.S. merchandise trade and financial markets. deficit was about unchanged in July from its In the implementation of policy for the average rate in the second quarter. After immediate future, the Committee seeks to rising at an accelerated rate in the early part maintain the existing degree of pressure on of the year, consumer prices have increased reserve positions. In the context of the more slowly and producer prices have fallen Committee's long-run objectives for price in recent months. stability and sustainable economic growth, Short-term interest rates have changed and giving careful consideration to ecolittle since the Committee meeting on nomic, financial, and monetary devel- August 17, while yields on intermediate and opments, slightly greater reserve restraint long-term debt obligations have declined or slightly lesser reserve restraint might somewhat. In foreign exchange markets, the be acceptable in the intermeeting period. trade-weighted value of the dollar in terms The contemplated reserve conditions are of the other G-10 currencies depreciated expected to be consistent with modest substantially over the intermeeting period. growth in M2 and M3 over the balance of M2 continued to expand at a slow rate in the year. August, while M3 turned up after declining in June and July. For the year through Votes for this action: Messrs. Greenspan, August, M2 and M3 are estimated to have McDonough, Angell, Boehne, Keehn, grown at rates close to the lower end of the Kelley, LaWare, Lindsey, McTeer, Mul- Committee's ranges for the year. Total lins, Ms. Phillips, and Mr. Stern. Votes domestic nonfinancial debt has expanded at a against this action: None. moderate rate in recent months, and for the year through July it is estimated to have It was agreed that the next meeting of increased at a rate in the lower half of the the Committee would be held on Tues- Committee's monitoring range. day, November 16, 1993. The Federal Open Market Committee seeks monetary and financial conditions that The meeting adjourned at 12:35 p.m. will foster price stability and promote sus- During the intermeeting period, availtainable growth in output. In furtherance of able members participated in three telethese objectives, the Committee at its meet- phone conference calls to discuss issues ing in July lowered the ranges it had estabrelating to the release of information lished in February for growth of M2 and M3 about discussions at Federal Open Marto ranges of 1 to 5 percent and 0 to 4 percent respectively, measured from the fourth quar- ket Committee meetings. These calls ter of 1992 to the fourth quarter of 1993. The were prompted by hearings on such Committee anticipated that developments issues that were held by the House Comcontributing to unusual velocity increases mittee on Banking, Finance, and Urban would persist over the balance of the year Affairs. The discussions took into and that money growth within these lower account information that unedited tranranges would be consistent with its broad policy objectives. The monitoring range for scripts for meetings since early 1976 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

176 80th Annual Report, 1993 were maintained by the FOMC secretar- Mr. Mattingly, General Counsel iat at the Board of Governors. The mem- Mr. Patrikis, Deputy General Counsel Mr. Prell, Economist bers did not reach any decisions on these Mr. Truman, Economist matters during these conferences. In the course of two further telephone confer- Messrs. R. Davis, Lang, Lindsey, ences during the intermeeting period, Promisel, Rolnick, Rosenblum, the Committee reviewed economic and Scheld, Siegman, Simpson, and financial developments affecting Mex- Slifman, Associate Economists ico and discussed various contingencies Ms. Lovett, Manager for Domestic that might involve the Federal Reserve. Operations, System Open Market Account Donald L. Kohn Mr. Fisher, Manager for Foreign Secretary Operations, System Open Market Account Meeting Held on Mr. Winn, Assistant to the Board, November 16, 1993 Office of Board Members, Board of Governors12 A meeting of the Federal Open Market Mr. Ettin, Deputy Director, Division Committee was held in the offices of the of Research and Statistics, Board Board of Governors of the Federal of Governors Reserve System in Washington, D.C., Mr. Madigan, Associate Director, Division of Monetary Affairs, on Tuesday, November 16, 1993, at Board of Governors 9:00 a.m. Mr. Stockton, Associate Director, Division of Research and Present: Statistics, Board of Governors Mr. Greenspan, Chairman Ms. Low, Open Market Secretariat Mr. McDonough, Vice Chairman Assistant, Division of Monetary Mr. Angell Affairs, Board of Governors Mr. Boehne Mr. Keehn Mr. Beebe, Ms. Browne, Messrs. Mr. Kelley J. Davis, T. Davis, Dewald, Mr. LaWare Goodfriend, and Ms. Tschinkel, Mr. Lindsey Senior Vice Presidents, Federal Mr. McTeer Reserve Banks of San Francisco, Mr. Mullins Boston, Cleveland, Kansas City, Ms. Phillips St. Louis, Richmond, and Atlanta Mr. Stern respectively Messrs. Broaddus, Jordan, Forrestal, Mr. Guentner, Assistant Vice President, and Parry, Alternate Members Federal Reserve Bank of of the Federal Open Market New York Committee By unanimous vote, the minutes for Messrs. Hoenig, Melzer, and Syron, Presidents of the Federal Reserve the meeting of the Federal Open Market Banks of Kansas City, St. Louis, and Boston respectively Mr. Kohn, Secretary and Economist 12. Attended portion of meeting on the review Mr. Bernard, Deputy Secretary of FOMC practices with regard to recording and Mr. Coyne, Assistant Secretary transcribing FOMC meeting discussions and the Mr. Gillum, Assistant Secretary release of information about such discussions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 177 Committee held on September 21, 1993, The Manager for Domestic Operawere approved. tions reported on developments in The Report of Examination of the domestic financial markets and on System Open Market Account, con- System open market transactions in ducted by the Board's Division of U.S. government securities and federal Reserve Bank Operations and Payment agency obligations during the period Systems as of the close of business on September 21, 1993, through Novem- April 30, 1993, was accepted. ber 15, 1993. By unanimous vote, the The Manager for Foreign Operations Committee ratified these transactions. reported on developments in foreign The Committee then turned to a disexchange markets during the period cussion of the economic and financial since the September meeting. There outlook and the formulation of monewere no open market transactions in for- tary policy for the intermeeting period eign currencies for the System account ahead. A summary of the economic and during this period, and thus no vote was financial information available at the required of the Committee. time of the meeting and of the Commit- By unanimous vote, the Committee tee's discussion is provided below, folauthorized the renewal for further peri- lowed by the domestic policy directive ods of one year of the System's recipro- that was approved by the Committee cal currency ("swap") arrangements and issued to the Federal Reserve Bank with foreign central banks and the of New York. Bank for International Settlements. The The information reviewed at this amounts and maturity dates of these meeting suggested some strengthening arrangements are indicated in the table in the expansion of economic activity in that follows: recent months. Consumer spending had picked up; housing activity was quick- Amounts ening; and business spending for dura- (millions Foreign bank of Term Maturity ble equipment had continued to trend (months) dates dollars higher, though at a reduced pace. Indusequivalent) trial production, particularly manufac- Austrian National turing, and employment had posted solid Bank 250 12 12/04/93 Bank of England 3,000 12/04/93 gains. At the same time, inflation had Bank of Japan 5,000 12/04/93 remained muted, with consumer prices Bank of Mexico 700 12/04/93 Bank of Norway 250 12/04/93 increasing moderately on balance in re- Bank of Sweden 300 12/04/93 cent months and producer prices falling. Swiss National Bank 4,000 12/04/93 Total nonfarm payroll employment rose appreciably in September and Octo- Bank for International Settlements ber after declining slightly in August. Swiss francs 600 12/04/93 Other authorized Although job gains were widespread European in October, a large part of the increase currencies 1,250 12/04/93 was in various business services, nota- National Bank bly temporary employment agencies. In of Belgium 1,000 12/18/93 Bank of Canada 2,000 12/28/93 other categories, construction employ- National Bank ment registered its largest monthly of Denmark 250 12/28/93 Bank of France 2,000 12/28/93 rise since last spring, and jobs in manu- German Federal facturing increased after seven months Bank 6,000 12/28/93 Bank of Italy 3,000 12/28/93 of declines. The civilian unemployment Netherlands Bank ... 500 12/28/93 rate edged up to 6.8 percent in October. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 80th Annual Report, 1993 Industrial production rose sharply in than offset continued strong gains in October, with manufacturing more than spending for computing equipment and accounting for the increase. Part of the other capital goods. Nonresidential congain in manufacturing reflected a further struction was down slightly in the third rebound in the output of motor vehicles quarter after a sizable advance over the and parts. Aside from motor vehicles, first half of the year. Office and indushowever, the production of business trial building activity appeared to have equipment was lifted by another surge bottomed out, but high vacancy rates in office and computing equipment, and and declining property values continued the output of consumer goods was to limit new construction. boosted by strength in furniture and Business inventories climbed signifiappliances. Utilization of total industrial cantly further in September; for the third capacity rose in October, reaching a quarter as a whole, however, stocks were level last seen in the fourth quarter of accumulated at a somewhat slower pace 1992. than in the first half of the year. At the Nominal retail sales were up substan- retail level, inventories rebounded in tially in October after changing little in September after declining on balance September. Sales in October were over July and August. The ratio of boosted by a turnaround in spending at inventories to sales for retailing edged automobile dealerships and by a surge at up in September but remained near the building materials and supply stores. low end of its range over the past year. Sales at other types of retail outlets were Inventory accumulation in the wholemixed. Purchases at general merchan- sale sector slowed in September after dise stores were brisk. However, sales rising substantially in August; the at apparel outlets and at furniture and inventory-to-sales ratio for this sector appliance stores edged down after rising was unchanged at the midpoint of its strongly for several months, and the range over the past several years. In increase in spending at gasoline stations manufacturing, stocks dropped in Sepentirely reflected the effects of the new tember after changing little over the two federal gasoline tax on pump prices. previous months; with factory shipments Housing activity strengthened further in up, the stocks-to-shipments ratio for the third quarter. Starts of single-family manufacturing as a whole fell in Sephomes in August and September were at tember to its lowest level in recent years. their highest levels in almost five years; The nominal U.S. merchandise trade starts of multifamily units also picked deficit declined further in August, but up in September, although construction for July and August combined the defiactivity in this sector remained at a very cit was about the same as its average low level. Sales of new and existing rate for the second quarter. The value of homes moved up further in the third both exports and imports was slightly quarter and were especially strong in lower in July-August than in the second September. quarter. The decline in the value of Real business capital spending exports primarily reflected shortfalls in increased in the third quarter at a consid- shipments of aircraft and automotive erably slower pace than earlier in the products, and the drop in imports was year. The slowdown largely reflected a associated with reduced imports of oil smaller rise in spending for producers' and automotive products. Available data durable equipment, as reduced outlays indicated that the performance of the for aircraft and motor vehicles more major foreign industrial economies Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 179 continued to be mixed. Economic activ- period. Accordingly, the directive indiity appeared to have remained weak in cated that in the context of the Commit- Japan in the third quarter and to have tee's long-run objectives for price stabilstagnated in western Germany after ity and sustainable economic growth, increasing moderately in the second and giving careful consideration to ecoquarter. On the other hand, the reces- nomic, financial, and monetary developsions in France and Italy seemed to ments, slightly greater or slightly lesser have bottomed out, and the economies reserve restraint might be acceptable of Canada and the United Kingdom to during the intermeeting period. The have recovered somewhat further. reserve conditions associated with this Producer prices for finished goods fell directive were expected to be consistent in October, retracing the small increase with modest growth of M2 and M3 over in September; excluding the effects of the balance of the year. higher prices for finished foods and Open market operations during the energy goods, producer prices were intermeeting period were directed down over the September-October toward maintaining the existing degree period. Over the twelve-month period of pressure on reserve positions. Adjustended in October, producer prices for ment plus seasonal borrowing avernonfood, non-energy finished goods aged somewhat above anticipated levels were fractionally higher on balance, the as a result of increased demands for lowest yearly increase on record for this adjustment credit associated with index, which was introduced in 1973. quarter-end pressures in financial mar- Consumer prices rose in October after kets and an unexpected swing in the being unchanged in September, with the Treasury balance. The federal funds rate increase partly reflecting the effect of remained close to 3 percent over the the implementation of the new federal period. gasoline tax. For nonfood, non-energy Most other interest rates were up consumer items, the rise in consumer somewhat over the period since the prices over the twelve months ended in Committee's September meeting. Trea- October was considerably smaller than sury bill rates rose in part because of the the rise over the comparable period Treasury's need to rely more heavily on ended in October 1992. Labor compen- bill issuance in a quarter containing a sation costs did not show a comparable reduced schedule for auctioning longdowntrend. The increase in hourly com- term debt. Intermediate- and long-term pensation for private industry workers yields fell in the weeks following the in the third quarter was about the same September meeting and reached twentyas in the second quarter. For the twelve year lows. These declines were more months ended in September, hourly than reversed subsequently, however, compensation advanced slightly faster when investors interpreted incoming than over the comparable year-earlier data as suggesting stronger economic period. growth and credit demands over the At its meeting on September 21, intermediate term and a somewhat 1993, the Committee adopted a directive greater likelihood of some tightening of that called for maintaining the existing monetary policy. Most indexes of stock degree of pressure on reserve positions market prices posted robust gains early and that did not include a presumption in the intermeeting period, but these about the likely direction of any adjust- gains subsequently were pared back as ment to policy during the intermeeting interest rates moved higher. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

180 80th Annual Report, 1993 In foreign exchange markets, the year ahead. In addition, fiscal restraint trade-weighted value of the dollar in and uncertainty about other government terms of the other G-10 currencies policies would continue to inhibit the appreciated over the intermeeting expansion, and a sluggish acceleration period. The strengthening of the dollar, in foreign industrial economies pointed and the associated rise in U.S. long-term to only modest improvement in export interest rates relative to foreign rates, demand. However, improving balance reflected both more optimistic expecta- sheet positions and credit supply conditions for growth in the United States and tions were lifting an unusual constraint more pessimistic assessments for the on spending, and the lower interest rates course of economic activity in continen- would encourage further increases in tal Europe and Japan. business fixed investment and housing M2 registered a relatively strong construction. The continued slack in advance in September, but growth labor and product markets, coupled with slowed again in October. The September some tempering of inflation expectapickup partly reflected an unexpected tions, was expected to foster further surge in the volatile overnight repur- reductions in wage and price inflation. chase agreement (RP) component of In the Committee's discussion of the M2. Ml also was strong, but the total of economic outlook, members commented time and savings deposits continued to that the economic data and anecdotal decline, apparently in large part because reports received since the September of the persisting allure of capital market meeting had tended to reinforce their instruments. Growth of M3 strength- earlier forecasts that moderate economic ened somewhat more than M2 over the expansion would be sustained. After a two months, reflecting a run-up in sluggish performance in the first half of institution-only money market funds. the year, overall economic activity had For the year through October, M2 and picked up somewhat more in the third M3 were estimated to have grown at quarter than most members had anticirates a little above the lower ends of the pated, and available indicators of spend- Committee's ranges for the year. Total ing and production pointed to relatively domestic nonfinancial debt expanded at robust economic growth in the current a moderate rate in recent months, and quarter. Looking ahead to 1994, the for the year through September it was members expected the expansion to estimated to have increased at a rate in slow somewhat from its apparent pace the lower half of the Committee's moni- over the closing months of this year. toring range. Fluctuations in the rate of quarterly GDP The staff projection prepared for this growth undoubtedly would occur, but meeting suggested that economic activ- the economy over the year ahead was ity, after advancing relatively strongly in thought likely to continue on a trend of the fourth quarter, would expand moder- moderate expansion averaging close to ately next year, about in line with the the economy's long-run potential or potential rate of economic growth over somewhat higher. Most members saw time, and thus would be associated with the probability of a sharp deviation in limited, if any, further reductions in mar- either direction from their current foregins of unemployed labor and capital. casts as relatively remote, though a Consumer spending, which had buoyed number also believed that any deviation growth recently, was expected to expand was more likely to be in the direction of at the same pace as incomes over the somewhat stronger rather than weaker Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 181 growth. In general, members expected expansion. Indications of improving core inflation to change little or to edge consumer confidence, reflected in turn lower next year, but a few saw some in the growing optimism expressed by danger of marginally higher inflation. business contacts regarding the outlook In their assessment of developments for holiday sales, should help to sustain underlying the economic outlook, mem- relatively ebullient consumer spending bers referred to indications in many through the year-end. Contacts in the areas of some strengthening in business motor vehicles industry also appeared to conditions and in related business senti- be relatively optimistic about the prosment, though economic activity clearly pects for sales of the new models. The remained sluggish or even depressed outlook for the consumer sector also in some parts of the country and over- was subject to some constraining influall business attitudes could still be ences. Growth in consumer spending described as cautious. Current financial had tended to exceed the expansion in conditions, including the strength in consumer incomes, and a number of equity markets, reduced intermediate- members questioned the extent to which and long-term interest rates, and an the acceleration in such spending was apparently improving availability of likely to extend into the new year. The business credit from financial institu- saving rate already was near the low end tions, provided a favorable backdrop for of its historic range, at least on the basis further economic expansion. Moreover, of current estimates, and was unlikely to businesses and households had made decline significantly, if at all. Much substantial progress in improving their would depend on consumers' outlook financial positions. These factors were for employment and incomes. Growing seen as reducing downside risks to the demands should eventually be translated expansion. At the same time, while there into faster employment gains, but at this were signs of significant firming in the point business firms continued to resist economic expansion, a number of mem- adding to their workforces despite bers observed that at this point they did increasing sales and many firms were not see the usual indications of any near- still announcing workforce reductions. term intensification of inflationary pres- While net gains in employment, includsures such as general increases in com- ing growth associated with increases in modity prices, lengthening delivery lead self-employment and new business fortimes along with efforts to increase mations, were continuing, expansion in inventories, and strong growth of credit. jobs and consumer incomes probably Indeed, the risks of an overheated and would be at a moderate pace over the inflationary expansion in the near term year ahead. Against this background, seemed quite limited in light of various members generally expected moderate constraints on the economy such as growth in consumer spending to be those associated with a restrictive fiscal maintained, but they did not see such policy and the continuing weakness in spending as likely to give extra impetus key export markets. to growth in economic activity in 1994. The members anticipated appreciable With regard to the outlook for spefurther expansion in business investcific sectors of the economy, a step-up ment spending, especially in the context in consumer spending, notably for motor of reduced interest rates, improved busivehicles and housing-related durable ness balance sheets, and ongoing efforts goods, had contributed substantially to improve productivity. Growth in to the strengthening of the economic Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 80th Annual Report, 1993 spending for business equipment proba- Net exports were seen as another conbly would continue at a relatively straining factor in the performance of vigorous pace, though perhaps some- the economy next year. On the import what below the growth rates experi- side, even moderate expansion in enced in recent quarters, and other in- domestic economic activity was likely vestment activity seemed poised to pick to stimulate appreciable further growth up. In this connection, several members in U.S. demands for foreign goods. At reported that vacancy rates in com- the same time, the prospects for exports mercial office buildings were declining to a number of major industrial counin some areas and while this develop- tries were not promising, at least for the ment was not yet being translated into nearer term, given lagging economies in appreciable new construction, invest- Europe and Japan. In this connection, a ment funds appeared to be flowing more number of members referred to reports freely into commercial real estate. of weak export demand for specific U.S. Clear indications of strengthening were products and also noted that an extended observed in housing construction in coal mining strike had cut supplies of many parts of the country and the out- coal available for export and had look for such building activity seemed induced some domestic firms to turn to promising in the context of reduced imports to help fill their requirements. mortgage rates and improving consumer On the other hand, some markets for sentiment. U.S. exports, notably those in a number Fiscal policy developments, including of East Asian nations and some Latin the effects on business attitudes of the American countries, were likely to conuncertainties surrounding health care tinue to experience considerable growth, reform legislation, were likely to con- thereby mitigating an otherwise fairly tinue to inhibit the expansion over gloomy outlook for exports. the year ahead. Some members again With regard to the outlook for inflaemphasized the negative effects that the tion over the year ahead, views did not ongoing retrenchment in defense spend- vary greatly among the members. They ing was having on local economies as ranged from expectations of some limwell as on the economy more generally. ited progress toward price stability to On the taxation side, the rise in tax forecasts of a marginal increase in the liabilities on higher incomes could have core rate of inflation. Members who an especially pronounced effect during anticipated a relatively favorable inflathe early months of next year, given the tion performance tended to underscore retroactive inclusion of 1993 incomes the likely persistence of appreciable subject to the new tax, but some mem- slack in labor and other production bers noted that the increased tax pay- resources on the assumption that growth ments probably had been widely antici- in overall economic activity would pated and the negative implications for remain on a moderate trend in line with the economy might well be less than their forecasts. Some also pointed to the many observers expected. Nonetheless, absence of inflationary pressures in most the overall posture of fiscal policy and commodity markets, the persistence of associated business concerns about the intense competition in local markets cost implications of possible future leg- across the nation, and the outlook for islation were likely to be an important relatively subdued increases in labor factor tending to limit the strength of the costs in part because of ongoing expansion. improvements in productivity. Other Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 183 members gave more emphasis to the interest-sensitive sectors of the econpossibility that the economic expansion omy. The members acknowledged that next year, especially if it turned out on current measures of inflation and anecthe high side of the range encompassing dotal reports from around the nation did the members' current projections, was not on the whole suggest an intensificamore likely to be associated with some tion of inflation at this point. Moreover, upward pressures on costs and prices. In the Committee had to be wary of misthis connection, relatively rapid growth leading signals that were inherent in the in economic activity, should it persist saw-tooth pattern of typical economic into the early part of next year, probably expansions, and it needed to avoid a would trigger attempts to raise prices policy move that would incur an unnecand wages somewhat more rapidly even essary risk to the expansion, given in the context of some continuing slack uncertainties about the degree to which in overall capacity and labor utilization. recent strength in spending would At this point, however, there were no persist. significant indications of accelerating Most of the members concluded that inflation, and business contacts around on balance current economic conditions the nation did not currently see or seem warranted a steady policy course and, in to anticipate increasing inflationary light of prevailing uncertainties, that it pressures. would be premature to anticipate any In the Committee's discussion of pol- particular policy change or its timing. icy for the intermeeting period ahead, As a consequence, the members also the members generally agreed that concluded that the currently unbiased despite various indications of a pickup instruction in the directive relating to in economic growth, the underlying the direction of possible intermeeting economic situation and the outlook for policy changes should be retained; in inflation had not changed sufficiently to any case, significant changes in the outwarrant an adjustment in monetary pol- look requiring policy action were icy. Looking beyond the intermeeting viewed as unlikely in the relatively short period, however, several members com- period until the next scheduled meeting mented that the Committee might well on December 21. One member exhave to consider the need to move from pressed the differing view that a less the currently stimulative stance of mon- accommodative policy would be more etary policy toward a more neutral pol- consistent over time with the Commiticy posture, should concerns about tee's desire to foster sustained economic rising inflationary pressures begin to be expansion and progress toward price realized. The members recognized the stability. However, this member also felt desirability of taking early action to that a policy tightening move at this arrest incipient inflationary pressures time might be seen as a response to a before they gathered strength, especially stronger economy, rather than an action given the Committee's commitment not that clearly was intended to underscore just to resist greater inflation but to the Committee's commitment to price foster sustained progress toward price stability and therefore would elicit a stability. In appropriate circumstances, a favorable response in intermediate- and prompt policy move also might allay long-term debt markets. market concerns about inflation with With regard to financial developfavorable implications for longer-term ments bearing on the economic outlook interest rates and the performance of and the potential need to adjust mone- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

184 80th Annual Report, 1993 tary policy, members observed that the The information reviewed at this meeting broader money and credit aggregates suggests some strengthening in the expansion of economic activity in recent months. had strengthened somewhat since Total nonfarm payroll employment rose earlier in the year, though to still relaappreciably in September and October, while tively moderate growth rates. More- the civilian unemployment rate edged up to over, much of the acceleration in M2 6.8 percent in October. Industrial production and M3 could be attributed to special or increased sharply in October, partly reflecttemporary factors, and according to a ing a continuing rebound in the output of motor vehicles. Retail sales were up substanstaff analysis growth in these aggretially in October after changing little in Sepgates was likely to revert to relatively tember. Housing activity picked up further in slow rates in coming months, assuming the third quarter. The expansion of business unchanged reserve conditions. At the capital spending has slowed from a robust same time, growth in Ml and reserves pace earlier in the year. The nominal U.S. had remained comparatively rapid and merchandise trade deficit in July-August was about unchanged from its average rate in one view such growth might well in the second quarter. Consumer prices have be indicative of an overly stimulaincreased moderately on balance in recent tive monetary policy that would pro- months and producer prices have fallen. mote more inflation over time or at Most interest rates have increased someleast prove inconsistent with further what since the Committee meeting on Sepdisinflation. tember 21. In foreign exchange markets, the trade-weighted value of the dollar in terms At the conclusion of the Committee's of the other G-10 currencies appreciated over discussion, all the members indicated the intermeeting period. their support of a directive that called Growth of M2 picked up slightly on balfor maintaining the existing degree of ance in September and October, while M3 pressure on reserve positions and that strengthened to a somewhat greater extent did not include a presumption about the over the two months. For the year through October, M2 and M3 are estimated to have likely direction of any adjustment to polgrown at rates a little above the lower end of icy during the intermeeting period. the Committee's ranges for the year. Total Accordingly, in the context of the Com- domestic nonfinancial debt has expanded at a mittee's long-run objectives for price moderate rate in recent months, and for the stability and sustainable economic year through August it is estimated to have growth, and giving careful consideration increased at a rate in the lower half of the Committee's monitoring range. to economic, financial, and monetary The Federal Open Market Committee developments, the Committee decided seeks monetary and financial conditions that that slightly greater or slightly lesser will foster price stability and promote susreserve restraint might be acceptable tainable growth in output. In furtherance of during the intermeeting period. The these objectives, the Committee at its meetreserve conditions contemplated at this ing in July lowered the ranges it had established in February for growth of M2 and M3 meeting were expected to be consistent to ranges of 1 to 5 percent and 0 to 4 percent with modest growth in M2 and M3 over respectively, measured from the fourth quarcoming months. ter of 1992 to the fourth quarter of 1993. The At the conclusion of the meeting, the Committee anticipated that developments Federal Reserve Bank of New York was contributing to unusual velocity increases authorized and directed, until instructed would persist over the balance of the year and that money growth within these lower otherwise by the Committee, to execute ranges would be consistent with its broad transactions in the System Account in policy objectives. The monitoring range for accordance with the following domestic growth of total domestic nonfinancial debt policy directive: also was lowered to 4 to 8 percent for the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 185 year. For 1994, the Committee agreed on Release of Information tentative ranges for monetary growth, mea- about FOMC Meetings sured from the fourth quarter of 1993 to the fourth quarter of 1994, of 1 to 5 percent for At this meeting the Committee consid- M2 and 0 to 4 percent for M3. The Commitered a number of alternatives for releastee provisionally set the monitoring range for ing detailed information on its delibgrowth of total domestic nonfinancial debt at 4 to 8 percent for 1994. The behavior of the erations at past and future meetings. monetary aggregates will continue to be Members emphasized that the most evaluated in the light of progress toward important consideration was the presprice level stability, movements in their ervation of a deliberative process that velocities, and developments in the economy would enable the Committee to arrive at and financial markets. the best possible monetary policy deci- In the implementation of policy for the sions. Premature release of detailed immediate future, the Committee seeks to maintain the existing degree of pressure on information, such as transcripts, would reserve positions. In the context of the Com- sharply curtail the Committee's ability mittee's long-run objectives for price stabil- to freely discuss evolving economic and ity and sustainable economic growth, and financial trends and alternative policy giving careful consideration to economic, responses. Moreover, if full transcripts financial, and monetary developments, were subject to release before many slightly greater reserve restraint or slightly lesser reserve restraint might be acceptable years had passed, much vital informain the intermeeting period. The contemplated tion obtained in confidence could not be reserve conditions are expected to be consis- discussed in meetings and in any event tent with modest growth in M2 and M3 over probably would not be made available coming months. by foreign central banks, business firms, and other sources. Votes for this action: Messrs. Greenspan, The information for all past meetings McDonough, Angell, Boehne, Keehn, Kelley, LaWare, Lindsey, McTeer, Mul- and many of the intermeeting telephone lins, Ms. Phillips, and Mr. Stern. Votes consultations was contained in unedited against this action: None. transcripts that had been preserved by the FOMC Secretariat since March The Committee approved a tempo- 1976. Virtually all the tapes from which rary increase of $3 billion, to a level of these transcripts were typed had been $11 billion, in the limit on changes reused to record subsequent meetings, between Committee meetings in System and very few tapes currently existed for Account holdings of U.S. government meetings before September 1993. and federal agency securities. The In the course of the Committee's disincrease amended paragraph l(a) of the cussion, members observed that the pur- Authorization for Domestic Open Mar- pose of the transcripts had been to assist ket Operations and was effective for the the FOMC Secretariat in the preparation intermeeting period ending with the of minutes that reported the economic close of business on December 21, 1993. and monetary policy discussions and were released after the next meeting. As a result, the transcripts for past meetings Votes for this action: Messrs. had never been edited nor had they been Greenspan, McDonough, Angell, checked by meeting participants for Boehne, Keehn, Kelley, LaWare, accuracy. It was clear from even a Lindsey, McTeer, Mullins, Ms. Phillips, and Mr. Stern. Votes against this casual perusal that at times the tranaction: None. scripts failed for various reasons to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

186 80th Annual Report, 1993 convey an intelligible account of mem- grammatical corrections, the smoothing bers' comments, and on occasion they of some sentences to facilitate the even misstated the views that had been understanding, and the correction of expressed. Moreover, most participants obvious transcription errors. The editing at these meetings had not been aware would be patterned after that done for until recently that the transcripts had congressional hearings; importantly, no been preserved and that they could at changes would be made in the substance some point be made public. Their or the intent of the speakers. Before release at this time would represent a release to the public, particularly sensisharp break with past practice and would tive materials would be redacted in raise an issue of fairness to participants accordance with the provisions of the at earlier meetings of the Committee. Freedom of Information Act. The Com- The members generally agreed that mittee agreed that the FOMC Secretariat their reservations about releasing the should be given responsibility for the transcripts could be mitigated through editing process and that the Committee appropriate safeguards such as with- itself would not undertake to review holding particularly sensitive materials these transcripts. It was noted in this and providing for a considerable lapse respect that many former members of of time after Committee meetings. They the Committee were no longer available noted in this connection that, while there to review their comments and that in was no legal requirement to prepare any event the passage of time would transcripts, the substance of existing make it impossible for members to transcripts needed to be preserved in recall precisely what they had said or to accordance with the Federal Records verify many of their comments. Accord- Act. With regard to the manner in which ingly, the edited transcripts could not the information might be made public, be regarded as official records of the the Committee considered several Committee. alternatives including making available With respect to the interval between a the unedited transcripts themselves, or meeting and release of a lightly edited lightly edited versions of the transcripts, transcript, all of the Committee memor Memoranda of Discussion compara- bers were concerned that the absence of ble to those prepared for meetings a substantial lag would seriously harm before late March 1976. The members the Committee's ongoing deliberative expressed varying preferences among process. Many also commented that the these alternatives. Some proposed that absence of a substantial lag would be marginal notations be included with unfair to meeting participants who had raw or edited transcripts to provide been unaware that their remarks would staff explanations or interpretations of be released and were unable to review unclear or evidently mistranscribed the transcripts for accuracy. Various comments. It was understood that members argued for lags that ranged preparation of edited transcripts and es- from three years to ten years or more, pecially Memoranda of Discussion but a majority felt that a five-year lag would require a considerable amount of was necessary to prevent harm to the time and effort before they would be Committee's ongoing deliberations. The ready for public release. A majority other members indicated that a five-year favored the release of lightly edited lag was acceptable because it repretranscripts that would retain all substan- sented a reasonable balance among the tive comments but would allow for various considerations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 187 At the conclusion of this discussion, Meeting Held on the members agreed unanimously to December 21, 1993 authorize the preparation of lightly edited transcripts of past meetings and A meeting of the Federal Open Market available telephone conferences since Committee was held in the offices of the late March 1976 and to release such Board of Governors of the Federal transcripts to the public five years after Reserve System in Washington, D.C., the meetings, subject to the redaction of on Tuesday, December 21, 1993, at especially sensitive materials as autho- 9:00 a.m. rized by the Freedom of Information Act. It was understood that the tran- Present: scripts for the meetings held during Mr. Greenspan, Chairman Mr. McDonough, Vice Chairman 1988 would be edited on a priority basis Mr. Angell and released as soon as possible. Provid- Mr. Boehne ing copies of unedited transcripts for all Mr. Keehn past meetings and available conference Mr. Kelley calls to the Chairman or staff of the Mr. LaWare House Banking Committee in response Mr. Lindsey Mr. McTeer to a request was not approved by the Mr. Mullins Committee. Ms. Phillips The members reviewed various Mr. Stern options for the release of information about the Committee's deliberations at Messrs. Broaddus, Jordan, Forrestal, future meetings. These options included and Parry, Alternate Members of the Federal Open Market continuing the preparation of the min- Committee utes in their current form, which members regarded as providing a complete Messrs. Hoenig, Melzer, and Syron, account of the substance of the Commit- Presidents of the Federal Reserve tee's deliberations. Some urged that Banks of Kansas City, St. Louis, consideration be given to supplementing and Boston respectively the minutes with the prompt release Mr. Kohn, Secretary and Economist after each meeting of information about Mr. Bernard, Deputy Secretary Committee decisions. Among other Mr. Coyne, Assistant Secretary options considered were an expanded Mr. Gillum, Assistant Secretary version of the current minutes and the Mr. Mattingly, General Counsel release, after an appropriate lag, of a Mr. Patrikis, Deputy General Counsel Mr. Prell, Economist lightly edited transcript or a Memoran- Mr. Truman, Economist dum of Discussion for each meeting. The members concluded that the com- Messrs. R. Davis, Lang, Lindsey, plexity of the issues reflected in these Promisel, Rolnick, Rosenblum, alternatives warranted further review by Scheld, Siegman, Simpson, and the Committee and accordingly a deci- Slifman, Associate Economists sion was deferred. It was agreed that the Committee would continue its discus- Ms. Lovett, Manager for Domestic Operations, System Open Market sion of these issues at a special meeting Account during December. Mr. Fisher, Manager for Foreign Donald L. Kohn Operations, System Open Market Secretary Account Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 80th Annual Report, 1993 Mr. Winn, Assistant to the Board, were no System open market transac- Office of Board Members, Board tions in foreign currencies during this of Governors13 period, and thus no vote was required of Mr. Ettin, Deputy Director, Division of the Committee. Research and Statistics, Board of Governors The Manager for Domestic Opera- Mr. Madigan, Associate Director, tions reported on developments in Division of Monetary Affairs, domestic financial markets and on Sys- Board of Governors tem open market transactions in govern- Mr. Stockton, Associate Director, ment securities and federal agency obli- Division of Research and Statistics, Board of Governors gations during the period November 16, Ms. Low, Open Market Secretariat 1993, through December 20, 1993. By Assistant, Division of Monetary unanimous vote, the Committee ratified Affairs, Board of Governors these transactions. Ms. Pianalto, First Vice President, The Committee then turned to a dis- Federal Reserve Bank of cussion of the economic and financial Cleveland outlook and the implementation of monetary policy over the intermeeting Messrs. Beebe, T. Davis, Goodfriend, period ahead. A summary of the ecoand Ms. Tschinkel, Senior Vice nomic and financial information avail- Presidents, Federal Reserve Banks of San Francisco, Kansas City, able at the time of the meeting and of Richmond, and Atlanta the Committee's discussion is provided respectively below, followed by the domestic policy directive that was approved by the Com- Mr. McNees, Vice President, Federal mittee and issued to the Federal Reserve Reserve Bank of Boston Bank of New York. Ms. Meulendyke and Mr. Thornton, The information reviewed at this Assistant Vice Presidents, Federal meeting suggested that economic activ- Reserve Banks of New York and ity had recorded a strong advance in St. Louis respectively recent months. Consumer spending had picked up, and business purchases of By unanimous vote, the minutes for durable equipment had remained on a the meeting of the Federal Open Market marked upward trend. Residential con- Committee held on November 16, 1993, struction was rising rapidly, and nonreswere approved. idential construction had turned up from By unanimous vote, responsibility for depressed levels. Industrial production making decisions on appeals of denials had been boosted by developments in by the Secretary of the Committee for the motor vehicle industry, and employaccess to Committee records was delement had continued to post solid gains. gated under the provisions of 271.4(d) Most indexes of prices pointed to little of the Committee's Rules Regarding change in inflation trends despite the Availability of Information to Mr. Mulrecent acceleration of economic activity. lins and, in his absence, to Ms. Phillips. Total nonfarm payroll employment The Manager for Foreign Operations rose appreciably further in November. reported on developments in foreign Another substantial increase in jobs was exchange markets during the period recorded in the services industries, notasince the November meeting. There bly in health and business services. Construction employment was up signifi- 13. Attended part of the meeting. cantly further after registering modest Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 189 gains on balance over the first three idly. Among nondefense capital goods quarters of 1993. In manufacturing, other than aircraft, shipments of comthere were back-to-back increases in puters and other durable equipment were jobs in October and November follow- significantly higher in October than ing seven consecutive monthly declines, in the third quarter. In addition, the and both overtime hours and the average demand for heavy trucks remained workweek remained at a high level. strong, and the brisk sales of light vehi- Most of the November expansion in fac- cles in October and November likely tory jobs occurred in the motor vehicle were the result in part of a step-up in and capital goods industries. The civil- spending by businesses. Nonresidential ian unemployment rate fell considerably construction activity increased again in in November, to 6.4 percent. October: Office building declined fur- Industrial production increased ther and industrial construction retraced sharply in October and November. Man- part of a sizable September gain, but ufacturing accounted for all the gain outlays for institutional, public utilities, over the two months, with the rise partly and non-office commercial structures reflecting a continuing rebound in the continued to move higher. production of motor vehicles and parts. Business inventories were little Elsewhere in manufacturing, strong changed in October, with reductions in advances were recorded in the output of manufacturing and wholesale stocks computers and non-auto durable con- nearly offsetting increases at the retail sumer goods. The sharp expansion in level. A moderate further decline in production was associated with substan- manufacturers' inventories in October tial increases in the rate of utilization was concentrated among producers of of industrial capacity in October and aircraft and parts, where stocks have November. been contracting for more than two Retail sales were up moderately in years; the stocks-to-shipments ratio for November after a large advance in Octo- manufacturing as a whole fell to its lowber. Motor vehicle sales surged in est level in recent years. In the whole- October and remained at the higher level sale sector, inventories declined in in November, apparently reflecting in October after changing little in Septempart favorable financing terms, small ber, and the ratio of inventories to sales price increases—adjusted for quality remained in the middle of its range over improvements—on 1994 models, and the past several years. At the retail level, generous incentives on pickup trucks stocks increased considerably further; from some manufacturers. Sales of with sales expanding vigorously, howapparel, furniture and appliances, and ever, the ratio of stocks to sales edged other durable goods also were strong on lower, and this ratio also was in the balance over October and November. middle of its range over the past several Housing starts rose substantially in years. November; starts of single-family units The nominal U.S. merchandise trade reached their highest level since early deficit for October was about unchanged 1987, but starts of multifamily units from its September level and its average edged lower. Sales of both new and rate for the third quarter. The value of existing homes remained robust in both exports and imports increased in October. October. Exports of automotive prod- Business spending for durable equip- ucts rose strongly, and exports of airment apparently continued to rise rap- craft rebounded from a September Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 80th Annual Report, 1993 downturn. The advance in imports ments, slightly greater or slightly lesser was spread across all major categories. reserve restraint might be acceptable Economic activity in the major foreign during the intermeeting period. The industrial countries expanded moder- reserve conditions associated with this ately in the third quarter; however, avail- directive were expected to be consistent able data suggested that output in Japan with modest growth of M2 and M3 over and Germany might decline in the cur- coming months. rent quarter, with a depressing effect on Open market operations during the growth for these industrial countries as a intermeeting period were directed group. toward maintaining the existing degree Broad indexes of consumer and pro- of pressure on reserve positions. Adjustducer prices pointed to little change in ment plus seasonal borrowing averaged inflation trends, although prices of some somewhat less than anticipated levels, commodities and industrial materials reflecting very light amounts of adjusthad firmed recently. Producer prices of ment borrowing over most of the period, finished goods were unchanged in and the federal funds rate remained November after declining in October close to 3 percent. and over the third quarter. In November, While most short-term interest rates a large drop in the prices of finished changed little over the intermeeting energy goods offset a rebound in the period, signs of stronger economic prices of other finished goods. Producer growth and the firming of some comprices for nonfood, non-energy finished modity prices tended to push up longergoods were about unchanged over the term interest rates, although that prestwelve months ended in November. At sure was offset to some extent by the consumer level, prices of items other declines in oil prices. Taken as a whole, than food and energy advanced moder- incoming economic data were seen by ately in November; the twelve-month market participants as increasing the increase in this price measure was a odds of a tightening of monetary policy little smaller than the rise over the com- at some point but not necessarily in the parable period ended in November very near term. Most indexes of stock 1992. Average hourly earnings edged up prices fell slightly over the intermeeting in November; for the twelve months period, but the strong performance of a ended in November, these earnings were few firms boosted the Dow Jones Indusup a smaller amount than over the pre- trial Average to a new high near the end ceding year. of the period. At its meeting on November 16, In foreign exchange markets, the 1993, the Committee adopted a directive trade-weighted value of the dollar in that called for maintaining the existing terms of the other G-10 currencies was degree of pressure on reserve positions about unchanged on balance over the and that did not include a presumption intermeeting period. The dollar appreciabout the likely direction of any adjust- ated against the yen in response to inment to policy during the intermeeting coming data suggesting weakness in the period. Accordingly, the directive indi- Japanese economy and heightened proscated that in the context of the Commit- pects for further monetary easing by the tee's long-run objectives for price stabil- Bank of Japan. Even though interest ity and sustainable economic growth, rates eased in Europe as central banks and giving careful consideration to eco- lowered their money-market intervennomic, financial, and monetary develop- tion rates, the dollar was little changed Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 191 against the German mark and declined In the Committee's discussion of cursomewhat against other European rent and prospective economic developcurrencies. ments, members referred to widespread Growth of M2 and M3 strengthened indications, both statistical and anecappreciably in November; both aggre- dotal, of a marked strengthening in ecogates had risen at somewhat faster rates nomic activity and much improved busisince late summer than earlier in the ness and consumer confidence in recent year. Ml growth remained brisk in months. The rate of economic growth November, and money funds included in could be expected to moderate during M2 apparently benefited from a slow- the early months of 1994 from what down in inflows to bond funds in the currently appeared to be an unsustainwake of the earlier decline in bond able pace, but the members viewed prices. The pickup in M3 growth re- the extent of such moderation as a key flected a surge in term Eurodollar depos- uncertainty in the outlook. A number of its as well as faster growth of M2. For members observed that a sharp slowing the year through November, M2 and of the expansion early next year, similar M3 were estimated to have grown at to the slowdown after the surge in activrates somewhat above the lower end of ity during the closing months of 1992, the Committee's ranges for the year. could not be ruled out. However, most Total domestic nonfinancial debt had saw the gains in the economy as more expanded moderately in recent months, solidly based than earlier in the expanand for the year through November it sion, and they generally expected the was estimated to have increased at a rate economy to settle into a pattern of modin the lower half of the Committee's erate growth over coming quarters at a monitoring range. trend rate close to or somewhat above The staff forecast prepared for this the economy's long-run potential. With meeting suggested that, after a strong regard to the outlook for inflation, the fourth-quarter advance, the economy members saw little evidence in available would expand at a more moderate rate measures of prices and wages or in other in 1994. Consumer spending was pro- indicators that any significant change jected to decelerate to a rate more in line might already have occurred in underwith the growth of disposable income. lying inflation trends. Nonetheless, Business fixed investment was expected views varied somewhat with regard to to advance briskly, although not quite as the outlook and ranged from expectarapidly as in 1993, and further gains in tions of some modest further decline in homebuilding activity likely would be the core rate of inflation to concerns concentrated in the first half of the year. about the possibility of some accel- Exports were projected to strengthen eration in the context of diminishing somewhat, bolstered by a modest pickup margins of unemployed production in foreign economic growth. Fiscal resources and an accommodative monerestraint was expected to exert a sub- tary policy as reflected in low real shortstantial drag on spending, through both term interest rates and continued rapid falling government defense purchases growth in narrow measures of money and higher taxes. In light of the limited and reserves. margins of slack in labor and product In their comments about developmarkets, the ongoing expansion was ments across the nation, members projected to be associated with only a observed that economic conditions slight further reduction in inflation. clearly had strengthened in many Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

192 80th Annual Report, 1993 regions and that the better conditions of reduced interest rates. Some members had fostered appreciable improvement cautioned, however, that growth in conin business and consumer sentiment in sumer expenditures had exceeded gains most parts of the country. The members in incomes for an extended period, insorecognized that the economic expansion far as could be judged from available was still quite subdued in many local data, and an already low saving rate areas and that economic activity re- seemed likely to limit the potential mained depressed in some parts of the growth in such spending. Moreover, the country such as southern California. The negative impact of increased tax rates overall strength of the economy was on high incomes seemed likely to be felt fueled to an important extent by interest- especially during the first half of 1994, sensitive spending on producer and con- though the extent of that impact on consumer durables and housing and tended sumer spending remained uncertain. On to confirm the durability of the expan- the positive side, members cited a numsion. Gains in such spending were not ber of developments that would tend to likely to be sustained at their recent bolster overall consumer expenditures, rates, but the cash flow and income that including lower energy costs, reduced such expenditures had generated were income taxes for many individuals stemlikely to foster further economic growth, ming from indexing, and lower interest especially in the context of generally charges on various kinds of debt. More supportive conditions in financial and generally, the rise in consumer conficredit markets. The members acknowl- dence seemed to be related to percepedged that a number of factors contin- tions of improving employment opporued to constrain the expansion, includ- tunities despite continuing announceing ongoing though less pervasive ments of sizable workforce reductions balance-sheet rebuilding, business re- by some large firms. structuring and downsizing activities, The members expected growth in real and the downtrend in defense spending. business investment to remain robust in On balance, however, current develop- 1994 but to decelerate somewhat from ments did not point to a marked devia- the rapid rate of expansion over the past tion from the moderate growth trend in year. Continuing increases in business economic activity that had been experi- sales and low financing costs along with enced over the past two years, though in ongoing efforts to improve productivity the view of a number of members, the were likely to remain conducive to subodds on somewhat stronger growth were stantial further growth in overall spendgreater than they had been earlier in the ing for business equipment despite expansion. persisting weakness in aerospace and With regard to the outlook for key defense-related industries. Nonresisectors of the economy, consumer dential construction activity, including expenditures were seen as likely to con- commercial and industrial building and tinue to provide vital support to the infrastructure construction, displayed expansion even though increases in signs of considerable strength in some consumer spending were not likely to be parts of the country; and declining maintained at recent rates. Members vacancy rates pointed to a leveling out noted that the improved consumer con- or even a pickup in nonresidential buildfidence and increased spending were ing construction in a number of other reflected in a somewhat greater willing- areas. Some expansion in inventories ness to incur debt, at least in the context seemed likely over the forecast horizon Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 193 to accommodate the continuing growth legislation would exert a restraining in overall demands. In this connection, effect on the economy, should it be members noted that a rise in inventories enacted, owing to mandated cost probably contributed to the expansion in increases on employers. If this form of production in recent months since the financing were adopted, however, the latter could not be explained entirely by legislation might have little, or perhaps the strength of final demand, and a even a favorable, effect on the federal buildup of motor vehicle stocks in late deficit. 1993 was likely to continue into the The external sector of the economy early part of 1994. also appeared likely to have a moderat- The housing sector was expected to ing effect on domestic economic activity remain a source of considerable eco- over the year ahead. The economies of nomic stimulus during the early months key foreign industrial nations and thus of 1994, both directly and indirectly in U.S. exports to those nations were terms of the favorable effects on pur- projected to grow only gradually, while chases of home furnishings. Some mem- the expansion of U.S. imports was likely bers commented that the increases in to remain relatively robust on the basis housing starts experienced over the clos- of current expectations for domestic ing months of this year might not be economic activity. In the view of at least sustainable; even so, housing construc- some members, however, stimulative tion, especially in the single-family sec- economic policies in a number of fortor, should be relatively well maintained eign countries might well lead to strongiven the likelihood that homeowner- ger economic performances and to ship would remain comparatively greater demand for U.S. goods and affordable in the context of growing services than many observers currently incomes, favorable mortgage rates, and anticipated. In any event, the members limited pressures on the prices of new generally agreed that the outlook for homes. developments abroad remained a source With respect to fiscal policy, mem- of particular uncertainty for the domesbers referred to the prospects for further tic economy. cutbacks in defense spending that proba- Members commented that there were bly would continue to be offset only in few indications of any change in inflapart by growth in federal government tionary trends in broad measures of purchases of other goods and services. prices and wages despite the surge in However, net reductions in government economic activity in recent months and purchases were expected to diminish associated increases in capacity utilizaover the projection horizon. Likewise, tion rates. One important sign of growadverse effects on spending of the rise in ing inflationary pressures, rising lead tax rates on higher incomes would tend times for deliveries of materials, had not to be concentrated in the first half of emerged. Some members noted that 1994, and the impact on spending over although capacity usage rates were the months ahead might well be rela- approaching or had reached levels that tively limited because many taxpayers in the past had tended to signal the onset probably had anticipated the higher of rising inflation, the growth of competaxes and had taken measures to miti- tition stemming from the internationalgate or spread out their effects or would ization of numerous markets suggested meet new tax obligations partly out of that old capacity benchmarks might no savings. Proposed health care reform longer apply and, especially in the con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

194 80th Annual Report, 1993 text of excess capacity in many foreign special care over the period ahead, espeeconomies, the potential inflationary cially in light of the considerable lags effects of strong domestic demand pres- between monetary policy actions and sures might remain subdued for some their effects on prices. period of time. In keeping with these In the Committee's discussion of assessments, members again reported on monetary policy for the period until the the absence of inflationary cost pres- next scheduled meeting in early Februsures in local areas across the country ary, a majority of the members endorsed and on persisting comments by business a proposal to maintain unchanged condicontacts regarding their inability to raise tions in reserve markets and to retain the prices to achieve more satisfactory or currently unbiased instruction in the customary profit margins. Business directive concerning possible intermeetexecutives continued to look to ing adjustments to policy. Looking forimprovements in productivity to main- ward, many of the members commented tain or increase their margins, and there that the Committee probably would have were numerous reports of considerable to firm reserve conditions at some point success in implementing productivity to adjust monetary policy from its curgains. Price developments in commod- rently quite accommodative stance to a ity markets presented a mixed picture; more neutral position, and that such a higher food prices stemming from policy move might have to be made weather conditions earlier in the year sooner rather than later to contain inflahad had an adverse effect on broad mea- tion and continue to provide a sound sures of prices, but the drop in energy basis for sustained economic expansion. prices had favorable implications for the Monetary conditions had been eased to near-term inflation outlook. their current degree of accommodation It also was noted that rising inflation- in the 1990-92 period in the context of ary pressures often were accompanied balance sheet restructuring and other by a pickup in credit demands, and there unusual forces that were holding down was no evidence of any surge in such spending. Since the latter part of 1992, demands. However, the expansion of however, downside risks to the expanoverall nonfinancial debt had strength- sion had diminished considerably as ened to a degree. Moreover, in the view financial conditions became more supof some members, the rise in long-term portive of economic activity. Borrowers interest rates and in gold prices might and lenders had strengthened their finanwell have been caused in part by height- cial positions substantially and were less ened inflation concerns. Members also reluctant to use and extend credit. Morecited scattered examples of greater price over, the low level of real short-term pressures, notably the prices of lumber interest rates and in the view of some and some other building materials and members the continued rapid growth of of related efforts to pass on the added reserves or increases in a variety of costs through higher prices on new commodity prices provided evidence of homes in some areas. Despite the a quite accommodative monetary policy. absence of any general indication of Overstaying such a policy would incur rising inflation, a number of members an increasing risk of fostering greater expressed concern about the potential inflationary pressures that in turn would for increasing inflationary pressures in undermine the sustainability of the the economy and saw a need to monitor expansion. For now, however, a majorpossible future sources of inflation with ity believed that the risks remained at an Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 195 acceptable level, given the remaining with the benefit of a full Committee slack in the economy and the lack of review of the implications for future near-term inflation pressures. Waiting growth and inflation pressures of a wide for further developments before making variety of emerging developments— any policy move was warranted in light including those in money, credit, and of the uncertainties surrounding the out- financial markets—rather than an interlook, notably with regard to the extent meeting action based on an asymmetric of the moderation in economic growth directive. In the view of one member, a expected early next year. If the economy tightening action over the coming intersettled into a pattern of growth about in meeting period would incur an undue line with its potential, the chances of risk of an exaggerated response in finangreater inflation pressures down the road cial markets, given the likelihood of thin would be reduced and the need for a trading markets around year-end; and near-term policy adjustment would be since a policy move should be postless pressing, though it would still be poned, a symmetrical directive seemed required at some point. appropriate. Two members expressed a strong At the conclusion of the Committee's preference for a prompt move toward a discussion, all but two members indifirmer policy stance to forestall inflation cated that they could support a directive pressures. A number of others com- that called for maintaining the existing mented that the decision was a close degree of pressure on reserve positions call, including two who had a marginal and that did not include a presumption preference for tightening policy at this about the likely direction of any adjusttime but who could accept a delay in ment to policy during the intermeeting light of the uncertainties that were period. Accordingly, in the context of involved. the Committee's long-run objectives for Members who could support an price stability and sustainable economic unchanged policy stance also indicated growth, and giving careful consideration their acceptance of a directive that was to economic, financial, and monetary not biased in either direction with regard developments, the Committee decided to possible adjustments in the degree of that slightly greater or slightly lesser reserve pressure during the intermeeting reserve restraint might be acceptable period. Some observed that while the during the intermeeting period. Accordflow of economic reports during this ing to a staff analysis, the reserve condiperiod was likely to underscore the tions contemplated at this meeting marked strengthening of the economy, would be consistent with moderate those reports mainly would cover devel- growth in M2 and M3 over the months opments in the fourth quarter, and from ahead. a monetary policy perspective the mem- At the conclusion of the meeting, the bers were more interested in knowing Federal Reserve Bank of New York was something about the extent of the authorized and directed, until instructed follow-through strength early in the new otherwise by the Committee, to execute year. Moreover, the members recognized transactions in the System Account in that any tightening move would repre- accordance with the following domestic sent a turn in policy that might well policy directive: have a greater-than-usual effect on financial markets. This prospect argued The information reviewed at this meeting for taking such an action at a meeting, suggests a strong advance in economic activ- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

196 80th Annual Report, 1993 ity in recent months. Total nonfarm payroll policy objectives. The monitoring range for employment rose appreciably further in growth of total domestic nonfinancial debt November, and the civilian unemployment also was lowered to 4 to 8 percent for the rate fell considerably to 6.4 percent. Indus- year. For 1994, the Committee agreed on trial production increased sharply in October tentative ranges for monetary growth, meaand November, partly reflecting a continuing sured from the fourth quarter of 1993 to the rebound in the output of motor vehicles. fourth quarter of 1994, of 1 to 5 percent for Retail sales were up moderately in Novem- M2 and 0 to 4 percent for M3. The Commitber after a large increase in October. Hous- tee provisionally set the monitoring range for ing starts advanced substantially in Novem- growth of total domestic nonfinancial debt at ber. Business equipment expenditures have 4 to 8 percent for 1994. The behavior of the been rising rapidly, and nonresidential con- monetary aggregates will continue to be struction has turned up from depressed lev- evaluated in the light of progress toward els. The nominal U.S. merchandise trade def- price level stability, movements in their icit in October was about unchanged from its velocities, and developments in the economy average rate in the third quarter. Broad and financial markets. indexes of consumer and producer prices In the implementation of policy for the suggest little change in inflation trends, immediate future, the Committee seeks to although prices of some raw materials have maintain the existing degree of pressure on increased recently. reserve positions. In the context of the Com- Short-term interest rates have changed mittee's long-run objectives for price stabillittle, while intermediate- and long-term rates ity and sustainable economic growth, and have risen slightly since the Committee giving careful consideration to economic, meeting on November 16. In foreign financial, and monetary developments, exchange markets, the trade-weighted value slightly greater reserve restraint or slightly of the dollar in terms of the other G-10 lesser reserve restraint might be acceptable currencies is about unchanged on balance in the intermeeting period. The contemplated over the intermeeting period. reserve conditions are expected to be consis- Growth of M2 and M3 strengthened in tent with moderate growth in M2 and M3 November, and both aggregates have risen at over coming months. somewhat faster rates since late summer than earlier in the year. For the year through Votes for this action: Messrs. Greenspan, November, M2 and M3 are estimated to McDonough, Boehne, Keehn, Kelley, have grown at rates somewhat above the LaWare, McTeer, Mullins, Ms. Phillips, lower end of the Committee's ranges for the and Mr. Stern. Votes against this action: year. Total domestic nonfinancial debt has Messrs. Angell and Lindsey. expanded at a moderate rate in recent months, and for the year through November Messrs. Angell and Lindsey dissented it is estimated to have increased at a rate in because they believed that monetary the lower half of the Committee's monitorpolicy was overly accommodative and ing range. The Federal Open Market Committee needed to be adjusted promptly toward a seeks monetary and financial conditions that more neutral stance to counter potential will foster price stability and promote sus- inflationary pressures in the economy. tainable growth in output. In furtherance of They referred to the long lags with these objectives, the Committee at its meetwhich monetary policy exerts its effects ing in July lowered the ranges it had estabon inflation and the consequent need to lished in February for growth of M2 and M3 to ranges of 1 to 5 percent and 0 to 4 percent adjust monetary policy on a timely basis respectively, measured from the fourth quar- to foster the Committee's long-run ter of 1992 to the fourth quarter of 1993. The objective of stable prices. They under- Committee anticipated that developments stood the difficulty of finding the approcontributing to unusual velocity increases priate circumstances for tightening would persist over the balance of the year actions so as to avoid unintended and that money growth within these lower ranges would be consistent with its broad interpretations and repercussions in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 197 financial markets. In their judgment, Gonzalez, Chairman of the House Comeconomic and financial conditions were mittee on Banking, Finance, and Urban unlikely to be more favorable later and Affairs, for access by his staff to the tape waiting risked undesirable inflationary recording and transcript of the Commitconsequences. tee's telephone conference on Octo- Mr. Angell also stressed that the ber 15, 1993. The main purpose of the Committee should focus more directly conference call was to discuss what on forward-looking indicators such as position the Committee should take on the price of gold and the estimate of the the release of material about its delibernatural rate of interest provided by the ations that are contained in historical yield on five-year Treasury notes. He files of meeting transcripts; the issue favored an immediate increase of 50 undoubtedly would be raised in the near basis points in the federal funds rate, future, probably during upcoming testiwhich would enable the Committee to mony before Chairman Gonzalez' Comobserve how the market adjusted the mittee scheduled for October 19, 1993. price of gold to the changed opportunity Chairman Gonzalez had indicated that cost of holding gold. He believed that if he was investigating the possibility that bond market participants concluded that Committee members had conspired durthe Committee was using the price of ing the conference call to hide informagold to target the price level, five-year tion from the House Banking Commitand ten-year interest rates would then be tee. The accusation was wholly without significantly lower than if the Commit- merit, but at this stage the Committee tee's tightening was a belated response could fully vindicate itself only by makto a worsening outlook for inflation. He ing the tape and transcript available to emphasized that the objective of mone- congressional staff for their review. tary policy clearly should be stable Such a step would be taken with conmoney, which produces stable prices siderable reluctance. The recording in and an ongoing optimal and stable eco- question did not contain a discussion of nomic growth path. monetary policy, but it did involve Com- Mr. Lindsey commented further that a mittee deliberations, which are protected modest policy move now would appro- from public disclosure by the Freedom priately signal the Committee's concern of Information Act. Some members about the potential for inflation. Such an expressed concern that granting access action would begin the process of mov- to this material could be viewed as seting policy away from what he perceived ting a precedent for the premature as an unsustainable stance. He also release of other tapes and transcripts, noted that foreign competition had been with adverse effects on the Committee's restraining pressures on domestic prices, deliberations. However, the Commitand the policy course he had in mind tee's General Counsel expressed the would continue to help in that regard by opinion that the Committee could make supporting the foreign exchange value an exception for this transcript without of the dollar. prejudicing its ability to withhold deliberative or other privileged materials in other transcripts under the Freedom of Request for Access to Information Act. The members agreed Conference Call Record with a proposal from the Chairman that At this meeting the Committee consid- the staff of Chairman Gonzalez and of ered a request from Mr. Henry B. certain other Banking Committee mem- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

198 80th Annual Report, 1993 bers be allowed to listen to the tape recording of the October 15 conference call. The review would be conducted at the offices of the Board of Governors, and the congressional staff members would be asked to keep confidential the information to be made available to them. The members indicated that it should be made clear that access to the tape in question was being undertaken solely to dispel the unfounded allegations regarding the Committee's actions. The Committee already had decided to make public, with a five-year lag, lightly edited versions of all the transcripts currently in the possession of the FOMC Secretariat. These transcripts as edited will include all the deliberative materials except for highly sensitive information that can continue to be withheld under the provisions of the Freedom of Information Act. It was agreed that the next meeting of the Committee would be held on Thursday-Friday, February 3^, 1994. The meeting adjourned at 1:30 p.m. Donald L. Kohn Secretary Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

199 Consumer and Community Affairs Concerns about possible discrimination notice by creditors that do not routinely in mortgage lending and access to credit provide appraisals. The regulation also by minorities and low-income house- provides alternative methods for compliholds continued to receive special atten- ance with the law. tion from the Division of Consumer and • Amended Regulation C (Home Community Affairs in 1993. A new pro- Mortgage Disclosure) to require that cess to reform the Community Reinvest- financial institutions make available to ment Act dominated Board and inter- the public an edited version of the loan agency activities during the latter half register data they file under the Home of the year. This CRA initiative was a Mortgage Disclosure Act. The amendresponse to a directive from President ment also requires that institutions Clinton to the regulatory agencies to release their disclosure statement within reform the law by developing new regu- three business days, instead of thirty lations, supervisory procedures, and days, after receiving it from their superstandards for assessing financial institu- visory agencies. tion performance. • Adopted a supervisory statement This chapter presents the efforts of announcing a series of steps designed the Board to address these concerns and to help ease financial stress on borrowto promote fair lending. It summarizes ers in areas affected by flooding in the the Board's actions to enforce existing Midwest. The Board also temporarily federal consumer protection laws. It also amended Regulation Z (Truth in Lenddiscusses the community affairs pro- ing) to make it easier for borrowers in gram of the Board and the Reserve flood-affected areas to waive the right to Banks; reports on the examination of cancel certain home-secured loans and institutions for compliance with con- thus to gain ready access to the loan sumer laws—by the Federal Reserve proceeds. and by other regulatory agencies—and • Issued for comment a proposal to on the System's handling of consumer extend the provisions of Regulation E complaints; details the activities of the (Electronic Fund Transfers) to electronic Board's Consumer Advisory Council; benefit transfer (EBT) programs estaband reports on congressional testimony lished by government agencies. Under on consumer affairs issues. these programs, the agencies issue access cards and personal identification numbers that recipients use to obtain Regulatory Matters government benefits. The Board took these actions with • Amended Regulation DD (Truth in regard to consumer affairs regulations: Savings) to extend by three months the mandatory date for compliance with the • Amended Regulation B (Equal requirements of the Truth in Savings Credit Opportunity) to clarify when Act and make certain other technical credit applicants have a right to receive changes. The Board also issued procopies of appraisal reports on residen- posed amendments to Regulation DD; tial property. The amendments require under these revisions the annual per- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 80th Annual Report, 1993 centage yield would reflect not only the Regulation C effect of compounding of interest but (Home Mortgage Disclosure) also the time value of money for con- In March the Board amended Regulasumers who receive interest payments tion C to expand public access to the during the term of the account. data collected under the Home Mort- • Announced plans to review Regulagage Disclosure Act (HMDA) and to tion M (Consumer Leasing) to deterrequire earlier release. These amendmine whether it can be simplified and ments, which took effect in 1993, apply clarified to carry out more effectively to the HMDA data for 1992 and subsethe purposes of the Consumer Leasing quent years; they implement provisions Act. contained in the Housing and Commu- • Revised the commentary to Regulanity Development Act of 1992. Lenders tion Z (Truth in Lending) to address must make a copy of their loan applicaissues such as the interaction between tion register available to the public upon the Truth in Lending rules on the terms request; they must first delete certain on which banks can demand repayment items—the loan or application number, of loans and the other federal rules dealthe date of application, and the date of ing with credit extended to executive the action taken—to protect the privacy officers of depository institutions; the of applicants and borrowers. Covered revisions provide greater flexibility in lenders will now make disclosure statecomplying with disclosure requirements. ments available to the public within three business days, instead of thirty Regulation B days, after receiving the statements from (Equal Credit Opportunity) supervisory agencies. To assist covered institutions in com- In December the Board revised Regulaplying with the regulation, the Board tion B to implement statutory amenddistributed a revised version of A Guide ments contained in the Federal Deposit to HMDA Reporting, Getting It Right, Insurance Corporation Improvement Act issued by the Federal Financial Instituof 1991. The amendments give credit tions Examination Council. The comapplicants the right to receive copies of prehensive guide discusses the law's appraisal reports on residential property. requirements, coverage, and manage- The regulation sets alternative ways of ment responsibilities; it also gives complying with the law. Creditors may detailed directions for gathering data automatically give a copy of an apand step-by-step instructions for compraisal report to all applicants for certain pleting the reporting form. dwelling-secured loans, or they may give a copy to applicants upon request. For creditors that do not routinely pro- Regulation Z (Truth in Lending) vide the reports, the regulation sets limits on when applicants may request (and In July the Board adopted a supervisory creditors must provide) the appraisal statement that encouraged financial reports, and requires that applicants be institutions to work constructively with notified of their right to receive the borrowers harmed by the flooding in the report. These rules cover applications Midwest. The disruption caused by the for credit to be secured by a lien on a heavy floods placed many financial presresidential structure containing one to sures on businesses and individuals, in four family units. some cases adversely affecting their Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 201 ability to repay loans in accordance with cations; in particular, periodic account the original terms and conditions. The statements would not be required prostatement suggested that lenders would vided certain conditions are met, such as find it more prudent to ease credit terms giving the benefits recipient information to help borrowers restore their financial about the balance remaining in the strength, consistent with sound banking account. The Board expected to take practices, and to restructure debt or final action early in 1994. extend repayment terms for existing borrowers. Regulation DD (Truth in Savings) The Board waived appraisal regulations for transactions related to real In March the Board amended Regulaestate affected by the flooding. The tion DD to carry out changes made to Board also adopted a temporary amend- the Truth in Savings Act by the Housing ment to Regulation Z to make it easier and Community Development Act of for borrowers in the major disaster areas 1992. The law extended the mandatory to waive their right to cancel certain date for compliance by three months, home-secured loans and thereby gain giving institutions until June 21, 1993, ready access to loan funds. to comply. The law also modified the advertising rules relating to signs on the premises of an institution and made a Regulation E technical change to the provision deal- (Electronic Fund Transfers) ing with notices to be given to existing In February the Board issued a proposal account holders. to revise Regulation E to cover elec- In November the Board issued a protronic benefit transfer (EBT) programs posal to revise Regulation DD. Under established by federal, state, or local the proposed revisions, the annual pergovernment agencies. The types of centage yield would reflect not only the transfers covered by Regulation E effect of compounding but also the time include transfers initiated through an value of money for consumers who automated teller machine, point-of-sale receive interest payments during the terminal, automated clearinghouse, term of the account. telephone bill-payment system, or In December the Board issued a conhome banking program. EBT programs sumer pamphlet entitled Making Sense involve the issuance of plastic access of Savings. It describes various types of cards and personal identification num- deposit accounts available as well as the bers to recipients of government bene- account features that consumers should fits such as food stamps, Aid to Families compare, and it helps consumers underwith Dependent Children, and Supple- stand the disclosures they receive. mental Security Income. Recipients gain access to benefits through automated Regulation M (Consumer Leasing) teller machines and point-of-sale terminals. The Board published an advance notice The proposal would primarily affect of proposed rulemaking, announcing a government agencies that administer review of Regulation M pursuant to the EBT programs and would affect only Board's policy of periodically reviewindirectly most depository institutions ing its regulations. The Consumer Leasand other private sector entities. The ing Act requires lessors to provide Board proposed certain limited modifi- disclosures about consumer lease Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 80th Annual Report, 1993 transactions. The Board plans to review lion. Beginning January 1, 1993, indethe regulation to determine whether it pendent mortgage companies with lower can be simplified and clarified to better assets are covered if they originated 100 achieve the purposes of the act without or more home purchase loans in the diminishing consumer protections. preceding calendar year. This new rule on coverage implements a statutory amendment contained in the Federal Interpretations Deposit Insurance Corporation Improve- In 1993 the Board continued to offer ment Act that directed the Board to set a legal interpretations and guidance on new exemption standard for mortgage Regulation Z (Truth in Lending) through companies comparable to the asset test an official staff commentary. The pur- for depository institutions. pose of the commentary is to help finan- Covered lenders collect and submit to cial institutions and others apply the reg- their supervisory agency geographic inulation to specific situations, and it is formation about the property involved updated periodically to address signifi- in a loan or a loan application. They also cant questions that arise. report information about the disposition In April the Board revised the com- of applications and, in most cases, about mentary to address the interaction the race or national origin, income, and between the Truth in Lending rules on sex of applicants and borrowers. The demand features and other federal rules Board processes the data and prepares dealing with credit extended to execu- disclosure statements on behalf of the tive officers of depository institutions. Department of Housing and Urban De- The revisions provide greater flexibility velopment and member agencies of the in complying with the disclosure re- FFIEC—the Board, the Federal Deposit quirements under Regulation Z in these Insurance Corporation, the National transactions. Other revisions clarify the Credit Union Administration, the Office disclosure rules for security interests and of the Comptroller of the Currency, and offer creditors alternative methods of the Office of Thrift Supervision. disclosing security interests in rescind- The FFIEC prepared almost 29,000 able transactions. disclosure statements for the more than As part of an ongoing commitment to 9,000 lenders that reported HMDA data assist the public by providing interpre- for 1992. In August 1993, individual tations of the Board's regulations, the institutions made these disclosure statedivision's attorneys responded to more ments public. The FFIEC also prepared than 14,000 telephone requests in 1993. aggregate reports that contained data for all lenders in a given metropolitan area; these reports became available in Octo- HMDA Data ber 1993 at a central depository in each The Home Mortgage Disclosure Act of the nation's 341 metropolitan areas. (HMDA) requires covered mortgage In November the Board appeared lenders in metropolitan areas to disclose before the Senate Committee on Bankdata regarding home purchase and home ing, Housing, and Urban Affairs and improvement loans, including refinanc- presented analyses based on national ings. Depository institutions and mort- aggregates of the HMDA data. The 1992 gage companies generally are covered if data continue to show rates of credit they are located in metropolitan areas denial that are higher for black and Hisand have assets of more than $10 mil- panic loan applicants than for Asian and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 203 white applicants, even when applicants applicant creditworthiness and of propare in the same income bracket. For erty characteristics. neighborhoods, the rate of loan denial During 1993 the supervisory agencies generally increased with an increase in began using a new computer-based the proportion of minority residents. system that helps examiners analyze Income is the one financial charac- HMDA data more effectively and effiteristic of applicants collected under ciently. The system, which the Board HMDA, and analysis shows that income developed in consultation with the other levels account for some, but not all, of agencies, enables examiners to design the variations in loan disposition rates and obtain specialized HMDA reports among racial groups: Even after control- that provide a more complete picture of ling for income, the categories show that an institution's mortgage lending record white applicants for conventional home than was readily available in the past. loans in all income groups had lower To facilitate use of the HMDA analysis rates of denial than black or Hispanic system by the other agencies, the Board applicants did. conducted four interagency training The data collected under HMDA do sessions for examiners. not include the wide range of financial In recent months the Federal Reserve and property-related factors that lenders System also has been testing a new fair consider in evaluating loan applications. lending examination tool for examina- Consequently, the data alone do not tions of large-volume mortgage lenders. provide a sufficient basis for determin- The use of this tool, which begins with ing whether a lender is discriminating an analysis of HMDA Loan/Application unlawfully. But when the data are com- Register (LAR) data, employs statistical bined with other information available techniques to determine the significance to the agencies, they are an important of race in a bank's lending decisions. tool for enforcement. Examiners supplement their analysis of In evaluating compliance with fair HMDA LAR data with other informalending laws, bank examiners assess tion related to the bank's credit decimortgage decisions in the context of the sions drawn from actual loan files. The lending institution's underwriting stan- analysis of this additional information dards. They look at a sample of ap- enables examiners to identify specific proved and denied applications and loan files for further review and discheck whether an institution, in apply- cussions of credit decisions with bank ing its lending criteria, has implemented management. standards consistently and fairly, particularly in its treatment of minority applicants. When examiners find apparent Other Uses of HMDA Data exceptions, they seek to determine whether differences in the decision to The expanded HMDA data are being grant or deny credit have a legitimate used to address a variety of public polbasis or whether they suggest discrimi- icy issues. In response to a directive in natory treatment that warrants further the Housing and Community Developinvestigation. Access to all of a lender's ment Act of 1992, the Board used the files on loan applications and to related 1992 data to assess the risks and returns information enables the agencies to associated with community developovercome many of the limitations of the ment lending in low-income, minority, HMDA data regarding the assessment of and distressed neighborhoods as com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

204 80th Annual Report, 1993 pared with lending elsewhere.1 The HMDA data are also being used analysis suggested that no significant, extensively as one component of fair consistent relationship exists between lending examinations conducted by profitability and variables describing the HUD's Office of Fair Housing and income or racial or ethnic composition Equal Opportunity and by the Office of of a neighborhood. The study found Lender Activities in the Office of Housevidence suggesting that FHA-insured ing. The data assist in targeting lenders loans and loans purchased by the Fed- for further investigation; the data are eral Home Loan Mortgage Corporation also used in HUD's investigation of spe- (Freddie Mac) had somewhat higher cific allegations of lending discriminadefault rates among borrowers in low- tion filed with HUD or with certain state income neighborhoods. or local agencies. HMDA data are also Lenders covered by HMDA are re- being used as part of a large-scale invesquired to identify secondary-market pur- tigation in three metropolitan areas chasers by type of entity. As a conse- where HUD is testing fair lending comquence, the expanded HMDA data pliance. In connection with these efforts, provide new opportunities to profile the HUD sponsored a major conference on characteristics both of the borrowers HMDA and fair lending in May 1993. whose loans are purchased by secondary-market entities and of the neighborhoods in which those borrow- Community Affairs ers reside.2 The Department of Housing and During 1993 the Federal Reserve Sys- Urban Development (HUD) uses the tem's Community Affairs programs expanded HMDA data as an important focused on community development, database in carrying out its statutory reinvestment, and fair lending and responsibilities to oversee the housing developed programs to facilitate conactivities of Freddie Mac and the Fed- structive responses beneficial to banks eral National Mortgage Association and their communities. Increased re- (Fannie Mae). The information can be sources devoted by the Board and the used to help assess the success of efforts Reserve Banks enabled the System to made by government-sponsored entities respond to public concerns about possilike Fannie Mae and Freddie Mac in ble discrimination in lending and bank attaining goals established by HUD for participation in community development supporting loans to benefit low- and and reinvestment. moderate-income families and to Helping financial institutions and finance mortgages on properties in communities address fair lending issues central cities. had high priority during 1993. Fair lending and the techniques banks can use to ensure equal access to credit was a focus 1. Board of Governors of the Federal Reserve of the educational programs of the System, Report to the Congress on Community Reserve Banks, which included training Development Lending by Depository Institutions (Board of Governors, October 1993). workshops, seminars, and major confer- 2. See the discussion of data on the secondary ences. Concurrently, the Reserve Banks market in Glenn B. Canner, Wayne Passmore, and developed new publications and educa- Dolores S. Smith, "Residential Lending to Low- tional materials to assist bankers and Income and Minority Families: Evidence from the others to better understand and respond 1992 HMDA Data," Federal Reserve Bulletin, vol. 80 (February 1994), pp. 79-108. to fair lending concerns. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 205 The Boston Reserve Bank developed and others interested in community Closing the Gap: A Guide to Equal development investments by banks and Opportunity Lending, a publication bank holding companies. The Board highlighting various techniques that revised and published its Directory of banks can use to help combat possible Bank Holding Company Community discrimination in lending and to ensure Development Corporations. The Board equitable treatment for loan applicants. also worked to address policy issues In conjunction with state bankers asso- concerning the community development ciations throughout New England, the investment authority of state member Boston Reserve Bank conducted state- banks. wide antidiscrimination workshops The Federal Reserve Bank of Philabased on the publication. Community delphia published Community Reinvest- Affairs programs at the other Federal ment Advocates, a compilation of pro- Reserve Banks distributed more than files on the performance of financial 50,000 copies of Closing the Gap to institution programs designed to meet bankers and to community and civil the credit needs of low- and moderaterights groups throughout the country. income borrowers; featured programs The Board, with the Federal Reserve include those of individual financial Bank of Richmond, sponsored a meet- institutions, multilender consortia, noning of Washington, D.C., bankers to dis- profit lenders, and other community cuss options for improving the fair lend- development finance partnerships and ing programs of financial institutions. intermediaries. For bankers and representatives of The Reserve Banks of St. Louis, community organizations, the Reserve Atlanta, Richmond, Kansas City, and Banks of Kansas City, San Francisco, San Francisco sponsored training proand Dallas conducted multiple sessions grams on the Community Reinvestment of seminars with a focus on fair lending Act for bank directors and executive issues and antidiscrimination initiatives. officers. The Reserve Banks of Boston, Promoting greater awareness of com- Cleveland, Atlanta, Chicago, Kansas munity development and reinvestment City, Dallas, and San Francisco sponopportunities for bankers and their com- sored and conducted workshops and munities was another major focus of the major conferences on affordable hous- System's Community Affairs program. ing, community development finance, The System sponsored six regional small business, and rural development. roundtables with representatives of de- Overall, during 1993 the Reserve pository institutions, nonprofit lending Banks' Community Affairs programs organizations, multibank loan consortia, sponsored or cosponsored more than and other intermediaries to gain more 175 conferences, seminars, and informainsight into the risks and profitability of tional meetings on fair lending, comcommunity development lending and to munity development, and reinvestment further the Board's congressionally topics. Staff members of the Board and mandated study of such lending.3 of the Reserve Banks made more than The Board and the Reserve Banks 300 presentations at other conferences, responded to numerous requests for seminars, and meetings sponsored by information and assistance from bankers banking, governmental, business, and community organizations. As part of the System's ongoing out- 3. Board of Governors, Report to the Congress on Community Development Lending. reach efforts, several Reserve Banks Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

206 80th Annual Report, 1993 published profiles of targeted communi- help several banks strengthen their CRA ties, identifying their reinvestment needs programs. and resources and the reinvestment Community Affairs programs also opportunities for bankers. These profiles expanded the reach of their newsletters, often helped stimulate collaboration which typically feature information on among local financial institutions and community development lending procommunity and business organizations grams and related CRA, HMDA, and by identifying community credit needs fair lending issues. The Federal Reserve and possible community development Bank of Kansas City published the inaufinance programs to respond to those gural issue of its Community Reinvestneeds. The Richmond Reserve Bank ment newsletter, bringing to ten the issued profiles highlighting community number of Reserve Banks that now pubdevelopment organizations and re- lish such newsletters. The newsletters sources in Richmond and Lynchburg, reach more than 48,000 representatives Virginia, and the San Francisco Bank of financial institutions, community published a comprehensive community organizations, local government agenprofile for Las Vegas, Nevada. The cies, and other interested parties. St. Louis Reserve Bank published a The Board intensified its support durprofile on Evansville, Indiana. ing 1993 for the Federal Reserve Sys- During 1993, Community Affairs pro- tem's supervisory responsibilities, pargrams at the Reserve Banks were ticularly those involving CRA and fair increasingly in demand to provide tech- lending. The Board conducted a onenical assistance to bankers, community week course on advanced CRA examiorganizations, and others on community nation techniques for compliance development and reinvestment issues. examiners, and it continued to instruct Unlike educational and training pro- consumer compliance examiners in the grams, technical assistance is aimed at conduct of community contacts and in helping develop specific program re- bank involvement in community develsponses to recognized needs or, in many opment finance. The Board also sigcases, to assist individual institutions in nificantly expanded its training on strengthening their CRA programs. affordable housing and community de- For example, the Federal Reserve velopment project finance for commer- Bank of Atlanta, working extensively cial examiners. For example, the Board with Minority Business Development conducted five half-day training sessions centers and local financial institutions, on community development finance for helped develop large-scale loan pro- senior commercial examiners. grams to assist minority businesses in Orlando, Florida, and Nashville, Ten- FFIEC and Other nessee. The Richmond Reserve Bank Interagency Activities completed a three-year effort to assist the West Virginia Bankers Association The Federal Financial Institutions Exand the state banking commission in amination Council (FFIEC) is the interforming a statewide multibank commu- agency coordinating body charged with nity development corporation that will developing uniform examination princifocus on small business development. ples, standards, and report forms. Dur- The Chicago Reserve Bank provided ing 1993, its activities and the joint technical assistance on CRA and com- efforts of its member agencies focused munity development finance options to intensively on fair lending and CRA Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 207 initiatives. Through improved data anal- cooperation between HUD and the other yses, examiner training, and more effec- agencies in complaint investigation and tive coordination efforts, the agencies to minimize duplication of effort. continued to strengthen their capacity to In September the FFIEC received a enforce fair lending laws. consultant's report with recommenda- In May the Chairman of the Federal tions for improving fair lending exami- Reserve Board and the heads of each of nation procedures. The report covered the other financial regulators issued a pre-examination planning, onsite examijoint letter stressing the agencies' con- nations, and procedures suggested for cerns about discriminatory treatment in cases in which enforcement action is the credit application process. The agen- indicated. The FFIEC member agencies cies reaffirmed their ongoing efforts to anticipated implementing key recomrefine and improve the fair lending mendations in 1994. examination process. They urged finan- In March the FFIEC sponsored its cial institutions to be creative in design- first national interagency conference on ing fair lending programs, and suggested consumer compliance. The conference positive actions that institutions could explored key examination issues and take to ensure that minority applicants updated senior compliance examiners are not discouraged from seeking credit from each of the agencies on current and and that they are treated equitably dur- prospective developments in consumer ing the application process. banking law and regulation. Sessions In June the agencies issued an "Inter- covered community reinvestment, agency Policy Statement on Fair Lend- HMDA, fair lending, real estate appraising Initiatives" that outlined ongoing als, trends in community development antidiscrimination projects and initia- lending by banks, the Truth in Savings tives being considered. These measures regulation, and common regulatory include expanded training for examin- problems with adjustable rate morters; fair lending seminars to make top- gages. Speakers included recognized level financial industry executives aware leaders from the industry and senior staff of practices that may result in inequita- members from the supervisory agencies ble treatment of applicants; develop- and other federal agencies. ment of new methods of discrimination detection; procedures that govern refer- Economic Effects of the rals of possible discrimination cases to Electronic Fund Transfer Act the Department of Justice; and program improvements to ensure that complaints In keeping with statutory requirements, involving discrimination are handled the Board monitors the effect of the effectively. Electronic Fund Transfer Act on the The agencies continued to work with compliance costs and consumer benefits HUD to ensure proper disposition of related to EFT services. In 1993 there consumer complaints involving viola- were no new requirements or changes in tions of the Fair Housing Act. Represen- the regulation, but because of continued tatives of the FFIEC's member agencies growth in the availability and use of and HUD held discussions in August EFT services, the economic effects of and November on the implementation of the act increased. a memorandum of understanding that The act covers a large number of contook effect in June 1992. The memoran- sumer accounts and financial institudum sets out procedures to facilitate tions. In 1993, about three-fourths of all Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

208 80th Annual Report, 1993 households in the United States had one from consumer protections that are proor more EFT features on accounts at vided even in the absence of regulation. financial institutions, and about two- The available evidence provides no thirds of all banks and thrift institutions indication of serious consumer proboffered EFT services. Automated teller lems with electronic transactions. In machines (ATMs) are the most widely 1993, about 90 percent of depository used EFT service in the United States. institutions examined by federal agen- Most of the nation's depository institu- cies were in full compliance with tions offer consumers access to ATMs, Regulation E. Statistics indicate that the and more than half of all households institutions that are not in full complicurrently have ATM access cards. ATM ance with the regulation generally had services have become more widely fewer than five violations. The violaavailable with the continuing expansion tions primarily involved the failure to of shared networks. Almost all ATM provide disclosures to consumers. terminals in operation today participate The Board's database of consumer in one or more shared networks. The complaints and inquiries is another monthly average number of ATM trans- source of information on potential probactions increased about 6 percent, from lems. In 1993, fifty of the complaints 605 million in 1992 to 642 million processed involved electronic transacin 1993. During the same period the tions. The System forwarded thirty-three number of installed ATMs rose about complaints that did not involve state 9 percent. member banks to other agencies for Direct deposit is another widely used resolution. Of the remaining seventeen EFT service. More than 40 percent of all complaints, one involved a possible U.S. households receive direct deposit violation of the act or regulation. of funds into their accounts. Direct In February 1993 the Board published deposit is particularly widespread in the for comment a proposal to expand covpublic sector, with more than half of erage of Regulation E to the electronic social security payments and about benefit transfer (EBT) programs of govtwo-thirds of federal salary and retire- ernment agencies. The Board expressed ment payments made by direct deposit. the view that recipients of electronic Although direct deposit in the private benefit transfers were entitled to the sector is less common, it has grown same protections as consumers who substantially in recent years. obtain EFT services from financial insti- Point of sale (POS) systems account tutions. Because EBT programs have for a small share of all EFT transactions, not yet extended much beyond the pilotbut their use grew rapidly in 1993. The program stage, the potential benefits of number of transactions on POS systems the proposal are difficult to measure. rose 43 percent, to 36.4 million a month, The costs of operating EBT programs and the number of POS terminals rose are currently about the same as those of 68 percent, to 196,000. paper-based systems. The expansion of The incremental costs associated EBT programs could be expected to with the EFT act are difficult to quantify result in lower per-unit costs through because no one knows how industry scale economies. The regulatory cost practices would have evolved in the that most concerns government agencies absence of statutory requirements. The that administer benefit programs is the benefits of the law are also difficult to cost of Regulation E liability rules, measure because they cannot be isolated which limit the consumer's liability if Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 209 the consumer reports promptly when a began conducting compliance examinadebit card is lost or stolen. The one EBT tions of foreign banking organizations pilot program that operates under Regu- in the first quarter of 1992. The scope of lation E liability rules has recorded loss these examinations typically includes rates no greater than those of financial the Equal Credit Opportunity Act, the institiutions for electronic fund transfers Home Mortgage Disclosure Act, the and lower than those of paper-based Truth in Lending Act, the Fair Credit food stamp programs and Aid to Fami- Reporting Act, the Fair Debt Collection lies with Dependent Children. If the lim- Practices Act, the Electronic Fund ited available evidence on the costs of Transfer Act, the Federal Trade Com- Regulation E to financial institutions can mission Act, and the Expedited Funds be a guide, ongoing costs of the regula- Availability Act. The degree to which tion seem unlikely to greatly inhibit foreign banking organizations conduct growth of EBT programs. activities covered by these laws and regulations varies, but often these institu- Compliance Examinations tions conduct far fewer such activities than a typical state member bank does. Since 1977 the Federal Reserve System During the 1993 reporting period, has maintained a specialized examinafrom July 1, 1992, to June 30, 1993, tion program to ensure compliance by Federal Reserve examiners conducted state member banks with consumer pro- 951 examinations for compliance with tection laws. The consumer compliance the consumer laws: 644 for state memexamination program is under the genber banks and 307 for foreign banking eral direction of the Board's Division organizations. of Consumer and Community Affairs An important aspect of the Federal and consists of a consumer affairs unit Reserve's compliance program is examwithin each Federal Reserve Bank's iner training for CRA, fair lending, and examination department. The Compliconsumer compliance. New examiners ance Section of the Board's Division of attend the Board's three-week basic con- Consumer and Community Affairs is sumer compliance school, while examresponsible for reviewing and coordinatiners with eighteen to twenty-four ing compliance activities, providing months of field experience attend the Reserve Banks with the information and Board's week-long advanced compliassistance they need, and ensuring that ance school and the one-week class on the Reserve Banks take a uniform advanced techniques for CRA examinaapproach to compliance examinations. tions. In addition, examiners receive The Federal Deposit Insurance Cortraining in the HMDA data analysis poration Improvement Act of 1991 exsystem. panded the Board's enforcement author- A resident examiner program compleity to include certain types of foreign ments the Board's schools and provides banking organizations.4 The System Federal Reserve examiners with an opportunity to get a System perspective 4. The Federal Reserve System is responsible for enforcing consumer laws for state-chartered by working at the Board for several agencies and state-chartered uninsured branches weeks; examiners observe how the diviof foreign banks, commercial lending companies sion works, how policies are developed, owned or controlled by foreign banks, and organiand how the Board interacts with the zations operating under section 25 or 25 (a) of the other agencies that supervise financial Federal Reserve Act (Edge Act and agreement corporations). institutions. Examiner training is supple- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

210 80th Annual Report, 1993 mented by the Reserve Banks through rizes these data for the reporting period regular departmental staff meetings and of July 1, 1992, to June 30, 1993.5 through special training sessions such as the FFIEC's 1993 senior examiner Equal Credit Opportunity Act conference. (Regulation B) During calendar year 1993 the Fed- The data from the Board, the Federal eral Reserve System conducted two Deposit Insurance Corporation (FDIC), basic consumer compliance schools for the National Credit Union Administra- 69 students, two advanced consumer tion (NCUA), the Office of the Compcompliance schools for 39 students, four troller of the Currency (OCC), and the HMDA data analysis system training Office of Thrift Supervision (OTS) show sessions for 270 students, and one that the level of compliance with the advanced CRA examination techniques Equal Credit Opportunity Act (ECOA) class for 25 students. Twenty examiners increased from 57 percent in the 1992 participated in the resident examiner reporting period to 61 percent during program. 1992.6 The four agencies that were able New classes are incorporated into the to provide the frequency of violations System's training program when (the Board, the NCUA, the OCC, and needed. For instance, Board and System the OTS) reported that, as in 1992, staff began working on a fair lending 77 percent of the institutions examined school for System examiners during that were not in full compliance with 1993. The first sessions will be held in Regulation B had between one and five 1994. violations (the lowest frequency cate- The Board monitors the various gory). The most frequent violations aspects of state member banks' compliinvolved the failure to take the followance examination records through data ing actions: collected on the Consumer Affairs Report of Examination Systems. During • Notify the applicant of the action 1993 the Board expanded its computer taken within thirty days of the date systems to better track detailed informathat the creditor receives a completed tion on violations of Regulation B and application the Fair Housing Act. • Provide a written notice of adverse action that contains a statement of the action taken, the name and address of Compliance with Consumer the creditor, the ECOA notice, and the Regulations name and address of the federal agency that enforces compliance Data received from the five federal • Follow the prescribed form of the agencies that supervise financial institu- ECOA notice tions and from other federal supervisory agencies indicate that compliance with 5. Not all the federal agencies that regulate the Equal Credit Opportunity Act, the financial institutions use the same method to com- Electronic Fund Transfer Act, the Truth pile compliance data. However, the data support in Lending Act, and the Expedited the general conclusions presented here. Funds Availability Act improved from 6. The percentage of institutions in full compli- 1992 levels while compliance with the ance with the regulations included in this report is calculated using a straight average of the percent- Consumer Leasing Act remained essenage of institutions in compliance as reported by tially unchanged. This section summa- the five financial regulatory agencies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 211 • Request information for monitoring institutions were in full compliance with purposes about race or national origin, Regulation E, up from 85 percent in sex, marital status, and age on credit 1992. The following five rules were the applications primarily for the purchase most frequently violated provisions of or refinancing of a primary dwelling Regulation E: • Note information for monitoring purposes on the basis of visual observa- • Provide a notice of the procedures tion or surname if applicants choose not for resolving alleged errors at least once to provide it. each calendar year • Provide, in a timely manner, a writ- The Board issued four written agreeten statement outlining the terms and ments and one cease-and-desist order conditions of the electronic fund transinvolving violations of Regulation B. fer service Civil money penalties were assessed in • Provide a summary of consumers' connection with Regulation B violations liability for unauthorized transfers found at one bank. The OTS issued six • Provide a statement with all inforsupervisory agreements. mation required for each monthly cycle The Federal Trade Commission in which an electronic transfer occurred (FTC) continued its enforcement efforts • Investigate and resolve alleged under the ECOA. The FTC worked with errors promptly. other government agencies and with creditor and consumer organizations to increase awareness of, and compliance The OTS issued two supervisory with, the ECOA. In 1993 the FTC, in agreements involving violations of Regcooperation with the American Bar ulation E. The Board issued one written Association, issued a new consumer agreement; civil money penalties were brochure entitled Credit and Divorce. assessed at one bank. The Federal Trade Commission The Farm Credit Administration reported ongoing litigation with one (FCA) reported a satisfactory level of telemarketing company that allegedly compliance with the ECOA. The total failed to obtain written authorization number of violations found as a result of from consumers for preauthorized examinations and enforcement activities transfers. decreased 35 percent from 1992 levels. The other agencies that enforce the ECOA—the Department of Transporta- Consumer Leasing tion, the Interstate Commerce Commis- (Regulation M) sion, the Small Business Administration, the Packers and Stockyards The five financial regulatory agencies Administration of the Department of reported finding substantial compliance Agriculture, and the Securities and with Regulation M, which implements Exchange Commission—reported subthe Consumer Leasing Act. As in the stantial compliance among the entities 1992 reporting period, more than 99 perthey supervise. cent of examined institutions were found to be in full compliance with the regula- Electronic Fund Transfer Act tion. The violations that were noted by (Regulation E) the agencies involved the failure to The five financial regulatory agencies adhere to specific disclosure requirereported that 90 percent of examined ments in the regulation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

212 80th Annual Report, 1993 The Federal Trade Commission FDIC, the OCC, or the OTS refunded issued one consent order during the $5.9 million on 28,786 accounts in reporting period. That consent order 1993. In 1992, roughly $4.1 million had involved the failure to provide advertis- been refunded on 23,967 accounts. ing disclosures required by Regulations The Federal Trade Commission Z and M. issued a final consent order in a case involving the failure to provide advertising disclosures required by Regulations Truth in Lending Act Z and M. The FTC also issued a final (Regulation Z) consent order against a mortgage lender The five regulatory agencies that super- that prohibited the lender from misreprevise financial institutions reported that, senting the terms or nature of lock-in on average, 49 percent of examined agreements offered to consumers in resiinstitutions were in full compliance with dential mortgage transactions. Regulation Z, up from 44 percent in Educating consumers and businesses 1992. The Board, the FDIC, and the about their rights and responsibilities OTS showed increases in compliance, continued to be an integral part of the the OCC reported a slight decline, and FTC's enforcement activities. In this the NCUA reported no change. The effort, the FTC issued a new publication agencies able to provide the fre- entitled Secured Credit Card Marketing quency of violations (the Board, the Scams and updated its publication NCUA, the OCC, and the OTS) reported entitled Refinancing Your Home. that 62 percent of the financial insti- Other agencies found that the institututions not in full compliance had tions they supervise had a satisfactory between one and five violations, an im- level of compliance with Regulation Z. provement from the 57 percent reported The Department of Transportation for 1992. reported that its investigation of con- The most frequent violations of Regu- sumer inquiries about foreign and lation Z observed by the five regulatory domestic carriers resulted in the initiaagencies involved the failure to accu- tion of formal enforcement proceedings rately disclose the finance charge, the against a travel agency and a charter annual percentage rate, the amount operator. The department initiated the financed, and the number, amounts, and proceedings after finding violations that timing of payments scheduled to repay involved credit practices with regard to the obligation; and the failure to pro- required refunds on air charters. The vide Truth in Lending disclosures that Farm Credit Administration (FCA) accurately reflected the terms of the reported that violations decreased legal obligation. 11 percent from the 1992 reporting The Board issued three written agree- period, and that no formal enforcement ments and one cease-and-desist order actions were taken as a result of the involving violations of Regulation Z; agency's examinations and enforcement civil money penalties were assessed at activities. The Packers and Stockyards one bank. The OTS issued thirteen Administration of the Department of supervisory agreements, one cease-and- Agriculture received no complaints, inidesist order, and one notice of charges. tiated no enforcement actions, and indi- Under the interagency enforcement pol- cated its belief that the individuals and icy on Regulation Z, a total of 426 insti- firms it regulates are in substantial comtutions supervised by the Board, the pliance with Regulation Z. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 213 Community Reinvestment Act ratings, 485 received "satisfactory" rat- (Regulation BB) ings, 40 received "needs to improve" ratings, and 6 received "substantial non- The Community Reinvestment Act compliance" ratings. The Board issued requires the Board to encourage finanfour written agreements and, in the case cial institutions under its jurisdiction of one bank, a notice of charges. to help meet the credit needs of their entire communities, including low- and moderate-income neighborhoods, in a CRA Reform manner consistent with safe and sound A new CRA reform process, initiated at banking practices. The Board assesses the direction of President Clinton, domithe CRA performance of state member nated interagency activities during the banks during regular compliance examilatter half of 1993. In July the President nations and takes the CRA record into asked the four supervisory agencies with account, along with other factors, when CRA responsibilities (the Board, the acting on applications from state mem- FDIC, the OCC, and the OTS) to reform ber banks and bank holding companies. the implementation of the CRA by For enforcing and fostering better developing new regulations, supervisory bank performance under the CRA, the procedures, and standards for assessing Federal Reserve System maintains a financial institutions' CRA performance. three-part program: The President also directed the agencies to consult with community groups and • Examinations of institutions to with the banking and thrift industries assess compliance during the reform process. • Dissemination of information on In August and September the agencommunity development techniques to cies held seven public hearings to solicit bankers and to the public through comthe views of the public and of financial munity affairs offices at the Reserve institutions across the country on spe- Banks cific ways in which the CRA regulations • CRA analyses in processing applicould be revised to facilitate improved cations from bank and bank holding performance by institutions while reduccompanies. ing their regulatory burdens. Hearings were held in Washington, D.C.; San Federal Reserve examiners review Antonio; Los Angeles; Albuquerque; performance in fair lending, community New York City; Chicago; and Henderrevitalization, and other relevant areas son, North Carolina. More than 250 witto assess CRA compliance. During the nesses representing financial institu- 1993 reporting period (July 1, 1992, tions, community and civil rights through June 30, 1993), they conducted groups, government agencies, small 627 examinations.7 When appropriate, businesses, and the general public preexaminers suggested ways to improve sented their views. Many others submit- CRA performance. ted written statements to the agencies. During the 1993 reporting period, After taking into consideration the 96 banks received "outstanding" CRA President's directive, the results of the hearings process, and their own experience in administering the current CRA 7. The foreign banking organizations superassessment system, the Board and the vised by the Federal Reserve System are not subject to CRA. other agencies jointly proposed CRA Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

214 80th Annual Report, 1993 regulations, which they published con- quently violated provisions of Regulacurrently in December. The agencies tion CC were the following: anticipated issuing final regulations in 1994. • Provide next-day availability as The proposed regulations would pro- required for certain items vide more direct guidance to financial • Provide two-day availability for instututions on the nature and extent of local checks their CRA responsibilities and the • Train employees adequately and means by which their obligations will be provide procedures to ensure assessed and enforced. The proposal compliance seeks to emphasize performance rather • Follow the prescribed procedures than process, to provide greater predict- for exceptions involving large deposits ability and consistency in examinations, • Provide fifth-day availability for and to reduce the compliance burden nonlocal checks. on some institutions. Specifically, the proposal would do the following: The OTS issued one supervisory agreement involving violations of Regu- • Create a new quantitative system lation CC. The Board issued two written for assessing CRA performance, which agreements and one cease-and-desist would include measurements for lend- order and assessed civil money penalties ing, services, and investments against one bank. • Require institutions to collect additional data for small business, small Applications farm, and certain consumer loans • Allow for alternative bases of eval- During 1993, ninety-eight of the appliuation to try to minimize the regulatory cations from banks and bank holding burden on institutions companies that the Federal Reserve • Establish a new approach to reviewed and acted on involved adverse enforcement that would subject institu- CRA ratings or CRA protests. This comtions to full enforcement actions based pares with fifty-nine applications in solely on their CRA rating. 1992.8 Among the ninety-eight applications acted on in 1993, forty-five were pro- Expedited Funds Availability Act tested on CRA grounds; forty raised (Regulation CC) adverse CRA rating issues; and thirteen The five financial regulatory agencies involved both protests and adverse reported that the level of compliance CRA rating issues. In comparison, the with Regulation CC improved during previous year's fifty-nine applications the 1993 reporting period: 74.1 percent involved twenty that were protested of examined institutions were in full based on CRA grounds, thirty-one that compliance with the act, compared with raised CRA rating issues, and eight that 69 percent in 1992. The four agencies involved adverse CRA rating issues and that were able to provide the frequency protests. of violations (the Board, the NCUA, the OCC, and the OTS), reported that of the institutions examined that were not in 8. Fifteen applications were pending at yearend 1993. Statistics for 1992 have been recalcufull compliance, 90 percent had between lated from those in last year's REPORT to reflect one and five violations. The most fre- only applications acted on during 1992. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 215 The Board denied two applications on cited concerns about Shawmut's compli- CRA grounds. In February it denied the ance with the Equal Credit Opportunity application of Farmers & Merchants Act and the Home Mortgage Disclosure Bank of Long Beach (California) to Act. establish a new branch and invest in The Board approved two applications, bank premises because of chronic defi- with dissents from Governor Lindsey ciencies in the bank's regulatory compli- that were based on consumer-related ance and CRA performance efforts. In issues. One, involving the application of May the Board denied the application First Interstate Bancorp (Los Angeles) of First Colonial Bankshares Corpora- to acquire Cal Rep Bancorp, Inc. tion (Chicago) to acquire all the voting (Bakersfield, California), was approved shares of Hi-Bancorp, Inc. (Highwood, in November. Governor Lindsey be- Illinois) and GNP Bancorp, Inc. (Mun- lieved that the lead bank's performance delein, Illinois). First Colonial's third in mortgage lending and in community largest subsidiary bank (which repre- outreach efforts to low- to moderatesented approximately 10 percent of con- income and minority neighborhoods was solidated assets) had received two con- deficient. In the second application, secutive CRA ratings of "needs to approved in December, Fleet Bank of improve." There also had been allega- New York (Albany) proposed to acquire tions of discriminatory lending practices twenty-nine branches of Chemical Bank and of the failure to address adequately (New York City). Governor Lindsey the credit needs of the subsidiary bank's based his dissent on managerial condelineated community. cerns related to Fleet's compliance with In November, by a vote of three to consumer credit protection laws. three, the Board did not approve the application of Shawmut National Corpo- Complaints about State ration (Hartford and Boston) to acquire Member Banks New Dartmouth Bank (Manchester, New Hampshire). The three Board The Federal Reserve investigates commembers voting against the acquisition plaints against state member banks, and Consumer Complaints to me Federal Reserve System Regarding State Member Banks and Other Institutions, by Subject. 1993 Subject State member Other Total banks institutionsl Regulation B (Equal Credit Opportunity) 93 67 160 Regulation E (Electronic Fund Transfers) 17 33 50 Regulation Q (Interest on Deposits) 19 22 41 Regulation Z (Truth in Lending) 100 197 297 Regulation BB (Community Reinvestment) 2 4 6 Regulation CC (Expedited Funds Availability) 19 32 51 Fair Credit Reporting Act 20 90 110 Fair Debt Collection Practices Act 5 15 20 Fair Housing Act 4 0 4 Flood Insurance 2 0 2 Real Estate Settlement Procedures Act 1 3 4 Unregulated practices 823 894 1,717 Tbtal 1,105 1,357 2,462 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

216 80th Annual Report, 1993 forwards to appropriate enforcement laws, regulations, and banking practices agencies complaints that involve other and provided relevant printed materials creditors or businesses. In 1993 the Fed- on the general issues. eral Reserve received 2,462 complaints: A second table summarizes the nature 2,120 by mail, 327 by telephone, and and resolution of the 1,105 complaints 15 in person. The Federal Reserve against state member banks. About investigated and resolved the 1,105 63 percent involved loan functions: complaints that were against state mem- 10 percent alleged discrimination on a ber banks (see preceding table). The prohibited basis, and 53 percent con- System also received 1,976 oral and cerned credit denial on nonprohibited written inquiries about consumer credit bases (such as length of residency) and and banking policies and practices. In other unregulated lending practices responding to these complaints and (such as release or use of credit inforinquiries, the Board and Federal Reserve mation). Approximately 24 percent Banks gave specific explanations of involved disputes about interest on Consumer Complaints to the Federal Reserve System, by Function and Resolution, 1993 Loans Electronic Type of complaint Trust Total Deposits fund Other and resolution Discrimi- Other transfers services nation Complaints about state member banks, by type Insufficient information' 22 1 11 9 0 0 1 Information furnished to complainant2 134 5 88 24 0 3 14 Bank legally correct No reimbursement or accommodation 465 62 222 114 9 12 46 Reimbursement or accommodation— goodwill3 156 12 100 31 2 0 11 Bank error No reimbursement 49 3 29 10 0 0 7 Reimbursement 89 2 51 27 1 1 7 Factual dispute4 44 1 19 19 2 1 2 Possible bank violation5 14 2 6 0 1 1 4 Matter in litigation6 15 1 3 8 0 2 1 Customer error 20 0 12 8 0 0 0 Pending, December 31 97 10 46 19 2 2 18 Total, state member banks 1,105 99 587 269 17 22 111 Percent 100 9 53 24 2 2 10 Complaints referred to other agencies 1,357 81 772 293 33 16 162 Total 2,462 180 1,359 562 50 38 273 1. The staff was unable, after follow-up correspondence 4. Involves a factual dispute not resolvable by the Federal with the consumer, to obtain sufficient information to process Reserve System or a contractual dispute that can be resolved 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

Consumer and Community Affairs 217 deposits and general deposit account Consumer Compliance Task Force: crepractices. The remaining 13 percent ating an interagency toll-free number concerned disputes about electronic dedicated to fielding discrimination fund transfers, trust services, and other complaints from consumers; developing miscellaneous bank practices. a joint brochure on consumers' rights In March 1993 the President issued under the fair lending laws; establishing an Interagency Policy Statement on toll-free numbers at each FFIEC agency Credit Availability, which requires agen- for receiving complaints and inquiries; cies to review their programs to ensure and improving the exchange of comthat complaints are carefully scrutinized plaint data among the agencies. and handled in a timely manner, particu- During 1993 the Federal Reserve conlarly complaints involving discrimina- tinued to refer to the Department of tory lending practices. Housing and Urban Development com- In response the Federal Reserve re- plaints alleging violations of the Fair viewed its complaint investigation pro- Housing Act as required by a memorangram and took actions during 1993 to dum of understanding between HUD strengthen and improve it, particularly and the federal bank regulatory agencies with respect to complaints alleging that became effective in June 1992. The illegal credit discrimination. These ac- memorandum encourages cooperation tions included implementing new poli- and coordination between HUD and the cies and procedures to ensure thorough bank regulatory agencies in the investianalysis and prompt investigation of dis- gation of these complaints. In 1993 the crimination complaints, and developing Federal Reserve referred fourteen comspecial analysis reports from the Board's plaints about state member banks to automated data system. HUD. The Federal Reserve's investiga- Under a new program, staff members tions of thirteen of these complaints from the consumer complaint sections revealed no evidence of illegal discrimiof the Reserve Banks began working for nation; one complaint remained pending several weeks in the consumer com- at year-end. plaint section of the Board at various The memorandum of understanding times during the year to become familiar requires HUD and the agencies to with operations in Washington; staff meet at least annually to discuss issues members from ten Reserve Banks par- relating to its implementation. The first ticipated during the year. meeting was held in August 1993, and a In November 1993 the first annual second meeting was held in November. Consumer Complaint Officers and Managers Conference was held at the Board Unregulated Practices to discuss issues, policy matters, and procedures related to the function. In 1993 the Board continued to monitor, In addition, an interagency work under section 18(f) of the Federal Trade group met regularly at the Board in 1993 Commission Act, complaints about to identify and develop ideas to improve banking practices that are not subject to consumer access to the agencies and existing regulations to focus on those improve the ability of the agencies to that may be unfair or deceptive. Two handle consumer concerns about the categories each accounted for 7 percent financial services area. In December or less of the 1,717 complaints: denial 1993 the work group submitted four ini- of credit applications based on credit tiatives for consideration by the FFIEC history (122) and other miscellaneous Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

218 80th Annual Report, 1993 complaints (54). Each of these catego- three other ratings ("outstanding," ries accounts for a small number (5 per- "needs to improve," and "substantial cent or less) of all consumer complaints noncompliance") would remain unreceived by the System. changed. The council adopted the Many of the complaints about credit recommendation unanimously. denials based on credit history indicate In June the council's Community that applicants underestimated the Affairs and Housing Committee reimportance lenders give to a poor credit ported on the Administration's proposal history or a lack of borrowing experi- to create a Community Development ence when assessing the applicant's Bank and Credit Fund to help finance creditworthiness. Complaints in the mis- community development financial insticellaneous category covered a wide tutions (CDFIs); CDFIs include tradirange of issues such as bank fees and tional depository institutions and comservices; tactics lenders employed to munity development corporations. The collect late payments or outstanding proposal specified, and the committee debts; or a lender's failure to close on a endorsed, four purposes of the proposal: mortgage loan by the agreed settlement date. • Support institutions whose primary mission is community development • Recognize the important role pri- Consumer Advisory Council vate money will play in the success of The Consumer Advisory Council met in CDFIs and the importance of CRA March, June, and October to advise the credit in attracting private investment in Board on its responsibilities under the CDFIs consumer credit protection laws and on • Recognize the diversity of local other issues dealing with financial ser- CDFIs, which range from unions to loan vices to consumers. The council's thirty funds to commercial banks specializing members come from consumer and in development lending community-based organizations, finan- • Apportion funds to CDFIs based on cial institutions, academia, and state and their performance in meeting local comlocal government. Council meetings are munity needs, for example, by making open to the public. During 1993 the loans and leveraging private money. council considered a variety of topics including impediments to the avail- In the context of the proposed reform ability of small business credit, com- of the CRA, the council's Bank Regulamunity development banks, secured tion Committee in October identified credit cards, and models for economic thirteen elements as key to any CRA development. reform proposal. Six elements pertained In March the council discussed issues to CRA activities by banks. The comrelated to the Community Reinvestment mittee believed that evidence of willful Act, including safe harbors for banks discrimination should result automatirated "outstanding" to provide protec- cally in a CRA rating of "substantial tion against protests on applications. noncompliance" and that significant sta- The council also recommended that the tistical imbalances in institutional lendcurrent number of CRA ratings be ing patterns should result in a rating of increased from four to five, with the less than "satisfactory." The committee "satisfactory" rating replaced by two supported a system in which banks ratings: "good" and "adequate." The developed a CRA business plan with Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 219 quantifiable performance measures regulatory burden associated with the against which their performance would Board's consumer protection rules. later be measured by the regulators. The committee also believed that Testimony and Legislative regulators should determine the value Recommendations of such a plan based in part on the amount of community outreach by The Board testified on matters relating the bank, with performance assessed on to the 1992 HMDA data, the status of the "depth and breadth" of performance the Community Reinvestment Act, on market share and variety of ser- bank-related community development vices offered. In the case of specialty corporations and other types of commuor wholesale banks, the committee nity development equity investments, believed that assessment of CRA per- the Home Ownership and Equity Protecformance should be based on the value tion Act of 1993, the Small Business of their targeted initiatives in low- Loan Securitization and Secondary Marand moderate-income and minority ket Enhancement Act, the challenges communities. that face banks in meeting the service The remaining elements pertained to and credit needs of low-income and the regulators. The committee recom- minority communities, and the Commumended that regulators meet regularly nity Development Secondary Market with community groups, provide ad- Development Act. vance public notice of CRA examinations, and provide feedback from Credit Discrimination community groups to the institutions. in Mortgage Lending Members also favored making CRA public evaluations available at central In February the Board testified before data depositories, where the HMDA data the Senate Committee on Banking, are currently available. The committee Housing, and Urban Affairs on credit recommended that the four agencies discrimination in mortgage lending on should provide training and basic expe- its own behalf and on behalf of the rience for their examiners in all aspects FFIEC. The Board noted the implemenof the examination process; create a tation of a system that has increased the tiered structure for CRA examinations agencies' ability to analyze HMDA data that contains more cost-effective re- for purposes of fair lending and CRA quirements for small community banks; enforcement; cooperation with the and create a five-tiered system of CRA Justice Department to target banks for ratings. fair lending examinations when HMDA Roundtable discussions, known as the data suggest disparate treatment by the Members Forum and held at each coun- banks of minority mortgage loan applicil meeting, gave council members the cants; the referral of consumer comopportunity through the year to offer plaints alleging violations of the Fair their views on visible signs of an eco- Housing Act to HUD and to the Departnomic recovery within their industries ment of Justice; formal enforcement or local economies. During the year, the actions, including assessment of civil council also considered "secured" money penalties, to enforce compliance credit cards (with credit lines fully with consumer protection laws, includbacked by consumer deposits) and dis- ing the prohibitions against credit discussed actions that could reduce the crimination based on marital status, age Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 80th Annual Report, 1993 and race; and the denial by the Board Board's testimony focused on the role of three applications in the past two of banks in community development, years primarily because of poor CRA the special role for CDCs, legal and performance. regulatory issues, characteristics of In September the Board testified CDCs, and types of community develbefore the House Committee on Bank- opment investments. ing, Finance and Urban Affairs about In May the Board testified before the the challenges that face banks in meet- Senate Committee on Banking, Housing the service and credit needs of low- ing, and Urban Affairs concerning the income and minority communities. The Home Ownership and Equity Protection hearing was held in Prince George's Act of 1993. The bill would amend the County, a Maryland suburb of Washing- Truth in Lending Act to require additon, D.C. tional disclosures to consumers who In November the Board testified take out "high-cost mortgages" on their before the Senate Committee on Bank- homes and would restrict the terms of ing, Housing, and Urban Affairs on the such mortgages. results, of the 1992 HMD A data, the In September the Board testified Board's fair lending enforcement before the Senate Committee on Bankefforts, and its examination process. ing, Housing, and Urban Affairs on the Small Business Loan Securitization and Secondary Market Enhancement Act Community Reinvestment Act (S.384), which sought to increase the In February the Board testified before availability of credit to small businesses the House Committee on Banking, by facilitating the securitization of Finance and Urban Affairs concerning small business loans. The Board's testithe status of CRA. The Board discussed mony was generally supportive of the several issues relating to the act, includ- legislation. ing supervisory agency roles and actions, examination improvements, Recommendations expanded educational and technical of Other Agencies assistance, effects on applications, and discrimination and home mortgage Each year the Board asks the agencies lending. with enforcement responsibilities under In October the Board testified before Regulations B, E, M, Z, and CC for the House Committee on Banking, recommendations of changes to the reg- Finance and Urban Affairs on current ulations or the underlying statutes. They efforts of the agencies to strengthen and had no recommendations in 1993. • improve the administration of CRA. Other Testimony In February the Board testified before the House Committee on Banking, Finance and Urban Affairs about the Board's perspective on bank-related community development corporations (CDCs) and other types of community development equity investments. The Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

221 Litigation During 1993 the Board of Governors of a civil money penalty assessment was named in twenty-two lawsuits, against a bank holding company and compared with seventeen in 1992. Four- three of its officers, directors, and teen new lawsuits were filed in 1993, shareholders for failure to comply with none of which raised questions under reporting requirements. The Board's the Bank Holding Company Act. As of order was affirmed by the Court of December 31, 1993, seventeen cases Appeals on November 30, 1993. were pending. First National Bank of Bellaire v. Board of Governors, No. H-93-1708 (S.D. Texas, filed June 8, 1993), is an Bank Holding Company Act- action to enjoin possible enforcement Review of Board Actions actions by the Board of Governors and other bank regulatory agencies. The case In State of Idaho, Department of is pending. Finance v. Board of Governors, No. 92- Board of Governors v. Oppegard, 70107 (9th Circuit, filed February 24, No. 93-3706 (8th Circuit, filed Novem- 1992), petitioner sought review of a ber 1, 1993), is an appeal of a District Board order determining, in accordance Court order ordering appellant Oppewith Synovus v. Board of Governors, gard to comply with a prior order 952 F.2d 426 (D.C. Circuit, 1991), that requiring compliance with a Board civil no application is required for a bank money penalty order. The case is holding company to relocate its subsidipending. ary bank across state lines. On June 4, Board of Governors v. DLG Financial 1993, the Court of Appeals denied the Corp., Nos. 93-2944 and 94-20013 petition for review (994 F.2d 1441). (5th Circuit, filed December 14 and December 31, 1993), is an appeal from orders, obtained by the Board, that Litigation under the Financial freeze appellants' assets pending admin- Institutions Supervisory Act istrative adjudication of civil money In Board of Governors v. Ghaith R. penalty assessments by the Board. In a Pharaon, No. 91-CIV-6250 (S.D. New related case, DLG Financial Corp. v. York, filed September 17, 1991), the Board of Governors, No. 94-10078 Board sought to freeze the assets of an (5th Circuit, filed January 20, 1994), individual pending administrative adju- appellants appeal the District Court disdication of a civil money penalty assess- missal of their action to enjoin the Board ment by the Board. On September 17, and the Federal Reserve Bank of Dallas 1991, the court issued an order tempo- from taking certain enforcement actions, rarily restraining the transfer or disposi- and for money damages on a variety of tion of the individual's assets. The order tort and contract theories. has been extended by agreement. In addition, in a case in which the In CBC, Inc. v. Board of Governors, records are sealed pursuant to a court No. 92-9572 (10th Circuit, filed Decem- order, a former officer of a foreign bank ber 2, 1992), petitioners sought review appeals a suspension order that the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

222 80th Annual Report, 1993 Board issued against him. The case has poena enforcement case in which plainbeen stayed. tiffs seek bank examination reports and other supervisory material in connection with a shareholder derivative suit. On Other Actions February 25, 1993, the District Court In Fields v. Board of Governors, No. denied enforcement and upheld the 3:91CV069 (N.D. Ohio, filed Febru- claim of privilege by the Board and the ary 5, 1991), the plaintiff appealed the Federal Deposit Insurance Corporation. Board's denial of a request under the The case was appealed, and on Decem- Freedom of Information Act. On June ber 28, 1993, the Court of Appeals for 23, 1992, the Board's motion for sum- the D.C. Circuit remanded the matter to mary judgment was granted in part, and the District Court for further findings on its motion to dismiss was denied. On the privilege issue. The case is pending. January 15, 1993, the action was In U.S. Check v. Board of Governors, dismissed. No. 92-2892 (D. District of Columbia, In In re Subpoena Served Upon the filed December 30, 1992), plaintiff Board of Governors of the Federal sought review of the denial of its request Reserve System, Nos. 91-5427, 91-5428 under the Freedom of Information Act. (D.C. Circuit, filed December 27, 1991), The case was dismissed by stipulation the Board appealed an order of the U.S. on November 9, 1993. District Court requiring the Board and In Sisti v. Board of Governors, No. the Office of the Comptroller of the Cur- 93-0033 (D. District of Columbia, filed rency to comply with a subpoena for the January 6, 1993), the plaintiff chalproduction of confidential examination lenged a Board staff interpretation with material to a private litigant. The sub- respect to margin accounts. The Board's poena was issued in a shareholder motion to dismiss was granted on derivative suit against the Fleet/Norstar May 13, 1993, and on October 14, 1993, Financial Group. On June 26, 1992, the dismissal was summarily affirmed by Court of Appeals affirmed the District the Court of Appeals for the District of Court order in part, but it held that the Columbia Circuit. bank examination privilege was not In Adams v. Greenspan, No. 93-0167 waived by the agencies' provision of (D. District of Columbia, filed Janexamination materials to the examined uary 27, 1993), the plaintiff, a former institution. The case was remanded for employee, alleges a violation of the further consideration of the privilege Civil Rights Act of 1964 and the Rehaissue (967 F.2d 630). On August 6, bilitation Act of 1973 concerning termi- 1992, the District Court ordered the mat- nation of employment. The case is ter held in abeyance pending settlement pending. of the underlying action. In Amann v. Prudential Home Mort- In Zemel v. Board of Governors, No. gage Co., et al, No. 93-10320 WD 92-1057 (D. District of Columbia, filed (D. Massachusetts, filed February 12, May 4, 1992), the plaintiff alleges dis- 1993), plaintiff alleges fraud and breach criminatory practices under the Age of contract arising out of a home mort- Discrimination in Employment Act. The gage. The case is pending. case is pending. In Ezell v. Federal Reserve Board, In re Subpoena Duces Tecum, Misc. No. 93-0361 (D. District of Columbia, No. 92-0375 (D. District of Columbia, filed February 19,1993), plaintiff sought filed August 25, 1992), is another sub- damages for personal injuries arising Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 223 from a motor vehicle collision. The case was dismissed on the Board's motion on July 30, 1993. In Bennett v. Greenspan, No. 93- 1813, (D. District of Columbia, filed April 20, 1993), plaintiff alleges employment discrimination. The case is pending. In Kubany v. Board of Governors, et ai, No. 93-1428 (D. District of Columbia, filed July 9, 1993), the plaintiff challenges a Board determination under the Freedom of Information Act. The case is pending. In re Subpoena Duces Tecum, Misc. No. 93-261 (D. District of Columbia, filed August 17, 1993), is a subpoena enforcement case in which plaintiffs seek examination and other supervisory material in connection with a shareholder derivative action against a bank holding company. The case is pending. Richardson v. Board of Governors, et al, No. 93-C836A (D. Utah, filed August 30, 1993), is an action for damages and injunctive relief against the Board and other parties for alleged constitutional and statutory violations caused by issuance of Federal Reserve notes. The case is pending. A similar case filed in Utah state courts, Scott v. Board of Governors, No. 930905843CV (District Court, Salt Lake County, Utah, filed October 8, 1993), is also pending. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

225 Legislation Enacted The 1993 federal legislation that directly rities custody requirements, and transfer affects the Federal Reserve System or and control of government securities the institutions it regulates includes the subject to repurchase agreements. The Government Securities Act Amend- 1993 amendments extend this authority, ments of 1993, the North American Free which had expired October 1, 1991, and Trade Agreement Implementation Act, make it permanent. the Omnibus Budget Reconciliation Act The amendments also require every of 1993, an act relating to unclaimed government securities dealer and broker insured deposits, and the Depository In- to furnish on request sufficient transstitutions Disaster Relief Act of 1993. action records for the Securities and Exchange Commission (SEC) to reconstruct trading in a government security Government Securities Act under investigation. The SEC, however, Amendments of 1993 may not request information not other- The Government Securities Act Amend- wise required by law or customary busiments of 1933, Public Law 103-202, ness practice, must consult with the was enacted on December 17, 1993. appropriate regulator on information to Title I augments the scope of regulation be requested, and may not obtain examof the government securities market, and ination reports. title II relates to the auction procedure. In addition, the SEC is not to request of government securities dealers or brokers information obtainable from the Title I Federal Reserve Bank of New York. Title I amends the government secu- Requested information is to be furnished rities provisions of the Securities to the SEC directly, to the New York Exchange Act of 1934 to extend the Reserve Bank, or to the appropriate regrulemaking authority of the Department ulatory agency. The Board is the approof the Treasury, require transaction priate regulatory agency for state memrecords and large position reporting, ber banks; for foreign banks, their prohibit fraud and manipulation, regu- commercial lending companies, state late sales practices, require disclosure agencies, and uninsured state branches; by government securities dealers and for foreign branches or affiliates of brokers that are not financial institu- national banks; and for Edge Act tions if their accounts are not insured corporations. by the Securities Investor Protection The 1993 amendments authorize Corporation, and obtain studies and Treasury to adopt rules requiring holdreports on the act's success in furthering ers of large positions in to-be-issued or transparency. recently issued government securities to Under the Government Securities Act file reports enabling Treasury to monitor of 1986, Treasury had authority to write the impact of such concentrations of rules related to capital adequacy, finan- position and authorize the SEC to encial responsibility, recordkeeping, re- force the provisions of title I. Treasury, ports, audits, customer protection, secu- however, must take into account the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

226 80th Annual Report, 1993 need for market liquidity and efficiency SEC approval. The appropriate regulaand the cost to taxpayers of funding the tory agencies and the SEC are to consult federal debt. Large positions include any with Treasury before adopting or apposition that would allow its holder to proving such rules; but they may implemanipulate the supply, price, or cost of ment them, even if Treasury believes the financing of an issue or the portion rules would adversely affect liquidity or thereof available for active trading. impose burdens on competition, if they Treasury may also impose recordkeep- find them necessary. ing requirements to ensure that such Although the amendments are generholders can comply with these reporting ally limited to secondary market trading requirements and may exempt any per- and specifically do not apply to the son or class of person from them. The issuance of government securities, these reports are to be filed with the New provisions would apply to any resale by York Reserve Bank as agent for Trea- a dealer even if part of the initial distrisury, and the Reserve Bank is to provide bution. In addition, in a separate provithem to the SEC. The reports are confi- sion, the amendments prohibit false or dential for Freedom of Information Act misleading written statements or omispurposes, but congressional requests, sions by any government securities legitimate requests from other agencies, dealer or broker or any other bidder in and court orders are to be fulfilled. connection with any bid or purchase The 1993 amendments subject gov- related to any issuance of government ernment securities dealers and brokers securities. to the prohibitions in the Securities Under the Government Securities Act Exchange Act of 1934 on manipulative of 1986, all government securities dealactivities (including fictitious quota- ers and brokers that are not financial tions) to effect or induce a government institutions and not already registered securities trade if the activities involve with the SEC as broker-dealers in other use of the mails or other instrumentali- securities are required to register with ties of interstate commerce. The SEC the SEC as government securities dealmust consult with Treasury before ers or brokers. Title I of the amendadopting rules under this provision, but ments requires any such government Treasury does not have a veto over such securities dealer or broker that is not a rules. member of the Securities Investor Pro- The amendments also grant rulemak- tection Corporation to follow such rules ing authority over sales practices to the as the SEC shall prescribe to assure appropriate regulatory agencies and reg- disclosure to its customers that their istered securities associations. For finan- accounts are not covered. cial institutions, which include banks, The amendments change somewhat foreign banks, and savings institutions, the Board's jurisdiction with respect these agencies may adopt rules to pre- to government securities dealers and vent fraudulent and manipulative acts brokers. Previously the Board was the and practices and to promote just and appropriate regulatory agency for all equitable principles of trade. For gov- state branches of foreign banks; under ernment securities dealers and brokers, title I, the Board is the agency for uninthe amendments remove prior limita- sured state branches of foreign banks, tions on the ability of registered securi- and the FDIC becomes the agency for ties associations to adopt rules applica- insured state branches. The Board ble to government securities, subject to also becomes the regulatory agency for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 227 foreign branches and affiliates of U.S. computer-generated tenders, and prohibbanks, including agreement corpora- its discrimination by the Secretary tions, and for Edge Act corporations; among government dealers. It also previously the SEC had supervisory requires that meetings of the Treasury responsibility for their government secu- Borrowing Advisory Committee of the rities activities. Public Securities Association be open to Title I requires Treasury, the Board, the public but permits closed meetings and the SEC to evaluate in a joint study at the recommendation of Treasury, prothe regulations promulgated under the hibits members from discussing closed amendments for their effectiveness and meetings except with other members or impact on market efficiency and Treasury personnel, and prohibits the liquidity. The study must also evaluate committee or its members from giving the effectiveness of surveillance and gratuities to employees of Treasury or enforcement and the extent to which the Federal Reserve System. they are affected by the availability of automated, time-sequenced trade data. The three agencies must make North American Free Trade recommendations to the Congress by Agreement Implementation Act March 31, 1998, concerning the regulation of dealers, the dissemination of The North American Free Trade Agreequotation and trade information, and the ment Implementation Act, Public Law prevention of abusive sales practices. 103-182, was enacted on December 8, Also with a view to promoting trans- 1993. It implements the North American parency, title I makes changes in the Free Trade Agreement (NAFTA), but annual report the SEC sends to the only to the extent consistent with prior Congress under the 1934 act. The SEC laws of the United States. report is to annually review the steps The parties to NAFTA are the United taken to promote the timely, nondiscrim- States, Canada, and Mexico. Its finaninatory dissemination of quotation and cial services chapter covers financial transactions data and make recommen- institutions, investment in such institudations to assure the availability of tions, and cross-border trade in financial high-bid and low-offer price and size services. The chapter generally requires information. each party to grant both national treat- Finally, in consultation with the SEC, ment and most-favored-nation treatment Treasury is to study the continuing need to financial service providers and invesfor, and consequences of, a separate reg- tors of the other parties. ulatory system for government dealers NAFTA's provisions do not apply to registered with the SEC and report its existing federal, state, or provincial recommendations to the Congress measures that are identified and set forth within eighteen months of enactment. (reserved) in the Annex to NAFTA. In addition, each party may adopt reasonable new prudential measures, including Title II measures to protect consumers of finan- Title II requires, among other things, the cial services, to maintain the soundness, Secretary of the Treasury to notify the integrity, and financial responsibility of Congress of any significant modification financial market participants, and to to Treasury auction procedures, requires ensure the integrity and stability of the modification of the system to accept financial system. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

228 80th Annual Report, 1993 No U.S. banking laws were changed FDIC's losses because the FDIC as by NAFTA; statutes and other measures insurer is subrogated to the claims of that do not conform to U.S. obligations insured depositors; but depositor preferunder NAFTA were reserved. Thus, ence also subordinates depositors at Canandian and Mexican banks in the foreign branches and other general or U.S. will continue to be subject to exist- senior creditors including sellers of ing U.S. laws and regulations. The federal funds and counterparties in United States will allow certain Mexi- off-balance-sheet transactions such as can financial groups a period of five derivatives transactions. This provision years from the date each became subject supersedes inconsistent state laws, to U.S. law to conform their existing including those in the many states with U.S. securities activities to U.S. legal depositor preference laws, to the extent requirements; this provision will be of any inconsistency; the FDIC will implemented through administrative determine, subject to judicial review, action by the Board under section whether any such inconsistency exists. 4(a)(2) of the Bank Holding Company Section 3002 amends section 7 of the Act. Subject to market share restrictions Federal Reserve Act to require transfers during a six-year transition period, from the surplus funds of the Reserve Mexico will allow U.S. and Canadian Banks to the Board and thence to banks to establish and operate banking Treasury. These transfers will amount and certain other financial services to $106 million in fiscal 1997 and subsidiaries. $107 million in fiscal 1998, in addition to all surplus in excess of 3 percent of the paid-in capital and surplus of the Omnibus Budget Reconciliation member banks. Previously, all surplus in Act of 1993 excess of such 3 percent was so trans- The Omnibus Budget Reconciliation ferred by the Reserve Banks pursuant to Act of 1993, Public Law 103-66, was Board policy, while the 3 percent was enacted on August 10, 1993. Title III retained by the Reserve Banks for capicreates a national depositor preference tal purposes. Reserve Banks are prohiband requires the transfer of certain Fed- ited from replenishing their reserve eral Reserve surpluses. funds by the amount of any such addi- For insured depository institutions for tional transfer during fiscal years 1997 which a receiver is appointed, section and 1998. 3001 of the act amends the Federal Deposit Insurance Act to require that Unclaimed Insured Deposits depositors be paid after secured claims and after the administrative expenses of An Act to Amend the Federal Deposit the receiver but before any general or Insurance Act to Improve Procedures senior liability. Previously, when distrib- for Treating Unclaimed Insured Deposuting the assets of a failed national bank its, Public Law 103-44, was enacted or a state bank in a state without a June 28, 1993. Within thirty days of depositor preference law, the Federal initiation of payment by the FDIC to Deposit Insurance Corporation (FDIC) insured depositors of an institution in or the Resolution Trust Corporation as default, the FDIC must, under section 1 receiver paid depositors on a pro rata of the act, notify insured depositors, at basis with general or senior creditors. the last known address on the insti- Depositor preference may reduce the tution's records, that they must claim Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 229 payment from the FDIC or the trans- teen months on how the bank regulatory feree institution. The FDIC must send a agencies used their authority under the second notice to depositors who have act and whether it should be extended. • not claimed their deposits within fifteen months of the FDIC's initiation of payment. After eighteen months, the transferee shall refund any unclaimed deposits to the FDIC and be relieved of liability; such deposits shall be distributed to the depositors' states of residence for custody, except that federal deposits shall be given to Treasury. If the deposit remains unclaimed for ten years, it becomes the property of the FDIC. Depositor.} institutions Disaster Relief Act of 1993 The Depository Institutions Disaster Relief Act of 1993, Public Law 103-76, enacted on August 12, 1993, permits the Board to make exceptions to the Truth in Lending and Expedited Funds Availability acts within major disaster areas, including those eligible because of the 1993 flooding of the Mississippi River. The permission to make exceptions lasts 240 days from enactment and the exceptions must expire by October 1, 1994. Bank regulatory agencies may also allow federally insured depository institutions that are located in disaster areas to subtract deposits attributable to qualified insurance proceeds from their assets in calculating leverage limits for capital adequacy purposes; the institutions must have been adequately capitalized before the disaster, and the • exception must expire by April 1, 1995. In order to facilitate recovery from a major disaster, bank regulatory agencies may also suspend certain administrative law provisions, including requirements for notice or hearing or time limits with respect to agency action, and for publication to establish branches. The act requires Treasury to report within eigh- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

231 Banking Supervision and Regulation Economic conditions in 1993 were gen- loans. In addition, the Federal Reserve erally favorable for the banking indus- and the other federal banking agencies try. Earnings for the industry substan- continued their programs, begun in late tially exceeded the record of 1992, 1991, to reduce regulatory impediments largely as a result of further improve- to the availability of credit. By the end ments in asset quality and the continua- of the year, reports seemed to suggest tion of historically wide net interest mar- that banks generally were seeking to gins. The industry also made further promote growth in loans to both busiprogress in expanding its fee-based ness and household borrowers and were, income, reflecting increased sales of to some extent, relaxing their credit mutual funds and continued growth of standards. transactions in derivative instruments During 1993, the substantial and (futures, forwards and options contracts growing involvement of banks and other and swap agreements). Earnings were financial firms in derivative markets also bolstered by profits obtained from attracted considerable attention. The foreign exchange and securities trading Federal Reserve responded to a number activities and by relatively large gains of inquiries from the Congress concernon sales of securities from investment ing the involvement of banking instituportfolios. tions in derivative markets. It also issued The number of commercial bank fail- guidance to examiners and field tested a ures in the country declined again, to comprehensive trading activities manual forty-one, the lowest level since 1983, setting forth procedures for evaluating a and at year-end the number of problem banking organization's derivatives and banks and the volume of assets held by trading activities. these banks were down substantially The growth in mutual funds sales by from the levels of the previous year. The banks raised concerns that customers equity capital of the industry grew to its may not understand that mutual funds highest level relative to assets since are not federally insured deposits. In 1963, primarily through the retention June the Board issued a supervisory letof a large portion of the year's strong ter to state member banks on this issue, earnings. and, shortly after the end of the year, the Despite the industry's general Board in coordination with the other strength, pockets of weakness persisted, federal banking agencies issued guidparticularly in Southern California and ance on mutual funds. New England, where many banks con- Risk-based capital standards, based tinued to have asset quality problems. upon a framework adopted internation- The majority of commercial bank fail- ally in 1989, were fully phased-in at the ures for 1993 occurred in these areas. start of 1993. In addition, the Federal One important effect of the recent Reserve, along with other banking solid performance of banks has been the agencies, took steps to augment and alleviation of difficulties faced by some strengthen the risk-based standards durcreditworthy borrowers, particularly ing 1993 in the areas of market risk small businesses, in obtaining bank and interest rate risk. The Board also Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

232 80th Annual Report, 1993 addressed rules on risk contained in the and (3) the operations of foreign bank- Federal Deposit Insurance Corporation ing companies in the United States.2 The Improvement Act of 1991 and contin- Foreign Bank Supervision Enhancement ued the process of implementing title II Act of 1991 increased the Federal of that law, the Foreign Bank Supervi- Reserves' s authority over the establishsion Enhancement Act of 1991. ment, examination, and termination of branches, agencies, commercial lending subsidiaries, and representative offices Scope of Responsibilities for of foreign banks in the United States. Supervision and Regulation The Federal Reserve also exercises The Federal Reserve is the primary fed- important regulatory influence over the eral supervisor and regulator of all U.S. entry into, and the structure of, the U.S. bank holding companies and of state- banking system through its administrachartered commercial banks that are tion of the Bank Holding Company Act, members of the Federal Reserve Sys- the Bank Merger Act for state member tem. In overseeing these organizations, banks, and the Change in Bank Control the Federal Reserve primarily seeks to Act for bank holding companies and promote their safety and soundness and state member banks. Also, the Federal their compliance with laws and regula- Reserve is responsible for imposing tions, including the Bank Secrecy Act margin requirements on securities transand consumer and civil rights laws.1 The actions. In carrying out these responsi- Federal Reserve also reviews the follow- bilities, the Federal Reserve coordinates ing specialized activities of these institu- its supervisory activities with other fedtions: electronic data processing, fidu- eral and state regulatory agencies and ciary activities, government securities with the bank regulatory agencies of dealing and brokering, municipal securi- other nations. ties dealing, securities clearing activities, and securities underwriting and Supervision for Safety dealing through special subsidiaries. and Soundness The Federal Reserve is also responsible for the supervision of (1) all Edge To ensure the safety and soundness of Act and agreement corporations, (2) the banking organizations, the Federal international operations of state member Reserve conducts on-site examinations, banks and U.S. bank holding companies, visitations, and inspections and off-site surveillance and monitoring, and it undertakes enforcement and other super- 1. The Board's Division of Consumer and visory actions. Community Affairs is responsible for coordinating the Federal Reserve's supervisory activities with regard to the compliance of banking organizations Examinations and Inspections with consumer and civil rights laws. To carry out The on-site review of operations is an this responsibility, institutions are examined by specially trained Reserve Bank examiners. The integral part of ensuring the safety and chapter of this REPORT covering consumer and soundness of financial institutions. community affairs describes these regulatory responsibilities. Compliance with other statutes and regulations, which is treated in this chapter, is 2. Edge Act corporations are chartered by the the responsibility of the Board's Division of Bank- Federal Reserve, and agreement corporations are ing Supervision and Regulation and the Reserve chartered by the states, to provide all segments of Banks, whose examiners check for safety and the U.S. economy with a means of financing intersoundness. national trade, especially exports. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 233 Examinations of state member banks, of aminations. Also, in conformance with branches and agencies of foreign banks, Federal Reserve guidelines, Reserve and of Edge Act and agreement corpora- Bank officials held 244 meetings with tions, as well as inspections of bank directors of large state member banks holding companies and their subsidi- and those state member banks that disaries, entail (1) an appraisal of the played significant weaknesses. quality of the institution's assets, (2) an evaluation of management, including internal policies, operations, and pro- Bank Holding Companies cedures, (3) an assessment of the key At the end of 1993 the number of bank financial factors of capital, earnings, holding companies was 6,111, a decline asset and liability management, and of 237 from the preceding year. These liquidity, and (4) a review for organizations controlled about 8,100 compliance with applicable laws and insured commercial banks that held regulations. approximately 90 percent of the assets of all insured commercial banks in the United States. State Member Banks Federal Reserve guidelines call for At the end of 1993, 972 state-chartered annual inspections of large bank holding banks belonged to the Federal Reserve companies and smaller companies with System, an increase of 15 from the yearsignificant nonbank assets. Small comend 1992. These banks represented panies (those with assets of less than about 9 percent of all insured commer- $150 million) that do not appear to have cial banks and held about 19 percent of problems are selected for inspection on all insured commercial bank assets. a sample basis; medium-sized compa- Federal Reserve guidelines call for nies ($150 million to $500 million in state member banks to be examined assets) that do not appear to have probannually by either a Reserve Bank or lems are inspected on a three-year cycle. state banking agency. Large or troubled The inspection focuses on the operabanks must be examined annually by a tions of the parent holding company and Reserve Bank.3 its nonbank subsidiaries. In judging the In conformance with Federal Reserve condition of subsidiary banks, Federal guidelines and the requirements of the Reserve examiners refer to the examina- Federal Deposit Insurance Corporation tion reports of the federal and state Improvement Act of 1991, all state banking authorities that have primary member banks were examined at least responsibility for the supervision of once in 1993. Altogether, the Reserve these banks. In 1993, the Federal Banks conducted 773 examinations Reserve inspected 1,922 bank holding (some of them jointly with the state companies. Altogether, Federal Reserve agencies), and state banking departexaminers conducted 2,146 inspections ments conducted 284 independent exand state examiners conducted 63 independent inspections. The assignment of examiners to work on industry problems 3. Beginning in 1994, the Federal Deposit Insurance Corporation Improvement Act of 1991 and major mergers and acquisitions in will require full-scope, on-site examinations dur- 1993 required that inspections of 50 ing each twelve-month period for all depository bank holding companies be deferred to institutions except well-capitalized and well- 1994. During 1993, Reserve Bank offimanaged banks (CAMEL 1 rating), which may be examined every eighteen months. cials held 465 meetings with the boards Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

234 80th Annual Report, 1993 of directors of bank holding companies sion in its significant referral tracking to discuss supervisory concerns. system. Specialized Examinations Enforcement Actions, Civil Money Penalties, and The Federal Reserve conducts special- Significant Criminal Referrals ized examinations of banks regarding electronic data processing, fiduciary In 1993 the Federal Reserve Banks rec- activities, government securities dealing ommended, and members of the Board's and brokering, municipal securities dealstaff initiated and worked on, 179 for- ing, securities clearing, and securities mal enforcement cases involving 468 underwriting and dealing through subseparate actions such as written agree- sidiaries. The Federal Reserve also ments, cease-and-desist orders, removal reviews state member banks and bank and prohibition orders, and civil money holding companies that act as transfer penalties. Of these, 65 cases involving agents. 138 actions were completed by yearend. Of particular note was the comple- Electronic Data Processing tion of several actions relating to the Under the Interagency EDP Examina- Board's extensive investigation of mattion Program, the Federal Reserve ters involving the Bank of Credit and examines the electronic data processing Commerce International; these actions activities of state member banks, U.S. included orders requiring restitution of branches and agencies of foreign banks, $188 million and the assessment of more Edge Act and agreement corporations than $45 million in fines. The Board and independent data centers that proassessed a $400,000 fine against a forvide EDP services to these institutions. eign bank for its failure to maintain ade- The Federal Reserve conducted 457 quate Bank Secrecy Act compliance on-site EDP reviews in 1992. The Fedprocedures. eral Reserve also was the agency-in- All final enforcement actions issued charge for 3 examinations of 18 large by the Board of Governors and all writindependent providers of data services; ten agreements executed by the Federal these examinations were coordinated Reserve Banks in 1993 are available to and conducted with the Federal Deposit the public. In addition to formal enforce- Insurance Corporation, the Office of the ment actions, the Federal Reserve Banks Comptroller of the Currency, and the initiated and worked on 261 informal Office of Thrift Supervision. enforcement actions and completed 221 of them through instruments such as memorandums of understanding with Fiduciary Activities state member banks, bank holding com- The Federal Reserve has supervisory panies, and foreign financial institutions responsibility for institutions that hold subject to the jurisdiction of the Federal more than $4.3 trillion of discretionary Reserve. and nondiscretionary assets in various In 1993 the staff of the Division of fiduciary capacities. This group of insti- Banking Supervision and Regulation tutions includes 304 state-chartered forwarded 539 criminal referrals to the member banks and trust companies and Fraud Section of the Criminal Division 61 nonmember trust companies that are of the Department of Justice for inclu- subsidiaries of bank holding companies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 235 On-site examinations are essential to securities dealers or as clearing agenensure the safety and soundness of cies. The Board supervises forty-six financial institutions that have fiduciary banks that act as municipal securities operations. These examinations include dealers and three clearing agencies that (1) an evaluation of management, poli- act as custodians of securities involved cies, audit procedures, and risk manage- in transactions settled by bookkeeping ment, (2) an appraisal of the quality of entries. In 1993 the Federal Reserve trust assets, (3) an assessment of earn- examined all three of the clearing agenings, (4) a review for conflicts of inter- cies and nineteen of the banks that deal est, and (5) a review for compliance in municipal securities. with laws, regulations, and general fiduciary principles. During 1993, Federal Reserve exam- Securities Subsidiaries iners conducted 177 on-site trust exami- of Bank Holding Companies nations of state member banks and trust The Banking Act of 1933, commonly companies engaged in fiduciary activi- known as the Glass-Steagall Act, proties. The institutions examined in 1993 hibits, in section 20, the affiliation of a held approximately $1 trillion in fidu- member bank with a company that is ciary assets. "engaged principally" in underwriting or dealing in securities. The Board in 1987 approved proposals by banking Government Securities Dealers organizations to underwrite and deal on and Brokers a limited basis in specified classes of The Federal Reserve is responsible for bank "ineligible" securities (that is, examining the activities of state member commercial paper, municipal revenue banks and foreign banks that are governbonds, conventional residential ment securities dealers and brokers for mortgage-related securities, and securicompliance with the Government Secutized consumer loans) in a manner conrities Act of 1986 and regulations of the sistent with section 20 of the Glass- Department of the Treasury. Forty-three Steagall Act and with the Bank Holding state member banks, five state branches Company Act. At that time, the Board of foreign banks, and one state agency limited revenues from these newly of a foreign bank have notified the approved activities to no more than Board that they are currently govern- 5 percent of total revenues for each ment securities dealers or brokers that securities subsidiary. This limit was are not exempt from Treasury's regulaincreased in September 1989 to 10 pertions. During 1993 the Federal Reserve cent. In January 1993 the Board adopted conducted twenty-two examinations of an optional indexed revenue test for calbroker-dealer activities in government culating the 10 percent limit that reflects securities at state member banks and the changes in the level and structure of foreign banks. interest rates since 1989. In January 1989 the Board approved Municipal Securities Dealers applications by five U.S. bank holding and Clearing Agencies companies to underwrite and deal in cor- The Securities Act Amendments of 1975 porate and sovereign debt and equity made the Board responsible for super- securities, subject, in each case, to vising state member banks and bank reviews of managerial and operational holding companies that act as municipal infrastructure and other conditions and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

236 80th Annual Report, 1993 requirements specified by the Board. the automated systems used by the Fed- Four of these organizations subse- eral Reserve to monitor banking organiquently received authorization to under- zations is the System to Estimate Examwrite and deal in corporate and sover- ination Ratings (SEER), which is used eign debt securities, and two received to track the overall financial condition comparable authority for equities. of individual organizations. SEER statis- At year-end 1993, thirty-one bank tically estimates an institution's superholding companies had so-called section visory rating based on its quarterly 20 subsidiaries authorized to underwrite Report of Condition and Income (Call and deal in ineligible securities. Of Report). A number of supplementary these, nine could underwrite any debt or screening systems are used to monitor equity security; four could underwrite specific areas of supervisory interest. any debt security; and eighteen could Another automated system tracks examunderwrite only the limited types of debt inations and inspections and summasecurities approved by the Board in rizes examination results and supervi- 1987. The Federal Reserve uses special- sory actions. ized procedures for reviewing opera- To assist supervisory staff in evaluattions of these securities subsidiaries; it ing individual bank holding companies, conducted twenty-nine such inspections the Federal Reserve produces and disin 1993. tributes the quarterly Bank Holding Company Performance Report, which Transfer Agents provides detailed financial information Federal Reserve examiners conduct sep- on the condition and performance of arate reviews of state member banks and each bank holding company. The Fedbank holding companies that act as eral Reserve also produces several transfer agents. Transfer agents counter- aggregate reports on the national and sign and monitor the issuance of securi- regional performance and condition of ties, register their transfer, and exchange the banking industry. or convert them. During 1993, Federal Automated monitoring systems rely Reserve examiners conducted on-site heavily on the information in regulatory examinations at 63 of the 182 banks and reports filed by banking organizations. bank holding companies registered as To ensure the timeliness and accuracy of transfer agents with the Board. the reports, the Federal Reserve maintains the Regulatory Reports Monitoring Surveillance and Monitoring System to track domestic and foreign The Federal Reserve monitors the finan- banking organizations that file late or cial condition and performance of indi- inaccurately. vidual banking organizations and the banking system as a whole to identify areas of supervisory concern. Auto- International Activities mated screening systems are used to The Federal Reserve is responsible for identify organizations with poor or detesupervising the international activities riorating financial profiles and to idenof various entities. tify adverse trends affecting the banking system. Information from these systems is then used in decisions to allocate Edge Act and Agreement Corporations examination resources or take other Edge Act corporations are international appropriate supervisory actions. Among banking organizations chartered by the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 237 Board to provide all segments of the licensed branches and agencies, of U.S. economy with a means of financing which 33 are insured by the Federal international trade, especially exports. Deposit Insurance Corporation. These An agreement corporation is a state- foreign banks also operated 73 branches chartered company that enters into an and agencies licensed by the Office of agreement with the Board not to exer- the Comptroller of the Currency, of cise any power that is impermissible for which 8 have FDIC insurance. Foreign an Edge Act corporation. In 1993 the banks also operated 245 representative Federal Reserve examined all eighty- offices and directly owned 16 Edge Act seven Edge Act and agreement corpora- corporations and 8 commercial lending tions, which held about $31 billion in companies. In addition, foreign banks total assets at year-end. held an equity interest of at least 25 percent in 88 U.S. commercial banks. Altogether, these U.S. offices of foreign Foreign-Office Operations banks control approximately 22 percent of U.S. Banking Organizations of U.S. banking assets. The Federal Reserve examines the inter- The Federal Reserve has broad national operations of state member authority to supervise and regulate forbanks, Edge Act corporations, and bank eign banks that engage in banking and holding companies, principally at the related activities in the United States U.S. head offices of these organizations, through branches, agencies, commerwhere the ultimate responsibility for cial lending companies, representative their foreign offices lies. In 1993 the offices, Edge Act corporations, banks, Federal Reserve conducted full-scope and certain nonbanking companies. The and targeted-scope examinations of Federal Reserve conducted or particitwelve foreign branches of state mempated with state and federal regulatory ber banks and forty foreign subsidiaries authorities in the examination of 784 of Edge Act corporations and bank holdsuch offices during 1993. ing companies. All of the examinations Before the December 1991 passage of abroad were conducted with the cooperthe Foreign Bank Supervision Enhanceation of the supervisory authorities of ment Act of 1991 (FBSEA), the Federal the countries in which they took place; Reserve had residual authority to examwhen appropriate, the examinations ine all branches, agencies, and commerwere coordinated with the Office of cial lending subsidiaries of foreign the Comptroller of the Currency. Also, banks in the United States. The Internaexaminers made 16 visitations to overtional Banking Act of 1978 instructed seas offices to obtain current financial the Federal Reserve to use, to the extent and operating information and, in some possible, the examination reports of instances, to evaluate their compliance other state and federal regulators. with corrective measures or test-check FBSEA amended the International their adherence to safe and sound Banking Act and increased the Federal practice. Reserve's authority with respect to these foreign bank operations, including rep- U.S. Activities of Foreign Banks resentative offices. The Federal Reserve Foreign banks continue to be significant has acted to ensure that all state and participants in the U.S. banking system. federally licensed branches and agen- As of year-end 1993, 295 foreign banks cies receive an on-site examination at from 61 countries operated 481 state- least once during each twelve-month Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

238 80th Annual Report, 1993 period. These examinations are coordi- of the U.S. operations of foreign banknated with other state and federal regula- ing organizations in accordance with tors to eliminate duplication whenever FBSEA. possible. FBSEA requires Federal Reserve approval to establish foreign Representative Offices bank branches, agencies, commercial FBSEA gave the Board supervisory lending subsidiaries, and representative responsibility, including examination offices in the United States. authority, over the activities of repre- In 1993, applications by twelve banks sentative offices of foreign banks. As from eight foreign countries were of year-end 1993, 245 representative approved to establish branches, agen- offices of foreign banks were registered cies, and representative offices. with the Federal Reserve System. In order to determine the various activities undertaken by these offices, the Board Charging for Examinations issued a policy directive to examine all of U.S. Offices of Foreign Banks registered representative offices by year- In December 1993 the Board published end 1993. The findings from these for comment a proposal to implement examinations will assist the Board in provisions of FBSEA that require the finalizing an ongoing supervisory and Board to charge foreign banks for the regulatory program for representative cost of examinations of their branches, offices. agencies, and representative offices in the United States. This notice of proposed rulemaking asked specifically for Technical Assistance public comment regarding the methods In 1993 the System provided staff on a developed by the Board for assessing number of technical assistance missions the cost of examinations against foreign and training sessions on bank supervibanks. The Board also sought comment sory matters to numerous central banks on whether implementation of this pro- in Russia, Eastern Europe, and Latin vision of FBSEA was consistent with America. the policy of national treatment established in the International Banking Act Supervisory Policy of 1978. During 1993 the Federal Reserve undertook several initiatives in supervisory Examination Manual and regulatory policy related to the con- In 1993 the federal bank regulatory tinuing implementation of the Federal agencies began developing a compre- Deposit Insurance Corporation Improvehensive interagency manual for examin- ment Act of 1991 (FDICIA). Other initiers of individual branches and agencies atives included guidance on the use of of foreign banking organizations. The and examination of derivatives and goal is to complete the manual in early amendments to the Board's risk-based 1994 and also make it available to for- capital guidelines and other rules and eign banking organizations and other policies. interested parties. Some of the policy concepts that are being incorporated in FDICIA the examination manual are part of a larger group of policy initiatives seek- The major Board actions of 1993 to ing to enhance the overall supervision implement FDICIA as it relates to super- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 239 visory policy covered the following sec- Trading Activities Manual codifies tions of the act: existing practices and addresses these topics in significant detail. The manual Section 132. On November 18 the outlines procedures for evaluating the federal banking agencies issued an trading function's organizational strucinteragency notice of proposed rule- ture and front- and back-office operamaking requesting public comment on tions and systems; approaches to market safety and soundness standards with and credit risk measurement; and overregard to operations and management, all risk management. asset quality, earnings, stock valuation, and compensation. The proposal prescribes standards specific enough to Risk-Based Capital Standards identify emerging operational and managerial problems and to require submis- The risk-based capital standards, phased sion of a compliance plan before those in over a four-year period, became fully problems become serious. The proposed effective at the end of 1992. Consestandards generally establish the ends quently, 1993 was the first full year that that proper operations and management banking organizations were expected to should achieve, leaving the means to maintain capital equal to at least 8 pereach institution. A final rulemaking is cent of risk-adjusted assets. The riskexpected in 1994. based capital standards were developed by the Board, in conjunction with the FDIC and the OCC, to implement the Section 305. On September 14 the Basle Accord, which was proposed by federal banking agencies issued an the Basle Committee on Banking Reguinteragency notice of proposed rulelations and Supervisory Practices (Basle making, requesting comment on the Supervisors' Committee) and endorsed incorporation of interest rate risk into by the central bank governors of the the risk-based capital framework. A Group of 10 (G-10) countries in July final rulemaking is expected in 1994. 1988. Trading Activities Guidance Amendments Trading in derivatives and cash invest- During 1993 the Board adopted amendments is becoming increasingly impor- ments to its risk-based capital guidelines tant to the overall risk profile and profit- in the following areas: ability of certain banking organizations. Accordingly, the Federal Reserve has Intangible assets. The Board adopted given examiners guidance on the issue an amendment to provide guidance on in a supervision letter and through the the types and amounts of intangible development and field testing of a Capi- assets that may be included in tier 1 tal Markets and Trading Activities Man- capital. The amendment incorporates ual. The supervisory letter, issued on limits and discounts on includable intan- December 22, highlights the key consid- gible assets in a manner that is consiserations in examining the risk manage- tent with the requirements of section ment and internal controls of trading 475 of FDICIA and achieves uniformity activities in both cash and derivative in the banking agencies' capital treatinstruments. The Capital Markets and ment of intangible assets. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

240 80th Annual Report, 1993 Presold one- to four-family residen- measure interest rate risk and two altertial construction loans. The Board native methods, one quantitative and adopted a final rule amending the risk- one qualitative, for determining the based capital guidelines to lower the additional capital, if any, an institution risk weight from 100 percent to 50 per- may be required to have for interest rate cent for presold one- to four-family resi- risk. The approach taken in the proposal dential construction loans that meet cer- seeks to balance the regulatory burden tain criteria. This action was mandated associated with more precise measures by section 618(a) of the Resolution of interest rate risk and the commer- Trust Corporation Refinancing, Restruc- cial banking industry's favorable expeturing, and Improvement Act of 1991 rience in adapting to changing rate (RTCRRIA). environments. Multifamily housing loans. The Board Securities accounting. In December adopted a final rule, effective December 1993 the Board issued a proposed rule 31, 1993, lowering the risk weight from seeking public comment on the inclu- 100 percent to 50 percent for qualifying sion in tier 1 capital of net unrealized multifamily housing loans and securities holding gains and losses on securities backed by such loans that meet certain available for sale. This rule was procriteria. This amendment was mandated posed in light of the recently adopted by section 618(b) of RTCRRIA and also Financial Accounting Standards Board fulfills the requirements of section (FASB) Statement No. 115, "Account- 305(b)(l)(B) of FDICIA, which requires ing for Certain Investents in Debt and the agencies to revise their capital stan- Equity Securities." A final rule is dards to ensure that the treatment of expected in 1994. multifamily housing loans reflects their actual risk. Recourse. In December 1993 the Board approved a recommendation from the Federal Financial Institutions Exam- Proposals ination Council that its members issue a The Board in 1993 issued for public proposed rulemaking, together with an comment several proposals regarding advance notice of proposed rulemaking, risk-based capital: requesting comment on various recourse issues. The proposed rulemaking would Interest rate risk. Section 305 of lower the capital requirement for assets FDICIA requires the bank regulatory sold with low levels of recourse. The agencies to incorporate interest rate in advance notice of proposed rulemaking risk the risk-based capital framework. outlines an approach to the capital treat- Accordingly, in September 1993 the ment of structured-finance transactions Board issued a proposal for incorporat- that would take into account various ing interest rate risk into the assessment levels of recourse exposure. of capital adequacy. The proposal would impose additional capital requirements Risk-based capital. The Board has on institutions having interest rate risk been working with banking supervisors in excess of a defined threshold level. of the other G-10 countries to broaden The proposal outlines the use of a the scope of the international risk-based reporting exemption test, an option for capital framework. The Board released institutions to use internal models to for public comment in May 1993 a con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 241 sultative paper developed by the Basle tory Institutions Disaster Relief Act of Supervisors' Committee. The paper con- 1992. tained proposals to incorporate interest rate risk, market risk, and netting into Credit Availability the Basle Accord. The comment period for the consultative paper ended on The Federal Reserve continued to work December 31, 1993. in a number of policy and supervisory areas to ease problems related to the availability of bank credit. The policy Real Estate Appraisals changes that were implemented included reducing unnecessary documentation On June 4, 1993 the Board and the other requirements for loans to small- and banking agencies issued for public com- medium-sized businesses and small ment an interagency proposal to revise farms, improving regulatory treatment their appraisal regulations. This proposal related to in-substance foreclosures, and was initiated as part of an interagency permitting certain partially performing effort to increase credit availability, loans to be placed on accrual status. The especially for small and medium-sized agencies also conformed with generally businesses, by reducing regulatory accepted accounting principles the reguimpediments to lending consistent with latory reporting requirements for sales safe and sound banking practices. The of other real estate owned; reaffirmed proposed amendments would increase that examiners should review commerto $250,000 the threshold level at or cial real estate loans in a consistent, below which appraisals are not required, prudent, and balanced manner; and expand and clarify existing exemptions developed a common definition for to appraisal requirements, and identify "Special Mention" assets that separates additional circumstances when apprais- these loans from loans warranting als are not required. The Board received adverse classification. more than 2,000 letters on the proposal. As a result of the comments, the Interagency Coordination Board and the other agencies reopened the public record on the proposal on The Federal Reserve together with the November 10, 1993, and placed into the FDIC, the OCC, and the OTS adopted a public file supplemental information that Uniform Core Report of Examination in relates to the proposed increase in the 1993. This report will be used by each appraisal threshold. The Board received agency for its reports of examination of more than 2,000 additional letters on financial institutions. Each agency is this supplemental information. The scheduled to implement the report Board is expected to consider in the first during 1994 and the use of a common quarter of 1994 a final rule to amend the report by each agency will significantly appraisal regulation. reduce the burden on institutions that In July 1993 the Board in conjunction are subject to examination by different with the other federal banking agencies agencies. Furthermore, the agencies issued an order granting relief from cer- issued guidelines to coordinate the tain real estate appraisal requirements supervision and examination of banking for financial institutions affected by the organizations in order to minimize the flooding in the Midwest. The Board disruptions and burdens associated with acted under provisions of the Deposi- the examination process, and provided Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

242 80th Annual Report, 1993 guidance on fair lending initiatives. The co-sponsored with, other agencies, as Federal Reserve also reiterated its long- shown in the accompanying table. One standing policy for resolving differences new school was added to the curricubetween bankers and examiners regard- lum during the year, a senior level ing examination findings. continuing education seminar for EDP examiners. In 1993 the Federal Reserve trained Staff Training 3,045 persons in System schools, 1,291 The training of System staff members in schools sponsored by the Federal emphasizes analytical and supervisory Financial Institutions Examination themes common to the four areas Council (FFIEC), and 145 in other of supervision and regulation— schools, for a total of 4,481 students, examinations, inspections, applications, including 230 representatives from forand surveillance—and stresses the inter- eign central banks. The number of studependence among these areas. During dent days of training in 1993 was 1993 the Federal Reserve conducted a 26,938, compared with 20,555 in 1992. variety of schools and seminars, and The Federal Reserve System also Federal Reserve staff members partici- gave scholarship assistance to the states pated in several courses offered by, or for training their examiners in Federal Training Programs for Banking Supervision and Regulation, 1993 Number of sessions Program Total Regional Schools or seminars conducted by the Federal Reserve ETS I, Introduction to examinations 14 ETS II, Financial institution analysis 17 ETS III, Loan analysis 17 13 ETS IV, Bank management 9 1 Effective writing for banking supervision staff 26 26 Management skills 12 9 Conducting meetings with management 17 17 Abbreviated cash flow seminar 2 2 Real estate lending seminar 6 2 Senior lending seminar 5 Senior forum for current banking and regulatory issues 3 Bank operations 6 Bank holding company applications 2 Bank holding company inspection 8 Basic entry-level trust 1 Advanced trust 1 Consumer compliance examination I 2 Consumer compliance examination II 2 Advanced CRA examination techniques 1 Advanced EDP examination 1 EDP continuing education 1 Section 20 securities seminar 1 Securities activities and interest rate risk 3 Seminar for senior supervisors of foreign central banks' 3 Other agencies conducting courses2 Federal Financial Institutions Examination Council 78 15 Federal Deposit Insurance Corporation or Office of the Comptroller of the Currency 12 Federal Bureau of Investigation3 4 4 1. Conducted jointly with the World Bank. Deposit Insurance Corporation, Office of Thrift Supervi- 2. Open to Federal Reserve employees. sion, Office of the Comptroller of the Currency, and the 3. Co-sponsored by the Federal Reserve, Federal Resolution Trust Corporation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 243 Reserve and FFIEC schools. Through Federal Financial Institutions this program, 537 state examiners were Examination Council trained; 276 in Federal Reserve courses, In December 1993 the Federal Reserve 239 in FFIEC programs, and 22 in other and the other bank regulatory agencies courses. issued, under the auspices of the FFIEC, During 1993 the Federal Reserve cona joint policy statement that provides tinued to integrate its core supervision comprehensive guidance on the mainteschools with those of the FDIC. This nance of an allowance for loan and lease effort began in 1992 with the integrating losses (ALLL) and an effective loan of the curriculum for the first two review system.4 The policy statement schools attended by newly hired examidiscusses the nature and purpose of the nation and inspection staff. The pilot ALLL, defines an adequate ALLL, and session of the joint Loan Analysis covers the responsibilities of the board School, sequentially the third school, of directors, the institution's managewas held in July 1993, and ten sessions ment, and the examiner. The policy of the joint schools were offered during statement emphasizes that it is the the remainder of the year. responsibility of the board of directors During 1993 the Federal Reserve and management of each institution to trained examiners on capital markets maintain the ALLL at an adequate level. topics using a variety of forums. Such The policy statement also discusses the training focused on issues related to analysis of the loan and lease portfolio, interest rate risk, investment activities, factors to consider in estimating credit financial derivatives and mortgage seculosses, and the characteristics of an rities. One effort involved the developeffective loan review system. ment of separate training modules on In response to an FFIEC recommenthese topics that are to be offered to dation, the Federal Reserve Board on examiners throughout the Federal February 11, 1993, issued for public Reserve System during 1994. Other comment a proposal to amend its capital efforts included seminars for capital guidelines for deferred tax assets. The markets specialists on examining interproposed rule would limit the amount of nal interest rate risk models and on the deferred tax assets that can be included concepts underlying the Basle proposals in capital. The FFIEC's recommendaregarding market risk. These seminars tion and the Board's proposal were were tailored to provide the specialists issued in response to FASB Statement with the resources and materials to 109, "Accounting for Income Taxes," train staff members at their respective issued in February 1992. Final action on Reserve Banks and to enable them to the rule will be considered when all of provide supplemental examination supthe other federal banking agencies have port when special issues arise. completed their comment process. In addition, the Federal Reserve has In addition, on April 16, 1993 the revised and updated both the Commer- FFIEC issued optional worksheets to cial Bank Examination Manual and the Bank Holding Company Supervision Manual. The revised manuals reflect 4. The FFIEC consists of representatives from certian provisions of FDICIA as well the Board of Governors of the Federal Reserve as the Federal Reserve's current prac- System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, tices in examining banks and holding the Office of the Comptroller of the Currency, and companies. the Office of Thrift Supervision. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

244 80th Annual Report, 1993 assist smaller banks in the implementa- required annually by financial institution of FASB Statement 109 for pur- tions that are required to submit audited poses of the Call Reports, which are financial statements to the federal bankfiled quarterly by all insured commer- ing agencies under FDICIA section 112. cial banks. Banks can use these work- In addition, the FFIEC requested comsheets to determine the amount of ment on whether it was "feasible and income taxes they should show in the practicable" to include these fair value Call Report. disclosures in certain other regulatory The FFIEC also approved a number reports and on a quarterly basis. The of revisions to the Call Report. These FFIEC continues to study the responses modifications, effective as of the received on the proposal and expects to March 31, 1994, reporting date, cover issue a final rule in the first half of the following items: the reporting of 1994o for disclosure of fair values of securities in the Call Report as required assets and. by FASB Statement 115, "Accounting In 1993 the FFIEC implemented a for Certain Investments in Debt and supplement to the Reportftrf Assets and Equity Securities;" sales of mutual Liabilities of U.S. Branches and Agenfunds and annuities and their related cies of Foreign Banks (FFIEC 002) to income; the original maturity of other obtain improved data for supervisory borrowed money; the disclosure of purposes and for the analysis of U.S. "Depository Institution Investment Con- credit and deposit flows in connection tracts" for deposit assessment purposes; with international indebtedness. and trading account assets and liabilities to reflect ongoing developments in the Regulation of the U.S. trading area. In addition, changes were Banking Structure made to collect information about past due derivatives, to provide instructional The Board administers the Bank Holdguidance on the offsetting of amounts ing Company Act, the Bank Merger Act associated with derivative contracts, and for state member banks, and the Change to set forth instructional clarifications in Bank Control Act for bank holding regarding loans to small businesses and companies and state member banks. In small farms. Furthermore, the revisions doing so, the Federal Reserve acts on a include deleting certain items related to variety of proposals that directly or indiloan sales and purchases and certain rectly affect the structure of U.S. bankitems related to taxable securities and ing at the local, regional, and national debt securities held for sale. levels. The Board also has primary On April 14, 1993, the FFIEC issued responsibility for regulating the interfor public comment proposals for cer- national operations of domestic banking tain fair value disclosure requirements organizations and the overall U.S. bankmandated by section 121 of FDICIA. ing operations of foreign banks, whether The FFIEC received more than 180 conducted directly through a branch or comment letters during the comment agency or indirectly through a subsidiperiod. The proposal provided a method ary commercial lending company. The for disclosing fair values of assets and Board has established regulations for the liabilities that is similar to that set forth interstate banking activities of these forin FASB Statement 107, "Disclosure eign banks and for foreign banks that about Fair Values of Financial Instru- control a U.S. subsidiary commercial ments." These disclosures would be bank. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 245 Bank Holding Company Act denied 3; approved 432 requests by existing companies to acquire nonbank By law, a company must obtain the Fed- firms engaged in activities closely eral Reserve's approval if it is to form a related to banking and denied 1; and bank holding company by acquiring approved 23 other applications. Data on control of one or more banks. Moreover, these and related bank holding company once formed, a bank holding company decisions are shown in the accompanymust receive the Federal Reserve's ing table. approval before acquiring additional banks or nonbanking companies. Bank Merger Act In reviewing an application filed by a bank holding company, the Federal The Bank Merger Act requires that all Reserve considers factors such as the proposed mergers of insured depository financial and managerial resources of institutions be acted upon by the approthe applicant, the future prospects of priate Federal banking agency. If the both the applicant and the firm to be institution surviving the merger is a state acquired, the convenience and needs of member bank, the Federal Reserve has the community to be served, the poten- primary jurisdiction. Before acting on a tial public benefits, and the competitive proposed merger, the Federal Reserve effects of the proposal. considers factors relating to the financial In 1993 the Federal Reserve acted on and managerial resources of the appli- 1,180 bank holding company and cant, the future prospects of the existing related applications. The Federal and combined institutions, the conve- Reserve approved 282 proposals to nience and needs of the community to organize bank holding companies and be served, and the competitive effects of denied 2; approved 111 proposals to the proposal. The Federal Reserve must merge existing bank holding companies; also consider the views of certain other approved 326 bank acquisitions by agencies on the competitive factors existing bank holding companies and involved in the transaction. Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1993 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 19 2 0 0 4 259 0 284 Merger of holding company 19 0 0 0 16 76 0 111 Retention of bank 0 0 0 0 0 00 0 Acquisition Bank 41 3 0 0 19 266 0 329 Nonbank 115 1 0 0 37 149 131 433 Bank service corporation ... 0 0 0 0 0 02 2 Other 1 0 20 0 0 0 0 21 Total 195 6 20 0 76 750 133 1,180 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

246 80th Annual Report, 1993 During 1993 the Federal Reserve and verifies information contained in the approved ninety-seven merger applica- proposal. tions. As required by law, each merger In 1993 the Federal Reserve acted is described in this REPORT (in table 16 on 192 proposed changes in control of of the Statistical Tables section). state member banks and bank holding When the FDIC, the OCC, or the companies. OTS has jurisdiction over a merger, the Federal Reserve is asked to comment on Public Notice of Federal Reserve the competitive factors to assure compa- Decisions rable enforcement of the antitrust pro- Each decision by the Federal Reserve visions of the act. The Federal Reserve that involves a bank holding company, and those agencies have adopted stanbank merger, change in control, or interdard terminology for assessing competinational banking proposal is effected by tive factors in merger cases to assure an order or announcement. Orders state consistency in administering the act. the decision along with the essential The Federal Reserve submitted 882 facts of the application and the basis for reports on competitive factors to the the decision; announcements state only other federal banking agencies in 1993. the decision. All orders and announcements are released immediately to the Change In Bank Control Act public; they are subsequently reported in the Board's weekly H.2 statistical The Change in Bank Control Act rerelease and in the monthly Federal quires persons seeking control of a bank Reserve Bulletin. The H.2 release also or bank holding company to obtain contains the announcement of applicaapproval from the appropriate federal tions and notices received by the Fedbanking agency before the transaction eral Reserve but not yet acted on. occurs. Under the act, the Federal Reserve is responsible for reviewing changes in the control of state member Timely Processing of Applications banks and of bank holding companies. The Federal Reserve maintains target In so doing, the Federal Reserve must dates and procedures for the processing review the financial condition, compe- of applications filed under the Bank tence, experience, and integrity of the Holding Company Act, the Bank acquiring person; consider the effect on Merger Act, and the Change in Bank the financial condition of the bank or Control Act. These target dates promote bank holding company to be acquired; efficiency at the Board and the Reserve and determine the effect on competition Banks and reduce the burden on appliin any relevant market. cants. The time allowed for a decision is The appropriate federal banking agen- sixty days; during 1993, 91 percent of cies are required to publish notice of the decisions met this standard. each proposed change in control and to invite public comment, particularly from Delegation of Applications persons located in the markets served by the institution to be acquired. The fed- Historically, the Board has delegated eral banking agencies are also required certain regulatory functions—including to assess the qualifications of each per- the authority to approve, but not to deny, son seeking control; the Federal Reserve certain types of applications—to the routinely makes such a determination Reserve Banks, to the Director of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 247 Board's Division of Banking Super- ing, certain futures, and certain options vision and Regulation, and to the Sec- on futures, on nonfinancial commodiretary of the Board. The delegation of ties. Previously, the Board had limited responsibility for applications permits its consideration of FCM activities to staff members at both the Board and the futures and options on futures on finan- Reserve Banks to work more efficiently cial commodites (such as bullion and by removing routine cases from the coin) and other financial instruments. Board's agenda. During the year, the Board also per- In 1993, 83 percent of the applica- mitted one bank holding company to tions processed were acted on under del- offer career counseling services to egated authority. The Board continued unaffiliated parties and another bank its efforts during the year to streamline holding company to provide inventory its processing procedures. In particular, inspection services on a stand-alone the Board permitted the Reserve Banks basis. In addition, the Board approved to act on more applications by bank a proposal by a bank holding company holding companies to initiate or expand to provide administrative services to their futures commission merchant mutual funds and closed-end funds. activities. Three rulemakings were under consideration at year-end. One proposal would ease the restrictions on the under- Board Policy Decisions writing and dealing activities of bank and Developments holding companies to permit certain in Bank-Related and joint marketing efforts and common Nonbanking Activities management officials. A second pro- In January 1993 the Board approved an posal would rescind an existing rule that indexed revenue test as an alternative to permits bank holding companies to the 10 percent revenue limit applicable establish or acquire indirectly, through to the ineligible securities activities of their state-chartered bank subsidiaries, section 20 subsidiaries of bank holding nonbank operations subsidiaries encompanies. This modification was effec- gaged in activities that may be contive immediately and applied to all sec- ducted by the parent bank. A third tion 20 subsidiaries. It did not in any rulemaking would permit bank holdother way affect the authorizations to ing companies to engage in real estate engage in securities underwriting and investment activities within certain dealing granted by the Board in its pre- limits. vious section 20 orders and was subject to the Board's continuing authority to Applications by State reexamine limitations on such activities. Member Banks In 1993 the Board approved an application by a foreign bank to clear futures State member banks must obtain the pertransactions that generally were exe- mission of the Federal Reserve to open cuted by other pre-approved execution new domestic branches, to make investgroups. In addition, the Board approved ments in bank premises that exceed applications by a foreign bank and by a 100 percent of capital stock, and to add U.S. bank holding company to act as a to their capital from sales of subordifutures commission merchant (FCM) for nated debt. State member banks must unaffiliated customers in executing and also give six months' notice of their clearing, and clearing without execut- intention to withdraw from membership Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

248 80th Annual Report, 1993 in the Federal Reserve, although the (International Banking Operations), notice period may be shortened or elim- member banks must obtain Board inated in specific cases. approval to establish branches in foreign countries. In reviewing proposed foreign branches, the Board considers the Stock Repurchases By Bank requirements of the law, the condition Holding Companies of the bank, and the bank's experience A bank holding company sometimes in international business. In 1993 the purchases its own shares from its share- Board approved the opening of three holders. When the company borrows the foreign branches. money to buy the shares, the transaction By the end of 1993, 114 member increases the debt of the bank holding banks were operating 739 branches in company and simultaneously decreases foreign countries and overseas areas of its equity. Relatively larger purchases the United States; 84 national banks may undermine the financial condition were operating 640 of these branches, of a bank holding company and its bank and 30 state member banks were operatsubsidiaries. The Federal Reserve may ing the remaining 99 branches. In addiobject to stock repurchases by holding tion, 18 nonmember banks were operatcompanies that fail to meet certain stan- ing 36 branches in foreign countries. dards, including the Board's capital guidelines. In 1993 the Federal Reserve Edge Act Corporations reviewed sevety-one proposed stock and Agreement Corporations repurchases by bank holding companies, all of which were acted on by the Under sections 25 and 25(a) of the Fed- Reserve Banks on behalf of the Board. eral Reserve Act, Edge Act and agreement corporations may engage in international banking and foreign financial International Activities of U.S. transactions. These corporations, which Banking Organizations are usually subsidiaries of member The Board has several statutory respon- banks, may (1) conduct a deposit and sibilities in supervising the international loan business in states other than that of operations of U.S. banking organiza- the parent, provided that the business is tions. The Board must provide autho- strictly related to international transacrization and regulation of foreign tions and (2) make foreign investments branches of member banks; of overseas that are broader than those of member investments by member banks, Edge banks because they can invest in foreign Act corporations, and bank holding financial organizations, such as finance companies; and of investments by bank companies and leasing companies, as holding companies in export trading well as in foreign banks. companies. In addition, the Board is In 1993 the Federal Reserve approved required to charter and regulate Edge two new agreement corporations. At Act corporations and their investments. year-end, there were eighty-seven Edge Act and agreement corporations, which together had thirty-six domestic Foreign Branches branches. Effective January 1, 1993, the of Member Banks Board, in line with the latest revision to Under provisions of the Federal Reserve Regulation K, requires each Edge Act Act and of the Board's Regulation K corporation that is "engaged in bank- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 249 ing" to maintain a minimum ratio of cally related to bank safety and soundqualifying total capital to weighted risk ness and the integrity of the banking assets of 10 percent. structure. Foreign Investments Bank Secrecy Act The Currency and Foreign Transactions Under authority of the Federal Reserve Reporting Act (the Bank Secrecy Act) Act and the Bank Holding Company was originally proposed as a means by Act, U.S. banking organizations may which to identify and track proceeds of engage in activities overseas with the illegal activity by creating and maintainauthorization of the Board. Significant ing records of various financial transacinvestments require advance review by tions that otherwise would not be identithe Board, although pursuant to Regulafiable. More recently, the Bank Secrecy tion K, most foreign investments may be Act has been regarded as a tool in the made under general-consent procedures fight against money laundering. The that involve only after-the-fact notificarecords required by the Bank Secrecy tion to the Board. Act provide useful data for aiding in the detection of unlawful activity as well as Export Trading Companies for determining the safety and soundness of financial institutions. The Fed- In 1982 the Bank Export Services Act eral Reserve monitors compliance with amended section 4 of the Bank Holding the requirements of the Bank Secrecy Company Act to permit bank holding Act by the institutions it supervises. companies, their subsidiary Edge Act or During 1993 the Federal Reserve agreement corporations, and bankers' tested new Bank Secrecy Act examinabanks to invest in export trading compation procedures during its regularly nies, subject to certain limitations and scheduled Bank Secrecy Act examafter Board review. The purpose of this inations of financial institutions under amendment was to allow effective parits supervision. Some examinations ticipation by bank holding companies in resulted in the issuance of cease and the financing and development of export desist orders and the assessment of civil trading companies. The Export Trading money penalties for failure to comply Company Act Amendments of 1988 with the requirements of the Bank provide additional flexibility for bank Secrecy Act. holding companies engaging in export The Federal Reserve also appointed a trading company activities. Since 1982 representative to the Bank Secrecy Act the Federal Reserve has acted affirma- Advisory Council, a committee created tively on notifications by 48 bank holdunder recent legislation to propose addiing companies to establish export tradtional anti-money-laundering measures ing companies. to be taken under the Bank Secrecy Act: created a Special Investigations and Examinations Section to, among other Enforcement of Other Laws things, assist in the investigation of and Regulations money laundering activities; and desig- The Board is also responsible for the nated staff members at each Reserve enforcement of various laws, rules, and Bank to assist examiners in reviewing regulations other than those specifi- compliance procedures under the Bank Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

250 80th Annual Report, 1993 Secrecy Act during regularly scheduled the filing of periodic regulatory reports. examinations. During 1993, Federal Reserve examin- During 1993 the Federal Reserve also ers inspected 67 lenders for compliance provided assistance to law enforcement with Regulation G. agencies conducting criminal investiga- In general, Regulations G and U tions under the Bank Secrecy Act. impose credit limits on loans secured by publicly held securities when the purpose of the loan is to purchase or carry Securities Regulation those or other publicly held equity secu- Under the Securities Exchange Act of rities. Regulation T limits the amount of 1934 the Board is responsible for regu- credit that brokers and dealers may lating credit in certain transactions extend when the credit is used to purinvolving the purchase or carrying of chase or carry publicly held debt or securities. The Board limits the amount equity securities. Collateral for such of credit that may be provided by securi- loans at brokers and dealers must be ties brokers and dealers (Regulation T), securities in one of the following categoby banks (Regulation U), and by other ries: those traded on national securities lenders (Regulation G). Regulation X exchanges, certain over-the-counter extends these credit limitations, or mar- (OTC) stocks that the Board designates gin requirements, to certain borrowers as having characteristics similar to and to certain credit extensions, such as those of stocks listed on the national credit obtained from foreign lenders by exchanges, or bonds that meet certain U.S. citizens. requirements. Several regulatory agencies enforce The Federal Reserve monitors the compliance with the Board's securities market activity of all OTC stocks to credit regulations. The Securities and determine which of them are subject to Exchange Commission, the National the Board's margin regulations. The Association of Securities Dealers, and Board publishes the resulting List of the national securities exchanges exam- Marginable OTC Stocks quarterly. In ine brokers and dealers for compliance 1993 the OTC list was revised in Febwith Regulation T. The federal banking ruary, May, August, and November. agencies examine banks under their The November OTC list contained respective jurisdictions for compliance 3,545 stocks. with Regulation U. The compliance of Pursuant to a 1990 amendment to other lenders with Regulation G is Regulation T, the Board publishes a list examined by the Board, the Farm Credit of foreign stocks that are eligible for Administration, the National Credit margin treatment at broker-dealers on Union Administration, and the OTS, the same basis as domestic margin according to the jurisdiction involved. securities. In 1993 the foreign list was At the end of 1993, 677 lenders were revised in February, May, August, and registered under Regulation G, and 377 November. The November foreign list came under the Board's supervision. Of contained 299 stocks. these 377, the Federal Reserve regularly Under section 8 of the Securities inspects 229 either biennially or trienni- Exchange Act, a nonmember domestic ally, according to the type of credit they or foreign bank may lend to brokers or extend. The others are exempted from dealers posting registered securities as periodic on-site inspections by the Fed- collateral only if the bank has filed an eral Reserve but are monitored through agreement with the Board that it will Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 251 comply with all the statutes, rules, and or medium-sized, were registered with regulations applicable to member banks the Board under the Securities Exchange regarding credit on securities. The Act. Board processed one new agreement in 1993. Loans to Executive Officers In 1993 the Securities Regulation Section of the Board's Division of Under section 22(g) of the Federal Banking Supervision and Regulation Reserve Act, state member banks must issued 53 interpretations of the margin include in each quarterly Call Report regulations. Those that presented suffi- all extensions of credit made by the ciently important or novel issues were bank to its executive officers since the published in the Securities Credit Trans- date of the bank's previous report. The actions Handbook which is part of the accompanying table summarizes this Federal Reserve Regulatory Service. information. These interpretations serve as a guide to the margin regulations. Federal Reserve Membership At the end of 1993, 4,338 banks were Financial Disclosure members of the Federal Reserve Sysby State Member Banks tem, a decrease of 281 from the previ- State member banks must disclose cer- ous year-end. Member banks operated tain information of interest to investors, 35,564 branches on December 31, 1993, including financial reports and proxy a net increase of 95 for the year. statements, if they issue securities regis- Member banks accounted for 39 pertered under the Securities Exchange Act cent of all commercial banks in the of 1934. By statute, the Board's finan- United States and for 67 percent of cial disclosure rules must be substan- all commercial banking offices; the figtially similar to those issued by the ures for year-end 1992 were 39 percent Securities and Exchange Commission. of banks and 66 percent of banking At the end of 1993, forty-two state offices. • member banks, most of which are small Loans bv Stare Member Banks tc iheir Executive Officers. 1992-93 Range of interest Period Number Amount (dollars) rates charged (percent) 7992 October 1-December 31 704 18,286,000 4.0-19.8 1993 January 1-March 31 611 18,324,000 3.0-21.0 April 1-June 30 752 25,072,000 3.9-21.0 July 1-September 30 760 20,705,000 3.0-21.0 SOURCE. Call Report. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

253 Regulatory Simplification In 1978 the Board of Governors estab- tant to avoid constricting the availabillished the Regulatory Improvement ity of credit in small communities or Project in the Office of the Secretary to to attract directors to such banks." help minimize the burdens imposed by Through an interim rule in May 1992, regulation. In 1986 the Board reaffirmed the Board allowed banks with deposits its commitment to regulatory improve- under $100 million to extend credit of ment, renaming the project the Regu- up to 200 percent of capital and surplus latory Review Section and creating a if the bank's board of directors adopted subcommittee of the Board called the a resolution certifying that the bank Regulatory Policy and Planning Com- meets the statute's criteria for the excepmittee. The purpose of the regulatory tion. Shortly after the end of 1993, after simplification function is to ensure that a period of public comment, the Board the economic effect of regulation on made the interim rule permanent. small business is considered, to afford During September the Board issued interested parties the opportunity to par- for comment (and, shortly after the end ticipate in designing regulations and to of the year, adopted) some additional comment on them, and to ensure that amendments to Regulation O to reduce regulations are written in simple and the burden and complexity of the regulaclear language. Board staff members tion. The amendments clarified the "tancontinually review regulations for their gible economic benefit" rule, adopted adherence to these objectives. certain exceptions to the lending limit During 1993 the Board took a variety for insiders, permitted banks to follow of actions to reduce the regulatory bur- alternative record keeping procedures, den on supervised institutions; among and narrowed the definition of "extenthese actions were changes to Regula- sion of credit." tion O to ease compliance for some small banks and the start of a review Consumer Leasing of Regulation M under the Board's program of periodic reviews of its In November the Board issued for comregulations. ment an advance notice of proposed rulemaking concerning review of Regulation M. The purpose of periodic Loans to Officers, Directors, reviews is to determine whether the regand Principal Shareholders ulation in question can be eliminated, Under the Federal Deposit Insurance simplified, or modified to ease any bur- Corporation Improvement Act of 1991, dens of compliance it may impose. The a bank's total lending to insiders cannot advance notice was to give the leasing exceed 100 percent of its unimpaired industry, consumer interest groups, state capital and surplus. The statute autho- and federal regulators, and other interrizes the Board, however, to establish a ested parties the opportunity to comhigher limit for banks with less than ment on revisions to the regulations that $100 million in deposits if the Board might be beneficial (with or without determines that the exception is "impor- corresponding statutory changes). The Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

254 80th Annual Report, 1993 notice indicated that the Board would be considering some specific areas, but it asked for public comment on these and any other issues which the Board should consider in preparing a more detailed proposal for comment in 1994. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

255 Federal Reserve Banks In 1993 the Federal Reserve Banks con- the Reserve Banks' operations in the tinued a variety of programs to improve consolidated environment. During 1993 the payment services they provide to all twelve Banks began using the new depository institutions. The Banks also daylight overdraft reporting and pricing began to prepare for the January 1994 system and two Banks implemented the implementation of the same-day settle- new integrated accounting system. In ment amendments to Regulation CC, addition, development of the new funds which were approved by the Board of transfer and account balance monitoring Governors in 1992. Under same-day set- applications was substantially comtlement, private collecting institutions pleted, and work continued on developwill be able to present checks directly to ment of the new automated clearingpayor institutions and to demand settle- house and book-entry securities transfer ment in same-day funds. Many institu- applications. tions currently using intermediaries, During 1993 the Reserve Banks such as the Reserve Banks, to collect began implementing the System's new checks are expected to begin presenting national communications network, Fedchecks directly to payor institutions. net. When it is fully implemented in The Reserve Banks made substantial 1995, Fednet will replace the current progress during the year in consolidat- FRCS-80 backbone network and the ing their mainframe data processing twelve District networks with a single operations. The objectives of consolida- unified network that will provide a tion are greater reliability and security, standard level of service throughout the increased control of payment system System. Fednet is designed to improve risk in a national banking environment, reliability, security, and disaster recovand improved efficiency. The Federal ery capabilities for the Reserve Banks Reserve Automation Services (FRAS) and the depository institutions that use organization substantially completed Federal Reserve services. The majority establishment of the three designated of Fednet's telecommunications circuits data centers at the head offices of the and circuit switching infrastructure were Richmond and Dallas Banks and the deployed in 1993; depository institu- East Rutherford (New Jersey) Opera- tions will begin using the new network tions Center of the New York Bank. in 1994. The Philadelphia, Richmond, Atlanta, St. Louis, Kansas City, Dallas, and Developments in Federal San Francisco Banks moved their funds Reserve Services transfer and book-entry securities transfer applications to the data centers The Monetary Control Act of 1980 in 1993. In addition, the Richmond, requires the Federal Reserve System to Atlanta, Kansas City, and Dallas Banks establish fees that, over the long run, completed the move of all other main- recover all direct and indirect costs of frame workloads to the data centers. providing services to depository institu- Work continued on new centralized tions, plus imputed costs that reflect the applications software that will support taxes that would have been paid and the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

256 80th Annual Report, 1993 return on capital that would have been Federal Reserve Bank check services earned had the services been provided designed to facilitate implementation of by a private firm. These imputed costs the same-day settlement provisions of are referred to as the private sector Regulation CC. Specifically, a paying adjustment factor (PSAF). In 1993, bank may now designate a Federal income from priced services totaled Reserve office as the place at which $945.1 million and costs totaled private sector banks may present checks $906.8 million, resulting in net revenue to it. In addition, the Reserve Banks will of $38.3 million and a recovery rate of provide information services to paying 104.2 percent of expenses, including the banks, enabling them to continue to pro- PSAF but before the cumulative effect vide timely cash-management informaof a change in accounting principle. The tion to their corporate customers. In one-time charge for the cumulative November, the Board approved, subject effect on prior years of the retroactive to additional staff analysis and public application of the accrual method of comment, volume-based pricing for cerpostretirement benefits resulted in a tain check deposit products and payor net loss of $33.1 million. In 1992, the bank services in two Districts. Volume- System had net income of $26.6 million based pricing offers lower per-item fees and recovered 105.1 percent of its total to high-volume users, allowing those expenses, including the PSAF.1 users to realize, through the fees they pay, the cost efficiencies that can be achieved in handling a large volume of Check Collection transactions. Also during the year, the The Federal Reserve's operating ex- Board approved adjustments to deposit penses and imputed costs for commer- deadlines at several Reserve Banks as cial check services in 1993 totaled the Banks continued their efforts to en- $555.0 million (see the second pro hance funds availability for depositors. forma income statement for priced During 1993 the Federal Reserve services, at the end of this chapter). continued to encourage the development Income from check operations totaled and use of electronic mechanisms to $583.2 million and other income (net enhance or replace paper check processof expenses) amounted to $13.7 million, ing. Furthering this effort, all Reserve for income after imputed costs of Banks will offer basic electronic check $28.3 million. The Reserve Banks han- presentment and local truncation serdled 19.0 billion checks, a decrease of vices in 1994. Nearly 248 million 0.2 percent from 1992 volume. checks were presented to payor banks During the year, the Board approved for settlement electronically during several changes to the check services 1993, an increase of approximately provided by the Reserve Banks. In June, 60 percent over the 1992 level. One after extensive analysis of comments Bank instituted a fully electronic check from the public, the Board adopted new collection service that permits collecting banks to deposit, in electronic form, checks destined for paying banks that 1. See the pro forma statements at the end of this chapter. Income is the sum of income from currently use the Reserve Bank's truncaservices and investment income. Cost is the sum tion services. The Federal Reserve also of operating expenses, imputed costs, earnings continued to develop and test mediumcredits, imputed income taxes, and the targeted speed and high-speed imaging technoloreturn on equity. Net revenue is net income less the targeted return on equity. gies. One District introduced the first Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 257 Federal Reserve check service that attractive for more types of payments applies imaging technology. The service than previously. The new processing allows a paying bank that uses trunca- exchanges also permit depository instition or other electronic check present- tutions to decrease the interval between ment services to obtain check images the origination of ACH transactions and for its information-processing needs. the time they are available to receiving Testing of intra- and inter-District trans- depository institutions. mission of requests for adjustment of check transactions via Fedline also con- Funds Transfer tinued, and several Districts have begun to implement this service. The operating expenses and imputed costs of providing funds transfer services in 1993 totaled $75.3 million. Automated Clearinghouse Income from operations was $88.4 mil- In 1993 the operating expenses and lion and other income was $1.8 million, imputed costs of providing commercial resulting in income after imputed automated clearinghouse (ACH) ser- expenses of $13.1 million. The number vices totaled $65.0 million. Income from of Fedwire funds transfers originated operations was $58.9 million and other increased 2.0 percent over the 1992 income was $1.2 million, resulting in a volume, to 71.2 million transfers.2 loss after imputed expenses of $6.2 mil- In July 1993 the Board announced a lion. The Reserve Banks processed delay in taking final action on its pro- 1,545 million commercial transactions posal to change the opening time for the during the year, an increase of 16.5 per- Fedwire funds transfer system from cent over 1992 volume. 8:30 a.m. to 6:30 a.m. Eastern time. By mid-1993 all depository institu- Commenters raised a number of comtions that originate or receive commer- plex issues concerning the proposal, cial transactions through the Federal questioned whether expanded operating Reserve Banks had established elec- hours would reduce risk, and requested tronic connections. By the end of 1993 that the Federal Reserve share its longonly 660 depository institutions that term plans regarding Fedwire operating receive only government transactions hours with the public. As a result, the were not connected electronically. The Board's staff began a thorough study of Department of the Treasury is requiring the issues raised by extending Fedwire that all these institutions establish elec- operating hours and the associated pubtronic connections by July 1, 1994. lic policy concerns. The conversion of all users of com- In August 1993 the Board and the mercial ACH services to electronic con- Department of the Treasury jointly renections enabled the Reserve Banks to quested public comment on a proposal improve their ACH services signifi- to impose recordkeeping requirements cantly during 1993. On October 1, 1993, for certain wire transfers sent by finanthe Banks added two processing ex- cial institutions. The proposal was changes each day, enhancing the flexi- developed to implement revisions to the bility of the ACH services for institu- Bank Secrecy Act as required by the tions that originate transactions. The Annunzio-Wylie Anti-Money Launderincrease in the number of times during the day that ACH transactions may be 2. Transfers originated include 69.7 million deposited should make the service value transfers and 1.5 million nonvalue transfers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

258 80th Annual Report, 1993 ing Act of 1992 and is intended to small-dollar transactions associated, facilitate investigations of money laun- respectively, with automated clearingdering. In response to commenters' con- house and check payments. The majorcerns about implementing the required ity of local arrangements are check changes by year-end 1993, Treasury in clearinghouses. December announced that the proposed In 1993 the Reserve Banks processed implementation would be delayed until about 600,000 net settlement entries for it could complete a review of its local netting arrangements; the value of anti-money laundering programs. Final these entries was about $600 billion. action is expected in 1994. In November 1993 the Board re- Securities and Fiscal Agency quested public comment on a proposal Services to expand the Fedwire funds transfer format and adopt a more comprehensive The Federal Reserve provides bookset of data elements by late 1996. The entry securities account maintenance change would facilitate compliance with and transfer services for debt issues of regulations proposed by Treasury to the U.S. Treasury and of certain federinclude, with each transfer, complete ally sponsored agencies, such as the name and address information for all Federal Home Loan Mortgage Corporaparties to the transfer. The proposed for- tion and the Student Loan Marketing mat would also be more consistent with Association. Only the services related to the formats used for other large-value federal agency securities are priced by funds transfer systems. Comments are the Federal Reserve. In 1993, operating expected in early 1994. expenses and imputed costs totaled $11.8 million and income was $14.2 million, for income after imputed Net Settlement expenses of $2.4 million. The Federal The Federal Reserve provides net settle- Reserve processed 3.7 million transfers ment services to four national, and of government agency securities during numerous local, private sector clearing the year, a 10.4 percent increase over arrangements. These arrangements en- 1992 volume. able participants to settle their net posi- Eight Federal Reserve Banks curtions either via Fedwire funds transfers rently offer purchases and sales services using special settlement accounts at the to depository institutions. Under the pro- Federal Reserve or via accounting gram, the Banks will purchase or sell, entries to their settling participants' on the secondary market, securities that reserve or clearing accounts at the Fed- are book-entry-eligible at the Federal eral Reserve. Reserve. Because of declining demand Two of the national arrangements, the and other factors, the Board in Novem- Clearing House Interbank Payments ber 1993 decided to consolidate this System and the Participants Trust Com- service at the Federal Reserve Bank of pany, process and net large-dollar trans- Chicago. Consolidation will provide an actions associated, respectively, with opportunity to reduce cost with little, if interbank funds transfers and with any, effect on the services offered. payments related to the settlement of The Federal Reserve continues to mortgage-backed securities transac- operate Treasury Direct, the book-entry tions. The other two national arrange- securities safekeeping system for indiments, Visa and Chexs, process and net viduals who invest in Treasury securi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 259 ties and use the Treasury Department as Noncash Collection and Definitive custodian. Treasury Direct has grown to Securities Safekeeping more than 1.2 million accounts with a The operating expenses and imputed total par value of more than $60 billion. costs of providing definitive safekeep- During 1993 the Reserve Banks proing services in 1993 totaled $3.9 milcessed 311,756 applications to purchase lion. Income was $1.5 million, for a securities, issued almost 5.2 million loss, after imputed expenses, of Treasury Direct payments to investors, $2.4 million. In keeping with the and handled more than 1.2 million tele- Board's 1992 decision to discontinue phone, walk-in, and written inquiries definitive safekeeping services, the from Treasury Direct account holders. Reserve Banks ceased providing these Early in 1993 the Federal Reserve services at the end of 1993. The operat- Bank of New York began using its ing loss largely reflects the costs of recently developed Treasury Automated withdrawing from the service. Auction Processing System (TAAPS). The operating expenses and imputed TAAPS enables bidders that have an costs of providing the noncash collecelectronic connection to a Federal tion service in 1993 totaled $5.6 million Reserve Bank to submit bids for new and income was $4.8 million, resultissues of Treasury securities electroniing in a loss after imputed expenses cally instead of on paper and facilitates of $0.7 million. The number of noncash the Federal Reserve's review of the bids. collection items processed decreased In 1993 the Federal Reserve System 37.7 percent, to 1.0 million items. printed more than 89 million savings Because of declining volumes, the bonds, representing over-the-counter, Reserve Banks in 1993 consolidated payroll, and other types of savings bond their noncash collection operations at purchases. By the end of the year, eight four sites. By the end of 1994, noncash Federal Reserve Districts had consolicollection transactions will be processed dated their savings bond operations at at only three sites—the Cleveland and one of five consolidation sites: the Chicago Banks and the Jacksonville Buffalo Branch of the New York Bank, Branch of the Atlanta Bank. In Novemthe Pittsburgh Branch of the Cleveland ber 1993 the Board approved the use Bank, and the Richmond, Minneapolis, of a volume-based pricing structure for and Kansas City Banks. The remaining the noncash collection service, which is four Districts will consolidate their savdesigned to reduce the burden on lowings bond operations at one of these volume users resulting from the fee sites within two years. increases necessary for Reserve Banks The Federal Reserve Banks of Minneto recover costs while transaction volapolis, St. Louis, and Atlanta are particume continues to decline. ipating in a test of an Electronic Federal Tax Deposit (EFTD) system, a nationwide system to collect federal business Currency and Coin and individual tax payments electronically. EFTD was designed by the Trea- In 1993, income from priced cash sersury Department's Internal Revenue vices was $6.3 million and the cost of Service and Financial Management Ser- providing the service was $6.2 million, vice to automate the tax collection for income after imputed expenses of system further and to reduce paper $0.1 million. Only three Federal Reserve handling. offices—the Minneapolis Bank, its Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

260 80th Annual Report, 1993 Helena Branch, and the Pittsburgh "order an examination of each Federal Branch of the Cleveland Bank— Reserve Bank" at least once a year. The continued to arrange transportation of responsibility is assigned to the Board's cash by armored carrier; the Cleveland Division of Reserve Bank Operations Bank and the Branches in the San Fran- and Payment Systems. In 1993 the cisco District discontinued the service Board also engaged two certified public during the year. Two Districts provided accounting (CPA) firms to examine two coin wrapping services, offices in two of the twelve Federal Reserve Banks. Districts provided nonstandard pack- The findings of all examinations are aging of currency, and offices in two reported to the management and direc- Districts offered nonstandard frequency tors of the respective Banks and to the of access to services; all are priced Board of Governors. services. To assess conformance with policies The Reserve Banks continued to work established by the Federal Open Market closely with Treasury and other agen- Committee (FOMC), the Division of cies to deter counterfeiting and launder- Reserve Bank Operations and Payment ing of U.S. currency. One important Systems also annually audits the aspect of these efforts was the distri- accounts and holdings of the System bution of $10 through $100 notes that Open Market Account at the Federal incorporate two new features, a security Reserve Bank of New York and the thread and microprinting, to discourage foreign currency operations conducted photocopied counterfeits. The security- by that Bank. The division furnishes enhanced notes account for 17 percent copies of these reports to the FOMC. of all notes now in circulation. Distribu- All examination procedures used by the tion of a new series $5 note with these division are reviewed each year by a same security features is scheduled for public accounting firm. 1994. In 1993 the Reserve Banks installed twenty-five ISS 3000 currency process- Income and Expenses ing machines. Over the next four years an additional 133 processors will be The accompanying table summarizes the installed to improve efficiency and en- income, expenses, and distribution of hance currency processing capabilities. net earnings of the Federal Reserve Banks for 1993 and 1992. Income was $18,914 million in 1993 Float and $20,235 million in 1992. Expenses in 1993 totaled $1,798 million Federal Reserve float increased to a ($1,475 million in operating expenses, daily average of $821 million in 1993, $183 million in earnings credits up from $417 million in 1992. The costs granted to depository institutions, and of Federal Reserve float associated with $140 million in assessments for expenpriced services are recovered each year ditures by the Board of Governors). The through fees for priced services. cost of currency was $356 million. Revenue from financial services was $757 million. Examinations The profit and loss account showed a The Federal Reserve Act, section 21, net loss of $201 million. The loss was a requires the Board of Governors to result primarily of the initial accrual Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 261 of postretirement employee benefits statement for each Bank for 1914-93. A required by the adoption of Statement of detailed account of the assessments and Financial Accounting Standards (SFAS) expenditures of the Board of Governors No. 106, "Employers' Accounting for appears in the next section, Board of Postretirement Benefits Other than Pen- Governors Financial Statements. sions." This accrual was partially offset by realized and unrealized gains on Holdings of Securities and Loans assets denominated in foreign currencies and gains on the sales of securities Average daily holdings of securities and from the System Open Market Account loans by the Reserve Banks during 1993 portfolio. Statutory dividends to mem- were $320,528 million, an increase of ber banks totaled $195 million, $23 mil- $37,424 million over 1992 (see accomlion more than in 1992. The rise re- panying table). From 1992 to 1993, flected an increase in the capital and holdings of U.S. government securities surplus of member banks and a conse- increased $37,420 million and loans quent increase in the paid-in capital increased $4 million. stock of the Reserve Banks. The average rate of interest on hold- Payments to the U.S. Treasury in the ings of U.S. government securities form of interest on Federal Reserve decreased from 6.13 percent in 1992 to notes totaled $15,987 million, compared 5.27 percent in 1993, and the average with $16,774 million in 1992. The pay- rate of interest on loans decreased from ments consist of all net income after the 3.43 percent to 3.08 percent. deduction of dividends and of the amount necessary to bring the surplus of Volume of Operations the Banks to the level of capital 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 1993 and table 7 shows a condensed Reserve Banks for the years 1990-93. Income ! Mvn-'.v .md OisinhutMw :»!" N\-i I'.irning of fvdrra k.ser u Barh ^ I<•>«)"• :«nu \^2 Millions of dollars 1993 1992 Item 18,914 20,235 Current income 1,658 1,475 Current expenses 1,475 1,298 Operating expenses2 183 177 Earnings credits granted 17,256 18,760 Current net income -201 -959 Net addition to (deduction from, - ) current net income 29 29 Cost of unreimbursed services to Treasury 496 424 Assessments by the Board of Governors 140 129 For expenditures of Board 356 295 For cost of currency 16,530 17,348 Net income before payments to Treasury 195 172 Dividends paid 15,987 16,774 Payments to Treasury (interest on Federal Reserve notes) 348 402 Transferred to surplus 1. Details may not sum to totals because of rounding. 2. Includes a net periodic credit for pension costs of $131 million in 1993 and $141 million in 1992. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

262 80th Annual Report, 1993 Federal Reserve Bank Premises lis Bank and renovation of the headquarters building of the Cleveland Bank In 1993 the New York Reserve Bank continued during 1993. completed the relocation of its staff and The Board approved projects to renooperations to its new East Rutherford vate the cash departments at several Operations Center, and the Dallas Bank Reserve Banks in preparation for instalcompleted its move to its new head lation of new currency-processing office building. In addition, modifica- equipment. Also approved were multitions to accommodate the new Federal year renovation programs for the Reserve Automation Services organiza- San Francisco Bank's Seattle and Porttion at the three consolidated processing land Branches. sites—the East Rutherford Operations Table 8, in the Statistical Tables chap- Center and the Richmond and Dallas ter, shows the cost and book values of Banks—were completed. premises owned and occupied by the The design activities for the new Federal Reserve Banks and the cost of headquarters building for the Minneapo- other real estate owned by the Banks. Securities and Loans of Federal Reserve Banks, 1991-93 Millions of dollars, except as noted U.S. Item and year Total government Loans 2 securitiesl Average daily holdings3 1991 256,929 256,559 370 1992 283,104 282,927 177 1993 320,528 320,347 181 Earnings 1991 19,283 19,262 21 1992 17,342 17,336 6 1993 16,896 16,891 6 Average interest rate (percent) 1991 7.51 7.51 5.73 1992 6.13 6.13 3.43 1993 5.27 5.27 3.08 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 263 Pro Forma Balance Sheet for Priced Services, December 31 ! 993 and ! 992 • Millions of dollars Item 1993 1992 Short-term assets2 Imputed reserve requirement on clearing balances 749.8 699.2 Investment in marketable securities 5,498.2 5,127.8 Receivables 67.4 66.6 Materials and supplies 9.9 6.5 Prepaid expenses 17.2 12.3 Items in process of collection 3,458.6 4,062.4 Total short-term assets 9,801.1 9,974.7 Long-term assets3 Premises 385.4 378.5 Furniture and equipment 211.2 176.2 Leases and leasehold improvements 18.0 51.3 Prepaid pension costs 179.9 141.7 794.4 747.6 Total long-term assets 10,595.5 10,722.4 Total assets Short-term liabilities Clearing balances and balances arising from early 7,039.0 8,820.7 credit of uncollected items 2,667.6 1,068.8 Deferred-availability items 94.5 85.3 Short-term debt Total short-term liabilities 9,801.1 9,974.7 Long-term liabilities Obligations under capital leases 1.2 1.2 Long-term debt 195.0 192.3 Postretirement benefits obligation 121.2 317.4 193.5 Total long-term liabilities 10,118.5 10,168.3 Total liabilities 477.0 554.1 Equity Total liabilities and equity4 10,595.5 10,722.4 1. Details may not sum to totals because of rounding. cost of float, or net CIPC during the period (the difference 2. The imputed reserve requirement on clearing bal- between gross CIPC and deferred-availability items, ances held at Reserve Banks by depository institutions which is the portion of gross CIPC that involves a financreflects a treatment comparable to that of compensating ing cost), valued at the federal funds rate. balances held at correspondent banks by respondent insti- 3. Long-term assets used solely in priced services, the tutions. The reserve requirement imposed on respondent priced-services portion of long-term assets shared with balances must be held as vault cash or as nonearning nonpriced services, and an estimate of the assets of the balances maintained at a Reserve Bank; thus, a portion of Board of Governors used in the development of priced priced services clearing balances held with the Federal services. Effective Jan. 1, 1987, the Reserve Banks imple- Reserve is shown as required reserves on the asset side of mented Financial Accounting Standards Board Statement the balance sheet. The remainder of clearing balances is No. 87, Employers' Accounting for Pensions. Accordassumed to be invested in three-month Treasury bills, ingly, in 1993 the Reserve Banks recognized a credit to shown as investment in marketable securities. Receiv- expenses of $54.6 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. Digitized tofo br eF rRecAoSveEreRd under the Monetary Control Act is the http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

264 80th Annual Report, 1993 Pro Forma Income Statement for Federal Reserve Priced Services. Calendar Years 1993 and 1992 ' Millions of dollars Item 1993 1992 Income from services provided to depository institutions2.. 757.3 758.4 Operating expenses3 633.4 606.1 Income from operations 123.9 152.3 Imputed costs4 Interest on float 10.6 14.5 Interest on debt 21.3 19.8 Sales taxes 12.2 11.2 FDIC insurance 18.0 62.0 8.9 54.4 Income from operations after imputed costs 61.9 97.9 Other income and expenses5 Investment income 187.8 180.2 Earnings credits 170.6 17.2 177.8 2.4 Income before income taxes 79.1 100.3 Imputed income taxes6 23.3 29.5 Income before cumulative effect of a change in accounting principle 55.8 Cumulative effect on prior years of retroactive application of accrual method of postretirement benefits (net of $29.9 million tax)7 -71.4 Net income -15.6 70.8 MEMO: Targeted return on equity8 17.5 24.9 1. Details may not sum to totals because of rounding. for cash items in process of collection, which reduces 2. Income from priced services is realized from direct imputed reserve requirements. The income on clearing charges to an institution's account or from charges against balances reduces the float to be recovered through other accumulated earnings credits. means. As-of adjustments and direct charges are mid- 3. Operating expenses include direct, indirect, and week closing float and interterritory check float, which other general administrative expenses of the Reserve may be recovered from depositing institutions through Banks for priced services and the expenses of staff mem- adjustments to the institution's reserve or clearing balbers of the Board of Governors working directly on the ance or by valuing the float at the federal funds rate and development of priced services, which were $2.3 million billing the institution directly. Float recovered through in 1993 and $1.9 million in 1992. The credit to expenses per-item fees is valued at the federal funds rate and has under FASB 87 is reflected in operating expenses (see the been added to the cost base subject to recovery in 1993. pro forma balance sheet, note 3). 5. Investment income is on clearing balances and rep- 4. Interest on float is derived from the value of float to resents the average coupon-equivalent yield on threebe recovered, either explicitly or through per-item fees, month Treasury bills applied to the total clearing balance during the period. Float costs include costs for checks, maintained, adjusted for the effect of reserve requirebook-entry securities, noncash collection, ACH, and ments on clearing balances. Expenses for earnings credits funds transfers. granted to depository institutions on their clearing bal- Interest is imputed on debt assumed necessary to ances are derived by applying the average federal funds finance priced-service assets. The sales taxes and FDIC rate to the required portion of the clearing balances, insurance assessment that the Federal Reserve would adjusted for the net effect of reserve requirements on have paid had it been a private-sector firm are among the clearing balances. components of the PSAF (see the pro forma balance 6. Calculated at the effective tax rate derived from the sheet, note 4). PSAF model. The following list shows the daily average recovery of 7. Effective January 1,1993, the Reserve Banks implefloat by the Reserve Banks for 1993 in millions of dollars: mented Financial Accounting Standards Board Statement No. 106, Employers' Accounting for Postretirement Total float 641.1 Benefits Other than Pensions. Accordingly, in 1993 the Unrecovered float 8.6 Reserve Banks recognized a one-time cumulative charge Float subject to recovery 632.5 of $101.3 million to reflect the retroactive application of Sources of recovery of float this change in accounting principle. Income on clearing balances 63.2 8. The after-tax rate of return on equity that the Fed- As-of adjustments 291.7 eral Reserve would have earned had it been a private Direct charges 134.9 business firm, as derived from the PSAF model. This Per-item fees 142.7 amount is adjusted to reflect the deferral of $7.4 million Unrecovered float includes float generated by services and $1.1 million respectively for 1993 and 1992 automato government agencies and by other central bank ser- tion consolidation, an amount that the Reserve Banks vices. Float recovered through income on clearing bal- plan to recover, along with a finance charge, by the end of ances is the result of the increase in investable clearing 1999. balances; the increase is produced by a deduction for float Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 265 ••i..- '"-t.'i- •*•; -v v- ! <\icM< K-.'^rve Priced Services, by Service, 1993 ! Millions of dollars Com- Funds Com- Bookmercial transfer Definitive Noncash Cash Item Total mercial entry check and net safekeeping collection services ACH securities collection settlement [ncome from services .. 757.3 583.2 88.4 58.9 1.5 4.8 14.2 6.3 Operating expenses 633.4 504.4 69.1 59.8 3.9 5.5 11.8 6.2 Income from operations 123 9 78 9 19 3 -1 0 -2 4 -6 24 1 Imputed costs2 62.0 50.6 6.2 5.2 .0 .1 .0 .0 Income from operations after imputed costs 61.9 28.3 13.1 -6.2 -2.4 -.7 2.4 .1 Other income and expenses, net3 17.2 13.7 1.8 1.2 .0 .1 .3 .1 Income before income taxes 79.1 42.0 14.9 -4.9 -2.4 -.6 2.6 .2 1. Details may not sum to totals because of rounding. on the actual float incurred for each priced service. The amortization of the initial effect of implementing Other imputed costs are allocated among priced services FASB 87 is reported only in the "Total" column of this according to the ratio of operating expenses less shipping table and has not been allocated to individual priced expenses for each service to the total expenses for all services, whereas the portion of the credit related to 1993 services less the total shipping expenses for all services. has been allocated (see pro forma balance sheet, note 3). 3. Income on clearing balances and the cost of earn- Taxes and the aftertax targeted rate of return on equity, as ings credits. Because clearing balances relate directly to shown on the overall pro forma income statement, have the Federal Reserve's offering of priced services, the not been allocated among services because these ele- income and cost associated with these balances are alloments relate to the organization as a whole. cated to each service based on the ratio of income from 2. Includes interest on float, interest on debt, sales each service to total income. taxes, and the FDIC assessment. Float costs are based dai \_dfs 1993. 1992. and 199) Thousands of items, except as noted Percent change Service 1993 1992 1991 1992-93 1991-92 Funds transfers 71,199 69,803 66,921 2.0 4.3 Commercial ACH 1,544,848 1,326,632 1,119,073 16.5 18.5 Commercial checks 19,008,808 19,052,928 18,742,950 -.2 1.7 Securities transfers 3,604 3,266 2,800 10.4 16.6 Definitive safekeeping 17 41 57 -58.5 -28.1 Noncash collection 1,020 1,636 2,243 -37.7 -27.1 Cash transportation 65 282 338 -77.0 -16.6 1. Activity is defined as follows: for funds transfers, for securities, number of basic transfers originated on the number of basic transactions originated; for ACH, line; for definitive safekeeping, average number of issues total number of commercial items processed; for com- or receipts maintained; for noncash collection, number of mercial checks, total number of commercial checks col- items on which fees are assessed; and for cash translected, 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

266 80th Annual Report, 1993 Income and Expenses for Locally Priced Federal Reserve Services, by District, 1993 [ Millions of dollars Total Operating Float Total Net District expense expense expense revenue Commercial check collection Boston 34.3 32.1 .6 32.7 1.6 New York ... 69.7 62.5 1.6 64.1 5.6 Philadelphia . 31.9 27.4 1.0 28.4 3.5 Cleveland ... 32.4 28.0 1.1 29.1 3.3 Richmond ... 55.2 48.4 .7 49.1 6.1 Atlanta 77.8 67.7 1.2 68.9 8.9 Chicago 79.5 66.4 1.1 67.5 12.0 St. Louis 24.1 20.8 .8 21.6 2.5 Minneapolis . 32.2 27.7 .2 27.9 4.3 Kansas City . 37.0 31.8 .9 32.7 4.3 Dallas 43.1 34.5 1.1 35.6 7.5 San Francisco 65.9 55.6 .2 55.8 10.1 System total 583.1 502.9 10.5 513.4 69.7 Definitive safekeeping Boston .1 .3 .3 -.2 New York ... .1 .2 .2 -.1 Philadelphia . .1 .4 .4 -.3 Cleveland ... .2 .5 .5 -.3 Richmond ... .1 .2 .2 -.1 Atlanta .2 .3 .3 -.1 Chicago .4 .7 .7 -.3 St. Louis .1 .1 .1 .0 Minneapolis . .1 .1 .1 .0 Kansas City . .1 .5 .5 -.4 Dallas .1 .2 .2 -.1 San Francisco .0 .0 .0 .0 .0 System total 1.6 3.5 .0 3.5 -1.9 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

Federal Reserve Banks 267 Income and Expenses for Locally Priced Federal Reserve Services—Continued Millions of dollars Total Operating Float Total Net District expense expense expense revenue Noncash collection Boston .1 .1 .0 New York ... 1.5 1.5 1.5 .0 Philadelphia . .1 .0 .1 Cleveland ... .9 .7 .2 Richmond ... * * * Atlanta 1.4 1.8 1.8 -.4 Chicago .7 .5 .5 .2 St. Louis .... .2 .3 .3 -.1 Minneapolis . .0 * * Kansas City . .0 .0 .0 Dallas .0 .0 San Francisco .0 .0 .0 .0 System total 4.9 4.9 .0 4.9 Cash services Boston New York ... .0 .0 Philadelphia . .0 .0 .0 Cleveland ... 1.9 1.9 .0 Richmond ... .0 * .0 Atlanta .0 .0 .0 Chicago .4 .4 .0 St. Louis .... .1 .1 .0 Minneapolis . 2.9 2.7 .2 Kansas City . .6 .5 .1 Dallas * San Francisco -.1 System total 6.3 6.1 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

269 Board iff Governors Financial Statements The financial statements of the Board were audited by Price Waterhouse, independent public accountants, for 1993. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Governors of the Federal Reserve System In our opinion, the accompanying balance sheet and the related statements of revenues and expenses and fund balance and of cash flows present fairly, in all material respects, the financial position of the Board of Governors of the Federal Reserve System (the Board) at December 31, 1993, and the results of its operations and its cash flows for the year in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Board's management; our responsibility is to express an opinion on these statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards and the financial audit standards in Government Auditing Standards issued by the Comptroller General of the United States. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. The financial statements of the Board of Governors of the Federal Reserve System for the year ended December 31, 1992, were audited by other independent accountants whose report dated February 12, 1993, expressed an unqualified opinion on those statements. As discussed in Note 1 to the financial statements, the Board implemented Statement of Financial Accounting Standard No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, effective January 1, 1993. Washington, D.C. February 18, 1994 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

270 80th Annual Report, 1993 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BALANCE SHEET As of December 31, 1993 1992 ASSETS CURRENT ASSETS Cash $12,186,714 $ 9,853,172 Accounts receivable 1,555,026 2,543,876 Prepaid expenses and other assets 1,130,894 1,462,101 Total current assets 14,872,634 13,859,149 PROPERTY, BUILDINGS, AND EQUIPMENT, NET (Note 4) 50,121,444 48,968,026 Total assets $64,994,078 $62,827,175 LIABILITIES AND FUND BALANCE CURRENT LIABILITIES Accounts payable $ 5,308,176 $ 5,311,460 Accrued payroll and related taxes 2,718,512 1,978,051 Accrued annual leave 5,871,643 5,612,406 Unearned revenues and other liabilities 1,504,663 1,366,877 Total current liabilities 15,402,994 14,268,794 ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (Note 3) 15,880,742 — FUND BALANCE 33,710,342 48,558,381 Total liabilities and fund balance $64,994,078 $62,827,175 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 271 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENT OF REVENUES AND EXPENSES AND FUND BALANCE For the years ended December 31, 1993 1992 BOARD OPERATING REVENUES Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $140,465,600 $128,955,300 Other revenues (Note 5) 5,452,588 6,795,747 Total operating revenues 145,918,188 135,751,047 BOARD OPERATING EXPENSES Salaries 90,339,090 81,981,637 Retirement and insurance contributions 14,945,349 13,106,634 Depreciation and net losses on disposals 7,124,330 6,079,387 Contractual services and professional fees 5,811,359 7,527,562 Travel 4,718,069 3,953,838 Postage and supplies 4,207,146 3,687,785 Utilities 3,744,162 3,607,431 Repairs and maintenance 3,684,542 3,757,815 Software 2,878,660 2,751,537 Printing and binding 2,374,942 2,089,901 Equipment and facilities rental 2,287,576 873,672 Other expenses (Note 5) 3,584,471 3,573,879 Total operating expenses 145,699,696 132,991,078 BOARD OPERATING REVENUES OVER EXPENSES 218,492 2,759,969 ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES Assessments levied on Federal Reserve Banks for currency costs 355,947,291 295,400,650 Expenses for currency printing, issuance, retirement, and shipping 355,947,291 295,400,650 CURRENCY ASSESSMENTS OVER (UNDER) EXPENSES — — TOTAL REVENUES OVER EXPENSES BEFORE EFFECT OF CHANGE IN ACCOUNTING FOR POSTRETIREMENT BENEFITS 218,492 2,759,969 Less: Effect on prior years (to December 31, 1992) of change in accounting for postretirement benefits (Note 3) 15,066,531 — TOTAL REVENUES (UNDER) OVER EXPENSES (14,848,039) 2,757,969 FUND BALANCE, Beginning of year 48,558,381 45,798,412 FUND BALANCE, End of year $ 33,710,342 $ 48,558,381 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

272 80th Annual Report, 1993 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENT OF CASH FLOWS Increase (Decrease) in Cash For the years ended December 31, 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES Board operating revenues (under) over expenses $(14,848,039) $2,759,969 Adjustments to reconcile operating revenues (under) over expenses to net cash provided by operating activities: Effect of change in accounting for postretirement benefits 15,066,531 — Depreciation and net losses on disposals 7,124,330 6,079,387 Increase in accrued postretirement benefits 814,211 — Decrease (Increase) in accounts receivable, and prepaid expenses and other assets 1,320,057 (2,000,125) Increase in accrued annual leave 259,237 555,041 (Decrease) Increase in accounts payable (3,284) 1,702,068 Increase in payroll payable 740,461 857,719 Increase in unearned revenue and other liabilities 137,786 109,435 Net cash provided by operating activities 10,611,290 10,063,494 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposals of furniture and equipment 3,723 15,104 Capital expenditures (8,281,471) (4,723,564) Net cash used in investing activities (8,277,748) (4,708,460) NET INCREASE IN CASH 2,333,542 5,355,034 CASH BALANCE, Beginning of year 9,853,172 4,498,138 CASH BALANCE, End of year $ 12,186,714 $ 9,853,172 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 273 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM NOTES TO FINANCIAL STATEMENTS the Federal Employees' Retirement System (FERS). The Board matches employee contributions to these plans. These defined benefits plans are administered by the (1) SIGNIFICANT ACCOUNTING POLICIES Office of Personnel Management. The Board's contribu- Board Operating Revenues and Expenses—Assess- tions to these plans totalled $867,600 and $898,000 in ments made on the Federal Reserve Banks for Board 1993 and 1992, respectively. The Board has no liability operating expenses and capital expenditures are calcu- for future payments to retirees under these programs, and lated based on expected cash needs. These assessments, it is not accountable for the assets of the plans. other operating revenues, and operating expenses are recorded on the accrual basis of accounting. (3) OTHER BENEFIT PLANS Issuance and Redemption of Federal Reserve Notes— The Board incurs expenses and assesses the Federal Employees of the Board may also participate in the Reserve Banks for the costs of printing, issuing, shipping, Federal Reserve System's Thrift Plan. Under the Thrift and retiring Federal Reserve Notes. These assessments Plan, members may contribute up to a fixed percentage of and expenses are separately reported in the statements of their salary. Board contributions are based upon a fixed revenues and expenses because they are not Board operat- percentage of each member's basic contribution and were ing transactions. $3,831,700 in 1993 and $3,419,000 in 1992. Property, Buildings, and Equipment—The Board's The Board also provides certain defined benefit health property, buildings, and equipment are stated at cost less and life insurance for its active employees and retirees accumulated depreciation. Depreciation is calculated on a under Federal and Board sponsored programs. As disstraight-line basis over the estimated useful lives of the cussed in Note 1, the Board adopted Statement of Finanassets, which range from 4 to 10 years for furniture and cial Accounting Standards No. 106, Employers' Accountequipment and from 10 to 50 years for building equip- ing for Postretirement Benefits Other Than Pensions ment and structures. Upon the sale or other disposition of (FAS 106), effective January 1, 1993. The Board elected a depreciable asset, the cost and related accumulated to immediately recognize the accumulated postretirement depreciation are removed from the accounts and any gain benefit obligation upon adoption of FAS 106; as of Januor loss is recognized. ary 1, 1993, the Board recorded an accumulated postre- Accounting Change—Effective January 1, 1993, the tirement benefit obligation of $15,066,531. The net peri- Board adopted Statement of Financial Accounting Stan- odic postretirement benefit cost for 1993 included the dards No. 106, Employers' Accounting for Postretirement following components: Benefits Other Than Pensions (FAS 106), using the immediate recognition method. Under this accounting method, Service cost (benefits attributed to the Board records the cost of these benefits during the employee services during the year) ... $ 248,662 employee's years of service rather than the previous Interest cost on accumulated pay-as-you-go method. Consistent with this method of postretirement benefit obligation 1,181,104 implementation option allowed in FAS 106, prior year financial statements have not been restated. Net periodic postretirement benefit cost ... $1,429,766 Reclassification—Certain prior year amounts have been reclassified to conform with current year Since postretirement benefit costs for the year ended presentation. December 31, 1992, were recorded on the cash basis, the amount recognized as expense in 1992 is not comparable with the current year. Although postretirement benefits (2) RETIREMENT BENEFITS are recorded using the accrual basis of accounting in Substantially all of the Board's employees participate accordance with FAS 106, the Board's current policy is to in the Retirement Plan for Employees of the Federal fund the cost of these benefits on a pay-as-you-go basis. Reserve System (System Plan). The System's Plan is a The FAS 106 accumulated postretirement benefit oblimultiemployer plan which covers employees of the Fed- gation at December 31, 1993, is comprised of: eral Reserve Banks, the Board, and the Plan Administrative Office. Employees of the Board who entered on duty Retirees $ 9,971,023 prior to 1984 are covered by a contributory defined bene- Fully eligible active plan participants 2,297,911 fits program under the Plan. Employees of the Board who Other active plan participants 5,092,539 entered on duty after 1983 are covered by a non- 17,361,473 contributory defined benefits program under the Plan. Unrecognized net loss (1,480,731) Contributions to the System's Plan are actuarially determined and funded by participating employers at amounts Liability for accumulated prescribed by the Plan's administrator. Based on actuarial postretirement benefit obligation $15,880,742 calculations, it was determined that employer funding contributions were not required for the years 1993 and The liability for the accumulated postretirement benefit 1992, and the Board was not assessed a contribution for obligation and the net periodic expense was determined these years. Excess Plan assets will continue to fund using an 8-percent discount rate. Unrecognized losses of future years' contributions. The Board is not accountable $1,480,731 result from applying a discount rate of 7 perfor the assets of this plan. cent as of December 31, 1993. Under FAS 106, the Board A relatively small number of Board employees partici- may have to record some of these unrecognized losses pate in the Civil Service Retirement System (CSRS) or in operations in future years. The assumed health care Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

274 80th Annual Report, 1993 cost trend rate for measuring the increase in costs from (5) OTHER REVENUES AND OTHER EXPENSES 1993 to 1994 was 12.5 percent for those under age 65, The following are summaries of the components of and 11 percent for those over age 65. These rates were Other Revenues and Other Expenses. assumed to gradually decline to an ultimate rate of 6.4 percent in the year 2004 for the purpose of calculating For the years the January 1, 1993, transition amount and the 1993 ended December 31, expense, and to 6.0 percent in 2004 for the purpose of 1993 1992 calculating the December 31, 1993, accumulated postre- Other Revenues tirement benefit obligation. The effect of a 1-percent Data processing increase in the assumed health care cost trend rate would revenue $3,152,492 $2,737,073 increase the accumulated postretirement benefit obli- Subscription gation by $1,947,400 at December 31, 1993, and the revenue 1,579,653 1,537,013 net periodic benefit cost by $173,400 for the year. The Reimbursement assumed salary trend rate for measuring the increase of regulatory in postretirement benefits related to life insurance was investigation 4 percent. costs — 1,500,000 Reimbursable The above accumulated postretirement benefit obligaservices to tion is related to the Board sponsored health benefits and other agencies . 319,938 471,590 life insurance programs. The Board has no liability for Miscellaneous 400,505 550,071 future payments to employees who continue coverage Total other under the federally sponsored programs upon retiring. revenues $5,452,588 $6,795,747 Contributions for active employees participating in federally sponsored programs totalled $3,353,200 and Other Expenses $1,149,700 in 1993 and 1992, respectively. Cafeteria operations, net $ 740,900 $ 765,478 Tuition, registration, (4) PROPERTY, BUILDINGS, AND EQUIPMENT and membership The following is a summary of the components of the fees 1,015,507 866,965 Board's fixed assets, at cost, net of accumulated Subsidies and depreciation. contributions ... 768,186 735,835 Miscellaneous 1,059,878 1,205,601 As of December 31, Total other 1993 1992 expenses $3,584,471 $3,573,879 Land and improvements ; 1,301,314 $ 1,301,314 Buildings 64,891,700 63,856,738 (6) COMMITMENTS Furniture and The Board has entered into several operating leases to equipment 43,055,132 38,550,995 secure office, classroom, and warehouse space for periods 109,248,146 103,709,047 ranging from two to ten years. Minimum future rental Less accumulated commitments under those operating leases having an depreciation .. 59,126,702 54,741,021 initial or remaining noncancelable lease term in excess of Total property, one year at December 31, 1993, are as follows: buildings, and equipment $ 50,121,444 $ 48,968,026 1994 $ 2,985,900 1995 3,179,900 1996 3,212,000 1997 3,194,500 1998 1,390,000 after 1998 5,947,200 $19,909,500 Rental expenses under these operating leases were $1,927,600 and $644,600 in 1993 and 1992, respectively. (7) FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL The Board is one of the five member agencies of the Federal Financial Institutions Examination Council (the "Council"). During 1993 and 1992, the Board paid $371,200 and $324,300, respectively, in assessments for operating expenses of the Council. These amounts are included in subsidies and contributions for 1993 and 1992. During 1993 and 1992, the Board paid $124,500 and $92,000, respectively, for office space sub-leased from the Council. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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

276 80th Annual Report, 1993 1. Detailed Statement of Condition of All Federal Reserve Banks Combined, December 31, 1993 ] Thousands of dollars ASSETS Gold certificate account 11,053,286 Special drawing rights certificate account 8,018,000 Coin 372,129 Loans and securities Loans to depository institutions 93,975 Federal agency obligations Bought outright 4,638,425 Held under repurchase agreement 1,025,000 U.S. Treasury securities Bought outright Bills 160^67,594 Notes 132,076,127 Bonds 39,571,572 Total bought outright 332,015,293 Held under repurchase agreement 12,187,000 Total securities 344,202,293 Total loans and securities 349,959,693 Items in process of collection Transit items 5,980,549 Other items in process of collection 1,192,782 Total items in process of collection 7,173,331 Bank premises Land 156,810 Buildings (including vaults) 872,266 Building machinery and equipment 228,729 Construction account 61,110 Total bank premises 1,162,105 Less depreciation allowance 263,731 898,374 Bank premises, net 1,055,184 Other assets Furniture and equipment 1,057,335 Less depreciation 608,399 Total furniture and equipment, net 448,935 Denominated in foreign currencies2 22,339,560 Interest accrued 3,406,080 Premium on securities 5,086,337 Overdrafts 25,271 Prepaid expenses 643,300 Suspense account 37,753 Real estate acquired for banking-house purposes 27,769 Other 323,883 Total other assets 32,338,887 Total assets 409,970,511 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 277 LIABILITIES Federal Reserve Notes Outstanding (issued to Federal Reserve Banks) 409,264,572 Less held by Federal Reserve Banks 65,339,274 Total Federal Reserve notes, net 343,925,298 Deposits Depository institutions 34,951,224 U.S. Treasury, general account 14,809,011 Foreign, official accounts 386,345 Other deposits Officers' and certified checks 23,255 International organizations 111,905 Other3 261,403 Total other deposits 396,563 Deferred credit items 6,210,168 Other liabilities Discount on securities 1,837,782 Sundry items payable 68,370 Suspense account 10,378 All other 572,851 Total other liabilities 2,489,380 Total liabilities 403,167,988 CAPITAL ACCOUNTS Capital paid in 3,401,261 Surplus 3,401,261 Other capital accounts4 0 Total liabilities and capital accounts 409,970,511 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 $10,447.8 million was invested in 4. During the year, includes undistributed net income, securities issued by foreign governments, and the balance which is closed out on 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

278 80th Annual Report, 1993 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1993 and 1992 Millions of dollars' Total Boston Item 1993 1992 1993 1992 ASSETS Gold certificate account 11,053 11,056 660 705 Special drawing rights certificate account 8,018 8,018 511 511 Coin 372 446 10 19 Loans To depository institutions 94 675 Other 0 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 4,638 5,413 274 346 Held under repurchase agreements 1,025 631 0 0 U.S. Treasury securities Bought outright2 332,015 295,011 19,592 18,843 Held under repurchase agreements 12,187 7,463 0 0 Total loans and securities 349,960 309,192 19,870 19,189 Items in process of collection 7,173 8,911 353 634 Bank premises 1,055 1,026 91 90 Other assets Denominated in foreign currencies3 22,339 21,514 793 794 Allother 10,000 7,738 460 376 Interdistrict Settlement Account 0 0 -2,195 -1,634 Total assets 409,971 367,901 20,553 20,683 LIABILITIES Federal Reserve notes 343,925 314,208 17,254 18,572 Deposits Depository institutions 34,951 32,079 2,555 1,442 U.S. Treasury, general account 14,809 7,492 0 0 Foreign, official accounts 386 206 5 5 Other 397 372 15 21 Total deposits 50,543 40,148 2,575 1,468 Deferred credit items 6,210 5,561 326 311 2,489 1,876 152 115 Other liabilities and accrued dividends4 403,168 361,793 2037 20,466 Total liabilities CAPITAL ACCOUNTS 3,401 3,054 123 108 Capital paid in 3,401 3,054 123 108 Surplus 0 0 0 0 Other capital accounts Total liabilities and capital accounts 409,971 367,901 20,553 20,683 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes outstanding (issued to Bank) 409,265 363,479 19,706 21,432 Less: Held by Bank 65,339 49,271 2,452 2,860 Federal Reserve notes, net 343,925 314,208 17,254 18,572 Collateral for Federal Reserve notes Gold certificate account 11,053 11,056 Special drawing rights certificate account 8,018 8,018 Other eligible assets 0 0 U.S. Treasury and federal agency securities 324,854 295,134 Total collateral 343,925 314,208 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 279 2.-—Continued New York Philadelphia Cleveland Richmond 1993 1992 1993 1992 1993 1992 1993 1992 3,753 4,042 399 347 701 658 899 941 2,808 2,808 303 303 556 556 652 652 11 13 15 24 21 26 67 95 9 0 8 592 0 0 65 0 0 0 0 0 0 0 0 0 1,602 2,106 176 165 312 341 362 423 1,025 631 0 0 0 0 0 0 114,654 114,769 12,583 8,979 22,303 18,569 25,898 23,068 12,187 7,463 0 0 0 0 0 0 129,477 124,969 12,766 2,736 22,614 18,909 26,325 23,492 789 1,352 445 538 275 442 502 760 140 137 47 45 37 36 139 128 6,474 6,258 858 852 1,289 1,308 1,537 1,383 4,529 3,421 306 199 512 375 835 876 12,726 -19,514 921 2,183 -3,321 1,420 598 -220 160,707 123,485 16,060 14,227 22,684 23,731 31,553 28,106 134,964 105,028 13,026 11,341 20,161 21,680 28,035 25,083 6,969 7,531 2,248 2,207 1,556 1,341 2,357 2,025 14,809 7,492 0 0 0 0 0 0 288 107 5 6 8 9 10 9 196 195 7 8 14 15 32 32 22,261 15,324 2,261 2,221 1,578 1,364 2,398 2,068 747 629 432 368 340 220 477 392 798 733 114 62 158 114 186 144 158,769 121,715 15,832 13,992 22,237 23,378 31,096 27,686 969 885 114 117 224 176 229 210 969 885 114 117 224 176 229 210 0 0 0 0 0 0 0 0 160,707 125,485 16,060 14,227 22,684 23,731 31,553 28,106 157,408 119,266 14,472 13,058 23,474 23,683 34,012 29,944 22,444 14,238 1,446 1,717 3,313 2,003 5,978 4,861 134,964 105,028 13,026 11,341 20,161 21,680 28,035 25,083 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

280 80th Annual Report, 1993 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1993 and 1992—Continued Millions of dollars' Atlanta Chicago Item 1993 1992 1993 1992 ASSETS Gold certificate account 509 503 1,186 1,270 Special drawing rights certificate account 318 318 1,036 1,036 Coin 55 38 32 30 Loans To depository institutions Other Acceptances held under repurchase agreements Federal agency obligations Bought outright 189 184 539 670 Held under repurchase agreements 0 0 0 0 U.S. Treasury securities Bought outright2 13,507 10,043 38,585 36,537 Held under repurchase agreements 0 0 0 0 Total loans and securities 13,697 10,229 39,124 37,210 Items in process of collection 775 1,305 674 923 Bank premises 61 57 113 112 Other assets Denominated in foreign currencies3 2,120 1,971 2,531 2,603 All other 380 326 960 111 Interdistrict Settlement Account 2,185 3,833 1,743 -3,444 Total assets 20,101 18,579 47,400 40,517 LIABILITIES Federal Reserve notes 14,960 13,232 41,541 35,485 Deposits Depository institutions 3,617 4,083 4,022 3,422 U.S. Treasury, general account 0 0 0 0 Foreign, official accounts 13 13 16 17 Other 2 5 81 49 Total deposits 3,632 4,101 4,118 3,489 Deferred credit items 736 600 679 621 132 67 282 231 Other liabilities and accrued dividends4 9,461 18,000 46,620 39,825 Total liabilities CAPITAL ACCOUNTS 320 290 390 346 Capital paid in 320 290 390 346 Surplus 0 0 0 0 Other capital accounts 20,101 18,579 47,400 40,517 Total liabilities and capital accounts FEDERAL RESERVE NOTE STATEMENT 19,797 17,318 45,621 38,700 Federal Reserve notes outstanding (issued to Bank) 4,837 4,086 4,081 3,215 Less: Held by Bank Federal Reserve notes, net 14,960 13,232 41,541 35,485 1. Components may not sum to totals because of 3. Valued monthly at market exchange rates. rounding. 4. Includes exchange-translation account reflecting the 2. Includes securities loaned—fully guaranteed by U.S. monthly revaluation at market exchange rates of foreign- Treasury securities pledged with Federal Reserve exchange commitments. Banks—and excludes securities sold and scheduled to be bought back under matched sale-purchase transactions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 281 St. Louis Minneapolis Kansas City Dallas San Francisco 1993 1992 1993 1992 1993 1992 1993 1992 1993 1992 392 304 243 195 409 329 510 463 1,392 1,299 168 168 186 186 199 199 377 377 904 904 22 25 15 16 21 36 42 27 61 98 1 5 4 1 1 5 0 0 0 69 0 0 0 0 0 0 0 0 0 0 164 132 106 84 176 146 199 199 542 616 0 0 0 0 0 0 0 0 0 0 11,723 7,218 7,600 4,598 12,592 7,981 14,219 10,823 38,761 33,583 0 0 0 0 0 0 0 0 0 0 11,888 7,356 7,710 4,683 12,769 8,131 14,418 11,021 39,303 34,268 246 294 465 415 583 482 511 418 1,555 1,349 31 30 35 33 51 51 158 161 151 146 512 531 585 566 795 807 1,550 1,717 3,295 2,724 271 152 181 120 292 169 380 282 895 667 1,857 5,311 -1,004 2,555 1,442 5,062 -2,831 2,314 -12,122 2,134 1537 14,171 8,418 8,768 16,561 15,266 15,115 16,781 35,433 43,589 14,006 12,824 7,048 7,458 14,511 13,544 12,097 14,082 26,323 35,878 907 952 677 721 1,233 1,079 2,021 1,808 6,791 5,466 0 0 0 0 0 0 0 0 0 0 3 3 4 4 5 5 10 11 21 18 9 3 5 5 11 6 4 27 21 6 919 958 686 730 1,249 1,090 2,034 1,846 6,833 5,490 215 204 435 390 427 362 381 356 1,016 1,108 99 44 67 29 118 53 112 73 272 212 15,238 14,031 8,236 8,608 16,305 15,049 14,623 16,357 34,443 42,688 74 70 91 80 128 109 246 212 495 450 74 70 91 80 128 109 246 212 495 450 0 0 0 0 0 0 0 0 0 0 15,387 14,171 8,418 8,768 16,561 15,266 15,115 16,781 35,433 43,589 16,735 14,440 8,219 8,191 16,022 15,086 16,082 16,914 37,716 45,448 2,729 1,617 1,171 733 1,511 1,542 3,986 2,831 11,393 9,570 14,006 12,824 7,048 7,458 14,511 13,544 12,097 14,082 26,323 35,878 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

282 80th Annual Report, 1993 3. Federal Reserve Open Market Transactions, 1993 ' 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 0 Exchanges 24,542 Redemptions 0 Others within 1 year Gross purchases 0 Gross sales 0 Maturity shift 561 Exchanges -1,202 Redemptions 0 1 to 5 years Gross purchases 0 Gross sales 0 Maturity shift -64 Exchanges 882 5 to 10 years Gross purchases 0 Gross sales 0 Maturity shift ^97 Exchanges 0 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 agreements Gross purchases Gross sales oooo ooo 0 0 19,832 0 0 0 2,892 -6,044 0 0 0 -2,617 4,564 0 0 -98 1,000 0 0 -177 480 114,543 116,510 34,768 42,231 ooo 0 121 0 0 23,796 30,124 0 0 279 244 0 0 4,303 1,950 -2,602 -1,100 0 0 1,441 2,490 0 0 -4,303 -1,630 2,602 800 716 1,147 0 0 0 -320 0 300 705 0 0 0 3,141 0 0 111,491 146,563 113,349 143,049 28,544 37,815 25,889 33,714 oooo 5,111 0 0 127,115 128,924 30,197 36,953 Net change in U.S. Treasury securities -5,497 4,513 3,728 163 FEDERAL AGENCY OBLIGATIONS Outright transactions Gross purchases 0 0 0 0 Gross sales 0 0 0 0 Redemptions 103 85 101 28 Repurchase agreements Gross purchases 2,237 1,107 1,811 197 Gross sales 2,868 832 1,519 764 Net change in agency obligations -734 190 191 -595 Total net change in System Open Market Account. -6,231 4,703 3,918 -431 1. Sales, redemptions, and negative figures reduce figures increase such holdings. Details may not sum to holdings of the System Open Market Account; all other totals because of rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 283 May June July Aug. Sept. Oct. Nov. Dec. Total 349 7,280 0 902 366 1,396 5,931 1,394 17,737 0 0 0 0 0 0 0 0 0 26,610 24,821 35,943 27,775 31,128 25,783 27,641 30,836 328,829 0 0 0 0 0 468 0 0 468 0 0 0 100 411 0 0 189 1,223 0 0 0 0 0 0 0 0 0 4,108 4,002 0 1,497 3,074 913 5,158 2,910 0 -4,013 -2,152 0 -5,491 -1,861 -1,566 -7,641 -2,910 0 0 0 0 0 0 0 0 0 0 0 0 200 1,100 2,400 0 100 2,619 10,350 0 0 0 0 0 0 0 0 0 -3,652 -4,002 666 -834 -3,074 -31 ^,689 -2,910 -27,140 3,245 2,152 0 3,866 1,861 1,566 5,341 2,910 0 0 0 0 500 797 0 0 1,008 4,168 0 0 0 0 0 0 0 0 0 -333 0 -666 -432 0 -882 -272 0 0 468 0 0 1,100 0 0 2,300 0 0 0 0 0 100 717 0 0 826 3,457 0 0 0 0 0 0 0 0 0 -123 0 0 -231 0 0 -197 0 0 300 0 0 525 0 0 0 0 0 349 7,280 200 2,702 4,691 1,396 6,031 6,035 36,935 0 0 0 0 0 0 0 0 0 0 0 0 0 0 468 0 0 468 124,462 111,726 115,504 136,037 124,898 115,160 109,941 137,645 1,475,085 123,227 113,095 117,074 135,705 122,578 112,837 112,772 136,821 1,475,941 33,987 53,051 41,190 53,053 62,905 27,693 38,493 33,751 475,447 28,640 43,342 56,246 48,263 61,399 30,397 34,072 29,577 470,723 4,461 18,357 -13,286 7,160 3,878 -4,099 13,283 9,386 42,047 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 41 22 366 125 35 70 15 81 1,072 2,105 2,968 3,479 2,485 9,810 3,812 2,841 2,211 35,063 2,105 2,019 4,428 2,415 7,734 5,509 2,861 1,615 34,669 -41 927 -1,315 -55 2,041 -1,767 -35 515 -678 4,420 19,284 -14,601 7,105 5,919 -5,866 13,248 9,901 41^68 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

284 80th Annual Report, 1993 4. Federal Reserve Bank Holdingsof L.S. i.'reasury and Federal Agency Securities, December 31, 1991-93 ! Millions of dollars December 31 Change Description 1993 1992 1991 1992-93 1991-92 U.S. TREASURY SECURITIES Held outright2 339,584 303,435 272,583 36,149 30,852 By remaining maturity Bills 1-91 days 90,186 79,988 74,888 10,198 5,100 92 days to 1 year 70,231 63,844 7,518 6,387 77,749 Notes and bonds 1 year or less 35,423 37,758 30,542 -2,335 7,216 More than 1 year through 5 years 79,826 68,750 64,299 11,076 4,451 More than 5 years through 10 years ... 24,659 18,903 14,469 5,756 4,434 More than 10 years 31,739 27,805 24,540 3,934 3,265 By type Bills 167,936 150,219 138,732 17,717 11,487 Notes 132,076 118,179 101,520 13,897 16,659 Bonds 39,572 35,037 32,331 4,535 2,706 Repurchase agreements 12,187 7,463 15,345 4,724 -7,882 MSPs, foreign accounts 7,568 8,424 6,097 -856 2^27 MSPs, in the market 0 0 0 0 0 FEDERAL AGENCY SECURITIES Held outright2 4,638 5,413 6,045 -775 -632 By remaining maturity 1 year or less 1,823 2,064 2,340 -241 -276 More than 1 year through 5 years 2,105 2,511 2,508 -406 3 More than 5 years through 10 years 569 696 1,008 -127 -312 More than 10 years 142 142 189 0 -47 By issuer Federal Farm Credit Banks 1,201 1,296 1,440 -95 -144 Federal Home Loan Banks 1,249 1,766 2,029 -517 -263 Federal Land Banks 66 66 66 0 0 Federal National Mortgage Association .. 2,005 2,167 2,342 -162 -175 U.S. Postal Service 0 0 37 0 -37 Washington Metropolitan Area Transit Authority 117 117 117 0 0 General Services Administration 0 0 12 0 -12 Repurchase agreements 1,025 631 553 394 78 1. Details may not sum to totals because of rounding. 2. Excludes the effects of temporary transactions— The categories have been revised since last year's repurchase agreements and matched sale-purchase agree- REPORT. ments (MSPs). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 285 \Ii irnhni ,iks. President Other officers Employees Ibtal 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 177,600 62 6,004,850 1,190 214 46,884,828 1,467 53,067,278 New York 205,000 189 20,381,600 4,044 60 162,281,650 4,294 182,868,250 Philadelphia 184,500 60 5,439,000 1,304 58 40,315,639 1,423 45,939,139 Cleveland 165,500 50 4,861,030 1,279 69 39,172,150 1,399 44,198,680 Richmond 159,600 80 6,975,300 1,929 125 58,550,532 2,135 65,685,432 Atlanta 212,000 79 6,866,200 2,273 61 69,127,082 2,414 76,205,282 Chicago 221,700 103 9,228,200 2,392 55 82,937,284 2,551 92,387,184 St. Louis 190,900 51 4,099,300 1,055 105 32,122,551 1,212 36,412,751 Minneapolis 175,200 49 4,353,100 1,076 112 35,012,882 1,238 39,541,182 Kansas City 159,800 60 5,264,500 1,553 61 48,633,867 1,675 54,058,167 Dallas 161,500 58 5,062,804 1,480 52 46,868,099 1,591 52,092,403 San Francisco 229,600 96 9,865,313 2,364 74 86,783,392 2,535 96,878,305 Federal Reserve Automation Service 25 2,482,100 360 5 17,048,727 390 19,530,827 Total 2,242,900 962 90,883,297 22,299 1,051 765,738,683 24,324 858,864,880 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

286 80th Annual Report, 1993 6. Income and Expenses of Federal Reserve Banks, 1993 Dollars Item1 Total Boston New York Philadelphia Cleveland CURRENT INCOME Loans 5,564,193 75,142 784,389 269,540 181 U.S. Treasury and federal agency securities 16,890,720,955 1,014,558,922 6,128,066,220 598,122,497 1,105,592,400 Foreign currencies 1,249,248,686 44,484,936 362,139,604 48,088,241 72,384,137 Priced services 757,299,472 43,728,635 107,985,749 39,574,727 44,464,874 Other 11,417,269 331,696 7,835,815 213,306 229,592 Total 18,914,250,574 1,103,179,331 6,606,811,777 686,268,311 1,222,671,184 CURRENT EXPENSES Salaries and other personnel expenses 918,424,802 55,083,540 188,872,094 50,240,255 47,423,217 Retirement and other benefits 123,643,287 15,560,945 52,377,963 14,879,105 13,098,353 Fees 30,598,366 3,065,541 3,622,890 885,679 1,663,506 Travel 44,266,367 2,353,408 5,890,137 2,258,335 2,462,776 Software expenses 42,818,464 1,917,492 8,006,978 2,049,311 1,955,385 Postage and other shipping costs 79,172,820 4,616,997 11,392,724 3,470,908 6,200,669 Communications 10,342,162 457,345 2,078,431 439,147 789,999 Materials and supplies 56,718,191 3,270,334 9,766,938 3,294,703 3,119,800 Building expenses Taxes on real estate 26,095,361 3,445,646 4,245,810 1,867,048 1,436,091 Property depreciation 44,102,286 3,311,943 7,445,546 2,004,877 1,745,684 Utilities 32,184,538 2,567,002 6,524,026 2,856,679 1,840,594 Rent 26,654,949 654,085 13,817,274 366,110 343,016 Other 23,995,451 752,127 4,518,651 1,205,779 838,200 Equipment Purchases 8,642,796 261,294 1,552,210 415,939 247,956 Rentals 29,006,750 913,164 5,262,208 801,363 888,906 Depreciation 118,576,407 4,827,820 20,272,801 4,404,454 5,556,610 Repairs and maintenance 61,670,630 3,629,508 11,313,329 2,674,606 3,655,485 Earnings-credit costs 182,588,684 11,330,964 41,389,736 23,892,111 10,756,841 Other 37,931,989 2,418,358 6,654,606 1,651,681 2,484,371 Shared costs, net3 0 1,178,016 (2,599,142) 4,903,908 4,294,432 Recoveries (46,974,192) (9,572,696) (5,471,428) (3,076,407) (3,339,219) Expenses capitalized4 (3,399,758) (316,416) (18,717) (187,038) (295,864) Total 1,847,060349 111,726,417 396,915,065 121,298,553 107,166,808 Reimbursements (189,260,435) (9,152,913) (39,459,321) (20,096,109) (17,177,478) Net expenses 1,657,799,914 102,573,504 357,455,744 101,202,444 89,989,330 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 287 6,— Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 230,416 144,962 351,679 692,396 1,749,488 334,916 97,125 833,959 1,309,605,453 648,986,059 1,988,279,841 537,603,849 347,124,853 581,368,658 687,482,280 1,943,929,922 85,509,215 118,231,697 142,291,217 28,783,433 32,740,073 44,658,649 87,712,656 182,224,829 65,142,479 93,871,686 101,646,876 30,570,393 41,659,094 48,114,654 54,170,503 86,369,801 251,348 466,250 790,056 209,876 128,893 101,457 236,070 622,909 1,460,738,911 861,700,654 2,233,359,669 597,859,947 423,402,401 674,578,334 829,698,634 2,213,981,421 91,935,994 85,184,076 97,304,524 40,174,380 43,306,573 58,186,606 56,339,181 104,374,362 23,657,995 24,418,047 26,957,750 11,825,720 10,512,847 17,831,515 15,540,235 28,333,072 13,941,639 1,197,813 1,231,198 663,097 1,525,252 496,466 994,598 1,310,687 5,522,976 4,602,075 5,451,591 2,064,642 2,727,575 3,003,613 2,876,279 5,052,960 12,395,381 1,972,904 4,566,038 1,761,629 2,142,749 1,163,537 1,150,954 3,736,106 7,432,219 10,530,374 9,497,409 3,975,228 5,814,473 6,012,414 4,383,275 5,846,130 936,681 1,318,703 931,954 598,118 499,649 818,655 861,461 612,019 6,884,473 5,985,768 6,084,905 3,408,515 2,431,160 3,267,861 3,413,271 5,790,463 2,184,823 1,668,282 3,876,771 481,137 865,808 843,395 2,572,993 2,607,557 4,707,131 3,265,448 4,808,628 2,022,685 1,149,274 3,145,825 4,719,212 5,776,033 3,045,710 2,420,586 2,533,702 1,634,318 1,046,076 1,602,171 2,508,107 3,605,567 5,429,269 2,053,958 1,977,958 422,803 752,589 327,913 163,835 346,139 2,730,934 2,489,320 5,228,823 805,944 687,548 854,559 1,784,191 2,099,375 848,098 866,100 1,065,739 260,369 1,114,640 351,573 742,502 916,376 1,866,166 2,305,213 9,964,700 672,247 970,110 2,074,696 1,098,794 2,189,183 40,635,291 7,747,233 11,869,680 3,320,756 4,015,268 2,472,037 4,203,869 9,250,588 7,655,027 6,695,941 10,234,537 2,019,383 3,028,852 1,969,669 2,664,934 6,129,359 10,500,338 8,436,001 32,414,846 3,602,738 3,944,819 8,588,564 7,932,378 19,799,348 4,258,019 4,424,451 4,688,365 1,727,848 1,690,120 2,298,782 2,559,203 3,076,185 (27,826,938) 2,847,825 (6,956,708) 4,570,892 (870,118) 6,734,630 10,267,831 3,455,372 (9,324,124) (2,569,051) (3,091,860) (1,518,036) (833,480) (704,234) (3,468,669) (4,004,988) (895,734) (323,383) (149,290) (59,088) (333,731) (657,274) (135,188) (28,035) 208,521,368 177,537,684 230,491,260 84,435,325 86,188,053 120,682,973 123,173,246 210,273,858 (12,548,330) (14,054,507) (19,478,772) (10,541,249) (8,783,775) (13,066,460) (9,317,353) (15,584,168) 195,973,038 163,483,177 211,012,488 73,894,076 77,404,278 107,616,513 113,855,892 194,689,690 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

288 80th Annual Report, 1993 6. Income and Expenses of Federal Reserve Banks, 1993—Continued Dollars Item1 Total Boston New York Philadelphia Cleveland PROFIT AND LOSS Current net income 17,256,450,656 1,000,605,827 6,380,706,293 585,065,867 1,132,681,854 Additions to and deductions from current net income5 Profit on sales of U.S. Treasury and federal agency securities 38,910,354 2,362,418 14,033,132 1,372,820 2,556,007 Net profit on foreign exchange transactions 265,499,308 9,425,225 76,941,700 10,195,173 15,319,310 Other additions 179,019 1,803 74,740 14,126 13,958 Total additions 304,588,682 11,789,446 91,049,572 11,582,120 17,889,275 Total deductions6 .... (505,508,552) (32,979,239) (96,561,073) (33,108,635) (30,269,967) Net additions to or deductions (-) from current net income (200,919,870) (21,189,793) (5,511,501) (21,526,515) (12,380,692) Cost of unreimbursed Treasury services 29,348,049 1,157,577 3,139,404 1,634,962 1,685,404 Assessments by Board Board expenditures7 140,465,600 5,006,300 40,674,400 5,218,700 8,215,500 Cost of currency 355,947,291 20,988,078 116,794,492 12,787,760 23,192,101 Net income before payment to U.S. Treasury 16,529,769,846 952,264,079 6,214,586,496 543,897,930 1,087,208,158 Dividends paid 195,422,234 7,076,855 55,967,417 6,873,347 12,010,618 Payments to U.S. Treasury (interest on Federal Reserve notes) 15,986,764,712 930,501,974 6,074,995,179 540,619,683 1,027,887,290 Transferred to surplus 347,582,900 14,685,250 83,623,900 (3,595,100) 47,310,250 Surplus, January 1 3,053,622,100 108,310,750 885,020,600 117,317,900 176,218,550 Surplus, December 31 3,401,205,000 122,996,000 968,644,500 113,722,800 223,528,800 1. Details may not sum to totals because of rounding. 5. Includes reimbursement from the U.S. Treasury for 2. The effect of the 1987 implementation of Financial uncut sheets of Federal Reserve notes, gains-losses on Accounting Standards Board Statement No. 87— the sale of Reserve Bank buildings, counterfeit currency Employers' Accounting for Pensions—is recorded in the that is not charged back to the depositing institution, and Total column only and has not been distributed to each stale Reseve Bank checks that are written off. See the District. Accordingly, the sum of the Districts will not extract on pp. 290-91 for correction to last year's data. equal the Total column for this category or for Total net 6. Includes initial accrual of postretirement employee expenses, and New York will not sum to Current net benefits required by the adoption of the Statement of income. The effect of FASB 87 on the Reserve Banks was Financial Accounting Standards (SFAS) No. 106, a reduction in expenses of $131,350,260. "Employers' Accounting for Postretirement Benefits 3. Includes distribution of costs for projects performed Other Than Pensions." The effect of SFAS 106 on the by one Bank for the benefit of one or more other Banks. Reserve Banks was ($503,725,767). 4. Includes expenses for labor and materials tempo- 7. For additional details, see the last four pages of rarily capitalized and charged to activities when the prod- the preceding section: Board of Governors, Financial ucts are consumed. Statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 289 Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 1,264,765,873 698,217,478 2,022,347,181 523,965,870 345,998,122 566,961,821 715,842,741 2,019,291,730 3,037,703 1,492,373 4,626,090 1,225,942 790,987 1,327,376 1,582,614 4,502,890 18,266,352 25,195,884 30,081,072 6,079,934 6,956,082 9,451,775 18,425,652 39,161,148 4,334 9,217 13,264 67 29,654 46 10,417 7,393 21,308,390 26,697,474 34,720,426 7,305,944 7,776,723 10,779,197 20,018,683 43,671,431 (36,520,950) (45,491,325) (55,108,616) (31,391,290) (20,924,316) (40,079,091) (29,448,056) (53,625,994) (15,212,560) (18,793,851) (20,388,189) (24,085,346) (13,147,593) (29,299,894) (9,429,373) (9,954,563) 2,875,705 3,084,435 3,073,702 1,774,207 1,890,219 2,402,305 2,370,626 4,259,504 9,619,500 13,209,600 15,939,100 3,186,600 3,739,300 5,031,000 9,932,200 20,693,400 29,323,293 16,958,398 37,898,065 14,141,071 8,021,270 14,773,237 16,563,299 44,506,227 1,207,734,815 646,171,194 1,945,048,124 480,778,646 319,199,740 515,455,385 677,547,243 1,939,878,036 13,061,399 18,375,321 22,248,839 4,292,762 5,321,308 7,103,256 14,333,677 28,757,435 1,176,241,766 597,512,673 1,879,027,386 472,141,134 303,003,282 489,172,679 629,121,366 1,866,540,300 18,431,650 30,283,200 43,771,900 4,344,750 10,875,150 19,179,450 34,092,200 44,580,300 210,062,000 289,640,200 346,093,200 69,932,250 79,968,800 108,819,900 211,943,300 450,294,650 228,493,650 319,923,400 389,865,100 74,277,000 90,843,950 127,999,350 246,035,500 494,874,950 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

290 80th Annual Report, 1993 Errata 79th Annual Report, 1992 The portion of table 6 on pp. 272-73 of the 1992 REPORT covering "Additions to and deductions from current net income" contains incorrect data. The corrected data appear in bold type in the excerpt below. 6. Income and Expenses of Federal Reserve Banks, 1992—Continued Dollars Item Total Boston New York Philadelphia Cleveland Additions to and deductions from current net income Profit on sales of U.S. Treasury and federal agency securities 121,119,028 7,919,191 47,361,641 3,494,576 7,605,686 Other additions 518,036 336,269 39,331 9,953 4,203 Total additions 121,637,064 8,255,461 47,400,973 3,504,528 7,609,888 Net loss on foreign exchange transactions (1,078,709,567) (39,804,383) (313,796,613) (42,716,899) (65,585,542) Other deductions (2,003,418) (74,297) (729,155) (54,974) (10,279) Total deductions (1,080,712,986) (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) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 291 6.— Errata, continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 9,514,182 4,094,691 15,087,036 3,059,936 1,760,568 3,308,309 4,565,278 13,347,935 11,215 3,353 1,612 4,818 91,948 6,055 4,244 5,036 9,525,397 4,098,044 15,088,647 3,064,754 1,852,516 3,314,363 4,569,522 13,352,971 (69,361,025) (98,809,796) 130,523,858) (26,644,126) (28^70,062) (40,451,609) (86,081,023) (136,564,631) (120,020) (92,463) (34,020) (10,180) (117,722) (440,742) (36,341) (283,224) (69,481,045) (98,902,259) (130,557,878) (26,654,306) (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) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

292 80th Annual Report, 1993 7. Income and Expenses of Federal Reserve Banks. 1914-93 ' 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 293 Payments to U.S. Treasury 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 '. '. '. 291,661 27,695 607,422 7,829,581 227,448 102,880 352,524 7,940,966 176,625 67,304 2,616,352 8,019,137 119,524 ^19,140 1,862,433 8,110,462 24,579 ^25,653 4,533,977 8,214,971 42,152 -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

294 80th Annual Report, 1993 7. Income and Expenses of Federal Reserve Banks. 1914-93—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 1,102,444,454 (412,943,156) 82,115,700 162,606,410 1985 18,131,982,786 1,127,744,490 1,301,624,294 77,377,700 173,738,745 1986 17,464,528,361 1,156,867,714 1,975,893,356 97,337,500 180,779,673 1987 17,633,011,623 1,146,910,699 1,796,593,9172 81,869,800 170,674,979 1988 19,526,431,297 1,205,960,134 (516,910,320) 84,410,500 164,244,653 1989 22,249,275,725 1,332,160,712 1,295,622,583 89,579,700 175,043,736 1990 23,476,603,651 1,349,725,812 2,201,470,397 103,752,200 193,006,998 1991 22,553,001,815 1,429,322,157 496,200,596 109,631,000 261,316,379 1992 20,235,027,938 1,474,530,523 (959,075,921) 128,955,300 295,400,692 1993 18,914,250,574 1,657,799,914 (200,919,870) 140,465,600 355,947,291 Total, 1914-93 345,938,644,285 24,985,375,340 4,832,520,986 1,843,398,508 3,248,226,064 Aggregate for each Bank, 1914-93 Boston 18,613,420,920 1,639,334,224 155,627,514 67,082,986 197,265,169 New York 107,548,933,556 5,012,056,041 1,356,577,841 490,173,186 936,268,463 Philadelphia 13,225,644,800 1,359,916,750 205,290,910 86,203,818 132,025,678 Cleveland 22,731,714,462 1,614,879,766 217,242,707 130,716,190 205,468,574 Richmond 27,414,783,831 2,079,903,128 271,921,382 102,915,176 292,233,490 Atlanta 14,826,850,937 2,252,713,406 440,233,955 148,880,760 177,181,330 Chicago 47,871,002,837 3,254,187,995 593,806,937 249,781,772 429,784,923 St. Louis 11,292,498,289 1,279,601,235 107,009,268 54,212,872 115,753,225 Minneapolis 6,318,691,261 1,174,727,956 147,156,772 53,877,715 59,267,890 Kansas City 14,045,187,169 1,612,710,483 176,301,137 76,058,509 139,051,995 Dallas 18,714,096,795 1,515,667,037 408,499,610 125,663,173 176,558,810 San Francisco 43,335,819,429 2,701,371,440 752,852,952 257,832,351 387,366,517 Total 345,938,644,285 24,985,375,3404 4,832,520,986 1,843,398,508 3,248,226,064 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 $3,529,877,199 transferred to surplus was ing a balance of $3,401,204,998 on December 31, 1993. reduced by direct changes of $500,000 for charge-off on 4. See note 2, table 6. Bank premises (1927), $139,299,557 for contributions to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 295 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 16,774,476,500 402,114,350 195,422,234 15,986,764,712 347,582,900 2,950,412,027 149,138,300 2,188,893 313,770,870,360 (3,657) 3,529,877,1993 118,157,958 7,111,395 280,843 16,593,044,628 135,411 133,090,825 808,430,647 68,006,262 369,116 101,056,342,370 (433,412) 1,055,801,071 149,140,400 5,558,901 722,406 11,535,384,767 290,661 128,053,022 221,463,390 4,842,447 82,930 20,506,402,265 (9,906) 236,762,593 159,849,550 6,200,189 172,493 24,789,464,998 (71,517) 234,373,458 223,669,318 8,950,561 79,264 12,106,937,089 5,491 325,189,940 393,168,780 25,313,526 151,045 43,677,063,350 11,682 405,193,854 88,382,056 2,755,629 7,464 9,764,663,347 (26,515) 79,396,628 83,061,582 5,202,900 55,615 4,981,452,579 64,874 94,721,163 119,766,409 6,939,100 64,213 12,113,664,108 (8,674) 132,139,300 191,229,424 560,049 102,083 16,846,432,420 55,337 250,312,978 394,092,512 7,697,341 101,421 39,800,018,437 (17,089) 504,742,367 2,950,412,027 149,138,300 2,188,893 313,770,870,360 (3,657) 3,529,877,199 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

296 80th Annual Report, 1993 8. Acquisition Costs and Net Book Vitiiu: Premises of Federal Reserve Banks and Branches, December 31. 1993 ] 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 86,118,643 5,919,179 114,111,322 90,943,976 NEW YORK. 20,354,440 99,526,036 43,528,039 163,408,514 136,215,094 Buffalo 887,844 2,775,173 2,767,406 6,430,424 4,136,601 PHILADELPHIA 2,251,556 55,497,145 5,903,704 63,652,405 47,217,109 CLEVELAND . 1,074,281 11,606,243 6,969,480 19,650,005 13,906,160 1,224,363 Cincinnati 2,246,599 13,752,555 8,235,221 24,234,375 11,562,935 Pittsburgh 1,658,376 9,535,710 4,347,570 15,541,656 11,904,502 RICHMOND. 5,812,396 80,449,462 18,295,193 104,557,050 77,796,619 Baltimore 6,476,335 26,826,903 3,842,189 37,145,427 28,948,142 Charlotte 3,129,645 27,402,251 4,737,485 35,269,381 31,873,809 ATLANTA... 1,209,360 14,312,239 4,319,451 19,841,050 14,928,470 13,086,575 Birmingham.. 3,197,830 1,905,770 1,303,037 6,406,637 4,449,752 Jacksonville.. 1,665,439 16,395,261 2,863,295 20,923,995 18,419,483 951,603 Miami 3,717,791 12,099,721 2,706,338 18,523,850 14,000,195 Nashville .... 592,342 1,474,678 2,219,668 4,286,688 2,107,059 New Orleans. 3,087,693 4,549,849 2,598,505 10,236,047 7,207,467 283,753 CHICAGO. 4,565,008 113,070,421 19,226,634 136,862,063 105,034,915 Detroit 797,734 4,431,451 5,120,023 10,349,208 8,344,944 ST. LOUIS.. 700,378 15,832,985 5,298,206 21,831,569 18,601,949 Little Rock.. 1,148,492 2,080,669 1,003,022 4,232,183 3,220,696 Louisville... 700,075 2,907,002 1,131,238 4,738,315 3,815,201 Memphis 1,135,623 4,216,382 2,280,473 7,632,478 5,222,711 MINNEAPOLIS. 1,394,384 33,252,859 7,851,532 42,498,775 24,445,460 Helena 1,954,514 9,042,980 501,857 11,499,351 10,867,325 KANSAS CITY. 1,829,420 16,015,019 11,638,819 29,483,258 21,760,171 149,948 Denver 3,187,962 4,625,568 3,185,925 10,999,455 8,194,847 Oklahoma City.. 646,386 4,296,538 861,305 5,804,229 4,264,366 Omaha 6,534,583 10,987,009 1,401,083 18,922,675 16,723,865 1,412,500 DALLAS 29,102,860 108,688,568 11,969,538 149,760,966 145,766,078 10,533,831 El Paso 262,477 1,662,527 404,946 2,329,950 2,134,716 Houston 2,205,500 3,631,039 1,150,965 6,987,504 6,562,297 San Antonio . 482,284 2,610,854 1,626,589 4,719,728 3,732,234 SAN FRANCISCO 15,599,928 67,895,364 17,887,493 101,382,785 79,582,418 Los Angeles 3,891,887 51,200,999 8,842,898 63,935,784 54,684,516 Portland 415,924 5,163,133 1,776,067 7,355,124 6,685,697 126,444 Salt Lake City .... 494,556 4,619,366 2,441,387 7,555,310 5,504,171 Seattle 324,772 2,918,056 2,573,283 5,816,111 4,418,652 Total 156,810,174 933,376,429 228,729,045 1,318,915,647 1,055,184,604 27,769,016 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 297 c> Operaiions in Principal Departments of Federal Reserve Banks. 1990-93 Operation 1993 1992 1991 1990 Millions of pieces (except as noted) Loans (thousands) 6 8 11 15 Currency received and counted 20,768 20,166 19,711 19,462 Currency verified and destroyed 7,376 7,506 6,254 6,561 Coin received and counted 7,690 8,660 9,462 12,072 Checks handled U.S. government checks 480 493 503 547 Postal money orders 192 181 166 162 All other 19,009 19,053 r 18,743 18,595 Issues, redemptions, and exchanges of U.S. Treasury and federal agency securities 79 77 r 52 44 Transfer of funds 70 68 65 63 Automated clearinghouse transactions Commercial' 1,545 1,327 1,119 915 Government 555 531 521 520 Food stamps redeemed 4,198 4,183 3,439 2,875 Millions of dollars Loans 20,760 29,427 64,597 194,538 Currency received and counted 290,989 277,681 265,473 252,430 Currency verified and destroyed 79,599 96,744 77,496 65,863 Coin received and counted 1,143 1,275 1,354 1,734 Checks handled U.S. government checks 534,236 588,311 610,106 623,008 Postal money orders 22,207 20,188 17,716 16,485 All other 14,066,518 13,241,785 12,164,175 12,514,201 Issues, redemptions, and exchanges of U.S. Treasury and federal agency securities 151,042,782 142,761,160 r 119,114,811 102,332,172 Transfer of funds 207,629,814 199,175,034 192,254,895 199,067,200 Automated clearinghouse transactions Commercial' 7,862,307 7,597,811 6,188,185 4,173,667 Government 885,011 859,774 723,426 486,809 Food stamps redeemed 21,661 21,452 17,888 14,517 1. Data for years preceding 1991 do not include items Revised. 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

298 80th Annual Report, 1993 10. Federal Reserve Bank Interest Rates, December 31, 1993 Loans to depository institutions Bank Extended credit3 Adjustment Seasonal credit' credit2 First 30 days After 30 days of borrowing of borrowing4 All Federal Reserve Banks 3.0 3.1 3.0 3.6 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(c) 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 299 11. Reserve Requirements of Depository Institutions1 Requirements Type of deposit2 Percent of deposits Effective date Net transaction accounts3 $0 million-$51.9 million 3 12/21/93 More than $51.9 million4 10 12/21/93 Nonpersonal time deposits5 0 12/27/90 Eurocurrency liabilities6 0 12/27/90 1. Reserve requirements in effect on December 31, money market deposit accounts (MMDAs) and similar 1993. Required reserves must be held in the form of accounts subject to the rules that permit no more than six deposits with Federal Reserve Banks or vault cash. Non- preauthorized, automatic, or other transfers per month, of member institutions may maintain reserve balances with a which no more than three may be checks, are not trans- Federal Reserve Bank indirectly on a pass-through basis action accounts (such accounts are savings deposits). with certain approved institutions. For previous reserve The Monetary Control Act of 1980 requires that the requirements, see earlier editions of the Annual Report or amount of transaction accounts against which the 3 perthe Federal Reserve Bulletin. Under provisions of the cent reserve requirement applies be modified annually by Monetary Control Act, depository institutions include 80 percent of the percentage change in transaction commercial banks, mutual savings banks, savings and accounts held by all depository institutions, determined as loan associations, credit unions, agencies and branches of of June 30 each year. Effective December 21, 1993 for foreign banks, and Edge Act corporations. institutions reporting quarterly and weekly, the amount 2. The Garn-St Germain Depository Institutions Act was increased from $46.8 million to $51.9 million. of 1982 (Public Law 97-320) requires that $2 million of 4. The reserve requirement was reduced from 12 perreservable liabilities of each depository institution be cent to 10 percent on April 2, 1992, for institutions that subject to a zero percent reserve requirement. The Board report weekly, and on April 16, 1992, for institutions that is to adjust the amount of reservable liabilities subject to report quarterly. this zero percent reserve requirement each year for the 5. For institutions that report weekly, the reserve resucceeding calendar year by 80 percent of the percentage quirement on nonpersonal time deposits with an original increase in the total reservable liabilities of all depository maturity of less than 1 xh years was reduced from 3 perinstitutions, measured on an annual basis as of June 30. cent to 1 xh percent for the maintenance period that began No corresponding adjustment is to be made in the event December 13, 1990, and to zero for the maintenance of a decrease. On December 21, 1993, the exemption was period that began December 27, 1990. The reserve reraised from $3.8 million to $4.0 million. The exemption quirement on nonpersonal time deposits with an original applies in the following order: (1) net negotiable order of maturity of 1 Vi years or more has been zero since Octowithdrawal (NOW) accounts (NOW accounts less allow- ber^ 1983. able deductions); and (2) net other transaction accounts. For institutions that report quarterly, the reserve re- The exemption applies only to accounts that would be quirement on nonpersonal time deposits with an original subject to a 3 percent reserve requirement. maturity of less than 1 xh years was reduced from 3 per- 3. Transaction accounts include all deposits against cent to zero on January 17, 1991. which the account holder is permitted to make withdraw- 6. The reserve requirement on Euroccurency liabilities als by negotiable or transferable instruments, payment was reduced from 3 percent to zero in the same manner orders of withdrawal, and telephone and preauthorized and on the same dates as was the reserve requirement on transfers in excess of three per month for the purpose nonpersonal time deposits with an original maturity of of making payments to third persons or others. However, less than 1 Vi years (see note 4). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

300 80th Annual Report, 1993 12. Initial Margin Requirements under Regulations T, U, G, and X ! Percent of market value Short sales, Effective date Tonly2 1934, Oct. 1 ... 25^5 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 is collateralized by securities. Margin requirements margin required by the appropriate exchange or selfon securities other than options are the difference between regulatory organization; such maintenance margin rules the market value (100 percent) and the maximum loan must be approved by the Securities and Exchange Comvalue of collateral as prescribed by the Board. Regulation mission. Effective June 6, 1988, the SEC approved new T was adopted effective October 15, 1934; Regulation U, maintenance margin rules, permitting margins to be the effective May 1, 1936; Regulation G, effective March 11, current market value of the option plus 20 percent of the 1968; and Regulation X, effective November 1, 1971. market value of the stock underlying the option. On January 1, 1977, the Board of Governors for the 2. From October 1, 1934, to October 31, 1937, the first time established in Regulation T the initial margin requirement was the margin "customarily required" by required for writing options on securities, setting it at the brokers and dealers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 301 'Jrmu|\.<i V"* !s diic i/ahili'u*^ and Number of Insured Commercial Banks, • \ i 1 is- *! K nk. hi':: M> !•'-.* jud MW Asset and liability items shown in millions of dollars Member banks Nonmember Item Total banks Total National State June 30, 1993 Loans and investments 2,589,765 1,887,748 1,469,708 418,041 702,016 Gross loans 1,829,457 1,348,320 1,066,867 281,453 481,137 Net loans 1,822,977 1,344,351 1,064,062 280,289 478,626 Investments 760,308 539,428 402,841 136,587 220,880 U.S. Treasury and federal agency securities 620,719 445,135 335,555 109,579 175,585 Other 139,589 94,294 67,286 27,008 45,295 Cash assets, total 184,607 143,027 111,514 31,513 41,580 Deposits, total 2,331,857 1,679,272 1,320,636 358,636 652,585 Interbank 45,538 37,536 27,669 9,867 8,002 Other transaction 742,464 549,842 432,025 117,817 192,623 Other nontransaction 1,832,239 1,294,118 1,025,163 268,955 538,122 Equity capital 276,357 202,248 155,024 47,224 74,109 Number of banks 11,126 4,404 3,435 969 6,722 June 30, 1992 Loans and investments 2,483,478 1,796,867 1,440,629 356,238 686,611 Gross loans 1,796,571 1,319,239 1,072,473 246,766 477,332 Net loans 1,788,168 1,314,068 1,068,465 245,603 474,101 Investments 686,907 477,628 368,156 109,473 209,279 U.S. Treasury and federal agency securities 549,316 386,440 300,159 86,281 162,876 Other 137,591 91,188 67,996 23,192 46,403 Cash assets, total 189,611 147,732 119,426 28,306 41,879 Deposits, total 2,316,586 1,661,042 1,344,573 316,468 655,544 Interbank 48,504 41,429 30,236 11,193 7,076 Other demand 669,361 493,488 396,539 96,948 175,874 Other time and savings 1,855,420 1,303,164 1,064,842 238,322 552,256 Equity capital 243,062 174,420 136,404 38,016 68,642 Number of banks 11,598 4,634 3,686 6,964 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

302 80th Annual Report, 1993 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items- Year-End 1918-93, and Month-End 1993 J Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasury and cial Treafederal agency securities draw- sury Period Other Gold ing curu H n e d l e d r Loans Float2 ot A he ll r3 R F e e s d e e r r v a e l Total stock5 c ri e g r h ti t f s - r o en u c t- y Total 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 ta n n g d 6 agree- count ment 1918 239 239 0 1,766 199 294 0 2,498 2,873 1,795 1919 300 300 0 2,215 201 575 0 3,292 2,707 1,707 1920 287 287 0 2,687 119 262 0 3,355 2,639 1,709 1921 234 234 0 1,144 40 146 0 1,563 3,373 1,842 1922 436 436 0 618 78 273 0 1,405 3,642 1,958 1923 134 80 54 723 27 355 0 1,238 3,957 2,009 1924 540 536 4 320 52 390 0 1,302 4,212 2,025 1925 375 367 8 643 63 378 0 1,459 4,112 1,977 1926 315 312 3 637 45 384 0 1,381 4,205 1,991 1927 617 560 57 582 63 393 0 1,655 4,092 2,006 1928 228 197 31 1,056 24 500 0 1,809 3,854 2,012 1929 511 488 23 632 34 405 0 1,583 3,997 2,022 1930 739 686 43 251 21 372 0 1,373 4,306 2,027 1931 817 775 42 638 20 378 0 1,853 4,173 2,035 1932 1,855 1,851 4 235 14 41 0 2,145 4,226 2,204 1933 2,437 2,435 2 98 15 137 0 2,688 4,036 2,303 1934 2,430 2,430 0 7 5 21 0 2,463 8,238 2,511 1935 2,431 2,430 1 5 12 38 0 2,486 10,125 2,476 1936 2,430 2,430 0 3 39 28 0 2,500 11,258 2,532 1937 2,564 2,564 0 10 19 19 0 2,612 12,760 2,637 1938 2,564 2,564 0 4 17 16 0 2,601 14,512 2,798 1939 2,484 2,484 0 7 91 11 0 2,593 17,644 2,963 1940 2,184 2,184 0 3 80 8 0 2,274 21,995 3,087 1941 2,254 2,254 0 3 94 10 0 2,361 22,737 3,247 1942 6,189 6,189 0 6 471 14 0 6,679 22,726 3,648 1943 11,543 11,543 0 5 681 10 0 12,239 21,938 4,094 1944 18,846 18,846 0 80 815 4 0 19,745 20,619 4,131 1945 24,252 24,252 0 249 578 2 0 15,091 20,065 4,339 1946 23,350 23,350 0 163 580 1 0 24,093 20,529 4,562 1947 22,559 22,559 0 85 535 1 0 23,181 22,754 4,562 1948 23,333 23,333 0 223 541 1 0 24,097 24,244 4,589 1949 18,885 18,885 0 78 534 2 0 19,499 24,427 4,598 1950 20,778 20,725 53 67 1,368 3 0 22,216 22,706 4,636 1951 23,801 23,605 196 19 1,184 5 0 25,009 22,695 4,709 1952 24,697 24,034 663 156 967 4 0 25,825 23,187 4,812 1953 25,916 25,318 598 28 935 2 0 26,880 22,030 4,894 1954 24,932 24,888 44 143 808 1 0 25,885 21,713 4,985 1955 24,785 24,391 394 108 1,585 29 0 26,507 21,690 5,008 1956 24,915 24,610 305 50 1,665 70 0 26,699 21,949 5,066 1957 24,238 23,719 519 55 1,424 66 0 25,784 22,781 5,146 1958 26,347 26,252 95 64 1,296 49 0 27,755 20,534 5,234 1959 26,648 26,607 41 458 1,590 75 0 28,771 19,456 5,311 1960 27,384 26,984 400 33 1,847 74 0 29,338 17,767 5,398 1961 28,881 30,478 159 130 2,300 51 0 31,362 16,889 5,585 1962 30,820 28,722 342 38 2,903 110 0 33,871 15,978 5,567 1963 33,593 33,582 11 63 2,600 162 0 36,418 15,513 5,578 1964 37,044 36,506 538 186 2,606 94 0 39,930 15,388 5,405 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 303 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 1( 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 39,619 612 820 229 321 1,036 0 0 18,086 4,151 21,663 574 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

304 80th Annual Report, 1993 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-93 and Month-End 1993 ! —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- 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 ut o ri u g g h h t t 11 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 12 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 4,293 111 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 1993 349,865 336,653 13,212 94 909 0 33,394 384,262 11,053 8,018 22,053 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 305 J 4. •-—("( >m inucd Factors absorbing reserve funds Deposits, other Member bank than reserves, with reserves8 Federal Reserve Banks Other Cur- Re- Trea- Other Federal rency quired sury Federal Reserve in clearcash Reserve liacir- ing With Curhold- ac- bilities c t u io la n - ings7 T s r u e r a y - e F i o g r n - Other counts4 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 l0 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 98 13 72,497 317 2,542 251 1,419 14 0 0 2,669 27,060 6,781 35,268 -1,360 79,743 185 2,113 418 1,275 14 0 0 2,935 25,843 7,370 37,011 -3,798 86,547 483 7,285 353 1,090 0 0 2,968 26,052 8,036 35,197 -1,103 15 93,717 460 10,393 352 1,357 0 0 3,063 25,158 8,628 35,461 -1,535 103,811 392 7,114 379 1,187 0 0 3,292 26,870 9,421 37,615 -1,265 114,645 240 4,196 368 1,256 0 0 4,275 31,152 10,538 42,694 -893 125,600 494 4,075 429 1,412 0 0 4,957 29,792 11,429 44,217 -2,835 136,829 441 3,062 411 617 0 0 4,671 27,456 13,654 40,558 675 144,774 443 4,301 505 781 0 117 5,261 25,111 15,576 42,145 -1,442 154,908 429 5,033 328 1,033 0 436 4,990 26,053 16,666 41,391 1,328 171,935 479 3,661 191 851 0 1,013 5,392 20,413 17,821 39,179 -945 183,796 513 5,316 253 867 0 1,126 5,952 20,693 i ii k 197,488 550 9,351 480 1,041 0 1,490 5,940 27,141 211,995 447 7,588 287 917 0 1,812 6,088 46,295 230,205 454 5,313 244 1,027 0 1,687 7,129 40,097 247,649 395 8,656 347 548 0 1,605 7,683 37,742 I I I 260,453 450 6,217 589 1,298 0 1,626 8,486 36,701 n.a. n.a. n.a. 286,965 561 8,960 369 242 0 1,963 8,147 36,695 307,780 636 17,697 968 1,706 0 3,955 8,113 25,458 334,757 508 7,492 206 372 0 5,901 7,984 26,178 365,229 377 14,809 386 397 0 6,336 9,292 28,285 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

306 80th Annual Report, 1993 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-93, and Month-End 1993'—Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasuryand cial Treafederal agency securities draw- sury Period Total o B ut o r u ig g h h t t 'l 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 i a g n r a c h t g t - i t e f s - s r i t c o e a n u n u n g r c t d - - 6 y agree- count ment n 1993 Jan. ... 302,287 302,287 0 35 226 0 30,578 333,126 11,055 8,018 21,490 Feb. ... 306,990 304,060 2,930 57 784 0 29,865 337,696 11,055 8,018 21,528 Mar. ... 310,907 303,584 7,323 753 337 0 31,450 343,447 11,054 8,018 21,578 Apr. ... 310,476 310,476 0 84 735 0 32,627 343,922 11,054 8,018 21,629 May ... 314,895 309,548 5,347 129 115 0 32,002 347,141 11,053 8,018 21,674 June ... 334,180 318,175 16,005 1,534 221 0 32,989 368,924 11,057 8,018 21,711 July .... 319,578 319,578 0 234 539 0 31,731 352,082 11,057 8,018 21,748 Aug. ... 326,684 321,824 4,860 236 850 0 31,428 359,198 11,057 8,018 21,808 Sept. ... 332,603 324,161 8,442 2,918 74 0 33,089 368,684 11,057 8,018 21,871 Oct. ... 326,736 322,695 4,041 145 502 0 32,857 360,240 11,056 8,018 21,927 Nov. ... 339,965 331,523 8,442 55 643 0 31,186 371,849 11,054 8,018 21,983 Dec. ... 349,865 336,653 13,212 94 909 0 33,394 384,262 11,053 8,018 22,053 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 ;307 14.—Continued Factors absorbing reservefunds Deposits, other Member bank than reserves, with Federal ReserveBanks Other reserves8 Cur- Re- Trea- Other Federal rency sury Federal quired Reserve in cash Reserve clear- liacir- hold- ac- ing bilities With Curc t u io la n - ings7 T s r u e r a y - F ei o g r n - Other counts 4 a b n a c l e - s ca a p n it d al4 R F B e e a d s n e e r k r v a s e l r c e a o n n i c n d y 9 qu R ire e d - l0 ces E s x 10 - -13 326,573 508 9,572 244 282 0 5,881 9,141 21,652 ii i i 329,621 463 5,350 296 302 0 6,005 9,180 27,080 332,822 515 6,752 318 314 0 5,904 8,844 28,629 335,907 505 7,273 221 291 0 5,849 291 24,730 340,856 489 5,787 194 300 0 6,111 9,263 24,888 344,123 432 28,386 286 297 0 6,046 8,705 21,132 346,113 386 5,818 284 232 0 6,145 9,349 24,580 nI.a. nI.a. nJ.a. 349,169 383 7,975 187 272 0 5,922 10,164 26,009 351,530 384 17,289 501 306 0 6,017 9,687 23,917 352,815 379 6,032 390 325 0 6,094 8,879 26,329 359,697 370 6,334 596 297 0 6,157 9,561 29,893 365,229 377 14,809 386 397 0 6,336 9,292 28,285 11. Beginning in 1969, includes securities loaned— 14. For the period before July 1973, includes certain fully guaranteed by U.S. government securities pledged deposits of domestic nonmember banks and foreignwith Federal Reserve Banks—and excludes securities owned banking institutions held with member banks and sold and scheduled to be bought back under matched redeposited in full with Federal Reserve Banks in connecsale-purchase transactions. tion with voluntary participation by nonmember institu- 12. Beginning December 1, 1966, includes federal tions in the Federal Reserve System program of credit agency obligations held under repurchase agreements and restraint. beginning September 29, 1971, includes federal agency As of December 12, 1974, the amount of voluntary issues bought outright. 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

308 80th Annual Report, 1993 15. Changes in Number of Banking Offices in the United States, 1993! Commercial banks2 State-chartered savings Type of office Total Member4 Nonmember banks3 and change Total Non- Non- Total National State Insured Insured insured- insured Banks, Dec. 31, 1992 12,118 11,689 4,608 3,641 967 6,815 266 429 Changes during 1993 New banks 71 71 21 16 5 33 17 0 Ceased banking operation6 -92 -86 -57 -52 -5 -22 -7 -6 Banks converted into branches7 .. -484 -470 -225 -191 -34 -245 0 -14 Other8 97 -9 45 15 89 -54 2 Net change -408 -477 -270 11 -219 69 -281 12 Banks, Dec. 31,1993 11,710 11,212 4338 978 6,596 498 3^60 278 Branches and additional offices, Dec. 31, 1992 ... 55,006 52,218 35,213 27,956 7,257 16,924 81 2,788 Changes during 1993 De novo 1,732 1,499 1,017 805 212 478 233 Banks converted into branches 484 473 311 263 48 162 0 11 0 Discontinued -1,287 -1,215 -1,004 -886 -118 -208 -3 -72 0 Other8 86 74 27 22 5 47 0 12 0 Net change8 1,015 831 351 204 147 479 184 Branches and additional offices, Dec. 31, 1993 ... 56,021 53,049 35,564 28,160 7,404 17,403 82 2,972 0 1. Preliminary. Final data will be available in the 5. Includes three workout national banks. Annual Statistical Digest, 1993, forthcoming. 6. Includes five banks that converted to thrift 2. Includes nondeposit trust companies, private banks, institutions. industrial banks, and nonbank banks. Member institutions 7. Includes three banks that converted to thrift instituare those that are members of the Federal Reserve tion branches. System. 8. Includes interclass changes and sale of branches. 3. Formerly called mutual savings banks. 4. As of Dec. 31, 1988, includes noninsured trust companies that are members of the Federal Reserve System. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 309 01 of Liabilities \ppii BancFirst, Oklahoma City, Oklahoma to merge Sun Bank/Gulf Coast, Sarasota, Florida to with United Bank and Trust Company of Nor- acquire assets and liabilities of the Coast Bank, man, Norman, Oklahoma' FSB, Sarasota, Florida SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (1/22/93) (2/12/93) The proposed transaction would not be signifi- The proposed transaction would not be significantly adverse to competition. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (1/5/93) (1/20/93) The applicant has assets of $700 million; the target The applicant has assets of $304 million; the target has assets of $33.7 million. The parties do not has assets of $1.2 billion. The parties operate in operate in the same market. the same market. The banking factors and considerations relating The banking factors and considerations relating to the convenience and needs of the community to the convenience and needs of the community are consistent with approval. are consistent with approval. Alice Bank of Texas, Alice, Texas to merge with Fifth Third Bank, Cincinnati, Ohio to acquire New First City Bank, Alice, Texas the assets and liabilities of six branch offices of The First National Bank, Dayton, Ohio SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the SUMMARY REPORT BY THE ATTORNEY GENERAL competitive factors was dispensed with, as autho- (2/12/93) rized by the Bank Merger Act, to permit the Fed- The proposed transaction would not be signifieral Reserve System to act immediately to safecantly adverse to competition. guard the depositors of New First City Bank.2 BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (1/7/93) (2/8/93) The applicant has assets of $5.6 billion; the targets The applicant has assets of $138 million; the target have assets of $117 million. The parties do not has assets of $106 million. The OCC has recomoperate in the same market. mended immediate action by the Federal Reserve The banking factors and considerations relating System to prevent the probable failure of the to the convenience and needs of the community target. are consistent with approval. Humboldt Bank, Eureka, California to acquire First Community Bank, Inc., Princeton, West assets and liabilities of the Arcata and McKin- Virginia to merge with Peoples Bank of Rich- leyville branches of HomeFed Bank, F.A., San wood, Inc., Richwood, West Virginia Diego, California SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (12/4/92) The proposed transaction would not be Request for report dispensed with as authorized by significantly adverse to competition. the Bank Merger Act. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (1/19/93) (2/19/93) The applicant has assets of $393 million; the target The applicant has assets of $66 million; the targets has assets of $32 million. The parties do not have assets of $57 million. The RTC has recomoperate in the same market. mended immediate action by the Federal Reserve The banking factors and considerations relating System to prevent the probable failure of the to the convenience and needs of the community target. are consistent with approval. 2. Hereafter, the entry for the summary report by the Attorney General will read, "Request for report dis- 1. The institution or group of institutions named be- pensed with as authorized by the Bank Merger Act," for fore the italicized words is referred to subsequently as the cases in which the Attorney General's report on the applicant, and the institution or group of institutions competitive factors was dispensed with, as authorized by named after the italicized words is referred to subse- the Bank Merger Act, to permit the Federal Reserve quently as the target institution or target institutions. System to act immediately to safeguard depositors. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

310 80th Annual Report, 1993 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1993—Continued Tri-City Bank and Trust Company, Blountville, Fleet Bank of New York, New York, New York Tennessee to acquire assets and liabilities of the to merge with Jefferson National Bank, Water- Rhea Parkway Branch of Home Federal Bank, town, New York FSB, Johnson City, Tennessee SUMMARY REPORT BY THE ATTORNEY GENERAL Request for report dispensed with as authorized by SUMMARY REPORT BY THE ATTORNEY GENERAL (2/26/93) the Bank Merger Act. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (2/26/93) The applicant has assets of $9.9 billion; the target BASIS FOR APPROVAL BY THE FEDERAL RESERVE has assets of $216 million. The OCC has recom- (2/23/93) mended immediate action by the Federal Reserve The applicant) has assets of $198 million; the System to prevent the probable failure of the target has assets of $25.6 million. The parties do target. not operate in the same market. The banking factors and considerations relating to the convenience and needs of the community Shelby County State Bank, Shelbyville, Illinois are consistent with approval. to merge with Bank of Findlay, Findlay, Illinois SUMMARY REPORT BY THE ATTORNEY GENERAL (1/22/93) First Interstate Bank of California, Los Ange- The proposed transaction would not be signifiles, California to merge with HomeFed Bank, cantly adverse to competition. F.A., San Diego, California BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (03/09/93) (2/19/93) The applicant has assets of $76.9 million; the The proposed transaction would not be signifi- target has assets of $9.3 million. The parties do cantly adverse to competition. 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 (2/25/93) are consistent with approval. The applicant has assets of $20 billion; the target has assets of $149 million. The parties do not operate in the same market. SouthTrust Bank of West Florida, St. Peters- The banking factors and considerations relating burg, Florida to merge with Gulf Bank of Duneto the convenience and needs of the community din, Dunedin, Florida are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (3/12/93) The proposed transaction would not be signifi- Farmers State Bank (formerly Jewell County cantly adverse to competition. Bank), Mankato, Kansas to merge with Traders BASIS FOR APPROVAL BY THE FEDERAL RESERVE State Bank, Glen Elder, Kansas, and Tipton (3/10/93) State Bank, Tipton, Kansas The applicant has assets of $452 million; the target SUMMARY REPORT BY THE ATTORNEY GENERAL has assets of $41 million. The parties do not (2/26/93) 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 are consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (2/26/93) The applicant has assets of $29 million; the target Central Bank of the South, Birmingham, Alahas assets of $21 million. The parties do not bama to merge with Altus Federal Savings Bank, Mobile, Alabama 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 are consistent with approval. by the Bank Merger Act. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 311 16.—Continued BASIS FOR APPROVAL BY THE FEDERAL RESERVE has assets of $29.1 million. The parties operate in (3/22/93) the same market. The applicant has assets of $5.1 billion; the target The banking factors and considerations relating has assets of $12.6 million. The RTC has recom- to the convenience and needs of the community mended immediate action by the Federal Reserve are consistent with approval. System to prevent the probable failure of the target. Commonwealth Bank, Williamsport, Pennsylvania to merge with Valley Community Bank, PremierBank & Trust, Elyria, Ohio to acquire Kingston, Pennsylvania assets and liabilities of one branch office of SUMMARY REPORT BY THE ATTORNEY GENERAL Home Savings of America, FSB, Irwindale, (3/12/93) California The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. (3/12/93) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (4/20/93) cantly adverse to competition. The applicant has assets of $2.0 billion; the target BASIS FOR APPROVAL BY THE FEDERAL RESERVE has assets of $45.8 million. The parties operate in (3/26/93) the same market. The applicant has assets of $489 million; the target The banking factors and considerations relating has assets of $28 million. The parties do not to the convenience and needs of the community operate in the same market. are consistent with approval. The banking factors and considerations relating to the convenience and needs of the community Banco Popular de Puerto Rico, Hato Rey, are consistent with approval. Puerto Rico to acquire the assets and liabilities of the Third Avenue branch of North Side Savings Crestar Bank, Richmond, Virginia to merge with Bank, Bronx, New York, and four branches Continental Federal Savings Bank, Fairfax, of Bank of Leumi Trust Company, New York, Virginia New York SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (2/26/93) (3/26/93) The proposed transaction would not be signifi- The proposed transaction would not be significantly adverse to competition. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/26/93) (4/30/93) The applicant has assets of $10 billion; the target The applicant has assets of $9.5 billion; the targets has assets of $926 million. The parties operate in have assets of $16.0 million and $14.8 million, the same market. respectively. The parties operate in the same The banking factors and considerations relating market. to the convenience and needs of the community The banking factors and considerations relating are consistent with approval. to the convenience and needs of the community are consistent with approval. Salamanca Trust Company, Salamanca, New York to acquire assets and liabilities of the West California Center Bank, Los Angeles, Califor- Main Street branch of Chemical Bank, Allegh- nia to merge with Wilshire Center Bank, N.A., eny, New York. Los Angeles, California SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (3/26/93) Request for report dispensed with as authorized by The proposed transaction would not be signifi- the Bank Merger Act. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (5/7/93) (4/9/93) The applicant has assets of $211 million; the target The applicant has assets of $49 million; the target has assets of $9 million. The OCC has recom- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

312 80th Annual Report, 1993 16. Mergers, Consolidations, and Acquisitions o\ Assets or Assumptions of Liabilities Approved by the Board of Governors, 1993—Continued mended immediate action by the Federal Reserve SUMMARY REPORT BY THE ATTORNEY GENERAL System to prevent the probable failure of the (6/11/93) target. The proposed transaction would not be significantly adverse to competition. Rio Blanco State Bank, Rangely, Colorado to BASIS FOR APPROVAL BY THE FEDERAL RESERVE merge with Bank of Rangely, Rangely, Colorado (7/7/93) SUMMARY REPORT BY THE ATTORNEY GENERAL The applicant has assets of $3.1 billion; the target (11/13/92) The proposed transaction would not be has assets of $62 million. The parties operate in significantly adverse to competition. the same market. The banking factors and considerations relating BASIS FOR APPROVAL BY THE FEDERAL RESERVE (5/26/93) to the convenience and needs of the community The applicant has assets of $9 million; the target are consistent with approval. has assets of $11 million. The parties operate in the same market. Union Bank and Trust Company, Bowling The banking factors and considerations relating Green, Virginia to acquire the assets and liabilito the convenience and needs of the community ties of a branch office of Dominion Bank, N.A., are consistent with approval. Roanoke, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL Centura Bank, Rocky Mount, North Carolina (6/11/93) to merge with Granite Savings Bank, SSB, The proposed transaction would not be signifi- Granite Falls, North Dakota cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (4/19/93) (7/7/93) The proposed transaction would not be signifi- The applicant has assets of $234 million; the target cantly adverse to competition. has assets of $12 million. The parties operate in BASIS FOR APPROVAL BY THE FEDERAL RESERVE the same market. (6/4/93) The banking factors and considerations relating The applicant has assets of $2.9 billion; the target to the convenience and needs of the community has assets of $100 million. The parties do not are consistent with approval. operate in the same market. The banking factors and considerations relating First Security Bank of Windsor, Windsor, Coloto the convenience and needs of the community rado to merge with Bank of Windsor, Windsor, are consistent with approval. Colorado F&M Bank-Winchester, Winchester, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL to merge with The Farmers and Merchants (5/7/93) National Bank of Hamilton, Hamilton, Virginia The proposed transaction would not be significantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (6/11/93) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (7/12/94) The applicant has assets of $23 million; cantly adverse to competition. the target has assets of $22 million. The parties operate in the same market. BASIS FOR APPROVAL BY THE FEDERAL RESERVE The banking factors and considerations relating (6/30/93) to the convenience and needs of the community The applicant has assets of $516 million; the target are consistent with approval. has assets of $189 million. The parties do not operate in the same market. Meridian Bank, Reading, Pennsylvania to The banking factors and considerations relating merge with Commonwealth Bank, Williamsport, to the convenience and needs of the community Pennsylvania are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL Centura Bank, Rocky Mount, North Carolina (6/4/93) to merge with First Savings Bank of Forest City, The proposed transaction would not be signifi- SSB, Forest City, North Carolina cantly adverse to competition. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 313 —-Continued BASIS FOR APPROVAL BY THE FEDERAL RESERVE Bank of Hampton Roads, Chesapeake, Virginia (7/26/93) to merge with New Atlantic Bank, NA, Norfolk, The applicant has assets of $12 billion; the target Virginia has assets of $2.1 billion. The parties do not SUMMARY REPORT BY THE ATTORNEY GENERAL operate in the same market. Request for report dispensed with as authorized The banking factors and considerations relating by the Bank Merger Act. tot he convenience and needs of the community are consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (8/12/93) The applicant has assets of $76 million; the target Sulphur Springs State Bank, Sulphur Springs, has assets of $16 million. The OCC has recom- Texas to merge with Wolfe City National Bank, mended immediate action by the Federal Reserve Wolfe City, Texas System to prevent the probable failure of the SUMMARY REPORT BY THE ATTORNEY GENERAL target. (6/30/93) The proposed transaction would not be significantly adverse to competition. Banco Popular de Puerto Rico, Hato Rey, Puerto Rico to acquire the assets and liabilities of BASIS FOR APPROVAL BY THE FEDERAL RESERVE five Virgin Islands branches of CoreStates (7/29/93) Bank, NA, Philadelphia, Pennsylvania The applicant has assets of $210 million; the target has assets of $32 million. The parties do not SUMMARY REPORT BY THE ATTORNEY GENERAL (7/13/93) 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 are consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (8/12/93) PremierBank & Trust, Elyria, Ohio to merge The applicant has assets of $9.7 billion; the targets with Crestline Savings and Loan, Crestline, have assets of $274.5 million. The parties operate Ohio 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 are consistent with approval. by the Bank Merger Act. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (7/30/93) United Bank of Philadelphia, Philadelphia, The applicant has assets of $489 million; the target Pennsylvania to acquire assets and liabilities of has assets of $19 million. The RTC has recom- three branches of Home Unity Federal Savmended immediate action by the Federal Reserve ings and Loan Association, Lafayette Hills, System to prevent the probable failure of the Pennsylvania target. SUMMARY REPORT BY THE ATTORNEY GENERAL Request for report dispensed with as authorized United Bank of Philadelphia, Philadelphia, by the Bank Merger Act. Pennsylvania to merge with Chase Federal BASIS FOR APPROVAL BY THE FEDERAL RESERVE Savings and Loan Association, Philadelphia, (8/31/93) Pennsylvania The applicant has assets of $94 million; the targets have assets of $35 million. The RTC has recom- SUMMARY REPORT BY THE ATTORNEY GENERAL Request for report dispensed with as authorized mended immediate action by the Federal Reserve by the Bank Merger Act. System to prevent the probable failure of the targets. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (7/30/93) The applicant has assets of $27 million; the target Ambassador Bank of the Commonwealth, has assets of $15 million. The RTC has recom- Allentown, Pennsylvania to acquire the assets mended immediate action by the Federal Reserve and liabilities of one branch of Lehigh Valley to prevent the probable failure of the target. Bank, Bethlehem, Pennsylvania Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

314 80th Annual Report, 1993 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1993—Continued SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (9/20/93) (9/10/93) The proposed transaction would not be signifi- The proposed transaction would not be significantly adverse to competition. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (9/15/93) (9/29/93) The applicant has assets of $75 million; the target The applicant has assets of $3.2 billion; the target has assets of $1 million. The parties operate in the has assets of $65 million. The parties operate in same market. the same market. The banking factors and considerations relating The banking factors and considerations relating to the convenience and needs of the community to the convenience and needs of the community are consistent with approval. are consistent with approval. Meridian Bank, Reading, Pennsylvania to Centura Bank, Rocky Mount, North Carolina merge with First National Bank of Bath, Bethle- to acquire the assets and liabilities of branches hem, Pennsylvania of First American Federal Savings Bank, SUMMARY REPORT BY THE ATTORNEY GENERAL Greensboro, North Carolina (8/8/93) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- Request for report dispensed with as authorized cantly adverse to competition. by the Bank Merger Act. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (9/21/93) (10/8/93) The applicant has assets of $12.5 billion; the target The applicant has assets of $3.4 billion; the targets has assets of $126 million. The parties operate in have assets of $303 million. The RTC has recomthe same market. mended immediate action by the Federal Reserve The banking factors and considerations relating System to prevent the probable failure of the to the convenience and needs of the community targets. are consistent with approval. Mid-South Bank and Trust Company, Sanford, Triangle Bank and Trust Company, Raleigh, North Carolina to acquire the assets and liabili- North Carolina to acquire the assets and liabilities of branches of First American Federal ties of New East Banks of Greenville, New Bern, Savings Bank, Greensboro, North Carolina Goldsboro, Fayetteville, and Elizabeth City, North Carolina SUMMARY REPORT BY THE ATTORNEY GENERAL Request for report dispensed with as authorized by SUMMARY REPORT BY THE ATTORNEY GENERAL the Bank Merger Act. (9/10/93) The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (10/8/93) The applicant has assets of $207 billion; the tar- BASIS FOR APPROVAL BY THE FEDERAL RESERVE gets have assets of $11 million. The RTC has (9/27/93) recommended immediate action by the Federal The applicant has assets of $161 million; the tar- Reserve System to prevent the probable failure of gets have assets of $28 million, $16 million, the target. $28 million, $43 million, and $16 million, respectively. The parties do not operate in the same market. Banco Popular de Puerto Rico, Hato Rey, The banking factors and considerations relating Puerto Rico to acquire the assets and liabilities of to the convenience and needs of the community the Southern Boulevard branch of Emigrant are consistent with approval. Savings Bank, Bronx, New York SUMMARY REPORT BY THE ATTORNEY GENERAL Centura Bank, Rocky Mount, North Carolina (9/28/93) to acquire the assets and liabilities of Canton The proposed transaction would not be signifi- Savings Bank, SSB, Canton, North Carolina cantly adverse to competition. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 315 16.-—Continued BASIS FOR APPROVAL BY THE FEDERAL RESERVE has assets of $378 million. The parties operate in (10/15/93) the same market. The applicant has assets of $10 billion; the target The banking factors and considerations relating has assets of $50 million. The parties operate in to the convenience and needs of the community the same market. are consistent with approval. The banking factors and considerations relating to the convenience and needs of the community Fayette Bank and Trust Company, Uniontown, are consistent with approval. Pennsylvania to merge with FirstSouth Savings Bank, Pittsburgh, Pennsylvania FCNB Bank, Frederick, Maryland to acquire SUMMARY REPORT BY THE ATTORNEY GENERAL the assets and liabilities of the Eldersburg, Mary- (10/1/93) land branch of The Columbia Bank, Columbia, The proposed transaction would not be signifi- Maryland cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (10/1/93) (11/1/93) The proposed transaction would not be signifi- The applicant has assets of $280 million; the target cantly adverse to competition. has assets of $161 million. The parties operate in BASIS FOR APPROVAL BY THE FEDERAL RESERVE the same market. (10/26/93) The banking factors and considerations relating The applicant has assets of $380 million; the target to the convenience and needs of the community has assets of $11 million. The parties operate in are consistent with approval. the same market. The banking factors and considerations relating Southlrust Bank of West Florida, St. Petersto the convenience and needs of the community burg, Florida to merge with Ameribank, Clearare consistent with approval. water, Florida, and First National Bank of the South, Wesley Chapel, Florida Heartland Bank, Croton, Ohio to acquire the SUMMARY REPORT BY THE ATTORNEY GENERAL assets and liabilities of one branch office of Request for report dispensed with as authorized Century Bank, Upper Arlington, Ohio by the Bank Merger Act. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (10/18/93) (11/8/93) The proposed transaction would not be signifi- The applicant has assets of $540 million; the tarcantly adverse to competition. gets have assets of $167 million. The FDIC has BASIS FOR APPROVAL BY THE FEDERAL RESERVE recommended immediate action by the Federal (10/28/93) Reserve to prevent the probable failure of the The applicant has assets of $87 million; the target targets. has assets of $23 million. The parties operate in the same market. First Interstate Bank of California, Los Ange- The banking factors and considerations relating les, California to merge with California Repubto the convenience and needs of the community lic Bank, Bakersfield, California are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (9/28/93) Fifth Third Bank, Cincinnati, Ohio to merge The proposed transaction would not be signifiwith First Financial Savings Association, FA, cantly adverse to competition. Cincinnati, Ohio BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (11/9/93) (10/18/93) The applicant has assets of $19 billion; the target The proposed transaction would not be signifihas assets of $569 million. The parties operate in cantly adverse to competition. the same market. BASIS FOR APPROVAL BY THE FEDERAL RESERVE The banking factors and considerations relating (11/1/93) to the convenience and needs of the community The applicant has assets of $6.6 billion; the target are consistent with approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

316 80th Annual Report, 1993 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1993—Continued Centura Bank, Rocky Mount, North Carolina SUMMARY REPORT BY THE ATTORNEY GENERAL to merge with the Robeson Interim Bank, (10/12/93) Lumberton, North Carolina, the successor by The proposed transaction would not be signifimerger and conversion from Robeson Savings cantly adverse to competition. Bank, Inc., SSB BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (11/30/93) (11/5/93) The applicant has assets of $124 million; the target The proposed transaction would not be signifi- has assets of $29 million. The parties do not cantly adverse to competition. operate in the same market. The banking factors and considerations relating BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11/10/93) to the convenience and needs of the community The applicant has assets of $3.2 billion; the target are consistent with approval. has assets of $99 million. The parties operate in the same market. First Interstate Bank of California, Los Ange- The banking factors and considerations relating les, California to acquire assets and liabilities to the convenience and needs of the community of four branches of HomeFed Bank, F.A., are consistent with approval. San Diego, California SUMMARY REPORT BY THE ATTORNEY GENERAL Centura Bank, Rocky Mount, North Carolina (10/28/93) to merge with First Charlotte Bank and IVust The proposed transaction would not be signifi- Company, Charlotte, North Carolina cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (9/20/93) (12/2/93) The proposed transaction would not be signifi- The applicant has assets of $20 billion; the targets cantly adverse to competition. have assets of $248 million. The parties do not BASIS FOR APPROVAL BY THE FEDERAL RESERVE operate in the same market. (11/12/93) The banking factors and considerations relating The applicant has assets of $3 billion; the target to the convenience and needs of the community has assets of $168 million. The parties do not are consistent with approval. operate in the same market. The banking factors and considerations relating First Interstate Bank of California, Los Angeto the convenience and needs of the community les, California to merge with First State Bank of are consistent with approval. the Oaks, Thousand Oaks, California Omnibank Arvada, Arvada, Colorado to merge SUMMARY REPORT BY THE ATTORNEY GENERAL (9/20/93) with Denver West Bank and Trust, Golden, Col- The proposed transaction would not be signifiorado cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (10/12/93) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (12/13/93) cantly adverse to competition. The applicant has assets of $20 billion; the target has assets of $139 million. The parties do not BASIS FOR APPROVAL BY THE FEDERAL RESERVE operate in the same market. (11/19/93) The banking factors and considerations relating The applicant has assets of $31 million; the target to the convenience and needs of the community has assets of $16 million. The parties operate in are consistent with approval. the same market. The banking factors and considerations relating West One Bank, Idaho, Boise, Idaho to merge to the convenience and needs of the community with Idaho State Bank, Glens Ferry, Idaho are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL First United Bank, Boca Raton, Florida to (8/8/93) merge with New River Bank, Oakland Park, The proposed transaction would not be signifi- Florida cantly adverse to competition. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 317 (6.--Continue BASIS FOR APPROVAL BY THE FEDERAL RESERVE The banking factors and considerations relating (12/20/93) to the convenience and needs of the community The applicant has assets of $4 billion; the target are consistent with approval. has assets of $46 million. The parties operate in the same market. Meridian Bank, Reading, Pennsylvania to The banking factors and considerations relating merge with The Grange National Bank of Susto the convenience and needs of the community quehanna County, New Milford, Pennsylvania are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL Crestar Bank, Richmond, Virginia to merge with (11/26/93) Virginia Federal Savings Association, Rich- The proposed transaction would not be signifimond, Virginia, and Providence Savings and cantly adverse to competition. Loan Association, Vienna, Virginia BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (12/24/93) (11/5/93) The applicant has assets of $13 billion; the target The proposed transaction would not be signifi- has assets of $28 million. The parties operate in cantly adverse to competition. the same market. The banking factors and considerations relating BASIS FOR APPROVAL BY THE FEDERAL RESERVE to the convenience and needs of the community (12/22/93) are consistent with approval. The applicant has assets of $11 billion; the targets have assets of $1.2 billion. The parties operate in the same market. Mergers Approved Involving Wholly Owned The banking factors and considerations relating Subsidiaries of the Same Bank Holding to the convenience and needs of the community Company are consistent with approval. The following transactions involve banks that are subsidiaries of the same bank holding company. In Fleet Bank of New York, Albany, New York each case, the summary report by the Attorney to acquire the assets and liabilities of twenty- General indicates that the transaction would not nine branches of Chemical Bank, throughout have a significantly adverse effect on competition New York because the proposed merger is essentially a cor- SUMMARY REPORT BY THE ATTORNEY GENERAL porate reorganization. The Board of Governors, (10/12/93) 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 (12/23/93) and managerial resources and prospects of the The applicant has assets of $10 billion; the target banks concerned, as well as the convenience and has assets of $786 million. The parties operate in needs of the community to be served were consisthe same market. tent with approval. Assets Date of Institution' (millions approval of dollars) 1st Source Bank, South Bend, Indiana 1,310 1/4/93 Merger 1st Source Bank of Starke County, Hamlet, Indiana 44 First Florida Bank, Tampa, Florida 1,900 1/13/93 Merger Barnett Bank of Tampa, NA, Tampa, Florida 1,500 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

318 80th Annual Report, 1993 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1993—Continued Assets Date of Institution' (millions approval of dollars) Sun Bank/Gulf Coast, Sarasota, Florida 304 1/20/93 Merger Sun Bank and Trust/Port Charlotte, Port Charlotte, Florida .... 351 First National Bank of Venice, Venice, Florida 372 The Jackson State Bank, Jackson, Wyoming 185 1/25/93 Merger The State Bank, West Jackson, Wyoming First of America Security, Southgate, Michigan (formerly Security Bank and Trust Company) 1,700 2/17/93 Merger Security Bank of Monroe, Monroe, Michigan 267 Independent Banks of Arizona, Phoenix, Arizona 0 2/17/93 Merger Caliber Bank, Phoenix, Arizona 1,600 The Bank of Woodward, Woodward, Oklahoma 119 4/9/93 Merger Cimmarron Bank, Waukomis, Oklahoma 17 Union Colony Bank, Greeley, Colorado 142 4/30/93 Merger Union Colony Bank of Loveland, NA, Loveland, Colorado .... 11 Chemical Bank, New York, New York 109,000 5/17/93 Merger Texas Commerce Banks, Newark, Delaware 63 Meridian Bank, Reading, Pennsylvania 1,060 5/25/93 Merger The First National Bank of Pike County, Milford, Pennsylvania 155 Texas Bank, Weatherford, Texas 231 6/11/93 Merger Texas Bank, Grapevine, Texas 35 Bank of Montana Great Falls, Great Falls, Montana 439 6/18/93 Merger Montana Bank, Billings, Montana 319 Sunbank of Tampa Bay, Tampa, Florida 1,701 6/30/93 Merger The Hillsboro Sun Bank, Plant City, Florida 190 NBD Bank, Elkhart, Indiana 694 6/30/93 Merger NBD Bank, NA, Gary, Indiana 2,271 Bank of Colorado-Western Slope, Grand Junction, Colorado .. 57 6/30/93 Merger Bank of Colorado, Glenwood Springs, Colorado 57 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 319 16.—Continued Assets Date of Institution' (millions approval of dollars) Wesbanco Bank Wheeling, Wheeling, West Virginia . 379 8/26/93 Merger Wesbanco Bank Sisterville, Sisterville, West Virginia 23 Vectra Bank, Denver, Colorado 127 9/3/93 Merger Vectra Bank of Denver, Englewood, Colorado 54 Barnett Bank of West Florida, Pensacola, Florida 389 10/25/93 Merger The Citizens and Peoples National Bank of Pensacola, Pensacola, Florida 415 Jefferson Bank of Florida, Miami, Florida 234 10/28/93 Merger Jefferson National Bank at Sunny Isles, Miami Beach, Florida 111 BancFirst, Oklahoma City, Oklahoma 738 11/5/93 Merger Security Bank, Coweta, Oklahoma 23 United Community Bank, Weatherford, Oklahoma 35 First American Bank, Stratford, Oklahoma 15 Security Bank, Coweta, Oklahoma 23 Compass Bank, Birmingham, Alabama 5,100 11/29/93 Merger Compass Bank of Calhoun County, Anniston, Alabama 126 Nevada Community Bank, Las Vegas, Nevada ... 52 12/2/93 Merger Continental National Bank, Las Vegas, Nevada ... 211 First Interstate Bank of California, Los Angeles, California . 2,010 12/13/93 Merger First State Bank of the Oaks, Thousand Oaks, California ... 139 Arkansas Bank and Trust Company, Hot Springs, Arkansas .. 394 12/14/93 Merger Hot Springs Village, Arkansas, branch of Benton State Bank, Benton, Arkansas 201 Central Bank of Oklahoma City, Oklahoma City, Oklahoma ., 281 12/17/93 Merger Friendly Bank of Oklahoma City, Oklahoma City, Oklahoma , 250 1. Each proposed transaction was to be effected include the acquisition of only certain assets and liabiliunder the charter of the first named bank. The entries are ties of the affiliated bank, in chronological order of approval. Some transactions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

320 80th Annual Report, 1993 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1993—Continued Mergers Approved Involving a Nonoperating the surviving bank by the holding company, the Institution with an Existing Bank merger would have no effect on competition. The Board of Governors, the Federal Reserve Bank, or The following transactions have no significant the Secretary of the Board, whichever approved effect on competition; they merely facilitate the the application, determined that the proposal acquisition of the voting shares of a bank (or would, in itself, have no adverse competitive banks) by a holding company. In such cases, the effects and that the financial factors and considersummary report by the Attorney General indicates ations relating to the convenience and needs of the that the transaction will merely combine an existcommunity were consistent with approval. ing bank with a nonoperating institution; in conse quence, and without regard to the acquisition of Assets Date of Institution' (millions of dollars)2 approval Barnett Bank of Hillsborough County, Tampa, Florida 1/13/93 Merger First Florida Bank, Tampa, Florida 1,900 UniSouth Interim Bank, Columbus, Mississippi 2/5/93 Merger UniSouth Banking Company, Columbus, Mississippi 168 Exchange Interim Bank, Luckey, Ohio 3/26/93 Merger The Exchange Bank, Luckey, Ohio 67 New Bank, Morristown, Tennessee 7/8/93 Merger United Southern Bank of Morristown, Morristown, Tennessee 42 WTC Interim Bank, Wilmington, Pennsylvania 8/13/93 Merger Freedom Valley Bank, West Chester, Pennsylvania 111 FB&T Bank, Fairfax, Virginia 8/31/93 Merger Fairfax Bank and Trust Company, Fairfax, Virginia 141 1. Each proposed transaction was to be effected under 2. Where no assets are listed, the bank is newly orgathe charter of the first-named bank. The entries are in nized and not in operation, chronological order of approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Directories and Meetings Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

322 80th Annual Report, 1993 Board of Governors of the Federal Reserve System December 31,1993 Members Term expires ALAN GREENSPAN of New York, Chairmanl January 31, 2006 DAVID W. MULUNS, JR., of Arkansas, Vice Chairmanl 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 Irene S. McNulty, Assistant Director Lynn Fox, Special Assistant to the Board Winthrop P. Hambley, Special Assistant DIVISION OF BANKING SUPERVISION to the Board AND REGULATION Diane E. Werneke, Special Assistant Richard Spillenkothen, Director to the Board Stephen C. Schemering, Deputy Director Don E. Kline, Associate Director LEGAL DIVISION William A. Ryback, Associate Director J. Virgil Mattingly, Jr., General Counsel Frederick M. Struble, Associate Director Scott G. Alvarez, Associate General Herbert A. Biern, Deputy Associate Counsel Director Richard M. Ashton, Associate Roger T. Cole, Deputy Associate Director General Counsel James I. Garner, Deputy Associate Director Oliver Ireland, Associate General Howard Amer, Assistant Director Counsel Gerald A. Edwards, Jr., Assistant Director Kathleen M. O'Day, Associate General James D. Goetzinger, Assistant Director Counsel Stephen M. Hoffman, Jr., Assistant OFFICE OF THE SECRETARY Director William W. Wiles, Secretary Laura M. Homer, Assistant Director Jennifer J. Johnson, Associate Secretary James V. Houpt, Jr., Assistant Director Barbara R. Lowrey, Associate Secretary Jack P. Jennings, Assistant Director Michael G. Martinson, Assistant Director Rhoger H Pugh, Assistant Director Sidney M. Sussan, Assistant Director Molly S. Wassom, Assistant Director 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 323 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, Associate Director Jack Dennis, Jr., Assistant Director Richard D. Porter, Deputy Associate Earl G. Hamilton, Assistant Director Director Jeffrey C. Marquardt, Assistant Director Normand R.V. Bernard, Special Assistant John H. Parrish, Assistant Director to the Board Louise L. Roseman, Assistant Director Florence M. Young, Assistant Director OFFICE OF STAFF DIRECTOR FOR MANAGEMENT S. David Frost, Staff Director OFFICE OF THE INSPECTOR GENERAL Brent L. Bowen, Inspector General William C. Schneider, Jr., Project Director, Donald L. Robinson, Assistant Inspector National Information Center General Portia W. Thompson, Equal Employment Opportunity Programs Officer Barry R. Snyder, Assistant Inspector Digitized for FRASER General http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

324 80th Annual Report, 1993 Federal Open Market Committee December 31,1993 Members ALAN GREENSPAN, Chairman, Board of Governors WILLIAM J. McDoNOUGH, Vice Chairman, President, Federal Reserve Bank of New York WAYNE D. ANGELL, Board of Governors EDWARD G. BOEHNE, President, Federal Reserve Bank of Philadelphia SILAS KEEHN, President, Federal Reserve Bank of Chicago EDWARD W. KELLEY, JR., Board of Governors JOHN P. LAWARE, Board of Governors LAWRENCE B. LINDSEY, Board of Governors ROBERT D. MCTEER, JR., President, Federal Reserve Bank of Dallas DAVID W. MULLINS, JR., Board of Governors SUSAN M. PHILLIPS, Board of Governors GARY H. STERN, President, Federal Reserve Bank of Minneapolis Alternate Members J. ALFRED BROADDUS, JR., President, Federal Reserve Bank of Richmond ROBERT P. FORRESTAL, President, Federal Reserve Bank of Atlanta JERRY L. JORDAN, President, Federal Reserve Bank of Cleveland JAMES H. OLTMAN, First Vice President, Federal Reserve Bank of New York ROBERT T. PARRY, President, Federal Reserve Bank of San Francisco Officers DONALD L. KOHN, RICHARD W. LANG, Secretary and Economist Associate Economist NORMAND R.V. BERNARD, DAVID E. LINDSEY, Deputy Secretary Associate Economist JOSEPH R. COYNE, LARRY J. PROMISEL, Assistant Secretary Associate Economist GARY P. GILLUM, ARTHUR J. ROLNICK, Assistant Secretary Associate Economist J. VIRGIL MATTINGLY, JR., HARVEY ROSENBLUM, General Counsel Associate Economist ERNEST T. PATRIKIS, KARL A. SCHELD, Deputy General Counsel Associate Economist MICHAEL J. PRELL, CHARLES J. SIEGMAN, Economist Associate Economist EDWIN M. TRUMAN, THOMAS D. SIMPSON, Economist Associate Economist RICHARD G. DAVIS, LAWRENCE SLIFMAN, Associate Economist Associate Economist JOAN E. LOVETT, Manager for Domestic Operations, System Open Market Account PETER R. FISHER, Manager for Foreign Operations, System Open Market Account During 1993 the Federal Open Market Com- the Federal Open Market Committee Meetmittee held eight meetings (see Minutes of ings in this REPORT.) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 325 Federal Advisory Council December 31,1993 District 1—MARSHALL N. CARTER, Chairman and Chief Executive Officer, State Street Bank and Trust Company, Boston, Massachusetts District 2—CHARLES S. SANFORD, JR., Chairman, Bankers Trust Company, New York, New York District 3—ANTHONY P. TERRACCIANO, Chairman, President, and Chief Executive Officer, First Fidelity Bancorporation, Newark, New Jersey District 4—JOHN B. MCCOY, JR., Chairman, President, and Chief Executive Officer, Bane One Corporation, Columbus, Ohio District 5—EDWARD E. CRUTCHFIELD, JR., 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 and Chief Executive Officer, Comerica Incorporated, Detroit, Michigan District 8—ANDREW B. CRAIG, III, Chairman, President, and Chief Executive Officer, Boatmen's Bancshares, Inc., St. Louis, Missouri 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—CHARLES R. HRDLICKA, Chairman and Chief Executive Officer, Victoria Bank and Trust, Victoria, Texas District 12—RICHARD M. ROSENBERG, Chairman and Chief Executive Officer, Bank of America, San Francisco, California Officers E. B. ROBINSON, JR., President JOHN B. MCCOY, JR., Vice President HERBERT V. PROCHNOW, Secretary WILLIAM J. KORSVIK, Associate Secretary Directors EUGENE A. MILLER JOHN F. GRUNDHOFER RICHARD M. ROSENBERG The Federal Advisory Council met on Feb- from each of the twelve Federal Reserve ruary 4-5, May 6-7, September 9-10, and Districts, is required by law to meet in Wash- November 4—5, 1993. The Board of Gover- ington at least four times each year and is nors met with the council on February 5, authorized by the Federal Reserve Act to May 7, September 10, and November 5, consult with, and advise, the Board on all 1993. 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

326 80th Annual Report, 1993 Consumer Advisory Council December 31,1993 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 D. DOUGLAS BLANKE, Director of Consumer Policy, Office of the Attorney General, St. Paul, Minnesota GENEVIEVE BROOKS, Deputy Borough President, Office of the Bronx Borough President, Bronx, New York TOYE L. BROWN, Deputy Secretary of Transportation and Construction, Intermodal Transportation Policy, Boston, Massachusetts CATHY CLOUD, Enforcement Program Director, National Fair Housing Alliance, Washington, D.C. MICHAEL D. EDWARDS, President, Prairie Security Bank, Yelm, Washington MICHAEL FERRY, Staff Attorney, Consumer Unit, Legal Services of Eastern Missouri, Inc., St. Louis, Missouri NORMA L. FREIBERG, Executive Director, New Orleans Neighborhood Development Foundation, New Orleans, Louisiana LORI GAY, Executive Director, Los Angeles Neighborhood Housing Services, Los Angeles, California DONALD A. GLAS, President, First State Federal Savings and Loan Association, Hutchinson, Minnesota BONNIE GUITON, Dean, Mclntire School of Commerce, University of Virginia, Charlottesville, Virginia 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 RONALD A. HOMER, Chairman and Chief Executive Officer, Boston Bank of Commerce, Boston, Massachusetts THOMAS L. HOUSTON, Executive Director, The Dallas Black Chamber of Commerce, Dallas, Texas HENRY JARAMILLO, JR., President, Ranchers State Bank, Belen, New Mexico EDMUND MIERZWINSKI, Consumer Advocate, U.S. Public Interest Research Group, Washington, D.C. JOHN V. SKINNER, President and Chief Executive Officer, Jewelers Financial Services, Inc., Irving, 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 GRACE W. WEINSTEIN, Financial Writer and Consultant, Englewood, New Jersey http://fraser.stlouisfed.org/ Federal RJ R AeO MsCBeE EorS Rnv TneL e B. Oc at W .in c E Zku S D toT Ef, NSP Etr.K eL, s oi S due eisn n i t o , r J i P m r o W gr e a s m t F O in ff a i n c c e i r a , l A G n r n o ie u p E , . I n C c a . s , e T y i j F er o a u s n , d N at e i w on , M G ex re ic e o nwich,

Directories and Meetings 327 Consumer Advisory Council—Continued Officers DENNY D. DUMLER, Chairman JEAN POGGE, Vice Chairman Senior Vice President, Colorado Vice President, Development National Bank, Denver, Deposits, South Shore Bank, Colorado Chicago, Illinois The Consumer Advisory Council met with sentatives of consumer and community intermembers of the Board of Governors on ests. It was established pursuant to the 1976 March 25, June 17, and October 28, 1993. amendments to the Equal Credit Opportunity The council is composed of academics, state Act to advise the Board on consumer finanand local government officials, representa- cial services, tives of the financial industry, and repre- Thrift Institutions Advisory Council December 31,1993 Members DANIEL C. ARNOLD, Director, Farm & Home Financial Corporation, Houston, Texas WILLIAM A. COOPER, Chairman and Chief Executive Officer, TCF Bank Savings F.S.B., Minneapolis, Minnesota BEATRICE D'AGOSTINO, Chairman, President, and Chief Executive Officer, New Jersey Savings Bank, Somerville, New Jersey PAUL L. ECKERT, Chairman and President, Citizens Federal Savings Bank, Davenport, Iowa GEORGE R. GLIGOREA, Chairman, President, and Chief Executive Officer, First Federal Savings Bank, Sheridan, Wyoming THOMAS J. HUGHES, President, Navy Federal Credit Union, Merrifield, Virginia KERRY KILLINGER, Chairman, President, and Chief Executive Officer, Washington Mutual Savings Bank, Seattle, Washington CHARLES JOHN KOCH, President and Chief Executive Officer, Charter One Bank, F.S.B., Cleveland, Ohio ROBERT MCCARTER, Chairman and Chief Executive Officer, New Bedford Institution for Savings, New Bedford, Massachusetts NICHOLAS W. MITCHELL, JR., President and Chief Executive Officer, Piedmont Federal Savings and Loan Association, Winston-Salem, North Carolina STEPHEN W. PROUGH, President and Chief Executive Officer, Western Financial Savings Bank, Irvine, California THOMAS R. RICKETTS, Chairman, President, and Chief Executive Officer, Standard Federal Bank, Troy, Michigan DANIEL C. ARNOLD, President BEATRICE D'AGOSTINO, 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, nors on March 5, May 14, September 24, and the Board on issues pertaining to the thrift December 10, 1993. The council, which industry and on various other matters within is composed of representatives from credit the Board's jurisdiction. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

328 80th Annual Report, 1993 Officers of Federal Reserve Banks, Branches, and Offices December 31,19931 BANK, Chairman2 President Vice President Branch, or facility Deputy Chairman First Vice President in charge of Branch BOSTON3 Jerome H. Grossman Richard F. Syron Warren B. Rudman Cathy E. Minehan NEW YORK3 Ellen V. Futter William J. McDonough Maurice R. James H. Oltman Greenberg Buffalo Joseph J. Castiglia James 0. Aston PHILADELPHIA Jane G. Pepper Edward G. Boehne James M. Mead William H. Stone, Jr. CLEVELAND3 A. William Reynolds Jerry L. Jordan G. Watts Sandra Pianalto Humphrey, Jr. Cincinnati Marvin Rosenberg Charles A. Cerino4 Pittsburgh Robert P. Bozzone Harold J. Swart4 RICHMOND3 Anne Marie J. Alfred Broaddus, Jr. Whittemore Jimmie R. Henry J. Faison Monhollon Baltimore Rebecca Hahn Ronald B. Duncan4 Windsor Charlotte Anne M. Allen Walter A. Varvel4 Culpeper John G. Stoides4 ATLANTA Edwin A. Huston Robert P. Forrestal Donald E. Nelson4 Leo Benatar Jack Guynn Birmingham Donald E. Boomershine Fred R. Herr4 Jacksonville Joan D. Ruffier James D. Hawkins4 Miami R. Kirk Landon James T. Curry III Nashville James R. Tuerff Melvyn K. Purcell New Orleans Lucimarian Roberts Robert J. Musso CHICAGO3 Richard G. Cline Silas Keehn Robert M. Healey William C. Conrad Detroit J Michael Moore Roby L. Sloan4 ST. LOUIS Robert H. Quenon Thomas C. Melzer Janet McAfee James R. Bowen Weakley Little Rock Robert D. Nabholz, Jr. Karl W. Ashman Louisville John A. Williams Howard Wells Memphis Seymour B Johnson John P Baumgartner MINNEAPOLIS Delbert W. Johnson Gary H. Stern Gerald A. Colleen K. Strand Rauenhorst Helena James E. Jenks John D. Johnson Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 329 BANK, Chairman2 President Vice President Deputy Chairman First Vice President in charge of Branch Branch, ox facility Burton A. Dole, Jr. Thomas M. Hoenig KANSAS CITY Herman Cain Henry R. Czerwinski Barbara B. Grogan Kent M. Scott Denver Ernest L. Holloway David J. France Oklahoma City Sheila Griffin Harold L. Shewmaker Omaha Leo E. Linbeck, Jr. Robert D. McTeer, Jr. Cece Smith Tony J. Salvaggio DALLAS W. Thomas Beard III Sammie C. Clay Judy Ley Allen Robert Smith III4 El Paso Erich Wendl Thomas H. Robertson Houston James A. Vohs Robert T. Parry San Antonio Judith M. Runstad Patrick K. Barron Donald G. Phelps John F. Moore4 SAN FRANCISCO William A. Hilliard E. Ronald Liggett4 Gary G. Michael Andrea P. Wolcott Los Angeles George F. Russell, Jr. Gordon R. G. Portland Werkema4 Salt Lake City Se1a.t tlAe 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 Robert T. Parry, President of the Federal Reserve Bank of San Francisco, served as The Chairmen of the Federal Reserve Banks Chairman of the Conference in 1993, and are organized into the Conference of Chair- Richard F. Syron, President of the Federal men, which meets to consider matters of Reserve Bank of Boston, served as its Vice common interest and to consult with, and Chairman. Robert L. Feinberg, of the Fedadvise, the Board of Governors. Such meet- eral Reserve Bank of San Francisco, served ings, attended also by the Deputy Chairmen, as its Secretary, and Rena DeSisto, of the were held in Washington on June 2 and 3, Federal Reserve Bank of Boston, served as and on December 1 and 2, 1993. its Assistant Secretary. The members of the Executive Committee of the Conference of Chairmen during 1993 were Delbert W. Johnson, Chairman; Conference of First Ellen V. Futter, Vice Chairman; and Vice Presidents Burton A. Dole, Jr., member. On December 2, 1993, the Conference The Conference of First Vice Presidents of elected its Executive Committee for 1994, the Federal Reserve Banks was organized in naming Burton A. Dole, Jr. as Chairman, 1969 to meet periodically for the consider- Jerome H. Grossman as Vice Chairman, and ation of operations and other matters. James A. Vohs, as the third member. William H. Stone, First Vice President of the Federal Reserve Bank of Philadelphia, Conference of Presidents served as Chairman of the Conference for 1993, and James H. Oltman, First Vice The presidents of the Federal Reserve Banks President of the Federal Reserve Bank of are organized into the Conference of Presi- New York, served as its Vice Chairman. dents, which meets periodically to consider Milissa M. Tadeo, of the Federal Reserve matters of common interest and to consult Bank of Philadelphia, served as its Secretary, with, and advise, the Board of Governors. and Ethan S. Harris of the Federal Reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

330 80th Annual Report, 1993 Bank of New York, served as its Assistant prescribed by the parent Federal Reserve Secretary. Bank. On October 5, 1993, the Conference For the name of the chairman and deputy elected James H. Oltman, First Vice Presi- chairman of the board of directors of each dent of the Federal Reserve Bank of New Reserve Bank and of the chairman of each York, as its Chairman for 1994, and Tony J. Branch, see the preceding table, "Officers Salvaggio, First Vice President of the Fed- of Federal Reserve Banks, Branches, and eral Reserve Bank of Dallas, as its Vice Offices." Chairman. Directors 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 board of directors and Federal Reserve Agent of each District Bank and appoints another Class C director as deputy chairman. Federal Reserve Branches have either five or seven directors, a majority of whom are appointed by the parent Federal Reserve Bank; the others are appointed by the Board of Governors. One of the directors appointed by the Board is designated annually as chairman of the board of that Branch in a manner Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 331 Term expires Dec. 31 DISTRICT 1—BOSTON Class A David A. Page President and Chief Executive Officer, 1993 Ocean National Bank of Kennebunk, Kennebunk, Maine Robert M. Silva President, Chief Executive Officer, and Director, 1994 The Citizens National Bank, Putnam, Connecticut Ira Stepanian Chairman and Chief Executive Officer, 1995 The Bank of Boston Corporation, Boston, Massachusetts Class B Stephen R. Levy Chairman and Chief Executive Officer, 1993 Bolt Beranek and Newman, Inc., Cambridge, Massachusetts Edward H. Ladd Chairman and Chief Executive Officer, Standish, 1994 Ayer and Wood, Inc., Boston, Massachusetts Joan T. Bok Chairman, New England Electric System, 1995 Westborough, Massachusetts Class C John E. Flynn Executive Director, The Quality Connection, 1993 East Dennis, Massachusetts Jerome H. Grossman Chairman and Chief Executive Officer, 1994 New England Medical Center, Inc., Boston, Massachusetts Warren B. Rudman, Esq Sheehan, Phinney, Bass, and Green, 1995 Manchester, New Hampshire DISTRICT 2—NEW YORK Class A Barbara Harding Chairman and Chief Executive Officer, 1993 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 Robert G. Wilmers Chairman, President, and Chief Executive 1995 Officer, Manufacturers and Traders Trust Company, Buffalo, New York Class B Rand V. Araskog Chairman, President, and Chief Executive Officer, 1993 ITT Corporation, New York, New York Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

332 80th Annual Report, 1993 Term expires Dec. 31 DISTRICT 2, Class B— Continued Robert E. Allen Chairman and Chief Executive Officer, AT&T, 1994 Basking Ridge, New Jersey William C. Steere, Jr. Chairman and Chief Executive Officer, Pfizer, 1995 Inc., New York, New York Class C Ellen V. Futter President, American Museum of Natural 1993 History, New York, New York Maurice R. Greenberg Chairman and Chief Executive Officer, 1994 American International Group, Inc., New York, New York Herbert L. Washington Owner, HLW Fast Track, Inc., 1995 Rochester, New York BUFFALO BRANCH Appointed by the Federal Reserve Bank Susan A. McLaughlin General Credit Manager, Eastman Kodak 1993 Company, Rochester, New York Charles M. Mitschow Chairman, Western Region, Marine Midland 1994 Bank, N.A., Buffalo, New York Richard H. Popp Operating Partner, Southview Farm, 1994 Castile, New York George W. Hamlin IV President and Chief Executive Officer, The 1995 Canandaigua National Bank and Trust Company, Canandaigua, New York Appointed by the Board of Governors 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 F. C. Richardson President, Buffalo State College, 1995 Buffalo, New York DISTRICT 3—PHILADELPHIA Class A Gary F. Simmerman President and Chief Executive Officer, United 1993 Jersey Bank/South, N.A., Cherry Hill, New Jersey H. Bernard Lynch President and Chief Executive Officer, 1994 The First National Bank of Wyoming, Wyoming, Delaware Carl L. Campbell President and Chief Executive Officer, Keystone 1995 Financial, Inc., Harrisburg, Pennsylvania Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 333 Term expires Dec. 31 DISTRICT 3—Continued Class B J. Richard Jones President and Chief Executive Officer, 1993 Jackson-Cross Company, Philadelphia, Pennsylvania James A. Hagen Chairman, President, and Chief Executive 1994 Officer, Consolidated Rail Corporation (CONRAIL), Philadelphia, Pennsylvania David W. Huggins President and Chief Executive Officer, RMS 1995 Technologies, Inc., Marlton, New Jersey Class C 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 James M. Mead President and Chief Executive Officer, Capital 1995 Blue Cross, Harrisburg, Pennsylvania DISTRICT 4—CLEVELAND Class A Alfred C. Leist Chairman, President, and Chief Executive 1993 Officer, Apple Creek Banking Company, Apple Creek, Ohio William T. McConnell Chairman and Chief Executive Officer, The Park 1994 National Bank, Newark, Ohio Edward B. Brandon Chairman and Chief Executive Officer, National 1995 City Corporation, Cleveland, Ohio Class B Verna K. Gibson President, Outlook Consulting International, Inc., 1993 Columbus, Ohio Douglas E. Olesen President and Chief Executive Officer, Battelle 1994 Memorial Institute, Columbus, Ohio I. N. Rendall Harper, Jr. President and Chief Executive Officer, American 1995 Micrographics Company, Inc., Monroeville, Pennsylvania Class C John R. Hodges Retired President, Ohio AFL-CIO, Columbus, Ohio 1993 G. Watts Humphrey, Jr President, GWH Holdings, Inc., Pittsburgh, 1994 Pennsylvania A. William Reynolds Chairman and Chief Executive Officer, 1995 GenCorp, Fairlawn, Ohio Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

334 80th Annual Report, 1993 Term expires Dec. 31 DISTRICT A—Continued CINCINNATI BRANCH Appointed by the Federal Reserve Bank Jack W. Buchanan President, Sphar & Company, Inc., Winchester, 1993 Kentucky John N. Taylor, Jr. Chairman and Chief Executive Officer, 1993 Kurz-Kasch, Inc., Dayton, Ohio Marvin J. Stammen President and Chief Executive Officer, Second 1994 National Bank, Greenville, Ohio Jerry W. Carey President and Chief Executive Officer, Union 1995 National Bank and Trust Company, Barbourville, Kentucky Appointed by the Board of Governors Marvin Rosenberg Partner, Towne Properties, Ltd., Cincinnati, Ohio 1993 Raymond A. Bradbury Chairman, Martin County Coal Corporation, 1994 Prestonburg, Kentucky Eleanor Hicks Hicks & Kinley, International Access 1995 Marketing, Cincinnati, Ohio PITTSBURGH BRANCH Appointed by the Federal Reserve Bank George A. Davidson, Jr. Chairman and Chief Executive Officer, 1993 Consolidated Natural Gas Company, Pittsburgh, Pennsylvania Randall L. C. Russell President and Chief Executive Officer, Ranbar 1993 Technology, Inc., Glenshaw, Pennsylvania David S. Dahlmann President and Chief Executive Officer, 1994 Southwest National Corporation, Greensburg, Pennsylvania Frank V. Cahouet Chairman, President, and Chief Executive Officer, 1995 Mellon Bank, N.A., Pittsburgh, Pennsylvania Appointed by the Board of Governors Sandra L. Phillips Executive Director, Pittsburgh Partnership for 1993 Neighborhood Development, Pittsburgh, Pennsylvania Jack B. Piatt Chairman and President, Millcraft Industries, 1994 Inc., Washington, Pennsylvania Robert P. Bozzone President and Chief Executive Officer, 1995 Allegheny Ludlum Corporation, Pittsburgh, Pennsylvania Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 335 Term expires Dec. 31 DISTRICT 5—RICHMOND Class A James G. Lindley Chairman Emeritus, South Carolina National 1993 Corporation, Columbia, South Carolina Webb C. Hayes IV Chairman, Palmer National Bancorp, Inc. and 1994 President, The Palmer National Bank, Washington, D.C. Charles E. Weller President, Elkridge National Bank and ENB 1995 Financial Corporation, Elkridge, Maryland Class B 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 R. E. Atkinson, Jr. Chairman, Dilmar Oil Company, Inc., 1995 Florence, South Carolina Class C Stephen Brobeck Executive Director, Consumer Federation of 1993 America, Washington, D.C. Anne Marie Whittemore Partner, McGuire, Woods, Battle & Boothe, 1994 Richmond, Virginia Henry J. Faison President, Faison Associates, 1995 Charlotte, North Carolina BALTIMORE BRANCH Appointed by the Federal Reserve Bank Claudine B. Malone President, Financial & Management Consulting, 1993 Inc., McLean, Virginia Thomas J. Hughes President and Chief Executive Officer, Navy 1994 Federal Credit Union, Vienna, Virginia F. Levi Ruark Chairman and President, The National Bank of 1994 Cambridge, Cambridge, Maryland Richard M. Adams Chairman and Chief Executive Officer, United 1995 Bankshares, Inc., Parkersburg, West Virginia Appointed by the Board of Governors Michael R. Watson President, Association of Maryland Pilots, 1993 Baltimore, Maryland Rebecca Hahn Windsor Chairman and Chief Executive Officer, Hahn 1994 Transportation, Inc., New Market, Maryland Daniel R. Baker President and Chief Executive Officer, Tate 1995 Access Floors, Inc., Jessup, Maryland Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

336 80th Annual Report, 1993 Term expires Dec. 31 DISTRICT 5—Continued CHARLOTTE BRANCH Appointed by the Federal Reserve Bank 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 David B. Jordan Vice Chairman, Chief Executive Officer, and 1995 Director, Security Capital Bancorp, Salisbury, North Carolina Appointed by the Board of Governors William E. Masters President, Perception, Inc., Easley, 1993 South Carolina Harold D. Kingsmore President and Chief Operating Officer, Graniteville 1994 Company, Graniteville, South Carolina Anne M. Allen President, Anne Allen & Associates, Inc., 1995 Greensboro, North Carolina DISTRICT 6—ATLANTA Class A 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 W. H. Swain Chairman, First National Bank, Oneida, Tennessee 1995 Class B Andre M. Rubenstein Chairman and Chief Executive Officer, 1993 Rubenstein Brothers, Inc., New Orleans, Louisiana Victoria B. Jackson President, DSS/ProDiesel, Nashville, Tennessee 1994 J. Thomas Holton Chairman and President, Sherman International 1995 Corporation, Birmingham, Alabama Class C 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 Leo Benatar Chairman and President, Engraph, Inc., 1995 Atlanta, Georgia Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 337 Term expires Dec. 31 DISTRICT 6—Continued BIRMINGHAM BRANCH Appointed by the Federal Reserve Bank 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 J. Stephen Nelson President and Chief Executive Officer, First 1995 National Bank, Brewton, Alabama Appointed by the Board of Governors Donald E. Boomershine President, Better Business Bureau of Central 1993 Alabama, Inc., Birmingham, Alabama Shelton E. Allred Chairman, President, and Chief Executive 1994 Officer, Frit Incorporated, Ozark, Alabama Patricia B. Compton President, Patco, Inc., Georgiana, Alabama 1995 JACKSONVILLE BRANCH Appointed by the Federal Reserve Bank Hugh H. Jones, Jr Chairman, Barnett Bank of Jacksonville, N.A., 1993 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 Merle L. Graser Chairman and Chief Executive Officer, First 1995 National Bank of Venice, Venice, Florida Appointed by the Board of Governors Joan Dial Ruffier General Partner, Sunshine Cafes, Orlando, Florida 1993 Samuel H. Vickers President, Chairman, and Chief Executive 1994 Officer, Design Containers, Inc., Jacksonville, Florida Lana Jane Lewis-Brent President, Paul Brent Designer, Inc., 1995 Panama City, Florida MIAMI BRANCH Appointed by the Federal Reserve Bank Steven C. Shimp President, O-A-K/Florida, Inc., 1993 Fort Myers, Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

338 80th Annual Report, 1993 Term expires Dec. 31 DISTRICT 6, MIAMI BRANCH Appointed by the Federal Reserve Bank—Continued 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 E. Anthony Newton President, Island National Bank of Palm Beach, 1995 Palm Beach, Florida Appointed by the Board of Governors Michael T. Wilson President, Vinegar Bend Farms, Inc., 1993 Belle Glade, Florida Dorothy C. Weaver Executive Vice President, Intercap Investments, 1994 Inc., Coral Gables, Florida R. Kirk Landon Chairman and Chief Executive Officer, 1995 American Bankers Insurance Group, Miami, Florida NASHVILLE BRANCH Appointed by the Federal Reserve Bank 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 James D. Harris President and Chief Executive Officer, Brentwood 1995 National Bank, Brentwood, Tennessee Appointed by the Board of Governors Paula Lovell President, Lovell Communications, Inc., 1993 Nashville, Tennessee James R. Tuerff President and Chief Executive Officer, American 1994 General Life and Accident Insurance Company, Nashville, Tennessee Harold A. Black James F. Smith Jr. Professor of Financial 1995 Institutions, College of Business Administration, University of Tennessee, Knoxville, Tennessee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 339 Term expires Dec. 31 DISTRICT 6—Continued NEW ORLEANS BRANCH Appointed by the Federal Reserve Bank Howard C. Gaines Chairman, President, and Chief Executive 1993 Officer, First National Bank of Commerce, New Orleans, Louisiana Angus R. Cooper Chairman and Chief Executive Officer, 1994 Cooper/T. Smith Corporation, Mobile, Alabama Kay L. Nelson Managing Director, Nelson Capital Corporation, 1994 New Orleans, Louisiana Thomas E. Walker President and Chief Executive Officer, Bank of 1995 Forest, Forest, Mississippi Appointed by the Board of Governors 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 Lucimarian Tolliver Roberts President, Mississippi Coast Coliseum 1995 Commission, Pass Christian, Mississippi DISTRICT 7—CHICAGO Class A David W. Fox Chairman and Chief Executive Officer, The 1993 Northern Trust Corporation and The Northern Trust Company, Chicago, Illinois Stefan S. Anderson Chairman, President, and Chief Executive 1994 Officer, First Merchants Corporation, Muncie, Indiana Arnold C. Schultz Chairman and President, Grundy National Bank, 1995 Grundy Center, Iowa Class B 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 Donald J. Schneider President, Schneider National, Inc., 1995 Green Bay, Wisconsin Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

340 80th Annual Report, 1993 Term expires Dec. 31 DISTRICT 7—Continued Class C Robert M. Healey President, Chicago Federation of Labor and 1993 Industrial Union Council, AFL-CIO, Chicago, Illinois Duane L. Burnham Chairman and Chief Executive Officer, Abbott 1994 Laboratories, Abbott Park, Illinois Richard G. Cline Chairman, President, and Chief Executive 1995 Officer, NICOR Inc., Naperville, Illinois DETROIT BRANCH Appointed by the Federal Reserve Bank Charles E. Allen President and Chief Executive Officer, Graimark 1993 Realty Advisors, Inc., Detroit, Michigan William E. Odom Chairman, Ford Motor Credit Company, 1993 Dearborn, Michigan Vacancy 1994 Norman F. Rodgers President and Chief Executive Officer, Hillsdale 1995 County National Bank, Hillsdale, Michigan Appointed by the Board of Governors Beverly A. Beltaire President, P R Associates, Inc., Detroit, Michigan 1993 John D. Forsyth Executive Director, University of Michigan 1994 Hospitals, Ann Arbor, Michigan J. Michael Moore Chairman and Chief Executive Officer, Invetech 1995 Company, Detroit, Michigan DISTRICT 8—ST. LOUIS Class A Ray U. Tanner Chairman, Director, and Chief Executive 1993 Officer, Volunteer Bank, Jackson, Tennessee Henry G. River, Jr. President and Chief Executive Officer, First 1994 National Bank in Pinckneyville, Pinckneyville, Illinois Douglas M. Lester Chairman and President, Trans Financial 1995 Bancorp, Inc., Bowling Green, Kentucky Class B 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 341 Term expires Dec. 31 DISTRICT 8, Class B— Continued Richard E. Bell President and Chief Executive Officer, Riceland 1995 Foods, Inc., Stuttgart, Arkansas Class C Janet McAfee Weakley President, Janet McAfee, Inc., St. Louis, Missouri 1993 Robert H. Quenon Mining Consultant, St. Louis, Missouri 1994 John F. McDonnell Chairman and Chief Executive Officer, McDonnell 1995 Douglas Corporation, St. Louis, Missouri LITTLE ROCK BRANCH Appointed by the Federal Reserve Bank 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 Mark A. Shelton III President, M. A. Shelton Farming Company, 1995 Altheimer, Arkansas Appointed by the Board of Governors L. Dickson Flake President, Barnes, Quinn, Flake & Anderson, 1993 Inc., Little Rock, Arkansas Robert Daniel Nabholz, Jr. ..Chief Executive Officer, Nabholz Construction 1994 Corporation, Conway, Arkansas Betta Carney President and Chief Executive Officer, 1995 World Wide Travel Service, Inc., Little Rock, Arkansas LOUISVILLE BRANCH Appointed by the Federal Reserve Bank Robert M. Hall Owner, Mike Hall Farm, Seymour, Indiana 1993 Charles D. Storms President and Chief Executive Officer, 1993 Red Spot Paint and Varnish Company, Inc., Evansville, Indiana Thomas E. Spragens, Jr. President, The Farmers National Bank of 1994 Lebanon, Lebanon, Kentucky Malcolm B. Chancey, Jr. ....Chairman and Chief Executive Officer, Liberty 1995 National Bank, Louisville, Kentucky Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

342 80th Annual Report, 1993 Term expires Dec. 31 DISTRICT 8, LOUISVILLE BRANCH—Continued Appointed by the Board of Governors 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 Daniel L. Ash Senior Consultant, Wenz-Neely Company, 1995 Louisville, Kentucky MEMPHIS BRANCH Appointed by the Federal Reserve Bank Thomas M. Garrott Chairman and Chief Executive Officer, National 1993 Bank of Commerce and National Commerce Bancorporation, Memphis, Tennessee Larry A. Watson Chairman and President, Liberty Federal 1993 Savings Bank, Paris, Tennessee Lewis F. Mallory, Jr. Chairman and Chief Executive Officer, 1994 National Bank of Commerce of Mississippi, Starkville, Mississippi Anthony M. Rampley President, Chief Executive Officer, and Director, 1995 Arkansas Glass Container Corporation, Jonesboro, Arkansas Appointed by the Board of Governors Seymour B. Johnson Owner, Kay Planting Company, 1993 Indianola, Mississippi Sidney Wilson, Jr. Owner, Wilson Automotive Group Inc., 1994 Jackson, Tennessee Vacancy 1995 DISTRICT 9—MINNEAPOLIS Class A Charles L. Seaman President and Chief Executive Officer, First 1993 State Bank of Warner, Warner, South Dakota William W. Strausberg Chairman and Chief Executive Officer, First 1994 Bank Montana, N.A., and General Manager, First Bank-Regional Banking Group, Billings, Montana Susanne V. Boxer President and Chief Executive Officer, Houghton 1995 National Bank, Houghton, Michigan Class B Earl R. St. John, Jr. President, St. John Forest Products, Inc., 1993 Spalding, Michigan Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 343 Term expires Dec. 31 DISTRICT 9, Class B— Continued Duane E. Dingmann President, Trubilt Auto Body, Inc., 1994 Eau Claire, Wisconsin Dennis W. Johnson President, TMI Systems Design Corporation, TMI 1995 Transport Corporation, Dickinson, North Dakota Class C 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 Gerald A. Rauenhorst Chairman and Chief Executive Officer, Opus 1995 Corporation, Minneapolis, Minnesota HELENA BRANCH Appointed by the Federal Reserve Bank Beverly D. Harris President, Empire Federal Savings and Loan 1993 Association, Livingston, Montana Donald E. Olsson, Jr. Executive Vice President, Ronan State Bank, 1994 Ronan, Montana Nancy M. Stephenson Executive Director, Neighborhood Housing 1994 Services, Great Falls, Montana Appointed by the Board of Governors James E. Jenks President, Jenks Farms, Hogeland, Montana 1993 Lane W. Basso President, Deaconess Medical Center of 1994 Billings, Inc., Billings, Montana DISTRICT 10—KANSAS CITY Class A Roger L. Reisher Co-Chairman, FirstBank Holding Company of 1993 Colorado, Lakewood, Colorado Charles I. Moyer Chairman and Chief Executive Officer, First 1994 National Bank, Phillipsburg, Kansas William L. McQuillan President, Chief Executive Officer, and Director, 1995 City National Bank, Greeley, Nebraska Class B Don E. Adams Buffalo, Oklahoma 1993 Frank J. Yaklich, Jr. Pueblo, Colorado 1994 W. W. Allen President and Chief Operating Officer, Phillips 1995 Petroleum Company, Bartlesville, Oklahoma Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

344 80th Annual Report, 1993 Term expires Dec. 31 DISTRICT 10—Continued Class C Thomas E. Rodriguez President and Manager, Thomas E. Rodriguez & 1993 Associates, P.C., Aurora, Colorado Burton A. Dole, Jr. Chairman and President, Puritan-Bennett 1994 Corporation, Overland Park, Kansas Herman Cain President and Chief Executive Officer, 1995 Godfather's Pizza, Inc., Omaha, Nebraska DENVER BRANCH Appointed by the Federal Reserve Bank Peter R. Decker President, Decker & Associates, Denver, Colorado 1993 Clifford E. Kirk President and Chief Executive Officer, First 1994 National Bank of Gillette, Gillette, Wyoming Richard I. Ledbetter President and Chief Executive Officer, 1994 First National Bank of Farmington, Farmington, New Mexico Peter I. Wold Partner, Wold Oil and Gas Company, 1995 Casper, Wyoming Appointed by the Board of Governors Gilbert Sanchez President, New Mexico Highlands University, 1993 Las Vegas, New Mexico Barbara B. Grogan President, Western Industrial Contractors, Inc., 1994 Denver, Colorado Sandra K. Woods Vice President, Adolph Coors Company, 1995 Golden, Colorado OKLAHOMA CITY BRANCH Appointed by the Federal Reserve Bank Gordona Duca President and Owner, Gordona Duca, Inc., 1993 Realtors, Tulsa, Oklahoma C. Kendric Fergeson Chairman and Chief Executive Officer, 1993 The National Bank of Commerce, Altus, Oklahoma John Wm. Laisle President and Chief Executive Officer, MidFirst 1994 Bank, SSB, Oklahoma City, Oklahoma Dennis M. Mitchell President, Citizens Bank of Ardmore, 1995 Ardmore, Oklahoma Appointed by the Board of Governors Ernest L. Holloway President, Langston University, 1993 Langston, Oklahoma Victor R. Schock President and Chief Executive Officer, Credit 1994 Counseling Centers, Tulsa, Oklahoma Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 345 Term expires Dec. 31 DISTRICT 10, OKLAHOMA CITY BRANCH Appointed by the Board of Governors—Continued Barry L. Eller Sr. Vice President and General Manager, 1995 MerCruiser, Mercury Marine Business Unit, Division of Brunswick Corp., Stillwater, Oklahoma OMAHA BRANCH Appointed by the Federal Reserve Bank Bruce R. Lauritzen President, First National Bank of Omaha, 1993 Omaha, Nebraska Donald A. Leu President and Chief Executive Officer, 1993 Consumer Credit Counseling Service, Omaha, Nebraska Thomas H. Olson Chairman, First National Bank, Sidney, Nebraska 1993 Robert L. Peterson Chairman, President, and Chief Executive 1995 Officer, IBP, Inc., Dakota City, Nebraska Appointed by the Board of Governors LeRoy W. Thorn President, T-L Irrigation Company, 1993 Hastings, Nebraska Arthur L. Shoener Executive Vice President - Operations, Union 1994 Pacific Railroad, Omaha, Nebraska Sheila Griffin Special Advisor to the Governor of the State of 1995 Nebraska for International Trade, Lincoln, Nebraska DISTRICT 11—DALLAS Class A T. C. Frost Chairman, Frost National Bank, San Antonio, Texas 1993 Eugene M. Phillips Chairman and President, The First National 1994 Bank of Panhandle, Panhandle, Texas Jeff Austin, Jr. Chairman, Texas National Bank, Longview, Texas 1995 Class B 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 Milton Carroll Chairman and Chief Executive Officer, 1995 Instrument Products, Inc., Houston, Texas Class C James A. Martin Third General Vice President, International 1993 Association of Bridge, Structural and Ornamental Iron Workers, Austin, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

346 80th Annual Report, 1993 Term expires Dec. 31 DISTRICT 11, Class C— Continued Cece Smith General Partner, Phillips-Smith Specialty Retail 1994 Group, Dallas, Texas Leo E. Linbeck, Jr. Chairman and Chief Executive Officer, Linbeck 1995 Construction Corporation, Houston, Texas EL PASO BRANCH Appointed by the Federal Reserve Bank 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 Inc. and CarLube, Inc., El Paso, Texas Wayne Merritt Chairman and President, Texas National Bank 1995 of Midland, Midland, Texas Appointed by the Board of Governors Diana S. Natalicio President, The University of Texas at El Paso, 1993 El Paso, Texas Alvin T. Johnson President, Management Assistance Corporation 1994 of America, El Paso, Texas W. Thomas Beard III President, Leoncita Cattle Company, Alpine, Texas 1995 HOUSTON BRANCH Appointed by the Federal Reserve Bank 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 and President, Brenham Bancshares, 1994 Inc., Brenham, Texas J. Michael Solar President, Solar & Ellis L.L.P., Houston, Texas 1995 Appointed by the Board of Governors Robert C. McNair Chairman and Chief Executive Officer, Cogen 1993 Technologies, Inc., Houston, Texas Isaac H. Kempner III Chairman, Imperial Holly Corporation, 1994 Sugar Land, Texas Judy Ley Allen Partner and Administrator, Allen Investments, 1995 Houston, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 347 Term expires Dec. 31 DISTRICT 11—Continued SAN ANTONIO BRANCH Appointed by the Federal Reserve Bank 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 Gregory W. Crane President and Chief Executive Officer, 1995 Broadway National Bank, San Antonio, Texas Appointed by the Board of Governors Erich Wendl President and Chief Executive Officer, Maverick 1993 Markets, Inc., Corpus Christi, Texas Roger R. Hemminghaus Chairman, President, and Chief Executive 1994 Officer, Diamond Shamrock, Inc., San Antonio, Texas Carol L. Thompson Consultant and President, The Thompson 1995 Group, Austin, Texas DISTRICT 12—SAN FRANCISCO Class A Richard L. Mount Chairman, President, and Chief Executive Officer, 1993 Saratoga Bancorp, Saratoga, California William E. B. Siart President, First Interstate Bancorp, 1994 Los Angeles, California Carl J. Schmitt Chairman and Chief Executive Officer, 1995 University National Bank & Trust Company, Palo Alto, California Class B 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 E. Kay Stepp Former President and Chief Operating Officer, 1995 Portland General Electric Company, Portland, Oregon Class C 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 Cynthia A. Parker Executive Director, Anchorage Neighborhood 1995 Housing Services, Inc., Anchorage, Alaska Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

348 80th Annual Report, 1993 Term expires Dec. 31 DISTRICT 12—Continued Los ANGELES BRANCH Appointed by the Federal Reserve Bank Anita Landecker Regional Vice President, Local Initiatives 1993 Support Corporation, Los Angeles, California 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 Steven R. Sensenbach President and Chief Executive Officer, Vineyard 1995 National Bank, Rancho Cucamonga, California Appointed by the Board of Governors Donald G. Phelps Chancellor, Los Angeles Community College 1993 District, Los Angeles, California David L. Moore President, Western Growers Association, 1994 Newport Beach, California Anne L. Evans Chairman, Evans Hotels, San Diego, California 1995 PORTLAND BRANCH Appointed by the Federal Reserve Bank 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., 1994 Salem, Oregon Elizabeth K. Johnson President, TransWestern Helicopters, Inc., 1995 Scappoose, Oregon Appointed by the Board of Governors Ross R. Runkel Professor of Law, Willamette University, 1993 Salem, Oregon William A. Hilliard Editor, The Oregonian, Portland, Oregon 1994 Carol A. Whipple Owner/Manager, Rocking C Ranch, 1995 Elkton, Oregon SALT LAKE CITY BRANCH Appointed by the Federal Reserve Bank 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 349 Term expires Dec. 31 DISTRICT 12, SALT LAKE CITY BRANCH Appointed by the Federal Reserve Bank—Continued Virginia P. Kelson Partner, Ralston Consulting Group, 1993 Salt Lake City, Utah Vacancy 1994 Roy C. Nelson President, Bank of Utah, Ogden, Utah 1995 Appointed by the Board of Governors Constance G. Hogland Executive Director, Boise Neighborhood 1993 Housing Services, Inc., Boise, Idaho Gerald R. Sherratt President, Southern Utah University, 1994 Cedar City, Utah Gary G. Michael Chairman and Chief Executive Officer, 1995 Albertson's, Inc., Boise, Idaho SEATTLE BRANCH Appointed by the Federal Reserve Bank B. R. Beeksma Chairman, InterWest Savings Bank, 1993 Oak Harbor, Washington Gerry B. Cameron Vice Chairman, U.S. Bancorp, Seattle, Washington 1993 Thomas E. Cleveland Chairman and Chief Executive Officer, 1994 Enterprise Bank of Bellevue, N.A., Bellevue, Washington Constance L. Proctor Partner, Alston, Courtnage, MacAulay & Proctor, 1995 Seattle, Washington Appointed by the Board of Governors George F. Russell, Jr. Chairman, Frank Russell Company, 1993 Tacoma, Washington William R. Wiley Senior Vice President, Battelle Memorial 1994 Institute; Director, Battelle/Paciflc Northwest Division; and Director, U.S. Department of Energy, Pacific Northwest Laboratory, Richland, Washington Emilie A. Adams President and Chief Executive Officer, Better 1995 Business Bureau, Seattle, Washington Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

350 80th Annual Report, 1993 Maps of the Federal Reserve System 9 BOSTON MINNEAPOLIS• ' 2 " 7 12 • ^ BNEW YORK CHICAGO • • SANFRANCISCO 10 CLEVELAND PHILADELPHIA KANSAS CITY • _ 4 • ST. LOUIS RICHMOND 8 5 6. 11 ^ ATLANTA DALLAS ALASKA US HAWAII LEGEND Ztof/j pages Facing page • Federal Reserve Bank city • Federal Reserve Branch city • Board of Governors of the Federal — Branch boundary Reserve System, Washington, D.C. NOTE The Federal Reserve officially identifies Bank serves the Commonwealth of Districts by number and Reserve Bank Puerto Rico and the U.S. Virgin Islands; city (shown on both pages) and by letter the San Francisco Bank serves Ameri- (shown on the facing page). can Samoa, Guam, and the Common- In 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 1993. 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 351 4-D 5_JH Baltimore Pittsburgh Charlotte • Cincinnati CLEVELAND RICHMOND 7-G 8-H •Nashville Birmingham Detroit • \ Jacksonville • Memphis New Orleans J Rock Miami ATLANTA • CHICAGO ST. LOUIS 9-1 • Helena MINNEAPOLIS 10-J 12-L Omaha • Denver Oklahoma City OK KANSAS CITY 11-K Salt Lake City Houston • Los Angeles SAN FRANCISCO Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

352 Index A Guide to Getting It Right, FFIEC Banking structure, regulation of, 244 publication, 200 Board of Governors (See also Federal "Accounting for Certain Investments in Reserve System) Debt and Equity Securities," FASB Banking supervision and regulation, 231 Statement 115, 244 Compliance examinations, 209 Agreement corporations Federal Reserve Banks, 255 International activities, 248 Federal Reserve decisions, public notice, Supervision and regulation of, 232 246 Agricultural price increases, 16 Financial statements, 269 Aid to Families with Dependent Children Legislation enacted, 225 program, 201, 209 Litigation, 222 American Bar Association, 211 Members and officers, 322 Assets and liabilities Recommendations from other agencies, Banks, by class, 301 220 Board of Governors, 270 Record of policy actions, 91 Federal Reserve Banks, 278 Regulatory simplification, 253 Automated clearinghouses, 257 Salaries, 285 Automatic teller machine, use, 208 Testimony and legislative recommendations, 219 Bank Export Services Act, 249 Bureau of Engraving and Printing, U.S. Bank Holding Company Act Department of the Treasury, 259 Banking structure regulation, 245 Business spending and investment, 9, 45, Supervision and regulation, 245 72 Bank Holding Company Performance Report, 236 Capital accounts Bank holding companies Banks, by class, 296 Applications, 214 Federal Reserve Banks, 277, 278, 280 Delegation, 246 Capital Markets and Trading Activities Timely processing, 246 Manual, 239 Criminal referral form, policy statement, Cash flows, statement, 272 93 Chairmen, presidents, and vice presidents Residential construction loans, policy of Federal Reserve Banks statement, 93 Conferences, 329 Risk-based capital guidelines, 98 List, 328 Safety and soundness supervision, 233 Salaries of presidents, 285 Stock repurchases, 248 Change in Bank Control Act Supervision and regulation of, 232 Banking structure regulation, 246 Bank Merger Act Supervision and regulation, 246 Advance notice of proposed mergers, 94 Check clearing and collection Banking structure regulation, 245 Fees and services, 256 Mergers and consolidations, 309 Volume of operations, table, 297 Supervision and regulation, 245 Clearing House Interbank Payments Bank Secrecy Act, 232, 249 System, 258 Banking supervision and regulation, 232 Clinton, President William Jefferson, 96 Bankers acceptances, Federal Reserve Closing the Gap: A Guide to Equal Banks, holdings, 278 Opportunity Lending, publication by Banking offices, changes in number, 308 Boston FRB, 205 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 353 Commercial bank failures in 1993, 231 Corporate profits, 1993, 9 Commodity Futures Trading Commission, Credit and Divorce, brochure by American delegation of authority to determine Bar Association, 211 margins, 97 Credit availability Community Affairs programs, 204 Discrimination in mortgage lending, Community Development Bank and Credit testimony, 219 Fund, 218 Interagency policy statement, 96, 97, 217 Community development corporations, Low-income and minority communities, testimony, 220 testimony, 220 Community Reinvestment Act Supervisory policy, 241 Bank applications, 214 Currency and coin, 259 Compliance and reform, 213 Currency and Foreign Transactions Newsletter, by Kansas City FRB, 206 Reporting Act of 1970, 249 Comptroller of the Currency, Office of the, 202 Definitive securities safekeeping, 259 Condition statements of Federal Reserve Delegation of Authority, Commodity Banks, 276 Futures Trading Commission, policy Conference call record, request for access, statement, 97 197 Depository institution investment contracts, Conferences of chairmen, presidents, and 244 vice presidents of Federal Reserve Depository Institutions Disaster Relief Act Banks, 329 of 1992, 241 Construction activity, 45 Depository Institutions Disaster Relief Act Consumer Advisory Council, 218, 326 of 1993, 229 Consumer and community affairs Depository institutions, reserves and related Appraisal reports, 199 items, 302 Community Reinvestment Act, Deposits compliance, 213 Banks, by class, 301 Consumer leasing compliance, 211 Federal Reserve Banks, 278, 302 Electronic benefit transfer programs, 199, Deposits, unclaimed and insured, 201 legislation enacted, 228 Expedited Funds Availability Act Directors, Federal Reserve Banks and compliance, 214 Branches, list, 330 Loan to officers of depository "Disclosure about Fair Values of Financial institutions, 200 Instruments," FASB Statement 107, Home mortgage disclosure, 200 244 Regulation M, review for simplification, Discount rate (See Interest rates) 200, 201 Discount rate structure, 100 Truth in Lending Act compliance, 212 Dividends, Federal Reserve Banks, 288, Truth in Savings regulation, date of 292 compliance, 199, 201 Waiver of right to cancel home-secured Earnings of Federal Reserve Banks (See loans, 199 also Federal Reserve Banks, income Consumer Complaint Officers and and expenses), 260, 286 Managers Conference, 217 East Rutherford Operations Center, 262 Consumer Compliance Task Force, FFIEC, EBT (See Electronic benefits transfer 217 programs) Consumer leasing Economy Compliance, 211 In 1993 Review of regulation M to simplify, 253 Business, 8 Consumer price index, 15, 53, 79 Government spending, 11 Consumer spending in 1993, 6 Households, 6 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

354 80th Annual Report, 1993 Economy—Continued Federal agency securities—Continued In 1993—Continued Federal Reserve open market Labor markets, 13 transactions, 1989, 282 Overview, 4, 5 Repurchase agreements, 277, 278, 282, Performance of, 69 284 Price developments, 15 Federal Deposit Insurance Corporation, 202 Performance of, in 1992, 42 Federal Deposit Insurance Corporation Edge Act corporations Improvement Act of 1991 International activities, 248 Actions to implement in 1993, 238 Supervision and regulation of, 232 Appraisal reports to applicants, 91 Electronic benefit transfer programs, 199, Bank supervision and regulation, 232 201, 208 Compliance, 200, 209 Extension of Federal Reserve Bank Electronic data processing, supervision, 234 credit, amendment, 91 Electronic Federal Tax Deposit system, 259 Home mortgage disclosure data, 202 Electronic Fund Transfer Act Interagency policy statement, 98 Compliance with in 1993, 211 Federal Financial Institutions Examination Economic effects, 207 Council Employment in 1993, 13 Regulatory activities, 206 Equal Credit Opportunity Act, compliance Supervision and regulation, 243 with in 1993, 210 Federal Home Loan Mortgage Corporation, Examinations, inspections, regulation, and 204, 258 audits Federal National Mortgage Association, Federal Reserve Banks, 260 204 Specialized Federal Open Market Committee Electronic data processing, 234 Meetings, minutes of, 101, 106, 125, Fiduciary activities, 234 135, 145, 158, 166, 176 Government securities dealers and Meetings, release of information, 185 brokers, 235 Members and officers, list, 324 Municipal securities dealers and Federal Reserve Automation Services, 255, clearing agencies, 235 262 Securities subsidiaries, 235 Federal Reserve Banks Transfer agents, supervision, 236 Assessments for expenses of Board of U.S. offices of foreign banks, charges for Governors, 288, 292 inspections, 238 Bank premises, 276, 278, 296 Export Trading Company Act Amendments Branches of 1988, 249 Bank premises, 296 Directors, list, 330 Fair Housing Act, 207, 217 Vice presidents in charge, 328 Fair Housing and Equal Opportunity, Office Capital accounts, 277, 278 of, 204 Chairmen and deputy chairmen, 328 Farm Credit Administration, 211, 212, 250 Condition statement, 276 Farmers & Merchants Bank of Long Conferences of chairmen, presidents, and Beach, 215 vice presidents, 329 Fannie Mae {See Federal National Deposits, 277, 278 Mortgage Association) Directors, list, 330 FDICIA {See Federal Deposit Insurance District Banks Corporation Act of 1991) Atlanta Federal Advisory Council, 325 Community affairs programs, 205 Federal agency securities Data processing center, 255 Federal Reserve Bank holdings and Boston earnings, 278, 302 Community affairs programs, 205 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 355 Federal Reserve Banks—Continued Federal Reserve Banks—Continued District Banks—Continued Surveillance and monitoring, 236 Chicago Federal Reserve notes Community affairs programs, 205 Condition statement data, 278 Cleveland, 262 Cost of issuance and redemption, 273, Community affairs programs, 205 288 Dallas, 262 Federal Reserve System (See also Board of Community affairs programs, 205 Governors) Data processing center, 255 Fees and services to depository Kansas City institutions, 256 Community affairs programs, 205 Fees, Federal Reserve services to Data processing center, 255 depository institutions Minneapolis, 262 Automated clearinghouse, 257 New York, 262 Check clearing and collection, 256 East Rutherford Operations Center, Currency and coin, 259 255 Definitive securities safekeeping, 259 Treasury Automated Auction Float, 260 Processing System, 259 Funds transfer, 257 Philadelphia Net settlement, 258 Community Reinvestment Advocates, Securities, U.S., 258 publication, 205 Map, 350 Data processing center, 255 Membership, 251 Richmond, 262 Security and loan holdings, 261 Community affairs programs, 205 Staff training, 242 Data processing center, 255 Federal Trade Commission, 211, 212 San Francisco Federal Trade Commission Act, 217 Community affairs programs, 205 Fednet, 255 Data processing center, 255 Fees, Federal Reserve services to Portland branch, 262 depository institutions Seattle branch, 262 Automated clearinghouse, 257 St. Louis Check clearing and collection, 256 Community affairs programs, 205 Currency and coin, 259 Data processing center, 255 Definitive securities safekeeping, 259 Dividends paid, 288, 293, 295 Float, 260 Examinations, inspection, regulation, and audits, 232, 260 Funds transfer, 257 Extension of credit, policy statement, 91 Net settlement, 258 Interest rates, 298 Pricing of, 286 International activities, 236 Securities, U.S., 258 Loans and securities, 276, 278, 284, 286, Fiduciary activities, supervision, 234 302, 304, 306 Financial Accounting Standards Board, Officers and employees, number and statements, 244 salaries, 285 Financial statements, Board of Governors, Operations, volume, 297 269 Payments to the U.S. Treasury, 293, 295 First Colonial Bankshares Corporation, 215 Premises, 262 First Interstate Bancorp, 215 Presidents and first vice presidents, 285, Fleet Bank of New York, 215 328 Float, 260 Priced services, tables, 263 Foreign Bank Supervision Enhancement Specialized examinations, 234 Act of 1991 Supervision and regulation, Policy statement, 96 responsibilities, 232 Supervision and regulation, 232 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

356 80th Annual Report, 1993 Foreign banks Industrial production, 8 Applications, procedures for processing, Insured commercial banks (See also policy statement, 96 Commercial banks) Compliance examinations, 209 Assets and liabilities, by class of bank, Supervision and regulation of, 232 301 Foreign currencies Banking offices, changes in number, 308 Federal Reserve income on, 286 Number, by class of bank, 301 Operations, 35 Interagency loan documentation, policy Foreign economies during 1993, 30 statement, 97 Foreign exchange, 35, 49, 75 Interagency policy statement Foreign investments, 249 Credit availability, 96, 97, 217 Freddie Mac (See Federal Home Loan Fair lending initiatives, 207 Mortgage Corporation) Interagency regulatory activities, 241 Funds transfer, 257 Interest rates, Federal Reserve Banks Futures Trading Practice Act of 1992, 97 Discount rates in 1993, 98 Risk, supervisory policy, 240 Garn-St Germain Depository Table, 298 Institutions Act of 1982, 92 International banking activities, 248 Gas prices, 1993, 17 Edge Act and agreement corporations, Gold certificate accounts of Reserve Banks 236 and gold stock, 278, 304, 306 Foreign-office operations of U.S. banking Gonzalez, Henry B., request for conference organizations, 237 call record, 197 U.S. activities of foreign banks, 237 Government Securities Act Amendments of International developments in monetary 1993, 226 policy, 29, 35, 49, 75 Government Securities Act of 1986, 225, International transactions, 33 235 Interpretations of regulations, 202 Government securities, supervision, 235 Interstate Commerce Commission, 211 Government spending, 47, 74 Investments Business, 1993, 9 Home Mortgage Disclosure Act Federal Reserve Banks, 276, 278 Data, 202 Residential property, 1993, 7 Data, FRB testimony, 220 State member banks, 301 Loan/Application Register, 203 Policy statement, 92 Household spending, 6, 43, 70 Justice, U.S. Department of, 207 Housing and Community Development Act of 1992 Labor markets, 13, 51, 77 Extension of credit, policy action, 93 Leasing, consumer Extension of mandatory date for Compliance, 211 compliance, policy action, 94 Review of regulation M to simplify, 253 Regulation C, amendment, 200 Legislation enacted Housing and Urban Development, Depository Institutions Disaster Relief Department of, 202, 204, 217 Act of 1993, 229 Hurricane Andrew, effects on economy, 44 Government Securities Act Amendments of 1993, 225 Idaho, State of, Department of Finance, North American Free Trade Agreement 222 Implementation Act, 227 Income and expenses Omnibus Budget Reconciliation Act of Board of Governors, 271 1993, 228 Federal Reserve Banks, 260, 286 Unclaimed insured deposits, 228 Income growth, 1993, 6 Lender Activities, Office of, 204 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 357 Litigation involving the Board of Monetary policy Governors Credit markets, 23, 59, 82 Financial Institutions Supervisory Act Developments during 1992, 55 CBC, Inc., 222 Developments in 1993, 80 DLG Financial Corp., 222 Financial markets relative to, 19 First National Bank of Bellaire, 222 Implementation of, 81 Oppegard, 222 Objectives for 1993-94, 66 Pharaon, 222 Reports to the Congress Other actions February 19, 1993, 37 Adams, 223 July 20, 1993, 64 Amann, 223 Multiagency criminal referral form, policy Bennett, 224 statement, 93 Duces Tecum, Subpoena, 223, 224 Municipal securities dealers, supervision, Ezell, 223 235 Federal Reserve System, subpoena, Mutual savings banks, 308 223 Fields, 223 NAFTA (See North American Free Trade Kubany, 224 Agreement Implementation Act) National Association of Securities Dealers, Richardson, 224 250 Sisti, 223 National Credit Union Administration, 202, U.S. Check, 223 250 Zemel, 223 Net settlement, 258 Review of Board actions, Idaho, State Nonmember depository institutions of, Department of Finance, 222 Assets and liabilities, 301 Loan Analysis School, 243 Banking offices, changes in number, 308 Loans Number, 301 Banks, by class, 301 North American Free Trade Agreement Federal Reserve Banks Implementation Act, 227 Depository institutions, 276, 278, 286, 304, 306 Officers of Federal Reserve Banks, Holdings and income, 276, 278, 304, Branches, and Offices, 328 306 Oil and gas prices, 1993, 17 Interest rates, 298 Omnibus Budget Reconciliation Act of Volume of operations, 297 1993, 228 To officers, directors, and principal shareholders, regulatory review, 253 Packers and Stockyards Administration, Department of Agriculture, 211, 212 Margin requirements, 300 Participants Trust Company, 258 Member banks (See also Depository Point-of-sale systems, use, 208 institutions) Policy actions Assets, liabilities, and capital accounts, Board of Governors, 91 301 Bank related activities, 247 Banking offices, changes in number, 308 Federal Open Market Committee Number, 301 Authorization for domestic open Reserve requirements, 299 market operations, 102 Minority Business Development centers, Authorization for foreign currency 206 operations, 103 Monetary aggregates Domestic policy directive, 103 Growth in 1993, 4, 26-28 Foreign currency directive, 105 Review of 1992, 55 Procedural instructions, foreign Monetary Control Act of 1980, 92 currency operations, 106 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

358 80th Annual Report, 1993 Policy actions—Continued Regulations—Continued Statements and other actions B, Equal Credit Opportunity Closing of branches, ninety-day Appraisal reports, available to notice, 98 applicants, 91, 199 Credit availability, 97 Compliance with, 210 Delegation of authority, Commodity C, Home Mortgage Disclosure Futures Trading Commission, 97 Loan register data disclosure by Documentation required for loans to financial institutions, 199, 200 small and medium-sized business Release of disclosure statement by and farms, 97 lenders, 92 Interagency loan documentation, 97 D, Reserve Requirements of Depository Interagency policy statement on credit Institutions, increase in transaction availability, 96 balances requirements, 92 Procedures for processing applications E, Electronic Fund Transfers Act filed by foreign banks, 96 Compliance, 211 Securities activities of section 20 Electronic benefit transfer programs, subsidiaries of bank holding 199, 201 companies, 95 H, Membership of State Banking Price developments, 15, 53, 78 Organizations in the Federal Priced services, Federal Reserve, 263, 286 Reserve System Profit and loss, Federal Reserve Banks, 288 Criminal referral form, 93 Publications in 1993 Residential construction loans, policy statement, 93 "Securities Credit Transactions K, International Banking Operations Handbook," Federal Reserve Criminal referral form, 93 Regulatory Service, 251 M, Consumer Leasing Bank Holding Company Supervision Compliance, 211 Manual, updated, 243 Review of, for simplification, 200, 201 Commercial Bank Examination Manual, O, Loans to Executive Officers, updated, 243 Directors, and Principal Directory of Bank Holding Company Shareholders of Member Banks, Community Development extension of credit exceptions, 93 Corporations, 205 Q, Interest of Deposits, extension of Making Sense of Savings, pamphlet, 201 mandatory date for compliance, Over-the-Counter Marginable Stocks, policy action, 94 list, 250 Y, Bank Holding Companies and Change in Bank Control Criminal referral form, 93 Real estate appraisals, supervisory policy, Residential construction loans, policy 241 statement, 93 Recommendations to the Board, 220 Z, Truth in Lending Refinancing Your Home, publication by Compliance, 212 FTC, 212 Loans to officers of depository Regulation of the U.S. banking structure institutions, 200 Bank Holding Company Act, 245 Waiver of right to cancel Bank Merger Act, 245 home-secured loans, 199, 200 Change in Bank Control Act, 246 BB, Community Reinvestment Act, Regulations compliance, 213 A, Extensions of Credit by Federal DD, Truth in Savings Reserve Banks Annual percentage yield, 201 Federal Reserve Bank limits on credit, Date of compliance, policy action, 94, Board policy action, 91 199, 201 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 359 Regulatory Reports Monitoring System, Securities, U.S.—Continued 242 U.S. government, holdings by Federal Reserve requirements of depository Reserve, 261 institutions Shawmut National Corporation, 215 Increase in amount of transaction Small Business Administration, 211 balances, policy statement, 92 Small Business Loan Securitization and Table, 299 Secondary Market Enhancement Act, Reserves and related items, 302 testimony, 220 Residential investment, 7 Special drawing rights, 276, 278, 302, 304, Resolution Trust Corporation Refinancing, 306 Restructuring, and Improvement Act State member banks (See also Member of 1991, risk-based capital guidelines banks) interim rule, 93, 240 Applications, 214, 247 Resolution Trust Corporation, banking Assets and liabilities, 301 structure regulation, 245 Banking offices, changes in number, 308 Risk-based capital guidelines, 98, 239 Compliance complaints, 215 Rules of Procedure, advance notice of Criminal referral form, policy statement, proposed mergers, 94 93 Rules Regarding Delegation of Authority Examinations and audits, 209 Board's General Counsel, authority to Financial disclosure, 251 grant certain individual waivers, 94 Foreign branches, 248 Division of Consumer and Community Loans to executive officers, 251 Affairs, authority for determining Number, by class of bank, 301 inconsistencies between state laws Residential construction loans, policy and Truth in Savings law, 94 statement, 93 Rules Regarding Equal Opportunity, Risk-based capital guidelines, 98 interim rule governing the handling of Safety and soundness supervision, 233 complaints of discrimination in the Supervision and regulation of, 232 federal sector, 95 Student Loan Marketing Association, 258 Supervision and regulation, Federal Safety and soundness, supervision for, 232 Reserve, 231 Salaries Supplemental Security Income program, Board of Governors, 271 201 Federal Reserve Banks, 285 System to Estimate Examination Ratings Saving and investment rates, 1993, 7 (SEER), 236, 242 Secured Credit Card Marketing Scams, publication by FTC, 212 Testimony, Board of Governors, 219 Securities and Exchange Commission, 211, Thrift Institutions Advisory Council, 327 225, 250 Thrift Supervision, Office of, 202, 250 Securities Exchange Act of 1934, 250 Trading activities, guidance, 239 Securities Investor Protection Corporation, Training, Federal Reserve System staff, 225, 226 209, 242 Securities, U.S. Transfer agents, supervision, 236 Accounting, 240 Transfers of funds (See also Fees and Activities of section 20 subsidiaries of Regulations: E) bank holding companies, policy Federal Reserve operations, volume, 297 statement, 95 Priced services, Federal Reserve, 286 Credit, 300 Transportation, U.S. Department of, 211, Federal Reserve services, 258 212 Legislation, 225 Treasury Automated Auction System, 259 Regulation, 250 Treasury securities Subsidiaries, supervision, 235 Bank holdings, by class of bank, 301 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

360 80th Annual Report, 1993 Treasury securities—Continued Federal Reserve Banks Holdings, 276, 278, 284, 302, 304, 306 Income, 286 Open market transactions, 282 Repurchase agreements, tables, 276, 278, 282, 284, 302, 304, 306 Treasury, U.S. Department of the, 225, 260 Truth in Lending Act, compliance, 212 Truth in Savings Act of 1992 Date for compliance, policy action, 94 Division of Consumer and Community Affairs, authority for determining inconsistencies between state laws and Truth in Savings law, 95 Unclaimed insured deposits, 228 Uniform Core Report of Examination in 1993, 241 University of Michigan Survey Research Center, 17 West Virginia Bankers Association, 206 • FRB1/1-12500-0494C Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis