Annual Report of the Federal Reserve Board, 1994

^Report X^f 1994 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 of Transmitted BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Washington, D.C., May 25, 1995 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 Eighty-First Annual Report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 1994. 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 1994 3 INTRODUCTION 7 THE ECONOMY IN 1994 8 The household sector 11 The business sector 15 The government sector 16 Labor markets 20 Price developments 23 MONETARY POLICY AND FINANCIAL MARKETS IN 1994 25 The course of policy and interest rates 29 Credit and money flows in 1994 35 INTERNATIONAL DEVELOPMENTS 36 Foreign economies 38 U.S. international transactions 40 Foreign exchange developments 41 Foreign exchange operations 41 Bank for International Settlements 43 MONETARY POLICY REPORTS TO THE CONGRESS 43 Report on February 22, 1994 69 Report on July 20, 1994 Part 2 Records, Operations, and Organization 99 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS 99 Regulation C (Home Mortgage Disclosure) 99 Regulation D (Reserve Requirements of Depository Institutions) 100 Regulation E (Electronic Fund Transfers) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS—Continued 101 Regulation H (Membership of State Banking Institutions in the Federal Reserve System) 101 Regulation H and Regulation Y (Bank Holding Companies and Change in Bank Control) 103 Regulation J (Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers through Fedwire) 103 Regulation K (International Banking Operations) 104 Regulation O (Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks) 104 Regulation S (Reimbursement to Financial Institutions for Assembling or Providing Financial Records) 104 Regulation T (Credit by Brokers and Dealers) 105 Regulation Y 106 Regulation Y and Rules Regarding Delegation of Authority 106 Regulation DD (Truth in Savings) 107 Regulation EE (Netting Eligibility for Financial Institutions) 107 Rules of Practice for Hearings 107 Rules Regarding Equal Opportunity 108 Policy statements and other actions 110 1994 discount rates 115 MINUTES OF FEDERAL OPEN MARKET COMMITTEE MEETINGS 115 Authorization for Domestic Open Market Operations 117 Domestic Policy Directive 117 Authorization for Foreign Currency Operations 119 Foreign Currency Directive 120 Procedural Instructions with Respect to Foreign Currency Operations 120 Meeting held on February ?>-4, 1994 139 Meeting held on March 22, 1994 151 Meeting held on May 17, 1994 160 Meeting held on July 5-6, 1994 172 Meeting held on August 16, 1994 181 Meeting held on September 27, 1994 191 Meeting held on November 15, 1994 201 Meeting held on December 20, 1994 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

213 CONSUMER AND COMMUNITY AFFAIRS 213 CRA reform 213 Fair lending 214 HMDA data and fair lending 217 Community development 219 Other regulatory matters 222 Economic effects of the Electronic Fund Transfer Act 223 Compliance examinations 224 Agency reports on compliance with consumer regulations 227 Applications 228 Consumer complaints 230 Consumer Advisory Council 231 Testimony and legislative recommendations 232 Recommendations of other agencies 233 LITIGATION 233 Bank Holding Company Act—review of Board actions 233 Litigation under the Financial Institutions Supervisory Act 234 Other actions 237 LEGISLATION ENACTED 237 Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 241 Riegle Community Development and Regulatory Improvement Act of 1994 247 Bankruptcy Amendments of 1994 249 BANKING SUPERVISION AND REGULATION 250 Scope of responsibilities for supervision and regulation 256 Supervisory policy 263 Regulation of the U.S. banking structure 267 International activities of U.S. banking organizations 268 Enforcement of other laws and regulations 271 Federal Reserve membership 273 REGULATORY SIMPLIFICATION 273 Requirements for real estate appraisals 273 Relaxation of restrictions on bank holding companies 274 Netting arrangements 274 Receipts for ATM transactions 274 Government securities transactions 277 FEDERAL RESERVE BANKS 278 Developments in Federal Reserve services 282 Examinations 283 Income and expenses Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FEDERAL RESERVE BANKS—Continued 284 Holdings of securities and loans 284 Volume of operations 284 Federal Reserve Bank premises 285 Pro forma financial statements for Federal Reserve priced services 291 BOARD OF GOVERNORS FINANCIAL STATEMENTS 299 STATISTICAL TABLES 300 1. Detailed statement of condition of all Federal Reserve Banks combined, December 31, 1994 302 2. Statement of condition of each Federal Reserve Bank, December 31, 1994 and 1993 306 3. Federal Reserve open market transactions, 1994 308 4. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities, December 31, 1992-94 309 5. Number and salaries of officers and employees of Federal Reserve Banks, December 31, 1994 310 6. Income and expenses of Federal Reserve Banks, 1994 314 7. Income and expenses of Federal Reserve Banks, 1914-94 318 8. Acquisition costs and net book value of premises of Federal Reserve Banks and Branches, December 31, 1994 319 9. Operations in principal departments of Federal Reserve Banks, 1991-94 320 10. Federal Reserve Bank interest rates, December 31, 1994 321 11. Reserve requirements of depository institutions, December 31, 1994 322 12. Initial margin requirements under Regulations T, U, G, and X 323 13. Principal assets and liabilities and number of insured commercial banks in the United States, by class of bank, June 30, 1994 and 1993 324 14. Reserves of depository institutions, Federal Reserve Bank credit, and related items—year-end 1918-94, and month-end 1994 330 15. Number of banking offices in the United States, December 31, 1993 and 1994 331 16. Mergers, consolidations, and acquisitions of assets or assumptions of liabilities approved by the Board of Governors, 1994 345 FEDERAL RESERVE DIRECTORIES AND MEETINGS 346 Board of Governors of the Federal Reserve System 348 Federal Open Market Committee 349 Federal Advisory Council 350 Consumer Advisory Council 351 Thrift Institutions Advisory Council 352 Officers of Federal Reserve Banks and Branches 354 Conferences of chairmen, presidents, and first vice presidents 354 Directors 374 MAPS OF THE FEDERAL RESERVE SYSTEM 376 INDEX Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Parti Monetary Policy and the U.S. Economy in 1994 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction The U.S. economy turned in a strong eral Reserve began to firm money marperformance in 1994. Real gross domes- ket conditions in February 1994. Additic product increased 4 percent over the tional tightening followed over the four quarters of the year. The employ- course of the year, as economic growth ment gains associated with this rise in remained unexpectedly strong, eroding production outpaced growth of the labor remaining margins of unused resources force by a sizable margin, and the unem- and intensifying price increases at early ployment rate thus declined substan- stages of production. During this period, tially. Price increases picked up in the economic effects of the tightening of some sectors of the economy in 1994 monetary policy may have been muted as labor and product markets tightened, by developments in financial markets— but broader measures of price change for example, easier credit availability showed inflation holding fairly steady: through banks and a decline in the for- The consumer price index increased eign exchange value of the dollar. about 23/4 percent over the year, the Short-term interest rates increased same as in 1993. about 2Vi percentage points during Federal Reserve policy during 1994 1994, with the federal funds rate rising was aimed at fostering a financial envi- from 3 percent to 51/2 percent. Other ronment conducive to sustained eco- market interest rates rose between nomic growth. As the economy moved 11/2 percentage points and 3 Vi percentback toward high rates of resource utili- age points, on net, with the largest zation, pursuit of this aim necessitated increases coming at intermediate acting to prevent a buildup of inflation- maturities. Through much of the year, ary pressures. Federal Reserve policy intermediate- and long-term rates were had remained very accommodative in lifted by more rapid actual and expected 1993 in order to offset factors that had economic growth, fears of a pickup in been inhibiting economic growth. By inflation, and market expectations of early 1994, however, the expansion additional policy moves. However, a clearly had gathered momentum, and further substantial tightening in Novemmaintenance of the prevailing stance of ber and, near year-end, some tentative policy would eventually have led to ris- signs of moderation in economic activing inflation that, in turn, would have ity appeared to reduce market concerns jeopardized economic and financial sta- about increased inflation pressures bility. Taking account of anticipated lags and additional Federal Reserve policy in the effects of policy changes, the Fed- actions. As a result, long-term rates declined, on net, from mid-November through the end of December. NOTE. The discussion here and in the following The foreign exchange value of the two chapters is adapted from Monetary Policy dollar in terms of other Group of Ten Report to the Congress Pursuant to the Full currencies declined about 6I/2 percent Employment and Balanced Growth Act of 1978 during 1994, even as the economy (Board of Governors, February 1995). Data cited picked up and interest rates rose. The here and in the next three chapters are those available as of mid-March 1995. positive effects on the dollar that would Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

81st Annual Report, 1994 normally have been expected from Growth in the broad monetary aggrehigher U.S. interest rates were offset in gates remained subdued in 1994. The large part by upward movements in expansion of M3, about VA percent, long-term interest rates abroad. Indeed, was well within the 0 percent to 4 perforeign long-term rates increased as cent range established by the Federal much, on average, as U.S. rates during Open Market Committee and slightly 1994, because growth abroad, especi- more than its increase in 1993. M3 was ally in Europe, was more rapid than buoyed by growth of 7 percent in large expected. Concerns about U.S. inflation time deposits, as banks turned to wholemay have contributed to weakness in the sale markets to fund credit expansion. dollar in the middle part of 1994; late For the year, M2 rose about 1 percent, in the year, the dollar rallied, as tighter the lower bound of its 1 percent to 5 permonetary policy apparently reduced cent range. In contrast to 1992 and 1993, investors' inflation fears. the slow growth in M2, and the result- Despite the rise in U.S. interest rates ing further substantial increase in its in 1994, private-sector borrowing, velocity (the ratio of nominal GDP to abetted in part by more aggressive lend- the money stock), was not a conseing by intermediaries, picked up in sup- quence of unusually large shifts from port of increased spending. The debts M2 deposits to bond and stock mutual of both households and businesses grew funds. Rather, it seemed to reflect behavat their fastest rates in five years. The ior similar to that in earlier periods of step-up in growth of private debt was rising short-term market interest rates. accompanied by changes in its compo- During such periods, changes in the sition. As bond yields rose, businesses rates available on retail deposits usually shifted toward short-term funding lag changes in market rates, providing sources, increasing their bank borrow- an incentive to redirect savings from ing and commercial paper issuance these deposits to market instruments. while cutting back on new bond issues. These shifts tend to have an especially Similarly, households turned increas- marked effect on M1 because yields on ingly to adjustable rate mortgages as its components either cannot adjust or rates on fixed rate mortgages increased adjust quite slowly to shifts in market substantially. Banks encouraged the shift rates. Growth of Ml during the year was of households and businesses to bank 2lA percent; it had been 10Vi percent in borrowing by easing lending standards 1993. Only continued strong growth in and not allowing all of the rise in market currency, much of which likely reflected rates to show through to loan rates. In increased use abroad, supported Ml. contrast to the trend in private-sector In 1995 the Federal Reserve will seek borrowing, federal borrowing was to promote continued economic expanslowed in 1994 by policies adopted in sion while avoiding the provision of so previous years to narrow the federal much liquidity that a sustained step-up deficit, as well as by the effects of the in inflation might begin to develop. strong economy on tax receipts and Much progress has been made over the spending. Taken together, the debt of all past couple of business cycles in reducnonfinancial sectors expanded 5VA per- ing the role that inflation plays in the cent, a rise that was the same as the economic decisions of households and increase of a year earlier and that was in businesses. Moving forward, the chalthe middle portion of the 1994 monitor- lenge will be to preserve and extend this ing range of 4 percent to 8 percent. progress, given that the Federal Reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction can best contribute to long-run prosperity by establishing an environment of effective price stability. Economic prospects for the long run will be further enhanced if the Congress and the Administration succeed in making further progress in reducing the federal budget deficit. An improved outlook for the federal deficit over the remainder of this decade and beyond could have significant favorable effects in financial markets, including a shift in long-term interest rates to a trajectory lower than that which would otherwise prevail. Such a shift in long-term rates would be an essential part of a process in which a larger share of the nation's limited supply of savings would be channeled to productivity-improving investment, thereby boosting growth in output and living standards. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1994 The economy recorded a third year of stronger buffers against potential delays strong expansion in 1994. Real GDP in supply. grew 4 percent over the four quarters of In contrast to the strength in private the year, industrial output rose 6 per- expenditures, government purchases of cent, and the number of nonfarm pay- goods and services edged down on roll jobs increased about 3Vi million, net over the four quarters of 1994. Fedthe largest gain in ten years. Labor and eral purchases of goods and services, product markets tightened appreciably. which had declined sharply in 1993, Price pressures intensified in the mar- fell further in 1994 as a consequence of kets for materials, but broader measures actions taken in recent years to reduce of price change showed inflation hold- the size of the federal deficit. Meaning steady. while, the real purchases of state and As in 1992 and 1993, the economic local governments rose only modestly. advance during 1994 was driven mainly Although the expanding economy proby sharp increases in the real expendi- vided states and localities with a tures of households and businesses. stronger revenue base, many of these Consumer purchases of motor vehicles jurisdictions continued trying to hold rose further in 1994, and purchases of spending in check; a number of states other consumer durables increased chose to cut taxes. even faster than they had in the two As in the two previous years, a sigprevious years. Residential investment nificant portion of the rise in domestic posted a small gain, on net, over the spending in 1994 went for imports of four quarters of the year, despite sharp goods and services, which increased increases in mortgage interest rates. about 14 percent in real terms during the Business investment in office and computing equipment slowed from the Change in Real GDP spectacular pace of 1993 but continued Percent, annual rate to rise rapidly nonetheless, and business investment in other types of equipment accelerated. Real outlays for nonresidential construction, which had been a weak sector of the economy in previous years, picked up in 1994; outlays 1, 1 for office construction ended a long slide that had stretched well back into the 1980s. Business investment in inven- T tories, which had been quite restrained in previous years of the expansion, increased appreciably in 1994. Much of the inventory buildup apparently was 1990 1992 1994 intentional and reflected the desires of firms to stock up in anticipation of NOTE. The data are seasonally adjusted and come from the Department of Commerce; they are measured in terms continued strength in sales or to build of 1987 dollars. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 81st Annual Report, 1994 year. Meanwhile, growth of real exports The Household Sector of goods and services picked up noticeably, with gains cumulating to about Real personal consumption expenditures 11 Vi percent over the year. advanced VA percent over the four quar- Labor and product markets tightened ters of 1994, a rate about in line with the in 1994. After ticking up in January average of the two previous years. Supin conjunction with the introduction port for the rise in spending came from of a new labor market survey, the rapid income growth, and, according to civilian unemployment rate fell sharply surveys, from sharp increases in conover the remainder of the year, to sumer confidence. Outlays for durable 5.4 percent in December. In manufac- goods continued to rise especially rapturing, gains in production exceeded idly, seemingly little affected by rising the growth of capacity by a sizable interest rates. Nor did spending appear margin during 1994, and the rate of to be much affected, in the aggregate, by capacity utilization climbed 3 percent- poor performance of the stock and bond age points. Its level at year-end was in markets, which cut into the real value of line with the highest level achieved household assets. Credit generally was during the economic expansion of the readily available during 1994; growth of 1980s. consumer installment debt picked up Inflation pressures picked up in some substantially, to a pace comparable with markets in 1994. Prices of raw indus- some of the larger increases that were trial commodities rose even more rap- observed during the expansions of the idly than in 1993, and prices of inter- 1970s and 1980s. mediate materials accelerated sharply, Real consumer expenditures for especially after midyear. However, the durable goods increased about 814 perinflation impulse in these markets did cent in 1994, bringing the cumulative not carry through with any visible force rise in these outlays over the past three to the consumer level, probably because years to nearly 30 percent. The stock of unit labor costs, which make up by durable goods that households wish to far the largest part of value added in hold apparently continued to rise quite production and marketing, continued to rapidly in 1994, and at least some houserise at a low rate. The employment cost holds probably were still making up for index of hourly compensation in private purchases that had been put off earlier in nonfarm industries actually slowed the 1990s, when the economy was slugnoticeably from the pace of 1993, and gish and concerns about job prospects productivity gains in 1994 held close to were widespread. Real expenditures for the pace of the previous year. motor vehicles moved up an additional As for retail prices, 1994 was the 3Vi percent over the four quarters of fourth year in a row in which the rise in 1994, after gains of about 9 percent the total consumer price index has been in each of the two preceding years; around 3 percent. The CPI excluding increases in sales of vehicles in 1994 food and energy rose just 2.8 percent might have been a bit stronger still but over the four quarters of 1994, after an for capacity constraints and various supincrease of 3.1 percent in 1993; the rate ply disruptions that sometimes limited of rise in this index, which is widely the availability of certain models. Real used as an indicator of underlying outlays for durable goods other than inflation trends, was nearly halved from motor vehicles rose about 12 percent 1990 to 1994. over the four quarters of 1994, a pickup Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1994 from the already rapid rates of expan- in real disposable income in 1994 was sion of the two previous years. Pur- the largest increase since the 1983-84 chases of personal computers and other period. Growth of wages and salaries electronic equipment continued to surge accelerated in 1994 in conjunction with in 1994, and spending on furniture and the step-up of employment growth. household appliances moved up further. Income from capital also rose: Divi- Consumer expenditures for non- dends moved up along with corporate durables and services exhibited mixed profits, and interest income turned patterns of change in 1994. Real outlays back up after three years of decline. By for nondurables increased more than contrast, transfer payments, the growth 3 percent over the year, a pickup from of which tends to slow as the economy the subdued rate of growth recorded strengthens, registered the smallest in the previous year and, for this cate- annual increase since 1987. The net gory, a larger-than-average advance by income of nonfarm proprietors appears historical standards. By contrast, real to have about kept pace with the average expenditures for services increased rate of growth in other types of income. roughly 214 percent, a slightly smaller Farm income rose moderately on an gain than that of 1993; growth of out- annual average basis, as an increase in lays for services was held down, to some the volume of output more than offset degree, by a decline in real outlays for the effects of sharp declines in farm energy, as warm weather late in 1994 output prices that developed over the reduced the amount of fuel needed for course of the year. heating. Consumers' perceptions of economic Real disposable personal income rose and financial conditions brightened connearly 41/2 percent during 1994. Except siderably during 1994. By year-end, the for a couple of occasions in previous composite measures of consumer confiyears when income growth was boosted dence that are prepared by the Confertemporarily by special factors, the rise ence Board and the University of Michigan Survey Research Center had both moved to new highs for the current busi- Change in Real Income and Consumption ness expansion. Consumers became Percent, annual rate more optimistic over the year in regard Personal consumption expenditures both to current and to future economic Disposable personal income conditions. Perceptions of employment prospects also improved, with a growing proportion of respondents saying that jobs were plentiful and a reduced proportion saying that jobs were hard to find. ElJI In contrast to most other indicators for the household sector of the economy, household balance sheets—which had strengthened appreciably in previous rp • years—showed little or no improvement in 1994. According to preliminary data, 1990 1992 1994 the aggregate net worth of households NOTE. The data are seasonally adjusted and come from recorded a relatively small increase in the Department of Commerce; they are measured in terms of 1987 dollars. nominal terms over the year, and, in real Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

10 81st Annual Report, 1994 terms, net worth may have declined. the number of houses on which con- Household assets rose only moderately struction was started fell back from in nominal terms, and the growth of the exceptionally high peaks that were nominal liabilities picked up a bit as a reached briefly in late 1993, but they result of the sharp increase in use of remained at elevated levels. In total, consumer credit. construction began on 1.20 million With personal income growing faster single-family units in 1994, a figure that than net worth during 1994, the ratio of was slightly above the highest annual wealth to income fell over the course of total of the 1980s. The number of sales the year. In the past, declines in this of existing homes nearly matched ratio sometimes have prompted house- the previous annual peak, reached in holds to boost the proportion of current 1978; and although sales of new homes income that is saved, in an attempt to remained well short of previous highs, restore wealth to more desirable levels, the 1994 total was in line with the numand this same tendency may have been ber sold in the brisk market of 1993. at work, to some extent, in 1994. After Declines in the starts and sales of dipping in the first quarter of the year to single-family houses in early 1994 basithe lowest level of the current expan- cally reversed the huge gains of late sion, the personal saving rate rose a full 1993. Whatever tendency there may percentage point over the remainder have been for these indicators to exhibit of the year, to a fourth-quarter level at least a temporary setback after a of 4.6 percent. Even then, however, the period of unusual strength was probably saving rate remained quite low by reinforced by the initial reactions of historical standards. Rising levels of builders and homebuyers to increases in income and employment and increased mortgage interest rates that had begun in confidence in the outlook apparently the final quarter of 1993. Exceptionally convinced consumers to push ahead severe winter weather in the Northeast with increases in outlays, most notably and Midwest early in 1994, coming on on consumer durables. the heels of favorable conditions in late Despite the apparent flagging in the 1993, probably also helped to account improvement in household balance for the sharpness of the downturn. In sheets, signs of outright stress in household financial conditions were not much Private Housing Starts in evidence in 1994. Delinquency rates Millions of units, annual rate on mortgages and most other types of household loans generally remained quite low relative to their historical ranges. Credit card delinquencies moved up toward the end of the year, however. Residential investment held up remarkably well in 1994 in the face of sharp increases in mortgage interest 0.5 rates. In real terms, these investment outlays were up about 3 percent, on net, over the four quarters of the year, after gains of 17 percent in 1992 and 8 per- 1988 1990 1992 1994 cent in 1993. In the market for single- NOTE. The data are seasonally adjusted and come from family houses, the number of sales and the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1994 \ \ any event, starts of single-family homes changes in median transaction prices ticked back up a bit in the second quar- slowed, but the rate of rise in the ter of the year, sales of existing homes quality-adjusted indexes picked up essentially flattened out, and the rate of somewhat. All told, prices have been decline in sales of new homes slowed. firmer in the past couple of years than After midyear, sales of existing they were earlier in the 1990s. homes began to exhibit a clear down- After falling to exceptionally low trend. However, sales of new homes levels in late 1992 and early 1993, constrengthened through the summer and struction of multifamily housing units into the autumn, and single-family starts increased throughout 1994. Although held firm. Sizable gains in employment the level of activity in this part of the and income and rising optimism about housing sector was not especially high, the future of the economy apparently gains during the year were large in helped to blunt the effects of increases percentage terms: Starts of these units in interest rates during this period. In moved up about 65 percent from the addition, the availability of a widening fourth quarter of 1993 to the fourth variety of alternative mortgage instru- quarter of 1994, at which point they ments and, perhaps, some easing of loan were more than double the lows of a qualification standards may have permit- couple of years ago. The national averted some buyers, who otherwise would age vacancy rate for multifamily rental not have been able to obtain financing, units remained relatively high in 1994, to go ahead with their purchases. but markets in some areas of the country Toward year-end a softer tone seemed had tightened enough to make constructo be emerging in some key indicators tion of new multifamily units economiof single-family housing activity. Sales cally attractive. The August 1993 reauof new homes tailed off sharply in thorization of a tax credit on low-income November and December, and the ratio housing units also provided some incenof the number of unsold homes to the tive for new construction. The financing number of sales, which had turned of multifamily projects was facilitated upward in early 1994, continued to rise. through more ready availability of credit By December the ratio had moved up to and increased equity investment. a level that was a little above its historical average. Nonetheless, starts of new single-family houses remained strong The Business Sector through year-end, rising to a December level that was moderately above the Robust expansion was evident in most average for the year as a whole. of the economic indicators for the busi- Increases in the various measures of ness sector of the economy in 1994. house prices were of small to moderate Real output of nonfarm businesses size in 1994. The median transaction increased about 4lA percent over the prices of new and existing homes that four quarters of the year, according were sold in the first half of the year to preliminary estimates. For a second were roughly 3V6 percent above the year, business investment in fixed level of a year earlier, and a similar rise capital advanced exceptionally rapidly. was reported during that period in price Inventory investment also picked up indexes that adjust for changes in the appreciably, spurred by large, sustained quality and regional mix of homes that increases in sales. Business finances are sold. After midyear, the four-quarter remained on a sound footing: Invest- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

12 81st Annual Report, 1994 ment expenditures continued to be surpassing, by a percentage point or financed predominantly with internal more, the peaks of the late 1970s and funds, and signs of financial stress were late 1980s. largely absent. After rising 2V/i percent during 1993, Industry entered 1994 with consider- corporate profits increased another able momentum and maintained a rapid 4 percent over the first three quarters of pace of expansion throughout the year. 1994 (and as of mid-March 1995, indi- Industrial production rose 6 percent cations are that profits also rose in the over the four quarters of 1994, a growth fourth quarter). The profits earned by rate exceeded in only one of the past nonfinancial corporations from their ten years. The production of business domestic operations increased about equipment advanced especially rapidly, IVi percent over the first three quarters buoyed by rising investment in the of 1994, after a gain of 2\Vi percent in domestic economy and further large 1993. Although these 1994 gains were increases in exports of capital goods. partly the result of increased volume, Production of intermediate products— profits per unit of output also rose. In which consist mainly of supplies used in the second and third quarters, before business and construction—also moved tax profits of nonfinancial corporaup substantially during 1994, as did the tions amounted to nearly 11 percent output of materials, especially those of the gross domestic output of those used as inputs in the production of businesses—the highest level for this durable goods. measure since the late 1970s. A reduced corporate reliance on debt, as well as The rate of capacity utilization in the cyclical recovery of the economy, industry increased about 2Vi percentage helped push up the profit share. In conpoints over the twelve months of 1994, trast to the experience of nonfinancial to a level that was about Vi percentage corporations, the profits of private finanpoint above the peak of the late 1980s. cial institutions from their domestic In manufacturing, the operating rate rose operations fell about 7 percent over the 3 percentage points during the year. By first three quarters of the year, as net year-end, utilization rates in some indusinterest margins narrowed. The decline tries had moved to exceptionally high reversed some of the large rise in profits levels. Most notably, the average operatthat these institutions had reported in ing rate among manufacturers engaged 1993. in primary processing (basically, the producers of materials) had climbed to Business fixed investment increased the highest level since the end of 1973, nearly 13 percent in real terms over Industrial Production Perc Index, 1987 = 100 - J 120 / 85 115 / 110 / J 80 105 / ** 1 I 1 1 I 1 1 \ i 1990 1992 1994 1988 1990 1992 1994 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1994 13 the four quarters of 1994, after a gain weakness; the investment cycle in that of 16 percent during 1993. Real expen- sector has been sharply out of phase ditures for equipment, which had with those of most other industries increased more than 20 percent in 1993, because of persistent excess capacity moved up an additional 15 percent over and poor profitability in the airline the four quarters of 1994, and invest- business. ment in structures scored its biggest gain Business investment in nonresidential in several years. structures rose more than 4 percent dur- In the equipment category, expendi- ing 1994, after an increase of V/i pertures for office and computing equip- cent in 1993 and declines in each of ment, which had registered an astonish- the three preceding years. Investment in ing gain in 1993, slowed in 1994, but industrial structures rose for the first the rise in these outlays still amounted time since 1990, more than likely in to nearly 20 percent in real terms. Mean- response to high—and rising—rates of while, the growth of real expenditures capacity utilization. Investment in office for most other types of business equip- buildings also picked up in 1994 after a ment picked up. Business investment long string of declines that, in total, had in motor vehicles rose about 17 percent brought spending on these structures over the four quarters of 1994. With down about 60 percent from the peak of this gain coming on top of big increases the mid-1980s; declining vacancy rates in each of the two previous years, and a firming of property values proannual business outlays for vehicles vided additional evidence of improvereached a level nearly one-third higher ment in this sector of the economy in than the peak year of the 1980s. Outlays 1994. The investment data for other for communications equipment also types of structures showed a mix of scored an especially big gain in 1994, pluses and minuses: Expenditures on more than 25 percent in real terms. Busi- commercial structures other than offices ness purchases of industrial equipment moved up further, after large gains in advanced about 12 percent during 1994, 1992 and 1993; however, outlays for one of the larger gains of the past two drilling declined for a fourth year, to the decades. By contrast, commercial air- lowest level since the early 1970s. craft once again was a notable area of Change in Real Business Fixed Investment Percent, annual rate Corporate Profits before Taxes Structures Percentage of nominal product Producers' durable equipment 10 _J I J_ J_ 1988 1990 1992 1994 NOTE. Profits of nonfinancial corporations from domes- 1990 1992 1994 tic operations, with adjustments for inventory valuation NOTE. The data are seasonally adjusted and come from and capital consumption, divided by GDP of nonfinancial the Department of Commerce; they are measured in terms corporate sector. of 1987 dollars. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 81st Annual Report, 1994 Because a large share of the growth usually were able to quickly obtain in business fixed investment in recent goods from their suppliers and thus were years has gone for items that depre- probably reluctant to hold stocks in ciate relatively quickly—computers house. At the end of 1993, the level of being a prime example—net additions real inventories in the nonfarm business to the stock of productive capital have sector was only 2 percent higher than it not been as impressive as the data on had been at the start of the recovery in gross investment expenditures might early 1991. seem to indicate. Nonetheless, with Circumstances changed in 1994, howthe further increase in gross investment ever. Markets tightened as demand in 1994, net additions to the capital continued to surge, and delays in the stock appear to have become more delivery of supplies became more substantial. Still unclear is the degree common. Anticipation of further growth to which these increases will ulti- in demand and increased concern mately translate into faster gains in about possible bottlenecks apparently output per worker and in living stan- prompted businesses to begin investdards; as discussed in more detail below, ing more heavily in inventories. Some the trend of growth in labor produc- firms may also have been trying to tivity, which is affected by the amount stock up on materials in advance of and quality of capital that workers have anticipated price increases. For the available, seems to have picked up in year as a whole, accumulation of nonrecent years but by a relatively small farm inventories was more than twice amount. what it had been in 1993. This addi- Business investment in inventories tional accumulation brought to a halt rose sharply in 1994. Earlier in the the previous downtrend in the ratio expansion, firms had refrained from of nonfarm inventories to business building stocks, even as the economy sales, but the ratio remained quite low strengthened. Increased reliance on by the standards of the past quarter- "just in time" systems of inventory con- century. trol reduced the level of stocks that firms Inventory accumulation in the farm needed to maintain their normal opera- sector of the economy also picked up tions, and, with a degree of slack in 1994. Stocks of farm products had still present in the economy, businesses been drawn down in 1993, when farm production fell sharply because of floods in the Midwest and droughts in some Change in Real Business Inventories other regions of the country. However, Billions of 1987 dollars, annual rate crop conditions in 1994 were unusually favorable throughout the year, and the output of some major crops climbed 50 to levels considerably above previous peaks. With the demand for farm out- 25 I. . 11 .lll.ll put rising much less rapidly than production, inventories of crops increased in i sharply. Livestock production also rose appreciably in 1994; inventories of live- J 1 L stock, which consist mainly of the cattle 1990 1992 1994 and hogs on farms and ranches, contin- NOTE. Total nonfarm sector. The data are seasonally ued to expand. adjusted and come from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1994 15 The Government Sector of federal receipts all showed sizable gains. Combined receipts from indi- Federal purchases of goods and servidual income taxes and social insurvices, the part of federal spending that is ance taxes increased a bit more than included in GDP, fell almost 6 percent 7 percent in fiscal 1994, after moving up in real terms over the four quarters of 5.4 percent in the previous fiscal year. 1994. Real outlays for defense remained Receipts from taxes on corporate profits on a sharp downtrend, and nondefense increased nearly 20 percent, slightly outlays, which had declined moderately more than the gain of 1993. in 1993, were little changed, on net, The federal budget deficit declined to over the four quarters of 1994. $203 billion in fiscal 1994, an amount Total federal outlays, measured in that was equal to 3.1 percent of nominal nominal dollars in the unified budget, GDP. Earlier in the 1990s, when the increased 3.7 percent in fiscal 1994 economy was sluggish, the federal defiafter a rise of 2.0 percent the previous cit had climbed to a cyclical peak of fiscal year. These increases are among 4.9 percent of nominal GDP. The previthe smallest of recent decades. Nominal ous cyclical low in the ratio of the defioutlays for defense fell again in fiscal cit to nominal GDP, 2.9 percent, was 1994. In addition, the growth of outlays reached in fiscal 1989. Since fiscal 1989, for income security (a category that defense spending as a share of GDP has includes the expenditures on unemploydropped appreciably, but this source of ment compensation and welfare benedeficit reduction has been essentially fits) slowed further as the economy conoffset by increased outlays for health tinued to strengthen. Increases in social and social insurance. Thus, the ratio of security outlays also slowed somewhat total federal outlays to GDP has changed in fiscal 1994; the rise was about 1 perlittle, on net; it was about 22 percent in centage point less than that of nominal both fiscal 1989 and fiscal 1994. The GDP. Outlays for Medicaid slowed as ratio of federal receipts to nominal GDP well, but the rate of rise in those expenwas about 19 percent in both of those ditures once again exceeded the growth fiscal years. of nominal GDP. The stronger economy of recent years Federal receipts were up 9 percent in has provided state and local governfiscal 1994, the largest rise in several ments with a growing revenue base and years. With rapid expansion of the econa broadening set of fiscal options. Some omy giving a strong boost to almost all types of income, the major categories Federal Budget Deficit Billions of dollars Change in Real Federal Purchases Percent, Q4 to Q4 • 1 1 1300 11 200 100 1990 1992 1994 NOTE. The data are for fiscal years. They are on a 1990 1992 1994 unified budget basis and are from the Department of the NOTE. The data are from the Department of Commerce. Treasury. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

16 81st Annual Report, 1994 governments have responded to these In real terms, the 1994 rise in purdevelopments by cutting taxes, in most chases of goods and services by state cases by small amounts. Effective tax and local governments amounted to just rates of state and local governments 2 percent. Compensation of employees, appear to have edged down a bit, on which accounts for about two-thirds of average, over the four quarters of 1994, total state and local purchases, increased and nominal receipts apparently rose 11/2 percent in real terms over the four somewhat less rapidly than nominal quarters of 1994. Construction outlays GDP over that period. declined slightly in real terms, as gains Many states and localities also have over the final three quarters of the year been trying to restrain the growth of were not sufficient to offset a firstexpenditures, but success on that score quarter plunge. Nonetheless, real outhas been difficult to achieve because of lays for structures remained at high increased outlays for entitlements and levels; a strong uptrend in construction rising demand for many of the public expenditures over the past ten or twelve services that traditionally have been pro- years has more than reversed a long vided by state and local governments. contraction that began in the latter half Transfers of income from state and local of the 1960s and bottomed out in the governments to persons rose about first half of the 1980s. 9 percent in nominal terms over the four The deficit in the combined operating quarters of 1994, roughly the same as and capital accounts of all state and the rise during 1993 but less than the local governments (a measure that increases of previous years; from 1988 excludes the surpluses in state and local to 1992, the average compound rate of social insurance funds) amounted to growth in these transfers was about about 0.6 percent of nominal GDP in 15 percent a year. In categories other calendar 1994, little changed from the than transfers, increases in spending corresponding figure for 1993 and down have been fairly restrained in recent only slightly from a cyclical peak of years; nominal purchases of goods and 0.8 percent in 1991. The recent cyclical services (which account for about peak in this measure was larger than the 80 percent of the total expenditures of peaks reached in recessions of the 1970s state and local governments) have been and 1980s, and declines in the deficit trending up less rapidly than nominal during this expansion have not been GDP since the early 1990s. as large as the declines that occurred during other recent expansions. Historically, the combined operating and capital accounts of state and local govern- Change in Real State and Local Purchases ments have been in deficit more often Percent, Q4 to Q4 than they have been in surplus; as a share of nominal GDP, the annual surpluses and deficits since World War II have averaged out to a deficit of 0.3 percent. I I • - I I Labor Markets Employment rose substantially in 1994. 1990 1992 1994 The total number of jobs in the nonfarm NOTE. The data are from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1994 17 sector of the economy increased 3.5 mil- Labor Market Conditions lion over the twelve months ended in Net change, millions of jobs December, after a gain of 2.3 million Payroll employment during 1993.' About a quarter of a mil- Total nonfarm lion of the rise in jobs during 1994 was in the government sector, mostly at the local level. Job growth in the private nonfarm sector amounted to 3.3 million, the largest gain since 1984. Increases in employment at nonfarm establishments were sizable in each quarter of 1994. Producers of goods boosted employi 1 1 t 1 i 1 ment more than half a million in 1994. Percent The job count in construction increased Civilian unemployment rate about 310,000 over the year; employment at general building contractors rose briskly for a second year, as did the number of jobs at firms involved in special trades related to construction. \ The number of jobs in manufacturing increased about 285,000 during 1994, after five years of decline. Producers of durables accounted for most of the rise 1 1 I 1 I I 1 in manufacturing employment; among Percent, Q4 to Q4 these producers, job gains were wide- Change in output per hour spread. Employment at factories that Nonfarm business sector produce nondurables rose slightly in total, as advances in some industries— such as printing and publishing and rubber and plastics—were partly offset by continued secular declines in the number of jobs in industries such as apparel, tobacco, and leather goods. The average workweek in manufacturing, which had 1 I I I I 1 stretched out in 1992 and 1993 when factory employment was declining, Change in employment cost index lengthened further in 1994, rising to new Total compensation, private industry highs for the postwar period. The high fixed costs that are associated with llllllll adding new workers probably continued to be an important factor in firms' 1. The Bureau of Labor Statistics has announced that the level of nonfarm payroll employment in March 1994 will be raised 760,000 when revised estimates are released in the summer of 1988 1990 1992 1994 NOTE. The data are from the Department of Labor. 1995. The revision may lead to larger estimates of The department introduced a new survey of households in job growth in both 1993 and 1994. January 1994; unemployment data from that point on are Digitized nfoot rd FireRctAlyS cEoRmp arable with those of earlier periods. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

18 81st Annual Report, 1994 decisions to rely still more heavily on points below that of January.2 Apprea longer workweek as a way to boost ciable net declines in unemployment labor input. Growth of factory output rates were reported over that period for surpassed the rise in labor input by a nearly all occupational and demographic sizable amount in 1994, a reflection of groups. substantial gains in productivity that Data on the reasons why individuals were realized in this sector of the econ- are unemployed have been tracing out omy in the most recent year. patterns fairly similar to those seen in Employment in the private service- previous business cycles. Most notably, producing sector rose nearly 23/4 million the number of persons who are unemduring 1994, after a gain of 2 million in ployed because they lost their last job 1993. The number of jobs in retail trade declined sharply, on net, during 1994. increased about 820,000 over the year. The number of individuals in this cate- Auto dealers, stores that sell building gory had soared earlier in the 1990s, materials, and those that sell general when the economy was struggling to merchandise were among the retail out- gain momentum and many large compalets that reported impressive gains. Hir- nies were restructuring their operations. ing at eating and drinking places also However, with the more recent decline, moved up briskly; after three years of the number of these "job losers," measlow growth around the start of the sured as a percentage of the labor force, decade, hiring at these establishments moved back toward the lows of the late has increased substantially in each of 1980s. Much of the decline in the numthe past three years. Employment at ber of job losers in 1994 was among firms that supply services to other busi- workers who were permanently sepanesses rose about 710,000 in 1994, even rated from their previous jobs. The nummore than in 1993. Once again, job ber of persons unemployed for reasons growth within this category was espe- other than the loss of a job (that is, the cially rapid at personnel supply firms— sum of "job leavers" and new entrants those that essentially lease the services or re-entrants unable to find work) also of their workers to other employers, declined in 1994. As in other business often on a temporary basis. Employment cycles, the number of these individuals, at businesses that supply health services measured relative to the size of the labor increased a quarter of a million in 1994, force, has been displaying a cyclical patabout the same as the gain in 1993; tern considerably more muted than that hiring at hospitals has flattened out over of job losers. the past couple of years, but elsewhere Growth of the civilian labor force— in the health sector job growth has con- which consists of the individuals who tinued at a rapid clip. are employed and those who are seeking Strength also was evident in 1994 in data from the monthly survey of households. After ticking up in January 1994, 2. Research by the Bureau of Labor Statistics suggests that the unemployment rate would have when a redesigned household survey run about two-tenths of a percentage point lower was implemented and new population in 1994 but for the changes that were introduced estimates were introduced, the civilian in January of that year. Other series from the unemployment rate turned back down household survey were also affected by the introduction of the new survey and the revised populain February and declined in most tion estimates; therefore, data for the period startmonths thereafter. The rate in Deceming in January 1994 are not directly comparable ber, 5.4 percent, was 1.3 percentage with those for the period ended in December 1993. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1994 19 employment but have not yet found it— The rate of increase in hourly compicked up a bit in the second half of pensation moved down another notch in 1994. However, even with this increase, 1994. The employment cost index for the cumulative rise in the labor force in private industry, a measure of hourly the current business expansion has been labor costs that comprises both wages relatively small compared with the gains and benefits, rose 3.1 percent during the recorded in other recent expansions; twelve months ended in December growth of the working-age population 1994, after increases of 3.6 percent in has been slower this decade than it was 1993 and 3.5 percent in 1992. The rise in the expansions of the 1970s and in the wage component of compensation 1980s, and the share of the population was slightly less than that of 1993, and participating in the labor force, which the rate of increase in hourly benefits trended up in earlier expansions, has slowed appreciably. Increases in benechanged little, on net, during this one. fits were restrained, in large part, by According to preliminary data, output another year of deceleration in health per hour of labor input in the nonfarm care costs and a further slowing in workbusiness sector increased 1.4 percent ers' compensation insurance costs. The over the four quarters of 1994, after a rise in nominal compensation per hour rise of 1.8 percent in 1993 and still in 1994 was the smallest yearly increase larger gains in 1992 and 1991. Over the in the fifteen-year history of the series, business cycle, productivity gains typi- the previous low of 3.2 percent having cally are largest in the early years of come midway through the expansion expansion, and, in that regard, the recent of the 1980s. Toward the end of that experience does not appear to be decade, as bidding for labor resources unusual. Abstracting from cyclical intensified, increases in compensation variation, the trend of productivity moved up for a time to around 5 percent growth in recent years seems to have a year. picked up somewhat from the unusually Unit labor costs in the nonfarm busisluggish pace that prevailed through ness sector rose 1.9 percent over the much of the 1970s and 1980s, but, at four quarters of 1994, after an increase the same time, the pickup has not of just 0.6 percent over the four quarters been nearly so large as some anecdotal of 1993. In manufacturing, a sector of reports might appear to suggest. For the economy in which productivity has example, from late 1988 to late 1994, an advanced quite rapidly in recent years, a interval of time that is long enough to rise in output per hour of 4.6 percent capture all the phases that productivity during 1994 more than offset a modest goes through during the business cycle, the average rate of rise in output per involved in the measurement of productivity is the hour in the nonfarm business sector choice of an appropriate set of prices for valuing amounted to slightly more than 1 lA per- the output of goods and services. Currently, aggrecent, up only modestly from an average gate output is tallied by using the prices of 1987, rate of rise of about 3A percent during but some major changes in relative prices have taken place since then, the most notable of which most of the 1970s and 1980s.3 is the huge decline in the price of office and computing equipment. Using the prices of a more recent year to gauge real output would result in a 3. Whether even this small degree of improve- reduced increment to growth from office and comment in the productivity trend will withstand puting equipment. All else equal, the growth of future revisions of the data is not clear. For productivity would also be negatively affected by example, among the many difficult issues that are a switch to the prices of a more recent year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

20 81st Annual Report, 1994 increase in hourly compensation, and to absorb these increases in the costs of unit labor costs declined noticeably for a domestically produced and imported second year. materials without raising their own prices very much. In the CPI, the prices of commodities Price Developments other than food and energy rose 1V2 per- Although price increases picked up in cent over the four quarters of 1994, some parts of the economy in 1994, the about the same as the rise of 1993. broader measures of price change con- Prices of new cars and new trucks, tinued to yield readings that were quite responding to strong demand and, at favorable. The rise in the total CPI was times, shortages in the supply of some about 23/4 percent in 1994, the same models, moved up faster than prices in as the increase during 1993. The CPI general; prices of used cars rose espeexcluding food and energy also rose cially rapidly for a third year. The prices about 23/4 percent over the four quarters of tobacco products, which had fallen of 1994, after increasing slightly more sharply in 1993 when producers made than 3 percent in 1993. The producer steep one-time price reductions, turned price index for finished goods increased 11/4 percent during 1994, after edging up just 1/4 percent during the previous year. Change in Prices As in 1992 and 1993, the past year's Percent, Q4 to Q4 increases in all these price indexes were Consumer among the lowest readings of the past quarter-century. Measures of inflation expectations held steady in 1994, but continued to show readings that were somewhat higher, on average, than the actual rates of price increase. The pickup of price increases in 1994 was confined largely to markets for materials. Prices of primary industrial inputs, which had moved up sharply during 1993, continued to surge in 1994, and price increases for intermediate Consumer excluding food and energy materials accelerated as the year progressed. By year-end, the PPI for intermediate materials other than food and energy had moved to a level more than 5 percent above that of a year earlier, the largest such increase since the late 1980s. Prices of imports also picked up somewhat in 1994, influenced by the depreciation in the exchange value of the dollar; as was true in the domestic economy, the largest price increases for imported goods were those for mate- 1988 1990 1992 1994 rials. Gains in productivity apparently NOTE. Consumer price index for all urban consumers. The data are seasonally adjusted and are from the Departenabled manufacturers of finished goods ment of Labor. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1994 21 back up in 1994, rising moderately about 2'/2 percent, slightly less than the over the four quarters of the year. By previous year's increase, and, for a third contrast, prices of home furnishings year, the rise in the price index for food changed little over the year, and the CPI away from home was less than 2 perfor apparel fell noticeably. cent. Coffee was the only item in the The CPI for non-energy services, a CPI for food to show sustained price category that accounts for about half of acceleration; freeze damage to the crop the total CPI, rose slightly less than in Brazil caused world prices of raw 3!/2 percent over the four quarters of coffee to surge and led to a price rise of 1994, after an increase of about VA per- more than 50 percent at retail over the cent in 1993. The increase in these four quarters of 1994. Prices for fresh prices in 1994 was just a bit more than vegetables jumped toward year-end after half the rise that was recorded in 1990, Hurricane Gordon had damaged crops when CPI inflation hit its most recent in Florida; run-ups in these prices typipeak. Prices of medical services contin- cally are reversed within a few months ued to slow in 1994, and airline fares, as new supplies become available. which have been an especially volatile The CPI for energy rose about category in the CPI in recent years, fell V/i percent during 1994, after edging appreciably after having risen sharply down V2 percent in 1993. Gasoline the previous year. However, auto finance prices increased 41/2 percent over the charges turned up, and the rate of rise in four quarters of 1994, reversing the owners' equivalent rent, a category that decline of the previous year. Much of has a weight of nearly 20 percent in the the increase in gasoline prices came in total CPI, rose slightly faster over the the third quarter and followed, with a four quarters of 1994 than it had during short lag, a second-quarter rise in crude the corresponding period of 1993. oil prices, which were moving back up In 1994, for a fourth year, neither from the low levels of late 1993 and food prices nor energy prices provided early 1994. Prices of other energy prodmuch impetus to the inflation process. ucts exhibited brief periods of rapid The consumer price index for food rose increase, but sustained upward pressures a shade more than 2!/2 percent over the in these prices did not materialize. Fuel four quarters of 1994, about the same oil prices shot up temporarily early in as the rise of 1993. Food prices in 1994, when stocks were pulled down for 1994 were restrained, in part, by sharp a time by cold weather in the Midwest declines in the prices of domestically and the Northeast; later in the year, howproduced farm products, which, in turn, ever, stocks were replenished and the were pulled down by the huge increases earlier price increases were more than in crop and livestock production noted reversed. Natural gas prices followed a previously. With beef and pork prices pattern similar to the price of fuel oil, declining over the year, the CPI for rising sharply in the first quarter of the meats, poultry, fish, and eggs changed year but falling back thereafter, to a little in total. Retail prices of dairy prod- fourth-quarter level that was about ucts rose only a small amount. Prices 214 percent lower than that of a year of foods that are more heavily influ- earlier. Electricity prices rose only enced by the costs of nonfarm inputs slightly during the year. also showed only small to moderate With the favorable inflation perforadvances in 1994: The increase in the mance of 1994, the average rate of rise CPI for prepared foods amounted to in the total CPI from the business cycle Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

22 81st Annual Report, 1994 trough in early 1991 to December 1994 amounted to 2.9 percent at an annual rate. Excluding food and energy, the rate of rise was 3.2 percent at an annual rate. Inflation rates lower than these have not been sustained through the first few years of any business expansion since that of the 1960s, when both the CPI and the CPI excluding food and energy showed average rates of increase of less than 1.5 percent during the first four years after the business cycle trough of early 1961. Average rates of price increase during the current expansion have been much smaller than those reported during the expansion that began in the mid-1970s. They also have been somewhat smaller than those reported during the first few years of the expansion that began in late 1982, a period when price increases were braked in part by unusually steep declines in oil prices. In measuring the progress that has been made toward bringing the economy closer to the goal of long-run price stability, the ratcheting down of the rate of price advance from cycle to cycle since the 1970s is perhaps an even more meaningful indicator than the favorable trends in the annual price data of recent years. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

23 Monetary Policy and Financial Markets in 1994 With the economy generally strong, trimmed estimates of the eventual rise in financial markets in 1994 were charac- short-term interest rates. As a conseterized by somewhat more rapid growth in private debt and by higher interest U.S. Interest Rates rates. The increase in interest rates re- Percent flected, in part, the policy actions of the Short-term Federal Reserve. Concerned about inflationary pressures resulting from rapid economic growth and dwindling margins of available resources, the Federal Reserve firmed policy on six occasions during the year. These actions were taken to foster a financial environment more likely to be consistent with sustained economic growth and low infla- Treasury bills tion. In total, the policy tightenings Three-month raised the federal funds rate a cumulative 2!/2 percentage points between early February 1994 and the end of Decem- 1 i i i j I ber. Other short-term rates rose similar Long-term amounts. Over this span, the Board of Governors increased the discount rate on three occasions, raising it a total of \3A percentage points. Longer-term rates increased IV2 percentage points to 3Vi percentage points on balance from early February through the end of December, with the largest increases posted at intermediate maturities. In addition to the policy actions, U.S. government bonds these rates were boosted through much of 1994 by greater-than-expected underlying strength in the economy and the _J resulting higher demand for credit, as 1982 1986 1990 1994 well as by upward revisions to expecta- NOTE. The data are monthly averages. tions in financial markets about the pol- The federal funds rate is from the Federal Reserve. The rate for three-month Treasury bills is the market icy tightenings that would be required rate on three-month issues on a coupon-equivalent basis to counter an incipient increase in infla- and is from the Department of the Treasury. tion. Beginning in late autumn, how- The rate for conventional mortgages is the weighted average for thirty-year fixed-rate mortgages with level ever, the extent of Federal Reserve payments at major financial institutions and is from the actions, along with incoming data sug- Federal Home Loan Mortgage Corporation. gesting some moderation in the pace of The rate for U.S. government bonds is their market yield adjusted to thirty-year constant maturity by the expansion, calmed inflation fears and Department of the Treasury. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

24 81st Annual Report, 1994 Annual Rate of Change in Reserves, Money Stock, and Debt Aggregates Percent 1994 Item 1991 1992 1993 Year Ql Q2 Q3 Q4 Depository institution reserves' Total 8.7 20.1 12.2 -1.3 3.3 -3.2 -1.8 -3.3 Nonborrowed 9.1 20.3 12.2 -1.5 3.9 -4.2 -3.5 -2.1 Required 9.4 20.3 12.5 -1.1 2.7 -2.3 -1.9 -3.0 Monetary base2 8.2 10.4 10.4 8.4 9.8 8.4 7.5 6.9 Concepts of money3 Ml 7.9 14.3 10.5 2.3 5.5 2.6 2.4 -1.2 Currency and travelers checks . 7.9 9.1 9.9 10.1 11.0 10.3 9.3 8.5 Demand deposits 3.3 17.7 13.3 .4 7.1 -1.3 .3 -4.2 Other checkable deposits 12.3 15.6 8.6 -2.1 -.5 .2 -1.4 -6.7 M2 2.9 2.0 1.7 .9 1.8 1.7 .7 -.4 Non-Mi components 1.2 -2.3 -1.9 .3 .1 1.3 -.1 .0 MMDAs, savings, and smalldenomination time deposits .8 -2.4 -2.8 -1.9 -1.0 -2.4 -2.4 -1.9 General-purpose and broker-dealer money market mutual fund assets 4.9 -3.8 -.4 7.5 3.5 11.9 5.0 8.8 Overnight RPs and Eurodollars (n.s.a.) ... -4.6 7.4 14.6 20.1 10.5 20.9 30.8 13.0 M3 1.2 .5 1.0 1.4 .6 1.3 1.9 1.7 Non-M2 components -6.3 -6.3 -2.5 3.6 -5.8 -1.2 8.6 13.1 Large-denomination time deposits -13.1 -15.5 -6.8 7.0 -2.2 .0 11.9 18.0 Institution-only money market mutual fund assets 33.9 18.4 -4.3 -8.2 -20.5 -15.6 -4.5 7.2 Term RPs (n.s.a.) -20.4 8.3 18.5 7.0 -12.8 25.6 9.6 5.9 Term Eurodollars (n.s.a.) -13.8 -22.8 -.4 16.1 .0 14.6 26.6 20.2 Domestic nonfinancial sector debt . 4.6 4.8 5.2 5.2 5.6 4.8 4.7 5.5 Federal 11.3 10.7 8.5 5.7 7.3 5.4 3.9 5.9 Nonfederal 2.6 2.8 4.0 5.0 5.0 4.5 4.9 5.3 NOTE. Changes for quarters are calculated from the M2 is Ml plus savings deposits (including money average amounts outstanding in each quarter. Changes for market deposit accounts); small-denomination time years are measured from Q4 to Q4. Based on seasonally deposits (including retail repurchase agreements), from adjusted data except as noted. which have been subtracted all individual retirement n.s.a. Not seasonally adjusted. accounts (IRAs) and Keogh accounts at commercial 1. Data on reserves and the monetary base incorporate banks and thrift institutions; taxable and tax-exempt adjustments for discontinuities associated with regulatory general-purpose and broker-dealer money market mutual changes in reserve requirements. funds, excluding IRAs and Keogh accounts; wholesale 2. The monetary base consists of total reserves; plus overnight and continuing-contract repurchase agreements the currency component of the money stock; plus, for all (RPs) issued by commercial banks and thrift institutions quarterly reporters, and for all weekly reporters without net of money fund holdings; and overnight Eurodollars required reserve balances, the excess of current vault cash issued to U.S. residents by foreign branches of U.S. banks over the amount applied to satisfy current reserve require- worldwide net of money fund holdings. ments. For further details, see the Federal Reserve's H.3 M3 is M2 plus large-denomination time deposits at all Statistical Release. depository institutions other than those due to money 3. Ml consists of currency in circulation excluding stock issuers; institution-only money market mutual vault cash; travelers checks of nonbank issuers; demand funds; wholesale term RPs issued by commercial banks deposits at all commercial banks other than those due to and thrift institutions net of money fund holdings; and depository institutions, the U.S. government, and foreign term Eurodollars held by U.S. residents at all banking banks and official institutions, less cash items in the offices in Canada and the United Kingdom and at foreign process of collection and Federal Reserve float; and other branches of U.S. banks worldwide net of money fund checkable deposits, which consist of negotiable orders of holdings. For further details, see the Federal Reserve's withdrawal and automatic transfer service accounts at H.6 Statistical Release. depository institutions, credit union share draft accounts, and demand deposits at thrift institutions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 25 quence, longer-term rates reversed some household borrowing was offset by of their earlier upward movements. lower growth in government debt. The Increases in intermediate- and long- effects of the strong economy on govterm rates over the course of the year ernment expenditures and receipts, polcaused significant capital losses for icy moves to reduce the federal deficit, some investors. Well-publicized losses and retirements of tax-exempt securities at a number of investment funds in the that had been advance-refunded all confirst half of the year, along with sub- tributed to the slowdown in government stantial portfolio reallocations in view borrowing. of the changed economic and finan- Banks funded much of the pickup in cial outlook, may have contributed to their loans with nondeposit funds and, in increased financial market volatility at the second half of the year, with sales of that time. On the whole, however, risk securities. As a result, the faster rate of premiums remained modest, and volatil- loan growth was not reflected in signifiity ebbed over the course of the year. cantly stronger expansion of the mone- Late in the year, following the bank- tary aggregates. M3, which was boosted ruptcy of Orange County, California, by relatively heavy issuance of large which resulted from losses in its invest- certificates of deposit, rose 1 Vi percent, ment fund, the tax-exempt securities a somewhat larger increase than in 1993. market dipped; but the effects, beyond With banks pricing savings and small those on the investors in the Orange time deposits unaggressively as market County fund, proved to be small and interest rates rose, M2 grew about 1 pershort-lived. cent over the year, somewhat below its One consequence of the higher and l3/4 percent pace in 1993. The increase more volatile long-term interest rates in market interest rates relative to rates was a shift in business borrowing away on transaction deposits slowed the from the capital markets and toward growth of Ml to just 214 percent from shorter-term sources, such as banks. the double-digit increases posted in This shift, which reversed the move to- 1992 and 1993. ward long-term financing that occurred as bond yields fell in 1992 and 1993, The Course of Policy was marked by the first annual increase and Interest Rates in bank business loans in several years. Consumer lending also accelerated in In early 1994, short-term interest rates 1994, as the improved economic out- remained at the very low levels reached look encouraged increased use of con- in late 1992, with the federal funds sumer credit. Higher interest rates lim- rate—fluctuating around 3 percent— ited the ability of households to "cash roughly in line with the rate of inflation. out" some of the equity in their homes The Federal Reserve had maintained when refinancing existing mortgages an accommodative monetary policy and thereby likely held down the growth throughout 1993, a stance that was of mortgage debt. Higher rates also en- believed to be necessary because of a couraged households to shift to adjust- number of extraordinary factors that able rate mortgages, which carried lower seemed to be inhibiting growth during initial interest costs. The debt of all non- the early years of the expansion. These financial sectors increased 5!A percent factors included efforts by households, in 1994, the same as the increase in firms, and financial intermediaries to 1993, as the pickup in business and repair strained balance sheets, business Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

26 81st Annual Report, 1994 restructuring activities, and the fiscal move was implemented in May. Taken contraction associated, in part, with the together, the four policy actions raised downsizing of defense industries. the federal funds rate about 1 ]A percent- During the recovery and expansion, age points. The May policy action was however, considerable progress had accompanied by a vote of the Board of been made by households and busi- Governors to increase the discount rate nesses in decreasing their debt-service Vi percentage point. burdens, and lending institutions had Other interest rates moved up succeeded in rebuilding their capital between 1 percentage point and 2 perpositions. By late 1993, the economy centage points as a result of these policy was expanding rapidly, and incoming data early in 1994 suggested that much of that momentum had likely carried over into the new year. In the circum- U.S. and Foreign Interest Rates Percent stances, continued monetary accommodation risked pushing the demands on Three-month productive resources to levels that ultimately would be associated with increased inflation. Consequently, the Average foreign Federal Open Market Committee, at its meeting in early February 1994, agreed that policy should be moved to a less stimulative stance. The pace at which the adjustment to policy should be made was less clear: A rapid shift would minimize the risk of allowing inflation pressures to build, while a more gradual move would allow financial markets time to adjust to the changed environment. Although many Ten-year market participants seemed to anticipate a firming move fairly soon, it would be the first tightening in many years, and some investors would undoubtedly 12 reconsider their portfolio strategies, possibly causing sharp movements in bond Average foreign and stock prices. In addition, a slower initial shift would allow more time to assess the strength of the economy and the effects of the change in policy. U.S. Treasury^1 In the event, the Committee tightened policy gradually through the winter and early spring. Pressures on reserve posi- J_ J L J_ 1984 1986 1988 1990 1992 1994 tions were increased by relatively small NOTE. The average foreign rates are the tradeamounts in February, March, and April; weighted averages, for the non-U.S. G-10 countries, of once market participants seemed to have bank rates (for the three-month comparison) and governmade substantial adjustments to the new ment bond yields (for the ten-year comparison) on instruments that are comparable to the U.S. instruments shown. direction of policy, a larger tightening The data are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 27 moves, with the largest increases com- part reflecting this concern, long-term ing at intermediate maturities. Besides rates moved up, and the dollar weakthe effect of the policy actions, longer- ened. Given the relatively large policy term rates were boosted by incoming action in May, however, the Committee data suggesting continued robust decided to take no action at the July growth, which heightened market con- meeting and to wait for more informacerns about a pickup in inflation and tion on the performance of the economy. expectations of further tightening by the The Committee saw the possible need Federal Reserve. In addition, uncertainty for tighter policy, however, and issued about the timing and magnitude of an asymmetric directive to the Fedfuture policy actions, as well as the capi- eral Reserve Bank of New York sugtal losses that followed the tightenings, gesting that policy would respond encouraged investors to shorten the promptly to evidence of increased inflamaturity of their investments and reduce tion pressures. their degree of leverage. The resulting In the interval between the Commitportfolio adjustments likely contributed tee meetings in early July and midto increased market volatility and may August, the economy continued to have intensified the upward pressure on expand robustly, and, coming into the longer-term interest rates. August meeting, it appeared that the Incoming data in the late spring and markets expected a small further early summer suggested that the econ- increase in reserve pressures. At its omy still was expanding at an appre- meeting, the Committee agreed that a ciable rate, led by increased sales of prompt further tightening move was business equipment, a rebound in non- needed to provide greater assurance that residential construction following bad inflationary pressures in the economy weather earlier in the year, and a pickup would remain subdued, and the memin inventory investment. Inflation was of bers chose a tightening action somewhat growing concern, as commodity prices larger than had been expected by the increased rapidly, and measures of slack markets. A rise of V2 percentage point suggested that the economy was enter- in the discount rate, voted by the Board ing a range in which pressures on broad of Governors, was allowed to show price indexes might begin to build. In through fully to the federal funds rate. Real Federal Funds Rate Market Rates on Selected Treasury Instruments Percent Percent 1960 1970 1980 1990 12/31 2/4* 3/22*4/18 5/17* 7/6* 8/16* 9/27* 11/15*12/20* NOTE. The real federal funds rate is the nominal fed- NOTE. Asterisks indicate days in 1994 on which the eral funds rate minus the change in the consumer price Federal Open Market Committee held scheduled meetindex less food and energy over the past four quarters. ings. Dashed lines indicate days on which the Committee The data are quarterly. announced a monetary policy action. The data are daily. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

28 81st Annual Report, 1994 Short-term market rates rose following intermeeting period would be toward the policy move, while long-term yields additional restraint. declined slightly, perhaps as a result of Broad measures of inflation remained downward revisions to expectations of moderate through the fall in spite of future tightening. continued substantial economic growth In advance of the late-September in an economy that was running close meeting, most market rates increased as to its estimated potential. Nonetheless, incoming economic data were seen in strong economic data and continued the market as raising the likelihood of upward pressure on prices at earlier higher inflation and the resulting need stages of production apparently heightfor tighter reserve conditions. The data ened investors' inflation concerns and suggested that the economy had not yet expectations of future policy tightenbeen greatly affected by the tightening ings. Consequently, most market interin monetary policy: Employment was est rates rose considerably between the growing strongly, and final sales, espe- September and November meetings, cially of consumer goods, appeared to with intermediate maturities showing have firmed. Manufacturing activity had the largest increases. At the Novemcontinued to expand rapidly, boosted in ber meeting, the Committee members part by an increase in motor vehicle agreed that the stance of policy was not production. Given the uncertain dura- sufficiently restrained given the clear tion of lags between changes in mone- risks of higher inflation. As a result, tary policy and the resulting effects on they chose a sizable firming of monetary the economy, however, it was not clear policy, tightening reserve conditions in whether the effects of the earlier interest line with the increase of 3A percentage rate increases were smaller than had point in the discount rate approved by been expected or were still in train. the Board of Governors. Another possibility was that the under- The yield curve flattened appreciably lying momentum of the expansion was in response to the larger-than-expected greater than had been evident earlier. policy action. The increase in the federal Given these uncertainties, the Commit- funds rate pushed up most short-term tee took no immediate tightening action interest rates, and although long-term at its September meeting. As in July, rates increased initially, they had, by however, the Committee agreed to an early December, more than reversed asymmetric directive suggesting that the their earlier increases. Evidently, market likely direction of any move over the participants ultimately interpreted the substantial policy tightening as dem- Bond Market Volatility onstrating the Committee's intention Percent to take the actions necessary to contain inflation at relatively low levels. By contrast, intermediate-term rates 20 increased over the weeks following 15 the November meeting as a variety of incoming data indicated that the 10 economy's growth had accelerated further in the fourth quarter and that J L_J L 1 1 1 additional tightenings might be required 1984 1986 1988 1990 1992 1994 to slow growth to a more sustainable NOTE. Expected volatility, derived from prices of options on Treasury bond futures. Month-end data. pace. By the time of the December Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 29 meeting, rates on two-year Treasury asymmetric directive pointing toward notes were only a little below those on further restraint. thirty-year Treasury bonds, although the yields on both instruments remained Credit and Money Flows in 1994 well above short-term rates. Financial markets were focused in The debt of all nonfinancial sectors grew early December on the failure of an 5]A percent in 1994, somewhat below investment fund run by Orange County, the middle of its monitoring range of California, and the subsequent bank- 4 percent to 8 percent and the same as ruptcy of the county itself. The munici- the increase of a year earlier. More rapid pal securities market bore the brunt of growth of private-sector debt was offset these developments, with rates rising for by slower growth of public-sector debt. a time relative to those on comparable As long-term rates rose well above their Treasury issues. The failure had a sub- late 1993 lows, private-sector borrowing stantial effect on the finances of the shifted toward shorter-term sources of municipalities that had invested in the funds. In part as a result of this shift, the fund. In addition, investors had to con- proportion of new debt supplied by sider the likelihood of other state and financial intermediaries was larger than local governments having similar invest- it had been for several years. Much of ment difficulties. In the period that fol- the growth in depository credit was lowed, however, only a few other prob- funded with nondeposit funds, however, lem situations emerged, and they were and growth in the broad monetary aggreon a much smaller scale. gates, which consist primarily of depos- In the period leading up to the its, remained subdued. December meeting, incoming data con- Debt growth both in the federal sector tinued to show robust growth and sub- and in the state and local government dued inflation. The Committee felt that sector slowed in 1994. Growth of fedthe effects on economic activity of the eral government debt was smaller bepolicy actions during the year, and espe- cause of the narrowing of the federal cially the substantial tightening moves budget deficit. The outstanding volume in the second half of the year, were not yet visible because of the lags in the economic effects of monetary policy. As Total Domestic Nonfinancial Debt Trillions of dollars a result, the Committee decided to take no new policy action at the meeting, waiting instead for additional information on the underlying strength in the economy and the effects of the earlier 13.0 policy actions. This decision was reinforced by concerns that the financial markets might be somewhat unsettled not only as a result of the usual year-end 12.5 adjustments but by the uncertain effects Monitoring range and incidence of the sizable market losses sustained by some investors over the year. In view of the substantial 1993 1994 strength evident in the incoming data, NOTE. The range was adopted by the FOMC for the however, the Committee again chose an period from 1993:Q4 to 1994:Q4. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

30 81st Annual Report, 1994 of state and local government debt actu- of the year, about half of all new home ally declined, as bonds that previously mortgages carried adjustable rates. The had been refunded in advance of their shift to adjustable rates and the sluggish earliest call date were retired. Much of adjustment of consumer loan rates mitithe bulge in tax-exempt issues in 1993 gated the effect of higher market interest had been for the advance refunding of rates on household debt-service burdens. higher-cost debt issued in the 1980s. The debt of nonfinancial businesses These offerings subsided early in 1994 expanded in 1994 after three years of as the amount of bonds eligible for stagnation. Earlier efforts to restructure advance refunding dwindled and bor- balance sheets by increasing equity capirowing costs rose. tal and refinancing higher-cost credit The growth of household debt picked appeared to leave businesses in a better up slightly in 1994 as an acceleration position to increase debt in 1994, as the in consumer credit was partly offset by sector's debt-service burden had fallen slower growth in mortgage debt. The about one-third from the peak reached pickup in consumer debt reflected, in five years earlier. Increased spending on part, increased demand for consumer capital and inventories in 1994 raised durables. In addition, responses to Fed- the funding needs of business. Funding eral Reserve surveys of banks indicated requirements also were boosted by a that many respondents were more substantial increase in the total value of willing to extend credit to households, mergers and acquisitions; the share of which may have led them to ease terms such activity requiring cash payments to and standards on consumer loans. shareholders—rather than swaps of Indeed, spreads between consumer loan shares—rose sharply, although it rerates and market rates narrowed signifi- mained below the levels reached in the cantly in 1994 as increases in loan rates late 1980s. Combined with a decline in lagged those in market interest rates. equity issuance—perhaps resulting from Consumer credit may also have been the lackluster performance of the stock boosted somewhat by the increased use market—the increased funding needs of credit cards offering rebates or other of business translated into a step-up in incentives. borrowing. Rising mortgage rates in 1994 greatly Rising and more volatile long-term reduced the volume of mortgage refi- interest rates encouraged businesses to nancings from the very high levels rely more heavily on short-term debt reached in 1993. The refinancings had in 1994. This shift was reinforced by contributed to an increase in mortgage changes in supply conditions in various debt because some households had taken markets. Capital losses early in the year the opportunity afforded by refinancing likely caused some of those supplying to borrow against a portion of the equity long-term funds to become more cauin their properties. Higher rates on fixed tious; for example, some savers backed rate mortgages also induced many bor- away from bond mutual funds. At the rowers to shift to adjustable rate mort- same time, banks were loosening terms gages, which carried much lower initial on business loans as well as easing their rates. Concessional starting rates and the underwriting standards. Banks attributed growing use of adjustable rate contracts the easing of loan terms and standards to with initial fixed rate periods lasting increased competition for business cusseveral years also may have contributed tomers from other banks and also from to this shift. Over the last few months nonbank lenders. The competitive pos- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 31 ture of banks likely reflected, in part, the was also damped by declining securities high level of profits earned by banks in prices.2 recent years and the resultant strength- In 1994, credit extended by thrift ening of their balance sheets. As a result institutions expanded for the first time of these factors, bank business loans in several years, as the Resolution Trust increased more than 9 percent, their first Corporation virtually completed its liqannual increase in several years. Other uidation of insolvent thrift institutions. sources of short-term business finance, In part, the increase in credit from this including commercial paper and finance sector also likely reflected the shift by company loans, also expanded over the households toward adjustable rate mortyear. gages. Thrift institutions and banks find The effect of the pickup in business holding adjustable rate mortgages less and consumer loans on bank credit risky than holding fixed rate mortgages, growth was partially offset by slower and so adjustable rate loans are less growth in bank securities holdings. likely to be securitized or sold. Early in the year, banks purchased a With the expansion of credit from significant volume of government secu- banks and thrift institutions, the growth rities, and reported holdings of other of depository credit in 1994 nearly securities were boosted by an account- matched that of total nonfinancial debt. ing change.1 Much of this growth was Thus, the share of credit provided by reversed later in the year, however, as these intermediaries stabilized after havbanks used sales of securities to fund ing declined substantially since 1988. loan growth. Reported securities growth Despite the growth in depository credit, the broad monetary aggregates continued to expand sluggishly. Domes- 1. New rules of the Financial Accounting Stantic banks funded much of their credit dards Board, effective at the start of 1994, limited expansion from nondeposit sources— the ability of banks to net off-balance-sheet items for reporting purposes. The new rules affected such as borrowings from their foreign items such as swaps and options, the cash values offices—that are not included in the of which are reported on balance sheets in the monetary aggregates. Funds from these "other securities" category. sources are not subject to deposit insurance premiums, which may help account for their recent rise. Changes in Business Lending Standards at Selected Large Commercial Banks, The broadest monetary aggregate, by Size of Borrower M3, did pick up a bit as banks funded Percent their asset growth in part from large time deposits. M3 expanded about 1 Vi percent, well above the lower bound of the 0 percent to 4 percent range established by the FOMC and a somewhat 2. A rule of the Financial Accounting Stan- 1990 1991 1992 1993 1994 dards Board, implemented at the start of 1994, required each bank to divide its investment NOTE. Data show percentage of domestic loan officers reporting tightening standards over the past three months account securities into those that it intended to less the percentage reporting easing. hold to maturity (which could be reported at book SOURCE. Federal Reserve, Senior Loan Officer Opin- value) and those that were available for sale ion Survey on Bank Lending Practices. (which had to be marked to market). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

32 81st Annual Report, 1994 larger increase than that in 1993. broadly consistent with the aggregate's Growth in large time deposits was about longer-run historical relationship to 7 percent for the year, the first annual nominal income and opportunity cost— increase in this component since 1989. traditionally defined as the difference Much of the increase in large time between rates on short-term instruments deposits was in senior bank notes, on (for example, Treasury bills) and rates which banks are not required to pay on retail balances. Rising opportunity deposit insurance premiums. costs during the year helped to damp M2 grew about 1 percent in 1994. the growth of M2, offsetting a part of The slow growth of the aggregate the impetus from increases in nominal reflected, in part, a relatively sluggish income. By contrast, slow growth of M2 upward adjustment of retail deposit in the years leading up to 1994 had rates. Rates on savings accounts and resulted from large portfolio shifts from other checkable deposits (OCDs), M2 deposits to bond and equity mutual including NOW accounts, responded funds. With these portfolio shifts about as slowly as they have in the past slowing in 1994, the growth in M2 plus to the increase in market rates, while the long-term mutual funds ran slightly response of rates on small time depos- below the 1 percent growth rate of M2 its was sluggish relative to historical itself. norms. Evidently, banks believed that Net sales of shares in equity mutual generating increased retail deposits funds continued at a high level in 1994, would be more expensive than raising although the pace slowed somewhat late wholesale funds, given that the offering in the year. The sales of equity fund of higher rates to attract new retail shares were partly offset, however, by deposits would also mean paying those outflows from bond mutual funds in the higher rates on existing liquid deposits last three quarters of the year. Apparand on time deposits as they were rolled ently, falling bond prices and greater over. Generating new and larger retail market uncertainty, and, perhaps, reports deposits would also require larger of derivatives losses at some funds, led expenses for advertising, administration, households to scale back their holdings and deposit insurance. of bond mutual funds in favor of invest- In 1994, for the first time in several ments that posed less risk of capital loss. years, M2 followed patterns that were With deposit rates lagging, however, Stock of M3 Stock of M2 Billions of dollars Billions of dollars Actual Actual 4,400 3,700 Range 4,300 3,600 i i i i i i t i i i 1993 1994 1993 1994 NOTE. The range was adopted by the FOMC for the NOTE. The range was adopted by the FOMC for the period from 1993:Q4 to 1994:Q4. period from 1993:Q4 to 1994:Q4. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 33 these outflows did not translate into Net Monthly Average Sales of Shares faster M2 growth. Some of the with- in Long-Term Mutual Funds drawals from bond funds may have been Millions of dollars invested directly in Treasury securities. Equity Bond Period Total Reflecting such portfolio shifts, net non- funds funds competitive tenders for Treasury bills, Year which had been negative in 1993, 1991 10,820 3,821 7,000 1992 16,844 7,268 9,576 totaled more than $16 billion in 1994, 1993 23,378 11,738 11,640 and net noncompetitive tenders for Trea- 1994 9,097 10,732 -1,636 sury notes also increased substantially.3 Quarter Growth of Ml slowed considerably I994:Q1 17,286 13,697 3,589 Q2 10,089 10,944 -856 in 1994, much as it has in past periods Q3 9,826 11,166 -1,340 when differentials between market Q4 -814 7,122 -7,936 interest rates and rates offered on trans- NOTE. Net sales are gross sales less redemptions. action deposits were widening. The SOURCE. Investment Company Institute. aggregate expanded only 2!/4 percent over the year—down substantially from offered on OCD accounts adjusted the double-digit increases of the pre- slowly to higher market rates, encouraging households with OCDs to shift vious two years. As is typical, the rates funds into higher-yielding assets. OCD balances also were depressed by the 3. The Treasury permits noncompetitive bids at introduction of sweep accounts at some its auctions to make it easier for smaller, less large banks. In these programs, the sophisticated bidders to participate. Those submitting noncompetitive tenders are assured of receiv- portion of customers' OCD balances ing the security, and the yield on the security they in excess of a predetermined level are obtain is the average issue rate established at the swept into money market deposit auction. The level of net noncompetitive tenders accounts at the end of each day. during a period is the dollar volume of securities purchased under noncompetitive tenders less the Higher market rates also encouraged volume of repayments of maturing securities that holders of demand deposits—accounts had been purchased under noncompetitive tenders. that earn no interest—to economize on such assets. On balance, demand deposits edged up only about V2 percent in M2 Velocity and M2 Opportunity Cost 1994, compared with 13 VA percent in Ratio scale Percentage points, ratio scale 1993. The slide in the growth of demand deposits also reflected the decline in -4 home mortgage refinancing activity in 1994: Demand deposits had been Stock of Ml Billions of dollars 1.6 1,250 1978 1982 1986 1990 1994 1,200 NOTE. The velocity of M2 is the ratio of nominal gross domestic product to the stock of M2. The opportunity 1,150 cost of M2 is a two-quarter moving average of the threemonth Treasury bill rate less the weighted average return on assets included in M2. 1993 1994 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

34 81st Annual Report, 1994 boosted in 1993 because prepayments of securitized mortgages were held primarily in such deposits for a time before they were distributed. In contrast to transaction deposits, the currency component of Ml continued to register strong growth in 1994. Currency increased 10 percent, about the same as the rise in 1993 and close to the record increase in 1990. As has been the case since 1990, much of the currency growth appeared to reflect the rapid expansion in U.S. currency circulating abroad. Informal reports suggest that foreign demand in 1994 was particularly strong in Russia and the other former Soviet republics. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

35 International Developments Economic activity in the major foreign rate regime in the face of an unsusindustrial countries rebounded sharply tainable current account position and during 1994, generally at a faster pace severely depleted international reserves. than most observers had expected at A substantial decline in the exchange the start of the year. Although recoveries rate ensued, and policies aimed at restorhad begun during the previous year in ing confidence in prospects for Mexico the United Kingdom and Canada, activ- were subsequently adopted. ity in 1993 had been sluggish in Ger- The U.S. international trade deficit many, France, and other continental in goods and services increased to European countries. Recovery was evi- $106 billion in 1994, compared with dent in Japan as well, if somewhat sub- $76 billion in 1993. U.S. output exdued in comparison with developments panded at about the same rate as that of in the other industrial countries. the country's major trading partners, but The expansionary climate notwith- U.S. imports are more responsive to standing, considerable slack persisted increases in the growth of U.S. income in most of the foreign industrial econo- than are U.S. exports to the growth in mies. As a result, consumer price infla- foreign income. Lagged effects of the tion generally remained low or even dollar's appreciation during 1993 also subsided further. On average, consumer continued to be felt. The current account prices in the six major foreign industrial deficit increased $52 billion, to $156 bilcountries rose 2 percent over the year.! lion. Net investment income shifted Economic activity in developing from a small inflow to a moderate outcountries remained robust in most parts flow in 1994. After several years of stagof the world during 1994. Toward year- nation, foreign earnings on direct investend, Mexico abandoned its exchange ment in the United States improved sharply with the expanding U.S. econ- 1. The six countries are Canada, France, Ger- omy; U.S. earnings on direct investmany, Italy, Japan, and the United Kingdom. ment abroad also rose, but at a more measured pace. In addition, net interest Exchange Value of the Dollar payments to foreigners increased with versus Selected Currencies growing U.S. indebtedness and the rise December 1993 = 100 in interest rates during the year. A large increase in net capital inflows in 1994 was more than accounted for by flows through private channels. Net Canadian dollar inflows reported by banks increased sharply, as did foreign direct investment in the United States; in addition, U.S. net purchases of foreign securities fell sharply. Official inflows fell this year, from a very high level in 1993. 1994 The foreign exchange value of the NOTE. Foreign currency units per dollar. The data are monthly. dollar declined about 6I/2 percent on bal- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

36 81st Annual Report, 1994 ance from December 1993 to December conditions in November more than had 1994 in terms of a trade-weighted aver- been expected, reassuring market parage of the other G-10 currencies.2 After ticipants that U.S. inflation risks were showing some strength at the start of being addressed. the year, the dollar's value fell about 10 percent from February through early Foreign Economies November. As the year progressed, increasingly positive assessments of Economic activity in the major foreign economic expansion in the other indus- industrial countries accelerated in trial countries led market participants to 1994 as recoveries became more firmly raise their estimates of prospective mar- established and widespread. Almost all ket interest rates abroad. This develop- countries experienced growth in gross ment, together with increased concerns domestic product at rates close to, or over potential inflation pressures in the even somewhat above, the highest that U.S. economy, put downward pressure are likely to prove sustainable for long on the dollar in terms of most foreign periods. In many countries, exports concurrencies. Toward the end of the year tinued to be a key factor, responding to the dollar's value rebounded somewhat strong demand from the United States as the Federal Reserve tightened credit and a number of developing countries where economic activity was robust. Much of the overall strength in demand, 2. The Group of Ten consists of Belgium, however, also came from domestic Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United King- sources. Even in Japan, domestic dedom, and the United States. mand and overall activity picked up somewhat in 1994, although the recovery remained tentative partly because Exchange Value of the Dollar external demand was held back by the and Interest Rate Differential yen's appreciation. Percentage points Ratio scale, March 1973 = 100 Even with strong growth in output, r L e o a n l g in t t e e r r m est Price adjusted - — 1 ] 6 4 0 0 labor market conditions in most foreign rate differential exchange value industrial countries were slack, and lev- U.S. minus foreign of the dollar ~ 12« els of economic activity remained well below estimated potential levels. The exception was Germany, where the recent recession was not as deep as elsewhere. These conditions helped keep inflationary pressures low despite the acceleration of activity in most couni 1 it i 1 t 1 i 1 tries and sizable increases in commodity 1975 1980 1985 1990 prices in global markets. In many coun- NOTE. The exchange value of the U.S. dollar is its weighted average exchange value in terms of the curren- tries, an improvement in productivity cies of the other G-10 countries using 1972-76 total trade also was an important factor conweights. Price adjustments are made using relative consumer prices. tributing to low inflation. On average, The interest rate differential is the rate on long term consumer prices in the major foreign U.S. government bonds minus the weighted-average rate industrial countries rose only about on comparable foreign securities, both adjusted for expected inflation; expected inflation is estimated by a 2 percent, slightly below the increase of thirty-six-month moving average of actual consumer price the previous year. In Japan, inflation was inflation or staff forecasts of inflation where needed. less than 3A percent, in part because the The data are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 37 appreciation of the yen damped upward recent recession. In Japan, deterioration pressure on prices of tradable goods. in labor market conditions appeared to Increased retail competition and dis- level off in 1994, but the unemployment counting may also have helped limit rate was still high by Japanese staninflation there. dards, and other indicators suggested Unemployment declined noticeably in that substantial slack persisted in Japan the United Kingdom and Canada, where through the end of the year. recoveries had been underway for sev- Government budget deficits narrowed eral years, but continental Europe saw as activity picked up in many countries, little change in labor market conditions. but progress in reducing structural bud- In some countries, the rate of unemploy- get deficits was more limited. Among ment actually rose. These developments the major industrial countries, only Gerheightened concerns about structural un- many narrowed its structural deficit employment in Europe, which is thought substantially; this gain was achieved to have increased significantly during largely by imposing new taxes. In the past decade, including during the Japan, the structural budget deficit widened as further expansionary mea- Changes in GDP, Demand, and Prices sures were introduced. Nonetheless, the Percent, from previous year Japanese budget deficit remained the Gross domestic product smallest among the major industrial Constant prices countries. Foreign G-10 Long-term interest rates in major foreign industrial countries generally rose during the year. On average, foreign rates on instruments with a maturity of ten years increased 200 basis points in the twelve months to December, Total domestic demand Constant prices about the same as U.S. rates. In Japan, where evidence of a buoyant recovery remained somewhat mixed, long-term rates rose less. In contrast, foreign shortterm rates were little changed on average and even declined slightly in several countries, including France and Germany. Major exceptions were Canada, where short-term market rates rose more than 250 basis points, and the United Kingdom, where they rose 100 basis points. In both of these countries, official lending rates were increased during the year to contain inflation risks atten- 1990 1992 1994 dant on the continuing vigorous growth NOTE. Data for the foreign G-10 countries are of their economies. weighted by the countries' GDP as valued after adjusting The current account balance moved for differences in the purchasing power of their currencies; the data are from foreign official sources. in the direction of surplus in several Data for the United States are from the Departments of countries, notably Italy, Canada, Swe- Commerce and Labor. den, and the United Kingdom. Cur- For GDP and domestic demand, the data are quarterly; for consumer prices, the data are monthly. rency depreciations in recent years in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

38 81st Annual Report, 1994 these countries together with recover- in the exchange rate, more reserve ing demand in key trading partners losses, and a large rise in interest rates. accounted for most of this movement. Subsequently, restrictive policies were Japan's large surplus of about $130 bil- adopted in an effort to restore balance to lion was similar to that for the previous the Mexican economy under a program year, while Germany's current account supported by the International Monetary deficit expanded. Fund with additional financial support Economic growth in the major devel- from the U.S. government. oping countries maintained the strength established in recent years. The newly U.S. International Transactions industrializing economies in Asia benefited from recovery in industrial coun- With brisk economic activity this year tries; in addition, their currencies' ear- both in the developing and industrial lier depreciations versus the yen helped trading partners of the United States, the stimulate external demand in 1994. volume of U.S. exports of goods and Although activity in China also contin- services rose 11 Vi percent, and U.S. ued to expand rapidly, the authorities merchandise exports increased 14 persucceeded in moderating the rate of growth somewhat by tightening credit U.S. International Trade conditions and imposing other measures Billions of dollars to dampen demand. In Argentina, a Balances rapid increase in investment, spurred by tariff reductions and other structural reforms, helped sustain growth. The growth of output was moderately strong in Brazil, where implementation of the Plan Real in July brought price increases down from near-hyperinflation rates to Ratio scale, billions of 1987 dollars an average of about 3 percent per month during the second half of 1994. How- Trade in goods and services ever, a substantial real appreciation of 800 the currency contributed to a swing in the trade balance to deficit in November and December. In Mexico, output expanded markedly during the second and third quarters after having been almost stagnant Ratio scale, 1987 = 100 in 1993. The burst of activity was due GDP fixed-weight price index partly to fiscal stimulus and generally lower interest rates in late 1993 and Non-oil merchandise imports early 1994; it proved unsustainable when the peso came under severe pressure late in the year. Mexico was forced Total merchandise exports to devalue its currency after it had depleted much of its international J | 1 | L reserves. Weakened investor confidence 1990 1992 1994 NOTE. The data are from the Department of Comin the aftermath of the initial devaluamerce; they are quarterly at annual rates and seasonally tion led to a further substantial decline adjusted. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 39 cent. An important contribution to this sumer goods were also buoyant. Import development came from exports of capi- prices rose about 4 percent as world tal goods, including computers and a commodity prices increased sharply and wide variety of other machinery. After oil prices moved back up after declining declining in 1993, agricultural exports in 1993 and early 1994. bounced back primarily because of a Recorded net capital inflows were much better U.S. harvest. substantially larger in 1994 than in Imports of goods and services rose 1993. Part of this development correnearly 14 percent in volume, and mer- sponded to the widening current account chandise imports increased 16 percent, deficit, but the remainder was the counreflecting the vigorous growth of U.S. terpart of a large swing in net unreincome during the year. Imports of com- corded transactions from inflows to puters continued to expand rapidly, and outflows between 1993 and 1994. The imports of other machinery, automotive source of this negative discrepancy is products, industrial supplies, and con- perforce unknown and is all the more U.S. Internationa] Transactions Billions of dollars, seasonally adjusted Quarter Year Transaction 1993 1994 1993 1994P Q4 Ql Q2 Q3 Q4 Goods and services, net -76 -106 -20 -24 -27 -29 -27 Exports 642 698 166 165 170 177 186 Merchandise 457 503 120 118 123 128 135 Services 185 195 47 47 48 50 51 Imports 717 804 186 189 197 206 212 Merchandise 589 669 153 155 164 172 178 Services 128 135 33 34 33 34 35 Investment income, net 4 -15 -1 -1 -3 -4 -8 Direct investment, net 52 41 12 12 11 10 9 Portfolio investment, net -49 -57 -13 -12 -14 -14 -16 Unilateral transfers, private and government, net -32 -34 -10 Current account balance -104 -156 -31 -32 -38 -41 -45 Private capital flows, net 13 145 4 35 30 35 46 Bank-related capital, net (outflows, -) 51 104 -2 34 41 20 10 U.S. net purchases (-) of foreign securities -120 -61 -30 -25 -14 -8 -14 Foreign net purchases (+) of U.S. securities Treasury securities 25 33 9 -7 5 26 Corporate and other non-Treasury bonds 61 56 26 15 15 13 13 Corporate stocks 19 3 12 7 -2 -3 U.S. direct investment abroad -58 -58 -23 -25 -8 -11 -14 Foreign direct investment in United States 21 60 12 5 15 28 Other corporate capital flows, net 14 -1 1 n.a. Foreign official assets in United States (increase, +) 72 39 24 12 20 -1 U.S. official reserve assets, net (increase, -) -1 -1 U.S. government foreign credits and other claims, net -1 Total discrepancy 20 -33 4 -14 -4 -14 Seasonal adjustment discrepancy 0 0 * 6 1 -7 Statistical discrepancy 20 -33 4 -20 -5 -7 -1 NOTE. Components may not sum to totals because of n.a. Not available. p Preliminary. rounding. SOURCE. Department of Commerce, Bureau of Eco- * In absolute value, greater than zero and less than nomic Analysis. $500 million. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

40 81st Annual Report, 1994 puzzling given the increase in net out- reserve accumulations by certain develflows of U.S. currency to foreigners in oping countries in Latin America that 1994: Net currency shipments—which experienced massive private capital are not recorded in the U.S. international inflows in 1993 were not repeated. A accounts, whereas the corresponding significant part of the 1994 inflows were payment for them is generally funds acquired by foreign industrial recorded—tend to make the discrepancy countries as the consequence of interpositive. vention in foreign exchange markets. Much of the recorded capital inflow took the form of a substantial increase in Foreign Exchange Developments net inflows reported by banks in the United States. Euromarket borrowing During 1994 the dollar depreciated was apparently an attractive source of 8 percent versus the mark and declined funding for banks expanding their similar amounts in terms of the other domestic lending. currencies in the exchange rate mecha- Direct investment in the United States nism (ERM) of the European Monetary also surged during 1994, while U.S. System. The appreciation of the mark direct investment in other countries was associated with an unexpectedly remained relatively static albeit at record strong recovery in real output in Gerlevels. Direct investment from abroad many and rather rapid growth of the took the form of takeovers of U.S. com- Bundesbank's targeted monetary aggrepanies as well as the reinvestment of gate, M3, during much of the year. Marrevived profits by affiliates of foreign ket participants revised their expeccompanies in the United States. tations of further declines in official The rest of the identifiable net private German lending rates, and German capital inflow was the result of a sharp long-term interest rates rose. The dollar retrenchment in U.S. net purchases of depreciated less in terms of the pound foreign securities, particularly bonds. By and the lira, both of which had been contrast, private foreign net purchases withdrawn from the ERM in 1992. The of U.S. securities fell only slightly. Ris- extended strong recovery in the United ing interest rates on bonds denominated Kingdom began to raise concerns about in many major currencies, including dol- inflation and, by extension, the pound; lars, produced capital losses for U.S. in Italy, political uncertainties weighed holders of long-term bonds and led to on the currency. outflows from U.S. global bond funds. The dollar depreciated about 8 per- Although U.S. investors proceeded more cent on balance in terms of the yen. As cautiously in their acquisition of foreign market perceptions developed that a securities, the slowdown was concen- recovery was under way in Japan, it trated in bonds rather than in stocks; began to look less likely that the Japa- U.S. investors expanded their net pur- nese authorities would continue to ease chases of shares of firms in Japan and in financial conditions as they had been a wide assortment of developing coun- doing for the past two years. In addition, tries, many of which had received much fluctuations during the year in the status smaller inflows in 1993. of trade negotiations between the United Foreign official assets in the United States and Japan were mirrored in move- States expanded substantially, although ments in the exchange rate. these accumulations were much smaller By contrast, the dollar appreciated than in 1993. In particular, the large nearly 4!/2 percent in terms of the Cana- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 41 dian dollar during 1994. The relative Intervention in dollars by fifteen weakness of the Canadian currency major foreign central banks amounted appeared to reflect pressures arising to net purchases of about $35 billion in from increases in U.S. short-term rates, 1994. In March, a $6 billion temporary concerns over large fiscal deficits of the bilateral swap facility was established central government and the provinces, for the Bank of Mexico in the aftermath and, at times, the risk of secession by of the assassination of a Mexican presi- Quebec. dential candidate. This facility was Adjusted for relative changes in con- replaced by an increase from $700 milsumer prices, the dollar depreciated in lion to $3 billion in the conventional terms of the currencies of most of the swap facility with the Bank of Mexico major U.S. trading partners in Latin when a swap facility involving Canada, America and East Asia. The major Mexico, and the United States was exception was the Mexican peso; the established in April. On December 30, dollar appreciated versus the peso, espe- Federal Reserve participation in the latcially at the end of the year, when the ter arrangement was activated and tem- Mexican authorities relaxed support for porarily enlarged to $4.5 billion.3 the peso and subsequently allowed the currency to float. Bank for International Settlements Foreign Exchange Operations On September 13 the Chairman of the Board of Governors assumed the ex offi- During 1994 the U.S. monetary authoricio seat reserved for the U.S. central ties conducted three major interventions bank on the Board of Directors of the to support the dollar, in each case selling Bank for International Settlements marks and yen. The first two episodes, (BIS).4 Ex officio members have the in early May and late June, involved right to appoint another person of the coordinated intervention with several same nationality to a three-year seat on foreign central banks. The last episode the BIS board; the Chairman appointed was in early November. For the year as the President of the Federal Reserve a whole, U.S. monetary authorities sold Bank of New York. The Federal Reserve a total of $3,500 million of marks and has had the right of representation on $2,610 million of yen. In the three the BIS board since the founding of the months from February through April, BIS in 1930 but had not exercised that U.S. monetary authorities sold all their right until this year for a variety of holdings of foreign currencies other than reasons. In taking its seat the Federal marks and yen, resulting in sales total- Reserve recognized the increasingly ing $768 million. At year-end, the System held foreign currencies valued at $22,031 million at current exchange rates. No Treasury 3. Early in 1995, Federal Reserve particpation balances were warehoused with the Sys- in the trilateral facility was temporarily enlarged tem during 1994. The System realized further, to $6 billion, and the additional portion $706 million in profits on sales of for- was activated. eign currency during 1994 and recorded 4. See Charles J. Siegman, "The Bank for International Settlements and the Federal a translation gain of $1,717 million on Reserve," Federal Reserve Bulletin, vol. 80 (Octoforeign currency balances. ber 1994), pp. 900-906. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

42 81st Annual Report, 1994 important role of the BIS as the principal forum for consultation, cooperation, and exchange of information among central bankers and the likely broadening of that role. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

43 Monetary Policy Reports to the Congress Given below are reports submitted to according to initial estimates. In the the Congress on February 22 and July labor market, employment moved up at 20, 1994, pursuant to the Full Employ- a moderate pace, and the unemployment ment and Balanced Growth Act of 1978. rate dropped almost a percentage point over the year. Measured by the consumer price index, the rate of inflation Report on February 22, 1994 edged lower last year, as unfavorable reports in the first few months of 1993 gave way to more subdued readings Monetary Policy and thereafter. The performance of the U.S. the Economic Outlook economy stood in sharp contrast to the Nineteen ninety-three turned out to be a continued sluggish growth in many of favorable year for the U.S. economy, the other industrial countries and helped with notable gains in real output, de- to buoy the trade-weighted value of the clines in joblessness, and a further small dollar on foreign exchange markets. drop in the rate of inflation. Financial In conducting policy through 1993, conditions conducive to growth pre- the Federal Open Market Committee vailed throughout the year and gave con- recognized that it was maintaining a siderable impetus to activity. With the very accommodative stance in reserve Federal Reserve keeping reserve market markets. Reserve conditions had been pressures unchanged, short-term interest eased to this degree over the preceding rates held steady during the year at four years to counter the effect of some unusually low levels, especially when unusual factors restraining aggregate measured relative to inflation or infla- demand. The Committee recognized that tion expectations. In addition, long-term as these forces abated, short-term interrates declined further, partly in response est rates would likely have to rise to to actions taken by the Congress and the forestall inflationary pressures that Administration to put the federal deficit would eventually undermine the on a more favorable trend. expansion. Against this backdrop, households Toward the end of 1993 and into early and businesses were able to take further 1994, incoming data on the economy steps to reduce the burden of servicing and credit flows have increasingly condebt, and more expansive attitudes veyed a picture of considerable undertoward spending and the use of credit lying strength. The marked speedup of seemed to take hold. Spending in the growth in the economy has been reducinterest-sensitive sectors of the econ- ing spare capacity, as is evident in the omy surged ahead, with particularly recent declines in unemployment and large advances in residential investment, increases in capacity utilization rates in business outlays for fixed capital, and industry. Moreover, while movements consumer durable goods. The growth of in broadly based price indexes have real GDP picked up sharply in the sec- remained relatively favorable, there also ond half, and the increases for all of have been undercurrents suggesting that 1993 cumulated to about 23A percent the process of disinflation might be stall- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

44 81st Annual Report, 1994 ing out. In particular, after slowing con- lower half of its 4 percent to 8 percent siderably in 1992, nominal increases monitoring range. in hourly compensation—comprising The growth of M2 slowed in 1993, wages and benefits—fell no further in albeit considerably less than the deceler- 1993, and long-term inflation expecta- ation in nominal GDP. For the year, M2 tions remain stubbornly above recent advanced 1 xh percent, placing it a little inflation rates. Also, commodity prices above the lower bound of its 1 percent generally have firmed in recent months. to 5 percent annual growth cone. M3 Earlier this month, the Federal expanded Vi percent, the same pace as Reserve concluded that the weight of in 1992 and a bit above the lower bound the evidence indicated that undimin- of its 0 percent to 4 percent annual ished monetary stimulus posed the threat range. The ranges had been adjusted that capacity pressures would build in down by the Federal Open Market Comthe foreseeable future to the point where mittee during 1993. The adjustments imbalances would develop and inflation were technical in nature and reflected would begin to pick up. At its February the Committee's judgment as to the 1994 meeting, the Federal Open Market extent of the ongoing distortions of Committee determined that it was time financial flows relative to historical patto move to a slightly less accommoda- terns and of consequent increases in tive stance. While the discount rate velocities—that is, the ratios of nominal remained at 3 percent, the federal funds GDP to money. rate edged up to trade around VA per- The special factors shaping the cent, a little above the prevailing rate of growth of the monetary aggregates ininflation. cluded a marked preference by borrow- Strength in spending last year was ers for capital market financing rather supported by increased borrowing by than bank loans and a configuration of both households and businesses. Con- market returns that enticed investors tinuing declines in a number of interest away from the traditional financial prodrates, which sparked considerable refi- ucts offered by depositories. Bond and nancing of existing obligations, helped stock mutual funds were the primary to trim debt service burdens for both beneficiaries of this shift, with inflows sectors, undoubtedly facilitating the into such funds in 1993 setting a new pickup in borrowing and spending. Indi- record. This continuing redirection of cators of financial stress, including loan credit flows has rendered the movements default rates and bankruptcy filings, of the broad monetary aggregates less took a decided turn for the better in representative of the pace of nominal 1993. Borrowing by households was spending than was evident in the longer robust enough to raise the ratio of debt historical record. In 1993, nominal GDP to disposable income; business debt, grew a shade more than 5 percent, or held down in part by equity issuance, 33/4 percentage points above the rate of declined relative to income. The total expansion of M2 and AVi percentage debt of all nonfinancial sectors is esti- points above that of M3. mated to have grown about 5 percent Most of the increase in the broad last year, the same as in 1992, as a aggregates was recorded in their Ml diminution of the net funding needs of component, which grew IOV2 percent in the federal government was about offset 1993, as low money market and deposit by the pickup in private demand. This interest rates provided little reason to growth placed the debt aggregate in the forgo the liquidity of transaction depos- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 45 its. At times during the year, declines a slower rate than in the previous year. in longer-term market rates produced This deceleration might indicate that the waves of mortgage refinancing, an activ- forces that had distorted the aggregates ity that is associated with temporary over the past few years, while still flows through the transaction deposits potent, were beginning to wane. The that are counted in Ml. In addition, the yield curve, although quite steep, now currency component expanded at about offers investors less inducement to move the same rate as the Ml total, spurred by outside M2 in search of better returns considerable demands from abroad. The than at any time in the past three years. double-digit expansion of Ml deposits Additionally, firms, having strengthened pushed reserves up at a HV2 percent their financial positions, may feel more rate in 1993, while the monetary base, comfortable taking on shorter-term obliwhich includes reserves and currency, gations and, therefore, may direct more increased lO1/^ percent, the same rate as of their business to depositories. Banks, was posted in the previous year. which are better capitalized and whose assets are more liquid, should be in a strong position to meet those needs. Money and Debt Ranges for 1994 Still, capital markets will provide attrac- At its July 1993 meeting, the Committee tive alternatives to the depository sector, provisionally chose the same ranges for suggesting that the forces tending to 1994 as it had established for 1993— divert funds from depositories—and to 1 percent to 5 percent for M2 and 0 per- raise the velocities of the monetary cent to 4 percent for M3 and a monitor- aggregates—will continue to be imporing range of 4 percent to 8 percent for tant. However, the strength of these the domestic nonfinancial debt aggre- forces, and whether or how quickly they gate. At that time, the Committee noted might be abating, remain difficult to that disturbances to the historical rela- judge. tionships between the aggregates and Against this background, the Federal spending required that the actual deter- Open Market Committee at its most mination of these ranges for 1994, in recent meeting reaffirmed the annual February of this year, be made in light growth ranges for the money and credit of additional experience and analysis. aggregates that it had chosen provision- As noted above, the velocities of M2 ally last July (table 1). The annual and M3 increased further in 1993, but at ranges appear to be sufficiently wide to encompass growth of M2 and M3 consistent with Committee members' expectations for nominal income under Ranges for Growth of Monetary a variety of alternatives for the behavior and Debt Aggregates of the velocities of the aggregates. If the Percent forces depressing the demand for money Aggregate 1992 1993 1994 relative to income were to persist unabated in 1994, M2 and M3 might be M2 2'/2-6'/2 1-5 1-5 M3 1-5 0-4 0-4 in the lower portion of their cones; Debt 4'/2-8'/2 4-8 4-8 should M2 and M3 move closer to their NOTE. Change from average for fourth quarter of pre- former alignments with spending— ceding year to average for fourth quarter of year indi- buoying the demands for those aggrecated. Ranges for monetary aggregates are targets; range gates and depressing their velocities— for debt is a monitoring range. Debt is of the domestic nonfinancial sector. then outcomes in the upper portion of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

46 81st Annual Report, 1994 the ranges would be expected. The The Federal Reserve officials' fore- Committee will watch the monetary casts of real GDP growth over the four aggregates closely during the course of quarters of 1994 span a range of 2x/i perthe year for evidence on unfolding eco- cent to 33/4 percent, with the central nomic and financial conditions. Given tendency of the forecasts being 3 peruncertainties about velocity behavior, cent to 3V4 percent (table 2). The govhowever, that information will necessar- ernors and Reserve Bank presidents ily be assessed in combination with a anticipate that the rise in real GDP will variety of other financial and economic be accompanied by a further increase indicators as the Committee formulates in labor productivity. Nonetheless, policy. Through 1994, as was true last employment gains are expected to be year, the Committee's primary concern sufficient to bring about some further will be to foster financial conditions that reduction in the degree of labor market help contain price pressures and sustain slack over the four quarters of the year. economic expansion, and it will have to Forecasts of the unemployment rate in assess the rates of money growth consis- the fourth quarter of 1994 span a range tent with these objectives as the year of 6Vi percent to 63/4 percent. Because goes on. of changes in survey design, a compara- Debt growth, which has moved in ble rate for the fourth quarter of last year closer alignment with nominal income is not available; however, the Bureau of over the past few years than have the Labor Statistics has estimated that the monetary aggregates, will again be mon- fourth-quarter rate would have exceeded itored in light of a 4 percent to 8 percent 7 percent on the new basis. annual range. With the federal sector's The sectoral composition of growth demands on the pool of saving diminish- in 1994 may well resemble that of 1993. ing, the Committee envisions that an The financial adjustments of recent unchanged range would be associated years have left households better posiwith some pickup in borrowing by the tioned and more willing to boost spendprivate sector. Healthier balance sheets, ing. Moreover, with employment rising, lighter debt service burdens, heavier real income growth should be supportcapital spending, and more eager lenders should all act to boost the expansion of nonfederal debt. Overall, the debt of Economic Projections of FOMC Members the nonfinancial sectors is expected to and Nonvoting Reserve Bank Presidents grow again at about the pace of nominal for 1994 income. Percent Central Measure Range tendency Change, fourth quarter Economic Projections for 1994 to fourth quarter{ In general, the governors and Reserve Nominal GDP 4-y4-7'/2 5'/2-6 Bank presidents anticipate that 1994 will C R o ea n l s u G m D e P r price index2 V 2' h /4 - - V 4 A Ab 3 o u 3 t « 3 /4 be another year of progress for the econ- Average level, omy, with low inflation and financial fourth quarter market conditions continuing to provide Unemployment rate3 6'/2-63/4 6'/2-63/4 a setting conducive to sustaining moder- 1. Change from average for fourth quarter of precedate economic growth and rising employ- ing year to average for fourth quarter of year indicated. 2. All urban consumers. ment opportunities. 3. Civilian labor force. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 47 ive of increased consumer expenditures The central tendencies of the forein the coming year, despite the higher casts of GDP growth, unemployment, taxes confronting some households. and inflation are quite similar to the Business investment seems likely to be projections put forth by the Administrapushed ahead by ongoing efforts to tion in its recent reports. Moreover, insomodernize and by further declines in far as the Administration's numbers computer prices. By contrast, further were predicated, in part, on the assumpcuts in federal outlays for defense likely tion that short-term interest rates would will continue to be a factor restraining rise modestly in 1994, the recent tightthe growth of aggregate demand. With ening action by the Federal Reserve the passage of time, the more accommo- does not appear to be inconsistent with dative monetary policies now in place in the Administration's outlook. a number of countries, together with the Prospects for sustained growth over moderate fiscal stimulus in Japan, are the longer run have been bolstered by likely to lead to a gradual pickup in the policy actions on a number of fronts. rates of growth of foreign industrial Considerable work remains to be done, countries and U.S. exports. However, however. Although recent fiscal mea- U.S. imports from abroad will likely sures have been helpful in bringing continue to move up at a brisk pace. Net about declines in the federal budget defexports of goods and services thus may icit, the Congress and the Administradecline somewhat further, albeit at a tion still must deal with some difficult slower rate than they have over the past issues to ensure that the deficit is kept year. on a downward course through the latter The majority of the governors and part of the 1990s and into the next Bank presidents expect inflation in 1994 century. In the area of trade policy, to run a shade higher than in 1993. Most the nation's long-standing support of of their forecasts for the rise in the con- an open world trading system was sumer price index are close to 3 percent, reaffirmed this past year in the form of although the full range of forecasts passage of the North American Free extends from a low of 2lA percent to a Trade Agreement and the agreement in high of 4 percent. Several developments the Uruguay Round—actions that will are likely to work against better inflation yield important benefits over time not performance in 1994. In agriculture, a only to the United States but also to its poor harvest in 1993 has left some crops trading partners. Nonetheless, serious in very tight supply, and the risk of obstacles to free trade remain. On a wide unfavorable food price developments is range of regulatory issues, the Congress greater than it has been in recent years. and the Administration face decisions In addition, although the future course that have the potential to promote—or of energy prices is uncertain, a repeat of to damage—the flexibility in labor and last year's declines, which helped to product markets and the processes of hold down the overall CPI, cannot be innovation and investment that are so counted on. More fundamentally, the critical to long-run economic progress. recent narrowing of the degree of slack In the area of monetary policy, the chalin the labor and product markets sug- lenge is to build on the favorable price gests that competitive pressures damp- performance of late in a situation in ing wage and price increases will be less which the economy will likely be operstrong and less pervasive than they have ating closer to full capacity than it has in been recently. recent years. With success in keeping Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

48 81st Annual Report, 1994 the economy on course toward the long- to trend lower. The federal budget defirun goal of price stability, the prospects cit declined somewhat in fiscal 1993 but for sustained expansion will be greatly remained quite large both in absolute enhanced. terms and relative to nominal GDP. The combined deficit in the operating and capital accounts of state and local gov- The Performance of ernments increased further. the Economy in 1993 Growth of the economy continued to The economy recorded significant gains be significantly influenced in 1993 by in 1993, lifted, as in 1992, by a surge the changing patterns of transactions in activity in the latter part of the year. with foreign economies. The weakness Job creation picked up, and the unem- of activity in a number of foreign counployment rate fell appreciably. Inflation tries that are major trading partners of continued to trend lower. the United States tended to slow the rise The rise in real GDP over the year of U.S. exports of goods and services. amounted to 2.8 percent, according to At the same time, a significant portion the Commerce Department's first esti- of the rise in domestic spending in this mate. For a second year, the growth of country continued to translate into rapid activity was propelled chiefly by rapid increases in imports. Net exports of gains in the investment outlays of house- goods and services thus fell for the secholds and businesses. Households ond year in a row, after a run of several boosted their purchases of homes and years in which real export growth had motor vehicles considerably, and spend- outpaced the growth of real imports by a ing for household durables also rose rap- considerable margin. idly. Business investment in computers The CPI rose 2.7 percent over the continued to grow at an extraordinary four quarters of 1993, after increases pace in 1993, and outlays for other types of about 3 percent in both 1991 and of capital equipment strengthened. 1992. Price increases were damped last Investment in nonresidential structures, year by falling oil prices, near-stable which had gone through a protracted prices for non-oil imports, and a further decline in the latter part of the 1980s rise in labor productivity, which held and early 1990s, rose moderately last down production costs in the domestic year. Bolstered by the gains in these economy. sectors, the four-quarter rise in the final purchases of households and businesses amounted to about 5 percent in real The Household Sector terms in 1993, matching the large 1992 Consumer spending recorded a second rise. Not since the 1983-84 period had year of brisk growth in 1993. Support private final purchases exhibited a com- for the rise in expenditures came from parable degree of strength. declines in interest rates and moderate The increase in private spending in increases in real incomes. Household 1993 was augmented by a pickup in the balance sheets continued to strengthen spending of state and local governments, in 1993 and debt servicing burdens especially for construction. By contrast, diminished, easing the financial strains real federal purchases of goods and that had inhibited spending earlier in the services—the part of federal spending 1990s. that is included in GDP—fell sharply, as In real terms, the 1993 advance in outlays for national defense continued personal consumption expenditures Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 49 amounted to about 3 percent, measured increased about \3A percent, after a jump to the year's fourth quarter from the of more than 3'/2 percent in 1992. fourth quarter of the previous year. After Spending for services rose 23A percent surging in late 1992, growth of real out- during 1993, the same increase as lays slowed in the first quarter of 1993. reported for the previous year. Whatever tendency there may have been Real income continued to advance in for a "payback" after a period of unusu- 1993, although its trend was masked by ally rapid growth was reinforced by a tax considerations that caused a sizable severe late-winter storm on the East volume of bonuses that would have been Coast, which temporarily hurt retail paid to workers in early 1993 to be sales. Thereafter, spending proceeded at shifted into the latter part of 1992. a relatively strong pace over the remain- Abstracting from these shifts in timing, ing three quarters of the year. the beneficial effects of continued eco- Consumer expenditures for motor nomic expansion showed through in vehicles increased 6 percent in real most categories of income, much as they terms over the four quarters of 1993, had in 1992. Wage and salary accruals, after rising 9 percent the previous year. a measure of income as it is earned The advance in expenditures continued rather than as it is disbursed, rose about to come partly from the replacement 4Vi percent in nominal terms over the needs of individuals who had put off four quarters of 1993, considerably outbuying vehicles earlier in the 1990s, pacing the rate of inflation for the secas well as from growth in consumers' ond year in a row. Further gains also desired stock of vehicles. Increasingly, were reported over the course of 1993 in buyers have opted for vans, light trucks, dividends and in the income of propriand other vehicles instead of cars, and etors, both farm and nonfarm. Transfer annual sales of these vehicles in 1993 payments, which tend to vary inversely reached the highest level on record. Car with the state of the economy, slowed in sales also rose, but they remained well 1993 after rising at rates of 10 percent or below previous highs. Data for January more in each of the four previous years. of this year showed strong gains in the Interest income, which had declined on unit sales of both cars and trucks. net in 1991 and 1992, edged up slightly Expenditures for a number of other over the four quarters of 1993. Because types of durable goods also rose rapidly of the shift in timing of bonuses, growth in 1993. Outlays for furniture and appli- of real disposable income in 1993 was ances scored further hefty gains, in con- less than in 1992. However, the cumulajunction with sharp increases in sales of tive gain over the two-year period was new and existing homes. Consumer pur- about 6 percent, a clear step-up from the chases of home computers and other performance of the three previous years, electronic equipment remained on a when real income growth had averaged steep uptrend. In total, outlays for dura- less than 1 percent per year. ble goods other than motor vehicles The personal saving rate—measured increased nearly 9 percent over the year, as the percentage of nominal after-tax after a rise of 10 percent in 1992. Other income disbursements that are not used types of consumer expenditures, which for consumption or other outlays— typically exhibit less cyclical variation declined nearly 2 percentage points, on than do outlays for durables, rose mod- net, over the course of 1993. However, erately, on balance, during 1993. Con- the saving rate in late 1992 had been sumer purchases of nondurable goods temporarily elevated by the aforemen- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

50 81st Annual Report, 1994 tioned speedup of bonus payments. bly in real terms as well as in nominal Looking through that blip of late 1992, a terms. The incidence of financial stress downward drift still is evident in the among households diminished further in saving rate from mid-1992 to the end of 1993, as delinquency rates on various 1993. Such a pattern is not uncommon types of household debt continued to when economic recovery is taking hold decline, in some cases to the lowest and consumer purchases of durable levels since the first half of the 1970s. goods are rising rapidly. In effect, house- According to survey data, households' holds have been holding part of their own assessments of their financial situasaving in the form of consumer dura- tions have improved of late, with some bles, which, at the time of purchase, are survey readings the most upbeat in more counted fully as consumption in the than three years. national accounts, but which in reality Residential investment increased will yield households a flow of services about 8 percent in real terms over the over time. four quarters of 1993, building on the Consumer reliance on credit picked 18 percent rise of 1992. As in 1992, up in 1993. The volume of consumer most of the advance came from credit outstanding rose 53/4 percent dur- increased construction of new singleing the year, after three years in which family homes. The construction of credit growth had been quite subdued. multifamily housing continued to be Growth of consumer credit was espe- adversely affected by a persistent overcially rapid in the final quarter of the hang of vacant rental units. year—about 9 percent at an annual rate. In the single-family market, impetus The mortgage debt of households rose for activity continued to come mainly about 7 percent from the end of 1992 to from declines in mortgage interest rates, the end of 1993, slightly more than in which by autumn had dropped to the either of the two previous years. lowest levels in more than two decades. Continued improvement was evident Fairly sharp declines in mortgage interon the asset side of household balance est rates took place early in the year, but sheets in 1993. As in 1992, the total the effect of those declines on housing nominal value of household assets activity was apparently short-circuited increased at a pace moderately faster for a time by a number of influences. A than the rate of inflation. Large increases severe blizzard on the East Coast in in stocks and bonds boosted the nominal mid-March temporarily waylaid the holdings of financial assets, more than start-up of construction in that region, offsetting a reduction in the aggregate and a huge run-up in lumber prices durholdings of deposits and credit market ing late winter also may have discourinstruments. The nominal value of tangi- aged some new construction for a while. ble assets was lifted by heavy invest- Concerns about the possible loss of jobs ment in consumer durables and residen- perhaps continued to deter some potential structures and by a rise in the tial homebuyers. Other buyers may simaverage price of existing residential ply have been holding back, waiting to properties. With the jump in growth of see how far rates eventually would fall. consumer credit and the slight pickup in In any event, the effects of the drop in the growth of home mortgage debt, mortgage rates began to show through household liabilities rose somewhat with greater force over the summer and faster than in 1992. Nonetheless, net fall, and considerable strength had worth appears to have increased, proba- emerged by year-end in all the major Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 51 indicators of single-family housing year, the same as the rise during 1992. activity. Sales of existing homes rose Profits rose further, and business balalmost without interruption from April ance sheets continued to strengthen. on. By the fourth quarter they had Capital spending surged. climbed to the highest level on record In the industrial sector, production (the series goes back to 1968). Sales of rose 414 percent during 1993, the largest new homes proceeded in somewhat advance in six years. Gains of at least choppier fashion from month to month, moderate proportions were reported in but by the end of the year they had each quarter of 1993. The gain in the moved well toward the upper end of year's final quarter was quite large—on their historical range. Housing construc- the order of 6I/2 percent at an annual tion also strengthened. The number of rate. Output of business equipment held single-family starts increased about to a strong uptrend throughout the year, 18 percent from the second quarter to as did the production of materials that the fourth quarter, rising to the highest are used as inputs in the durable goods quarterly level since 1979. Although industries. Output of construction suphousing starts fell sharply in January, plies rose moderately in the first half of the decline probably was in large mea- the year and at a stronger pace in the sure a reflection of the unusually bad second half. Motor vehicle assemblies weather across the country that month. also rose appreciably, with strength According to survey data, consumers' early in 1993 and in the year's final assessments of home-buying conditions quarter more than offsetting a stretch of continued to be very upbeat in January sluggishness through the middle part and early February. Builders' ratings of of the year. By contrast, output of conthe market edged down a touch in early sumer goods other than motor vehicles 1994 but remained at a very favorable rose only modestly, and production of level. defense and space equipment fell Activity in the multifamily housing 9Vi percent further, extending a downmarket remained depressed in 1993. ward trend that began in 1987. In Janu- In the mid-1980s, tax incentives and ary of this year, industrial production relatively easy availability of credit rose 0.5 percent. Severe winter weather encouraged overbuilding in many and the California earthquake cut into locales. The proportion of multifamily the growth of production in the manurental units that were vacant soared and facturing sector in January, but the outhas remained high subsequently, even as put of utilities was boosted by increased construction of multifamily units has heating requirements. Underlying supdwindled. Starts of these units reached port for industrial production is coming the lowest levels on record early in from large gains in new orders that were 1993, and they picked up only modestly reported toward the end of 1993. thereafter, despite restoration of tax The amount of spare capacity in the credits for low-income units. industrial sector continued to diminish in 1993 and early 1994. The utilization rate in January was 83.1 percent. The The Business Sector rate has increased more than two per- The year 1993 saw appreciable gains in centage points during the past year, to most important barometers of business the highest level since the second half of activity. Output of the nonfarm business 1989. In manufacturing, capacity use in sector increased 33A percent during the primary processing industries has been Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

52 81st Annual Report, 1994 running above its long-run average for petitive market conditions kept prices more than a year, and tbe rate of utiliza- on a downward course. More real comtion in advanced processing industries puting power thus continued to become recently has moved up into line with its ever more accessible, and the many long-run average. businesses eager to boost labor produc- Corporate profits, which had surged tivity and overall operating efficiency in 1992, increased an additional 6V2 per- provided a huge market for the new cent over the first three quarters of 1993 products. and appear to have risen further in the Excluding office and computing year's final quarter. Financial institu- equipment, outlays for capital equiptions in general continued to benefit in ment increased about 11 percent in real 1993 from the persistence of a relatively terms during 1993, the biggest rise in wide margin between their cost of funds ten years. Business expenditures for and the interest rates on their assets; motor vehicles advanced about 13 perinsurers' profits suffered less drag from cent, as investment in trucks, which had natural disasters than in 1992, the year strengthened considerably in 1992, of hurricane Andrew. The profits of non- climbed further. Factories producing financial corporations moved up slightly heavy trucks were operating at or near further over the first three quarters, full capacity at year-end. Spending boosted by the rise in the volume of for communication equipment also output over that period. Operating prof- advanced sharply, as did real outlays for its per unit of output held fairly steady, many other types of machinery and close to the high level reached in the equipment. Diminished slack in many final quarter of 1992. Although nonfi- industries and expectations of continued nancial corporations raised their prices business expansion were among the by only a small amount over those three chief factors giving rise to the increase quarters, they were able to maintain unit in these outlays. Ample cash flow from profit margins through continued tight internal operations provided a ready control over costs. Gains in productivity source of finance. restrained the rise in unit labor costs, Commercial aircraft was the most and net interest expenses per unit of notable exception to the general upward output continued to decline. trend in equipment spending. Outlays Business fixed investment increased for aircraft plunged in the second half of about 15 percent in real terms over the 1993, and survey data suggest that four quarters of 1993, after a rise of spending will remain weak in 1994. The IV2 percent in 1992. A spectacular reductions in outlays had been foreshadincrease in outlays for office and com- owed by earlier declines in new orders puting equipment accounted for about for commercial aircraft, and producers one-half of the 1993 gain. Business of aircraft have been scaling back their expenditures for these items increased operations for some time. more than 25 percent in nominal terms Business investment in structures rose over the year, the steepest annual gain nearly 5 percent in 1993, the first annual since 1984, and the rise in real terms increase since 1989. Declines in the inwas greater still. Technological ad- tervening years had cumulated to about vances embodied in the latest computers 18 percent. Within the sector, divergent made them far more powerful than trends were evident once again. Outlays equipment that was at the forefront for the construction of office buildings only a few years ago, and highly com- fell for the sixth consecutive year, to a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 53 level two-thirds below the peak of the cyclical patterns in inventory change mid-1980s. Several indicators suggest, have been tempered to some degree by however, that the worst of the decline in the more sophisticated inventory control office construction might be over. The procedures that have become widerate at which real outlays fell in 1993 spread in the business sector in recent was much smaller than the declines of years. Toward year-end, inventories the three previous years. In addition, appeared to be comfortably aligned with the national vacancy rate for office sales in most industries and were lean in buildings, while still quite high, moved some. Most notable among the latter down somewhat; improvement was were the stocks of motor vehicles, which most noticeable in suburban areas, were drawn down by production delays where vacancy rates previously had through the summer and strength in been the highest. The value of contracts sales through the latter part of the year. for construction of office buildings In view of those developments, producfirmed over the course of 1993. Prices ers of motor vehicles have scheduled a of office buildings continued to trend further hefty rise in production for the lower, but survey data suggest that the current quarter, with assemblies slated rate of decline has eased in at least some to move up to the highest quarterly rate markets. in more than fifteen years. Investment increased for most other In the farm sector, inventories detypes of structures in 1993. Outlays for clined in 1993. Stocks were pulled down industrial structures, which had declined by weather-related reductions in crop sharply in 1991 and 1992, rose about output, especially in parts of the Mid- 8 percent, on net, over the four quar- west, where the worst flood of the centers of 1993. Outlays for commercial tury caused millions of acres to be left structures other than office buildings idle and cut deeply into yields on the increased fairly briskly for a second acres that were planted. Inventories of a year; by the fourth quarter, they had number of major field crops are in tight retraced about 40 percent of the steep supply, in some cases the tightest since decline that took place during 1990 and the mid-1970s. Farmers whose crops 1991. Investment in drilling also rose in were hurt by weather suffered income 1993, as incentives from rising prices losses in 1993, while the producers for natural gas apparently offset the whose crops were not hurt benefited disincentives associated with falling oil from rising prices. Total net farm prices. Spending for other types of struc- income thus appears to have held in the tures rose by a small amount in the range of other recent years, at a level aggregate. well within the extremes of either boom Swings in business inventory invest- or bust. ment played only a small role in the Trends in business finance remained economy in 1993. Inventory accumula- favorable in 1993. Business expendition in the nonfarm business sector tures for fixed capital and inventories picked up in the early part of the year, were financed almost entirely with funds but thereafter, the rate of stockbuilding generated internally, and, in the aggreslowed. Accumulation for the year as a gate, the relatively little external financwhole was of only modest proportions, ing that did take place came partly from especially when compared with the rates positive net issuance of equity. Growth of buildup seen during previous busi- of debt was slow, both in absolute terms ness expansions. Conceivably, the usual and relative to the high rates of debt Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

54 81st Annual Report, 1994 growth seen in the 1980s. With little slowed, but their rate of increase contingrowth in debt and interest rates down, ued to exceed the growth of nominal the portion of business cash flow GDP by a considerable margin. required for the repayment of principal Growth of federal receipts picked up and interest declined further in 1993. All a bit in fiscal 1993, to a pace roughly this seemed to augur well for sustained matching that of nominal GDP growth. expansion of the business sector and the Combined receipts from individual economy. income taxes and social insurance taxes, which account for about 80 percent of total federal receipts, rose about 5Vz per- The Government Sector cent, after a gain of 3 percent in fiscal Federal purchases of goods and ser- 1992. Receipts from corporate income vices, the portion of federal outlays that taxes, which account for about half of are included in GDP, fell more than the remaining receipts, increased more 6 percent in real terms over the four than 17 percent in fiscal 1993, after only quarters of 1993. Real outlays for a small gain in the previous fiscal year. national defense, which have been Taken together, the slowing of federal trending down since 1987, declined outlays and the pickup of receipts led to nearly 9 percent over the year. Growth a decline in the size of the federal budof nondefense outlays fell slightly, on get deficit in fiscal 1993, after three net, after fairly sizable increases in each years of sharp increases. The 1993 defiof the three previous years. The level of cit amounted to $255 billion and was real federal purchases in the fourth quar- equal to 4.0 percent of nominal GDP. ter of 1993 was down about 10 percent The previous year, the deficit had from the level of six years earlier. Real amounted to $290 billion and was equal defense purchases dropped about 20 per- to 4.9 percent of nominal GDP. In fiscal cent over that six-year stretch. 1989, toward the end of the last eco- Total federal outlays, measured in nomic expansion, the size of the deficit nominal terms in the unified budget, relative to nominal GDP had reached a rose 2 percent in fiscal 1993, the small- cyclical low of 2.9 percent. est increase in six years. Outlays for In the state and local sector, receipts defense fell about 2Vi percent in nomi- moved up about in step with the growth nal terms, and net interest payments of nominal GDP in 1993, but state and were down slightly—the first decline in local expenditures rose still faster. In that category since 1961. Net expendi- nominal terms, the increases in spending tures for deposit insurance, which had cumulated to a rise of about 63/4 percent been slightly positive in 1992, were over the four quarters of the year. State negative in fiscal 1993, held down in and local transfer payments to persons part by delays in funding the activities have slowed from the extraordinary of the Resolution Trust Corporation. rates of increase seen in the early 1990s, Federal spending for income security a reflection of improvement in the econslowed from the rapid pace of 1991 and omy and intensified efforts among state 1992, as economic expansion led to a and local governments to tighten control reduction in outlays for unemployment over these types of outlays. Nonethecompensation and a less rapid rate of less, the rate of rise in these payments increase in outlays for food stamps. remained in excess of 10 percent in Growth in federal expenditures for 1993. Nominal purchases of goods and Medicare and other health programs also services rose moderately, but at a pace Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 55 somewhat faster than that of 1992. The terms of the other Group of Ten (G-10) deficit in the combined operating and currencies, rose nearly 6 percent on balcapital accounts of state and local gov- ance from December 1992 to December ernments widened further during the 1993. The dollar's 1993 rise in real first three quarters of the year, from an terms (that is, adjusted for movements end-of-1992 level that already was quite in relative consumer prices) was slightly sizable; in the fourth quarter, the deficit greater than its rise in nominal terms, apparently shrank, but not by enough to as U.S inflation exceeded weightedfully retrace the earlier increases. average inflation in the other G-10 coun- In real terms, purchases of goods and tries by about V2 percent. The dollar's services by state and local governments rise continued into the early weeks of increased 3 percent over the four quar- 1994, but by mid-February it had fallen ters of 1993, after gains of about back to a level a bit below its average in V/2 percent per year in both 1991 and December 1993. 1992. State and local expenditures for The main factor behind the strengthstructures rose more than 9 percent in ening of the dollar last year appears real terms over the year, according to to have been the general downward preliminary data. Some of the spending revision in perceptions of the strength went for the repair or replacement of of economic activity in a number of structures that had been damaged in foreign countries while activity in the recent natural disasters, such as the United States seemed to be improving summer flooding in the Midwest. In on balance, especially in the latter part addition, the efforts of state and local of the year. The weakening of activity governments to cope with the needs abroad contributed to large declines in of growing populations prompted interest rates in the foreign G-10 counincreased investment in schools, high- tries, both in absolute terms and relative ways, and other state and local facilities. to levels of interest rates in the United Low interest rates probably convinced States. On average, foreign short-term state and local officials to undertake rates fell nearly 3 percentage points more of this new construction in 1993 relative to U.S. rates last year, and forthan they would have otherwise. Growth eign long-term rates fell about 1 percentin other types of state and local pur- age point relative to U.S. rates. Foreign chases continued to be fairly restrained short-term rates have changed little on in 1993. Employee compensation, which average during the first few weeks of makes up roughly two-thirds of state 1994, while long-term rates have edged and local purchases, rose about 1 ]A per- higher. cent in real terms during the year, the The dollar rose 8 percent against the same as in 1992. Employment growth in mark and by similar amounts against the state and local sector was slow by other currencies in the exchange rate historical standards again in 1993, and mechanism (ERM) of the European increases in hourly compensation were Monetary System during 1993. It apprerelatively small. State and local pur- ciated a bit further, on balance, in early chases of goods rose only moderately. 1994. Potential existed for much greater divergence of dollar exchange rates against these currencies as the result of a The External Sector widening of permitted fluctuation mar- The trade-weighted foreign exchange gins following the ERM crisis last sumvalue of the U.S. dollar, measured in mer. Strains developed in the ERM in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

56 81st Annual Report, 1994 July and August on growing expecta- almost 100 yen per dollar last August. tions that weakness in the French econ- At that point, statements by U.S. omy and an anticipated recovery of the officials expressing concern over the German economy would cause French implications of the yen's strength for authorities to reduce interest rates ahead Japanese growth, accompanied by U.S. of German rates. Growing pressure on intervention support for the dollar, the French, Belgian, Danish, and Iberian appeared to shift the market's main currencies led to massive foreign ex- focus from these external considerations change intervention, sharp increases in back toward the Japanese domestic short-term interest rates in those coun- economy. Over the latter part of the tries, and in early August, a substantial year, as economic activity in Japan conwidening of the ERM margins. Later, tinued to weaken and Japanese interest market pressures eased and interest rates rates moved lower, the dollar rose returned to their pre-crisis levels as it against the yen, partially offsetting its became clear that these countries would earlier decline. That uptrend was halted not make use of the wider margins to in February 1994, however, in the face ease policy, and as the German economy of renewed trade tensions between the showed signs of weakening further. United States and Japan, and the dollar The pound, which had depreciated fell back close to the low reached in sharply against the dollar in late 1992 August. after U.K. authorities pulled it from the The dollar depreciated slightly in real ERM and substantially lowered interest terms on average against the currencies rates, fell an additional 4 percent rela- of major U.S. trading partners among tive to the dollar during 1993. The developing countries in Latin America Italian lira depreciated nearly 20 percent and East Asia in 1993. The Mexican against the dollar last year, reflecting peso rose 6 percent, despite a period of market concerns over political uncer- downward pressure amid uncertainty tainties and massive budget deficits in about the outcome of the U.S. congres- Italy. Similar concerns, although on a sional vote on the North American Free smaller scale, contributed to the Cana- Trade Agreement as that vote drew near. dian dollar's depreciation against the The rise in the peso's inflation-adjusted U.S. dollar of about 4 percent during exchange value has cumulated to nearly 1993. 35 percent since 1989, reflecting in part The Japanese yen was the only cur- a strong inflow of capital from abroad rency of a foreign G-10 country to stimulated by domestic reforms, declinappreciate against the dollar in 1993, ing world interest rates, and the anticirising on balance about 11 percent. The pated positive influence of NAFTA on dollar-yen exchange rate appeared to be Mexico's real growth. The Brazilian subject to two conflicting sets of pres- cruzeiro rose fairly strongly in real terms sures last year. During the first eight against the dollar, as substantial nominal months of the year, the dollar depre- depreciation of the cruzeiro did not keep ciated nearly 20 percent against the pace with the even more rapid domestic yen, as market attention appeared to be inflation in that country. Meanwhile, the focused mainly on the rising Japanese Hong Kong dollar rose in real terms and external trade surplus and perceived the Taiwan dollar fell. political pressures from abroad, particu- Growth of real GDP in the major larly from the United States, to reduce industrial countries picked up somethis surplus. The dollar reached a low of what, on average, during 1993 from Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 57 depressed levels in 1992. Growth was changed little, on net, over the first three lifted as economic recoveries in Canada quarters of the year but strengthened and the United Kingdom gained some in the fourth quarter as shipments of momentum. However, output in Japan machinery and automotive products and most of continental Europe increased. The growth of computer remained sluggish at best, showing exports in real terms slowed from the either small increases or small declines very rapid pace of recent years but still for most of the year. The weakness of posted an increase of more than 15 perreal activity in the foreign Group of Six cent. Agricultural exports declined as a industrial countries put further down- result of reduced U.S. output in the 1993 ward pressure on CPI inflation, which crop year. By region of the world, the receded to roughly 2 percent on average rise in merchandise exports during in those countries last year. Further 1993 was more than accounted for by declines in interest rates in most of these increased shipments to Canada, the countries during the past year should United Kingdom, and Mexico. Shipenhance the prospects of recovery in the ments to the sluggish economies in concoming year. The economies of the tinental Europe and Japan declined major developing countries in Asia con- somewhat, while the growth of exports tinued to grow rapidly, fueled in part by to developing countries in Asia slowed exceptionally strong growth in China. from the rapid pace of 1992. Real growth in Mexico fell to near zero, Merchandise imports grew about however, reflecting the depressing 14 percent in real terms during 1993. effects of policy restraint aimed at con- The growth in imports was broadly taining inflationary pressures and, for a based across commodity categories. time, growing uncertainty about whether Computers accounted for one-third of NAFTA would be implemented. the growth in real terms, but imports of The nominal U.S. merchandise trade consumer goods, machinery, automotive deficit widened to more than $130 bil- products, and industrial supplies all rose lion in 1993, compared with $96 billion strongly as well. Import prices declined in 1992. Imports grew much faster slightly during 1993, reflecting a sharp than exports, partly because the U.S. decline in the price of oil imports. The economic recovery gained momentum average price of non-oil imports rose while economic growth in U.S. export only slightly, reflecting low inflation markets was sluggish on average. The abroad and the rise of the dollar. appreciation of the dollar also tended to In the first three quarters of 1993, depress real net exports. The current recorded net capital inflows balanced account worsened about in line with the only part of the substantial U.S. current trade deficit, moving from a deficit of account deficit, as net statistical errors $66 billion in 1992 to nearly $105 bil- and omissions were positive and large. lion at an annual rate over the first three Sizable net shipments of U.S. currency quarters of 1993. Net service receipts to foreigners, which are not recorded and net investment income receipts both in the U.S. international accounts, conremained little changed over this period. tributed to the positive net errors and U.S. merchandise exports grew omissions. 33/4 percent in real terms over the four Net official capital inflows amounted quarters of 1993, based on the initial to $48 billion. G-10 countries accounted fourth-quarter estimate from the national for part of the inflows. In addition, variincome and product accounts. Exports ous developing countries, particularly in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

58 81st Annual Report, 1994 Latin America, experienced large pri- retail and wholesale trade increased vate capital flows into their countries about one-half million, the largest and added substantially to their official annual rise since 1988. The number of holdings in the United States. jobs in finance, insurance, and real Net private capital inflows into the estate picked up a bit after a five-year United States were negligible in the first period that had encompassed three years three quarters of 1993. However, reflect- of sluggish growth and two years of ing the continued internationalization of unprecedented reductions. Construction financial markets, both inflows and out- employment rose 200,000 after three flows grew. U.S. net purchases of for- years of sharp declines. eign securities reached a record $96 bil- The services industry added about lion, about evenly divided between 1.2 million new jobs in 1993. More than stocks and bonds. Most of these net one-third of the increase came at firms purchases were accounted for by West- that supply services to other businesses. ern Europe, Canada, and Japan; devel- Of these firms, the ones exhibiting by oping countries in Asia and Latin Amer- far the most rapid growth were personica accounted for a small but growing nel supply firms—companies that essenshare of total U.S. net purchases of for- tially lease the services of their employeign stocks and bonds. Foreign private ees to other businesses, usually on a net purchases of U.S. government secu- temporary basis. Many companies rerities and corporate bonds remained quiring additional labor apparently have strong; foreign asset holders also re- been attracted by the flexibility of such sumed making net purchases of U.S. arrangements, as well as by cost advancorporate stocks. In addition, capital in- tages, at least over the short run. Elseflows from foreign direct investors in where in the services industry, health the United States resumed in the first services continued to generate a substanthree quarters of 1993, while capital out- tial number of new job opportunities in flows by U.S. direct investors abroad 1993, even though the gain was not remained strong. quite as large as those of other recent years. Small to moderate employment gains also were reported during the year Labor Market Developments at firms supplying a wide variety of The labor market strengthened in 1993, other types of services. as economic expansion began to trans- Manufacturing employment continlate more forcefully into increased job ued to decline in 1993, but at a slower creation. Payroll employment, a mea- pace than in any of the three previous sure of jobs that is derived from a years. Although manufacturers boosted monthly survey of establishments, rose output considerably, the gain was almost 2 million over the twelve months achieved mainly through another sizable of the year. Although this gain was rise in factory productivity. Labor input only moderate compared with annual in manufacturing reportedly increased increases in many years of the 1970s only slightly, and the gain took the form and 1980s, it was about twice the of a lengthened workweek rather than increase of 1992. The increase in em- increased hiring. By the latter part of the ployment in January of this year appar- year, the average workweek in manufacently was held down by bad weather. turing had reached A\3A hours, the long- Hiring picked up in most major sec- est since World War II. Hiring did pick tors in 1993. The number of jobs in up late in the year, however, and a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 59 further rise in the number of factory jobs force participation rate has edged down was reported in January of this year. slightly, on net. Based on data from the Reliance by manufacturers on workers old survey, the number of persons who from personnel supply firms reportedly desired work but did not seek it because has increased; because these workers are of a perceived lack of job openings carried on the payrolls of the personnel changed little over the course of 1993. firms, actual labor input in manufactur- In addition, the number of persons outing was greater than the data indicate. side the labor force and not wanting a Significant improvement in labor job rose about 0.8 percent during the market conditions also was evident in year, pulled up in part by a sharp data from the monthly survey of house- increase in the number of retirees. holds. The measure of employment that Workers whose careers were cut short is derived from this survey rose 2l/z mil- by business restructurings and defense lion over the twelve months of 1993, cutbacks probably augmented the norafter an increase of about Wi million mal flow of workers into retirement. during the previous year. At the same Growth in the number of persons not time, the number of unemployed per- wanting a job because of attendance sons fell more than 1 million over the in school also increased during 1993, course of 1993, and the civilian unem- according to data from the old survey. ployment rate declined nearly a full per- To the extent that these individuals have centage point. Because of changes in the been honing their job skills, their lack of design of the monthly survey of house- current participation in the labor force holds, the official rate reported for could turn into a positive factor for the January of this year—6.7 percent—is economy over the longer run. not comparable with the official rates for The slowing of nominal increases in 1993 or previous years. However, the hourly compensation came to a halt in Bureau of Labor Statistics has indicated 1993. The employment cost index for that, abstracting from the changes in private industry—a labor cost measure survey design, the unemployment rate that includes wages and benefits and probably fell in January, with estimates covers the entire nonfarm business of the size of the decline ranging from sector—increased 3.6 percent from 0.1 percentage point to 0.3 percentage December of 1992 to December of point. The aim of the new survey is to 1993, about the same as the rise of the achieve more precise classification of previous year. Wages rose 3.1 percent individuals whose labor market situa- over the year, one-half percentage point tions may not have been accurately cap- more than in 1992, and the growth of tured by the questions included in the benefits slowed only a little, to 5.0 perold survey. cent. Compensation gains picked up for Growth of the civilian labor force— workers in some white-collar occupathe sum of persons who are employed tions, notably sales workers and managand those who are looking for work— ers. Slightly bigger gains than in 1992 was relatively sluggish again in 1993. also were realized by workers in some The rise over the four quarters of the blue-collar occupations. By contrast, the year was 1.2 percent, only slightly faster rate of compensation growth held steady than the rate of growth of the working- in service occupations and edged down age population. Over the past four years, in some blue-collar occupations in labor force growth has averaged less which fewer specialized skills are than 1 percent per year, and the labor required. The overall rise in hourly Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

60 81st Annual Report, 1994 compensation during 1993 exceeded the showed up in the commodity markets rise in consumer prices by about 1 per- from time to time during 1993; late in centage point. Hourly wage gains more the year and early in 1994, these than kept pace with inflation, and the increases became more widespread. Provalue of benefits provided to workers by ducer prices picked up somewhat in Jantheir employers continued to rise rapidly uary, but prices at the retail level were in real terms. unchanged, on balance. Labor productivity continued to The patterns of price change for items increase in 1993, albeit less rapidly than other than food and energy were more in the earlier stages of the cyclical checkered in 1993 than they had been expansion. According to preliminary in 1992, a year when deceleration was data, output per hour in the nonfarm widespread among both commodities business sector rose 1.5 percent during and services. The CPI for commodities the year, after large increases in both other than food and energy rose only 1991 and 1992. Although part of the 1.6 percent over the four quarters of gain in output per hour over this three- 1993 a percentage point less than in year period is no doubt a reflection of 1992. Within this category, the CPI for normal cyclical processes, the data also tobacco fell 5 percent in 1993 after seem to suggest that the longer-run trend many years of large increases, as the in productivity is tilting up a bit more inroads being made by generic brands in sharply than in the 1970s and 1980s, a that market forced major suppliers to result of heavy investment by business alter their basic pricing strategies. Prices in new information technologies, of the of apparel rose less than 1 percent durrising skill of workers in exploiting ing 1993, an even smaller increase than those technologies, and, perhaps, of the in 1992. By contrast, the prices of motor more quiescent inflation environment of vehicles moved up somewhat faster than recent years. With gains in labor produc- in 1992; the price rise for trucks was the tivity offsetting part of the 1993 increase largest in recent years. The CPI for nonin compensation per hour, unit labor energy services increased 3.8 percent costs in the nonfarm business sector over the four quarters of 1993, about the increased just 1.3 percent, a shade less same as the rise during the previous than in 1992. year. The index for medical care services slowed for the third year in a row, but airfares rose sharply for a second Price Developments year. Price increases for other services Inflation edged down a bit further in generally were little different from those 1993. The 2.7 percent rise in the CPI in 1992, with small deceleration for over the four quarters of the year was some items and small acceleration for the smallest increase since 1986, and the others. four-quarter rise of 3.1 percent in the Food prices picked up in 1993. The CPI excluding food and energy was the consumer price index for food increased smallest increase in that measure in 2.7 percent over the four quarters of the more than twenty years. At the same year, an acceleration of about a percenttime, however, progress toward lower age point from the pace of the two previinflation was sporadic during the year, ous years. Because price increases in and the slowing of price increases was those two previous years had been held less widespread than it had been in down, in part, by unusually favorable 1992. Scattered upward price pressures supply developments in agriculture, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 61 some pickup of food price inflation natural gas has picked up in recent might have been in store for 1993 even years, after trending lower through had weather conditions been no worse much of the 1970s and a large part of than average. In the event, the weather the 1980s. Since the end of last year, oil was unusually bad. Severe winter prices have changed little, on net, as an weather disrupted livestock production upswing in prices during the first few early in the year; drought in the eastern weeks of 1994 has been reversed by states hurt crop production in that region more recent declines. The CPI for during the summer; and flooding of energy continued to fall in January. historic severity in the Missouri and The producer price index for finished Mississippi River basins cut deeply into goods, which includes both consumer output of some of the nation's major goods and capital equipment and covers field crops. At retail, effects of the vari- only the prices received by domestic ous supply disruptions showed through producers, increased just 0.2 percent in the prices of meats, poultry, and fresh over the four quarters of 1993. An idenproduce. Price increases for other foods, tical increase was reported in the PPI for which account for by far the larger share finished goods other than food and of total food in the CPI, showed almost energy; the increase in this measure no acceleration in 1993; most of the was the smallest in its history, which value added in production of these other goes back to 1974. As at retail, price foods comes from nonfarm inputs. increases for these domestically pro- Consumer energy prices declined duced goods were held down, in part, by 0.4 percent over the four quarters of the sharp drop in prices of tobacco prod- 1993 after rising only moderately in ucts. More broadly, competition from 1992. With world oil production out- imports and further increases in labor stripping demand, crude oil prices fell productivity in manufacturing were sharply during the last three quarters of important elements in pricing restraint. 1993, to levels in December that were The prices of intermediate materials about 25 percent below those of a year excluding food and energy rose 1.6 perearlier. Gasoline prices, after increasing cent over the four quarters of 1993, a in the early part of 1993, turned down in small step-up from the pace of the pre- March and fell for six additional months vious year. thereafter. The string of declines was In the markets for raw commodities interrupted in October when federal gas- and other primary inputs, scattered oline taxes were raised, but it resumed upward price pressures emerged from in November and continued through time to time during the first three quaryear-end. Average pump prices for the ters of 1993, and fairly widespread fourth quarter were about 4 percent increases were reported in the year's below the level of a year earlier. Fuel oil final quarter and into early 1994. The prices fell about 3 percent over the same producer price index for crude materials period. Prices of the service fuels— excluding food and energy thus moved electricity and natural gas—increased up sharply over the year, by about during 1993. The rise in electricity 10 percent in all. The weight of these prices over the year amounted to inputs in GDP is quite small, however, 1.7 percent, slightly less than the and in the absence of more general cost increase posted in 1992. Natural gas pressures, increases in their prices prices rose nearly 5 percent for the usually do not impart much upward second year in a row; consumption of thrust to the prices of finished goods. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

62 81st Annual Report, 1994 Inflation expectations, as reported in and thrifts. In part spurred by the higher various surveys of consumers and other returns available in those markets, respondents, flared up for a time during investors found bonds and stocks to be a 1993 but retreated in the latter part of more attractive alternative than deposthe year. According to one such survey, its; flows into bond and stock mutual conducted by the University of Michi- funds were at record levels last year. As gan Survey Research Center, the rate of a consequence, the monetary aggregates price increase expected one year into the continued to grow quite slowly relative future moved up from an average of to the expansion of nominal income. 3.8 percent in the final quarter of 1992 Recognizing the ongoing redirection of to an average of 4.7 percent in the third financial flows relative to historical quarter of 1993. The rise was fully norms, the Federal Open Market Comreversed in the fourth quarter, however. mittee (FOMC) in February and July A similar but much less pronounced 1993 lowered the annual ranges for M2 swing in expectations was evident in and M3 for 1993 in two technical adjustsome other surveys as well. The surveys ments totaling 1 Vi percentage points for have continued to show one-year expec- M2 and 1 percentage point for M3. tations of price change running some- Uncertainty about the extent and durawhat higher than the actual increases of tion of the unusual change in velocity recent years. Longer-run expectations of meant that growth in the aggregates price change have remained higher still, could not be relied upon to guide with the Survey Research Center's changes in reserve conditions, and the series on average inflation rates that are FOMC continued to use a wide variety expected over a five- to ten-year horizon of information about financial and ecoholding in a range of 4!/2 percent to nomic conditions for this purpose. 5 percent, according to surveys con- Assessing the incoming information, ducted in the second half of 1993 and the Federal Reserve judged that no early 1994. change was needed in reserve and money market conditions during 1993 to sustain the economic expansion with- Monetary and Financial out engendering inflationary pressure. Developments in 1993 With money market rates remaining in a Financial repair continued in 1993, amid range not much, if at all, above the core increasing signs that borrowers and rate of inflation, however, the members lenders were more comfortable with of the FOMC viewed that a tightening in their balance-sheet positions. House- reserve conditions at some point would holds, in particular, and firms, to a lesser likely be needed to avoid pressures on extent, stepped up their borrowing as the capacity and a pickup in inflation. year progressed. Depository institutions, Concerns about a buildup of inflationfor their part, were sufficiently encour- ary momentum increased in the spring, aged by the stronger economy and the and, over the three months from midimprovement in their own financial con- May until mid-August, instructions from ditions to ease the terms and conditions the FOMC to the Federal Reserve Bank of credit for businesses and households. of New York indicated that there was a Nonetheless, with efforts to greater likelihood that money market strengthen financial positions continu- conditions should be tightened rather ing, financing remained concentrated in than eased before the next scheduled capital markets, largely bypassing banks meeting of the FOMC. Those concerns Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 63 again came to the fore as 1994 opened. considerable—the unemployment rate Considerable underlying strength in averaged 1]A percent (on the old aggregate demand and dwindling levels basis)—price pressures were not perof excess capacity to meet that demand ceived to be likely. The expansion of the raised the risk that inflation pressures monetary aggregates had faltered around would strengthen down the road, derail- the turn of the year, but the sense ing the expansion. Consequently, in Feb- was that special factors—importantly ruary, the FOMC tightened reserve con- including a decline of mortgage prepayditions for the first time in five years, ments that constricted the level of transnudging short-term rates up ]A percent- actions deposits—accounted for some of age point. the weakness. Against this backdrop, it appeared to the members of the FOMC that unchanged reserve conditions The Implementation would support economic expansion and of Monetary Policy still be consistent with further declines Most short-term interest rates ended in inflation and inflation expectations. 1993 where they had begun the year, at Moreover, the situation did not seem to quarter-century lows that had resulted call for a presumption of the likely from the substantial easing in reserve direction of any intermeeting adjustment conditions engineered by the Federal in reserve conditions; such a symmetric Reserve from 1989 to 1992. The rate directive had been issued to the Account charged for adjustment borrowing at the Manager of the System Open Market discount window remained at 3 percent, Account at the end of the December and federal funds traded around the 1992 meeting as well. same rate. Despite the stability of short- Investor confidence in the longer-term term interest rates, longer-term interest prospects in capital markets apparently rates fell as much as 1 percentage point strengthened in the weeks that followed, over the course of 1993, to settle at owing in part to a growing perception levels not seen on a sustained basis since that significant progress in reducing the the late 1960s. Investors apparently path of future budget deficits might be were encouraged by the prospects for in the offing. By the time of the March low inflation and reduced federal bud- Committee meeting, bond yields had get deficits. Helped by the decline in fallen appreciably, touching levels last long-term rates and by brighter earnings observed in 1973, with the largest reports, the stock market enjoyed strong declines posted at the longest maturities. gains. Indicators of real activity suggested In February 1993, the time of the first some slowing from the torrid fourth- FOMC meeting of the year, incoming quarter pace, but in labor markets, payinformation suggested that the economy roll employment had strengthened and had exhibited considerable strength in the unemployment rate had moved down 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 real GDP at a 53A percent annual rate a buildup of inflationary momentum. and the growth of nominal GDP in With fundamental forces still suggesting excess of 9 percent. Final demand was further disinflation, however, and with seen to be strong, paced by household those concerns not evident in capital consumption and business investment. market indicators, or in the exchange With slack relative to capacity still value of the dollar, which remained Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

64 81st Annual Report, 1994 relatively steady, the FOMC retained its aggregates in May apparently had not symmetric directive. marked a trend toward more rapid In May, Committee members were expansion in broad measures of money. confronted with ambiguous indicators of Overall, the evidence pointed toward a economic activity, prices, and the finan- sustained economic expansion and some cial aggregates, which were all made ebbing of the recent upsurge in inflationmore confusing by a spell of bad ary pressures. News in that vein, along weather that had distorted somewhat with progress in the Congress toward the seasonal patterns of spending and adoption of a deficit-reduction package, production. As for the prices of goods had fostered a drop in longer-term bond and services, although many analysts yields in the days leading up to the thought that the major indexes were dis- meeting. The durability of that improvetorted by difficulties in seasonal adjust- ment in market sentiment remained an ment, data releases showing a variety of open question, however. Monetary polprice and labor compensation indexes icy could be viewed as relatively expanon the high side of investor expectations sive in light of the behavior of a variety still roiled financial markets. Slack in of other indicators, including the growth the economy remained appreciable, in narrow measures of the monetary which weighed against any pickup in aggregates and reserves and the low inflation, but inflation expectations were levels of money market interest rates, in in danger of ratcheting higher, with pos- both nominal and, in particular, real sible adverse consequences for inflation terms. In such an environment, Commititself. Meanwhile, the latest readings on tee members agreed that it was necesthe monetary aggregates showed a burst sary to remain especially alert to the of growth in early May, but tax-induced potential for a pickup in inflation. As a distortions and a surge in prepayments result, the FOMC decided to retain the of mortgage-backed securities made current degree of restraint in the reserve this information particularly difficult to market and an asymmetric tilt toward interpret. In the view of a majority of tightening in the policy directive. the members of the FOMC, wage and At the time of the August meeting of price developments were sufficiently the Committee, readings on inflation worrisome to warrant positioning policy were encouraging: Consumer prices had for a move toward restraint should signs changed little, and producer prices had of mounting inflation pressures continue fallen over recent months. Data on to multiply. Although they saw no spending and production had a weakish immediate need to alter the degree of cast, and the persistence of the sluggishreserve pressure, they agreed that cur- ness in the second quarter had become rent conditions made it easier to envis- more apparent. These data releases had age a tightening rather than an easing bolstered investor confidence in the over the intermeeting period, a sense prospects for continued disinflation, that was embodied in an asymmetric while the recently passed legislation on policy directive. the federal budget offered the promise In advance of the July meeting of the of meaningful cuts in the deficit over the FOMC, the unemployment rate had next several years. Accordingly, longermoved back up to 7 percent (on the old term yields fell about 40 basis points. basis), while industrial production had The resulting capital gains apparently changed little over the preceding few added to the allure of stock and bond months. The surge in the monetary mutual funds, thereby weakening M2, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 65 which only edged up in July. At this be to tighten, the members of the Commeeting, policymakers saw existing mittee agreed that until trends became reserve conditions as consistent with clearer, the current stance of policy their goals. Moreover, the dissipation of should be maintained. The prospects of the inflation threat and the encouraging heightened credit demands and forecasts downward tilt to expectations of infla- of looming capacity pressures pushed tion suggested to members of the FOMC up longer-term interest rates about that the risks were more evenly bal- Vs percentage point from their yearly anced than of late. As a result, the lows set in mid-October. Over that same Committee reverted to a symmetric span, the dollar showed notable strength directive—instructions that carried no on foreign exchange markets. presumption as to the direction of an in- Most market rates held at these higher termeeting move—which was retained levels as the FOMC met for the first for the remainder of 1993. time in 1994. Readings on activity sug- Leading up to the September FOMC gested that 1993 had ended on a very meeting, the unemployment rate had strong note, with real GDP expanding edged lower, to 6.7 percent (old basis), about 6 percent at an annual rate in the housing starts had declined, and retail fourth quarter and reports suggesting sales were flat in real terms. Substantial that some of this momentum had carried drags on economic growth remained: over into 1994. Slack in labor and prodcutbacks in the defense sector; uncer- uct markets had been reduced considtainties regarding the effects of other erably, and the prices of a number of government policies that had the poten- commodities important in the productial to raise labor and production costs; tion of durable goods and in construcand slow growth on average in the for- tion had begun to move higher. With eign industrial economies. However, that backdrop, the Committee decided sources of stimulus were also apparent: that it was time to trim back some of the the cumulative spur to spending of low stimulus provided by the current low interest rates, especially at longer matu- level of short-term interest rates before rities; the lessening of balance-sheet it fed through to higher inflation. The constraints on households and firms; and Account Manager was directed to the improving financial condition of the tighten reserve conditions, and the feddepository sector, which was making eral funds rate moved up to a range credit more available. Given these around VA percent, while the discount conflicting influences on spending, the rate remained at 3 percent. Committee determined that leaving reserve conditions unchanged would be most consistent with maintaining sus- Money and Credit Flows tainable economic growth. The long expansion of the 1980s was The incoming data in advance of the associated with growth of total debt of final two Committee meetings of 1993 domestic nonfinancial sectors that was indicated a robust near-term expansion about IV2 times the pace of nominal in activity with no immediate inflation- GDP growth. In the wake of this pheary pressure. Although there was a sense nomenal leveraging, the recession and that with reserves ample and money tepid economic recovery from 1990 to market rates at the low end of the range 1992 were importantly a balance-sheet of experience over the past three phenomenon that was reflected in a decades, the next move in policy would slowing in debt growth. In retrospect, it Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

66 81st Annual Report, 1994 is apparent that this deceleration in debt liabilities to disposable income to just was one symptom of the general dissat- under 90 percent in 1993. The largest isfaction of both borrowers and lenders swing was in the consumer credit catewith their financial conditions, a con- gory, as households evidently became cern that also led to some restraint on more confident of the sustainability of spending and asset accumulation. Nine- the economic expansion and made teen ninety-three saw some lessening of previously delayed purchases of durable this restraint, and the growth of the debt goods, especially autos. The record of the nonfinancial sectors expanded volume of mortgage originations mostly 5 percent, about in line with nominal involved refinancings, but with a pickup GDP. This performance put the debt in construction activity and some aggregate in the lower portion of its cashing out of equity in the process of 4 percent to 8 percent monitoring range, refinancing, home mortgages expanded a range that had been set at the first 7 percent, on net, last year. Overall, this meeting of the year. pickup in liabilities was dwarfed by a The debt of the nonfederal sectors substantial expansion of the asset side of (nonfinancial businesses, households, the household balance sheet last year, and state and local governments) ex- raising net worth to a level about panded 33/4 percent last year. For non- 43/4 times that of disposable income. financial corporations, a pickup in fixed Within those assets, households contininvestment and inventory investment ued to shun deposits in favor of the outpaced increases in internally gener- investment products of nonbank interated funds, pushing the financing gap mediaries, notably mutual funds and into positive territory after two years of insurance companies. As a result, deposnegative readings; as those firms sought its shrank to less than 20 percent of total outside funds, they turned, in the main, household assets, a post-World War II to long-term debt markets, though net low. Much of the declining role for equity issuance remained sizable as deposits probably owed to the pattern of well. However, the debt markets in 1993 financial returns, with investors, consaw far more activity than the net fronted by a steep yield curve, seeking requirements for external funds implied. out the higher yields provided by longer- Low longer-term rates induced many maturity instruments that were mostly firms to refinance existing obligations, available from outside the depository pushing gross public debt issuance by sector. nonfinancial firms above $190 billion. Depository institutions, pressed by Earlier efforts to restructure balance their own balance-sheet problems, were sheets, along with the opportunities unaggressive in seeking deposits and afforded by lower long-term rates to extending credit in the early 1990s. By refinance existing obligations, appar- 1993, however, commercial banks had ently put households in a better position made substantial strides in improving to take on new debt in 1993. With debt- their capital standing. About threeservice burdens holding at about 16 per- quarters of the assets at commercial cent of income, or about 2XA percentage banks were on the books of wellpoints below the peak set at the end of capitalized institutions as of September the previous decade, and with loan rates 1993, 2!/2 times the proportion at the declining substantially, households end of 1990 (table 3). Partly as a conassumed new liabilities rapidly enough, sequence, banks reported on Federal on net, to push up the ratio of their total Reserve surveys a substantial easing of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 67 terms and standards on business and annual range of 0 percent to 4 percent consumer loans during the year. How- (table 4). This range had been adjusted ever, borrowers, endeavoring to lock in down for technical reasons to acknowllonger-term funds, which are not typi- edge the appreciable upward trend to cally supplied by banks, continued to M3 velocity over the past few years, rely heavily on capital markets, keeping which accompanied the shrinking role the need of depositories to fund asset of depositories in intermediating funds. expansion subdued. Depository credit The part of M3 exclusive to that aggredid expand modestly in 1993, marking a gate declined V/i percent on a fourthsubstantial rebound from the declines quarter-to-fourth-quarter basis, held posted in the previous three years. The down by a steep drop in institution-only increase in depository credit exceeded money market mutual funds. Overall, the growth of deposit funds, as deposito- M3 velocity rose at a AV2 percent annual ries made extensive use of equity, subor- rate in 1993, down almost 2 percentage dinated debt, and other nondeposit funds points from the previous year. to finance the expansion of depository The velocity of M2 rose at a 33/4 perbalance sheets. Bank credit increased cent annual rate in 1993 after increasing 5 percent last year after two years of nearly 5 percent in 1992. The rise in growth in the neighborhood of 3 Vi per- velocity last year was posted even as the cent, while thrift credit contracted only return on many competing short-term modestly. Indeed, thrift credit is esti- assets remained relatively constant, and mated to have expanded in the second it was this ongoing drift upward in the half of the year, pulled up by extensions ratio between nominal GDP and the of loans by credit unions that out- aggregate that led the FOMC to reduce weighed continuing, albeit slackening, the annual growth range for M2 from runoffs at savings and loans. the 2 percent to 6 percent spread that Slow expansion of depository credit, was set in February to the 1 percent to together with the increased reliance by 5 percent range that was ultimately in banks on nondeposit funds, damped the effect. In the event, M2 grew \Vi pergrowth of M3 in 1993. From the fourth cent from the fourth quarter of 1992 to quarter of 1992 to the fourth quarter of the fourth quarter of 1993, slowing 1993, M3 grew Vi percent, ending the slightly from the 2 percent growth rate year a little above the lower bound of its in 1992. Even this anemic expansion was accounted for in part by special factors. In particular, foreign demands Distribution of Assets of Domestic Commercial Banks, by Adjusted for currency were strong and transac- Capital Category tions deposits were boosted late in the year by a surge in mortgage refinancings Percent that followed when mortgage rates End of year Sep- fell to levels not seen in a generation. Category tember 1990 1991 1992 1993 Refinancings are associated with the temporary parking of funds in trans- Well capitalized .. 30.4 34.4 67.8 73.3 actions and other highly liquid deposit Adequately capitalized .. 38.5 45.1 21.8 17.8 accounts. Undercapitalized . 31.1 20.5 10.3 8.9 Especially after taking account of NOTE. Adjustments to capital categories were made such special factors, the growth of M2 according to the rule of thumb of downgrading a bank by was quite subdued in 1993, owing in one category for a low examination rating by its supervisory agency (CAMEL 3, 4, or 5). large part to the attractiveness of capital Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

68 81st Annual Report, 1994 market instruments. Although the bond At the end of 1993, assets in stock market rally trimmed as much as 1 per- and bond mutual funds totaled about centage point from longer-term yields, $l'/2 trillion, up $400 billion from the the term structure still retained an end of 1992. About one-half of the abnormally steep tilt through all of December 1993 total was held by insti- 1993. Some investors were willing to tutions and in retirement accounts—two expose themselves to the greater price categories generally not in M2. M2 plus risk inherent in capital market mutual the remainder of stock and bond funds funds in the pursuit of higher average expanded at around a 5 I/2 percent annual returns. Commercial banks took some rate in 1993, roughly in line with nomimeasures to keep those customers, if not nal GDP over that period. those deposits: Many banks made it Ml grew at a 10Vi percent pace last possible to buy stock and bond mutual year, spurred on by double-digit funds in their lobbies. Promotion of increases in currency and demand these services picked up, and some deposits. As noted above, the former banks sponsored their own mutual funds was importantly boosted by foreign or established exclusive marketing demands, while the latter was closely arrangements with mutual fund com- related to swings in mortgage refinancpanies, undoubtedly encouraging the ing. Ml velocity declined at a 43/4 perdiversion of deposits to mutual funds. cent annual rate, despite the relative stability of money market interest rates. In contrast, the narrow aggregate's veloc- Growth of Money and Debt ity had followed the path of short rates Percent down during the easing of monetary policy from 1989 to 1992. Altogether, the Domestic Measurement non- drop in M1 velocity in recent years illus- Ml M2 M3 period financial trates both its high interest-rate sensitivdebt ity and the fairly loose relationship of Year' Ml to interest rates and income. With 1980 7.4 8.9 9.6 9.1 1981 5.4 9.3 12.4 9.9 the rapid expansion of transactions 2.52 1982 8.8 9.2 9.9 9.6 deposits, total reserves grew at a 1983 10.4 12.2 9.9 12.0 1214 percent annual rate last year, down 1984 .... 5.5 8.1 10.9 14.0 from the 20 percent pace posted in 1992. 1985 12.0 8.7 7.6 14.2 Adding in the increase in currency 1986 15.5 9.3 8.9 13.4 1987 6.3 4.3 5.7 10.3 results in a 10^2 percent growth rate for 1988 4.3 5.3 6.3 9.0 the monetary base in 1993, the same 1989 .6 4.8 3.8 7.8 performance as the previous year. 1990 4.2 4.0 1.7 6.6 1991 7.9 2.9 1.2 4.6 Confronted with this rapid expansion 1992 14.3 1.9 .5 5.0 in transaction deposits, and therefore 1993 10.5 1.4 .6 4.9 required reserves, and directed by Quarter the Federal Open Market Committee (annual rate)3 1993: 1 8.3 -1.3 -3.2 4.0 to keep reserve market pressures 2 10.7 2.2 2.1 4.5 unchanged over all of 1993, the Domes- 3 12.0 2.6 1.1 5.7 4 9.4 2.1 2.4 5.2 tic Desk at the Federal Reserve Bank of New York added about $35 billion of 1. From average for fourth quarter of preceding year to average for fourth quarter of year indicated. securities, on net, to the System Open 2. Adjusted for shift to NOW accounts in 1981. Market Account over the course of the 3. From average for preceding quarter to average for quarter indicated. year. In keeping with previous FOMC Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 69 instructions, those purchases were gain in the second quarter. Business weighted more heavily than in the past fixed investment has continued to grow toward longer-maturity instruments. As rapidly this year, as firms have sought to a result, the average maturity of the improve efficiency by installing state-of- Treasury securities held by the Federal the-art equipment; rising utilization rates Reserve moved up slightly over 1993, to have spurred interest in expansion of 3.2 years. capacity as well. Consumer outlays have trended higher this year, buoyed by the considerable gains in income and an Report on July 20, 1994 increased willingness to borrow or use savings; lately, though, spending growth Monetary Policy and appears to have moderated somewhat. the Economic Outlook The rise in long-term interest rates that for 1994 and 1995 began last fall has damped the growth of The favorable performance of the U.S. housing activity this year, but the effect economy continued in the first half of has been relatively mild, in part because 1994. Economic activity advanced at a homes remain quite affordable by the brisk pace, building on the substantial standards of the past two decades. In the gains in late 1993, and broad measures labor market, the employment gains durof inflation moved still lower. Unem- ing the first half of this year were subployment declined and industrial capac- stantially more rapid than those in 1993, ity utilization rose, substantially reduc- and the unemployment rate has contining the remaining slack in resource use. ued to move lower. In this context, monetary policy has Inflation generally was moderate durbeen directed this year at heading off a ing the first half of 1994. Retail food buildup of inflationary pressures that and energy prices changed little, on balcould jeopardize the continuation of the ance, over the period, holding the rise economic expansion. To do so, the Fed- in the consumer price index (CPI) to eral Reserve has had to move away from 2V2 percent at an annual rate. At the its highly accommodative policy stance same time, the prices of a wide range of of recent years. That stance had been materials used in manufacturing and adopted to counteract unusual restraint construction have been boosted considon domestic spending associated in large erably by strong demand and the part with the efforts of both borrowers resulting higher rates of resource utilizaand lenders to strengthen their financial tion. Looking ahead, retail energy prices condition. Data available in late 1993 likely will rise over the summer, pushed and early 1994 suggested that the re- up by the rebound in crude oil prices in straint on spending had dissipated and recent months; in addition, the decline that the economic expansion had in the dollar since the beginning of the become strong and self-sustaining. year, if not reversed, probably will exert Against this background, the Federal some upward pressure on prices. Reserve has firmed money market con- The Federal Reserve's policy actions ditions in four steps this year. this year have raised the federal funds Despite disruptions caused by severe rate to around 414 percent, from 3 perwinter storms, real gross domestic prod- cent, and have boosted the discount rate uct (GDP) rose at an annual rate of to 31/2 percent, also from 3 percent. 31/2 percent in the first quarter, and avail- Other market interest rates have risen able indicators point to another sizable 114 to P/4 percentage points since the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

70 81st Annual Report, 1994 beginning of the year. Increases in the monetary authorities of a large numintermediate- and long-term rates have ber of other countries, including the been unusually large relative to the other members of the Group of Seven adjustment of short-term rates, reflect- (G-7). ing stronger-than-anticipated economic The strength of spending and a growth and market expectations of renewed willingness to use and extend greater inflationary pressures as well as credit contributed to a pickup in borrowactual and expected tightening actions ing by households and businesses in the by the Federal Reserve to contain those second half of last year, and this trend pressures. On occasion, the declining extended into the first half of 1994. value of the dollar also appeared to con- However, the composition of borrowing tribute to higher yields. Markets have has been affected by financial market been volatile at times this year as inves- conditions. Rising and more volatile tors have adjusted to a changing eco- long-term interest rates have encournomic and policy outlook. The uncertain aged businesses to rely more heavily on conditions encouraged investors to try sources of shorter-term financing, such to reduce their risk exposure, and the as finance companies and banks, and associated attempts to make large shifts have prompted households to shift to in portfolios over short periods seemed adjustable rate mortgages. Banks, which to add to the upward pressure on long- had been hampered by balance sheet term rates at times. problems of their own in recent years, Despite the rise in U.S. interest rates, sought business and household loans the dollar has declined considerably this more aggressively by continuing to ease year, with its trade-weighted foreign credit standards and the nonprice terms exchange value against the Group of of lending. Total commercial bank credit Ten (G-10) countries falling about 8 per- has increased moderately this year, and cent. Rising long-term interest rates thrift institution credit, which contracted abroad, associated with brighter pros- sharply between 1989 and 1993, appears pects for economic growth, tended to to have expanded a bit. In contrast to offset the effect on the dollar of higher the strength of private borrowing, the U.S. rates. Moreover, other factors, growth of federal government debt has including diminished hopes for a prompt slowed this year, reflecting the subdued resolution of trade tensions with Japan growth of expenditures and sharply and market concerns about future infla- higher tax receipts associated with fiscal tion in the United States, fostered down- policy actions and the robust economy. ward pressure on the dollar. This pres- As a result, the total debt of the domessure was especially intense in late April tic nonfinancial sectors expanded at and early May and again in the second about a 514 percent annual rate from the half of June and first half of July. The fourth quarter of 1993 through May, U.S. Treasury and the Federal Reserve close to its pace over the second half of made substantial dollar purchases on last year and well within its monitoring three occasions during these periods to range of 4 to 8 percent. deal with volatile trading conditions and Growth of the broad money aggremovements in the dollar judged to be gates has not kept pace with that of inconsistent with economic fundamen- nominal GDP again this year. M2 tals. Other governments shared the con- increased at about a 1 lA percent annual cern of U.S. officials, and the more rate from the fourth quarter of last year recent operations were coordinated with through June, while M3 fell slightly, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 71 placing these aggregates around the slower flows on M2 has been offset by lower bounds of their respective annual shifts into direct holdings of market growth ranges. In the usual pattern, instruments, such as Treasury bills. As a increases in rates on retail deposits and consequence, the sum of M2 and houseon money market mutual funds have hold holdings of bond and stock mutual lagged the rise in market interest rates, funds has decelerated sharply this year. inducing a redirection of savings from M2 into market instruments and boosting M2 velocity. With returns on Money and Debt Ranges interest-paying checking accounts virtufor 1994 and 1995 ally unchanged, compensating balance At its July 1994 meeting, the Federal requirements for demand deposits re- Open Market Committee reviewed the duced by rising rates, and transactions annual ranges for money growth for balances also depressed by several spe- 1994 that it had established in Februcial influences, Ml growth this year ary. In light of the experience of the first has slowed to less than half its rate half of the year and the likelihood that of advance in 1993; through June, funds would continue to be diverted this aggregate had expanded at about a from deposits to higher-yielding market 4 percent annual rate since the fourth instruments, the Committee expected a quarter of last year. Owing to the substantial increase in the level of M2 anemic expansion of transactions deposvelocity over 1994. M3 velocity also its, total reserves fell slightly over the was seen as likely to rise quite sharply, first half of the year. Only continued given the funding patterns of depository strong demand for currency, much of institutions, which had been favoring which reflected use abroad, has supsources of funds not included in M3, ported growth of Ml and the monetary such as capital and borrowing from base. overseas offices. As a consequence, the In contrast to 1992 and 1993, shifts Committee continued to expect that into bond and stock mutual funds were money growth within, though perhaps not a major factor in the rise in M2 toward the lower end of, the ranges of velocity this year. Falling securities 1 percent to 5 percent for M2 and 0 perprices created capital losses for bond cent to 4 percent for M3 would be and equity mutual funds, prompting consistent with its broader objective of some fund holders to reevaluate the risks and prospective returns of such investments. Bond mutual funds experienced outflows this spring, and a portion of Ranges for Growth of Monetary the proceeds was directed to less-risky and Credit Aggregates money market mutual funds, thus ele- Percent vating M2 for a time. Even with more Provisional subdued moves in securities prices since Aggregate 1993 1994 for the late spring, many small investors 1995 have retained a more cautious view of M2 1-5 1-5 1-5 the possible risks and rewards of hold- M3 0-4 0-4 0-4 ing capital market instruments, and total Debt 4-8 4-8 3-7 inflows to bond and stock mutual funds NOTE. Change from average for fourth quarter of have remained considerably weaker than preceding year to average for fourth quarter of year indicated. Figures for debt of the domestic nonfinancial in the past few years. The effect of these sector are monitoring ranges. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

72 81st Annual Report, 1994 fostering financial conditions that would Economic Projections sustain economic expansion and contain for 1994 and 1995 price pressures. It therefore voted to The members of the Board of Governors retain these ranges for 1994 (table 1). and the Reserve Bank presidents, all of With little information to suggest any whom participate in the deliberations of new trends in velocity for 1995, the the Federal Open Market Committee, Committee chose simply to carry for- generally anticipate that the growth of ward the 1994 ranges for M2 and M3 as real GDP will moderate during the secprovisional ranges for those aggregates ond half of this year and into 1995 from for 1995. The Committee noted that the unsustainable pace in recent quarters these ranges, especially that for M2, (table 2). Employment gains through the provided an indication of the longer- end of 1995 are expected to roughly run growth of this aggregate that might balance the net flow of individuals into be expected with the attainment of the labor force, leaving the unemployreasonable price stability and a return to ment rate about unchanged from its the past pattern of velocity fluctuating average level in the second quarter of around a constant long-run level. Con- this year. Inflation is expected to pick up siderable uncertainty about the behavior a little over the next year and one-half. of velocity is likely to persist, however, The forecasts of the Board members and the Committee will continue to and Reserve Bank presidents for ecomonitor a broad range of financial and nomic growth in 1994 are quite close to economic indicators in addition to the those made in February. Most continue monetary aggregates when determining to expect that real GDP will rise 3 perthe appropriate stance of policy. cent to 3lA percent over the four quar- The Committee also decided to retain ters of this year. For 1995, the central its current monitoring range of 4 percent tendency of the forecasts is a range of to 8 percent for growth of the debt 21/2 percent to 23A percent. The unemaggregate during 1994. With debt ployment rate anticipated for the fourth expanding at a rate close to that of nom- quarter of 1994 has been revised down inal income, the Committee's expecta- about !/2 percentage point from that protion for the growth of nominal GDP for jected in February.1 The forecasts of the the year suggested that the debt aggre- unemployment rate in the fourth quarter gate would finish the year comfortably of 1994 are now bunched between 6 perwithin this range. However, the Com- cent and 6lA percent; this range is also mittee expected that in 1995, macro- the central tendency of the projections economic performance consistent with for the fourth quarter of 1995. sustainable expansion would involve These forecasts are based on the some slowing of the growth of nominal expectation that the next several quarspending and moderate growth of debt; indeed, rapid credit growth might suggest the possibility of a borrow-and- 1. The unemployment forecast in February was subject to an unusual degree of uncertainty, as it spend psychology typical of strengthwas made shortly after the introduction of major ening inflation. Consequently, the revisions to the survey that generates the unem- Committee voted to set a provisional ployment data. In February, the revised survey monitoring range for debt growth for was believed to have boosted the unemployment rate from January 1994 forward by roughly V2 per- 1995 of 3 percent to 7 percent, a reduccentage point. Subsequent analysis indicates that tion of 1 percentage point at each end of the upward shift caused by the new survey probathe range. bly was smaller than originally thought. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 73 ters will be a period of transition to a in the prices of fruits and vegetables, the more moderate expansion accompanied rate of inflation projected for the next by reasonably full use of available year and one-half is slightly higher than resources. This transition is already evi- that posted recently. The decline in the dent in the housing market and, perhaps, dollar to date, if not reversed, also could in consumer outlays as well. The result- exert some mild upward pressure on ing deceleration in private domestic inflation. spending is expected to be offset, in The Administration recently released part, by a smaller decline in net exports its mid-year update of economic and than that registered over the past several budgetary projections. The projections quarters; this projection for the external for nominal and real GDP growth, inflasector largely reflects an expectation of tion, and unemployment for 1994 and stronger economic expansion abroad. 1995 fall within the ranges anticipated The Board members and Reserve by Federal Reserve officials and are Bank presidents generally expect the essentially consistent with the central rise in the consumer price index over the tendency of those ranges. Thus, it four quarters of 1994 to end up in the appears that the monetary ranges set by range of 23A percent to 3 percent. So far the Federal Open Market Committee this year, retail energy prices have been are compatible with the goals of the flat on balance and retail food prices Administration. have moved up only a little, restraining Both Federal Reserve policymakers the rise in the total CPI. However, given and the Administration anticipate furthe run-up in crude oil prices of late and ther economic expansion accompanied the improbability of another large drop by relatively low inflation. The Federal Economic Projections for 1994 and 1995 Percent FOMC members and nonvoting Reserve Bank presidents Measure Administration Central Range tendency 1994 Change, fourth quarter to fourth quarter' Nominal GDP 5'/4-6'/2 5'/2-6 5.8 R C e o a n l s u G m D e P r price index2 2'/ 3 2 - - 3 3 I ' / / 2 2 23/ 3 4- - 3 3 '/4 2 3 . . 9 0 Average level, fourth quarter Unemployment rate3 6-6'/4 6-6'/4 6.2 1995 Change, fourth quarter to fourth quarter' Nominal GDP 4'/2-6'/4 5-5»/2 5.6 C R o ea n l s u G m D e P r price index2 2'/ 2 4 - - 4 2 3 '/ / 2 4 2 2 3 '/ / 2 4 - - 2 3 3 ' / / 4 2 2 3 . . 7 2 Average level, fourth quarter Unemployment rate3 53/4-6'/2 6-6'/4 6.2 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

74 81st Annual Report, 1994 Reserve can do its part to prolong and hours worked, and the civilian unemenhance this favorable performance of ployment rate fell further. The indicators the economy by continuing to set mone- of spending, although less robust on baltary policy in accord with the long-run ance than those for the labor market, objective of price stability. An envir- still point to a sizable increase in ecoonment of stable prices is a necessary nomic activity. condition for attaining the maximum Inflation trends remained favorable sustainable growth of productivity and over the first half of this year, with the living standards. However, the outcome consumer price index rising at an annual for the economy will also depend on rate of only 2!/2 percent over the period. government policy in other areas. In this Inflation has been damped by the regard, the Congress and the Adminis- healthy uptrend in productivity—which tration can help ensure that the nation's has offset much of the increase in comeconomy reaches its full potential by pensation rates—and by the minimal working to keep the federal budget defi- rise in non-oil import prices. In addition, cit on a downward course, by promoting the decline in crude oil prices through an open world trading system, and by this spring held down retail energy adopting regulatory policies that pre- prices. However, oil prices have since serve the flexibility of labor, product, moved up considerably, and the rise and financial markets and minimize the likely will boost retail energy prices costs imposed on the private sector. over the summer. Prices have also risen substantially for many industrial materials, but these increases have not had The Performance of a noticeable effect on the prices of finthe Economy in 1994 ished goods. The economy entered 1994 with a considerable amount of forward momentum. Severe winter weather disrupted The Household Sector activity, but real GDP still posted a solid Household balance sheets strengthened gain in the first quarter, amounting to over 1992 and 1993, and the setback in Vh percent at an annual rate. As had stock and bond markets this year has not been the case during 1993, domestic made a major dent in the sector's finanprivate-sector spending was robust in cial position. In addition, real income the first quarter, with consumer pur- has continued to trend up at a healthy chases of motor vehicles and investment pace. Averaging through the monthly in business equipment both increasing at ups and downs, consumer spending double-digit annual rates. At the same appears to have posted a sizable time, the ongoing cutbacks in defense advance over the first half of 1994, with spending depressed total purchases by most of the gain coming in the first the federal government, and the slug- quarter. Higher mortgage rates have gish economic performance of some cooled the growth of housing demand, major foreign industrial countries held but the level of activity remains strong. down the growth of U.S. exports. In the first quarter of 1994, real con- The data in hand suggest that real sumer spending rose at an annual rate of GDP increased substantially further in about 5lA percent, building on the large the second quarter. In the labor market, increases registered during the second gains in payroll employment and longer half of 1993. Real outlays for motor workweeks appreciably boosted total vehicles were particularly strong in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 75 first quarter. Spending on other durable the average level of real disposable goods, which had advanced robustly income in April and May was about during most of 1993, rose only slightly 3Vi percent above the level during the in the first quarter, whereas outlays for same period in 1993. This rise in real nondurable goods and services remained income was slightly smaller than the on a solid uptrend. The severe weather advance in real consumer spending over that gripped much of the country this the same time span. winter left its mark on the monthly pat- According to preliminary estimates tern of outlays but appears to have had (which are subject to potentially large little effect on the level of consumer revisions), the personal saving rate averspending for the first quarter as a whole. aged a bit less than 4 percent during the Outlays for furniture and appliances, first five months of this year—quite a clothing, and food all tumbled in Janu- low rate by historical standards. The ary but then rebounded smartly over the level was so low partly because of a remainder of the first quarter. This pat- one-time charge against income to tern was reversed for energy consump- account for the wealth lost in the Los tion, which soared in January and then Angeles earthquake. In addition, the turned down. higher taxes due on returns filed this The growth of real consumer spend- spring probably pushed down the ing appears to have slowed in the sec- amount of personal saving. Still, a good ond quarter, with much of the decelera- part of the decline in the saving rate tion reflecting declines in two areas. from the 5 percent level prevailing two First, consumer outlays for motor vehi- years ago reflects a burst of spending on cles softened in April and May, and motor vehicles and other durable goods. the level of spending probably did not Such a decline in the saving rate often move up much, if at all, in June. How- accompanies cyclical surges in outlays ever, underlying consumer demand has for consumer durables, which are remained firmer than the recent spend- counted as consumption in the national ing data would suggest, as vehicle sales accounts; in reality, much of the initial in the second quarter were held down by expenditure on durables is a form of shortages of popular models. Second, saving, as these goods are assets that household use of electricity and gas for provide a flow of services for years to the second quarter as a whole likely will come. turn out to have been below the weather- Household balance sheets have reboosted level of the first quarter. Apart mained relatively strong despite the from these two categories, real con- lower prices in financial markets this sumer outlays evidently posted a moder- year. The total value of household ate increase in the second quarter. assets—which includes not only finan- On a pre-tax basis, real income cial assets, but also housing and congrowth has been brisk over the past year, sumer durables—rose moderately on buoyed by a considerable gain in wages balance over the year ended in the first and salaries, a sharp increase in the net quarter of 1994. Moreover, survey data income of nonfarm proprietorships, and indicate that households, in the aggrean upturn in interest income. However, gate, continue to view their current and the higher personal income taxes expected financial positions in a favorimposed on upper-bracket taxpayers by able light. This greater sense of financial the 1993 Budget Act have cut into the security, and the attendant willingness to growth of disposable income. All told, take on debt, help explain the rapid Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76 81st Annual Report, 1994 growth of consumer credit since the mortgages (ARMs); the lower initial middle of last year. Other measures of rates on ARMs allow some households household financial conditions also to obtain financing when they would remain positive. Debt-service burdens, be unable to qualify for a fixed-rate measured as a percentage of disposable mortgage. As another support for income, held about steady in the first housing demand, the strong labor marquarter at a level well below the peak ket in recent quarters has lessened reached several years ago. Delinquency the perceived likelihood of job loss, rates for consumer loans and home encouraging many households to mortgages were little changed in the first assume the financial commitment of quarter, with most measures of delin- homeownership. quencies holding near their lowest Starts of multifamily housing units levels in a decade or more. this year have picked up from the The market for single-family housing extraordinarily low levels registered has softened in recent months. Starts of from 1991 through 1993. This rise likely single-family homes, which strength- reflects an improving balance between ened over the course of 1993, plum- demand and supply in some local marmeted in January and remained low in kets. Lenders have shown a greater will- February. Much of this sharp decline ingness to fund multifamily projects, can be attributed to adverse weather. owing not only to the firming real estate With the return to more normal weather market, but also to their own improved in the spring, starts did recover, but the financial conditions; equity investors— rebound was relatively weak, leaving including real estate investment trusts— the May level below that in the fourth also have been participating more quarter of last year. Sales of both new actively in this market. However, for the and existing homes in May also were nation as a whole, vacancy rates for down from their respective fourth- multifamily rental units remain high and quarter levels. In addition, consumer rent increases continue to be relatively attitudes toward homebuying have dete- small, suggesting that a major recovery riorated somewhat since late winter. in this sector is unlikely in the near Nonetheless, the level of sales and term. building activity in the single-family market has remained fairly high. Even with the rise in mortgage rates, new The Business Sector homes continue to be quite affordable Developments in the business sector by the standards of recent decades. A remained favorable during the first half simple measure of affordability is the of 1994. Apart from losses from the monthly payment on a fixed-rate mort- Los Angeles earthquake, earnings have gage for a new home having a given set continued to be strong, and the repair of of attributes, divided by average house- balance sheets over the past few years hold income. By this measure, the cost has improved the access to credit for burden of homeownership in the second many businesses. Fixed investment has quarter of this year was lower than at moved up further, supported by wideany time from mid-1973 to early 1992. spread efforts to boost productivity. Moreover, in response to the rise in Business output, excluding that in the long-term rates, an increasing share of farm sector, continued to increase at a households have financed home pur- brisk pace in the first quarter. In real chases this year with adjustable-rate terms, the gross domestic product of this Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 77 sector rose in the first quarter at an Real outlays for business equipment annual rate of 4lA percent, about the continued to rise rapidly in the first same rate of advance recorded in quarter, increasing about 17 percent at 1993. Focusing on the industrial an annual rate. This was the eighth consector—for which output data are secutive quarter that showed a doubleavailable on a more timely basis— digit advance. Monthly data through production advanced at an annual rate May on orders and shipments of busiof 5 percent over the first half of 1994, ness capital goods point to further sizwith the strongest gains registered early able gains in real equipment purchases. in the year. This pattern largely reflects The increase in equipment investment developments in the motor vehicle this year has been quite broad, as firms industry, where production rose sharply have attempted to cut costs and improve from last August to February of this product quality through the use of more year in response to strengthening de- advanced technology. Real outlays for mand and dwindling inventories. Since computers and related devices climbed February, assembly rates have moved at an annual rate of 20 percent in the lower on a seasonally adjusted basis, as first quarter, reaching a level more than capacity constraints have hindered auto- double that of three years earlier. Busimakers from achieving their normal sea- nesses have invested heavily in computsonal gains. Excluding motor vehicles ers to take advantage of the increasingly and parts, industrial production contin- powerful equipment available at everued to advance strongly in the second lower prices. Outlays for industrial and quarter. other types of machinery, which turned After having risen sharply over 1993, up in the middle of 1992, continued to the profits of U.S. corporations from expand at a solid pace early this year. current operations fell back in the first Business spending for motor vehicles quarter of 1994. However, this decline also rose substantially in the first quarin economic profits appears to have ter, led by another large increase in been due entirely to the effects of the purchases of trucks; these purchases Los Angeles earthquake and the severe have likely been bolstered by improveweather last winter; these events greatly ments in the safety and efficiency of increased the volume of claims against new models and by the increased insurance companies and also resulted demand for shipping to support just-inin uninsured damage to plant and equip- time inventory management. In contrast ment. Abstracting from these losses, to this widespread strength in investpre-tax economic profits in the first ment, domestic purchases of commerquarter rose slightly from the already cial aircraft dropped in the first quarter high fourth-quarter level. Profits of non- to a very low level, reflecting the excess financial corporations have been boosted capacity in the airline industry. by the strong growth in sales and by Business investment in nonresidential continued tight control of costs. For structures fell sharply in the first quarter financial corporations, domestic profits after having posted a moderate gain over surged over 1993 and remained high in 1993. Severe weather was responsible the first quarter (after adjustment for the for the skid in activity during January jump in insurance payouts), buoyed by and February. Construction spending the relatively wide margin between their then recovered during the spring, leavcost of funds and the interest rates ing the level in May about the same as earned on their assets. that registered in December of last year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78 81st Annual Report, 1994 The absence of growth, on net, over this ers, which had been depleted during the period might suggest that the sector has third quarter of 1993. In addition, the lost some momentum, quite apart from rate of inventory accumulation increased the effects of weather. However, the this year for producers of machinery, monthly construction data are prone to likely in response to the robust orders large revisions, which limits the useful- for these goods. At the wholesale level, ness of the initial estimates. Two lead- stocks of machinery and other durable ing indicators of private nonresidential goods increased considerably during the construction—permit issuance and spring; the pace of stockbuilding in the contract awards—remained on a choppy retail sector spurted at about the same uptrend through May. time. Looking at the major components In the farm sector, output last year of nonresidential construction, some was depressed by floods in the Midwest progress has been made in reducing the and by drought conditions farther east. huge stock of unoccupied office space, As a result, inventories of some major and the plunge in prices for office prop- field crops—principally corn and erties appears to have abated. Nonethe- soybeans—currently are unusually low. less, the national vacancy rate remains This year, changes in government subhigh by historical standards, and starts sidy programs encouraged farmers to of new office buildings continue to be increase their planted acreage, and limited. In contrast, outlays for commer- favorable weather during the spring cial structures other than offices moved facilitated rapid planting. Although the up smartly last year. Financing for these harvest is still several months away, projects has become more readily avail- field conditions appear to be reasonably able, and the proliferation of large-scale good at present. discount stores in suburban locations has Farmers hurt by bad weather last year been a major source of construction suffered income losses, and the financial activity. In the industrial sector, utiliza- positions of some may have weakened. tion rates have risen considerably over Nonetheless, the financial condition of the past year, but little sign has yet the farm sector as a whole appears to be emerged of a significant rise in construc- sound. Delinquency rates for farm loans tion of new plants. Public utilities, at the end of 1993 were quite low comaccording to surveys taken this spring, pared with the experience of the past anticipate only a small rise in invest- decade, and land values rose noticeably ment this year, in part because of the last year across most of the farm belt. perceived difficulty in gaining approval Reflecting these favorable conditions, for rate hikes and because of new rules investment in farm machinery has been requiring utilities to purchase power relatively strong this year. generated by other sources. Meanwhile, real investment in petroleum drilling structures fell somewhat in the first The Government Sector quarter, to a level about unchanged from Federal purchases of goods and that of a year earlier. services—the part of federal spending Nonfarm inventory investment during included in gross domestic product— the first five months of 1994 picked up fell at an annual rate of 5lA percent in substantially from the pace of late last real terms in the first quarter. Real fedyear. Part of the pickup reflected efforts eral purchases have been trending down to replenish stocks at automotive deal- since the first half of 1991, and the level Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 79 of outlays in the first quarter of this year The growth of federal receipts was stood roughly 12 percent below the peak strong during the first eight months reached three years earlier. This decline of fiscal year 1994, with all major catehas been driven by the ongoing reduc- gories posting solid gains. The 93A pertion in military outlays. Real defense cent rise in receipts over the comparspending plunged at an annual rate of able part of fiscal 1993 exceeded the about 15 percent in the first quarter after increase in nominal GDP by a wide having declined more than 9 percent margin. Receipts from corporate over 1993. Real nondefense outlays income taxes have been especially jumped in the first quarter, more than robust, reflecting the upswing in correversing the drop in late 1993; how- porate profits and various provisions ever, given the appropriations for nonde- of the 1993 Budget Act. Receipts from fense spending in the fiscal year 1994 individual income and social insurbudget, these outlays are not likely to ance taxes have also been boosted by increase much further in the near term. the tax hikes in the 1993 act. In addi- As measured in nominal terms in the tion, revenues from excise taxes thus unified budget, total federal expendi- far in fiscal 1994 are up markedly tures during the first eight months of from the year-earlier level, in part fiscal 1994—the period from October because of the higher tax on transporthrough May—were only 2l/z percent tation fuels that became effective last above the level during the comparable October. part of fiscal 1993. Although the drop in As a result of the slow growth in defense spending has figured impor- federal outlays and the robust rise in tantly in the overall restraint on outlays, receipts, the federal budget deficit narother factors have contributed as well. rowed during the first eight months of First, substantial gains in income and fiscal 1994. The deficit, as measured in the expiration of the emergency unem- the unified budget, totaled $165 billion ployment compensation program have during this period, down from the tempered the growth of income security $212 billion deficit recorded over the payments. Second, net interest payments same part of fiscal 1993. on the national debt have been about In contrast to the improved budget flat thus far in fiscal 1994, as a further picture at the federal level, the fiscal decline in the average interest rate paid pressures facing state and local governon federal debt has offset the effect of ments have not abated much. It is true increases in the stock of debt. In addi- that for most states, receipts during the tion, farm subsidy payments have fallen past year have matched or exceeded probecause of the rise in crop prices. The jected levels, as economic growth turned main stimulus to federal outlays still out to be somewhat more buoyant than comes from spending on Medicare, anticipated. Even so, as measured in the Medicaid, and other health programs. national income accounts, the deficit Health-related outlays during the first (net of social insurance funds) in state eight months of fiscal 1994 were up and local operating and capital accounts 10 percent from the same period in fis- has remained large. The $57 billion cal 1993; this increase, although about deficit during the year ended in the first the same as that during fiscal 1993, is quarter of 1994 amounted to 6!A percent considerably smaller than the increases of the sector's expenditures, about the registered during the preceding three fis- same percentage as in the preceding cal years. three years. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80 81st Annual Report, 1994 State and local outlays have contin- The External Sector ued to rise at a fairly rapid pace despite Since December 1993, the tradeefforts to curb spending. Over the weighted foreign exchange value of the year ended in the first quarter of 1994, dollar has declined about 8 percent relathese outlays increased 63A percent in tive to the currencies of the other memnominal terms, about 1 percentage point bers of the G-10. In terms of the currenfaster than the rise in nominal GDP. cies of a wider group of major U.S. Transfer payments to individuals have trading partners, the value of the dollar remained the fastest growing compo- has dropped roughly 4 percent since last nent of state and local spending, reflect- December, when adjusted for changes in ing large increases for Medicaid. consumer prices here and abroad. Tak- Although the growth in Medicaid ing a longer view, the exchange value spending has slowed markedly from of the dollar—adjusted for these price the 30 percent jump during 1991, these changes—has held within a rather naroutlays still rose 13 percent over the row range since the end of 1992 despite year ended in the first quarter. In addi- the decline this year. (See the final section, state and local governments remain tion of this report for a discussion of under pressure to fight crime, to repair developments in foreign exchange aging infrastructure, and to meet the markets.) needs of a growing school-age popula- Economic activity appears to be tion. Boosted by higher spending on strengthening in the major foreign highways and schools, outlays for con- industrial countries. In Canada and the struction rose almost 7 percent in real United Kingdom, where recovery has terms over the year ended in the first been under way for some time, real GDP quarter. This rise occurred even though continues to expand at a fairly steady adverse weather depressed construc- pace. Continental European countries, tion activity early this year, dragging most of which were in recession during down total state and local purchases in 1993, are showing signs of a turnaround. the first quarter in real terms. Apart from In western Germany, real GDP rose transfer payments and construction moderately in the first quarter; although spending, state and local outlays— indicators suggest that growth may have mainly compensation for employees— slowed somewhat in the second quarter, have continued to grow at a relatively economic activity continues to move slow pace. back toward pre-recession levels. There The receipts of state and local gov- is also some evidence of a turnaround in ernments moved up about 6V2 percent Japan: After no growth on net in 1993, in nominal terms over the year ended real GDP moved up strongly in the first in the first quarter, also outpacing quarter; data for the second quarter point the growth in nominal GDP. As to continued, albeit slower, expansion. noted earlier, this outcome was some- The level of real GDP remains subwhat better than most states had stantially below potential in all the anticipated. In response, tax cuts are major foreign industrial countries, and now on the agenda in about one-third inflation generally has continued to of the states. However, most of these slow. In western Germany, the twelveproposals are fairly narrow in scope month change in the consumer price and, in the aggregate, would have index was 3 percent in June, down from only a small effect on expected more than 3!/2 percent at the end of revenues. 1993. In Japan, consumer prices rose Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 81 less than 1 percent over the twelve have risen only slightly over the past months ended in June, an even more year. Looking across our major trading modest increase than that recorded over partners, exports to Canada and Latin the twelve months of 1993. Jobless rates America remained on an upward path remain very high in France and drifted through the first quarter. Although somewhat higher in western Germany exports to Asia dropped back in the first over the first half of this year. The unem- quarter, they also remain on a strong ployment rate in Japan is essentially upward trend. Exports to continental unchanged from its level at the end of Europe continued to expand sluggishly 1993; the number of job offers per appli- through the first quarter. cant, a more sensitive indicator of labor Real imports of goods and services market conditions in Japan, also has posted another sizable increase in the shown no improvement since the end of first quarter, reflecting the strength in last year. In contrast, in both the United U.S. economic activity. Over the year Kingdom and Canada, the unemploy- ended in the first quarter, real imports ment rate has continued to edge down jumped more than 11 percent, and the from the peaks reached in mid-1993. level of imports in April stood some- So far this year, growth in the major what above that in the first quarter. developing countries appears to have Imports of capital goods and industrial slowed slightly, on balance, from its supplies have continued to be especially rapid pace in 1993. The growth of real robust. Prices of non-oil imports rose output in China has moderated from relatively little over the twelve months its previously very strong—and ended in May, as inflation abroad generunsustainable—pace in response to ally remained subdued and the dollar's tighter macroeconomic policy, while foreign exchange value against the curreal growth in the other Asian develop- rencies of the other G-10 countries was ing countries has remained robust on little changed on net over this twelveaverage. Real output in Mexico has month period. rebounded somewhat this year after hav- The nominal trade deficit on goods ing declined during the second half of and services widened to $97 billion (at 1993. The rebound appears to have been an annual rate) in the first quarter, signifdue in part to the somewhat more expan- icantly larger than in any recent quarter, sionary fiscal policy in Mexico and to and remained at about that level in the ratification of the North American April. Net investment income showed a Free Trade Agreement, which resolved small deficit in the first quarter, someuncertainty that had held down invest- what weaker than the average performent activity during 1993. mance in 1993. The current account After having surged in the fourth deficit widened to $128 billion (at an quarter of last year, real U.S. exports of annual rate) in the first quarter, comgoods and services fell back in the first pared with $104 billion for all of 1993. quarter of this year; however, they Recorded net capital inflows for the remained about 43A percent above the first quarter about balanced the current year-earlier level. Preliminary data indi- account deficit. Foreign official inflows cate that real exports in April were slowed, particularly on the part of some somewhat above the first-quarter aver- developing countries that had substanage. The uptrend largely reflects a boom tial accumulations of reserves in 1993. in sales of capital goods; for other Net inflows of private capital into the goods, and for services as well, exports United States picked up in the first Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

82 81st Annual Report, 1994 quarter of 1994. Private foreign net pur- tion employment, held down early in the chases of U.S. securities were strong, as year by the severe weather, moved up foreign investors added to their holdings sharply in March and April and rose of U.S. government securities, corporate somewhat further in May and June. bonds, and stocks. U.S. net purchases of Considerable employment growth has foreign securities also remained very also taken place this year in the servicehigh in the first quarter. Banking offices producing sector. Continuing the pattern in the United States reported substan- of recent years, employment in business tial inflows, as foreign-chartered banks services rose at a rapid clip in the first in particular continued to substitute bor- half of 1994. Employment in health serrowing abroad for funding in the United vices has remained on a fairly brisk States. Foreign branches of U.S. banks uptrend, and job gains have been widealso became net providers of funds to spread in other service industries. their U.S. offices. Direct investment Another area of strength has been inflows and outflows were spurred by a wholesale and retail trade, where the revival of mergers and acquisitions. U.S. sizable employment gains recorded durdirect investment abroad continued at ing 1993 and again this year contrast near-record levels; foreign direct invest- with the lack of job growth on net over ment in the United States was also sig- the preceding four years. nificant, although far below the peaks In addition to boosting the pace of reached in the late 1980s. hiring, employers have continued to rely on a longer workweek to increase aggregate labor input. Indeed, in April, the Labor Market Developments workweek of production or nonsuper- The labor market continued to visory workers in manufacturing strengthen in the first half of 1994. Non- reached a record high for the post-World farm payroll employment increased at War II period; it has since edged off an average rate of about 285,000 per only slightly. Before this expansion, the month during the period, up from the typical pattern had been for the workaverage monthly gain of roughly week to rise as the recovery got under 200,000 during 1993. These increases way but to drift back down with the brought the total rise in payrolls to about eventual pickup in hiring. 5 million since the beginning of the Firms have also shown an increased current expansion in early 1991. preference for using temporary workers. The job gains this year have been In the employment data, these workers spread across most major sectors of the appear on the payrolls of personnel economy. In manufacturing, employ- supply agencies (a component of busiment turned up last October, and a ness services), where employment choppy advance continued during the growth continued to be extremely fast first half of 1994. Hiring has been con- in the first half of 1994. Although these centrated in two industries that have agencies represent only about 2 perexperienced robust sales growth, cent of total payroll employment, they machinery and motor vehicles; payrolls accounted for more than 15 percent of also have expanded in industries that the total rise in employment in 1993 and supply materials and parts to these pro- for nearly that share so far this year. ducers. In contrast, employment in Manufacturing firms in particular have defense-related industries has continued increased their use of temporary workto drop this year. Meanwhile, construc- ers. Both the growing employment of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 83 temporary workers and the lengthening which may be limiting their desire to of the workweek may be motivated, in search for employment. part, by the desire to avoid the rising Output per hour in the nonfarm busicosts of health insurance and other ness sector rose at an annual rate of fringe benefits, which typically are 1XA percent in the first quarter after havgranted to new permanent workers. ing advanced at a far more rapid pace Moreover, given the greater costs now over the second half of 1993. Averaging associated with hiring and firing through these movements, labor producemployees, such behavior may be a tivity rose about 2Vi percent over the response to uncertainty about future year ended in the first quarter of 1994, staffing needs. roughly in line with the increases during In January, the introduction of the the first two years of the current expanredesigned household survey, along with sion. Most of the productivity gain over the incorporation of population esti- this three-year period likely reflects the mates from the 1990 census, created normal cyclical upswing that accoma break in the household measure of panies the strengthening of output after employment, the civilian unemployment a recession. Nonetheless, there does rate, and numerous other series. The appear to have been some speedup in decline in the unemployment rate from the trend rate of productivity growth January to June of 6.7 percent to 6 per- from the relatively slow pace in the cent provides additional evidence of 1970s and 1980s. strong labor demand this year. Unem- The growth in labor compensation ployment rates by region have generally remained subdued early this year. The moved lower since January, and the employment cost index (ECI) for pridispersion across regions also has nar- vate industry—a measure that includes rowed; the declines since January have both wages and benefits—rose VA perbeen largest in California and other cent over the twelve months ended in states in the Pacific region and in March 1994, a shade below the increase New England. registered over the preceding twelve The strength in hiring has not drawn months. The cost of employee benefits many workers into the civilian labor decelerated quite a bit over the past force. In fact, between January and year, largely because of more moderate June the labor force contracted a bit, increases in employer costs for health pushing down the labor force partici- insurance and workers' compensation. pation rate—which measures the per- In contrast, wage increases have held centage of the working age population fairly stable. The ECI for wages and that is either employed or looking for salaries rose almost 3 percent over the work. The participation rate has changed twelve months ended in March, a figure little on net during the current expan- at about the midpoint of the twelvesion, in contrast to the upswing that month changes recorded over the past typically occurs with a strengthening of two years. Separate data through June labor demand. The reasons for this on average hourly earnings of producdeparture from the usual pattern are not tion or nonsupervisory workers also entirely clear. It appears that more show no significant change in the rate of young women are opting for activi- wage inflation. With the rise in labor ties outside the labor market. Also, compensation largely offset by improveaccording to survey data, many individ- ments in productivity, unit labor costs in uals still perceive jobs as hard to find, nonfarm business rose only a little more Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

84 81st Annual Report, 1994 than xh percent over the year ended in come of this year's harvest. As disthe first quarter of 1994. cussed earlier, planting proceeded fairly smoothly this spring, and crops generally were in good condition as of mid- Price Developments July. Inflation slowed slightly further during The CPI for energy was about the first half of 1994. The CPI excluding unchanged on balance over the first half food and energy—a measure of the of 1994, but this measure has yet to underlying trend of inflation—rose reflect the rise in crude oil prices since 3 percent during the period, down a bit March. As the year began, consumer from the 3!/4 percent increases recorded energy prices were still on a downward in 1992 and 1993. "Core" inflation has path, owing to the persistent oversupply not been this low for an extended period of crude oil in world markets. Energy since the early 1970s, when wage and demand then soared when the frigid price controls were in place; apart from weather hit in January and February, that episode, the core inflation rate over depleting inventories of fuel oil, gasoa twelve-month span was last below line, and natural gas. In response, the 3 percent in 1966. Food prices have CPI for energy jumped in February and risen only slightly this year, and energy rose slightly further in March, but most prices have been flat on net, holding the of this increase was reversed in April increase in the total CPI over the first and May. Quite apart from any effects of half of the year to 2x/i percent at an abnormal weather, world oil markets annual rate. Price pressures have been have tightened since March, boosting evident in the markets for raw materials, the price of crude oil by as much as but these increases have not had an $6 per barrel. This increase appears to obvious effect on inflation at the retail have resulted from the expectation of level. improved economic conditions—and The news on food prices so far this hence stronger demand—in Western year has been quite favorable. After hav- Europe and Japan, combined with flat ing risen at close to a 4 percent annual OPEC production and supply disruprate during the second half of last year, tions in the North Sea and other areas. the CPI for food edged up at an annual Retail energy prices were little changed rate of less than 1 percent over the first in June, but the higher costs of crude oil half of 1994. This moderation largely are likely to be passed through to the reflects a decline in the prices of fruits retail level over the summer. and vegetables over the first few months The CPI for commodities excluding of the year, which retraced much of the food and energy increased at an annual run-up that occurred over the second rate of 2!/2 percent over the first half of half of 1993. In addition, plentiful sup- 1994, a somewhat faster rise than during plies of beef and pork pushed down 1993. However, the increase last year retail meat prices a bit on balance over was held down by a huge drop in the the first half of 1994. Prices of other price of tobacco products. Excluding foods—which represent about two- tobacco as well as food and energy, thirds of total food in the CPI— goods prices rose at an annual rate of increased at an annual rate of 2lA per- 2lA percent during the first half of this cent during the first half of the year. year, about the same rate of advance as Looking ahead, the path for retail food in 1993. Price increases for most conprices will depend heavily on the out- sumer commodities have been modest Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 85 this year, owing in part to the very lim- June, after an increase of \Vi percent ited increases in the prices of imported over the preceding twelve months. goods. The only major area in which In contrast, inflation pressures conprices have clearly accelerated is motor tinue to be evident in the markets for vehicles. Reflecting strong demand and raw commodities. With the exception of the weakness of the dollar vis a vis the steel scrap, prices of industrial metals yen, the CPI for new motor vehicles have moved up from their lows last fall, rose 43/4 percent over the first half of in some cases quite substantially. Lum- 1994, up from the VA percent increase ber prices, which have swung widely during 1993. over the past few years, have been at Inflation for consumer services other relatively high levels for most of this than energy has continued to trend year. Prices of other raw materials have lower. During the first half of the year, been firm as well. As a summary meathe CPI for this aggregate rose at sure of these movements, the PPI for an annual rate of 3lA percent, after crude materials excluding food and increases of nearly 4 percent in 1992 energy rose about 7 percent over the and 1993 and AVi percent in 1991. twelve months ended in June. However, Shelter costs—which represent about crude materials constitute a relatively half of non-energy services—have con- small part of the value of finished goods, tinued to rise at a relatively subdued and price increases for these inputs usurate, while price increases in a variety of ally have a limited effect on the prices of other areas have slowed. Indeed, the CPI finished goods in the absence of more for medical care services rose only general cost pressures. 5 percent over the year ended in June, Expectations of inflation appear to the smallest twelve-month change in this have changed little on net since the end series in twenty years. Tuition costs, of 1993. According to the survey of which posted increases of 8 percent to households conducted by the Survey 9 percent annually for several years, Research Center of the University of have decelerated as well, rising 63/4 per- Michigan, the mean expected increase cent over the twelve months ended in in the CPI over the coming year rose June. from 33/4 percent in the fourth quarter of The producer price index (PPI) for 1993 to AVi percent in March and April; finished goods excluding food and however, the readings for May through energy, which covers domestically pro- early July dropped back to an average duced consumer goods and capital of about 4 percent. In the Conference equipment, rose only Vi percent over the Board survey of households, the twelve months ended in June 1994. As expected rate of inflation over the comwith the CPI, this measure of inflation ing year has held fairly steady at has been held down by the plunge in 4!/4 percent since last November. Expectobacco prices; excluding tobacco, the tations of inflation over longer periods P/4 percent rise over the twelve-month also have not changed much on balance period was about the same as that over this year. In the University of Michigan the preceding twelve months. At earlier survey, the expected rate of CPI inflastages of processing, price increases tion over the next five to ten years have remained fairly small on balance. jumped in March but has since retraced The PPI for intermediate materials the increase. Finally, the June 1994 excluding food and energy rose 2 per- survey of professional forecasters concent over the twelve months ended in ducted by the Federal Reserve Bank of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

86 81st Annual Report, 1994 Philadelphia produced the same expec- their use of bank loans. Nonetheless, tation of inflation over the coming ten overall bank lending has increased only years—3.5 percent—as did the survey slightly, as growth in real estate loans taken last December. has slowed. The expansion of bank securities holdings, after adjustment for certain accounting rule changes, has Monetary and Financial eased slightly, and bank credit growth Developments in 1994 has remained close to the pace recorded Interest rates have increased substan- last year. Higher short-term market tially in 1994. Short-term rates started interest rates have also restrained the the year at the unusually low levels that monetary aggregates. Growth of the prevailed throughout 1993, but they broader aggregates has slowed somehave subsequently risen in response to what from last year, and growth of Ml the Federal Reserve's monetary policy has decelerated substantially. actions and market expectations about Since December 1993, the dollar has future actions. The Federal Reserve has declined about 10 percent against the moved away from its previously very German mark and about 11 percent accommodative policy posture in four against the Japanese yen, although it has steps, which lifted the federal funds rate appreciated against the Canadian dollar. a total of VA percentage points. Other Over the same period, stronger growth short-term rates increased commensu- prospects abroad as well as portfolio rately, and banks raised their prime lend- adjustments by globally diversified ing rate, also by 1XA percentage points. investors have lifted long-term inter- Longer-term interest rates have risen est rates in the G-10 countries about about VA to l3/4 percentage points. 1 Vi percentage points, similar to the rise These rates have been boosted by in U.S. longer-term yields. By contrast, stronger-than-expected economic foreign short-term rates, which largely growth, market concerns about higher reflect the thrust of monetary policy inflation, and actual and anticipated in individual countries, are about tightening moves. In addition, a shift in unchanged on a trade-weighted basis; the financial setting, from one marked rates have declined substantially in by yields that were stable or declining to Germany and a number of continental one characterized by rising rates, was European countries, have changed little accompanied by greater market volatil- in Japan, and have risen more in Canada ity and a reevaluation of the risks of and than in the United States. Dollar weakreturns on long-term securities. Inves- ness against the yen and mark was tors seemed to become more uncertain intense from time to time and seemed to about the future path of interest rates, reflect, in part, difficulty in resolving and the resulting portfolio shifts and vol- trade tensions, changing expectations atility have contributed to the upward about macroeconomic developments in pressure on long-term yields at times. Japan and Germany, and investor con- Despite the rise in interest rates, over- cerns that U.S. inflation prospects were all borrowing has remained fairly no longer improving while inflation strong. The composition of private bor- abroad seemed likely to continue to rowing, however, has been affected by move lower. On three occasions when financial market conditions. Businesses, conditions warranted, the U.S. Treasury in particular, have reduced their issu- and the Federal Reserve intervened to ance of long-term debt and stepped up buy dollars. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 87 The Course of Policy the considerable degree of monetary and Interest Rates accommodation that had prevailed for At the beginning of 1994, financial mar- some time. kets had been characterized for several When discussing how to implement years by falling and then persistently this decision, the Committee considered low short-term interest rates, declining the possible reaction of financial marlong-term rates, and unusually wide kets. Market participants, while anticispreads between long- and short-term pating that interest rates would rise at yields. Moreover, the volatility of bond some point, generally did not expect a prices had been quite low by recent his- tightening of policy at this meeting. The torical standards. In this environment, Committee was concerned that the investors had taken on riskier assets in capital losses engendered by the firming pursuit of higher returns. For example, action might unsettle many investors, small investors had switched out of who had not faced a policy firming in low-yielding, but low-risk, assets such nearly five years and whose portfolio as deposits and money market mutual choices in some cases seemed not to funds and into such investments as bond anticipate the consequences of rising and equity mutual fund shares. rates. In these circumstances, the In February, when the Federal Open response to the policy action might be Market Committee gathered for its first outsized, especially if a large adjustment meeting of the year, the available data were made. Consequently, the Comsuggested that the economic expansion mittee decided to initiate its move was solid and self-sustaining. Spending toward a less accommodative stance had picked up considerably, partly reflect- with a small step, although it thought ing declines in long-term interest rates that additional firming steps likely and the improved financial condition of would be necessary in the months ahead. businesses and households. Short-term The Committee instructed the Domesinterest rates had been at historically tic Trading Desk to increase slightly low levels for some time, measured both the degree of pressure on reserve posiabsolutely and relative to inflation, and tions and authorized the Chairman to banks and other lenders had been loos- announce the action so as to avoid any ening their terms and standards for misinterpretation of its action or purextending credit. In this environment, pose. The tightening of reserve condithe Committee was concerned that keep- tions pushed up the federal funds rate ing policy so accommodative risked el- about ]A percentage point, to a range evating demands on productive capacity around 3 lA percent. to the point where inflation pressures Although a policy firming in the might emerge. Even though current months ahead was built into the strucinflation readings were favorable, delay- ture of market interest rates, the timing ing a policy move until these indicators of the move caught many market particisignaled an actual acceleration of prices pants by surprise and, by itself, seemed would permit an inflationary process to to precipitate a substantial shift in become embedded in the economy. In expectations. When the move was folthat event, larger and possibly disruptive lowed by information indicating a much actions eventually would be needed to stronger path for U.S. economic activity bring inflation back under control. than had been anticipated and by an Against this backdrop, the Committee associated heightening of concerns decided to take steps toward eliminating about inflationary pressures, short- and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

88 81st Annual Report, 1994 long-term interest rates moved sharply monetary accommodation and, in light higher throughout the remainder of the of recent financial market conditions, winter. International developments— chose to take another small step. The such as trade tensions, improving eco- resultant increase in reserve pressures nomic prospects, rising long-term inter- lifted the federal funds rate lA percentest rates, and a declining value of the age point, to about Vh percent. dollar—also may have played a role in Data released over the next several elevating yields by raising investor con- weeks indicated considerable strength in cerns about price pressures in the United economic activity. Yields increased States and about foreign investor appe- across the maturity spectrum, with longtite for dollar-denominated assets. Rates term rates rising especially sharply into were volatile on occasion, owing to early April before settling back someshifting perceptions about the future what. On April 18, the Committee course of economic and financial devel- reviewed the incoming data, as well as opments. Market participants generally the apparently more stable conditions in believed that the System's firming financial markets, during a telephone action was the first of a series, but they consultation. Following that review, were unsure of the timing and cumula- Committee members supported the tive magnitude of future policy steps. Chairman's decision to continue the pro- This heightened uncertainty, as well as cess of reducing the degree of monetary the capital losses in the wake of the accommodation. Reserve pressures were firming action, prompted market par- tightened slightly further, and the fedticipants to reduce their risk exposure eral funds rate again rose lA percentage by attempting to shorten the maturities point. of their investments and by trimming Yields continued to increase, on balthe degree to which positions were lev- ance, through mid-May. Short-term rates eraged. They sold long-term assets were affected by expectations of addidenominated not only in dollars but in tional firming actions, while long-term other currencies as well. This rebalanc- rates were subject to countervailing ing of portfolios contributed to sharp forces. Incoming data that showed signs rate swings and may have exacerbated of a possible cooling in the pace of the the upward pressure on long-term inter- economic expansion, favorable price est rates, both in the United States and reports, and more stable trading condiabroad. tions helped push bond yields down for When the Federal Open Market Com- a time. Later, however, a falling dollar, mittee convened in mid-March, the especially in late April and early May, evidence suggested that the expansion and the release of a stronger-thanof economic activity remained robust. expected employment report caused There was a small risk that the weakness long-term yields to retrace some of the and volatility in financial markets might earlier decline. have significantly affected household Despite the earlier firming actions, and business confidence and spending. real short-term rates were still fairly low However, the Committee believed that, at the time of the May Committee meeton balance, its policy stance still was ing. The economy continued to exhibit overly accommodative and likely to pro- forward momentum, and a considerable mote inflationary pressures. It therefore portion of the remaining margin of slack decided to continue the process begun in in resource utilization had eroded. In February to remove the excess degree of financial markets, many of the more risk Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 89 averse investors had made the initial cess could begin to build. However, data portfolio adjustments to a rising rate on spending showed some signs of modenvironment. Under these circum- eration, and growth of money and credit stances, the Federal Reserve thought had not picked up. In these circumthat conditions warranted eliminating stances, the Committee decided to mainmuch of the remaining degree of mon- tain the existing degree of reserve presetary stimulus. The Board of Governors, sure and await additional information to therefore, approved an increase in the judge the trajectory of the economy and discount rate to 3 V2 percent, from 3 per- prices and the appropriateness of its cent, and the Committee directed the policy stance. Domestic Trading Desk to permit the entire Vi percentage point rise to show through to the federal funds rate, which Credit and Money Flows moved up to AXA percent. These moves, Since mid-1993, credit expansion has along with the three earlier steps, were picked up as the economy has strengthjudged to have substantially removed ened and the restraint exerted by finanthe degree of monetary accommodation cial restructuring has ebbed. Lower that had prevailed throughout 1993. debt-service burdens and improved bal- Still, the Committee would have to ance sheets have encouraged businesses monitor incoming financial and eco- and households to take on new debt, nomic data carefully to determine while stronger capital positions and whether additional policy adjustments more robust economic conditions apparwere needed to accomplish its objective ently have made banks and other lenders of maintaining favorable trends in infla- more willing to extend credit. Growth of tion and thereby sustaining the eco- the debt of nonfederal nonfinancial secnomic expansion. tors (nonfinancial businesses, house- Long-term interest rates dropped holds, and state and local governments) immediately following the May 17 pol- picked up in the second half of 1993 and icy moves, but since that time they have has increased a bit more this year—to a retraced the decline. Market partici- 5 percent annual rate. Total domestic pants initially interpreted the Federal nonfinancial sector debt, which includes Reserve's policy announcement as sig- the debt of the federal government, rose naling that it had completed its firming at a 514 percent annual rate between the actions, at least for a while. In addition, fourth quarter of last year and May, investors apparently viewed the actions close to its pace over the second half of as reducing the degree and frequency of 1993 and a little below the midpoint of tightening that might be needed in the its monitoring range of 4 percent to future. Long-term yields began to move 8 percent. (Historical data on the growth up in June, however, reflecting the fur- of the money and debt aggregates ther depreciation of the dollar, intermit- appear in table 3.) tent jumps in commodities prices, less Rising market interest rates and lesssanguine inflation reports, and rising hospitable capital market conditions foreign long-term interest rates. have affected the growth and composi- At the time of the July Committee tion of borrowing by nonfinancial busimeeting, data on employment and hours nesses. The debt of such firms has worked suggested that the economy was expanded at a somewhat faster pace in still growing at a brisk rate, and there 1994 after three years of very little remained a risk that an inflationary pro- growth, in part reflecting a shift away Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

90 81st Annual Report, 1994 from equity issuance as stock prices fell. the second half of 1993, reflecting the Moreover, rising and more-volatile in- rise in mortgage rates that began late in terest rates have played a role in discour- that year. Higher rates have curbed refiaging businesses from issuing long-term nancing, a practice that tended to boost debt securities. Such issuance had been mortgage debt growth as some borrowstrong in 1993 as businesses took advan- ers took the opportunity to liquefy some tage of relatively low interest rates to of the capital in their homes. In contrast refinance high-rate longer-term debt and to the behavior of mortgage debt, conreplace shorter-term debt, such as bank sumer credit growth has remained brisk, loans. In 1994, however, businesses reflecting strong demand for consumer have turned more to banks and finance durable goods and relatively attractive companies to meet their financing needs. rates on many consumer loans. Gener- Interest rate developments have also ally, rates on such loans have risen much affected borrowing by households. The less than market rates. Consumer credit growth of household mortgage debt has at both finance companies and banks has slowed a bit from the pace recorded in picked up in 1994. Total loans at commercial banks have risen at about a AVA percent annual rate, Growth of Money and Debt a bit above last year's pace. The faster Percent growth of business and consumer loans Domestic has been offset by slower expansion of Measurement Ml M2 M3 non- other types of loans, such as those for period tinancial debt real estate. In addition, security loans have dropped off as the more subdued Year* 1980 7.4 8.9 9.6 9.1 pace of debt issuance and the paring 1981 5 2 . . 4 5 2 9.3 12.4 9.9 of dealer long positions in a rising rate 1982 8.8 9.2 9.9 9.6 environment have reduced dealer 1983 10.4 12.2 9.9 12.0 1984 5.5 8.1 10.9 14.0 financing needs. The expansion of bank lending in 1985 12.0 8.7 7.6 14.2 1986 15.5 9.3 8.9 13.4 1993 and 1994, following two years of 1987 6.3 4.3 5.7 10.3 virtually no growth, has reflected not 1988 4.3 5.3 6.3 9.0 1989 .6 4.8 3.8 7.8 only stronger loan demand but also an increased willingness on the part of 1990 4.2 4.0 1.7 6.6 1991 7.9 2.9 1.2 4.6 banks to make loans. This heightened 1992 14.3 1.9 .5 5.0 1993 10.5 1.4 .6 5.0 desire to extend credit stems from the improved financial condition of banks Half year (annual rate)3 as well as their borrowers. In the early 1994:H1 4.0 1.6 -.1 5.4 1990s, banks had been pressed by bal- Quarter ance sheet problems and the need to (annual rate)4 meet more stringent requirements for 1994:Q1 6.0 1.8 .2 5.9 Q2 2.0 1.5 -.3 4.7 capital-asset ratios. By early 1993, however, the capitalization ratios of many 1. From average for fourth quarter of preceding year to average for fourth quarter of year indicated. banks were considerably stronger, and 2. Adjusted for shift to NOW accounts in 1981. they have continued to improve since 3. From average for fourth quarter of 1993 to average then as banks issued sizable volumes of for second quarter of 1994. For debt aggregate, data for second quarter are through May. equity and retained a high proportion of 4. From average for preceding quarter to average for their record earnings. In mid-1993, some quarter indicated. For debt aggregate, data for second banks began to report an easing of their quarter are through May. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 91 standards and terms for business loans The weakness in M3 partly reflects an and residential mortgages, and this eas- exodus of investors from institutioning has continued, albeit at a reduced only money market mutual funds, whose rate, into the first two quarters of 1994. returns have lagged the rise in market Measured growth of holdings of bank rates. M3 has also been held back by securities this year has been affected by declines in large time deposits. The runtwo accounting changes. One change off in this component has been concenaffects how banks report, on their bal- trated at U.S. branches and agencies of ance sheets, the fair market value of foreign banks, which have stepped up off-balance-sheet items. Banks are no their borrowings from affiliated foreign longer permitted to net positions in these offices. Domestic banks have also items across customers; this change has boosted such borrowings. In December appreciably boosted the "other securi- 1993, domestic banks for the first time ties" component, where these positions borrowed more from their foreign affiliare booked. The other change in ates than they lent to them. This net accounting rules requires banks to value borrowed position has expanded considat market prices those securities that erably since that time. Apparently, they do not plan to hold to maturity. weaker credit demands abroad have held With the decline in securities prices this down the costs of borrowing overseas year, the requirement of "marking to relative to the costs of obtaining funds market" likely has restrained the mea- in the United States. sured growth of bank securities port- M2 growth has slowed a bit in 1994, folios, although to an uncertain extent. and its velocity appears to have regis- Abstracting from these special factors, tered another sizable increase. The growth of bank securities holdings likely major factor behind the rise in velocity has slowed slightly further in 1994. This this year has been higher short-term slowing has been about offset by the market interest rates. In the usual patpickup in loan growth, leaving under- tern, the increases in rates paid on M2 lying bank credit growth close to the deposits and money market mutual pace recorded last year. Meanwhile, funds have lagged behind the rise in thrift institution credit has resumed market rates, boosting the earnings forexpanding this year, albeit modestly, gone (opportunity costs) by holding the after declining over the past five years. components of M2 and thus inducing Expansion at credit unions has been shifts out of the aggregate. For example, robust, while the contraction of the noncompetitive bids at Treasury aucremainder of the thrift sector has slowed tions have increased sharply this year, somewhat further. and some of the funds likely were drawn Despite the expansion of depository from the instruments included in M2. credit, the broadest monetary aggregate, Moreover, the composition of M2 has M3, has edged a bit lower since the been affected by the varying speed with fourth quarter of last year, as depository which rates on different components institutions have chosen to fund growth have adjusted to higher market yields. in assets with nondeposit sources. In Rates on money market mutual funds June, M3 was around the bottom of the and retail certificates of deposit (CDs) 0 percent to 4 percent growth range have moved up considerably since Febestablished by the Federal Open Market ruary, while rates on liquid deposits, Committee, and its velocity seems to be such as savings and NOW accounts, increasing faster this year than in 1993. have been virtually unchanged. Partly as Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

92 81st Annual Report, 1994 a consequence, holdings of money mar- Ml velocity, which fell at a 5 percent ket mutual funds have increased, small rate last year, appears to have increased CDs have turned around, and liquid this year. The growth of Ml has deposit growth has languished. From the stemmed primarily from the continued fourth quarter of 1993 through June, M2 rapid rise in currency, as overseas expanded at a 1 lA percent annual rate, demand has remained robust and domesplacing this aggregate around the lower tic demand has expanded with sales. In bound of the 1 percent to 5 percent contrast, increases in transactions deposgrowth range set by the Committee. its have been quite weak. Growth of The depressing effect of higher inter- demand deposits, which pay no interest, est rates on M2 was offset for a time by has been reined in by higher market flows from bond and equity (or long- rates, the associated rise in earnings term) mutual funds into money market credits on compensating balances, and mutual funds. Declining securities prices a drop-off in mortgage refinancings. and higher volatility prompted house- Refinancings boost liquid deposits— holds to reconsider their investments in especially demand deposits—because long-term mutual funds and encouraged they are accompanied by a temporary many to liquidate some of their bond parking of funds in such accounts; howand equity mutual fund holdings. Over ever, as the volume of refinancings the March-to-May period, households declines, deposits return to more normal pulled more money out of bond funds levels. Rate spreads have also depressed than they invested. A portion of the pro- the growth of other checkable deposits, ceeds from the redemptions likely was whose offering rates have changed little placed in money market mutual funds, since the beginning of the year. In addiwhich grew quite rapidly. As changes in tion, growth has been restrained by a securities prices became more subdued large bank's introduction of a program in late May, flows into long-term mutual that sweeps excess balances out of funds began to pick up, but they have NOW accounts and into money market remained weak by the standards of deposit accounts. (The program, thererecent years. Shifts from M2 into direct fore, has no impact on M2.) The anemic holdings of securities, such as Treasury expansion of transactions deposits has bills, as well as the capital losses on contributed to a decline in total reserves. long-term mutual funds, have damped This reserve measure has contracted at a the growth of a measure that adds to M2 1 lA percent annual rate so far this year, a the net assets of mutual funds not held stark contrast with its 12 percent expanby institutional investors or in retire- sion in 1993. The continued strong ment accounts. This series has grown at demand for currency has propped up an estimated 1 percent annual rate this growth of the monetary base, whose year, well below its 5*/2 percent advance growth has slowed only slightly this in 1993. Its velocity therefore also has year, to a 9VA percent annual rate. increased, after several years of rough stability. Ml growth has been restrained by Foreign Exchange Developments wider opportunity costs as well as some After starting the year with a firm tone, special factors. From the fourth quarter the dollar declined on balance from Febof last year through June, Ml expanded ruary through late April. The dollar was at about a 4 percent annual rate, less supported initially by market expectathan half of its lO1^ percent rise in 1993. tions that it would rise over the near Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 93 term as the U.S. economy strengthened orderly market conditions. The dollar and U.S. interest rates rose, in contrast recovered briefly but resumed falling to expected developments abroad. Fol- over the next several days. On May 4, lowing the Committee's firming action the U.S. Treasury and the Federal on February 4, the dollar rose only mod- Reserve joined other monetary authoriestly and briefly, in part because foreign ties in substantial, coordinated interlong-term rates increased with U.S. vention in support of the dollar. Secrates. In the weeks that followed, the retary Bentsen again confirmed the dollar weakened with respect to the yen, intervention and said it was in response especially in mid-February, when mar- to exchange market developments that ket participants became more concerned were inconsistent with economic fundaabout the sizable external surpluses in mentals. These actions stemmed the Japan in the wake of the lack of progress slide of the dollar and contributed to a in the framework talks between the partial recovery over the subsequent two United States and Japan. The dollar also weeks. came under downward pressure against The dollar fluctuated in a narrow the German mark, particularly in Febru- range following the May 17 policy ary and March. Continued strong growth actions by the Federal Reserve, but it in German M3, amid signs of economic later lost ground. These policy actions revival, suggested that further sizable were consistent with the view expressed cuts in German and other European rates in the statement accompanying the were not as likely as had been previ- May 4 intervention that the U.S. Adminously thought, and long-term rates in istration did not believe that the prosthese countries increased further. In pects for the U.S. economy warranted a early April, the dollar came under weak dollar. However, in mid-June, renewed downward pressure in terms of the dollar declined against the yen as the yen. The resignation of Prime Minis- market perceptions resurfaced that the ter Hosokawa rejuvenated concerns that United States was not concerned about a progress on negotiations to open Japa- weak dollar, despite official statements nese markets would stall and that plans to the contrary, and as an easing of trade to stimulate the Japanese economy frictions with Japan appeared less likely would not be implemented. following the resignation of Prime Market sentiment against the dollar Minister Hata on June 24. Downward became particularly strong in late April pressure on the dollar in terms of the and early May, in sometimes disorderly German mark intensified at this time markets. On April 28, with U.S. bond as additional data confirmed that an prices falling, the dollar approached its economic recovery was under way in postwar low against the yen in thin trad- Germany. These data contributed to ing, and on the following day it started higher long-term rates and reinforced to drop sharply against the mark as trad- views that Bundesbank official rates ing became more volatile. In response, were not likely to be reduced further the Foreign Trading Desk at the Federal following the substantial adjustment on Reserve Bank of New York entered the May 11. The selling pressure on the market and purchased dollars against dollar may also have been exacerbated both marks ($500 million) and yen by a rise in dollar-denominated com- ($200 million). Treasury Secretary Bent- modity prices, which market participants sen confirmed the intervention and viewed as indicative of a risk of higher explained that it was prompted by dis- U.S. inflation. With the dollar hovering Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

94 81st Annual Report, 1994 around a postwar low against the yen on during the initial weeks of the year, fol- June 24, the United States led substan- lowing ratification of the North Ameritial coordinated intervention with the can Free Trade Agreement by the United monetary authorities of the G-7 coun- States in November. The peso began to tries and a number of other countries. weaken in late February, however, in Secretary Bentsen confirmed the response to disappointing economic intervention, citing shared concerns news and political unrest in Mexico. over recent developments in foreign The assassination of presidential candiexchange markets. Since that time, sen- date Luis Donaldo Colosio on March 23 timent against the dollar has continued, further undermined the peso, which fell with the dollar recording a new postwar to the lower intervention limit against low against the yen on July 12 before the dollar set by the Bank of Mexico. rebounding moderately in subsequent Mexican authorities then intervened days. heavily to support the peso. At the request of the Mexican government and the Bank of Mexico, U.S. monetary Federal Reserve Foreign authorities established a $6 billion Currency Transactions temporary bilateral swap facility for the The Federal Reserve has undertaken Bank of Mexico, which was split other foreign currency transactions in between the U.S. Treasury and the Fed- 1994 in addition to the intervention eral Reserve. The swap was intended to actions of April 29, May 4, and June 24. help prevent any turmoil in Mexican The Federal Open Market Committee markets, which could have spilled into has authorized a restructuring of the U.S. financial markets. In the event, no System's portfolio of foreign currencies drawings were made on this facility. In and has approved three reciprocal cur- late April, the peso moved away from rency arrangements, also known as swap its lower intervention limit as the subarrangements. stantial increase in Mexican interest At its December 1993 meeting, the rates persuaded market participants of Committee authorized the Manager for the commitment of the Mexican govern- Foreign Operations to sell all non-mark ment to maintain the value of the peso. and non-yen foreign exchange reserves On April 26, the monetary authorities held by the Federal Reserve. The Man- of the United States, Canada, and ager sold these reserves, which were Mexico announced the creation of the equivalent to $750 million, during the North American Financial Group to first few months of 1994. These hold- provide an opportunity for more regular ings along with those of the Exchange consultation on economic and financial Stabilization Fund of the U.S. Treasury developments. Plans for this group had were eliminated in light of the practice been under way for several months in of U.S. monetary authorities in recent recognition of the increasing interdepenyears to conduct intervention operations dence of the three economies. In conexclusively in marks and yen. nection with the formation of the group, On March 24, the Committee ap- the authorities of the three countries proved a temporary increase to $3 bil- established a trilateral foreign exchange lion, from $700 million, in the System's swap facility. The United States and swap arrangement with the Bank of Mexico put in place swap arrangements Mexico. The value of the Mexican peso for up to $6 billion, with the Treasury against the dollar had been nearly stable and the Federal Reserve each partici- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report, July 95 pating up to $3 billion. The Federal Reserve and the Bank of Canada reaffirmed their existing swap agreement of $2 billion and extended its maturity to December 1995. The Bank of Canada increased its swap line with the Bank of Mexico to 1 billion Canadian dollars. These arrangements expand the pool of potential resources available to the monetary authorities of each country to maintain orderly exchange markets. The Federal Open Market Committee approved the Federal Reserve's participation in these arrangements effective April 26. • 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

99 Record of Policy Actions of the Board of Governors Regulation C (Home Mortgage Under the Monetary Control Act of Disclosure) 1980, depository institutions, Edge Act and agreement corporations, and U.S. November 23, 1994—Amendments agencies and branches of foreign banks are subject to reserve requirements set The Board approved amendments to by the Board. Initially, the Board set Regulation C, effective January 1, 1995, reserve requirements at 3 percent of an to facilitate the availability, and improve institution's first $25 million in transthe quality, of information disclosed to action balances and 12 percent of balthe public under the Home Mortgage ances above that amount. Subsequently Disclosure Act. the Board lowered the maximum reserve requirement to 10 percent. The Votes for this action: Messrs. Greenspan, act directs the Board to adjust annually Blinder, and Kelley and Mses. Phillips and Yellen. Absent and not voting: the amount subject to the lower reserve Messrs. La Ware and Lindsey. requirement to reflect changes in nationwide transaction balances. By the The amendments require that most beginning of 1994, that amount was financial institutions report data required $51.9 million. Recent increases in transunder the Home Mortgage Disclosure action balances warranted an increase Act in machine-readable form and to $54 million, and the Board amended update quarterly their reports to regula- Regulation D accordingly. tory agencies. Institutions may comply The Garn-St Germain Depository with the amendments at their option Institutions Act of 1982 established a beginning January 1, 1995. Compliance zero percent reserve requirement on the is mandatory for the collection of data first $2 million of an institution's reservthat begins January 1, 1996. able liabilities. The act also provides for annual adjustments to that exemption Regulation D (Reserve based on nationwide deposit growth. By Requirements of Depository the beginning of 1994, that amount had Institutions) been increased to $4 million. Recent growth in deposits warranted an increase to $4.2 million, and the Board amended November 17, 1994—Amendments Regulation D accordingly. The Board amended Regulation D to The amendments are effective with increase the amount of transaction the reserve computation period beginbalances to which the lower reserve ning December 20, 1994, for institutions requirement applies. reporting either weekly or quarterly. To reduce the reporting burden for Votes for this action: Messrs. Greenspan, small institutions, the Board requires Blinder, Kelley, and LaWare and Mses. that depository institutions with total Phillips and Yellen. Absent and not voting: Mr. Lindsey. deposits below specified levels report Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

100 81st Annual Report, 1994 their deposits and reservable liabilities documentation of electronic fund transquarterly, or less frequently, although fer services through terminal receipts larger institutions must report weekly. and periodic account statements, estab- To reflect increases in the growth rate of lishes limitations on consumer liability total deposits at all depository institu- for unauthorized transfers, and provides tions from June 30, 1993, to June 30, procedures for error resolution. 1994, the Board increased the deposit The amendments to Regulation E cutoff levels used in conjunction with make the regulation applicable to electhe exemption level to determine the tronic benefit transfer programs estabfrequency and detail of deposit report- lished by federal, state, or local agening required for each institution from cies. The amendments apply the $55 million to $55.4 million for non- unauthorized transfer liability and error exempt depository institutions and from resolution provisions of Regulation E $44.8 million to $45.1 million for to electronic benefit transfer programs, exempt depository institutions begin- provide an exception for the periodic ning September 1995. statement requirements under certain conditions, and apply most other provisions of Regulation E to electronic benefit transfer programs. Regulation E (Electronic Fund In response to a request by a federal Transfers) task force working to establish a nationwide system for electronic delivery of February 16, 1994—Amendments government benefits, the Board delayed mandatory compliance with the amend- The Board approved amendments to ments until March 1, 1997. Regulation E, effective February 28, 1994, to make the regulation applicable to electronic benefit transfer programs established by federal, state, or local November 23, 1994—Interim Rule agencies. The Board approved an interim amend- Votes for this action: Messrs. Greenspan, ment to Regulation E to revise the Kelley, and Lindsey and Ms. Phillips. requirements for receipts at automated Absent and not voting: Mr. La Ware.1 teller machines, effective December 1, 1994. The Electronic Fund Transfer Act governs any transfer of funds that is Votes for this action: Messrs. Greenspan, electronically initiated and that debits Blinder, and Kelley and Mses. Phillips or credits a consumer's account. The and Yellen. Absent and not voting: statute, which is implemented by the Messrs. LaWare and Lindsey. Board's Regulation E, creates a legal framework of rights and responsibilities The interim rule gives financial instifor consumers and for providers of elec- tutions flexibility in identifying account tronic fund transfer services. Among numbers on receipts for transactions at other things, Regulation E requires automated teller machines. It eliminates the requirement that a receipt from an electronic terminal disclose a number or 1. Throughout this chapter, note 1 indicates that code that uniquely identifies the contwo vacancies existed on the Board when the action was taken. sumer, the consumer's account, or the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 101 access device. In connection with this reports will continue to be available to action, the Board also sought public the public through the National Techcomment on the interim rule. nical Information Service of the U.S. Department of Commerce under the Board's Rules Regarding Availability of Regulation H (Membership Information. of State Banking Institutions in the Federal Reserve) Regulation H (Membership of May 23, 1994—Amendment State Banking Institutions in the Federal Reserve System) and The Board approved an amendment to Regulation Y (Bank Holding Regulation H to raise the threshold at Companies and Change in Bank which certain state member banks must Control) apply to the Board for approval to invest in bank premises, effective July 5, 1994. August 3, 1994—Amendments Votes for this action: Messrs. Greenspan, The Board approved amendments to Kelley, and Lindsey and Ms. Phillips. Regulations H and Y to revise its risk- Absent and not voting: Mr. LaWare.1 based capital guidelines for state member banks to take into account concen- The amendments allow a state memtration of credit risk and the risks of ber bank that meets certain conditions to nontraditional activities, effective Januinvest in bank premises in an amount up ary 17, 1995. to 50 percent of its tier 1 capital without applying for the Board's approval. Votes for this action: Messrs. Greenspan, Blinder, Kelley, LaWare, and Lindsey and Ms. Phillips.2 November 2, 1994—Amendment The Board revised its risk-based capi- The Board approved an amendment to tal guidelines to explicitly identify con- Regulation H to remove the requirement centrations of credit risk and an instithat a state member bank publish its tution's ability to manage them as reports of condition, effective Novemimportant factors in assessing its overall ber 10, 1994. capital adequacy. The revision also identifies an institution's ability to manage Votes for this action: Messrs. Greenspan, the risks posed by nontraditional activi- Blinder, Kelley, LaWare, and Lindsey and Mses. Phillips and Yellen. ties as an important factor in assessing its overall capital adequacy. The Riegle Community Development and Regulatory Improvement Act of November 23, 1994—Amendments 1994 includes measures to reduce the regulatory burden of federal regulation The Board approved amendments to on depository institutions. The amend- Regulations H and Y to revise its riskment to Regulation H implements sec- based capital guidelines to recognize tion 308 of the act, which amended the Federal Reserve Act to repeal the 2. Throughout this chapter, note 2 indicates that requirement that state member banks one vacancy existed on the Board when the action publish their reports of condition. The was taken. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

102 81st Annual Report, 1994 the risk-reducing benefits of netting November 30, 1994—Amendments arrangements, effective December 31, and Revised Interpretation 1994. The Board approved amendments to Votes for this action: Messrs. Greenspan, Regulation H to allow state member Blinder, and Kelley and Mses. Phillips banks to make certain investments deand Yellen. Absent and not voting: signed primarily to promote the public Messrs. LaWare and Lindsey. welfare, effective January 9, 1995. The Board also approved a related revision The revised guidelines allow state of an interpretation of Regulation Y. member banks and bank holding companies to net positive and negative mark- Votes for this action: Messrs. Blinder, to-market values of interest rate and ex- Kelley, LaWare, and Lindsey and Mses. change rate contracts in determining the Phillips and Yellen. Absent and not voting: Mr. Greenspan. current exposure portion of the creditequivalent amount of such contracts to The Depository Institutions Disaster be included in risk-weighted assets. Relief Act of 1992 amended the Federal Reserve Act to relax the restriction on the ability of state member banks to November 30, 1994—Amendments purchase, sell, underwrite, and hold investment securities; it also allows state The Board approved amendments to member banks to make certain invest- Regulations H and Y to revise its riskments designed primarily to promote based capital guidelines to direct state the public welfare. The Board amended member banks and bank holding compa- Regulation H to permit state member nies not to include in regulatory capital banks to make certain public welfare the net unrealized holding gains or investments without prior Board losses on debt securities available for approval and to make other public welsale, effective December 31,1994. fare investments with specific Board approval. The amendment also Votes for this action: Messrs. Blinder, Kelley, LaWare, and Lindsey and Mses. addresses the procedural aspects of Phillips and Yellen. Absent and not vot- those investments. ing: Mr. Greenspan. The revised interpretation of Regulation Y provides that bank holding com- The Statement of Financial Account- panies that have received approval to ing Standards Number 11 (FAS 11) engage in activities that promote comfrom the Financial Accounting Stan- munity welfare may make similar dards Board created a new common investments permissible for state memstockholders' equity account for net ber banks. unrealized holding gains or losses on debt securities available for sale. The amendments to Regulations H and Y December 14, 1994—Amendments instruct institutions not to include in tier 1 capital the component of common The Board approved amendments to stockholders' equity. Net unrealized Regulations H and Y revising its capital losses on marketable equity securities adequacy guidelines to establish a limit will continue to be deducted from tier 1 on the amount of certain deferred-tax capital. assets that may be included in tier 1 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions \ 03 capital for risk-based and leverage capi- cial Code, and to make other minor tal purposes, effective April 1, 1995. changes in the regulation. Votes for this action: Messrs. Greenspan, Blinder, Kelley, and LaWare and Mses. Regulation K (International Phillips and Yellen. Absent and not voting: Mr. Lindsey. Banking Operations) The Board revised its risk-based and October 19, 1994—Amendments leverage capital guidelines for state member banks and bank holding compa- The Board approved amendments to nies. Under the new rule, deferred-tax Regulation K concerning the permisassets that can be realized only if an sible activities of state-licensed branches institution earns taxable income in the or agencies of foreign banks, effective future are limited for regulatory capital January 1, 1995. purposes to the amount the institution expects to realize within one year of the Votes for this action: Messrs. Greenspan, quarter-end report date or 10 percent of Blinder, Kelley, LaWare, and Lindsey and tier 1 capital, whichever is less. Mses. Phillips and Yellen. A provision in the Foreign Bank Regulation J (Collection of Supervision Enhancement Act of 1991 Checks and Other Items by prohibits a state-licensed branch or a Federal Reserve Banks) state-licensed agency of a foreign bank from engaging in any type of activity April 28, 1994—Amendments not permissible for a federal branch of a foreign bank unless the Board has deter- The Board approved amendments to mined that the activity is consistent with subpart A of Regulation J to conform sound banking practice and, in the the warranties and various other provicase of a state-licensed insured branch, sions of the regulation to Regulation CC unless the Federal Deposit Insurance (Availability of Funds and Collection of Corporation has determined that the Checks) or to the Uniform Commercial activity would pose no significant risk to Code, effective June 6, 1994. the deposit insurance fund. The amendment to Regulation K sets Votes for this action: Messrs. Greenspan, forth procedures that state-licensed Kelley, LaWare, and Lindsey and Ms. Phillips.1 branches and agencies of foreign banks are required to follow in requesting the Regulation CC warranties require Board's permission to engage, or conprivate-sector collecting, returning, and tinue to engage, in an activity not perpresenting banks to warrant the accu- missible for a federal branch of a racy of cash letter totals and check foreign bank and to set forth the requireencoding. The amendments to Regula- ments for divestiture and cessation tion J clarify that Federal Reserve Banks plans. The Board also amended Regulaand institutions that send items to tion K to clarify that the conversion of a Reserve Banks must also make the U.S. branch or agency of a foreign bank Regulation CC warranties, to conform from a federal license to a state license certain Regulation J provisions to the would not require an application to the 1990 version of the Uniform Commer- Board. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

104 81st Annual Report, 1994 Regulation O (Loans to Executive Votes for this action: Messrs. Greenspan, Officers, Directors, and Principal Kelley, LaWare, and Lindsey and Mses. Shareholders of Members Banks) Phillips and Yellen. Absent and not voting: Mr. Blinder. January 26, 1994—Amendments The Annunzio-Wylie Anti-Money Laundering Act of 1992 requires the The Board approved amendments to Board and the Department of the Trea- Regulation O to increase the aggregate sury to adopt joint regulations for reclending limit for small adequately capiordkeeping in international funds transtalized banks and made certain other fers and authorizes the two agencies to amendments designed to reduce the buradopt additional recordkeeping rules den and complexity of the regulation, that promote law enforcement in coneffective February 18, 1994. nection with domestic funds transfers. Votes for this action: Messrs. Greenspan, The Board and the Department of the Mullins, Kelley, La Ware, and Lindsey and Treasury jointly approved a rule that Ms. Phillips. Absent and not voting: requires that domestic financial institu- Mr. Angell. tions involved in a wire transfer collect and retain certain information on trans- The Board's amendment to Regula- fers of $3,000 or more. The amount and tion O makes permanent an interim rule type of information that are required increasing the aggregate lending limit depend on the type of financial institufor small, adequately capitalized banks tion, its role in the transfer, and the from 100 percent of the bank's unimrelationship of the parties to the transpaired capital and surplus to 200 peraction with the financial institution. The cent; clarifies the rule on tangible rule also clarifies the requirements for economic benefits; provides certain verification and retrieval of information exceptions to the lending limit for insidand clarifies and expands the types of ers; permits banks to follow certain transfers that are exempt. alternative procedures for recordkeeping; narrows the definition of extension Regulation T (Credit by Brokers of credit; and makes certain technical amendments in the regulation to make it and Dealers) more understandable and somewhat shorter. October 17, 1994—Amendments The Board approved amendments to Regulation T concerning the payment Regulation S (Reimbursement for securities purchases and the status to Financial Institutions for of government securities transactions, Assembling or Providing effective November 25, 1994. Financial Records) Votes for this action: Messrs. Greenspan, December 21, 1994—Amendments Blinder, Kelley, LaWare, and Lindsey and Mses. Phillips and Yellen. The Board approved amendments to Regulation S to incorporate enhanced The amendment requires that, within recordkeeping requirements for certain two business days of the standard settlewire transfers by financial institutions, ment period, customers meet initial mareffective January 1, 1996. gin calls or make cash payment in full Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 105 for securities purchased from a broker- appraisals prepared by other financial dealer. services institutions. The amendments The Board approved related amend- were issued jointly with amendments ments to Regulation T to raise the to the rules of other bank and thrift amount below which liquidation of an regulators. unpaid transaction is not required, to require that brokers seeking extensions July 27, 1994—Amendments of the payment periods obtain them from their designated examining authority, The Board approved amendments to and to clarify that the time periods pro- Regulation Y to permit banks to offer vided for certain securities with discounts on traditional bank products extended settlement periods are the time and brokerage services for customers periods used to determine procedures obtaining traditional bank products from and penalties when payment is not affiliates, effective September 2, 1994. made. The Board also approved amend- Votes for this action: Messrs. Greenspan, ments to Regulation T to exempt Blinder, Kelley, LaWare, and Lindsey. Absent and not voting: Ms. Phillips.2 broker-dealers whose business is limited to transactions in government secu- With certain exceptions, the Bank rities and to provide a mechanism for Holding Company Act prohibits a bank other broker-dealers to effect customer from tying a product or service to transactions in government securities another product or service offered by the without regard to other provisions in the bank or any of its affiliates. A statutory regulation. exception allows a bank to discount any product or service on condition that a Regulation Y (Bank Holding customer obtain a traditional bank prod- Companies and Change in Bank uct from that bank. Control) The Board's amendments extend the statutory exception to allow bank hold- March 9, 1994—Amendments ing company affiliates to offer package The Board approved amendments to discounts on traditional bank products, provisions of Regulation Y pertaining to provided that all products in the package real estate appraisals, effective June 7, are separately available. The Board also 1994. amended the regulation to permit bank holding company affiliates to offer a dis- Votes for this action: Messrs. Greenspan, count on securities brokerage services Kelley, La Ware, and Lindsey and Ms. on condition that a customer obtain a Phillips.1 traditional bank product from the holding company or from an affiliate. The amended real estate appraisal provisions increase to $250,000 the transaction-value threshold above which October 24, 1994—Interim real estate appraisals are required; Amendments expand and clarify existing exemptions to the appraisal requirements; specify The Board approved interim amendwhen exempt transactions require evalu- ments to Regulation Y to implement ations; and revise the requirements gov- provisions of the Riegle Community erning appraisal content and the use of Development and Regulatory Improve- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

106 81st Annual Report, 1994 ment Act of 1994 that revised certain holding company or its nonbank subsidof the Board's application procedures, iary to offer a discount on a product effective October 26, 1994. or service on condition that a customer obtain any other product or service Votes for this action: Messrs. Greenspan, from that company or from any of Blinder, Kelley, LaWare, and Lindsey and its nonbank affiliates. The amendment Mses. Phillips and Yellen. generally lifts the regulation's anti-tying provisions when no bank is involved The Riegle Community Development in the arrangement and products are and Regulatory Improvement Act of separately available for purchase by the 1994 establishes a prior notice procecustomer. dure to replace the current application process for all proposals by bank holding companies to engage in nonbanking Regulation Y (Bank Holding activities; establishes a streamlined Companies and Change in Bank notice procedure for the formation of a Control) and Rules Regarding new bank holding company as part of a Delegation of Authority reorganization by the existing shareholders of a bank; permits the Board, April 25, 1994—Amendments with the consent of the Department of Justice, to shorten the time after The Board approved amendments to approval of an application in which the Regulation Y and to its Rules Regarding department can file a court challenge Delegation of Authority to make final to a bank acquisition on competitive previously approved initiatives to regrounds; and eliminates the need for duce the regulatory burden associated prior Board approval of certain trans- with certain application and notice proactions under which a bank acquires a cedures, effective May 4, 1994. thrift institution or assets of a thrift institution. Because the amendments became Votes for this action: Messrs. Greenspan, Kelley, LaWare, and Lindsey and Ms. effective upon passage of the act, the Phillips.1 Board adopted interim rules implementing those changes and requested public The Board amended Regulation Y to comment on the rules. reflect changes that had been in effect since 1992, when the Board eliminated the requirement in Regulation Y for December 14, 1994—Amendments stock redemptions by well capitalized The Board approved an amendment to bank holding companies. The Board Regulation Y, effective January 23, also modified certain provisions in its 1995, to remove restrictions on tying Rules Regarding Delegation of Authorbetween nonbank subsidiaries when ity pertaining to competition and market the products are separately available. concentration. Votes for this action: Messrs. Greenspan, Blinder, Kelley, and LaWare and Mses. Regulation DD (Truth in Savings) Phillips and Yellen. Absent and not voting: Mr. Lindsey. October 12, 1994—Amendments The amendment to the anti-tying pro- The Board approved amendments to visions of Regulation Y permits a bank Regulation DD to decrease the number Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 107 of accounts subject to the Truth in Sav- The act defines financial institution to ings Act, effective September 23, 1994. include depository institutions, securities brokers or dealers, futures commis- Votes for this action: Messrs. Greenspan, sion merchants, and any other institu- Blinder, Kelley, La Ware, and Lindsey and tions so determined by the Board. Mses. Phillips and Yellen. The new regulation expands application of the netting provisions by includ- The Truth in Savings Act and the ing in the definition of financial institu- Board's implementing Regulation DD, tion those financial market participants which require that depository institumeeting certain tests based on market tions provide consumers with informaactivity. tion about deposit accounts, initially applied to accounts held by individuals and accounts held by unincorporated Rules of Practice for Hearings associations of individuals that are not businesses. A provision of the Riegle December 14, 1994—Amendment Community Development and Regulatory Improvement Act of 1994 limits the The Board approved an amendment to act's coverage to accounts held by indi- its Rules of Practice for Hearings to viduals for personal, family, or house- make its rules on ex parte communicahold purposes. To implement that provi- tions conform to the Administrative Prosion, the Board amended Regulation DD cedure Act, effective January 18, 1995. to exclude from the requirements of the Votes for this action: Messrs. Greenspan, regulation unincorporated associations Blinder, Kelley, and LaWare and Mses. of individuals that are not businesses. Phillips and Yellen. Absent and not voting: Mr. Lindsey. Regulation EE (Netting Eligibility The amendments clarify that the for Financial Institutions) Board's rules governing ex parte communications do not apply to intra- January 26, 1994—New Rule agency communications, which are gov- The Board adopted Regulation EE to erned by a separate provision of that act. expand application of the netting provisions in the Federal Deposit Insurance Rules Regarding Equal Corporation Improvement Act of 1991 Opportunity to a broader range of financial market participants, effective March 7, 1994. March 28, 1994—Amendments Votes for this action: Messrs. Greenspan, The Board approved as a final rule its Mullins, Angell, Kelley, LaWare, and Rules Regarding Equal Opportunity, Lindsey and Ms. Phillips. effective March 29, 1994, after having received comments on its interim rules. The Federal Deposit Insurance Cor- The final rule conforms the Board's poration Improvement Act of 1991 valirules to those of the Equal Employment dates netting contracts among members Opportunity Commission. of clearing organizations and between financial institutions to increase effi- Votes for this action: Messrs. Greenspan, ciency and reduce systemic risk in the Kelley, LaWare, and Lindsey and Ms. banking system and financial markets. Phillips.1 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 81st Annual Report, 1994 The Board's final rule closely follows Votes for this action: Messrs. Greenspan, the rules of the Equal Employment Angell, LaWare, and Lindsey and Ms. Phillips. Absent and not voting: Messrs. Opportunity Commission. It differs only Mullins and Kelley. when necessary to take account of the Board's independent status under sec- The Board expanded the operating tion 10(4) of the Federal Reserve Act, to hours of Fedwire to eighteen hours per clarify the processing of complaints in day, 12:30 a.m. to 6:30 p.m. eastern light of the Board's organizational structime, five days per week. Intraday credit ture, and to exclude matters that do not from the Federal Reserve will be availapply to the Board. The final rule also able during the expanded hours on covers issues addressed by laws such as the same terms on which it is currently the Rehabilitation Act and the Equal provided. On December 21, 1994, the Pay Act. Board delayed implementation of the expanded operating hours (see below). Policy Statements and Other Actions February 16, 1994—Policy Statement on Payments January 3, 1994—Policy Statement System Risk on Payments System Risk The Board approved certain revisions of The Board approved penalty fees for its policy on payments system risk, daylight overdrafts by institutions that effective April 14, 1994. do not have regular access to the discount window, effective April 14, 1994. Votes for this action: Messrs. Greenspan, Angell, and Kelley and Ms. Phillips. Votes for this action: Messrs. Greenspan, Absent and not voting: Messrs. Mullins, Kelley, and Lindsey and Ms. Phillips. LaWare, and Lindsey. Absent and not voting: Mr. LaWare.1 As part of its payments system risk The revised penalty rate for daylight reduction program, the Board revised its overdrafts, which is equal to the regular policy statement to streamline the pro- daylight overdraft rate plus 100 basis cedures that depository institutions are points, applies to bankers' banks that required to use if they choose to com- do not maintain reserves, Edge Act and plete a self-assessment to establish a agreement corporations, and limiteddaylight overdraft net debit cap. The purpose trust companies. Board also eliminated the requirement that branches and agencies of foreign banks provide certain information that February 16, 1994—Policy on had been used in determining their day- Overnight Overdrafts light overdraft net debit caps. The Board adopted a new penalty rate structure for overnight overdrafts to February 9, 1994—Expansion of make the structure more consistent with Fedwire Operating Hours current market rates, effective April 1, 1994. The Board approved the expansion, beginning in early 1997, of the operat- Votes for this action: Messrs. Greenspan, ing hours of the Fedwire on-line funds Kelley, and Lindsey and Ms. Phillips. transfer service. Absent and not voting: Mr. LaWare.1 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 109 The Board eliminated the penalty-fee 20 percent to 40 percent of risk-based floor for overnight overdrafts, adopted capital. The Board also approved a proa penalty fee for overnight overdrafts gram of administrative counseling flexequal to the federal funds rate plus ibility for institutions that continue to 4 percentage points, established a mini- exceed their net debit caps because of mum penalty of $100 for all overnight the posting of non-Fedwire transactions. overdrafts, and increased the penalty fee 1 percentage point for each overnight overdraft after the third in a twelve- December 21, 1994—Policy month period. Statement on Privately Operated Large-Dollar Multilateral Netting Systems March 4, 1994—Interagency Policy Statement on Discrimination in The Board approved the adoption of a Lending policy statement on privately operated large-dollar multilateral netting sys- The Board approved issuance of an tems, effective December 21, 1994, to interagency policy statement on dis- update and integrate certain existing crimination in lending, effective policies and to incorporate certain mini- April 15, 1994. mum standards for multilateral netting systems. Votes for this action: Messrs. Greenspan, Kelley, LaWare, and Lindsey and Ms. Votes for this action: Messrs. Greenspan, Phillips.1 Kelley, LaWare, and Lindsey and Mses. Phillips and Yellen. Absent and not vot- The policy statement describes the ing: Mr. Blinder. general principles the agencies will use in identifying lending discrimination The policy statement updates and that violates the Equal Credit Opportu- integrates existing policies on privately nity Act or the Fair Housing Act. The operated large-dollar multilateral pay- Board also sought public comment on ment netting systems and on offshore the application of the principles to spe- large-dollar multilateral payment netting cific policies and practices. systems. The policy statement now also addresses multilateral foreign exchange clearinghouses involving settlements in September 29, 1994—Policy U.S. dollars and multicurrency payment Statement on Payments System Risk netting systems involving settlement in U.S. dollars. The policy applies to such The Board approved a revision of the arrangements the minimum standards portion of its policy statement on payfor multilateral netting systems identiment system risk concerning net debit fied in the report of the Committee on caps, effective October 13, 1994. Interbank Netting Schemes of the central banks of the Group of Ten countries. Votes for this action: Messrs. Greenspan, Blinder, Kelley, LaWare, and Lindsey and The policy statement is designed to Mses. Phillips and Yellen. cover more completely the range of multilateral netting systems involving The revised policy statement settlements in U.S. dollars that might increases the multiple associated with increase systemic risk in the financial the de minimis net debit cap from markets. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 81st Annual Report, 1994 December 21, 1994—Fedwire with policy actions of the Federal Open Funds Transfer Format Market Committee (FOMC) and in the context of economic and financial devel- The Board approved an expanded foropments that are covered in more detail mat for Fedwire funds transfers, to be elsewhere in this REPORT. A listing of fully implemented by the end of 1997. the Board's actions on the basic rate during 1994, including the votes on Votes for this action: Messrs. Greenspan, Kelley, LaWare, and Lindsey and Mses. those actions, concludes this review. Phillips and Yellen. Absent and not voting: Mr. Blinder. Actions on the Basic Discount Rate The expanded format contains a more comprehensive set of data elements January through April: intended to reduce the need for manual No Change in the Basic Rate intervention when transfers are pro- During the first four months of 1994 the cessed and posted. Board considered but took no action on requests from an increasing number of Federal Reserve Banks—a total of ten December 21, 1994—Delay by late April—to raise the basic rate. in Expansion of Fedwire The economy appeared to be expanding Operating Hours at a brisk pace after posting substantial The Board delayed, until the fourth gains in late 1993, and broad measures quarter of 1997, implementation of the of wages and prices indicated a generexpansion of Fedwire operating hours ally moderate rate of inflation. During that it had approved on February 9, this period, however, the low level of 1994. The specific implementation date short-term interest rates together with is to be announced a year before the diminishing margins of unemployed effective date. labor and other producer resources and sizable increases in the prices of a wide Votes for this action: Messrs. Greenspan, range of materials used in manufactur- Kelley, LaWare, and Lindsey and Mses. Phillips and Yellen. Absent and not vot- ing and construction led to increasing ing: Mr. Blinder. concerns about the potential for higher inflation. Against this background, the FOMC acted on three occasions begin- 1994 Discount Rates ning in early February to head off the The Board approved three increases in threat of a more general buildup of inflathe basic discount rate during 1994; tionary pressures and to maintain condithese actions raised the rate from 3 per- tions conducive to sustained economic cent at the start of the year to 43/4 per- expansion by reducing the degree of cent by year-end. Rates charged by the accommodation in the stance of mone- Federal Reserve Banks for seasonal and tary policy. The Board considered for extended credit also rose in 1994; approval of the pending increases in the rates for both types of credit are set on discount rate, but the members generally the basis of market-related formulas that concluded that it was preferable to perare approved by the Board. mit the gap that had emerged in early The reasons for the Board's decisions February between the discount rate and on the basic rate are summarized below. the federal funds rate to widen a little The decisions were made in conjunction further; a wider gap was normal and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 1 11 helped to provide flexibility in setting when the utilization of labor and other monetary policy. The basic discount rate producer resources had reached levels and the average federal funds rate had that in the past had often been associbeen identical from September 1992 to ated with some increase in inflation. As early February 1994. in the case of the two previous actions in 1994, this larger-than-usual increase in May to Mid-November: the basic rate accompanied the imple- Basic Rate Increased mentation of a corresponding tightening By the middle of May, eleven Reserve of reserve conditions by the FOMC. On Banks had proposed increases of Vi per- the date of this approval, all the Reserve centage point in the basic rate and Banks had pending rate increases rangone Reserve Bank an increase of 1 per- ing from V2 to 1 percentage point; by centage point. On May 17 the Board November 17, all had submitted, and approved the pending increases of the Board had approved, conforming Vi percentage point. This action was increases of VA percentage point. taken in conjunction with the FOMC decision on the same day to remove Mid-November to Year-End: most of the remaining degree of accom- No Change modation in the stance of monetary pol- Beginning in the first part of December, icy. These decisions reflected increasing a number of Reserve Banks submitted concerns that continued policy accom- requests for further increases of VA or modation could lead before long to Vi percentage point in the basic rate. growing pressures on production Pending an evaluation of the lagged resources and to a renewed outbreak of effects of the considerable tightening inflation. measures already implemented, the On August 16 the Board approved a Board took no action on these proposals. further increase of V2 percentage point Four proposed increases were outstandin the basic rate for seven Reserve ing at year-end. Banks that already had acted on such an increase. Growth in aggregate demand Structure of Discount Rates appeared to have moderated somewhat in previous months, and broad measures The basic rate is the rate charged of wages and prices suggested little on loans to depository institutions for change in inflation trends. Nonetheless, short-term adjustment credit, while flexthe evidence of continuing strength in ible, market-related rates generally are the economic expansion and high levels charged on seasonal and extended of resource utilization were seen as credit. These flexible rates are calcupointing to a considerable risk of further lated periodically in accordance with inflation in the absence of additional formulas that are subject to Board policy restraining measures. As in May, approval. the increase in the discount rate was Under the seasonal program, whose associated with some further tightening purpose is to assist smaller institutions of reserve conditions by the FOMC. in meeting regular needs arising from a The final increase in the basic rate clear pattern of intra-yearly movements during 1994, a rise of 3A percentage in their deposits and loans, funds may point on November 15, was approved in be provided for periods longer than the light of indications that the expan- those permitted under adjustment credit. sion retained strong momentum at a time Since its introduction on January 9, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

112 81st Annual Report, 1994 1992, the flexible rate charged on sea- Governors for review and determinasonal credit has been closely aligned tion. Reserve Bank proposals on the diswith short-term market rates; it is never count rate include requests to renew the less than the basic rate applicable to formulas for calculating the flexible adjustment credit. rates on seasonal and extended credit. A different flexible rate is charged on Votes on the reestablishment of existing extended-credit loans, which are made rates or the updating of market-related to depository institutions that are under rates under the seasonal and extended sustained liquidity pressure and are not credit prgrams are not shown. All able to obtain funds from other sources. votes on discount rates taken by the The rate for extended credit is 50 basis Board of Governors during 1994 were points higher than the seasonal rate and unanimous. is at least 50 basis points above the basic rate. The first thirty days of borrowing Votes on the Basic Discount Rate on extended credit may be at the basic May 17. Effective this date, the rate, but further borrowings ordinarily Board approved actions taken by the are charged the flexible rate. directors of the Federal Reserve Banks Exceptionally large adjustment-credit of Boston, New York, Philadelphia, loans that arise from computer break- Richmond, Atlanta, Chicago, St. Louis, downs or other operating problems that Minneapolis, Kansas City, Dallas, and are not clearly beyond the reasonable San Francisco to increase the basic control of the borrowing institution are discount rate by Vi percentage point, to assessed the highest rate applicable to 31/2 percent. any credit extended to depository institutions; under the current structure, that Votes for this action: Messrs. Greenspan, rate is the flexible rate on extended Kelley, LaWare, and Lindsey and Ms. credit. Phillips. Votes against this action: None.] At the end of 1994 the structure of The Board subsequently approved a discount rates was as follows: a basic similar action taken by the directors of rate of 4.75 percent for short-term the Federal Reserve Bank of Cleveland, adjustment credit, a rate of 5.90 percent effective May 18. for seasonal credit, and a rate of 6.40 percent for extended credit. During August 16. Effective this date, the 1994 the flexible rate on seasonal credit Board approved actions taken by the ranged from a low of 3.10 percent to directors of the Federal Reserve Banks a high of 5.90 percent, and the flexof Boston, New York, Richmond, Chiible rate on extended credit ranged from a low of 3.60 percent to a high of cago, St. Louis, Kansas City, and Dallas 6.40 percent. to increase the basic discount rate Vi percentage point, to 4 percent. Board Votes Votes for this action: Messrs. Greenspan, Blinder, Kelley, LaWare, and Lindsey and Under the provisions of the Federal Mses. Phillips and Yellen. Votes against Reserve Act, the boards of directors of this action: None. the Federal Reserve Banks are required to establish rates on loans to depository The Board subsequently approved institutions at least every fourteen days similar actions taken by the directors of and to submit such rates to the Board of the Federal Reserve Banks of Cleveland Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions \ \ 3 and San Francisco, effective August 17, and Philadelphia, Atlanta, and Minneapolis, effective August 18. November 15. Effective this date, the Board approved actions taken by the directors of the Federal Reserve Banks of New York, St. Louis, Kansas City, and San Francisco to increase the basic discount rate by 3A percentage point, to 43/4 percent. Votes for this action: Messrs. Greenspan, Blinder, Kelley, LaWare, and Lindsey and Mses. Phillips and Yellen. Votes against this action: None. The Board subsequently approved similar actions taken by the directors of the Federal Reserve Banks of Boston, Cleveland, Richmond, Atlanta, Minneapolis, and Dallas, effective November 16, and Philadelphia and Chicago, effective November 17. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

115 Minutes of Federal Open Market Committee Meetings The policy actions of the Federal Open the Bank selected by the Committee to Market Committee, contained in the execute transactions for the System minutes of its meetings, are presented in Open Market Account. In the area of the ANNUAL REPORT of the Board of domestic open market activities, the Governors pursuant to the requirements Federal Reserve Bank of New York of section 10 of the Federal Reserve operates under two sets of instructions Act. That section provides that the from the Open Market Committee: an Board shall keep a complete record of Authorization for Domestic Open Marthe actions taken by the Board and by ket Operations and a Domestic Policy the Federal Open Market Committee on Directive. (A new Domestic Policy all questions of policy relating to open Directive is adopted at each regularly market operations, that it shall record scheduled meeting.) In the foreign therein the votes taken in connection currency area, the Committee operates with the determination of open market under an Authorization for Foreign policies and the reasons underlying each Currency Operations, a Foreign Cursuch action, and that it shall include in rency Directive, and Procedural its annual report to the Congress a full Instructions with Respect to Foreign account of such actions. Currency Operations. These policy The minutes of the meetings contain instruments are shown below in the form the votes on the policy decisions made in which they were in effect at the beginat those meetings as well as a resume of ning of 1994. Changes in the instruthe discussions that led to the decisions. ments during the year are reported in the The summary descriptions of economic records for the individual meetings. and financial conditions are based on the information that was available to the Authorization for Domestic Open Committee at the time of the meetings, Market Operations rather than on data as they may have been revised later. In Effect January 1, 1994 Members of the Committee voting for a particular action may differ among 1. The Federal Open Market Committee themselves as to the reasons for their authorizes and directs the Federal Reserve votes; in such cases, the range of their Bank of New York, to the extent necessary to carry out the most recent domestic policy views is noted in the record. When directive adopted at a meeting of the members dissent from a decision, they Committee: are identified in the record along with a summary of the reasons for their (a) To buy or sell U.S. Government dissent. securities, including securities of the Federal Financing Bank, and securities that are direct Policy directives of the Federal Open obligations of, or fully guaranteed as to Market Committee are issued to the principal and interest by, any agency of the Federal Reserve Bank of New York as United States in the open market, from or Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

116 81st Annual Report, J 994 to securities dealers and foreign and inter- be determined by competitive bidding, after national accounts maintained at the Federal applying reasonable limitations on the vol- Reserve Bank of New York, on a cash, regu- ume of agreements with individual dealers; lar, or deferred delivery basis, for the System provided that in the event Government secu- Open Market Account at market prices, and, rities or agency issues covered by any such for such Account, to exchange maturing U.S. agreement are not repurchased by the dealer Government and Federal agency securities pursuant to the agreement or a renewal with the Treasury or the individual agencies thereof, they shall be sold in the market or or to allow them to mature without replace- transferred to the System Open Market ment; provided that the aggregate amount of Account; and provided further that in the U.S. Government and Federal agency securi- event bankers acceptances covered by any ties held in such Account (including forward such agreement are not repurchased by the commitments) at the close of business on the seller, they shall continue to be held by the day of a meeting of the Committee at which Federal Reserve Bank or shall be sold in action is taken with respect to a domestic the open market. policy directive shall not be increased or decreased by more than $8.0 billion during 2. In order to ensure the effective conduct the period commencing with the opening of of open market operations, the Federal Open business on the day following such meeting Market Committee authorizes and directs the and ending with the close of business on the Federal Reserve Banks to lend U.S. Governday of the next such meeting; ment securities held in the System Open Market Account to Government securities (b) When appropriate, to buy or sell in dealers and to banks participating in Governthe open market, from or to acceptance ment securities clearing arrangements condealers and foreign accounts maintained at ducted through a Federal Reserve Bank, the Federal Reserve Bank of New York, on a under such instructions as the Committee cash, regular, or deferred delivery basis, for may specify from time to time. the account of the Federal Reserve Bank of New York at market discount rates, prime 3. In order to ensure the effective conduct bankers acceptances with maturities of up to of open market operations, while assisting in nine months at the time of acceptance that the provision of short-term investments for (1) arise out of the current shipment of goods foreign and international accounts mainbetween countries or within the United tained at the Federal Reserve Bank of New States, or (2) arise out of the storage within York, the Federal Open Market Committee the United States of goods under contract of authorizes and directs the Federal Reserve sale or expected to move into the channels of Bank of New York (a) for System Open trade within a reasonable time and that are Market Account, to sell U.S. Government secured throughout their life by a warehouse securities to such foreign and international receipt or similar document conveying title accounts on the bases set forth in paragraph to the underlying goods; provided that the l(a) under agreements providing for the aggregate amount of bankers acceptances resale by such accounts of those securities held at any one time shall not exceed within 15 calendar days on terms compa- $100 million; rable to those available on such transactions in the market; and (b) for New York Bank (c) To buy U.S. Government securities, account, when appropriate, to undertake with obligations that are direct obligations of, or dealers, subject to the conditions imposed on fully guaranteed as to principal and interest purchases and sales of securities in paraby, any agency of the United States, and graph l(c), repurchase agreements in U.S. prime bankers acceptances of the types Government and agency securities, and to authorized for purchase under l(b) above, arrange corresponding sale and repurchase from dealers for the account of the Federal agreements between its own account and Reserve Bank of New York under agree- foreign and international accounts mainments for repurchase of such securities, obli- tained at the Bank. Transactions undertaken gations, or acceptances in 15 calendar days with such accounts under the provisions of or less, at rates that, unless otherwise this paragraph may provide for a service fee expressly authorized by the Committee, shall when appropriate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings \ 1 7 Domestic Policy Directive meeting in July lowered the ranges it had established in February for growth of M2 In Effect January 1, 19941 and M3 to ranges of 1 to 5 percent and 0 to 4 percent respectively, measured from The information reviewed at this meeting the fourth quarter of 1992 to the fourth quarsuggests a strong advance in economic activ- ter of 1993. The Committee anticipated that ity in recent months. Total nonfarm payroll developments contributing to unusual velocemployment rose appreciably further in ity increases would persist over the balance November, and the civilian unemployment of the year and that money growth within rate fell considerably to 6.4 percent. Indus- these lower ranges would be consistent with trial production increased sharply in October its broad policy objectives. The monitoring and November, partly reflecting a continuing range for growth of total domestic nonfinanrebound in the output of motor vehicles. cial debt also was lowered to 4 to 8 percent Retail sales were up moderately in Novem- for the year. For 1994, the Committee agreed ber after a large increase in October. Hous- on tentative ranges for monetary growth, ing starts advanced substantially in Novem- measured from the fourth quarter of 1993 to ber. Business equipment expenditures have the fourth quarter of 1994, of 1 to 5 percent been rising rapidly, and nonresidential con- for M2 and 0 to 4 percent for M3. The struction has turned up from depressed lev- Committee provisionally set the monitoring els. The nominal U.S. merchandise trade range for growth of total domestic nonfinandeficit in October was about unchanged from cial debt at 4 to 8 percent for 1994. The its average rate in the third quarter. Broad behavior of the monetary aggregates will indexes of consumer and producer prices continue to be evaluated in the light of suggest little change in inflation trends, progress toward price level stability, movealthough prices of some raw materials have ments in their velocities, and developments increased recently. in the economy and financial markets. Short-term interest rates have changed In the implementation of policy for the little, while intermediate- and long-term rates immediate future, the Committee seeks to have risen slightly since the Committee maintain the existing degree of pressure on meeting on November 16. In foreign reserve positions. In the context of the Comexchange markets, the trade-weighted value mittee's long-run objectives for price stabilof the dollar in terms of the other G-10 cur- ity and sustainable economic growth, and rencies is about unchanged on balance over giving careful consideration to economic, the intermeeting period. financial, and monetary developments, Growth of M2 and M3 strengthened in slightly greater reserve restraint or slightly November, and both aggregates have risen at lesser reserve restraint might be acceptable somewhat faster rates since late summer than in the intermeeting period. The contemplated earlier in the year. For the year through reserve conditions are expected to be consis- November, M2 and M3 are estimated to have tent with moderate growth in M2 and M3 grown at rates somewhat above the lower over coming months. end of the Committee's ranges for the year. Total domestic nonfinancial debt has expanded at a moderate rate in recent months, Authorization for Foreign and for the year through November it is Currency Operations estimated to have increased at a rate in the lower half of the Committee's monitoring range. In Effect January 1, 1994 The Federal Open Market Committee seeks monetary and financial conditions that 1. The Federal Open Market Committee will foster price stability and promote sus- authorizes and directs the Federal Reserve tainable growth in output. In furtherance Bank of New York, for System Open Market of these objectives, the Committee at its Account, to the extent necessary to carry out the Committee's foreign currency directive and express authorizations by the Committee pursuant thereto, and in conformity with 1. Adopted by the Committee at its meeting on such procedural instructions as the Commit- December 21, 1993. tee may issue from time to time: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 81st Annual Report, 1994 A. To purchase and sell the following Federal Reserve System under Section 214.5 foreign currencies in the form of cable trans- of Regulation N, Relations with Foreign fers through spot or forward transactions on Banks and Bankers, and with the approval of the open market at home and abroad, includ- the Committee to renew such arrangements ing transactions with the U.S. Treasury, with on maturity: the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve Act of 1934, with foreign monetary authori- Amount Foreign bank (millions of ties, with the Bank for International Settledollars equivalent) ments, and with other international financial institutions: Austrian National Bank 250 National Bank of Belgium 1,000 Bank of Canada 2,000 Austrian schillings Italian lire National Bank of Denmark 250 Belgian francs Japanese yen Bank of England 3,000 Canadian dollars Mexican pesos Bank of France 2,000 Danish kroner Netherlands guilders German Federal Bank 6,000 Pounds sterling Norwegian kroner Bank of Italy 3,000 French francs Swedish kronor Bank of Japan 5,000 German marks Swiss francs Bank of Mexico 700 Netherlands Bank 500 Bank of Norway 250 B. To hold balances of, and to have Bank of Sweden 300 Swiss National Bank 4,000 outstanding forward contracts to receive or Bank for International Settlements to deliver, the foreign currencies listed in Dollars against Swiss francs 600 paragraph A above. Dollars against authorized European currencies other than Swiss francs 1,250 C. To draw foreign currencies and to permit foreign banks to draw dollars under the reciprocal currency arrangements listed Any changes in the terms of existing swap in paragraph 2 below, provided that draw- arrangements, and the proposed terms of any ings by either party to any such arrangement new arrangements that may be authorized, shall be fully liquidated within 12 months shall be referred for review and approval to after any amount outstanding at that time the Committee. was first drawn, unless the Committee, because of exceptional circumstances, spe- 3. All transactions in foreign currencies cifically authorizes a delay. undertaken under paragraph 1(A) above shall, unless otherwise expressly authorized D. To maintain an overall open posi- by the Committee, be at prevailing market tion in all foreign currencies not exceeding rates. For the purpose of providing an invest- $25.0 billion. For this purpose, the overall ment return on System holdings of foreign open position in all foreign currencies is currencies, or for the purpose of adjusting defined as the sum (disregarding signs) of interest rates paid or received in connection net positions in individual currencies. The with swap drawings, transactions with fornet position in a single foreign currency is eign central banks may be undertaken at defined as holdings of balances in that cur- non-market exchange rates. rency, plus outstanding contracts for future receipt, minus outstanding contracts for 4. It shall be the normal practice to future delivery of that currency, i.e., as the arrange with foreign central banks for the sum of these elements with due regard to coordination of foreign currency transacsign. tions. In making operating arrangements with foreign central banks on System hold- 2. The Federal Open Market Committee ings of foreign currencies, the Federal directs the Federal Reserve Bank of New Reserve Bank of New York shall not commit York to maintain reciprocal currency ar- itself to maintain any specific balance, unless rangements ("swap" arrangements) for the authorized by the Federal Open Market System Open Market Account for periods up Committee. Any agreements or understandto a maximum of 12 months with the follow- ings concerning the administration of the ing foreign banks, which are among those accounts maintained by the Federal Reserve designated by the Board of Governors of the Bank of New York with the foreign banks Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings \ \ 9 designated by the Board of Governors under C. From time to time, to transmit Section 214.5 of Regulation N shall be appropriate reports and information to the referred for review and approval to the National Advisory Council on International Committee. Monetary and Financial Policies, 5. Foreign currency holdings shall be 8. Staff officers of the Committee are invested insofar as practicable, considering authorized to transmit pertinent informaneeds for minimum working balances. Such tion on System foreign currency operations investments shall be in liquid form, and to appropriate officials of the Treasury generally have no more than 12 months Department. remaining to maturity. When appropriate in connection with arrangements to provide 9. All Federal Reserve Banks shall parinvestment facilities for foreign currency ticipate in the foreign currency operations holdings, U.S. Government securities may be for System Account in accordance with parapurchased from foreign central banks under graph 3 G(l) of the Board of Governors' agreements for repurchase of such securities Statement of Procedure with Respect to Forwithin 30 calendar days. eign Relationships of Federal Reserve Banks dated January 1, 1944. 6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Foreign Currency Directive Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of In Effect January 1, 1994 Governors, and such other member of the Board as the Chairman may designate (or in 1. System operations in foreign currenthe absence of members of the Board serving cies shall generally be directed at countering on the Subcommittee, other Board Members disorderly market conditions, provided that designated by the Chairman as alternates, market exchange rates for the U.S. dollar and in the absence of the Vice Chairman of reflect actions and behavior consistent with the Committee, his alternate). Meetings of the IMF Article IV, Section 1. the Subcommittee shall be called at the request of any member, or at the request of 2. To achieve this end the System shall: the Manager of the System Open Market Account, for the purposes of reviewing A. Undertake spot and forward purrecent or contemplated operations and of chases and sales of foreign exchange. consulting with the Manager on other mat- B. Maintain reciprocal currency ters relating to his responsibilities. At the ("swap") arrangements with selected forrequest of any member of the Subcommittee, eign central banks and with the Bank for questions arising from such reviews and con- International Settlements. sultations shall be referred for determination to the Federal Open Market Committee. C. Cooperate in other respects with central banks of other countries and with 7. The Chairman is authorized: international monetary institutions. A. With the approval of the Commit- 3. Transactions may also be undertaken: tee, to enter into any needed agreement or understanding with the Secretary of the Trea- A. To adjust System balances in light sury about the division of responsibility for of probable future needs for currencies. foreign currency operations between the System and the Treasury; B. To provide means for meeting System and Treasury commitments in particular B. To keep the Secretary of the Treacurrencies, and to facilitate operations of the sury fully advised concerning System for- Exchange Stabilization Fund. eign currency operations, and to consult with the Secretary on policy matters relating to C. For such other purposes as may be foreign currency operations; expressly authorized by the Committee. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 81st Annual Report, 1994 4. System foreign currency operations C. Any operation that might generate a shall be conducted: substantial volume of trading in a particular currency by the System, even though the A. In close and continuous consulta- change in the System's net position in that tion and cooperation with the United States currency might be less than the limits speci- Treasury; fied in l.B. B. In cooperation, as appropriate, with D. Any swap drawing proposed by a foreign monetary authorities; and foreign bank not exceeding the larger of (i) $200 million or (ii) 15 percent of the size C. In a manner consistent with the obliof the swap arrangement. gations of the United States in the International Monetary Fund regarding exchange arrangements under the IMF Article IV. 2. The Manager shall clear with the Committee (or with the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the Procedural Instructions with time available, or with the Chairman, if the Respect to Foreign Currency Chairman believes that consultation with Operations the Subcommittee is not feasible in the time available): A. Any operation that would result in a In Effect January 1, 1994 change in the System's overall open position in foreign currencies exceeding $1.5 billion In conducting operations pursuant to the since the most recent regular meeting of the authorization and direction of the Federal Committee. Open Market Committee as set forth in the Authorization for Foreign Currency Opera- B. Any swap drawing proposed by a tions and the Foreign Currency Directive, foreign bank exceeding the larger of (i) $200 the Federal Reserve Bank of New York, million or (ii) 15 percent of the size of the through the Manager of the System Open swap arrangement. Market Account ("Manager"), shall be guided by the following procedural under- 3. The Manager shall also consult with standings with respect to consultations and the Subcommittee or the Chairman about clearance with the Committee, the Foreign proposed swap drawings by the System, and Currency Subcommittee, and the Chairman about any operations that are not of a routine of the Committee. All operations undertaken character. pursuant to such clearances shall be reported promptly to the Committee. Meeting Held on 1. The Manager shall clear with the Subcommittee (or with the Chairman, if the February 3-4, 1994 Chairman believes that consultation with the Subcommittee is not feasible in the time A meeting of the Federal Open Market available): Committee was held in the offices of the Board of Governors of the Federal A. Any operation that would result in a change in the System's overall open position Reserve System in Washington, D.C., in foreign currencies exceeding $300 million on Thursday, February 3, 1994, at 2:30 on any day or $600 million since the most p.m. and was continued on Friday, Febrecent regular meeting of the Committee. ruary 4, 1994, at 9:00 a.m. B. Any operation that would result in a change on any day in the System's net posi- Present: tion in a single foreign currency exceeding Mr. Greenspan, Chairman $150 million, or $300 million when the Mr. McDonough, Vice Chairman operation is associated with repayment of Mr. Broaddus swap drawings. Mr. Forrestal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 121 Mr. Jordan Mr. Reinhart, Section Chief, Division Mr. Kelley of Monetary Affairs, Board of Mr. La Ware Governors3 Mr. Lindsey Mr. Rosine, Senior Economist, Mr. Parry Division of Research and Ms. Phillips Statistics, Board of Governors3 Ms. Low, Open Market Secretariat Messrs. Hoenig, Keehn, Melzer, Assistant, Division of Monetary Oltman,2 and Syron, Alternate Affairs, Board of Governors Members of the Federal Open Market Committee Messrs. T. Davis, Dewald, Lang, Rolnick, Rosenblum, and Scheld, Messrs. Boehne, McTeer, and Stern, Senior Vice Presidents, Federal Presidents of the Federal Reserve Reserve Banks of Kansas City, Banks of Philadelphia, Dallas, and St. Louis, Philadelphia, Minneapolis respectively Minneapolis, Dallas, and Chicago respectively Mr. Kohn, Secretary and Economist Mr. McNees, Vice President, Federal Mr. Bernard, Deputy Secretary Reserve Bank of Boston Mr. Coyne, Assistant Secretary Ms. Krieger, Assistant Vice President, Mr. Gillum, Assistant Secretary Federal Reserve Bank of Mr. Mattingly, General Counsel New York Mr. Prell, Economist Mr. Truman, Economist In the agenda for this meeting, it was Messrs. Beebe, J. Davis, R. Davis, reported that advices of the election of Goodfriend, Lindsey, Promisel, the following members and alternate Siegman, Simpson, and Stockton members of the Federal Open Market and Ms. Tschinkel, Associate Committee for the period commencing Economists January 1, 1994, and ending December 31, 1994, had been received and that Ms. Lovett, Manager for Domestic the named individuals had executed Operations, System Open Market Account their oaths of office. Mr. Fisher, Manager for Foreign The elected members and alternate Operations, System Open Market members were as follows: Account William J. McDonough, President of the Mr. Ettin, Deputy Director, Division of Federal Reserve bank of New York, Research and Statistics, Board of with James H. Oltman, First Vice Presi- Governors dent of the Federal Reserve Bank of Mr. Slifman, Associate Director, New York, as alternate; Division of Research and J. Alfred Broaddus, Jr., President of the Statistics, Board of Governors Federal Reserve Bank of Richmond, Mr. Madigan, Associate Director, with Richard F. Syron, President of the Division of Monetary Affairs, Federal Reserve Bank of Boston, as Board of Governors alternate; Mr. Hooper, Assistant Director, Jerry L. Jordan, President of the Federal Division of International Finance, Reserve Bank of Cleveland, with Silas Board of Governors2 3. Attended portion of meeting relating to the Committee's discussion of the economic outlook and its longer-run objectives for monetary and 2. Attended the Thursday session only. debt aggregates. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 81st Annual Report, 1994 Keehn, President of the Federal Reserve Open Market Account until the adjourn- Bank of Chicago, as alternate; ment of the first meeting of the Commit- Robert P. Forrestal, President of the Federal tee after December 31, 1994. Reserve Bank of Atlanta, with Thomas By unanimous vote, Joan E. Lovett C. Melzer, President of the Federal Reserve Bank of St. Louis, as alternate; and Peter R. Fisher were selected to Robert T. Parry, President of the Federal serve at the pleasure of the Committee Reserve Bank of San Francisco, with in the capacities of Manager for Thomas M. Hoenig, President of the Domestic Operations, System Open Federal Reserve Bank of Kansas City, Market Account, and Manager for Foras alternate. eign Operations, System Open Market Account, respectively on the under- By unanimous vote, the following standing that their selection was subject officers of the Federal Open Market to their being satisfactory to the Federal Committee were elected to serve until Reserve Bank of New York. the election of their successors at the first meeting of the Committee after December 31, 1994, with the under- Secretary's note: Advice subsequently was standing that in the event of the discon- received that the selections indicated above were satisfactory to the board of directors of tinuance of their official connection with the Federal Reserve Bank of New York. the Board of Governors or with a Federal Reserve Bank, they would cease to On January 24, 1994, the continuing have any official connection with the rules, regulations, authorizations, and Federal Open Market Committee: other instruments of the Committee had been distributed with the advice that, in Alan Greenspan Chairman accordance with procedures approved William J. McDonough Vice Chairman by the Committee, they were being called to the Committee's attention Donald L. Kohn Secretary and before the February 3^X organization Economist Normand R. V. Bernard Deputy Secretary meeting to give members an opportunity Joseph R. Coyne Assistant to raise any questions they might have concerning them. Members were asked Secretary Gary P. Gillum to indicate if they wished to have any of Assistant the instruments in question placed on Secretary J. Virgil Mattingly, Jr. the agenda for consideration at this General Counsel Ernest T. Patrikis meeting, and no requests for substantive Deputy General consideration were received. Counsel Michael J. Prell At this meeting, the members agreed Economist Edwin M. Truman to update the references to the Manage- Economist ment of the System Open Market Jack H. Beebe, John M. Davis, Richard G. Account in the following FOMC docu- Davis, Marvin S. Goodfriend, David E. ments to reflect the new titles of Man- Lindsey, Larry J. Promisel, Charles J. ager for Domestic Operations, System Siegman, Thomas D. Simpson, David J. Stockton, and Sheila L. Tschinkel, Open Market Account, and Manager for Associate Economists Foreign Operations, System Open Market Account: (1) FOMC Rules of Orga- By unanimous vote, the Federal nization, (2) Procedures for Allocation Reserve Bank of New York was selected of Securities in the System Open Market to execute transactions for the System Account, and (3) Program for Security Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February \ 23 of FOMC Information. Except for this Reserve Bank of New York, on a cash, reguchange, all of the instruments identified lar, or deferred delivery basis, for the System Open Market Account at market prices, and, below remained in effect in their existfor such Account, to exchange maturing U.S. ing forms: Government and Federal agency securities with the Treasury or the individual agencies 1. Procedures for Allocation of Securities or to allow them to mature without replacein the System Open Market Account. ment; provided that the aggregate amount of 2. Authority for the Chairman to appoint U.S. Government and Federal agency securia Federal Reserve Bank as agent to operate ties held in such Account (including forward the System Account in case the New York commitments) at the close of business on the Bank is unable to function. day of a meeting of the Committee at which 3. Resolution to Provide for the Contin- action is taken with respect to a domestic ued Operation of the Federal Open Market policy directive shall not be increased or Committee During an Emergency. decreased by more than $8.0 billion during 4. Resolution Authorizing Certain the period commencing with the opening of Actions by Federal Reserve Banks During business on the day following such meeting an Emergency. and ending with the close of business on the 5. Resolution Relating to Examinations of day of the next such meeting; the System Open Market Account. (b) When appropriate, to buy or sell in 6. Guidelines for the Conduct of System the open market, from or to acceptance Operations in Federal Agency Issues. dealers and foreign accounts maintained at 7. Regulation Relating to Open Market the Federal Reserve Bank of New York, on a Operations of Federal Reserve Banks. cash, regular, or deferred delivery basis, for 8. Program for Security of FOMC the account of the Federal Reserve Bank of Information. New York at market discount rates, prime 9. Federal Open Market Committee bankers acceptances with maturities of up to Rules of Organization, Rules of Procedure, nine months at the time of acceptance that and Rules Regarding Availability of (1) arise out of the current shipment of goods Information. between countries or within the United States, or (2) arise out of the storage within By unanimous vote, the Authorizathe United States of goods under contract of tion for Domestic Open Market Opera- sale or expected to move into the channels of tions shown below was reaffirmed. trade within a reasonable time and that are secured throughout their life by a warehouse receipt or similar document conveying title to the underlying goods; provided that the Authorization for Domestic Open aggregate amount of bankers acceptances Market Operations held at any one time shall not exceed $100 million; Reaffirmed February 3, 1994 (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 neces- prime bankers acceptances of the types sary to carry out the most recent domestic authorized for purchase under l(b) above, policy 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- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 81st Annual Report, 1994 rities or agency issues covered by any such Authorization for Foreign Currency agreement are not repurchased by the dealer Operations pursuant to the agreement or a renewal thereof, they shall be sold in the market or transferred to the System Open Market Amended February 3, 1994 Account; and provided further that in the event bankers acceptances covered by any 1. The Federal Open Market Committee such agreement are not repurchased by the authorizes and directs the Federal Reserve seller, they shall continue to be held by the Bank of New York, for System Open Market Federal Reserve Bank or shall be sold in Account, to the extent necessary to carry out the open market. the Committee's foreign currency directive 2. In order to ensure the effective conduct and express authorizations by the Committee of open market operations, the Federal Open pursuant thereto, and in conformity with Market Committee authorizes and directs the such procedural instructions as the Commit- Federal Reserve Banks to lend U.S. Govern- tee may issue from time to time: ment securities held in the System Open A. To purchase and sell the following Market Account to Government securities foreign currencies in the form of cable transdealers and to banks participating in Govern- fers through spot or forward transactions on ment securities clearing arrangements con- the open market at home and abroad, includducted through a Federal Reserve Bank, ing transactions with the U.S. Treasury, with under such instructions as the Committee the U.S. Exchange Stabilization Fund estabmay specify from time to time. lished by Section 10 of the Gold Reserve 3. In order to ensure the effective conduct Act of 1934, with foreign monetary authoriof open market operations, while assisting in ties, with the Bank for International Settlethe provision of short-term investments for ments, and with other international financial foreign and international accounts main- institutions: tained 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 Bank of New York (a) for System Open Canadian dollars Mexican pesos Market Account, to sell U.S. Government Danish kroner Netherlands guilders securities to such foreign and international Pounds sterling Norwegian kroner accounts on the bases set forth in paragraph French francs Swedish kronor l(a) under agreements providing for the German marks Swiss francs resale by such accounts of those securities within 15 calendar days on terms compa- B. To hold balances of, and to have rable to those available on such transactions outstanding forward contracts to receive or in the market; and (b) for New York Bank to deliver, the foreign currencies listed in account, when appropriate, to undertake with paragraph A above. dealers, subject to the conditions imposed on purchases and sales of securities in para- C. To draw foreign currencies and to graph l(c), repurchase agreements in U.S. permit foreign banks to draw dollars under Government and agency securities, and to the reciprocal currency arrangements listed arrange corresponding sale and repurchase in paragraph 2 below, provided that drawagreements between its own account and ings by either party to any such arrangement foreign and international accounts main- shall be fully liquidated within 12 months tained at the Bank. Transactions undertaken after any amount outstanding at that time with such accounts under the provisions of was first drawn, unless the Committee, bethis paragraph may provide for a service fee cause of exceptional circumstances, specifiwhen appropriate. cally authorizes a delay. D. To maintain an overall open posi- By unanimous vote, the Authoriza- tion in all foreign currencies not exceeding $25.0 billion. For this purpose, the overall tion for Foreign Currency Operations open position in all foreign currencies is was amended to reflect the new title of defined as the sum (disregarding signs) of Manager for Foreign Operations, Sys- net positions in individual currencies. The tem Open Market Account. net position in a single foreign currency is Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February \ 25 defined as holdings of balances in that cur- 4. It shall be the normal practice to rency, plus outstanding contracts for future arrange with foreign central banks for the receipt, minus outstanding contracts for coordination of foreign currency transacfuture delivery of that currency, i.e., as the tions. In making operating arrangements sum of these elements with due regard to with foreign central banks on System holdsign. ings of foreign currencies, the Federal 2. The Federal Open Market Committee Reserve Bank of New York shall not commit directs the Federal Reserve Bank of New itself to maintain any specific balance, unless York to maintain reciprocal currency ar- authorized by the Federal Open Market rangements ("swap" arrangements) for the Committee. Any agreements or understand- System Open Market Account for periods up ings concerning the administration of the to a maximum of 12 months with the follow- accounts maintained by the Federal Reserve ing foreign banks, which are among those Bank of New York with the foreign banks designated by the Board of Governors of the designated by the Board of Governors under Federal Reserve System under Section 214.5 Section 214.5 of Regulation N shall be of Regulation N, Relations with Foreign referred for review and approval to the Banks and Bankers, and with the approval of Committee. the Committee to renew such arrangements 5. Foreign currency holdings shall be on maturity: invested insofar as practicable, considering needs for minimum working balances. Such investments shall be in liquid form, and Amount generally have no more than 12 months Foreign bank (millions of remaining to maturity. When appropriate in dollars equivalent) connection with arrangements to provide investment facilities for foreign currency Austrian National Bank 250 National Bank of Belgium 1,000 holdings, U.S. Government securities may be Bank of Canada 2,000 purchased from foreign central banks under National Bank of Denmark 250 agreements for repurchase of such securities Bank of England 3,000 Bank of France 2,000 within 30 calendar days. German Federal Bank 6,000 6. All operations undertaken pursuant to Bank of Italy 3,000 Bank of Japan 5,000 the preceding paragraphs shall be reported Bank of Mexico 700 promptly to the Foreign Currency Subcom- Netherlands Bank 500 mittee and the Committee. The Foreign Bank of Norway 250 Bank of Sweden 300 Currency Subcommittee consists of the Swiss National Bank 4,000 Chairman and Vice Chairman of the Bank for International Settlements Committee, the Vice Chairman of the Board Dollars against Swiss francs 600 of Governors, and such other member of Dollars against authorized European currencies other than Swiss francs 1,250 the Board as the Chairman may designate (or in the absence of members of the Board serving on the Subcommittee, other Board Any changes in the terms of existing swap members designated by the Chairman as arrangements, and the proposed terms of any alternates, and in the absence of the Vice new arrangements that may be authorized, Chairman of the Committee, his alternate). shall be referred for review and approval to Meetings of the Subcommittee shall be the Committee. called at the request of any member, or at the 3. All transactions in foreign currencies request of the Manager for Foreign Operaundertaken under paragraph LA. above tions, System Open Market Account shall, unless otherwise expressly authorized ("Manager"), for the purposes of reviewing by the Committee, be at prevailing market recent or contemplated operations and of rates. For the purpose of providing an invest- consulting with the Manager on other matment return on System holdings of foreign ters relating to his responsibilities. At the currencies, or for the purpose of adjusting request of any member of the Subcommitinterest rates paid or received in connection tee, questions arising from such reviews with swap drawings, transactions with for- and consultations shall be referred for deeign central banks may be undertaken at termination to the Federal Open Market non-market exchange rates. Committee. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 81st Annual Report, 1994 7. The Chairman is authorized: A. To adjust System balances in light A. With the approval of the Commit- of probable future needs for currencies. tee, to enter into any needed agreement or B. To provide means for meeting Sysunderstanding with the Secretary of the Trea- tem and Treasury commitments in particular sury about the division of responsibility for currencies, and to facilitate operations of the foreign currency operations between the Sys- Exchange Stabilization Fund. tem and the Treasury; C. For such other purposes as may be B. To keep the Secretary of the Trea- expressly authorized by the Committee. sury fully advised concerning System for- 4. System foreign currency operations eign currency operations, and to consult with shall be conducted: the Secretary on policy matters relating to A. In close and continuous consultaforeign currency operations; tion and cooperation with the United States C. From time to time, to transmit Treasury; appropriate reports and information to the B. In cooperation, as appropriate, with National Advisory Council on International foreign monetary authorities; and Monetary and Financial Policies. C. In a manner consistent with the obli- 8. Staff officers of the Committee are gations of the United States in the Internaauthorized to transmit pertinent information tional Monetary Fund regarding exchange on System foreign currency operations to arrangements under the IMF Article IV. appropriate officials of the Treasury Department. By unanimous vote, the Procedural 9. All Federal Reserve Banks shall par- Instructions with Respect to Foreign ticipate in the foreign currency operations Currency Operations shown below were for System Account in accordance with paraamended to reflect the new title of Mangraph 3.G(1) of the Board of Governors' Statement of Procedure with Respect to For- ager for Foreign Operations, System eign Relationships of Federal Reserve Banks Open Market Account. dated January 1, 1944. Procedural Instructions with By unanimous vote, the Foreign Respect to Foreign Currency Currency Directive shown below was Operations reaffirmed. Amended February 3, 1994 Foreign Currency Directive In conducting operations pursuant to the authorization and direction of the Federal Reaffirmed February 3, 1994 Open Market Committee as set forth in the Authorization for Foreign Currency Opera- 1. System operations in foreign curren- tions and the Foreign Currency Directive, cies shall generally be directed at countering the Federal Reserve Bank of New York, disorderly market conditions, provided that through the Manager for Foreign Operations, market exchange rates for the U.S. dollar System Open Market Account ("Manager"), reflect actions and behavior consistent with shall be guided by the following procethe IMF Article IV, Section 1. dural understandings with respect to consul- 2. To achieve this end the System shall: tations and clearances with the Commit- A. Undertake spot and forward pur- tee, the Foreign Currency Subcommittee, chases and sales of foreign exchange. and the Chairman of the Committee. All B. Maintain reciprocal currency operations undertaken pursuant to such ("swap") arrangements with selected for- clearances shall be reported promptly to the eign central banks and with the Bank for Committee. International Settlements. 1. The Manager shall clear with the Sub- C. Cooperate in other respects with committee (or with the Chairman, if the central banks of other countries and with Chairman believes that consultation with the international monetary institutions. Subcommittee is not feasible in the time 3. Transactions may also be undertaken: available): Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 127 A. Any operation that would result in a facility is to supplement, at the discrechange in the System's overall open position tion of the Federal Reserve, the U.S. in foreign currencies exceeding $300 million dollar resources of the Treasury and the on any day or $600 million since the most ESF for financing their purchases of forrecent regular meeting of the Committee. eign currencies and related international B. Any operation that would result in a change on any day in the System's net posi- operations. There had been no use of tion in a single foreign currency exceeding this facility since an ESF repayment of $150 million, or $300 million when the $2 billion on April 2, 1992. The Comoperation is associated with repayment of mittee decided at this meeting to swap drawings. reaffirm the $5 billion ceiling, which it C. Any operation that might generate a viewed as providing adequate operasubstantial volume of trading in a particular currency by the System, even though the tional flexibility to respond on short change in the System's net position in that notice to unanticipated developments. currency might be less than the limits specified in l.B. Votes for this action: Messrs. Greenspan, D. Any swap drawing proposed by a McDonough, Broaddus, Forrestal, Kelley, foreign bank not exceeding the larger of La Ware, Lindsey, and Parry and Ms. Phil- (i) $200 million or (ii) 15 percent of the size lips. Vote against this action: Mr. Jordan. of the swap arrangement. Absent and not voting: Messrs. Angell 2. The Manager shall clear with the Com- and Mullins. mittee (or with the Subcommittee, if the Subcommittee believes that consultation Mr. Jordan dissented because he felt with the full Committee is not feasible in the that providing funds to the Treasury time available, or with the Chairman, if the Chairman believes that consultation with using a warehousing arrangement was, the Subcommittee is not feasible in the time in effect, a loan to the Treasury. In his available): opinion, direct financing of government A. Any operation that would result in a operations by the central bank is inapchange in the System's overall open position propriate and could compromise the in foreign currencies exceeding $1.5 billion effective conduct of monetary policy. since the most recent regular meeting of the Committee. He did not rule out the possible efficacy B. Any swap drawing proposed by a of some warehousing transactions in foreign bank exceeding the larger of (i) $200 very exceptional circumstances in the million or (ii) 15 percent of the size of the future, but he believed that the latter swap arrangement. should be approved only after full Com- 3. The Manager shall also consult with mittee discussion. Accordingly, he did the Subcommittee or the Chairman about proposed swap drawings by the System and not want to retain the standing $5 billion about any operations that are not of a routine authorization. character. By unanimous vote, the minutes of actions taken at the meeting of the Federal Open Market Committee held on Agreement to "Warehouse" December 21, 1993, were approved. Foreign Currencies The Manager for Foreign Operations At its meeting on February 2-3, 1993, reported on developments in foreign the Committee had reaffirmed the $5 bil- exchange markets during the period lion limit on the amount of eligible for- since the December meeting. There eign currencies that the System was pre- were no System open market transacpared to "warehouse" for the Treasury tions in foreign currencies during this and the Exchange Stabilization Fund period, and thus no vote was required of (ESF). The purpose of the warehousing the Committee. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 81st Annual Report, 1994 The Manager for Domestic Opera- turing employment rose for a fourth tions reported on developments in consecutive month, with gains again domestic financial markets and on Sys- concentrated in motor vehicles. Contem open market transactions in govern- struction payrolls edged down, evidently ment securities and federal agency obli- reflecting the adverse effects of severe gations during the period December 21, winter weather. The total number of jobs 1993, through February 3, 1994. By in the services industries was unchanged unanimous vote, the Committee ratified in January, but the inclement weather these transactions. apparently held down employment in The Committee then turned to a dis- some segments of this sector as well. cussion of the economic and financial The average workweek of production or outlook, the ranges for the growth of nonsupervisory workers rose in January money and debt in 1994, and the imple- to its highest level in almost five years; mentation of monetary policy over the for manufacturing, the average workintermeeting period ahead. A summary week remained at its post-World War II of the economic and financial informa- high for a third consecutive month. The tion available at the time of the meeting civilian unemployment rate, calculated and of the Committee's discussion is on a new basis, was 6.7 percent in provided below, followed by the domes- January. tic policy directive that was approved by Industrial production increased apprethe Committee and issued to the Federal ciably further in December, and the Reserve Bank of New York. available information suggested a con- The information reviewed at this siderable rise in January. In December, meeting indicated that economic activ- the advance in manufacturing was led ity recorded a strong advance during the by the motor vehicle and computing closing months of 1993, and the limited equipment industries. Sizable increases data available on production and em- in materials and construction supplies ployment suggested appreciable further also were recorded. On the other hand, gains in the early weeks of this year. the output of consumer goods other than Housing starts had strengthened sub- motor vehicles was sluggish, and the stantially in the fourth quarter of last production of aircraft and defense and year, and business fixed investment had space equipment continued to shrink. registered a sharp rise. Increases in Total utilization of manufacturing broad indexes of consumer and pro- capacity rose again in December and ducer prices, excluding their food and reached a relatively high level, judged energy components, had been somewhat against historical experience. larger in recent months than earlier in Consumer spending, as measured by 1993, and prices of a number of com- real personal consumption expenditures, modities had turned up. posted another solid increase in the Assessment of the January labor mar- fourth quarter, and strong sales of motor ket data was complicated by statistical vehicles in January suggested continued revisions and weather-related reporting buoyancy in consumer demand. In the problems, but a variety of indicators fourth quarter, real outlays on motor pointed convincingly to a further vehicles surged, and spending on other strengthening in the demand for labor. durable goods—notably furniture, appli- Total nonfarm payroll employment ances, and other household equipment— posted a small gain in January after a registered further large gains. By consizable December increase. Manufac- trast, real outlays for nondurable goods Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February \ 29 and services rose only moderately. day sales, but for some retail businesses, Housing starts jumped in December, particularly general merchandise stores, with both single-family and multifamily the increases coincided with weak sales. starts sharing in the advance. For 1993 For the retail sector as a whole, the as a whole, housing starts were at their inventory-to-sales ratio was up slightly highest annual total in four years. Sales in November. of new homes were up sharply in The average nominal U.S. merchan- November, and sales of existing homes dise trade deficit for the Octoberended the year at the highest monthly November period was about the same as level in the twenty-five-year history of its average rate in the third quarter. The the series. value of exports was up for the two- Real business fixed investment re- month period, with the increase occurcorded a very large increase in the fourth ring largely in machinery, automotive quarter. Business spending for equip- products, and aircraft. The higher value ment, notably for information process- of imports for the two-month period ing equipment, was up sharply for a reflected, as had been the case earlier in seventh straight quarter. The strength 1993, greater imports of consumer evident in recent orders for nondefense goods, automotive products, and macapital goods pointed to further gains in chinery. Trends in economic activity in shipments of these goods in early 1994. the major foreign industrial countries Outlays for nonresidential structures in appeared to have diverged further in the fourth quarter posted their largest the fourth quarter. Moderate growth quarterly rise in six years; the increases appeared to be continuing in Canada were spread across a broad array of cate- and the United Kingdom, but economic gories other than office buildings. Con- activity seemed to be growing more struction permits continued to rise in the slowly or to have turned down in Japan, fourth quarter, suggesting further growth western Germany, and France. of investment in nonresidential struc- Producer prices of finished goods tures in the near term. were down slightly in December after Business inventories remained gener- being unchanged in November. Excludally well aligned with sales through ing the food and energy components, November, the most recent month for producer prices edged higher in Decemwhich complete data were available. In ber and were up slightly for the year as a manufacturing, inventory stocks fell in whole. At the retail level, consumer December after edging lower in Novem- prices rose modestly in November and ber; with brisk gains in shipments in December, with energy price declines both months, the ratio of stocks to holding down the increase in the overall shipments fell further from levels that index. For items other than food and already were low by historical stan- energy, prices advanced in the two dards. At the wholesale level, invento- months at a slightly faster pace than that ries rose moderately in November after seen over previous months of the year; little change in the preceding two for 1993 as a whole, the increase was months. The inventory-to-sales ratio for about the same as in 1992. Hourly comthis sector had changed little since May. pensation of private industry workers Retail inventories expanded substan- increased in the fourth quarter at the tially in November for a third straight same pace as in the third quarter. For month. The buildup of stocks might 1993, the rise in hourly compensation have been in anticipation of robust holi- was little changed from the previous Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 81st Annual Report, 1994 year. Average hourly earnings of pro- counteract a potential buildup of infladuction or nonsupervisory workers rose tion pressures as likely in the next few sharply in January, but for the twelve months, but probably not in the very months ended in January, the increase near term. was the same as that recorded for the In foreign exchange markets, the previous twelve months. trade-weighted value of the dollar in At its meeting on December 21, 1993, terms of the other G-10 currencies the Committee adopted a directive that changed little on balance over the intercalled for maintaining the existing meeting period. The dollar fell against degree of pressure on reserve positions the yen in the context of somewhat and that did not include a presumption higher Japanese interest rates -and about the likely direction of any adjust- renewed expressions of U.S. concern ment to policy during the intermeeting about bilateral trade issues. The dollar period. Accordingly, the directive indi- appreciated slightly relative to the Gercated that in the context of the Commit- man mark and other European currentee's long-run objectives for price stabil- cies against the background of relatively ity and sustainable economic growth, strong U.S. economic data and generally and giving careful consideration to eco- sluggish economic activity in continennomic, financial, and monetary develop- tal Europe. ments, slightly greater or slightly lesser Growth of the broad monetary aggrereserve restraint might be acceptable gates, though a little faster than in most during the intermeeting period. The of 1993, remained relatively slow over reserve conditions associated with this December and January. Investors evidirective were expected to be consistent dently continued to find low-yielding with modest growth of M2 and M3 over deposits less appealing than stock and the following months. bond mutual funds, although recent Open market operations were directed inflows to bond funds appeared to have toward maintaining the existing degree been at a slower rate than that seen over of pressure on reserve positions through- most of 1993. For the year 1993, growth out the intermeeting period. Additional of both M2 and M3 was estimated to reserves were supplied to the banking have been slightly above the lower ends system on a temporary basis around of the Committee's ranges. Private boryear-end to meet seasonal movements in rowing had picked up in recent months, currency and required reserves as well and total domestic nonfinancial debt as an enlarged demand for excess expanded at a somewhat faster, though reserves. For the intermeeting period as still moderate, pace in the fourth quara whole, the federal funds rate remained ter; for the year, nonfinancial debt was close to 3 percent while adjustment plus estimated to have been in the lower half seasonal borrowing averaged somewhat of the Committee's monitoring range. more than anticipated. The staff forecast prepared for this Most market interest rates declined meeting suggested that economic expanslightly during the intermeeting period, sion would slow from the very strong and major indexes of stock prices posted pace of the fourth quarter, but that the new highs. Market participants saw the economy still would advance in 1994 at incoming news on inflation as encourag- a rate somewhat in excess of the growth ing; still, they viewed the economy as of potential. The severe winter weather relatively robust, and on balance they over much of the country and the Calideemed a firming of monetary policy to fornia earthquake would tend to distort Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February \ 31 economic indicators for the early part of to underlying demands so that the pace the year; however, taken together, these of additional increases undoubtedly developments were not expected to have would moderate during the course of a material or lasting effect on the overall 1994. Still, the economic expansion level of activity or prices. Consumer seemed to have considerable momenspending, which for some time had tum, largely as a consequence of dimintended to outpace the growth of dispos- ishing balance sheet constraints and able income, was projected to increase generally favorable financial conditions at a rate more in line with incomes. spurred by a highly accommodative Business fixed investment was expected monetary policy. As a consequence, a to decelerate gradually from the very number of members expressed the view rapid rate of 1993, reflecting the dimin- that the risks were on the upside of a ishing effect of the earlier pickup in moderate growth forecast. In the context output growth, the slower growth of of low and decreasing slack in the econcorporate cash flow, and a less rapid omy, little further progress would be decline in the cost of capital. Home- made toward price stability in 1994, and building activity, driven by the greatly there was a distinct risk of higher inflaimproved affordability of housing and tion at some point if monetary policy increased confidence in employment were not adjusted. While broad meaprospects, was anticipated to continue at sures of inflation did not on the whole a relatively brisk pace through much of suggest any changes in inflation trends, the year. Exports were projected to some members noted that a number of strengthen somewhat, bolstered by some commodity prices had turned up in pickup in foreign economic growth, and recent months, and they referred to fiscal restraint was expected to exert a still scattered but increasing anecdotal reduced drag on spending. In light of the reports that some business firms were limited margins of slack in labor and paying slightly higher prices for various product markets that were anticipated to materials purchased for use in the proprevail over the forecast horizon, the duction process. ongoing expansion was projected to be In keeping with the practice at meetassociated with only a slight further ings when the Committee establishes its reduction in the core rate of inflation. long-run ranges for growth of the money In the Committee's discussion of cur- and debt aggregates, the Committee rent and prospective economic develop- members and the Federal Reserve Bank ments, members commented that the presidents not currently serving as memeconomy had entered the new year with bers had prepared projections of ecoappreciable forward momentum and that nomic activity, the rate of unemploythe expansion was likely to be sustained ment, and inflation for 1994. The central over the year ahead at a pace somewhat tendency of the forecasts pointed to above the economy's long-run potential. somewhat faster economic growth this The very rapid rate of economic growth year than currently was estimated for now indicated for the fourth quarter of 1993. The anticipated rate of economic 1993 clearly could not be maintained. expansion was expected to foster a lim- Much of the recent impetus to the ex- ited further drop in the rate of unempansion stemmed from a surge in expen- ployment by the fourth quarter of this ditures on housing, business equipment, year. With the slack in productive and consumer durables. Such spending resources expected to diminish further had reached a very high level in relation to a quite low level, price and cost pres- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 81st Annual Report, 1994 sures were unlikely to abate signifi- to incur new debt to finance growing cantly; indeed, price increases in 1994 expenditures. could exceed those of 1993 when infla- In their reports on developments tion had been held down by favorable across the nation, members commented developments in energy prices. Mea- on widespread indications of improving sured from the fourth quarter of 1993 to economic activity, including some the fourth quarter of 1994, the forecasts strengthening in regions that earlier for growth of real GDP had a central were characterized by stagnant business tendency of 3 to VA percent and a full conditions. Some areas continued to be range of 2Vi to VA percent. Projections affected adversely by special factors, of the civilian rate of unemployment in especially by spending cutbacks in the fourth quarter of 1994 were all in a defense and aerospace industries. Calirange of 6'/2 to 6V* percent calculated on fornia was a notable example, but a the basis of the new survey recently range of indicators suggested that the introduced by the Bureau of Labor Sta- California economy might be stabiliztistics. For the CPI, the central tendency ing, albeit at a depressed level, after an of the forecasts for the period from the extended period of declining activity. fourth quarter of 1993 to the fourth Mirroring these developments, business quarter of 1994 was centered on sentiment was characterized as generincreases of about 3 percent within a ally optimistic around the nation. While range of 2lA to 4 percent, and for nomi- business executives remained cautious nal GDP the forecasts were clustered in their hiring practices, the expansion in a range of 5!/2 to 6 percent for the in business activity was fostering sizyear. able overall gains in employment even In the Committee's review of factors in areas where some major business underlying recent developments, mem- concerns were reducing their workbers observed that generally favorable forces. A few large firms that previously financial conditions provided a back- had frozen or reduced their payrolls drop conducive to further robust expan- were now reported to be hiring addision in business activity. Much of the tional workers. recent strengthening in economic Turning to prospective developments growth was generated by increased in key sectors of the economy, the memspending in interest-sensitive sectors of bers anticipated that the expansion in the economy such as housing in re- consumer expenditures would be well sponse to relatively low interest rates. maintained during 1994, though the Generally buoyant equity markets, a growth in such spending probably would readier availability of financing from moderate to a pace more in line with lending institutions, and the strength- gains in disposable income. The availened financial condition of businesses able data on retail sales since the holiand households also were cited as fac- day period were still limited, but anectors tending to boost economic activity. dotal reports pointed to continuing Balance sheet restructuring activities momentum in several parts of the counappeared to have slackened markedly, try. Winter storms had hindered sales in and while balance sheet adjustments a number of areas, but according to probably were still being made, the some retail contacts the adverse effects latter seemed to be exerting much less were likely to be temporary. In any restraint on the willingness of businesses event, the very rapid rates of growth in and especially households to spend and sales of automobiles and other consumer Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 133 durables were not sustainable, and highly competitive domestic and world already high consumer debt ratios would markets. The gains in such investment be a further inhibiting factor. It was had been concentrated in expenditures noted in this connection that consumer for equipment, and while new orders debt had become more concentrated pointed to further brisk growth in the over the course of recent years among months ahead, increases in such expenconsumer groups that were most likely ditures were likely to moderate over to borrow to help finance their spending, time. At the same time, growing ecowith the result that the ability of such nomic activity and associated declines consumers to incur additional indebted- in commercial and industrial vacancy ness could be diminished. Higher taxes rates, at least in some parts of the counconfronting some households also were try, suggested that nonresidential buildcited as a negative factor in the outlook ing construction other than office strucfor the consumer sector. On balance, tures would post sizable increases over however, while the prospects for con- the year. Rebuilding activity following sumer spending clearly were not free of the earthquake in California would uncertainty, the marked improvement in stimulate engineering and construction consumer confidence and favorable in the Los Angeles area over the quarfinancial conditions would provide a set- ters ahead. ting conducive to sustained moderate Fiscal policy and foreign trade had growth in consumer expenditures. exerted retarding effects on the econ- The improvement in consumer senti- omy in 1993. While the response of the ment together with the availability of economy to fiscal restraint and the outrelatively low cost financing had fos- look for export markets remained subtered very strong growth in housing con- ject to substantial uncertainty, both struction over the closing months of fiscal policy and the trade deficit were 1993 and, adjusting for seasonal weather expected at this point to be less negative conditions, anecdotal reports from many factors in the performance of the econareas suggested a continued robust per- omy during 1994. With regard to the formance in this sector of the economy outlook for fiscal policy, the downtrend in the early weeks of this year. The in defense spending was projected to strength in housing activity had induced moderate and to contribute to a smaller increases in the costs of lumber and net decline in overall federal governother building materials, and shortages ment expenditures on goods and serof skilled construction workers were vices in 1994. It was noted that the reported in some areas. Despite these widespread political support of efforts to developments, prices of new homes did curtail federal government deficits could not appear at this point to be under be expected to continue to contain new significant upward pressure. Looking federal spending initiatives. With regard ahead, with housing construction al- to the outlook for U.S. exports, more ready at high levels, further gains over accommodative fiscal or monetary polithe course of 1994 were expected to be cies abroad were expected to foster a substantially below those recorded in gradual improvement in rates of ecorecent quarters. nomic growth in major foreign indus- Business fixed investment was likely trial countries with beneficial effects on to be sustained by continuing efforts to the demand from those countries for modernize production facilities in order U.S. goods and services. One member to achieve more efficient operations in also commented that NAFTA already Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 81st Annual Report, 1994 seemed to be having a favorable effect Continuing upward impetus to food on some exports to Mexico. prices, resulting from the adverse One sector of the economy that was weather conditions during 1993, and the viewed as a source of particular uncer- likelihood that energy prices would not tainty was the outlook for inventories. decline further and might in fact turn up Business firms continued to maintain in an environment of somewhat stronger tight control over their inventories, and worldwide demand for energy products in general the latter were at quite low could add to overall price pressures. levels in relation to sales. Indeed, there The members acknowledged that were some anecdotal reports that inven- broad measures of prices and wages had tory shortfalls had resulted in the loss of displayed mixed patterns over recent sales in recent months. Lean inventory months and that on the whole they did levels in the context of diminishing not yet point to any clear change in slack in labor and product markets inflation trends. However, some other raised concerns about the potential for indicators were more disquieting. One increasing capacity pressures should example was the growing, though still strong demands persist that would tend limited, number of anecdotal reports of to deplete existing inventories and lead shortages of skilled workers in some to efforts not only to rebuild but to parts of the country or occupations, increase them. Thus far, there were few notably construction. Moreover, there signs of developments such as signifi- were more reports of rising prices for cant increases in delivery lead times or products being purchased by business in the costs of goods purchased by busi- firms for use in the production process ness firms that in the past had triggered and in turn of successful efforts by busisubstantial inventory buildups. How- nesses to raise their own prices in order ever, there were ample precedents in the to pass on higher costs or to improve history of business-cycle expansions of their profit margins. More generally, efforts to accumulate large inventories many commodity prices had increased in periods when strong final demands over the past several weeks. On the already were exerting inflationary pres- positive side, competitive pressures sures in the economy. remained intense in many markets, aug- The members generally expressed mented in markets for numerous prodconcern about a buildup in inflationary ucts by competition from foreign propressures during the year ahead, espe- ducers. Some members also commented cially if what they currently viewed as a that the tradeoff between economic very accommodative monetary policy growth and inflation would be improved were maintained. A number of members over the year ahead to the extent that emphasized that even with the substan- the credibility of the System's antitial slowing that they anticipated in the inflationary policy was maintained. rate of economic expansion from the In keeping with the requirements of very rapid growth in the fourth quarter, the Full Employment and Balanced overall margins of slack in labor and Growth Act of 1978 (the Humphreyproduct markets, already reduced to Hawkins Act), the Committee at this fairly modest levels, would shrink fur- meeting reviewed the ranges for growth ther in the quarters ahead with the clear of the monetary and debt aggregates in possibility that various imbalances and 1994 that it had established on a tentaadded inflation would emerge in the tive basis at its meeting on July 6-7, absence of monetary tightening actions. 1993. The tentative ranges included Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February \ 35 expansion of 1 to 5 percent for M2 and for 1994. According to a staff analysis 0 to 4 percent for M3, measured from prepared for this meeting, somewhat the fourth quarter of 1993 to the fourth faster growth in both of these aggregates quarter of 1994. The monitoring range could be expected in 1994. But with for growth of total domestic nonfinan- nominal GDP also expected to be cial debt had been set provisionally at 4 stronger, as indicated by the central to 8 percent for 1994. All of these ranges tendency of the members' forecasts, the were unchanged from those that the velocity of M2 would continue to rise at Committee had set for 1993; the latter an appreciably faster rate than historical had been adjusted down to take account relationships would have suggested. of ongoing increases in velocity. This assessment assumed that house- In the Committee's discussion of the holds would continue to redirect savranges for 1994, which tended to focus ings from M2-type accounts to higheron M2, all the members expressed a yielding investments, especially bond preference for affirming the M2 and M3 and stock mutual funds. However, such ranges that had been established on a redeployments of funds should moderprovisional basis in July and all but one ate this year to the extent that some favored adopting the provisional moni- investors already had accomplished a toring range for nonflnancial debt; that considerable portion of their desired member preferred a lower range. Many portfolio reallocations and in light of the of the members commented on the possibility that changes in the prices of uncertainties that surrounded the estab- stocks and bonds, including the drop in lishment of ranges that were consistent bond prices in recent months, would with the Committee's goals for the underline the risks of holding such economy. They noted that a variety of instruments. Moreover, depository instidevelopments had altered the historical tutions had strengthened their capital relationships between the monetary positions markedly and were likely to aggregates and broad measures of eco- compete more aggressively for M2 and nomic performance over the past several especially for M3-type deposits in an years. The resulting uncertainty implied effort to maintain or increase their role that the Committee needed to retain a in the financing of expanding economic flexible approach to the behavior of the activity. While these developments and monetary aggregates in relation to their their implications for monetary growth ranges, including the need to assess a could not be forecast with confidence, broad array of other indicators to gauge the members believed that the ranges the implications of monetary growth under consideration would probably be developments. Nonetheless, the mem- sufficiently wide to accommodate M2 bers concluded that as best they could and M3 growth rates under a variety of evaluate evolving financial conditions at likely velocity scenarios. For example, this point, monetary growth within the if the factors that had tended to depress tentative ranges would be likely to pro- the growth of the broad aggregates in mote the Committee's objectives of sus- relation to income did not abate as tained economic expansion and subdued expected this year, M2 and M3 growth inflation. would again be near the lower bounds of In 1993, both M2 and M3 had grown the Committee's ranges. Alternatively, at rates about V2 percentage point above if the behavior of these aggregates were the lower bounds of the ranges that the to move closer to earlier patterns, Committee now contemplated retaining growth in the upper portions of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

136 81st Annual Report, 1994 ranges would foster an economic per- established on a tentative basis at its formance in line with the members' meeting in July 1993. In keeping with forecasts. the Committee's usual procedures under From the perspective of a longer time the Humphrey-Hawkins Act, the ranges horizon, many of the members noted would be reviewed at midyear, or sooner that the provisional range for M2 was if deemed necessary, in light of the essentially at a level that could well behavior of the aggregates and interim prove to be consistent with sustained economic and financial developments. and noninflationary economic expan- The Committee approved the following sion. This conclusion assumed that his- paragraph for inclusion in the domestic torical relationships between money policy directive: growth and the expansion of broad measures of economic performance would The Federal Open Market Committee be restored at some point. In the absence seeks monetary and financialc onditions that will foster price stability and promote susof such a development or the emergence tainable growth in output. In furtherance of of new, reasonably stable relationships, these objectives, the Committee at this meetthe Committee would have to continue ing established ranges for growth of M2 and to place diminished reliance on the mon- M3 of 1 to 5 percent and 0 to 4 percent etary aggregates in the formulation of respectively, measured from the fourth quarmonetary policy. ter of 1993 to the fourth quarter of 1994. The Committee anticipated that developments With regard to the range for nonfinancontributing to unusual velocity increases cial debt, the members anticipated that could persist during the year and that money its growth this year would remain within growth within these ranges would be consisthe contemplated range. A staff analysis tent with its broad policy objectives. The suggested that its federal borrowing monitoring range for growth of total domestic nonfinancial debt was set at 4 to 8 percent component would decrease as a result of for the year. The behavior of the monetary the ongoing effects of deficit reduction aggregates will continue to be evaluated measures that had been enacted and the in the light of progress toward price level rise in tax receipts stemming from eco- stability, movements in their velocities, and nomic growth. At the same time, bor- developments in the economy and financial markets. rowing by the nonfederal sectors should strengthen further against the backdrop Votes for this action: Messrs. Greenspan, of more comfortable financial positions McDonough, Broaddus, Forrestal, Jordan, and the expected pickup in GDP expan- Kelley, LaWare, Lindsey, and Parry and sion. In one view, however, a somewhat Ms. Phillips. Votes against this action: lower range was desirable for nonfinan- None. Absent and not voting: Messrs. cial debt. In light of the shift in business Angell and Mullins. preferences away from debt and toward equity, debt velocity could increase and In the Committee's discussion of polslower growth in debt would be consis- icy for the intermeeting period ahead, tent with the Committee's objectives. the members favored an adjustment However, this member could accept the toward a less accommodative policy higher range favored by the other mem- stance, though views differed to some bers for 1994. extent with regard to the amount of the At the conclusion of the Committee's adjustment. The current policy posture, disqussion, all the members indicated which had been in effect since the late that they favored or could accept the summer of 1992, was highly stimulative ranges for 1994 that the Committee had as evidenced, for example, by very low Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February \ 37 or even slightly negative real short-term the first policy change after a long hiatus interest rates and, in the view of at least and indeed the first tightening action some members, the relatively rapid in about five years. The market effect growth over an extended period in nar- might be amplified by a contemplated row measures of money and reserves. decision to authorize the Chairman to Such a policy had been appropriate in a announce the policy action (discussed period when various developments had below). In the circumstances, these tended to inhibit the expansion, includ- members felt that a somewhat greater ing widespread efforts to repair strained policy adjustment would incur an unacbalance sheets and a variety of business ceptable risk of dislocative repercusrestructuring activities that had tended sions in financial markets. A relatively to depress confidence and spending. small move would readily accomplish More recently, the considerable progress the purposes of signaling the Commitmade by households and businesses in tee's anti-inflation resolve and together decreasing their debt service burdens with expected further action should help and the much strengthened capital posi- to temper or avert an increase in inflations of lending institutions had pro- tion expectations and speculative develvided a financial basis, in the context opments in financial markets. of low interest rates, for growth in de- Other members indicated a prefermands on productive capacity that could ence for a somewhat greater firming generate inflation pressures. In this situ- action that would move monetary policy ation, the members agreed that mone- closer to a desirable neutral stance. In tary policy should be adjusted toward a this view, recent developments in the more neutral stance that would encour- economy had demonstrated that moneage sustained economic growth without tary policy was much too accommodaa buildup of inflationary imbalances. tive and that slow, gradual tightening The members recognized that timely moves risked allowing inflation presaction was needed to preclude the neces- sures to build. A more decisive policy sity for more vigorous and disruptive move at this juncture would in fact policy moves later if inflationary pres- reduce uncertainty, because fewer dissures were allowed to intensify. The crete actions would be required and they history of past cyclical upswings had would have a more pronounced and demonstrated the inflationary conse- desirable effect in curbing inflationary quences and adverse effects on eco- sentiment and thus in minimizing upnomic activity of delayed anti-inflation ward pressures on longer-term interest policy actions. rates over time. The result would be a In the course of the Committee's dis- policy stance that was more consistent cussion, a number of members endorsed with sustained economic expansion and a policy move that would involve only a progress toward price stability. slight adjustment toward a less accom- In further discussion, all the memmodative degree of reserve pressure. bers indicated that they could accept These members recognized that evolv- the proposed slight policy adjustment at ing economic conditions might well this point, but many observed that addijustify a somewhat greater policy adjust- tional finning probably would be desirment. They believed, however, that even able later. The members did not see any a slight move at this time was likely to unusual likelihood that a further policy have a particularly strong impact on action would be needed during the financial markets because it would be intermeeting period, and the Commit- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

138 81st Annual Report, 1994 tee therefore decided to retain an growth in M2 and M3 over the first half unbiased intermeeting instruction in of 1994. the directive. In this connection, it was At the conclusion of the meeting, the understood that the Committee would Federal Reserve Bank of New York was be prepared to review its policy stance authorized and directed, until instructed and take further action, if warranted by otherwise by the Committee, to execute intermeeting developments, at a tele- transactions in the System Account in phone conference during the period accordance with the following domestic ahead. policy directive: At this meeting, Committee members discussed and agreed on a proposal to The information reviewed at this meeting have the Chairman announce the Com- indicates a strong advance in economic mittee's short-term policy decision activity during the closing months of 1993, promptly. The purpose of such an and the limited data available for the early announcement, which would be a depar- weeks of this year suggest appreciable further gains. The January labor market data ture from past Committee practice, was were complicated by statistical revisions and to avoid any misinterpretation of the weather-related reporting problems; how- Committee's action and its purpose. ever, a variety of indicators pointed convinc- Because this would be the first tighten- ingly to a continuing expansion of employing policy action in a long time, it was ment. Industrial production increased sharply likely to attract considerable attention. in the fourth quarter and appears to have risen considerably further in January. Con- The Committee did not intend this sumer spending and housing activity posted announcement to set any precedents or solid gains in late 1993, and strong sales of to imply any commitments regarding the motor vehicles in January suggested continannouncement of its decisions in the ued buoyancy in consumer demand. Trends future. That matter would be reviewed in contracts and orders point to further sizalong with other issues relating to the able gains in business fixed investment. The average nominal U.S. merchandise trade disclosure of Committee information at deficit in October-November was about the a later meeting. same as its average rate in the third quarter. At the conclusion of the Committee's Over the latter part of 1993, increases in discussion, all the members indicated broad indexes of consumer and producer that they could support a directive that prices, excluding their food and energy components, were somewhat larger than earlier called for a slight increase in the degree in the year and prices of a number of comof pressure on reserve positions and that modities also turned up recently. did not include a presumption about the Most market interest rates have declined likely direction of any adjustment to slightly since the Committee meeting on policy during the intermeeting period. December 21, 1993. In foreign exchange Accordingly, the Committee decided markets, the trade-weighted value of the dollar in terms of the other G-10 currencies is that in the context of its long-run objecabout unchanged over the intermeeting tives for price stability and sustainable period. economic growth, and giving careful Growth of M2 and M3 was relatively slow consideration to economic, financial, over December and January. From the fourth and monetary developments, slightly quarter of 1992 to the fourth quarter of 1993, greater or slightly lesser reserve restraint M2 and M3 are estimated to have grown at rates slightly above the lower ends of the might be acceptable during the inter- Committee's ranges for the year. Private bormeeting period. The reserve conditions rowing has picked up in recent months and contemplated at this meeting were extotal domestic nonfinancial debt expanded at pected to be consistent with moderate a moderate rate in the fourth quarter; for the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 139 year, nonfinancial debt is estimated to have Meeting Held on increased at a rate in the lower half of the March 22, 1994 Committee's monitoring range. The Federal Open Market Committee A meeting of the Federal Open Market seeks monetary and financial conditions that Committee was held in the offices of will foster price stability and promote susthe Board of Governors of the Fedtainable growth in output. In furtherance of these objectives, the Committee at this meet- eral Reserve System in Washington, ing established ranges for growth of M2 and D.C., on Tuesday, March 22, 1994, at M3 of 1 to 5 percent and 0 to 4 percent 9:00 a.m. respectively, measured from the fourth quarter of 1993 to the fourth quarter of 1994. The Committee anticipated that developments Present: contributing to unusual velocity increases Mr. Greenspan, Chairman could persist during the year and that money Mr. McDonough, Vice Chairman growth within these ranges would be consis- Mr. Broaddus tent with its broad policy objectives. The Mr. Forrestal monitoring range for growth of total domes- Mr. Jordan tic nonfinancial debt was set at 4 to 8 percent Mr. Kelley for the year. The behavior of the monetary Mr. LaWare aggregates will continue to be evaluated Mr. Lindsey in the light of progress toward price level Mr. Parry stability, movements in their velocities, and Ms. Phillips developments in the economy and financial markets. Messrs. Hoenig, Keehn, Melzer, and In the implementation of policy for the Oltman, Alternate Members of the immediate future, the Committee seeks to Federal Open Market Committee increase slightly the existing degree of pressure on reserve positions. In the context of Messrs. Boehne, McTeer, and Stern, the Committee's long-run objectives for Presidents of the Federal Reserve price stability and sustainable economic Banks of Philadelphia, Dallas, and growth, and giving careful consideration Minneapolis respectively to economic, financial, and monetary developments, slightly greater reserve restraint Ms. Minehan, First Vice President, or slightly lesser reserve restraint might Federal Reserve Bank of Boston be acceptable in the intermeeting period. The contemplated reserve conditions are Mr. Kohn, Secretary and Economist expected to be consistent with moderate Mr. Bernard, Deputy Secretary growth in M2 and M3 over the first half of Mr. Coyne, Assistant Secretary 1994. Mr. Gillum, Assistant Secretary Mr. Mattingly, General Counsel Votes for this action: Messrs. Greenspan, Mr. Prell, Economist McDonough, Broaddus, Forrestal, Jordan, Mr. Truman, Economist Kelley, LaWare, Lindsey, and Parry and Ms. Phillips. Votes against this action: None. Absent and not voting: Messrs. Messrs. Beebe, J. Davis, Goodfriend, Angell and Mullins. Promisel, Siegman, Simpson, and Stockton and Ms. Tschinkel, It was agreed that the next meeting of Associate Economists the Committee would be held on Tues- Ms. Lovett, Manager for Domestic day, March 22, 1994. Operations, System Open Market The meeting adjourned at 11:45 a.m. Account 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

140 81st Annual Report, 1994 Mr. Ettin, Deputy Director, Division of from $8 billion to $11 billion the dollar Research and Statistics, Board of limit on intermeeting changes in System Governors Account holdings of U.S. government Mr. Slifman, Associate Director, and federal agency securities for the Division of Research and Statistics, Board of Governors intermeeting period ending with the Mr. Madigan, Associate Director, close of business on May 17, 1994. Division of Monetary Affairs, The Committee then turned to a dis- Board of Governors cussion of the economic and financial Ms. Low, Open Market Secretariat outlook and the implementation of Assistant, Division of Monetary monetary policy over the intermeeting Affairs, Board of Governors period ahead. A summary of the eco- Mr. Bennett, Ms. Browne, Messrs. nomic and financial information avail- T. Davis, Dewald, Lang, Rolnick, able at the time of the meeting and of and Scheld, Senior Vice the Committee's discussion is provided Presidents, Federal Reserve Banks below, followed by the domestic policy of New York, Boston, Kansas City, directive that was approved by the Com- St. Louis, Philadelphia, Minneapolis, and Chicago mittee and issued to the Federal Reserve respectively Bank of New York. The information reviewed at this Mr. Cox, Vice President, Federal meeting indicated that economic activ- Reserve Bank of Dallas ity had expanded appreciably further in Mr. Hilton, Manager, Open Market Operations, Federal Reserve Bank the early months of 1994, despite unusuof New York ally severe winter weather. Consumer spending and construction activity had By unanimous vote, the minutes of been held down to some extent by the actions taken at the meeting of the Fed- adverse weather conditions, but motor eral Open Market Committee held on vehicle production had continued at a February 3-4, 1994, were approved. very strong pace and business fixed The Manager for Foreign Operations investment appeared to be headed for a reported on developments in foreign significant gain in the first quarter. Facexchange markets and on System tory utilization rates had moved still transactions in foreign currencies dur- higher, and labor demand seemed to ing the period February 4, 1994, have grown moderately further. Outside through March 21, 1994. By unani- of a surge in energy prices, increases in mous vote, the Committee ratified these broad indexes of consumer and protransactions. ducer prices remained moderate. The Manager for Domestic Opera- Nonfarm payroll employment was tions reported on developments in unchanged in January but posted a Febdomestic financial markets and on ruary advance comparable to the sizable System open market transactions in monthly increases recorded in the final government securities and federal quarter of 1993. Employment in the seragency obligations during the period vice industries declined slightly in Janu- February 4, 1994, through March 21, ary, then rebounded substantially in Feb- 1994. By unanimous vote, the Commit- ruary. Manufacturing payrolls rose in tee ratified these transactions. January and February, but the number of By unanimous vote, paragraph 1 (a) of jobs in construction declined in both the Authorization for Domestic Open months, reflecting that industry's vulner- Market Operations was amended to raise ability to weather disruptions. The civil- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 141 ian unemployment rate, calculated on levels of late 1993, and new home sales the new basis, fell to 6.5 percent in plunged in January. Sales of existing February; however, the Bureau of Labor homes in January were only slightly Statistics cautioned that a variety of below their high December level. technical factors might have exagger- The limited available evidence ated the decline in joblessness in early pointed to a noticeably smaller gain in 1994. business fixed investment in the first After a sharp rise in the fourth quar- quarter of 1994 after a very large ter, industrial production increased con- increase in the previous quarter. Shipsiderably further in January and Febru- ments of nondefense capital goods ary. Manufacturing output continued to slowed in January, retracing part of the rise, despite the apparent damping effect sharp rise of the fourth quarter, but the of adverse weather on a number of buoyancy of orders in recent months industries. Assemblies of motor vehicles pointed to a further increase in shipremained quite buoyant, accounting for ments in coming months. Sales of heavy more than half of the increase in manu- trucks were strong in January, and the facturing production in the first two backlog of orders for such vehicles months of the year and reaching in remained large. Nonresidential construc- February their highest level since the tion activity, perhaps owing in part to late 1970s. Production of manufactured bad weather, was down in January after goods other than motor vehicles also trending up over most of 1993. The largwas up in the two months, but the est decline was in office building, which advances were smaller than those of had posted large increases in the precedlate 1993. Output of utilities surged in ing two months. January, reflecting the heating demand Business inventories fell slightly in resulting from abnormally cold tempera- January, and stocks were lean, espetures, but a portion of that gain was cially at manufacturing firms. Invenretraced in February. Total utilization of tories in manufacturing rose, retracing industrial capacity increased in both in January part of a large December January and February and was at rela- decline; much of the January increase tively elevated levels, judged by histori- was at producers of machinery, where cal norms; operating rates in primary stocks had fallen to very low levels relaprocessing industries were especially tive to shipments. At both the wholesale high. and retail levels, inventories posted siz- Retail sales were little changed on able decreases. In the wholesale sector, balance over the first two months of the the inventory-to-sales ratio edged down year, with sales recovering in February and had changed little since May of last from a large January decline. By con- year. The inventory-to-sales ratio for the trast, sales of motor vehicles remained retail sector was up slightly, reflecting quite brisk on average over the two weak sales in January. months, despite the California earth- The nominal deficit on U.S. trade in quake and the severe weather. Soaring goods and services, measured on the outlays for home heating contributed new balance-of-payments basis, was to rapid growth of consumer spending slightly smaller in January than the averon services in January. The unusual age for the fourth quarter. However, the weather also affected housing activity; January deficit was substantially larger starts were down considerably in Janu- than that of December, with exports ary and February from the very high down by more than imports. Much of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

142 81st Annual Report, 1994 the reduction in exports was in agricul- reserve conditions associated with this tural goods, aircraft, and gold; the drop directive were expected to be consistent in imports mainly reflected both lower with moderate growth of M2 and M3 quantities and lower prices of imported over the first half of 1994. oil. The limited available data suggested Immediately following the February that economic activity in the major for- meeting, Chairman Greenspan aneign industrial countries picked up in nounced the Committee's decision, and early 1994 after a mixed performance in open market operations were directed the fourth quarter of 1993. toward implementing the slightly less Producer prices of finished goods accommodative degree of reserve preswere boosted in February by a surge in sures sought by the Committee. The energy prices, especially for gasoline federal funds rate increased by lA perand heating oil, that more than offset a centage point and then remained close further decline in food prices. Excluding to VA percent over the intermeeting the food and energy components, pro- period, while adjustment plus seasonal ducer prices edged higher in February; borrowing averaged a little less than for the twelve months ended in Febru- anticipated. ary, producer prices increased by a sig- Most other market interest rates rose nificantly smaller amount than in the considerably more than the federal funds twelve-month period ended in February rate in frequently volatile markets. Mar- 1993. At the consumer level, higher ket participants generally had anticienergy prices in February were offset by pated a tightening of monetary policy, lower food prices. For items other than but the Committee's action apparently food and energy, consumer prices also came a little sooner than had been exrose less over the twelve months ended pected. Strong fourth-quarter economic in February than in the previous twelve data and evidence of solid growth in months. Average hourly earnings of early 1994 were seen as suggesting production or nonsupervisory workers greater credit demands and the need for increased more slowly in February, but higher interest rates in the future to confor the twelve months ended in Febru- tain inflation. Heightened trade tensions ary, the advance was about the same as and unsettled market conditions abroad that recorded for the previous twelve also contributed to market concerns. In months. these circumstances, intermediate- and At its meeting on February 3-4, 1994, longer-term interest rates increased by the Committee adopted a directive that appreciably more than short-term money called for a slight increase in the degree market rates. Major indexes of stock of pressure on reserve positions and that prices had fallen on balance since early did not include a presumption about the February in sometimes volatile trading. likely direction of any adjustment to pol- The trade-weighted value of the dolicy during the intermeeting period. The lar in terms of the other G-10 currencies directive stated that in the context of initially rose following the tightening of the Committee's long-run objectives for monetary policy on February 4. The dolprice stability and sustainable economic lar depreciated over the balance of the growth, and giving careful consideration intermeeting period, however, despite to economic, financial, and monetary de- higher U.S. interest rates and the release velopments, slightly greater or slightly of data indicating generally strong U.S. lesser reserve restraint might be accept- economic activity. The dollar declined able during the intermeeting period. The against both the Japanese yen and the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 143 German mark; trade frictions between pickup in output growth and the slower the United States and Japan and disap- growth of corporate cash flow. Homepointment over the pace of monetary building activity was anticipated to coneasing in Germany appeared to be con- tinue at a relatively brisk pace, spurred tributing factors in the depreciation of by the greater cash-flow affordability the dollar. Bond yields in all the major of housing and the good prospects for foreign industrial countries rose on aver- continued growth in employment and age by almost as much as yields on incomes. The restraint on output growth comparable U.S. bonds. from federal spending cutbacks and M2 declined somewhat and M3 was weak export demand was projected to down sharply in February. A substantial diminish somewhat. In light of the limdrop in mortgage refinancings since late ited margins of slack in labor and prod- 1993 that depressed demand deposits, uct markets that were expected to preand to a lesser extent savings deposits, vail over the forecast horizon, little contributed to the weakness of M2 in further reduction in the core rate of February. M3 also was affected by a inflation was expected. precipitous decline in institution-only In the Committee's discussion of curmoney funds as investors reacted rent and prospective economic developquickly following the monetary tighten- ments, members referred to widespread ing to widening spreads between returns indications of appreciable momentum in on these funds and higher-yielding the economic expansion and decreasing short-term instruments. Data for early margins of unemployed labor and other March pointed to some rebound in both producer resources. While the members monetary aggregates, perhaps owing to continued to anticipate a marked slowportfolio readjustments that involved ing in economic growth from the very sizable net redemptions of bond funds rapid pace of the fourth quarter, some and apparently weaker inflows to stock commented that despite unusually funds. Total domestic nonfinancial debt severe winter weather in large parts of expanded at a moderate rate in recent the country the deceleration in the curmonths. rent quarter appeared to be less than The staff forecast prepared for this they had expected. The indications of meeting suggested that economic expan- continuing strength in aggregate demand sion would slow from the very strong along with a still-accommodative monepace of the fourth quarter but that the tary policy suggested a much reduced economy would advance in 1994 at a risk that the economic expansion would rate slightly in excess of the growth of stall. Indeed, members continued to potential. Consumer spending, which expect moderate economic growth, had tended for some time to outpace though perhaps for a time at a rate someincome growth, was projected to what above the economy's potential. increase at a rate more in line with dis- The amount of resources that could be posable incomes; spending on durable mobilized readily to meet this demand goods, in particular, was projected to was subject to substantial uncertainty, slow markedly as stock-adjustment but the degree of slack in the economy motives diminished and higher interest clearly had diminished considerably in rates exerted some restraint. Business recent quarters to relatively low levels fixed investment was expected to and likely would shrink further. The imincrease less rapidly in 1994, reflecting mediate outlook for inflation remained the diminishing effect of the earlier favorable: Costs and prices were being Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 81st Annual Report, 1994 contained by moderate wage increases, indications of improving regional continuing pressures for productivity- economies. enhancing investment, and competitive A number of members observed that prices from abroad where slack was they expected consumer spending to be still quite ample; and broad measures of relatively well maintained, buttressed money and credit, though strengthening by considerable strength in expenditures over the last half of 1993, remained for motor vehicles and other consumer moderate by historical standards. Never- durables. Reports on retail sales from theless, looking ahead, members were various parts of the country tended to concerned that, unless monetary policy support such assessments, and many were adjusted further from its still- contacts among retailers were expressaccommodative stance, pressures on ing optimism about the outlook for their resources would intensify and inflation sales. At the same time, some members would pick up. observed that a number of factors were Members assessed the outlook for likely to limit the potential strength of economic activity and prices against the consumer spending. They referred in backdrop of sharp changes in bond and, particular to the already low saving rate, to a lesser extent, equity prices over the relatively high consumer indebtedness, intermeeting period. Clearly, the tighten- and recent declines in the value of secuing of reserve conditions announced on rities held by households. More impor- February 4 had played a role in market tantly, however, consumer confidence movements, but other factors had been and spending would continue to depend at work as well. Members variously heavily on the outlook for further stressed the possibility that the backup growth in employment and incomes. in interest rates had reflected much Business investment expenditures stronger aggregate demand, added remained on a solid uptrend as firms uncertainty about the course of interest continued to focus on the need to conrates, influences from foreign exchange trol costs and improve operating effiand foreign capital markets, changes in ciencies in the face of vigorous comtrading strategies by wary participants, petitive pressures. Members also cited and rising inflation expectations. On bal- some examples of investment spending ance, financial conditions were still seen induced by rising demands pressing as supportive of solid economic expan- against limitations in production capacsion, and a number of members referred ity. While business investment had in particular to the more accommodative tended to be concentrated in new, more lending policies of many depository productive equipment, nonresidential institutions; however, some commented construction also had strengthened and on the risk, which they viewed as hav- anecdotal reports from numerous areas ing a low probability, that weakness and tended to confirm more positive nationvolatility in financial markets could at wide statistics. The rising levels of nonsome point have a significantly inhibit- residential construction activity tended ing effect on business and consumer to be concentrated in commercial and confidence and spending. To date, industrial facilities and public works business sentiment was described as projects; the construction of office buildquite positive in most parts of the coun- ings continued to lag but this sector try, and although there were some appeared to have stabilized or perhaps exceptions—notably in California— improved marginally after a long period members commented on numerous of decline. More generally, currently Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 145 positive business attitudes augured well demands, was likely to slow the decline for further growth in overall business in real net exports. A few members cited investment, but on the negative side it growing indications that last year's was noted that further turbulence in NAFTA legislation would have quite financial markets could erode confi- positive effects on U.S. foreign trade, dence with adverse implications for though those effects were still largely in investment spending. Residential con- the future. struction was described as quite strong In the discussion of the outlook for in numerous areas, although overall prices and wages, many of the members housing construction had been held expressed concern about the potential down thus far this year by severe winter for a pickup in inflation if, as they anticiweather in numerous parts of the coun- pated, margins of unemployed resources try. Shortages of skilled construction narrowed further or disappeared. The workers and building materials were members acknowledged that broad meareported in many areas. sures of prices relating to final pur- Despite generally rising final de- chases and of wages currently did not mands, business firms were continuing suggest any increase in inflation. Indeed, to maintain lean inventory positions in in the view of at least some members, their ongoing efforts to hold down costs. those measures still suggested on bal- Nonetheless, with production levels in ance that the inflation trend had retained many industries approaching or reach- a downward tilt thus far. In this connecing full capacity utilization, prices of tion, some commented that the overall some materials and other business pur- performance of the broad measures had chases coming under increasing pres- been somewhat better in recent months sure, and delivery lead times tending to than they had anticipated, especially lengthen at least in some industries, given the very rapid expansion of the efforts to build inventories could be economy over the closing months of expected to materialize and in one view 1993 and the less than expected moderathe potential for such a development tion thus far this year. Developments represented a key upside risk from cur- that had been exerting a favorable effect rent forecasts. In this connection, some on prices included above-trend growth members referred to scattered indica- in productivity, relatively low prices in tions of efforts to increase inventories, world oil markets, and strong competinotably of steel products. Manufacturers tion in many markets from both domesof motor vehicles also were in the pro- tic and foreign firms. Moreover, the cess of rebuilding depleted inventories, strong rise in credit usage that often had though the currently stimulative impact accompanied intensified inflation presof such rebuilding on overall production sures in the past had yet to materialize. was likely to be reversed when motor To date, the pickup in price increases vehicle stocks reached desired levels in had been uneven and had tended to be the months ahead. concentrated in some regions or indus- The foreign trade sector was expected tries and in the early stages of the proto remain a negative factor in the eco- duction process, and a number of memnomic outlook. However, the members bers reported that they saw little change anticipated some improvement in the in inflation trends in their areas. Noneeconomies of major foreign industrial theless, warning signs had emerged of nations which, together with some mod- the prospect of greater inflation, though eration in the growth of domestic final perhaps not over the nearer term. These Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 81st Annual Report, 1994 included increases in a wide range of members cited the very low inflationcommodity prices and anecdotal reports adjusted interest rates in short-term debt from various parts of the country sug- markets as an indicator of excessive gesting a further rise in the number of policy accommodation, and one membusiness firms that were facing some- ber also referred to the rapid growth in what higher prices of materials and other reserves and narrow measures of money purchases and in turn were able, often over an extended period. While a quite for the first time in recent years, to raise accommodative policy stance had been their selling prices. Price and wage pres- entirely appropriate earlier in the ecosures appeared to be especially pro- nomic recovery, when constraints such nounced in the construction industry, as the widespread rebuilding of balance where capacity constraints had been sheets and business restructuring activiencountered in many localities. Mem- ties were strongly inhibiting the expanbers also referred to the potential for sionary forces in the economy, those higher prices in the food and energy constraints had greatly diminished and sectors; low crop carryovers for some the expansion clearly had gained considgrains made food prices vulnerable to erable momentum. In the circumstances, unfavorable growing conditions, should maintaining an accommodative monethey materialize; oil prices currently tary policy could be expected before too were at relative lows but were likely to long to foster growing pressures on come under some upward pressures as labor and capital resources with a resultworld economic growth accelerated and ing pickup in inflation. While actual if political developments led to disrup- inflation remained subdued and credit tions in world supplies. More funda- growth was still damped, it was only mentally, the relatively robust economic a matter of time before the current expansion over the second half of 1993 monetary policy induced a surge in and the further advance in early 1994 credit extensions that could fuel an appeared in the view of many members outbreak of inflation. to have appreciably diminished the gap In these circumstances, the members between actual and potential GDP and concluded that monetary policy needed to have reduced the rate of unemploy- to move fairly quickly toward what ment to a level that could well be not far might be characterized as a more neutral from the natural rate. If this assessment position. Such a policy posture could proved to be correct, further economic not be defined with precision and it expansion at a pace above the econo- undoubtedly varied to some extent with my's potential would bring more indus- changing circumstances. Nonetheless, it tries and the economy more generally to provided a useful conceptual approach capacity production levels before very to policy in current circumstances and long and could well generate growing could be identified as a policy stance inflation thereafter. that sought to foster sustained nonin- In the Committee's discussion of pol- flationary expansion consistent with the icy for the intermeeting period ahead, all economy's potential. The members the members supported a further move generally concluded that such a policy toward a less accommodative policy stance was still some distance away, and stance. An initial move in that direction the key issue facing the Committee was had been made in early February, but not whether but how promptly the the members still viewed monetary pol- necessary policy adjustment should be icy as too stimulative. In this regard, completed. Whether further tightening Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings\ March 147 beyond that point would be needed later members, continued market expectacould not be determined at this time but tions of further actions to tighten reserve would depend on the potential emer- conditions were themselves contributing gence of conditions pointing to an accel- to market instability. Some members eration of inflation. also commented that any policy choice As had been the case at the February incurred the risk of proving to be wrong, meeting, views differed on how much but they viewed the greatest risk at this further current monetary policy should juncture to be a policy that allowed be adjusted at this meeting. Many mem- inflationary pressures to gather momenbers noted that money market interest tum. A policy decision that in hindsight rates would have to rise by a relatively led to the implementation of too much sizable amount from current levels, restraint could be corrected more readily given underlying economic conditions, and with less damage to the economy in but a majority indicated a preference for this view. another small move at this time. Many In the Committee's discussion of poswere concerned about a possible over- sible intermeeting adjustments to the reaction in financial markets that had degree of reserve pressure, a majority of become quite sensitive and volatile since the members indicated a preference for early February. A few also placed some retaining a symmetric directive. While emphasis on their expectations of a con- the probability of an easing action dursiderable slowdown in the rate of eco- ing this period was deemed to be very nomic growth and the possibility that low, the members also did not see as the moderation of the expansion might very likely any firming over the interprove to be somewhat more pronounced meeting period beyond that to be implethan was currently projected. In this mented after today's meeting. The Comview, a degree of caution was advisable mittee had embarked on a course of to permit an assessment of ongoing moving away from an accommodative developments. stance toward one that was more neu- Members who preferred a more siz- tral. The timing of the actions to impleable policy adjustment, or perhaps a ment this policy was not independent of small move through open market opera- the behavior of the economy, of course, tions that was associated with a rise in but it was not as dependent on the the discount rate, believed that the nuances of incoming data as policy increasing risks of greater inflation might be at other times when the course pointed to the need to move more of policy was less clear. Symmetry did promptly and decisively away from a not rule out an intermeeting adjustment policy stance that had become overly of policy by the Chairman on behalf of accommodative. A stronger policy the Committee, as had been done with action at this point would serve to some frequency in the past when that underscore the Committee's commit- seemed warranted by intermeeting ment to its price stability objective and developments. Members who favored would help to counteract what some an asymmetric directive observed that members interpreted as a significant such a directive seemed more consistent increase in inflationary expectations with the current thrust of monetary polsince earlier in the year. A reduction in icy toward less accommodation and the such expectations would over time have related need to respond promptly to indibeneficial implications for bond markets cations of accelerating inflation. These and the economy. In the view of some members indicated, however, that they Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

148 81st Annual Report, 1994 could support a symmetric directive that contracts and orders point to a sizable was associated with the prospect of increase in business fixed investment but at a rate well below that for the fourth quarter of intermeeting consultations. 1993. The nominal deficit on U.S. trade in At the conclusion of the Committee's goods and services in January was slightly policy discussion, all but two of the smaller than the average in the fourth quarmembers indicated that they could ter. Increases in broad indexes of consumer accept a directive that called for a slight and producer prices have remained moderate increase in the degree of pressure on in recent months despite a surge in energy prices. reserve positions and that did not Most market interest rates have risen coninclude a presumption about the likely siderably since the Committee meeting on direction of any adjustment to policy February 3-4, 1994. In foreign exchange during the intermeeting period. Accord- markets, the trade-weighted value of the dolingly, in the context of the Committee's lar in terms of the other G-10 currencies long-run objectives for price stability depreciated over the intermeeting period. M2 declined somewhat and M3 was down and sustainable economic growth, and sharply in February, but data for early March giving careful consideration to ecopoint to some rebound in both aggregates. nomic, financial, and monetary devel- Total domestic nonfinancial debt has exopments, the Committee decided that panded at a moderate rate in recent months. slightly greater or slightly lesser reserve The Federal Open Market Committee restraint might be acceptable during the seeks monetary and financial conditions that will foster price stability and promote susintermeeting period. According to a staff tainable growth in output. In furtherance analysis, the reserve conditions contemof these objectives, the Committee at its plated at this meeting would be consis- meeting in February established ranges for tent with moderate growth in M2 and growth of M2 and M3 of 1 to 5 percent and M3 over the first half of 1994. 0 to 4 percent respectively, measured from At the conclusion of the meeting, the the fourth quarter of 1993 to the fourth quarter of 1994. The Committee anticipated that Federal Reserve Bank of New York was developments contributing to unusual velocauthorized and directed, until instructed ity increases could persist during the year otherwise by the Committee, to execute and that money growth within these ranges transactions in the System Account in would be consistent with its broad policy accordance with the following domestic objectives. The monitoring range for growth of total domestic nonfinancial debt was set at policy directive: 4 to 8 percent for the year. The behavior of the monetary aggregates will continue to be The information reviewed at this meeting evaluated in the light of progress toward suggests that economic activity has ex- price level stability, movements in their panded appreciably further in the early velocities, and developments in the economy months of 1994. Severe weather and changes and financial markets. in statistical methodology distorted move- In the implementation of policy for the ments in official labor market data in January immediate future, the Committee seeks to and February, but it appears that employ- increase slightly the existing degree of presment increased somewhat on balance over sure on reserve positions. In the context of the two months and that unemployment fell. the Committee's long-run objectives for Industrial production also increased substan- price stability and sustainable economic tially over this period after a sharp rise in the growth, and giving careful consideration to fourth quarter. Consumer spending and hous- economic, financial, and monetary develing activity apparently have been held down opments, slightly greater reserve restraint to some extent by adverse weather in Janu- or slightly lesser reserve restraint might ary and February; retail sales were little be acceptable in the intermeeting period. changed on balance over the two months and The contemplated reserve conditions are housing starts fell considerably. Trends in expected to be consistent with moderate Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 149 growth in M2 and M3 over the first half of would come after a similar announce- 1994. ment following the most recent meeting in early February, would in effect set a Votes for this action: Messrs. Greenspan, precedent that would tend to limit the McDonough, Forrestal, Kelley, La Ware, Lindsey, and Parry and Ms. Phillips. Votes Committee's future options. A majority against this action: Messrs. Broaddus and of the members concluded, however, Jordan. that while the Committee was not making a formal, binding decision on this Messrs. Broaddus and Jordan dis- issue at this meeting, the Chairman sented because they preferred a stronger would be authorized to release a short move toward a more neutral policy press statement regarding today's policy stance. In their view, the recent sharp decision. A useful purpose would be increases in longer-term interest rates served in reducing or eliminating potenindicated clearly that inflationary expec- tial misinterpretation of the Committations were rising and that the prin- tee's policy decision and the related risk cipal policy risk had become one of of overreactions in financial markets at a remaining accommodative for too long time of considerable uncertainty and a period. In this environment, they volatility in those markets. The news of believed that a more aggressive move the Committee's action would be conwould underscore the Committee's com- veyed unambiguously to the entire pubmitment to fostering sustainable longer- lic at once and not filtered through the term growth and reduce the risk that financial markets' interpretation of open a highly restrictive policy might be market operations. Moreover, the Comrequired at a later date to contain mittee would retain the option of speciinflation. fying the exact contents and timing of The Committee then turned to a future policy announcements, including discussion of the desirability of making intermeeting policy actions. Most of the an immediate announcement of today's members concluded that the advantages policy decision. All the members to the public of prompt release today favored prompt disclosure in principle, outweighed the potential disadvantages. but some expressed reservations about It was agreed that the next meeting announcing today's decision immedi- of the Committee would be held on ately after the meeting. These members Tuesday, May 17, 1994. This meeting preferred to consider a decision on adjourned at 2:05 p.m. announcements of policy actions in the At a telephone conference held on context of a broad range of disclosure March 24, 1994, the Committee issues, some of which had yet to be approved a temporary increase, from fully explored. Some stressed that they $700 million to $3.0 billion, in the Fedremained concerned about the inhibiting eral Reserve System's reciprocal cureffects of some types of disclosures on rency ("swap") arrangement with the the Committee's deliberations, and one Bank of Mexico. Concurrently, the U.S. member emphasized that the Committee Treasury announced a $3 billion swap also needed to consider the implications arrangement between the U.S. Exchange of immediate announcements of changes Stabilization Fund and the Bank of in open market policy for the role of Mexico and the Mexican Ministry of the discount rate. Several members Finance. The System's action was effeccommented that announcing a decision tive immediately and, subject to certain reached at this meeting, because it conditions, it authorized the Bank of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 81st Annual Report, 1994 Mexico to draw on the enlarged Canada was extended by one year to arrangement until April 29, 1994, with December 15, 1995. full repayment of any drawings to be made by July 29, 1994. Votes for this action: Messrs. Greenspan, McDonough, Forrestal, Jordan, Kelley, A permanent increase in the System's LaWare, Lindsey, and Parry and Ms. swap arrangement with the Bank of Phillips. Vote against this action: Mr. Mexico had been discussed at the Com- Broaddus. mittee's recent meeting on March 22, and it had been contemplated at that The enlarged foreign exchange swap meeting that the Committee would vote arrangement with the Bank of Mexico on such an increase during April in the constituted part of a new trilateral forcontext of the establishment of a consul- eign exchange swap facility established tative mechanism involving the finance in connection with the newly formed ministries and central banks of Canada, consultative group called the North Mexico, and the United States. How- American Financial Group and comever, the assassination of a major candi- prised of the Finance Ministers and Cendate for the presidency of Mexico on the tral Bank Governors of Canada, Mexico, evening of March 23 had prompted the and the United States. The purpose of closing of Mexican financial markets on this standing facility is to expand the March 24 and had given rise to concerns pool of potential resources available to regarding possible financial market dis- the monetary authorities of each country order in reaction to unfolding political to maintain orderly exchange markets. developments when those markets Its establishment at this time was reopened. Against this background, the deemed desirable in light of the out- Committee decided to join the U.S. look for expanding and increasingly Treasury in an action that would help interdependent economic relationships confirm continued U.S. support for among the three economies after the Mexico's economic policies at a poten- successful conclusion of the North tially critical time for Mexican financial American Free Trade Agreement. markets. The components of the trilateral facility include (1) swap agreements between Votes for this action: Messrs. Greenspan, the United States and Mexico for up to McDonough, Forrestal, Jordan, Kelley, $6.0 billion, with the Treasury and the La Ware, Lindsey, and Parry and Ms. Phillips. Vote against this action: Mr. Federal Reserve each participating up to Broaddus. $3.0 billion; (2) an expansion of the swap agreement between the Bank of Effective April 26, 1994, the Commit- Canada and the Bank of Mexico to tee by notation vote approved a recom- Can$1.0 billion; and (3) a reaffirmation mendation by Chairman Greenspan to of the existing swap agreement between establish an enlarged swap arrangement the Bank of Canada and the Fedof $3 billion on a permanent basis. As eral Reserve in the amount of $2.0 bilis the case for all swap arrangements, lion, with the above-noted maturity this arrangement is subject to periodic extension. annual review after an initial maturity Mr. Broaddus dissented because he date of December 15, 1995. Simulta- was concerned about the appropriateneously, the maturity date of the Sys- ness of the System's involvement in this tem's swap facility with the Bank of type of foreign currency operation. In Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 1 51 his view, the System's swap network Reserve System in Washington, D.C., raised a number of broad issues that he on Tuesday, May 17, 1994, at 9:00 a.m. felt the Committee needed to review at some point. Accordingly, he would not Present: favor increasing any existing swap Mr. Greenspan, Chairman arrangement until such a review had Mr. McDonough, Vice Chairman Mr. Broaddus taken place. Mr. Forrestal At a telephone conference on Mr. Jordan April 18, Committee members reviewed Mr. Kelley economic and financial developments Mr. LaWare since the March meeting and discussed Mr. Lindsey the desirability of taking further action Mr. Parry Ms. Phillips to move policy away from its still accommodative stance. Broad indicators Messrs. Hoenig, Keehn, and Melzer, of economic activity, supported by Alternate Members of the Federal widespread anecdotal evidence, pointed Open Market Committee to considerable momentum in economic activity and further reductions in Messrs. Boehne, McTeer, and Stern, already limited margins of unutilized Presidents of the Federal Reserve labor and other production resources. In Banks of Philadelphia, Dallas, financial markets, sharp declines in bond and Minneapolis respectively and stock prices suggested that specula- Ms. Minehan, First Vice President, tive excesses had been reduced, and Federal Reserve Bank of Boston ongoing portfolio realignments probably were shifting long-term financial assets Mr. Kohn, Secretary and Economist to firmer hands. As a result, financial Mr. Bernard, Deputy Secretary markets now appeared to be less likely Mr. Coyne, Assistant Secretary to overreact to adverse developments or Mr. Gillum, Assistant Secretary to policy actions. In the circumstances, Mr. Mattingly, General Counsel Mr. Patrikis, Deputy General Counsel the members supported the Chairman's Mr. Prell, Economist decision to reduce the degree of accom- Mr. Truman, Economist modation in reserve markets slightly further at this time rather than to await the Messrs. Goodfriend, Lindsey, next regularly scheduled meeting in Promisel, Simpson, and Stockton mid-May. Some members expressed the and Ms. Tschinkel, Associate view that an increase in the discount rate Economists would provide a desirable supplement to this policy action. Ms. Lovett, Manager for Domestic Operations, System Open Market Account Donald L. Kohn Mr. Fisher, Manager for Foreign Secretary Operations, System Open Market Account Meeting Held on Mr. Ettin, Deputy Director, Division of May 17, 1994 Research and Statistics, Board of Governors A meeting of the Federal Open Market Mr. Slifman, Associate Director, Committee was held in the offices of Division of Research and the Board of Governors of the Federal Statistics, Board of Governors Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

152 81st Annual Report, 1994 Mr. Madigan, Associate Director, monetary policy over the intermeeting Division of Monetary Affairs, period ahead. A summary of the eco- Board of Governors nomic and financial information avail- Ms. Johnson, Assistant Director, able at the time of the meeting and of Division of International Finance Ms. Low, Open Market Secretariat the Committee's discussion is provided Assistant, Division of Monetary below, followed by the domestic policy Affairs, Board of Governors directive that was approved by the Committee and issued to the Federal Reserve Mr. Bennett, Ms. Browne, Messrs. Bank of New York. Davis, Lang, Rolnick, The information reviewed at this Rosenblum, and Scheld, Senior meeting suggested that economic activ- Vice Presidents, Federal Reserve ity had expanded substantially on bal- Banks of New York, Boston, Kansas City, Philadelphia, ance thus far in 1994. Favorable busi- Minneapolis, Dallas, and Chicago ness expectations and buoyant consumer respectively sentiment in the context of stronger gains in employment appeared to have Mr. Judd and Ms. White, Vice sustained strong growth in domestic Presidents, Federal Reserve Banks final demand. Broad measures of inflaof San Francisco and New York tion had remained subdued and labor respectively cost increases had been moderate, Messrs. Altig and Coughlin, Assistant Vice Presidents, Federal Reserve though prices of industrial materials had Banks of Cleveland and St. Louis continued to rise. respectively Nonfarm payroll employment increased sharply in March and April, in By unanimous vote, the minutes of part reflecting a rebound in industries the meeting of the Federal Open Market affected by earlier severe winter Committee held on March 22, 1994, weather; for the first four months of the were approved. year, the average monthly rise exceeded The Manager for Foreign Operations the improved pace of the fourth quarter. reported on developments in foreign Further large advances in employment exchange markets and on System open in the March-April period were remarket transactions in foreign curren- corded in the services sector, notably at cies during the period March 22, 1994, personnel supply services firms; hiring through May 16, 1994. By unanimous in construction was strong after earlier vote, the Committee ratified these weather-related losses; and the number transactions. of jobs in manufacturing continued to The Manager for Domestic Opera- expand, although at a somewhat slower tions reported on developments in do- pace than in previous months. The mestic financial markets and on System civilian unemployment rate registered open market transactions in government another slight decline in April, to securities and federal agency obliga- 6.4 percent, and the average workweek tions during the period March 22, 1994, of production or nonsupervisory workthrough May 16, 1994. By unanimous ers remained at an unusually high level. vote, the Committee ratified these Industrial production was up appretransactions. ciably further in April, with increases The Committee then turned to a dis- widespread across sectors. The pace cussion of the economic and financial of motor vehicle assemblies slowed, outlook and the implementation of but much of the indicated slowdown Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 153 reflected the effects of seasonal adjust- two months of the year. For the first ment, which called for increases at a quarter as a whole, inventories rose at a time when manufacturing operations slightly slower pace than in the second already were at levels close to capacity. half of last year. In manufacturing, the Output of public utilities fell again, as accumulation in the first quarter retraced electricity generation dropped with the much of the drawdown that had taken return to less severe weather patterns. place in previous months; the inventory- Rates of industrial capacity utilization to-shipments ratio, already at a low had risen rapidly in recent months level, edged still lower. Wholesale and were at very high levels in many inventories were down on balance over industries—especially in motor vehicles, the first quarter, with a large March petroleum refining, lumber, and primary decline more than retracing increases metals. earlier in the year; the ratio of inven- Retail sales were estimated to have tories to sales was well below the range fallen in April after two months of very prevailing over the last several years. large increases. Despite the April de- Retail inventories expanded modestly in cline, which was widespread by type of the first quarter, and the inventory-toretail outlet, outlays were considerably sales ratio fell slightly. above the first-quarter average. Sales of The nominal deficit on U.S. trade in new and existing homes posted sig- goods and services was larger on avernificant gains in March although they age in January and February than it had remained below their fourth-quarter been in the fourth quarter. The value of averages. Housing starts decreased exports in the January-February period slightly in April but were well above the was sharply below the unusually strong depressed winter pace. The third con- level in the fourth quarter but was secutive monthly gain in multifamily slightly higher than the levels recorded starts was more than offset by a decline in the first three quarters of 1993. in single-family starts. Exports were down in virtually all major Real business fixed investment con- trade categories; one important exceptinued to increase rapidly in the first tion was semiconductors, for which quarter, but at a less robust pace than in exports continued to trend higher. the fourth quarter of 1993. Outlays for Imports in the two-month period fell producers durable equipment posted by less than exports; nearly all of the another sizable advance, spending for decline reflected reduced oil imports. computing equipment surged again, and Available indicators for the first quarter purchases of most other types of equip- pointed to recovery in economic activity ment also continued to trend up. More- at a moderate pace on average in the over, business demand for automobiles major foreign industrial countries. Signs and trucks remained strong. Outlays of recovery ranged from quite tentative for nonresidential structures declined in Japan to relatively well established in sharply in the first quarter, although con- the United Kingdom and Canada. struction activity showed some recovery Indexes of consumer and producer in March after the disruptions associated prices had increased slightly thus far in with severe weather during January and 1994. In April, consumer prices posted February. their smallest rise since January; food Business inventories declined in prices were up a bit further, but energy March, reversing part of the large run-up prices retraced their March run-up. in stocks that had occurred in the first Excluding the food and energy compo- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 81st Annual Report, 1994 nents of the index, consumer prices to economic, financial, and monetary deedged up in April, and over the twelve velopments, slightly greater or slightly months ending in April these prices lesser reserve restraint might be acceptincreased less than they had over the able during the intermeeting period. The previous twelve months. Producer prices reserve conditions associated with this of finished goods declined a little in directive were expected to be consistent April as prices of finished foods and with moderate growth of M2 and M3 energy moved down; for items other over the first half of 1994. than food and energy, prices were up Immediately after the meeting, open slightly in April and for the twelve market operations were directed toward months ending in April. At earlier stages implementing the slightly less accomof processing, the index of producer modative degree of reserve pressure prices of crude materials other than food sought by the Committee. Subsequently, and energy was substantially above its on April 18, against the background of year-ago level, despite a small drop in incoming data suggesting considerable April. At the intermediate stage, the momentum and diminishing slack in the prices of some important construction economy and of indications that finanmaterials had increased sharply al- cial markets were less likely to be destathough, overall, prices of nonfood, non- bilized by a further policy action, the energy goods had risen only modestly degree of accommodation in reserve over the past twelve months. pressures was reduced a little further. Increases in labor costs continued to The federal funds rate rose XA percentmoderate in early 1994. The employ- age point, to V/i percent, after the initial ment cost index for private industry policy action; following the second workers rose more slowly in the first policy move, the funds rate went up quarter of 1994 than in any quarter another XA percentage point and generof 1993. The slowdown reflected more ally remained near 33A percent. Over the moderate growth in both wages and intermeeting period, adjustment plus salaries and benefit costs. Hourly com- seasonal borrowing averaged slightly pensation increased at a slightly slower above anticipated levels. pace over the twelve months ending in Most market interest rates increased March 1994 than over the previous year. by more than the federal funds rate over In April, average hourly earnings of pro- the period since the March meeting, duction or nonsupervisory workers on with the largest increases occurring at nonfarm payrolls increased moderately intermediate maturities. Weakness in the after having changed little over Febru- dollar as well as the release of data ary and March. suggesting considerable vigor in eco- At its meeting on March 22, 1994, nomic activity appeared to have contribthe Committee adopted a directive that uted to the upward pressure on market called for a slight increase in the degree rates. The bank prime rate was raised of pressure on reserve positions and that 3A percentage point, to 63A percent, did not include a presumption about the while major indexes of stock prices fell likely direction of any adjustment to pol- substantially. icy during the intermeeting period. The In foreign exchange markets, the directive stated that in the context of trade-weighted value of the dollar in the Committee's long-run objectives for terms of the other G-10 currencies price stability and sustainable economic declined somewhat further on balance growth, and giving careful consideration over the intermeeting period. The dol- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 155 lar's depreciation occurred despite the tions caused by adverse weather condiimplementation of less accommodative tions earlier in the year, would expand policy actions in the United States and in the second half of 1994 at a rate close monetary easing moves in several key to the growth of the economy's potenforeign countries. Market concerns tial. Consumer spending, which had outabout political developments in Japan as paced gains in household income for well as a worsened outlook for progress some time, was projected to slow to a toward more open trading relationships growth rate more in line with the expanand for a more stimulative fiscal policy sion of income; with pent-up demands in that country contributed to downward apparently reduced and somewhat pressure on the dollar. Against the back- higher interest rates exerting a damping drop of a falling dollar, U.S. authorities effect, much of the slowing was exconducted intervention operations on pected to be centered on outlays for April 29 and again on May 4. The latter durable goods. Business fixed investoperations were coupled with a state- ment would be restrained by the slower ment by Treasury Secretary Bentsen growth of business output and the assoindicating that intervention was being ciated moderation of corporate cash undertaken in response to recent move- flows but would continue to advance at ments in exchange markets that had a faster rate than overall economic activgone beyond what could be justified by ity. Homebuilding was projected to economic fundamentals and was being remain at a pace that was relatively conducted in concert with operations by robust compared with the rate of recent other major countries. Subsequent to years, though a bit below that of the these actions, the dollar retraced part of fourth quarter. The restraint on output its earlier decline. growth from federal spending cutbacks Growth of M2 and M3 turned up, on and weak export demand was expected balance, in March and April despite the to diminish somewhat. In light of limrising short-term opportunity costs of ited margins of slack in labor and prodholding deposits. The strengthening of uct markets over the forecast horizon, these aggregates seemed to be related to little or no further reduction in the core a reassessment by households of the rate of inflation was anticipated. relative attractiveness of investing in In the Committee's discussion of capital market instruments; capital current and prospective developments, losses sparked substantial net redemp- members commented on widespread tions at bond mutual funds over March indications, both statistical and anecand April that were accompanied by a dotal, of considerable momentum in the surge in flows to retail money market economic expansion. Business activity funds and slower runoffs of small time seemed to be rebounding smartly from deposits. For the year through April, M2 the disruptive effects of unusually expanded at a rate somewhat below the severe winter weather, and it appeared middle of its range for 1994, and M3 at that the expansion over the first half of a pace somewhat above the lower end of the year was likely to be a little stronger its range. Total domestic nonfinancial than had been expected at the time of debt continued to expand at a moderate the March meeting. A deceleration in rate over recent months. activity still seemed to be in train for the The staff forecast prepared for this second half, but the extent of such a meeting suggested that economic activ- slowing was an important source of ity, after rebounding from the disrup- uncertainty in the outlook. The members Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 81st Annual Report, 1994 continued to see moderate growth at a most clearly evident in interest-sensitive rate in line with or slightly above the sectors, including motor vehicles, other economy's potential as the most likely durable goods, and housing. The rise in prospect, but the overall momentum of interest rates over the course of recent the expansion and the still accommoda- months was cited by business contacts tive stance of monetary policy suggested as a potential source of restraint on that there was an appreciable risk of interest-sensitive expenditures, but thus faster growth for a period, with conse- far relatively few contacts had reported quent implications for greater pressures actual examples of adverse interest rate on resources. At the same time, the effects on spending. While higher rates members saw relatively few signs of the would constrain aggregate demand kinds of imbalances that would pose a going forward, their effects probably significant downside potential for the would be offset in part by more aggreseconomy, although some cautioned that sive lending practices at banks and other the rise in long-term interest rates, institutions. At the same time, reports of recently weaker data on production and industries that were operating at or near sales, and continuing anxiety about job capacity limits were becoming more security in an environment of corporate numerous, and capacity constraints were restructuring contributed elements of said to be limiting some sales. fragility to what was otherwise a healthy With regard to the outlook for key outlook. The near-term prospects for sectors of the economy, consumer exinflation were favorable. Wage and price penditures were viewed by many memtrends generally remained moderate; the bers as likely to be well maintained, persisting high rate of business invest- particularly for motor vehicles and other ment bode well for further enhance- consumer durables. Reports from variments of productivity; and competitive ous parts of the country indicated that pressures, including those from im- sales had tended in many areas to exported goods, were restraining efforts by ceed retailers' expectations by a considfirms to raise prices. The members were erable margin in recent months. Some concerned, however, that in an environ- members noted, however, that sales had ment in which slack in the economy been less ebullient since late winter and already had been reduced to a fairly low cited factors that might work to restrain level and could decline further in the somewhat the growth of consumer quarters ahead, inflation could begin spending. These included high and risto rise unless monetary policy were ing debt levels, declines in household adjusted further from its accommoda- wealth owing to the drop in stock and tive stance. bond prices, and the effects on con- In their comments about develop- sumer confidence of ongoing workforce ments across the nation, members took reductions associated with business note of the considerable strength in restructuring. Higher interest rates also economic conditions in many parts of might limit the pace at which pent-up the country. However, they also recog- demands would continue to be satisfied. nized that some parts of the nation were On balance, in the view of a number of experiencing relatively subdued growth members, growth in consumer spending and that economic activity remained seemed likely to moderate to a pace depressed in other areas such as South- close to the growth in incomes. ern California and Hawaii. The strong Members expected business fixed forward momentum in the economy was investment to continue to expand at a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 157 pace substantially above that of the winter. The affordability of housing economy as a whole. With production remained high by historical standards, straining capacity limits in a number of and the appeal of home ownership had industries and firms striving for cost sav- been enhanced somewhat by the apparings and productivity improvements to ent firming of house prices over the maintain their competitiveness, real out- past year. In these circumstances, houslays for producers' durable equipment ing activity had been well sustained, were likely to stay on a strong upward although there were some indications trend despite an anticipated deceleration that the higher mortgage rates now prein business output and the recently vailing had begun to damp residential increased cost of external capital associ- investment. ated with higher interest rates and lower The foreign trade sector was expected equity prices. It was noted in this con- to continue to exert some drag on econection that order books at producers nomic growth, but the members saw this of capital equipment had grown con- as likely to lessen as an anticipated siderably. Nonresidential construction gradual pickup in economic activity appeared to be rebounding from the dis- among key trading partners bolstered ruptive effects of unusually severe win- demand for U.S. exports while imports ter weather conditions; however, the pat- were restrained by a projected modtern of construction activity across the eration in the growth of U.S. domestic nation was mixed, with some areas of demand. In the view of one member, the the country displaying considerable export sector would tend to sustain and strength in activity and other areas still perhaps become an important stimulus depressed. The construction of office to growth in the United States as earlier buildings for the most part remained at declines in the dollar, taken in conjuncvery low levels, but anecdotal reports tion with technological improvements indicated that markets for office space, and higher product quality, enhanced the especially those that had been hard hit in competitiveness of U.S. exports. recent years, seemed to be improving In their discussion of the outlook for considerably in some locales. Business prices and wages, the members noted inventories remained quite lean by his- that broad measures of inflation retorical standards, and some reports sug- mained subdued and increases in labor gested that efforts to augment stocks had costs had been moderate. Nevertheless, been negated by strong sales. With sur- they continued to be concerned that vey reports indicating that order back- inflation could begin to rise if growth logs had grown and lead times on mate- in excess of potential were to persist rials deliveries had lengthened, the and margins of unutilized production possibility was increasing that desired resources were to shrink further, or inventory ratios might be adjusted even disappear. Production already had upward and some pickup in inventory reached capacity limits in a number of investment might get under way, espe- industries, including motor vehicles and cially in manufacturing where stocks-to- steel, and prices of some raw materials sales ratios recently had fallen to new and intermediate goods had risen sublows. stantially over the past year. Ongoing Residential construction was indi- efforts to expand production capacity cated to be robust across much of the through productivity-enhancing investcountry, with activity picking up rapidly ment and the hiring of additional workin the aftermath of the unusually severe ers were likely to be of some help in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 81st Annual Report, 1994 meeting growing demands, but an other retarding forces had diminished increasing number of contacts were considerably. The financial health of the reporting that business firms were tak- banking system was greatly improved, ing advantage of opportunities to adjust and banking institutions had evidenced prices upward. There also were indica- a growing willingness to make new tions of shortages of qualified workers loans. Moreover, the demand for bank in some labor markets or industries, but loans, which had been sluggish for sevto date there were only limited signs of eral years, now appeared to be on the upward wage pressures and these did rise. While a series of small steps earlier not seem to signal a near-term emer- this year had already reduced the degree gence of general upward cost pressures of accommodation in monetary policy on prices. Indeed, even with sales and inflation was subdued for the time strong, many business contacts were being, the members were concerned that reporting that intense competition, in continued policy accommodation could part from imports, was curbing or negat- be expected to lead before long to growing efforts to raise prices. Firms were ing pressures on production resources continuing to look primarily to improve- and to a fresh outbreak of inflation. ments in productivity and quality to bol- In the circumstances, all the members ster their profit margins, although there agreed that a further tightening action also were reports that price discounting was needed at this point; and, in order to was lessening and that sales promotions better ensure that the remaining degree were becoming less frequent. Price and of policy accommodation had been wage pressures were most clearly evi- largely removed, the adjustment should dent and widespread in the construction fully reflect the Vi percentage point industry, where resource constraints increase in the discount rate that the appeared to be most pronounced. Board of Governors was expected to In the Committee's discussion of approve later in the day. The actions monetary policy for the period until the taken earlier in the year had been modmeeting in early July, the members est in size because of concerns that more favored prompt further action to remove aggressive steps might generate submuch of the remaining accommodation stantial uncertainty and undue disrupin the stance of monetary policy, at least tions in financial markets, with adverse as measured by real short-term interest consequences for the economy. Even rates. Many members commented that though financial markets remained volathe expansion was on a solid and self- tile, speculative sentiment and holdings sustaining basis and appeared to have seemed to have been reduced to a more underlying strength than they marked extent, and financial markets had foreseen earlier. The stimulative appeared to be in a much better position effects of an expansionary monetary pol- to absorb needed policy adjustments. icy had become increasingly apparent— Accordingly, a stronger action probably especially in business purchases of capi- would not produce an unduly adverse tal equipment and consumer spending market response and could well have a on housing, motor vehicles, and other settling effect on the markets. A number consumer durables. At the same time, of members cautioned that the Committhe constraints on economic expansion tee could not be sure that today's policy that had been associated with business actions, along with those implemented restructuring activities, widespread earlier this year, had produced a policy efforts to strengthen balance sheets, and stance that would foster economic Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 159 growth at a sustainable, non-inflationary slightly greater or slightly lesser reserve pace. Thus, the Committee would have restraint might be acceptable during the to remain alert to economic and finan- intermeeting period. According to a staff cial developments that might signal the analysis, the reserve conditions contemneed for further tightening. plated at this meeting would be consis- In the Committee's discussion of pos- tent with modest growth in M2 and M3 sible intermeeting adjustments to the over coming months. degree of reserve pressure, all but one of At the conclusion of the meeting, the the members indicated a preference for Federal Reserve Bank of New York was retaining a symmetric directive. Sym- authorized and directed, until instructed metry would be consistent with a judg- otherwise by the Committee, to execute ment that further policy adjustment transactions in the System Account in likely would not be needed during the accordance with the following domestic intermeeting period ahead and, in par- policy directive: ticular, that additional tightening would not be triggered unless inflation pres- The information reviewed at this meeting suggests that economic activity has sures greater than those currently anticiexpanded substantially on balance thus far pated were to emerge. The adoption of a in 1994. Nonfarm payroll employment symmetric directive would not preclude increased sharply in March and April, in part an intermeeting consultation and pos- reflecting a rebound in sectors affected by sible adjustment by the Chairman on severe winter weather; the civilian unembehalf of the Committee if such were ployment rate fell slightly further in April, to 6.4 percent. Industrial production was up warranted by intermeeting developappreciably in April after a strong rise over ments. One member expressed a prefthe previous two quarters. Advance data on erence for an asymmetric directive. In retail sales indicate a decline in April, after his view, a symmetric directive might very large increases in February and March. be mistakenly interpreted both in the Housing starts fell slightly in April but remained well above the depressed winter United States and abroad as a signal that pace. Orders for nondefense capital goods the Committee believed that policy neupoint to a continued strong uptrend in spendtrality definitely had been achieved and ing on business equipment, while nonresithat there was no need to allow for the dential building has shown some recovery possibility of further tightening. after severe weather disrupted construction during January and February. The nominal At the conclusion of the Committee's deficit on U.S. trade in goods and services policy discussion, all the members indiwidened on average in January and February cated they could support a directive that from the fourth-quarter rate. Increases in called for increasing somewhat the broad indexes of consumer and producer degree of pressure on reserve positions, prices remained moderate through April, taking account of a possible increase in though prices of industrial materials continued to rise. the discount rate, and that did not Market interest rates have posted large include a presumption about the likely additional increases since the Committee direction of any adjustment to policy meeting on March 22, 1994. In foreign during the intermeeting period. Accord- exchange markets, the trade-weighted value ingly, in the context of the Committee's of the dollar in terms of the other G-10 curlong-run objectives for price stability rencies declined somewhat further on baland sustainable economic growth, and ance over the intermeeting period. Growth of M2 and M3 picked up on avergiving careful consideration to ecoage in March and April; for the year through nomic, financial, and monetary develop- April, M2 expanded at a rate somewhat ments, the Committee decided that below the middle of its range for 1994 and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

160 81st Annual Report, 1994 M3 at a pace somewhat above the bottom of Meeting Held on its range. Total domestic nonfinancial debt July 5-6, 1994 has expanded at a moderate rate in recent months. A meeting of the Federal Open Market The Federal Open Market Committee Committee was held in the offices of the seeks monetary and financial conditions that will foster price stability and promote sus- Board of Governors of the Federal tainable growth in output. In furtherance of Reserve System in Washington, D.C., these objectives, the Committee at its meet- beginning on Tuesday, July 5, 1994, at ing in February established ranges for 2:30 p.m. and continuing on Wednesgrowth of M2 and M3 of 1 to 5 percent and day, July 6, 1994, at 9:00 a.m. 0 to 4 percent respectively, measured from the fourth quarter of 1993 to the fourth quarter of 1994. The Committee anticipated that Present: developments contributing to unusual veloc- Mr. Greenspan, Chairman ity increases could persist during the year Mr. McDonough, Vice Chairman and that money growth within these ranges Mr. Blinder would be consistent with its broad policy Mr. Broaddus objectives. The monitoring range for growth Mr. Forrestal of total domestic nonfinancial debt was set at Mr. Jordan 4 to 8 percent for the year. The behavior of Mr. Kelley the monetary aggregates will continue to be Mr. LaWare evaluated in the light of progress toward Mr. Lindsey price level stability, movements in their Mr. Parry velocities, and developments in the economy Ms. Phillips and financial markets. In the implementation of policy for the Messrs. Hoenig, Keehn, and Melzer, immediate future, the Committee seeks to Alternate Members of the Federal increase somewhat the existing degree of Open Market Committee pressure on reserve positions, taking account of a possible increase in the discount rate. Messrs. Boehne, McTeer, and Stern, In the context of the Committee's long-run Presidents of the Federal Reserve objectives for price stability and sustainable Banks of Philadelphia, Dallas, economic growth, and giving careful con- and Minneapolis respectively sideration to economic, financial, and monetary developments, slightly greater reserve Mr. Conrad and Ms. Minehan, First restraint or slightly lesser reserve restraint Vice Presidents, Federal Reserve might be acceptable in the intermeeting Banks of Chicago and Boston period. The contemplated reserve conditions respectively are expected to be consistent with modest growth in M2 and M3 over coming months. Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Votes for this action: Messrs. Greenspan, Mr. Coyne, Assistant Secretary McDonough, Broaddus, Forrestal, Jordan, Mr. Gillum, Assistant Secretary Kelley, LaWare, Lindsey, and Parry and Mr. Mattingly, General Counsel Ms. Phillips. Votes against this action: Mr. Patrikis, Deputy General Counsel None. Mr. Prell, Economist Mr. Truman, Economist It was agreed that the next meeting of Messrs. Beebe, Goodfriend, Lindsey, the Committee would be held on Promisel, Siegman, and Simpson Tuesday-Wednesday, July 5-6, 1994. and Ms. Tschinkel, Associate The meeting adjourned at 12:45 p.m. Economists Ms. Lovett, Manager for Domestic Donald L. Kohn Operations, System Open Market Secretary Account Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July \ 61 Mr. Fisher, Manager for Foreign The Manager for Foreign Operations Operations, System Open Market reported on developments in foreign Account exchange markets and on System open market transactions in foreign curren- Mr. Winn, Assistant to the Board, cies during the period May 17, 1994, Office of Board Members, Board of Governors to July 5, 1994. The Committee ratified Mr. Ettin, Deputy Director, Division of these transactions. Research and Statistics, Board of Governors Votes for this action: Messrs. Greenspan, Mr. Madigan, Associate Director, McDonough, Blinder, Broaddus, Forrestal, Division of Monetary Affairs, Kelley, LaWare, and Parry and Ms. Phil- Board of Governors lips. Votes against this action: Messrs. Mr. Struckmeyer and Ms. Zickler, Jordan and Lindsey. Assistant Directors, Division of Research and Statistics, Board of Messrs. Jordan and Lindsey dissented Governors from this action, although they agreed Ms. Edwards4 and Mr. Oliner,4 that the foreign exchange transactions Economists, Divisions of conducted during the intermeeting Monetary Affairs and Research and Statistics respectively, Board period were authorized under the Comof Governors mittee's rules. Their dissents were based Ms. Low, Open Market Secretariat on their strong reservations about the Assistant, Division of Monetary efficacy of sterilized intervention in Affairs, Board of Governors most circumstances, including those prevailing during the intermeeting period. Mr. Bennett, Ms. Browne, Messrs. Davis, Dewald, Lang, Rolnick, In their view, to the extent that repeated Rosenblum, and Scheld, Senior intervention failed to achieve stated or Vice Presidents, Federal Reserve perceived objectives, questions would Banks of New York, Boston, tend to arise about the credibility of Kansas City, St. Louis, monetary policy more generally. Philadelphia, Minneapolis, Dallas, and Chicago respectively The Manager for Domestic Opera- Messrs. Guentner and Sniderman, tions reported on developments in do- Vice Presidents, Federal Reserve mestic financial markets and on System Banks of New York and open market transactions in government Cleveland respectively securities and federal agency obligations during the period May 17, 1994, to Secretary's Note: Advice had been July 5, 1994. By unanimous vote, the received that Alan S. Blinder had executed his oath of office as a member of the Federal Committee ratified these transactions. Open Market Committee. The Committee then turned to a discussion of the economic and financial By unanimous vote, the minutes of outlook and the implementation of monethe meeting of the Federal Open Market tary policy over the intermeeting period Committee held on May 17, 1994, were ahead. A summary of the economic and approved. financial information available at the time of the meeting and of the Committee's discussion is provided below, followed by the domestic policy directive 4. Attended portion of the meeting relating to that was approved by the Committee the Committee's discussion of the economic outand issued to the Federal Reserve Bank look and its longer-run growth objectives for monetary and debt aggregates. of New York. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

162 87 st Annual Report, 1994 The information reviewed at this that prevented normal seasonal increases meeting suggested that economic activ- in the production of motor vehicles. ity recorded another substantial gain in Growth of output of manufactured the second quarter. Although consumer goods other than motor vehicles and spending and homebuying apparently parts was at a slightly less robust pace had increased at a slower pace, busi- than in the first quarter but close to the ness spending on durable equipment rapid rate seen in 1993; business equipremained quite strong and investment ment and construction supplies continin nonresidential structures rebounded ued to be areas of strength. The overall from a weather-depressed level in the rate of utilization in manufacturing first quarter. In addition, the rate of non- stayed at a high level in May, with most farm inventory investment evidently had major industry groups operating at or picked up in the second quarter. Levels near capacity. In addition to motor of resource utilization had risen further: vehicles, capacity constraints were evi- Factory operating rates were at rela- dent in the petroleum products and nontively high levels, and the slack in electrical machinery industry groups and labor markets had narrowed consider- in some individual product lines in other ably over the first half of the year to industries. what appeared to be very low levels. Real personal consumption expendi- Increases in consumer and producer tures fell on balance in April and May prices had remained moderate in recent after a strong advance earlier in the year, months, but prices of many basic indus- but the level of expenditures for the two trial materials had risen. months combined was a little above the Nonfarm payroll employment ad- first-quarter average. The recent slowvanced somewhat less rapidly in May down in consumer spending in large part after the brisk increases of recent reflected reduced outlays for motor months; however, the average work- vehicles. Spending for durable goods week of production and nonsupervisory other than motor vehicles increased over workers reached its highest level since April and May at about the first-quarter 1987. The reduction in job gains was pace. Outlays for nondurable goods widespread by sector—including busi- were down on balance in April and May, ness services; finance, insurance, and while spending for services in May more real estate; manufacturing; and construc- than reversed a small April decline. tion. Employment in transportation Housing activity had rebounded from rebounded, reflecting the end of a Team- weather disruptions early in the year to a sters strike. The civilian unemployment pace close to the elevated fourth-quarter rate, measured on the new basis intro- rate. Single-family starts edged down duced in January, declined sharply in in May after declining substantially in May, to 6.0 percent; the decline might April but were still at a relatively high have been overstated as a result of sea- level. While the cash-flow affordability sonal adjustment problems, but even of home ownership had fallen since late after correcting for these factors, the last year, it remained at favorable levels unemployment rate had fallen sharply in comparison with recent years. Multisince late 1993. family starts in May were at their high- The rise in industrial production est level in more than three years; most slackened in April and May after strong of the pickup occurred in the South, first-quarter gains. Much of the slowing where vacancy rates had declined was the result of capacity constraints recently. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 163 Shipments of nondefense capital shipments of machinery, especially to goods other than aircraft and parts expanding markets in Asia. The value of posted a further solid gain in May, imports of goods and services was about although the upward trend appeared to the same in April as in March; increases have moderated in recent months. Sales in consumer goods, machinery, and oil of heavy trucks also were strong in April were offset by declines in other cateand May. Shipments of aircraft declined gories. The economies of all the major sharply in April (latest available data), foreign industrial countries expanded retracing much of a March surge. Avail- in the first quarter of 1994. Growth able data on orders for nondefense capi- resumed in Japan, western Germany, tal goods pointed to a continued strong and France, while economic expansion uptrend in business spending on durable continued at a healthy pace in the equipment. Nonresidential construction United Kingdom and Canada. picked up in April and May from a Broad indexes of consumer and proweather-depressed slump in the first ducer prices had risen moderately quarter. through the first five months of the year. Business inventories increased in In May, the rise in the overall index of April, more than reversing a March consumer prices continued to be held runoff; the overall pace of accumulation down by declines in energy prices. remained moderate, and buildups were Excluding the food and energy compolargely concentrated in segments of the nents, the increase in consumer prices in economy where market demand was the twelve months ending in May was robust. In manufacturing, inventories smaller than that for the previous twelve increased in April and May after a small months. Producer prices of finished drawdown in March. The rise in stocks goods continued to edge lower in May, was in line with shipments, and the ratio reflecting further declines in prices of of stocks to shipments stayed at a very finished foods and energy goods. Prolow level. In April (latest available ducer prices for items other than food data), wholesale inventories retraced and energy increased at a faster rate in most of the sizable March drawdown. May, but the change over the twelve- The ratio of inventories to sales in this month period ending in May was very sector remained below the range that small. At an earlier stage of processing, has prevailed in recent years. At the producer prices of crude materials other retail level, inventory stocks again than food and energy registered another edged higher; the inventory-to-sales small decline in May, although the ratio for this sector was well within the index was substantially higher in May range observed over the past year. than a year ago. Furthermore, prices The nominal deficit on U.S. trade in of many basic industrial materials goods and services widened in April but remained under upward pressure. Averwas little changed from the average for age hourly earnings of production or the first quarter; over the first four nonsupervisory workers increased by a months of 1994, the deficit was signifi- larger amount in May than in April, but cantly larger than that recorded in the the rise over the twelve months ended in fourth quarter of last year. The value of May was about the same as in the preexports of goods and services was down vious twelve months. somewhat in April, retracing part of a At its meeting on May 17, 1994, the sharp runup in March. The uptrend in Committee adopted a directive that exports since last fall has been led by called for increasing somewhat the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

164 81st Annual Report, 1994 degree of pressure on reserve positions, ing announcement as signaling that the taking account of a possible increase in System would not take further tightenthe discount rate. The directive did not ing actions as soon as they had anticiinclude a presumption about the likely pated earlier. Incoming data suggesting direction of any further adjustment to sluggish spending and subdued inflation policy during the intermeeting period. tended to confirm these market assess- The directive stated that in the context ments. Late in the intermeeting period, of the Committee's long-run objectives however, bond yields retraced their earfor price stability and sustainable eco- lier declines, partly in association with a nomic growth, and giving careful con- weakening dollar in foreign exchange sideration to economic, financial, and markets and rising commodity prices. monetary developments, slightly greater Most major indexes of equity prices rose or slightly lesser reserve restraint might early in the intermeeting period, but they be acceptable during the intermeeting then moved lower in sympathy with the period. The reserve conditions associ- declines in bond prices and the dollar ated with this directive were expected to and ended the period with small losses. be consistent with modest growth of M2 The trade-weighted value of the doland M3 over coming months. lar in terms of the other G-10 currencies Immediately after the conclusion of fell significantly further on balance over the May meeting, the Board of Gover- the intermeeting period. The renewed nors approved a Vi percentage point decline, which began toward the middle increase in the discount rate, to 3!/2 per- of June, occurred in response to indicacent, and the Committee permitted tions of an improved economic outlook the full amount of the increase to pass abroad, associated increases in foreign through to interest rates in reserve mar- bond yields, and heightened concerns kets. Thereafter, open market operations about possible increases in U.S. inflawere conducted with a view to maintain- tion. Developments suggesting less ing the less acommodative degree of favorable prospects for progress in reserve pressure sought by the Commit- U.S.-Japanese trade negotiations also tee. After the policy change, the federal tended to strengthen the yen against the funds rate rose Vi percentage point, to dollar. 4lA percent, and remained at about that The broad monetary aggregates were level over the intermeeting period. weaker than the Committee anticipated Adjustment plus seasonal borrowing at the time of its previous meeting, with trended higher over the intermeeting both M2 and M3 declining on average period, reflecting the usual seasonal over May and June. The declines pickup in lending activity, and averaged appeared to be related in part to the close to anticipated levels. continuing appeal of capital market Market interest rates on instruments instruments. More generally, however, with more than three-month maturities the rise in short- and long-term interest moved lower immediately following rates since the beginning of 1994, the announcement of the Committee's coupled with the reluctance of banks action, although some very short-term and other depository institutions to interest rates moved up. The commer- adjust their offering rates promptly, had cial bank prime rate also was raised by produced a widening of the opportunity Vi percentage point, to 7 lA percent. Mar- costs of holding deposits and had led ket participants apparently interpreted households to move deposit monies into the policy actions and the accompany- direct and indirect holdings of market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 165 instruments. For the year through June, In the Committee's discussion of curboth M2 and M3 were at the bottom rent and prospective economic developof the Committee's ranges for 1994, and ments, members commented that the total domestic nonfinancial debt had expansion continued to display considexpanded at a moderate rate in the lower erable momentum, with business activhalf of its monitoring range. ity apparently still increasing at a pace The staff forecast prepared for this above the economy's long-run growth meeting suggested that the economy was potential. At the same time, indications operating at a level close to capacity and of some slowing in aggregate demand that the expansion would slow over the had tended to increase over the past few next several quarters to a rate generally months. The extent of that slowing in line with the growth of the economy's remained subject to considerable uncerpotential. To the extent that aggregate tainty, especially in light of somewhat demand tended to expand at a pace that disparate data on employment and could foster higher inflation, it would spending. Nonetheless, it was generally not be accommodated by monetary pol- agreed that, in the context of appropriate icy, and pressures would be generated fiscal and monetary policies, some modin financial markets that would restrain eration in economic growth to a pace domestic spending. Consumer spending, closer to that of the economy's long-run which had been increasing faster than potential was a reasonable expectation. household income for some time, was Such a slowing seemed necessary to expected to moderate as smaller gains forestall a buildup of inflation pressures in employment and income, coupled in the view of many members. A numwith higher interest rates and reductions ber of members emphasized that remainin the value of household financial ing margins of unemployed labor and assets, exerted a restraining influence on other production resources, while difficonsumption patterns. Business fixed cult to assess, now appeared to be quite investment was projected to continue at limited. Although views differed to a brisk pace, although growth would be some degree, the members generally damped somewhat by the expected concluded that the various factors affectdeceleration in economic activity, a ing the course of inflation were likely to growing shortfall of corporate cash flow result, on balance, in little change, or relative to capital outlays, and higher perhaps a small rise, in inflation over the financing costs. The effects of higher 1994-95 forecast horizon. Some memmortgage interest rates were expected to bers regarded the risks of a significant cause some slowing in the relatively divergence from their forecasts of ecorobust pace of single-family homebuild- nomic growth and inflation as fairly ing. The restraint on output growth evenly balanced in either direction, but exerted by weak export demand was most believed that those risks were tilted expected to diminish because of the to the upside. lower value of the dollar and the some- In keeping with the usual practice at what faster recovery now projected in meetings when the Committee considers economic activity abroad. The staff its long-run objectives for growth of the analysis suggested that, with the econ- money and debt aggregates, the memomy already operating close to its long- bers of the Committee and the Federal run potential, no further reduction in the Reserve Bank presidents not currently core rate of inflation was likely over the serving as members provided specific forecast horizon. individual projections of growth in real Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

166 81st Annual Report, 1994 and nominal GDP, the rate of unemploy- veyed more effectively by the Chairman ment, and the rate of inflation for the in his upcoming congressional testiyears 1994 and 1995. The central ten- mony through a discussion of the impordency of the forecasts of the rate of tant factors bearing on trends in expansion in real GDP for 1994 as a economic growth, prices, and unemwhole was 3 to 3lA percent, a little ployment; the uncertainties involved in below the rate of growth estimated for projecting such variables; and the role the first half of the year; for 1995, the of monetary policy in achieving desired projections had a central tendency of economic goals. Committee members 2*/2 to 23/4 percent. With regard to the noted that the Administration's mediumexpansion of nominal GDP, the fore- term outlook contained reasonable esticasts centered on growth rates of 5 Vi to mates of the trend growth in output. 6 percent for 1994 and 5 to 5Vi percent In their review of developments in for 1995. The projections of more mod- different parts of the country and sectors erate growth in economic activity were of the economy, members referred to associated with rates of unemployment indications of continuing growth in in a range of 6 to 614 percent in the regional business activity ranging from fourth quarters of both 1994 and 1995, relatively modest to quite robust across about the same as the average unem- much of the nation; at the same time, ployment rate in recent months. For the some areas such as California continued rate of inflation, as measured by the to experience generally stagnant eco- CPI, the projections had a central ten- nomic conditions. While solid growth dency of 23/4 to 3 percent for 1994 and seemed to characterize the overall econ- 23/4 to VA percent for 1995; both ranges omy, the members saw increasing signs represented a slight increase from the of some slowing in many areas. Busiaverage rate over the past year. Favor- ness and consumer sentiment generally able developments in the food and remained quite positive, although a energy sectors, which had held down number of members commented on a overall inflation measures over the past new note of caution among some of several quarters, were not expected to their business contacts and some shavcontinue and the drop in the dollar ing of industry forecasts for the balance would be exerting upward pressures on of the year. prices in coming quarters. Turning to the key consumer sector, Pursuant to a request from the Chair- members commented on various indicaman of the Senate Banking Committee, tions of some moderation in the growth the members considered extending their of expenditures. Higher interest costs specific forecasts by an additional year. were cited by some business contacts Many expressed reservations about the as constraining purchases of consumer reliability and thus the usefulness of durables, but members also referred to numerical forecasts extending relatively the negative impact of persisting, highly far into the future. Moreover, they were visible cutbacks in workforces by some concerned about misunderstandings of major business firms and of growing specific long-range forecasts in rela- consumer debt. Some members also tion to the Committee's goals and the noted that supply constraints, such as ongoing formulation of monetary pol- limitations on the availability of some icy. The members concluded that, on popular automobile models, had tended balance, the Committee's policy inten- to curb the expansion in sales. Looking tions and expectations would be con- ahead, more moderate growth in con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 1 67 sumer spending seemed likely; apart and that foreign trade, on net, probably from the direct effects of higher interest would make a small contribution to ecorates on such spending, the prospec- nomic growth over the next several tively less ebullient housing sector was quarters. Some noted that business likely to retard demands for household contacts were reporting strong foreign furnishings. demand for various U.S. products. As Business fixed investment was members had noted at previous meetthought likely to continue to provide ings, the North American Free Trade appreciable stimulus to the expansion, Agreement appeared to have stimulated though to a diminishing extent in the increased trade between Mexico and the context of slower overall growth in United States, although it was still too economic activity and higher financing early to gauge the extent of this developcosts. While spending for equipment ment. More generally, the decline in the was likely to moderate considerably foreign exchange value of the dollar and from the extraordinarily rapid increases a somewhat greater strengthening in the recorded over an extended period, economies of major trading partners ongoing business efforts to improve than was expected earlier had enhanced operating efficiencies would probably the prospects for appreciable growth in sustain substantial further growth in U.S. exports, and in the view of at least equipment outlays. Nonresidential con- some members that growth might prove struction expenditures were expected to to be considerably greater than was curpost moderate increases after stagnating rently projected. earlier; in this connection, a number of Members remarked that uncertainties members observed that commercial about remaining margins of slack in the vacancy rates were declining in various economy, accentuated by the change in metropolitan areas and improved the household employment survey, and demand for space was likely to gener- about potential levels of economic activate increased construction activity. ity over the quarters ahead made it par- Although higher interest costs could ticularly difficult to assess the outlook have some restraining effect, financing for inflation. However, based on what for such projects was more readily avail- seemed to be reasonable estimates of able than earlier. The outlook for inven- resource utilization levels and their own tory investment remained uncertain. projections that the rate of economic Some buildup in inventories was occur- growth would slow to a pace nearer the ring, but business firms were continuing economy's growth potential, the memto resist sizable increases and inventory- bers generally concluded that the rate of to-sales ratios remained at unusually low inflation, as measured by the CPI, might levels. Developments that might be remain about unchanged or tilt slightly expected to foster a faster buildup, such higher over the forecast horizon. This as some lengthening of order lead times conclusion took into account the effects and rising pressures on capacity in of the decline in the foreign exchange some industries, had not led to the value of the dollar, the increase in oil strengthening in inventory investment prices on world markets, and the atthat had characterized comparable least-temporary rise in food prices. stages of previous business cycle Some members observed that the overexpansions. all behavior of prices had been some- Members observed that the outlook what more favorable than they would for exports appeared to have improved have predicted, given the strength of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 81st Annual Report, 1994 expansion and the level of resource utili- favor of retaining the current ranges for zation. One explanation could be that M2 and M3 for 1994 and extending increases in overall capacity and produc- those ranges on a provisional basis to tivity stemming from business restruc- 1995. In their evaluation of appropriate turing activities and investments in growth ranges for 1994, the members new equipment and facilities had been anticipated that the projected moderagreater than expected. Comments from tion in the expansion of nominal GDP numerous business contacts around and the likelihood that funds would the country continued to indicate that continue to be diverted from deposits despite the rising costs of many mate- to higher yielding market instruments rials used in the production process, would be reflected in relatively sluggish highly competitive markets rendered it growth in M2 and M3 and further very difficult or impossible to pass these increases in their velocity—the ratio of higher costs through to prices of fin- nominal GDP to these monetary meaished goods. At the same time, labor sures. In the circumstances, expected compensation increases had remained growth in M2 and M3 at rates around subdued despite indications of shortages the lower end of their ranges would be of some types of labor in many parts of consistent with the Committee's overall the country. Exceptions involving siz- objective of fostering financial condiable wage increases continued to be tions that would promote sustainable cited for some industries, such as con- economic growth and contain pressures struction and trucking, that were operat- on prices. Indeed, that objective might ing at full capacity. Nonetheless, in the even imply a shortfall from current absence of an uptrend thus far in con- ranges, but a shortfall could be tolerated sumer price inflation and given continu- and explained if it reflected a greatering uncertainties about job prospects than-expected rise in velocities associdespite large job gains, wage pressures ated with an acceptable economic perhad remained restrained. formance. While growth of the broad In keeping with the requirements of monetary aggregates might pick up the Full Employment and Balanced somewhat next year, it probably would Growth Act of 1978 (the Humphrey- remain damped relative to income. In Hawkins Act), the Committee at this light of this prospect, and of the uncermeeting reviewed the ranges for growth tainties about appropriate monetary in the monetary and debt aggregates that growth in 1995, the Committee decided it had established in February for 1994 to carry forward the 1994 ranges, suband it decided on tentative ranges for ject to a review early next year. The growth in those aggregates in 1995. The Committee noted that the current ranges, current ranges set in February for the which had been reduced greatly over the period from the fourth quarter of 1993 years, could be viewed as long-run to the fourth quarter of 1994 included benchmarks for monetary growth conexpansion of 1 to 5 percent for M2 and sistent with maximum sustainable eco- 0 to 4 percent for M3. A monitoring nomic expansion in a noninflationary range for growth of total domestic non- environment, if there were a return financial debt had been set at 4 to 8 per- to more normal velocity behavior. The cent for 1994. Committee recognized that considerable In the Committee's discussion, which uncertainty about the behavior of velocas in the past tended to focus on M2, all ity was likely to persist and that a broad the members indicated that they were in range of financial and economic indica- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 169 tors, in addition to the monetary aggre- 5 percent and 0 to 4 percent respectively, gates, would need to be monitored in measured from the fourth quarter of 1993 to the fourth quarter of 1994. The Committee determining the appropriate course for anticipated that developments contributing monetary policy. to unusual velocity increases could persist In their review of the Committee's during the year and that money growth monitoring range for the growth of total within these ranges would be consistent with domestic nonfinancial debt, the mem- its broad policy objectives. The monitoring bers agreed that the current range for range for growth of total domestic nonfinancial debt was maintained at 4 to 8 percent for 1994 should be retained. This view took the year. into account staff projections indicating that the debt aggregate was likely to Votes for this action: Messrs. Greenspan, grow within its present range this year, McDonough, Blinder, Broaddus, Forrestal, albeit the lower half of that range. Jordan, Kelley, LaWare, Lindsey, and Considerable sentiment was expressed, Parry and Ms. Phillips. Votes against this however, for reducing the debt monitor- action: None. ing range for 1995. Debt growth was expected to remain relatively subdued in For the year 1995, the Committee association with projections of a slower approved provisional ranges for M2 and rate of expansion in nominal GDP. Low- M3 that were unchanged from the 1994 ering the range would underscore the ranges. The Committee reduced the Committee's view that rapid debt monitoring range for growth in total growth, should it materialize and be sus- domestic nonfinancial debt by 1 percenttained, could have adverse implications age point from 1994 to a range of 3 to for inflation and financial stability. 7 percent. Accordingly, the Committee Members emphasized, however, that voted to incorporate the following stateaction to adjust the debt range did not ment regarding the 1995 ranges in its imply increased Committee emphasis on domestic policy directive: the debt aggregate, and most believed that the risks of any misinterpretation For 1995, the Committee agreed on tentative ranges for monetary growth, measured could be minimized by including an from the fourth quarter of 1994 to the fourth appropriate explanation in the report to quarter of 1995, of 1 to 5 percent for M2 and the Congress. 0 to 4 percent for M3. The Committee provi- At the conclusion of this discussion, sionally set the associated monitoring range the Committee voted to reaffirm the for growth of domestic nonfinancial debt at 3 to 7 percent for 1995. The behavior of the ranges for growth of M2 and M3 and the monetary aggregates will continue to be monitoring range for growth of total evaluated in the light of progress toward domestic nonfinancial debt that it had price level stability, movements in their established in February for 1994. The velocities, and developments in the economy following statement was approved for and financial markets. inclusion in the Committee's domestic policy directive: Votes for this action: Messrs. Greenspan, McDonough, Blinder, Broaddus, Forrestal, Jordan, Kelley, LaWare, Lindsey, and The Federal Open Market Committee Parry and Ms. Phillips. Votes against this seeks monetary and financial conditions that action: None. will foster price stability and promote sustainable growth in output. In furtherance of these objectives, the Committee reaffirmed In the Committee's discussion of polat this meeting the ranges it had established icy for the intermeeting period ahead, in February for growth of M2 and M3 of 1 tomost members endorsed a proposal to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 81st Annual Report, 1994 maintain an unchanged degree of pres- not likely to call for an adjustment to sure in reserve markets. The economy policy. Nonetheless, the risk of inflaseemed to be slowing, although to an tionary momentum in the expansion uncertain extent. Earlier policy tight- remained high, given an economy that ening actions were being reflected in appeared to be operating at or very close the sluggish behavior of money and to full capacity, and they believed that reserves, although the extent of their the probable direction of the next policy effects on spending were still in ques- move was likely to be in the direction of tion. Inflation was a concern, but direct restraint. Some emphasized that such a evidence of additional pressures on costs move should be made promptly in and prices was quite fragmentary. In response to information suggesting a these circumstances, all but one of the greater potential for inflation. In the members concluded that it would be view of many though not all members, prudent for the Committee to assess fur- the costs of policy errors were asymther developments before taking any metrical at this point. The costs of action. One member believed that reversing a policy stance that turned out prompt further tightening was needed to be slightly too tight would be limited to avert the development of greater to somewhat slower economic growth inflation. for a time; the expansion appeared to be In the discussion of the near-term so well established at this juncture that course of policy, the members took the risks of a greater economic adjustaccount of the substantial weakness of ment were remote. On the other hand, the dollar in foreign exchange markets a policy that turned out to be unduly over the course of recent weeks. By stimulative would foster greater inflaitself, the drop in the dollar could put tion and inflationary expectations that some pressure on resources and prices. probably could be reversed only at the However, the members agreed that these cost of considerable disruption in finaneffects needed to be considered in the cial markets and the economy. It also context of overall prospects for the was noted that an asymmetric directive economy and financial markets, and pol- would underscore the Committee's icy should not be focused narrowly on determination to resist greater inflation; the dollar alone. In any case, given the asymmetry could be viewed as a the negative sentiment in the foreign logical extension of the strategy adopted exchange markets, the effects on the dol- in February to move to a policy stance lar that would flow from a small change consistent with averting inflationary in policy were uncertain. Ultimately, the pressures in a firmly established most effective support that monetary expansion. policy could provide for the dollar was Some members indicated a preferto foster the objectives of sustainable ence for retaining a symmetric directive. economic growth and progress toward These members did not rule out the posprice stability. sible need for further policy tightening, With regard to possible changes in but they believed that the risks surroundpolicy during the intermeeting period, ing current forecasts were about evenly a majority favored a change in the weighted in both directions. One memintermeeting instruction in the directive ber expressed strong reservations about from symmetry to asymmetry toward the use of an asymmetric directive on restraint. Some of the members indi- the grounds that such language made cated that near-term developments were intermeeting changes more likely and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 171 in the view of that member markets production of motor vehicles. Growth in conreacted more favorably when actions sumer spending has slowed in recent months after very large increases in February and were taken and announced at regular March. Housing starts have rebounded from meetings. However, all those favoring a winter disruptions to a pace close to the symmetric directive with an unchanged elevated fourth-quarter level. Orders for nonpolicy stance could accept an asymmet- defense capital goods point to a continued ric intermeeting instruction. strong uptrend in spending on business At the conclusion of the Committee's equipment, while nonresidential construction has recovered from a weather-depressed discussion, all but one of the members level in the first quarter. The nominal deficit indicated that they could support a direcon U.S. trade in goods and services was tive that called for maintaining the exist- larger in April than in March but about ing degree of pressure on reserve posi- unchanged from the average for the first tions and that included a bias toward the quarter. Increases in broad indexes of conpossible firming of reserve conditions sumer and producer prices have remained moderate in recent months, though prices of during the intermeeting period. Accordmany basic industrial materials have risen. ingly, in the context of the Committee's On May 17, 1994, the Board of Governors long-run objectives for price stability approved an increase in the discount rate and sustainable economic growth, and from 3 to 3'/2 percent. Most market interest giving careful consideration to eco- rates were up slightly on balance since the nomic, financial, and monetary devel- May meeting; declines in bond yields early in the intermeeting period were offset later opments, the Committee decided that by market reactions to a weakening dollar slightly greater reserve restraint would in foreign exchange markets and rising combe acceptable or slightly lesser reserve modity prices. The trade-weighted value of restraint might be acceptable during the the dollar in terms of the other G-10 currenintermeeting period. The reserve condi- cies was down significantly further on baltions contemplated at this meeting were ance over the intermeeting period, reflecting a sizable drop since early June. expected to be consistent with modest M2 and M3 declined on average over May growth in the broader monetary aggreand June; for the year through June, both M2 gates over coming months. and M3 are at the bottom of their ranges for At the conclusion of the meeting, the 1994. Total domestic nonfinancial debt has Federal Reserve Bank of New York was continued to expand at a moderate rate in authorized and directed, until instructed recent months. The Federal Open Market Committee otherwise by the Committee, to execute seeks monetary and financial conditions that transactions in the System Account in will foster price stability and promote susaccordance with the following domestic tainable growth in output. In furtherance of policy directive: these objectives, the Committee reaffirmed at this meeting the ranges it had established in February for growth of M2 and M3 of 1 to The information reviewed at this meeting 5 percent and 0 to 4 percent respectively, suggests that economic activity recorded measured from the fourth quarter of 1993 to another substantial gain in the second quar- the fourth quarter of 1994. The Committee ter, causing levels of resource utilization to anticipated that developments contributing rise further. Increases in nonfarm payroll to unusual velocity increases could persist employment have been relatively large on during the year and that money growth average in recent months; the civilian unem- within these ranges would be consistent with ployment rate is reported to have declined to its broad policy objectives. The monitoring 6.0 percent in May. The rise in industrial range for growth of total domestic nonfinanproduction slackened in April and May, pri- cial debt was maintained at 4 to 8 percent for marily because capacity constraints pre- the year. For 1995, the Committee agreed on vented normal seasonal increases in the tentative ranges for monetary growth, mea- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

172 81st Annual Report, 1994 sured from the fourth quarter of 1994 to the and informal indication that the meeting fourth quarter of 1995, of 1 to 5 percent for had ended and that there would be no M2 and 0 to 4 percent for M3. The Commitfurther announcements. Since early Febtee provisionally set the associated monitorruary, a statement had been released ing range for growth of domestic nonfinanafter each meeting, all of which had cial debt at 3 to 7 percent for 1995. The behavior of the monetary aggregates will involved policy changes; failure to take continue to be evaluated in the light of some step after this meeting to make progress toward price level stability, move- clear that there was no change to ments in their velocities, and developments announce would lead for a time to in the economy and financial markets. a heightened degree of uncertainty. In the implementation of policy for the With regard to future announcements, immediate future, the Committee seeks to maintain the existing degree of pressure on it was understood that this issue along reserve positions. In the context of the Com- with other public disclosure questions mittee's long-run objectives for price stabil- would be considered at a later meeting. ity and sustainable economic growth, and The Committee's decision regarding giving careful consideration to economic, announcements would then be made financial, and monetary developments, public. slightly greater reserve restraint would or slightly lesser reserve restraint might be It was agreed that the next meeting of acceptable in the intermeeting period. The the Committee would be held on Tuescontemplated reserve conditions are ex- day, August 16, 1994. pected to be consistent with modest growth The meeting adjourned at 12:35 p.m. in M2 and M3 over coming months. Donald L. Kohn Votes for this action: Messrs. Greenspan, Secretary McDonough, Blinder, Forrestal, Jordan, Kelley, LaWare, Lindsey, and Parry and Ms. Phillips. Votes against this action: Mr. Broaddus. Meeting Held on Mr. Broaddus dissented because he August 16, 1994 believed that additional near-term tightening was necessary to contain inflation. A meeting of the Federal Open Market The tightening actions implemented thus Committee was held in the offices of far this year were moderate by histori- the Board of Governors of the Fedcal standards, and he doubted that they eral Reserve System in Washington, would prove sufficient to prevent higher D.C., on Tuesday, August 16, 1994, at inflation given the strength of the eco- 9:00 a.m. nomic expansion, the minimal remaining margins of unemployed labor and Present: Mr. Greenspan, Chairman other producer resources, and inflation- Mr. McDonough, Vice Chairman ary expectations that he feared might Mr. Blinder already be rising. Mr. Broaddus Before the conclusion of this meet- Mr. Forrestal ing, the members discussed the desir- Mr. Jordan ability of announcing the outcome of Mr. Kelley Mr. LaWare a meeting when no action to change Mr. Lindsey policy was taken. Views differed on Mr. Parry this issue, but most of the members Ms. Phillips supported a proposal to provide a brief Ms. Yellen Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 173 Messrs. Conrad, Hoenig, Melzer, and Ms. Meulendyke, Assistant Vice Ms. Minehan, Alternate Members President, Federal Reserve Bank of the Federal Open Market of New York Committee Mr. Weber, Senior Research Officer, Federal Reserve Bank of Messrs. Boehne, McTeer, and Stern, Minneapolis Presidents of the Federal Reserve Banks of Philadelphia, Dallas, Secretary's Note: and Minneapolis respectively Advice had been received that Janet L. Yellen had executed her oath of office as member of the Federal Open Market Mr. Kohn, Secretary and Economist Committee. Mr. Bernard, Deputy Secretary Advice also had been received of the elec- Mr. Coyne, Assistant Secretary tion of Cathy E. Minehan by the boards of Mr. Gillum, Assistant Secretary directors of the Federal Reserve Banks of Mr. Mattingly, General Counsel Boston, Philadelphia, and Richmond as alter- Mr. Patrikis, Deputy General Counsel nate member of the Federal Open Market Mr. Prell, Economist Committee for the period ending Decem- Mr. Truman, Economist ber 31, 1994, and that she had executed her oath of office; and of the election of Messrs. Beebe, Goodfriend, Lindsey, William C. Conrad by the boards of directors Promisel, Siegman, Simpson, of the Federal Reserve Banks of Cleveland Stockton, and Ms. Tschinkel, and Chicago as alternate member of the Fed- Associate Economists eral Open Market Committee for the period ending with the appointment of a president Ms. Lovett, Manager for Domestic for the Federal Reserve Bank of Chicago or Operations, System Open Market December 31, 1994, whichever comes first, Account and that he had executed his oath of office. Mr. Fisher, Manager for Foreign Operations, System Open Market By unanimous vote, the minutes of Account the meeting of the Federal Open Market Committee held on July 5-6, 1994, were Mr. Ettin, Deputy Director, Division of Research and Statistics, Board approved. of Governors The Manager for Foreign Operations Mr. Slifman, Associate Director, reported on developments in foreign Division of Research and exchange markets during the period Statistics, Board of Governors since the July meeting. There were no Mr. Madigan, Associate Director, Division of Monetary Affairs, System open market transactions in Board of Governors foreign currencies during this period, Ms. Low, Open Market Secretariat and thus no vote was required of the Assistant, Division of Monetary Committee. Affairs, Board of Governors The Manager for Domestic Operations reported on developments in do- Messrs. Bennett, Davis, Dewald, mestic financial markets and on System Rosenblum, and Vander Wilt, Senior Vice Presidents, Federal open market transactions in government Reserve Banks of New York, securities and federal agency obliga- Kansas City, St. Louis, Dallas, tions during the period July 6, 1994, and Chicago respectively through August 15, 1994. By unani- Messrs. McNees, Meyer, and mous vote, the Committee ratified these Sniderman, Vice Presidents, transactions. Federal Reserve Banks of Boston, Philadelphia, and Cleveland The Committee then turned to a disrespectively cussion of the economic and financial Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

174 87st Annual Report, 1994 outlook and the implementation of facturing output was up considerably in monetary policy over the intermeeting July, despite a drop in the production of period ahead. A summary of the eco- motor vehicles and parts; outside of nomic and financial information avail- motor vehicles, increases were wideable at the time of the meeting and of spread, with a very large rise recorded the Committee's discussion is provided in the output of durable consumer below, followed by the domestic policy goods. The overall rate of capacity utilidirective that was approved by the Com- zation in manufacturing remained at a mittee and issued to the Federal Reserve high level, with most major industry Bank of New York. groups operating at or near capacity. The information reviewed at this Growth in consumer spending had meeting suggested that the pace of eco- slowed in recent months, owing in part nomic expansion, though still substan- to constraints on the supply of motor tial, might have slowed somewhat vehicles. Nominal retail sales edged recently. Consumer spending continued lower in July after expanding at a to post moderate gains, supported by slightly reduced pace in the second quarrising labor income and favorable senti- ter. Sales at general merchandise and ment. Business outlays for plant and furniture and appliance stores increased equipment remained on a steep uptrend, further in July, while purchases at but higher interest rates seemed to be apparel outlets were down after large having some restraining effect on home- June increases. Sales at automotive dealbuilding activity. Resource utilization erships fell appreciably in July after was at elevated levels, with factories edging lower in the second quarter; operating at relatively high rates and these sales declines apparently resulted labor markets evidencing very low lev- in part from the inability of manufacturels of slack. Increases in broad indexes ers to produce enough of the most popof consumer and producer prices had ular models. Housing starts in July remained moderate in recent months, retraced part of a large June decline but apart from the effects of short-run remained below their elevated rate in swings in the volatile food and energy the fourth quarter of 1993. components. Business fixed investment expanded Nonfarm payroll employment con- in the second quarter at about the same tinued to advance at a robust pace in brisk pace as in the first quarter but well July. Hiring in the services industries below the rate recorded in 1993. In the remained strong, with personnel supply second quarter, a strong recovery in nonagencies posting another sizable in- residential construction activity from the crease. Jobs also were up substantially weather-related decline of the first quarin retail trade and construction. By con- ter offset a marked slowing in business trast, employment in manufacturing was purchases of durable equipment. Much held down by strike activity. The civil- of the slowdown in the growth of outian unemployment rate edged up to lays for equipment reflected a reduction 6.1 percent in July, little changed from in the pace of acquisition of office and the average for the second quarter. computing equipment. Other categories Industrial production rose moderately of durable equipment, with the excepin July after a sizable gain in June; a tion of aircraft and motor vehicles, condecline in electricity generation from its tinued to show solid increases. Most unusually high weather-related level in indicators of business investment activ- June damped the July advance. Manu- ity suggested further large gains in com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 175 ing months: Orders for nondefense capi- in the United Kingdom and Canada and tal goods pointed to a continued strong appeared to have firmed in continental expansion in spending on business Europe. In Japan, growth apparently equipment, and permits for nonresiden- slowed somewhat in the second quarter. tial construction had been rising as well. Trends in broad measures of prices Business inventory investment and labor costs had shown no change slowed in June after a sharp acceleration thus far in 1994. In July, the overall in April and May; for the second quarter index of consumer prices rose at the as a whole, inventories were up sub- same pace as in June, despite larger stantially, but they appeared to have monthly increases in the food and remained broadly in line with sales. In energy components of the index. The manufacturing, recent inventory build- jump in energy prices reflected the ups had been concentrated in a few effects of the earlier run-up in crude oil industries in which orders had been par- prices. For the twelve months ended in ticularly strong. For manufacturing as a July, both the overall index and the whole, the ratio of stocks to shipments index excluding food and energy rose declined from an already low level. At by about the same amounts as during the the wholesale level, the accumulation of preceding twelve-month period. At the inventories in the second quarter was producer level, prices of finished goods largely in durable goods, which were in were up significantly in July after no strong demand; the inventory-to-sales change in June; large price increases ratio for this sector remained below the were recorded for coffee and finished range that has prevailed in recent years. energy goods. Prices of finished goods A large part of the buildup of retail other than food and energy were inventories in the second quarter was in unchanged on balance over June and nondurable goods, especially in stocks July and registered only a small rise of general merchandise. For the retail over the twelve months ended in July. sector as a whole, the inventory-to-sales At an earlier stage of processing, proratio at the end of June was near the ducer prices of intermediate materials high end of the range observed in recent posted another sizable gain in July. years. These prices had increased at a faster The nominal deficit on U.S. trade in rate thus far this year than in 1993, goods and services widened slightly in mirroring a similar pattern in prices of May; for April and May combined, the nonfood, non-energy crude materials. deficit was significantly larger than in The employment cost index for private the first quarter. Exports of goods and industry workers rose more rapidly in services were about the same in May as the second quarter after a sharp slowing in April, with increased shipments of in the first quarter, with the acceleration machinery and industrial supplies offset in compensation largely reflecting a by reduced exports of aircraft and gold. pickup in wage and salary growth. The Imports of goods and services were increase in total compensation over the slightly higher in May than in April. last four quarters was little changed Most of the increase was in imports of from the advance over the previous fouroil, as a consequence of higher prices, quarter period. and consumer goods. The economies of At its meeting on July 5-6, 1994, the all the major foreign industrial countries Committee adopted a directive that continued to expand in the second quar- called for maintaining the existing ter. Growth remained at a healthy pace degree of pressure on reserve positions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

176 81st Annual Report, 1994 but that included a bias toward the pos- declined early in the intermeeting period sible firming of reserve conditions dur- but later recouped its losses and ended ing the intermeeting period. The direc- the period unchanged on balance. The tive stated that in the context of the fluctuations in the dollar partly reflected Committee's long-run objectives for evolving perceptions of the degree to price stability and sustainable economic which U.S. authorities were concerned growth, and giving careful consideration about further weakness in the currency. to economic, financial, and monetary Over the intermeeting period, the dollar developments, slightly greater reserve depreciated slightly against the mark but restraint would be acceptable or slightly edged higher against the yen. lesser reserve restraint might be accept- Both M2 and M3 expanded in July able during the intermeeting period. The after declining on average over May and reserve conditions associated with this June. The growth of M2 in July owed in directive were expected to be consistent part to a sizable increase in liquid deposwith modest growth in M2 and M3 over its, but in light of a resumption of runcoming months. offs at bond mutual funds it also may Open market operations during the have reflected a renewed preference by intermeeting period were directed households for the protection of princitoward maintaining the existing degree pal provided by money market mutual of pressure on reserve positions. Adjust- funds. The strength in M2 showed ment plus seasonal borrowing rose over through to M3, which also was boosted the period in accommodation of the by funds garnered from wholesale usual summer pickup in demands for sources to finance a surge in bank credit. seasonal credit and averaged near antici- For the year through July, M2 and M3 pated levels. The federal funds rate grew at rates slightly above the bottom remained close to 4!/4 percent. of their ranges for 1994. Total domestic Other market interest rates were nonfinancial debt continued to expand at unchanged to up slightly on balance a moderate pace. over the intermeeting period. Rates gen- The staff forecast prepared for this erally edged lower during the early part meeting suggested that the economy was of the period as incoming data were operating close to its long-run capacity viewed by market participants as being and that growth would trend lower over consistent with continued moderation in the next several quarters to a rate generfinal demands and a reduced need for ally in line with the increase in its potenany further monetary tightening actions. tial. Under these circumstances, trends In early August, however, interest rates in the core rate of inflation would not began to erase their previous declines, deviate significantly from recent experipartly in response to the strong employ- ence, but there was a risk that such an ment report, which generated expec- outcome might require further monetary tations that monetary policy might need policy tightening. Growth in consumer to be tightened substantially in the near spending was projected to slow in term. Most major indexes of equity response to smaller gains in employprices were up on balance over the inter- ment and income, some reductions in meeting period, with second-quarter cor- pent-up demands, and the adverse porate profits generally better than had effects on household financial wealth of been expected. earlier increases in interest rates and The trade-weighted value of the dol- declines in stock market prices. Busilar in terms of the other G-10 currencies ness fixed investment, while remaining Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 177 relatively brisk, was expected to decel- reached, its long-run potential. In these erate somewhat over the forecast hori- circumstances, the members saw apprezon, primarily owing to smaller pro- ciable risks of intensifying pressures on jected gains in sales, a growing shortfall resources and higher inflation. Broad of corporate cash flow relative to capi- measures of wages and prices suggested tal outlays, and higher financing costs. little change in inflation trends in recent Single-family housing construction quarters, but worrisome signs of greater would continue to be damped by the inflation were evident in the prices of higher mortgage rates; however, the materials purchased by business firms pace of homebuilding was expected to and in anecdotal reports of successful remain relatively robust compared with efforts by an increasing number of busithe rate of recent years, reflecting still nesses to pass on rising costs by raising unsatisfied demand for home ownership prices. and the relatively favorable cash-flow In their comments on business condiaffordability of housing, as judged by tions in different parts of the nation, the standards of the past two decades. members reported continuing expansion The restraint on economic activity ranging from modest to solid growth in exerted by weak export demand was most regions, however, the rise in busiprojected to diminish as economic con- ness activity appeared to have slowed in ditions improved abroad, given the com- some areas and business conditions had petitiveness of U.S. produced goods. remained essentially unchanged in a In the Committee's discussion of cur- number of others, notably in California. rent and prospective economic develop- In the course of their review, members ments, members commented that final pointed to the general strength in labor aggregate demand appeared to have markets as evidenced, for example, by slowed somewhat in recent months but statistical indications of large and perthat the expansion still seemed to have sisting gains in employment and relaconsiderable underlying momentum. tively low initial claims for unemploy- Indeed, available data on the various ment compensation. These data for the components of spending taken together national economy were reinforced by might in fact be understating the growth reports of sizable employment increases in economic activity; the strength of in numerous industries and parts of the labor markets and measures of gross country and associated indications of domestic income suggested a somewhat growing labor shortages in a number of stronger economic performance. Sus- areas and some occupations. tained expansion, perhaps at a pace The financial climate remained supbroadly in line with or a bit above the portive of sustained economic growth. It economy's long-run growth potential, was clear that the rise in interest rates remained a reasonable expectation, but since the start of the year had had some many members observed that they saw restraining effects on interest-sensitive the risks as being on the upside of such expenditures, notably housing and pera projection in the absence of some fur- haps to a lesser extent some consumer ther policy tightening. Views varied to durables, but to date these effects had some degree with regard to available not been large. Moreover, surveys and margins of unemployed resources, but anecdotal reports suggested that bankthe members agreed that the economy ing institutions were becoming increasprobably was operating very close to, ingly aggressive in their efforts to foster and in the view of some might have loan growth by easing many terms and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 81st Annual Report, 1994 standards for lending. In financial mar- ing costs. The outlook for nonresidential kets more generally, risk spreads had construction, while not ebullient, noneremained relatively narrow and both theless seemed likely to become a more debt and equity markets appeared to be positive factor in fostering further ecowell positioned to provide ample financ- nomic growth. Demand for commercial ing for further economic expansion. real estate space, including office space, In their review of developments in had begun to improve in many areas. key sectors of the economy, members Against this background and given the saw widespread evidence of a well apparent availability of financing for established expansion. Some signs of soundly based projects, nonresidential moderation from the rapid advance in construction activity, while displaying recent quarters had emerged, including considerable local variation, appeared to statistical and anecdotal indications of be on a moderate uptrend for the nation somewhat slower growth of consumer as a whole. spending. Members noted, however, that Prospective developments in foreign an apparently significant portion of trade also were expected to have a posithe recent weakness in sales of motor tive effect on the expansion of the vehicles appeared to be related to supply domestic economy and indeed to offset shortages that were in the process of some of the anticipated slowing in the being corrected. Consumer confidence overall growth of domestic demand. remained at a high level and likely Economic conditions abroad were reflected, among other factors, the improving faster than had been anticistrength in job markets in many parts of pated, and this development along with the country. Nonetheless, more moder- the decline in the foreign exchange ate consumer spending was a reasonable value of the dollar was projected to expectation in the context of a low sav- stimulate faster growth in exports while ing rate, increased consumer debt levels, curbing that of imports over the next and higher interest rates. One member several quarters. commented that some pause in the Members focused on recent inventory expansion of overall consumer spending developments, which in the context of would not be unusual after several quar- some moderation in the growth of final ters of robust growth, and another demand had accounted for a considerremarked that the rise in household able portion of the overall expansion in expenditures had been larger than the GDP reported for the second quarter. increase in household cash incomes by While the rate of inventory accumulaan appreciable margin over the past tion could be expected to slow in the year. current quarter, the extent of that slow- Further marked expansion in business ing and its retarding effects on near-term fixed investment was likely to make a economic growth were uncertain. Partly sizable contribution to continuing eco- on the basis of anecdotal reports, the nomic growth. Ongoing strength in members concluded that much of the orders, including foreign demand, inventory buildup in the second quarter pointed to rapid further growth in expen- was voluntary, thereby reducing the ditures for business equipment over probability of a sharp reversal. Indeed, coming months. Some moderation in the to the degree that delivery lead times growth of such spending appeared likely might edge up in various industries as later in the context of projected slower capacity constraints were encountered, expansion in sales and the rise in financ- stronger efforts to build inventories Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 179 could emerge, especially against the measures of inflation and wages. Those background of currently low inventory- measures, while subject to fluctuations to-sales ratios. Some business contacts largely associated with swings in food reported that they were planning to add and energy prices, had not displayed any to their inventories over the months discernible trend over the past several ahead. At the same time, ongoing busi- quarters. At the same time, signs of ness efforts to maintain relatively lean increasing prices and costs at earlier inventories undoubtedly would tend to stages of production appeared to be limit any broad buildup in inventories. multiplying, including sizable price With regard to the outlook for resi- increases for a wide range of industrial dential construction, members reported commodities. More generally, members some slowing in single-family housing cited a growing number of reports by demand in many parts of the country as business firms of rising input costs and homebuyers reacted to the rise in mort- of more successful efforts by some firms gage interest rates. However, single- to raise prices. It also was noted that the family homebuilding activity was being decline in the value of the dollar would maintained at relatively robust levels in contribute, directly and indirectly, to some areas and multifamily housing some upward pressures on prices. Howconstruction was improving in numer- ever, business contacts, notably at the ous local markets. On balance, the hous- retail level, indicated that competition ing sector probably would contribute remained intense and made it very diffilittle, if any, impetus to the expansion cult to pass on cost increases through but homebuilding was likely to remain higher prices, thereby placing a prewell above its earlier depressed levels. mium on continued efforts to contain costs through improvements in produc- In their assessment of the outlook for tivity. From a differing perspective, one inflation, many members focused on the member noted that decelerating growth prospects for further growth in output in in money measures such as Ml, the the context of diminishing margins of monetary base, and reserves—which unemployed production resources. It had been expanding rapidly for several was difficult to assess the extent of reyears—implied that monetary policy maining margins of available resources, had been moved substantially to curtail in part because of uncertainty about the any increase in inflation pressures, effects on capacity of ongoing efforts to though more action might still be improve productivity through business required. restructurings and sharp increases in business investment expenditures. De- In the Committee's discussion of polspite somewhat differing views, the icy for the intermeeting period ahead, members generally concluded that the the members agreed that a prompt fureconomy probably was operating at a ther tightening move was needed to prolevel that was quite close to, if not vide greater assurance that inflationary already at, its long-run potential. In the pressures in the economy would remain circumstances, many of the members subdued. The members recognized that commented that the risks of intensifying the Committee's earlier policy actions inflation clearly were on the upside if were exerting some restraining effects the economic expansion did not moder- and that further lagged effects from ate from its pace in recent quarters. Indi- those actions could be expected. Even cations of accelerating cost and price so, the underlying strength in demand pressures were not yet visible in broad and narrow margins of slack in the econ- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

180 81st Annual Report, 1994 omy pointed to a considerable risk of degree of pressure on reserve positions, further inflation pressures in the absence taking account of a possible increase of additional policy tightening. in the discount rate, and that did not With regard to the size of the policy include a presumption about possible adjustment, the members were apprised adjustments to policy during the interof a disposition on the part of the Board meeting period. Accordingly, in the conof Governors to approve the ^-percent- text of the Committee's long-run objecage-point increase in the discount rate tives for price stability and sustainable that was pending at several Federal economic growth, and giving careful Reserve Banks. The Committee mem- consideration to economic, financial, bers endorsed a proposal to allow the and monetary developments, the Comeffects of such a rise in the discount rate, mittee decided that slightly greater or should it be approved, to be reflected slightly lesser reserve restraint would fully in reserve markets. Consideration be acceptable during the intermeeting was given to a lesser adjustment in period. According to a staff analysis, the reserve conditions, but the members reserve conditions contemplated at this concluded that a smaller step was meeting would be consistent with modunlikely to be adequate, and on perceiv- est growth in M2 and M3 over coming ing this, financial markets would quickly months. build in further monetary tightening, the At the conclusion of the meeting, the unknown size and timing of which Federal Reserve Bank of New York was would add to market uncertainty and authorized and directed, until instructed volatility. A more decisive policy move otherwise by the Committee, to execute might reduce the need for further tight- transactions in the System Account in ening later, or possibly even avert that accordance with the following domestic need entirely, by moderating or arresting policy directive: the inflationary momentum in the economy more promptly and by helping to The information reviewed at this meeting curb inflationary expectations more suggests that the pace of economic expaneffectively. sion, though still substantial, may have mod- In considering possible adjustments erated somewhat recently, while resource to policy during the period before the utilization has remained at high levels. Nonfarm payroll employment continued to next meeting, all the members favored advance at a robust pace in July, but the moving to a symmetric intermeeting civilian unemployment rate edged up to instruction. Such a directive would be 6.1 percent—about the same as the average consistent with the members' expecta- for the second quarter. Industrial production tions that a further policy action was not rose appreciably over June and July. Growth likely to be needed for some time, given in consumer spending has slowed in recent months, owing in part to constraints on the the substantial nature of today's policy supply of motor vehicles. Housing starts rose move. However, a symmetrical directive in July. Orders for nondefense capital goods would not rule out the possibility of a point to a continued strong expansion in policy move in the event that intermeet- spending on business equipment; permits for ing developments differed substantially nonresidential construction have been rising from expectations. as well. Business inventories registered a large increase in the second quarter, but At the conclusion of the Committee's inventories appeared to have remained policy discussion, all the members indi- broadly in line with sales. The average cated they could support a directive that nominal deficit on U.S. trade in goods and called for increasing somewhat the services was larger in April and May than Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September 181 the average for the first quarter. Increases economic growth, and giving careful conin broad indexes of consumer and pro- sideration to economic, financial, and moneducer prices have remained moderate in tary developments, slightly greater reserve recent months, apart from the effect of restraint or slightly lesser reserve restraint short-run swings in volatile food and energy would be acceptable in the intermeeting components. period. The contemplated reserve conditions Most market interest rates are unchanged are expected to be consistent with modest to up slightly on balance since the July meet- growth in M2 and M3 over coming months. ing. The trade-weighted value of the dollar in terms of the other G-10 currencies was Votes for this action: Messrs. Greenspan, unchanged on balance over the inter-meeting McDonough, Blinder, Broaddus, Forrestal, period. Jordan, Kelley, LaWare, Lindsey, and M2 and M3 turned up in July following Parry and Mses. Phillips and Yellen. Votes declines on average in both aggregates over against this action: None. May and June; for the year through July, M2 and M3 grew at rates slightly above It was agreed that the next meeting of the bottom of their ranges for 1994. Total the Committee would be held on Tuesdomestic nonfinancial debt has continued to day, September 27, 1994. expand at a moderate rate in recent months. The Federal Open Market Committee The meeting adjourned at 12:30 p.m. seeks monetary and financial conditions that will foster price stability and promote sus- Donald L. Kohn tainable growth in output. In furtherance of Secretary these objectives, the Committee at its meeting in July reaffirmed the ranges it had established in February for growth of M2 and M3 of 1 to 5 percent and 0 to 4 percent respec- Meeting Held on tively, measured from the fourth quarter of September 27, 1994 1993 to the fourth quarter of 1994. The Committee anticipated that developments contributing to unusual velocity increases could per- A meeting of the Federal Open Market sist during the year and that money growth Committee was held in the orifices of within these ranges would be consistent with the Board of Governors of the Federal its broad policy objectives. The monitoring Reserve System in Washington, D.C., range for growth of total domestic nonfinanon Tuesday, September 27, 1994, at cial debt was maintained at 4 to 8 percent for 9:00 a.m. the year. For 1995, the Committee agreed on tentative ranges for monetary growth, measured from the fourth quarter of 1994 to the Present: fourth quarter of 1995, of 1 to 5 percent for Mr. Greenspan, Chairman M2 and 0 to 4 percent for M3. The Commit- Mr. McDonough, Vice Chairman tee provisionally set the associated monitor- Mr. Blinder ing range for growth of domestic nonfinan- Mr. Broaddus cial debt at 3 to 7 percent for 1995. The Mr. Forrestal behavior of the monetary aggregates will Mr. Jordan continue to be evaluated in the light of Mr. Kelley progress toward price level stability, move- Mr. LaWare ments in their velocities, and developments Mr. Lindsey in the economy and financial markets. Mr. Parry In the implementation of policy for the Ms. Phillips immediate future, the Committee seeks to Ms. Yellen increase somewhat the existing degree of pressure on reserve positions, taking account Messrs. Hoenig, Melzer, and Moskow, of a possible increase in the discount rate. In and Ms. Minehan, Alternate the context of the Committee's long-run Members of the Federal Open objectives for price stability and sustainable Market Committee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 81st Annual Report, 1994 Messrs. Boehne, McTeer, and Stern, Secretary's Note: Presidents of the Federal Reserve Advice had been received of the election Banks of Philadelphia, Dallas, and of Michael H. Moskow by the boards of Minneapolis respectively directors of the Federal Reserve Banks of Cleveland and Chicago as alternate member of the Federal Open Market Committee for Mr. Kohn, Secretary and Economist the period September 1, 1994, through Mr. Bernard, Deputy Secretary December 31, 1994, and that he had exe- Mr. Coyne, Assistant Secretary cuted his oath of office. Mr. Gillum, Assistant Secretary Mr. Mattingly, General Counsel Mr. Patrikis, Deputy General Counsel By unanimous vote, the minutes of Mr. Prell, Economist the meeting of the Federal Open Market Mr. Truman, Economist Committee held on August 16, 1994, were approved. Messrs. Beebe, Goodfriend, Lindsey, By unanimous vote, the Committee Mishkin, Promisel, Simpson, elected Frederic S. Mishkin as Associate Stockton, and Ms. Tschinkel, Associate Economists Economist from the Federal Reserve Bank of New York, to serve until the Ms. Lovett, Manager for Domestic next election at the first meeting of the Operations, System Open Market Committee after December 31, 1994, Account with the understanding that in the event Mr. Fisher, Manager for Foreign of the discontinuance of his official con- Operations, System Open Market nection with the Federal Reserve Bank Account of New York he would cease to have any official connection with the Federal Mr. Ettin, Deputy Director, Division Open Market Committee. of Research and Statistics, Board of Governors The Manager for Foreign Operations Mr. Slifman, Associate Director, Division reported on developments in foreign of Research and Statistics, Board exchange markets during the period of Governors since the August meeting. There were no System open market transactions in Mr. Madigan, Associate Director, foreign currencies during this period, Division of Monetary Affairs, and thus no vote was required of the Board of Governors Mr. Hooper, Assistant Director, Division Committee. of International Finance, Board of The Manager for Domestic Opera- Governors tions reported on developments in do- Ms. Low, Open Market Secretariat mestic financial markets and on System Assistant, Division of Monetary open market transactions in government Affairs, Board of Governors securities and federal agency obligations during the period August 16, 1994, Ms. Browne, Messrs. Davis, Dewald, through September 26, 1994. By unani- Lang, Rolnick, Rosenblum, and mous vote, the Committee ratified these Vander Wilt, Senior Vice Presidents, Federal Reserve Banks of Boston, transactions. Kansas City, St. Louis, Philadelphia, The Committee then turned to a dis- Minneapolis, Dallas, and Chicago cussion of the economic and financial respectively outlook and the implementation of mone- Mr. Sniderman, Vice President, Federal tary policy over the intermeeting period Reserve Bank of Cleveland ahead. A summary of the economic and Ms. Krieger, Assistant Vice President, Federal Reserve Bank of New York financial information available at the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September 183 time of the meeting and of the Commit- unemployment rate was unchanged at tee's discussion is provided below, fol- 6.1 percent. lowed by the domestic policy directive Industrial production rose sharply in that was approved by the Committee August after sizable gains in previous and issued to the Federal Reserve Bank months. The August advance reflected a of New York. large increase in manufacturing output The information reviewed at this that was partly offset by declines in minmeeting suggested that the pace of eco- ing production and electricity generanomic expansion remained substantial, tion; much of the strength in manufacthough it appeared to have moderated turing resulted from a large rise in the slightly in recent months. Final sales, output of motor vehicles stemming from especially of consumer goods, had unusually rapid retooling for the new firmed during the summer months while model year. Elsewhere in manufacturinventory investment apparently had ing, production of office and computslowed after a second-quarter surge. ing equipment continued to expand Manufacturing activity, bolstered by a briskly, and output of industrial equippickup in production of motor vehicles, ment was up significantly. Total utilizahad been rising briskly, and the trend tion of industrial capacity rose further in of payroll hiring remained strong. August from already high levels. Increases in broad indexes of consumer Consumer spending remained on a and producer prices had been somewhat solid upward trend. Retail sales rose larger in recent months, and prices of considerably in August after holding materials had remained under consider- steady in July. Sales of goods other than able upward pressure. motor vehicles registered sizable in- Nonfarm payroll employment ad- creases in both July and August. Sales vanced appreciably further in August, of motor vehicles, which had been conthough at a somewhat less rapid rate strained in recent months by shortages than the average pace in earlier months of popular domestic models, rebounded of the year. The slowdown in hiring in in August. Housing starts in July and August was concentrated in retail trade, August averaged slightly less than their where employment was little changed second-quarter rate. Single-family starts after large gains in the two preceding had leveled off in recent months after months, and in construction, where it declining earlier in the year; multifamily fell slightly. In manufacturing, employ- starts, though erratic from month to ment was up considerably after essen- month, had been drifting higher. tially no change in July; while much The limited data available for the of the strength was related to a pickup third quarter suggested that growth of in the production of motor vehicles, real business fixed investment, though hiring was up in a number of other still strong, continued to slow from the industries as well. The average work- very rapid pace of 1993. Shipments of week of production or nonsuper- nondefense capital goods declined in visory workers declined in August July, offsetting much of a large June from July's relatively high level, but advance. However, orders for nondefor the two months combined the fense capital goods were up significantly average hours worked was well above on balance in June and July, pointing to the second-quarter level. Both house- continued brisk expansion in business hold employment and the labor force spending on durable equipment. Nonsurged in August, and the civilian residential construction activity in- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

184 81st Annual Report, 1994 creased further in July, and permits for for the first half of the year. The recent such construction remained on a mild pickup in consumer inflation reflected uptrend. large increases in energy prices as well The growth in business inventories as somewhat higher food prices; excludslowed markedly in July after surging in ing the food and energy components, the second quarter. The July decelera- consumer price advances had remained tion reflected a sizable reduction in moderate. Prices rose briskly at the proretail inventories, principally automo- ducer level in July and August as prices tive and general merchandise stocks. of finished energy goods surged and For the retail sector as a whole, the prices of finished foods turned up after inventory-to-sales ratio declined sharply declining over the first half of the year. in July to about the middle of the range For items other than finished foods seen in recent years. At the wholesale and energy, the increase over the Julylevel, inventories increased substan- August period was a little faster than in tially, both in July and over the second the first half of the year. Recent data quarter, and the overall inventory-to- indicated little change in wage trends. sales ratio edged up in July toward the Average hourly earnings of production middle of the range for this ratio in or nonsupervisory workers rose in recent years. Inventory investment also August at about the rate observed over picked up in manufacturing, where the previous twelve months. much of the July accumulation repre- At its meeting on August 16, 1994, sented stocks of materials, supplies, and the Committee adopted a directive that work-in-progress. The run-up in stocks called for increasing somewhat the was accompanied by a drop in fac- degree of pressure on reserve positions, tory shipments, and as a result, the taking account of a possible rise in the inventory-shipments ratio recorded an discount rate. The Committee did not unusually steep rise. include in the directive any presumption The nominal deficit on U.S. trade in about further adjustments to policy durgoods and services widened substan- ing the intermeeting period. Accordtially further in July after a large in- ingly, the directive stated that in the crease in the second quarter. The value context of the Committee's long-run of exports of goods and services slipped objectives for price stability and sustainin July from a relatively high level in able economic growth, and giving care- June, while the value of imports in July ful consideration to economic, financial, changed little from June. Economic and monetary developments, slightly activity in all of the foreign G-7 indus- greater reserve restraint or slightly lesser trial countries except Japan expanded reserve restraint would be acceptable rapidly in the second quarter, and avail- during the intermeeting period. The able indicators suggested that strong reserve conditions associated with this growth continued on average in the third directive were expected to be consistent quarter. In Japan, activity contracted in with modest growth in M2 and M3 over the second quarter, reflecting weakness coming months. in consumption and business invest- Immediately after the conclusion of ment; the limited data available for the the August meeting, the Board of Govthird quarter suggested that growth in ernors approved a ^-percentage-point that country might have resumed. increase in the discount rate to a level of Consumer prices rose a little faster in 4 percent. The Committee permitted the July and August than their average pace full amount of the increase to pass Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September 185 through to interest rates in the market meeting period. Bearish sentiment for reserves, and the federal funds rate toward the dollar in the foreign rose about Vi percentage point to an exchange markets appeared to be influaverage of around 43/4 percent. As indi- enced importantly by continuing concated in an announcement released on cerns about inflation trends in the United the day of the meeting, the Committee States compared with those in other madid not anticipate that further policy jor industrial countries. tightening was likely to be needed for a M2 and M3 declined in August after time, given the substantial nature of the expanding moderately in July, and data policy move. Accordingly, open market available for September pointed to little operations over the intermeeting period further change in either aggregate. The were conducted with a view to maintain- August decline in M2 reflected weaking the less accommodative degree of ness in most of its liquid components pressure on reserve positions imple- that may have been induced to a considmented just after the August meeting, erable extent by the rise, which began and the federal funds rate remained near early this year, in the opportunity costs 43/4 percent. In accordance with the of holding such accounts. The decline in usual cresting of seasonal demands for M3 was associated with a sharp drop discount credit at this time of the year, in institution-only money funds in adjustment plus seasonal borrowing rose response to the increase in market over much of the period but began to yields, but the weakness in this broader edge lower subsequently. Borrowing aggregate was limited by the brisk averaged near anticipated levels. issuance of large-denomination time Most market interest rates were up deposits as banks continued to rely on somewhat on balance since the August managed liabilities to fund credit meeting. Short-term rates, which had growth. For the year through August, risen before the meeting in anticipation M2 and M3 grew at rates slightly above of a smaller policy move, increased the lower ends of their respective ranges modestly further after the Federal for 1994. Total domestic nonfinancial Reserve tightened and then changed debt continued to expand at a moderate little over the next several weeks. Sub- rate in recent months. sequently, however, these rates began to The staff forecast prepared for this move higher in response to incoming meeting suggested that growth in ecoeconomic data that were seen as point- nomic activity would slow appreciably ing to the potential for greater inflation over the next several quarters, dropping in the future and hence to further firm- briefly below the rate of increase in the ing in reserve conditions. Long-term economy's potential output. According yields fell after the policy tightening, to a staff analysis, the economy already but these declines were erased within a was operating at its long-run capacity, few days, and rates later rose noticeably and the forecast assumed that monetary further in response to the incoming data. policy would not accommodate any con- Most major indexes of equity prices tinuing tendency for aggregate demand were up on balance over the intermeet- to expand at a pace that could foster ing period despite price declines near sustained higher inflation. Growth in the end of the period. consumer expenditures was projected to The trade-weighted value of the dol- moderate next year as spending on conlar in terms of the other G-10 currencies sumer durables lost some momentum depreciated somewhat over the inter- in the context of diminishing pent-up Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

186 81st Annual Report, 1994 demands, the rise in borrowing costs, increased. How large this rise might be and smaller gains in income. After an or when it might be reversed was very extended period of very rapid increases, difficult to predict at this point. Howgrowth in business fixed investment also ever, indications of a persisting pickup was expected to slow appreciably, partly in inflation would be a matter of considreflecting less favorable financial con- erable concern, and further developditions and partly the slower pace of ments would need to be monitored with output growth. Homebuilding would special care in light of the Committee's be damped by higher financing costs, longstanding commitment to containthough activity in this sector was ing inflation and moving over time expected to remain well above the toward price stability to foster the maxidepressed levels reached in recent years. mum, sustainable performance of the With the economy operating close to its economy. long-run potential, no further reduction In their review of developments in the core rate of inflation was antici- across the nation, members commented pated over the forecast horizon. Con- on high levels of business activity in sumer price inflation was projected to be many regions and many of them referred elevated over the near term—by some to increasing reports of scarcities of spepass-through of the ongoing run-up in cific types of labor resources. After softmaterials prices and by higher import ening earlier in many areas, business prices—before settling down again. conditions appeared to have strength- In the Committee's discussion of cur- ened in a number of regions during rent and prospective economic condi- recent weeks while displaying little tions, members commented on continu- change or continued moderate growth ing indications of a robust expansion elsewhere. Robust expansion in manin business activity, with output near ufacturing activity, especially in the maximum sustainable levels. They still motor vehicle and related industries, viewed significant slowing in the pace was a notable feature of recent business of the expansion as a reasonable expec- developments. On the financial side, the tation, though they acknowledged that overall expansion of credit had remained signs of such slowing currently were moderate, but many members stressed limited and in particular that the most the ready availability of financing from recent data indicated a greater probabil- increasingly aggressive bank lenders. ity of somewhat more strength in aggre- Moreover, despite higher interest rates, gate demand than had appeared to be capital markets were providing contindeveloping during the late spring and ued support to a wide variety of borrowearly summer. The policy tightening ers. The constraints on the availability actions implemented earlier in the year of credit and the reluctance of many seemed to have elicited only a mild borrowers to incur new debt, factors that response thus far in interest-sensitive had tended to retard the recovery during sectors of the economy. However, much its earlier stages, had given way to a of the retarding effects of those actions, financial climate that might even be proincluding the recent sizable tightening viding an extra impetus to spending. in August, probably had not yet been With regard to the outlook for activity felt in the economy. In light of the in key sectors of the economy, consumer strength of aggregate demand and lags spending had been more buoyant than in the effects of policy, the risks of some expected over recent months and memrise in inflation rates probably had bers saw such spending as likely to be Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September \ 87 reasonably well maintained. Some mod- buildup probably had been intended. eration in its growth over the quarters Indeed, in the context of increasing ahead seemed likely, however, as backlogs and lagging deliveries that pent-up demands increasingly were sat- pointed to growing capacity constraints, isfied and housing-related purchases of many business firms might seek to build consumer durables tended to moderate. "safety stocks" to avoid supply dis- Members cited anecdotal evidence of ruptions that would interfere with fairly brisk retail sales in many areas production schedules. At the same time, recently and associated optimism the trend toward "just in time" invenamong retail business contacts. Recent tory management—even if temporarily survey results indicated that consumer arrested as safety stocks were sentiment remained favorable. Sales of increased—would help to limit a potenmotor vehicles were expected to con- tially excessive buildup in inventories tinue the improvement noted in August that would present a threat later to the as supply shortages were met through sustainability of the expansion. increased production. Members cited anecdotal evidence Business fixed investment was tending to support statistical indications viewed as likely to rise substantially fur- of some weakening in housing markets, ther over the next several quarters, but and they generally anticipated that the the rate of growth had been moderating rise that had occurred in mortgage interthis year and probably would diminish est rates would exert a further damping further in conjunction with the projected effect on housing activity over the year slowing in overall demand. The expan- ahead. However, against the background sion in expenditures for business equip- of the still relatively favorable affordment had slowed considerably this year ability of housing and the likelihood of from an extremely rapid rate in 1993 some further pent-up demand, only a and could be expected to moderate moderate drop in overall homebuilding somewhat further. At the same time, activity seemed likely. nonresidential construction was slowly A number of members expressed the trending higher as firms facing capacity view that the external sector was likely constraints sought to expand their pro- to contribute to the expansion of domesduction facilities. tic economic activity in light of the The prospects for inventory invest- depreciation in the value of the dollar ment remained a key uncertainty in the and indications of stronger economic outlook in that developments in this sec- growth in foreign industrial nations. tor could well have an important bearing However, relatively rapid expansion in on the extent of the anticipated slowing foreign economic activity would add to in the expansion of overall economic pressures on world commodity prices at activity over the next few quarters. The least for a time. One member expressed surge in inventory investment in the sec- concern about the potential, albeit ond quarter clearly was unsustainable, uncertain, effects on the exchange value but some members questioned whether of the dollar of developments unrelated the expected cutback in inventory accu- to the conduct of monetary policy, such mulation would be sizable over the near as the ongoing trade negotiations with term. Continuing strength in new orders Japan and forthcoming elections in and anecdotal reports did not point to a Germany. desire to reduce inventories and sug- In their discussion of various factors gested that much of the second-quarter bearing on the outlook for inflation, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 81st Annual Report, 1994 members noted that some measures of able to the credibility of the Commitinflation had picked up recently and that tee's anti-inflationary stance in recent many private forecasters anticipated years. A number of members comhigher inflation in 1995 than in 1994. mented that the sluggish-to-moderate The worsening of inflation could per- growth of a wide variety of money and haps be viewed as reflecting increasing credit measures provided some assurcapacity constraints in the face of recent ance that, to date, monetary policy had growth in overall demand at a pace not laid the basis for a sustained upturn above the economy's long-run potential. in inflation. Nonetheless, the members From this perspective, the future path of concluded that the potential for addiinflation would depend importantly on tional inflation remained substantial and, the extent to which the expansion in from a monetary policy standpoint, renoverall activity would in fact abate from dered especially urgent the ongoing an unsustainable pace. Some members assessment of inflation trends. expressed particular concern that if In the Committee's discussion of polabove-trend growth did not moderate icy for the period ahead, most of the soon, existing inflationary pressures and members agreed on the desirability of inflationary expectations would quickly maintaining a steady policy course, at become more pronounced and inflation least for the near term. In light of would gather momentum. Thus far, the appreciable tightening of policy however, price pressures remained con- approved in August, the members had centrated in the early stages of produc- anticipated that no further policy change tion. As evidenced by broad measures was likely to be required for a period, of prices and anecdotal information and at this juncture they generally conobtained from numerous business con- tinued to feel that the recent evidence tacts, the pass-through of the higher did not warrant an immediate further costs of materials to the prices of final tightening. Even so, the ongoing inflow goods had been muted in what business of information on the performance of executives continued to describe as the economy continued to indicate a sighighly competitive markets. The ability nificant potential for higher inflation of business firms to hold down price down the road, and for many members increases in turn reflected to a marked this suggested that additional monetary degree their successful efforts to control restraint could well be needed at some unit costs through ongoing gains in pro- time. A key uncertainty in this regard ductivity. Moreover, with profit margins related to the restraining effects of the currently at high levels, business firms policy moves implemented earlier this facing competitive market conditions year; these actions appeared to have had some leeway to absorb rising costs. exerted less restraint to date than had Increasingly tight labor markets in many been anticipated, but appreciable lagged parts of the country had not resulted in effects from those actions—indeed, perhigher overall wage inflation, but mem- haps a large part of those effects—could bers reported some upward pressure on still be expected. At this time, it was the wages of certain categories of work- extremely difficult to evaluate whether ers in strong demand. One member the earlier tightening moves were exertexpressed the view that continued mod- ing a lesser effect than usual or it simply eration in price and wage increases also was more delayed, or whether the memmight reflect in some measure a shift in bers might have misjudged the underprice and wage-setting behavior attribut- lying strength of the expansion. In the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September \ 89 view of many members, the information ever, that the slow growth in the narrow that would become available during the measures of reserves and money folintermeeting period should provide a lowed an extended period of rapid firmer basis for judging the course of the expansion and their recent weakness economy and the risks of greater infla- might not be indicative of constrained tion. Should incoming information point liquidity at this point. Moreover, the to a greater likelihood that price pres- ready availability of bank credit and sures would intensify, the Committee the receptivity of financial markets more would need to act promptly and force- generally argued that many borrowers, fully to avert an upward ratcheting of including small and medium-sized busiinflationary expectations and actual nesses, currently had access to ample inflation that would be difficult to financing. reverse. Consequently, while views dif- At the conclusion of the Committee's fered with regard to the likely need for discussion, all but one of the members some policy tightening over the weeks indicated that they could support a direcimmediately ahead, the members gener- tive that called for maintaining the existally supported a shift from the symme- ing degree of pressure on reserve positry in the August directive to asymmetry tions and that included a bias toward the toward restraint. Some members indi- possible firming of reserve conditions cated that they could accept an asym- during the intermeeting period. Accordmetric directive, but they expressed ingly, in the context of the Committee's misgivings about the use of such an long-run objectives for price stability instruction in the directive because they and sustainable economic growth, and felt it was subject to misunderstanding giving careful consideration to ecoin financial markets and could add to nomic, financial, and monetary develuncertainty about Committee intentions. opments, the Committee decided that One member favored an immediate somewhat greater reserve restraint move to somewhat greater reserve would be acceptable or slightly lesser restraint because" the available evidence reserve restraint might be acceptable in his view already suggested an upturn during the intermeeting period. The in inflationary expectations and the pros- reserve conditions contemplated at this pect of a significant rise in inflation. meeting were expected to be consis- In the course of the Committee's dis- tent with modest growth in the broader cussion, a number of members com- monetary aggregates over the balance of mented that the behavior of the mone- the year. tary and credit aggregates should be At the conclusion of the meeting, the taken into account in the evaluation of Federal Reserve Bank of New York was the current stance of monetary policy. authorized and directed, until instructed While various money and related mea- otherwise by the Committee, to execute sures had for many years proved unre- transactions in the System Account in liable to a greater or lesser extent in accordance with the following domestic gauging economic prospects, the weak policy directive: growth in a wide array of these measures could not be entirely disregarded The information reviewed at this meeting as a possible indicator of the degree of suggests that the pace of economic expanmonetary restraint and argued for causion, though perhaps moderating slightly in tion in implementing any further policy recent months, remains substantial. Nonfarm tightening. One member noted, how- payroll employment advanced appreciably Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 81st Annual Report, 1994 further in August, and the civilian unemploy- within these ranges would be consistent with ment rate was unchanged at 6.1 percent. its broad policy objectives. The monitoring Reflecting strength in motor vehicles, indus- range for growth of total domestic nonfinantrial production rose sharply in August after cial debt was maintained at 4 to 8 percent for posting sizable gains in other recent months, the year. For 1995, the Committee agreed on and capacity utilization moved up further tentative ranges for monetary growth, meafrom already high levels. Retail sales were sured from the fourth quarter of 1994 to the up considerably in August, boosted by a fourth quarter of 1995, of 1 to 5 percent for rebound in sales of durable goods, including M2 and 0 to 4 percent for M3. The Commitmotor vehicles. Housing starts rose in tee provisionally set the associated monitor- August but were unchanged from their ing range for growth of domestic nonfinansecond-quarter level. Orders for nondefense cial debt at 3 to 7 percent for 1995. The capital goods point to a continued strong behavior of the monetary aggregates will expansion in spending on business equip- continue to be evaluated in the light of ment; permits for nonresidential construction progress toward price level stability, moveremain on a mild uptrend. Inventory accumu- ments in their velocities, and developments lation appears to have moderated recently in the economy and financial markets. after surging in the second quarter. The In the implementation of policy for the nominal deficit on U.S. trade in goods and immediate future, the Committee seeks to services widened in July from its second- maintain the existing degree of pressure on quarter average. Prices of materials have reserve positions. In the context of the Comremained under upward pressure, and mittee's long-run objectives for price stabilincreases in broad indexes of consumer and ity and sustainable economic growth, and producer prices have been somewhat larger giving careful consideration to economic, in recent months. financial, and monetary developments, On August 16, 1994, the Board of Gover- somewhat greater reserve restraint would or nors approved an increase in the discount slightly lesser reserve restraint might be rate from V/i to 4 percent, and the Com- acceptable in the intermeeting period. The mittee agreed that this increase would be contemplated reserve conditions are exallowed to show through completely to inter- pected to be consistent with modest growth est rates in reserve markets. Most market in M2 and M3 over the balance of the year. interest rates are up somewhat on balance since the August meeting. The trade- Votes for this action: Messrs. Greenspan, weighted value of the dollar in terms of the McDonough, Blinder, Forrestal, Jordan, other G-10 currencies depreciated somewhat Kelley, La Ware, Lindsey, and Parry and over the intermeeting period. Mses. Phillips and Yellen. Vote against M2 and M3 declined in August after this action: Mr. Broaddus. expanding moderately in July; for the year through August, M2 and M3 grew at rates Mr. Broaddus dissented because he slightly above the bottom of their ranges for believed that a prompt move to some- 1994. Total domestic nonfinancial debt has continued to expand at a moderate rate in what greater monetary restraint was recent months. needed at this point. In his view, the The Federal Open Market Committee current stance of monetary policy was seeks monetary and financial conditions that overly accommodative in light of the will foster price stability and promote sussigns of increasing price pressures and tainable growth in output. In furtherance of rising inflationary expectations that were these objectives, the Committee at its meeting in July reaffirmed the ranges it had estab- associated with the continuing strength lished in February for growth of M2 and M3 of the economic expansion and high of 1 to 5 percent and 0 to 4 percent respec- levels of capacity utilization. In this sittively, measured from the fourth quarter of uation, a delay in implementing some 1993 to the fourth quarter of 1994. The Commonetary policy tightening would incur mittee anticipated that developments contriba substantial risk of a further increase uting to unusual velocity increases could persist during the year and that money growth in inflationary expectations and could Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 191 make it more costly to achieve the Com- Mr. Prell, Economist mittee's longer-term anti-inflationary Mr. Truman, Economist goals. Messrs. Goodfriend, Lindsey, Mishkin, It was agreed that the next meeting of Promisel, Siegman, and Simpson the Committee would be held on Tues- and Ms. Tschinkel, Associate day, November 15, 1994. Economists The meeting adjourned at 1:00 p.m. Ms. Lovett, Manager for Domestic Operations, System Open Market Donald L. Kohn Account Secretary Mr. Fisher, Manager for Foreign Operations, System Open Market Account Meeting Held on Mr. Ettin, Deputy Director, Division November 15, 1994 of Research and Statistics, Board of Governors A meeting of the Federal Open Market Mr. Slifman, Associate Director, Committee was held in the offices of Division of Research and the Board of Governors of the Federal Statistics, Board of Governors Reserve System in Washington, D.C., Mr. Madigan, Associate Director, on Tuesday, November 15, 1994, at Division of Monetary Affairs, 9:00 a.m. Board of Governors Mr. Brayton, Assistant Director, Present: Division of Research and Mr. Greenspan, Chairman Statistics, Board of Governors Mr. McDonough, Vice Chairman Ms. Low, Open Market Secretariat Mr. Blinder Assistant, Division of Monetary Mr. Broaddus Affairs, Board of Governors Mr. Forrestal Mr. Jordan Ms. Pianalto, First Vice President, Mr. Kelley Federal Reserve Bank of Mr. LaWare Cleveland Mr. Lindsey Ms. Browne and Messrs. Davis, Mr. Parry Dewald, Lang, Rolnick, Ms. Phillips Rosenblum, and Vander Wilt, Ms. Yellen Senior Vice Presidents, Federal Reserve Banks of Boston, Messrs. Hoenig, Melzer, and Moskow Kansas City, St. Louis, and Ms. Minehan, Alternate Philadelphia, Minneapolis, Dallas, Members of the Federal Open and Chicago respectively Market Committee Mr. Judd, Vice President, Federal Reserve Bank of San Francisco Messrs. Boehne, McTeer, and Stern, Mr. Guentner, Assistant Vice Presidents of the Federal Reserve President, Federal Reserve Banks of Philadelphia, Dallas, Bank of New York and Minneapolis respectively By unanimous vote, the minutes of Mr. Kohn, Secretary and Economist the meeting of the Federal Open Market Mr. Bernard, Deputy Secretary Committee held on September 27, 1994, Mr. Coyne, Assistant Secretary were approved. Mr. Gillum, Assistant Secretary Mr. Mattingly, General Counsel The Report of Examination of the Mr. Patrikis, Deputy General Counsel System Open Market Account, con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

192 81st Annual Report, 1994 ducted by the Board's Division of there were some tentative signs of wage Reserve Bank Operations and Payment acceleration associated with the further Systems as of the close of business on tightening of labor markets. Prices of June 30, 1994, was accepted. many materials continued to move up The Manager for Foreign Operations rapidly, but broad indexes did not indireported on developments in foreign cate a pickup in consumer inflation. exchange markets and on System open Nonfarm payroll employment rose market transactions in foreign curren- appreciably further in October, with job cies during the period September 27, gains widespread by industry. In the 1994, through November 14, 1994. By service-producing sector, retail trade unanimous vote, the Committee ratified posted a particularly large advance these transactions. while health and business services con- The Manager for Domestic Opera- tinued to record moderate increases. tions reported on developments in do- Manufacturing employment was up in mestic financial markets and on System October after having been unchanged in open market transactions in government September; the rise was related partly to securities and federal agency obliga- continued job growth in automobile- and tions during the period September 27, construction-related industries, but pay- 1994, through November 14, 1994. By rolls also expanded in a number of other unanimous vote, the Committee ratified industries, including textiles, paper, rubthese transactions. ber, and plastics. Construction hiring The Committee then turned to a slowed after a large rise in September. discussion of the economic and finan- Employment, as measured by the housecial outlook and the implementation of hold survey, increased by more than the monetary policy over the intermeeting labor force in October, and the civilian period ahead. A summary of the eco- unemployment rate edged down to nomic and financial information avail- 5.8 percent. able at the time of the meeting and of Industrial production increased subthe Committee's discussion is provided stantially in October after having posted below, followed by the domestic policy appreciable advances on balance in directive that was approved by the Com- previous months. Manufacturing output mittee and issued to the Federal Reserve accounted for all of the October rise as Bank of New York. production declined again in the mining The information reviewed at this and utilities components. In manufacmeeting suggested that the growth of turing, the pace of motor vehicle assemthe economy remained substantial. Con- blies was unchanged, but production sumer spending was robust, business in automotive-related industries was fixed investment continued on a strong stepped up noticeably and output of upward trend, and housing activity had business equipment continued to expand been well sustained despite the increase vigorously. Total utilization of industrial in mortgage interest rates over the past capacity climbed further in October year. Business inventory investment had from already elevated rates. been brisk since the spring, apparently Consumer confidence remained at a in response to the strong growth in final high level, and retail sales continued sales. Further sizable gains had been to rise rapidly in October. Automotive recorded in industrial production and dealers reported a large increase in employment. Increases in labor com- sales, but strength also was evident pensation were still moderate, although elsewhere: Furniture and appliance Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 193 stores posted another appreciable gain; inventory-to-sales ratio for this sector apparel outlets registered a brisk rise; remained near the middle of its range in and spending at food and general recent years. merchandise stores grew moderately. The nominal deficit on U.S. trade in Housing starts rose appreciably in goods and services narrowed in August, September, reaching their highest level but for July and August combined the of the year. Sales of new and exist- deficit was substantially larger than its ing homes were stronger in Septem- second-quarter average. The value ber, despite the higher interest rates on of exports of goods and services reboth fixed- and adjustable-rate mort- bounded in August, with increases gages that had prevailed since earlier in spread widely among automotive prodthe year. ucts, aircraft, agricultural products, Business capital spending remained machinery, and consumer goods. The on a solid uptrend. Shipments of non- value of imports also increased in defense capital goods were brisk during August, but by a lesser amount than that the third quarter, and with orders con- of exports; much of the rise reflected tinuing to exceed shipments, already greater imports of automotive vehicles large backlogs increased further for from Canada. Economic activity conmost types of business equipment. tinued to expand in the major foreign Spending for transportation equipment industrial countries in the third quarter, grew at a healthy rate in the third quar- but growth apparently was at a more ter; purchases of heavy trucks persisted moderate pace than in the first half of at a very high level, and spending for the year. motor vehicles picked up after a second- Consumer price inflation remained quarter lull. Nonresidential construction moderate in September. For items other activity advanced at a reduced pace in than the food and energy components, the third quarter; however, permits for the increase in consumer prices over new construction continued to trend the twelve months ending in September higher. was slightly smaller than the rise over Business inventory investment appar- the previous twelve months. At the proently continued at a brisk pace in the ducer level, prices of finished goods third quarter, with much of the accumu- declined, largely reflecting a sharp fall lation occurring in types of goods in prices of finished energy goods. where sales were strong. Manufacturing Excluding food and energy items, prostocks fell in September, but for the ducer prices edged up in September third quarter as a whole they increased and had risen slowly over the twelve at the same moderate rate as in the sec- months ending in September. At interond quarter; the inventory-to-shipments mediate stages of processing, prices of ratio for manufacturing in September many materials, notably industrial materemained near the historical low reached rials, had continued to move up rapidly. the previous month. At the wholesale Total compensation of private industry level, inventory accumulation slowed workers rose significantly less over the slightly in the third quarter, and the four quarters ending in September than inventory-to-sales ratio was in the over the previous four quarters, prilower end of its range over recent years. marily reflecting a sharply smaller Retail inventories surged in August increase in benefit costs. Average hourly (latest data available) after having de- earnings of production or nonsuperclined slightly in July. Nonetheless, the visory workers recorded a large gain Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

194 81st Annual Report, 1994 in September after having expanded equity prices were little changed on balmoderately over previous months. ance over the intermeeting period. At its meeting on September 27, The trade-weighted value of the dol- 1994, the Committee adopted a directive lar in terms of the other G-10 currencies that called for maintaining the existing changed little on net over the intermeetdegree of pressure on reserve positions ing period. The dollar trended lower but included a bias toward possible firm- over much of the period, apparently reing during the intermeeting period. The flecting market perceptions that inflation directive stated that in the context of the risks in the United States were on the Committee's long-run objectives for rise. In early November, after reaching a price stability and sustainable economic new post-World War II low against the growth, and giving careful consideration yen and a two-year low against the to economic, financial, and monetary de- mark, the dollar began to recover. The velopments, somewhat greater reserve rebound in the value of the dollar apparrestraint would be acceptable or slightly ently was in part a response to U.S. lesser reserve restraint might be accept- intervention in support of the dollar and able during the intermeeting period. The heightened expectations of further monreserve conditions contemplated at this etary tightening in the United States. meeting were expected to be consistent M2 continued to edge lower in Octowith modest growth of M2 and M3 over ber; the weakness was concentrated in the balance of the year. its more-liquid deposit components, for Open market operations during the which opportunity costs had risen very intermeeting period were directed to- substantially this year. M3 expanded at a ward maintaining the existing degree of moderate pace, buoyed by continued pressure on reserve positions. As the rapid growth in large-denomination time need for seasonal credit waned over the deposits issued to finance rapid loan period, adjustment plus seasonal bor- growth and to counter runoffs of nonrowing declined substantially, with ac- deposit sources of funds. For the year tual borrowing remaining close to antici- through October, M2 grew at a rate at pated levels. Apart from some tightness the bottom of the Committee's range for in reserves markets around the end of 1994 and M3 at a rate in the lower half the third quarter, the federal funds rate of its range for the year. Total domestic averaged close to 43A percent. nonfinancial debt continued to expand at Most market interest rates rose appre- a moderate rate in recent months. ciably over the period since the Septem- The staff forecast prepared for this ber 27 meeting in response to incoming meeting suggested that growth in ecoeconomic data that generally indicated nomic activity would slow markedly sustained momentum in final sales and over the next several quarters and for a inventory investment and high levels of period would average less than the rate aggregate output relative to the econo- of increase in the economy's potential my's potential. The strong economic output. In the staff's judgment, the data and persisting upward pressures on economy currently was operating at or prices at earlier stages of production beyond its long-run capacity, and the appeared to heighten concerns among forecast assumed that monetary policy market participants about inflationary would not accommodate any continupressures and prospects for even more ing tendency for aggregate demand to monetary tightening than had previously expand at a pace that could foster susbeen anticipated. Most major indexes of tained higher inflation. The expansion of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November \ 95 consumer spending was projected to higher import prices increasingly were slow considerably in response to dimin- felt in an environment where the utiliishing pent-up demands, higher borrow- zation of labor and other producer ing costs, and reduced income growth. resources was already at, if not above, Business fixed investment also was sustainable full employment levels. anticipated to decelerate appreciably in The evidence of persisting growth in the context of smaller increases in sales aggregate demand at a pace appreciably and less favorable financial conditions. above that of the economy's long-run Homebuilding was expected to be potential and of developing pressures damped by higher financing costs, on resources tended to be confirmed although housing activity likely would by anecdotal reports of robust business remain well above the depressed levels expansion in many parts of the country of recent years when cash-flow afford- and growing difficulties in hiring and ability had been less favorable. The retaining some types of labor. Ongoing lower value of the dollar and the favor- cutbacks in some industries, such as able prospects for faster economic defense, were tending to hold down recovery abroad were projected to overall economic activity in a few bolster the demand for U.S. exports. regions, but all parts of the country With the economy having reached or appeared to be experiencing at least exceeded its long-run potential in the modest economic growth, including staff's judgment, wage and price infla- California where economic activity now tion was projected to pick up for a seemed to have turned up after an period before turning down as pressures extended period of weakness. Sentiment on productive resources eased. among retailers and other business con- In the Committee's discussion of tacts was widely reported to be quite current and prospective economic de- favorable. In addition, some members velopments, members commented on commented that despite higher interest widespread statistical and anecdotal rates financial conditions generally indications of considerably greater remained conducive to further business strength in the business expansion than expansion. The lending constraints that they had anticipated earlier, with numer- had tended to retard the expansion ous industries now operating at or earlier seemed to have given way to beyond historic, long-run capacity lev- increasingly accommodative loan poliels. They saw few signs that growth in cies by depository institutions and ready aggregate demand might be moderating access to market sources of financing toward a more sustainable pace; none- for many business firms. theless, they continued to view some In their assessment of the contribuslowing as a reasonable expectation as tion of key sectors of the economy to the the monetary policy tightening actions expansion, members commented on the implemented earlier exerted their lagged current strength of consumer spending effects on interest-sensitive sectors of and also noted that business contacts the economy. At this point, increases in were expressing considerable optimism prices of final goods and services and of about the prospects for retail sales over wages generally did not appear to be the holiday season. Consumer sentitrending higher, but the members were ment, as evidenced by survey results concerned that inflation would worsen and retailer comments, appeared to be at as the effects of continuing strong a high level. Some moderation in the demand, rising production costs, and growth of consumer spending could be Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

196 81st Annual Report, 1994 expected to emerge next year for a structures, and perhaps some continuing variety of reasons, including reduced strength in multifamily housing. pent-up demands and some anticipated After a surge in the second quarter, slowing in the growth of employment inventory investment remained substanand consumer incomes. Members also tial in the third quarter and appeared to noted that rising interest rates were be continuing at a robust pace in the likely to damp consumer spending, nota- current quarter. For a variety of reasons, bly for durable goods, though there was inventory accumulation might well be little evidence of such a development relatively brisk for some period of time, thus far. A projected softening in hous- given the favorable sales experience of ing markets would contribute to slower numerous business firms and the still growth in demand for housing-related quite low levels of inventories relative consumer durables. to sales. Moreover, with capacity pres- Expanding sales and favorable profit sures in many industries leading to some margins were fostering strong growth in lengthening in delivery times, busibusiness fixed investment, and much of nesses would tend to build inventories the momentum in this sector probably to support sales and avoid disruptions would carry over into 1995. Some busi- to production schedules. Tending to conness contacts reported that they were firm such an assessment were anecdotal developing plans for major capital out- reports suggesting that recent additions lays over coming months. As the year to inventories were largely intended and progressed, however, the increases that not the result of disappointing sales. An had occurred in interest rates, and the inventory buildup at the pace recorded possibility of less receptive financial on average in the second and third conditions more generally, should begin quarters would not be sustainable, but to exert some inhibiting effects on busi- inventory investment was likely to be ness fixed investment, especially if relatively well maintained over coming profit margins also were to fall in the months if aggregate demand were to context of rising labor and other costs. expand in line with current expectations. With regard to the outlook for hous- The members generally anticipated ing, members reported that conditions that the external sector of the economy were somewhat uneven across the coun- would provide some impetus to the try but that for the nation as a whole expansion. The recent depreciation of rising mortgage rates had had surpris- the dollar and strength in foreign ecoingly little effect thus far on this typi- nomic activity could be expected to cally interest-sensitive sector of the boost real exports at a time when growth economy. One reason, it was suggested, in real imports was likely to moderate. was the apparent willingness of some The resulting improvement in the homebuyers to accept higher mortgage nation's net trade position would, howrates at this point because they expected ever, tend to exacerbate any tendency rates to rise further later. Even so, the for domestic demand to outrun the members continued to anticipate some economy's output potential. slowdown in housing construction over In the Committee's discussion of the coming quarters. Overall construction outlook for prices, the members saw a activity was likely to be supported to considerable risk of higher inflation if some extent, however, by further growth in demand and output continued gradual gains in nonresidential construc- at an unsustainable pace, placing added tion, notably commercial and industrial pressures on labor and other producer Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 197 resources. They noted indications of the members agreed that the current greater inflation pressures, especially in stance of monetary policy presented the rising prices of many materials used unacceptable risks of embedding higher in the production process and the in- inflation in the economy. The expansion creasing number of reports of labor retained appreciably more forward shortages. To date, prices of finished momentum and greater inflationary goods and services did not reflect those potential than the members had anticipressures and overall wage inflation did pated, given the policy restraint implenot appear to be trending higher. Even mented earlier this year. The reasons for so, at least some modest worsening of that outcome remained unclear. Among inflation seemed quite likely over the the suggested explanations were that the quarters immediately ahead, despite the earlier restraint appeared to have had persistence of strong competition that a less-than-expected effect on current continued to limit attempts to raise economic conditions and, in particular, prices in most markets. This view on the more interest-sensitive sectors of seemed to be reinforced by increasing the economy. Some members also sugreports of successful efforts by some gested that the underlying expansion business firms to establish and sustain was stronger than they had anticipated, higher prices and by numerous indica- and a couple referred to the possibiltions of business plans to raise prices ity that the lingering effects from the around year-end or the early part of next accommodative policy stance mainyear. Other factors that appeared to have tained through last year were larger than adverse implications for the inflation had been expected. Moreover, additional outlook included faster increases in monetary restraint seemed to be needed import prices, and in the view of at least to counteract the stimulative effects on some members the prospect of diminish- domestic economic activity of a number ing gains in productivity. Moreover, as of atypical financial developments in a evidenced by the comments of some period of rising interest rates; these business contacts and the behavior of included the easing of nonprice credit financial markets, inflationary expecta- terms by depository institutions, the tions might be in the process of worsen- ample availability of funds in debt and ing, though such a development could equity markets, and the depreciation of not be seen in broad survey results. To the dollar in foreign exchange markets. what extent such expectations would The members recognized that monetary become more pervasive and foster policy actions exerted much of their greater inflation momentum was very effects after relatively long lags and that difficult to gauge at this point. One a substantial portion of the restraint member suggested that some further rise stemming from the earlier policy actions in inflation might reflect a typical devel- undoubtedly had not yet been felt in the opment in a maturing cyclical expansion economy. They agreed, nonetheless, that but that such a rise would not necessar- monetary policy was still insufficiently ily augur a permanent uptick in inflation restrictive in light of emerging inflationor even that progress toward price stabil- ary signals in the economy. Views difity would not continue to be made over fered to some extent, however, regardtime, provided appropriate monetary ing the degree of additional restraint that policies were pursued. might be needed to foster the Commit- In the Committee's discussion of pol- tee's objectives for sustainable, nonicy for the intermeeting period ahead, all inflationary economic growth. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

198 81st Annual Report, 1994 A majority of the members believed Other members indicated that they that an unusually sizable firming of preferred a less forceful policy move at monetary policy was desirable at this this point, one that would be consistent time, and they endorsed a proposal to with the Vi percentage point increase in tighten reserve conditions in line with the discount rate that had been proposed a 3/4 percentage point increase in the by several Federal Reserve Banks. In discount rate that a number of Federal their view, substantial further restraint Reserve Banks had proposed for could be expected from the combined approval by the Board of Governors. In effects of the policy tightening actions this view, the data becoming available implemented earlier this year and the in recent months had suggested con- inevitable waning of the stimulative siderable resilience and underlying effects of policy actions taken in previstrength in economic activity and rising ous years. While the need for further risks of greater inflation pressures. A monetary restraint could not be ruled somewhat aggressive tightening action out, a more limited policy move at this would improve the prospects for curb- point could reasonably be expected ing intensifying inflationary pressures in this view to accomplish the greater before they gathered further momen- part or all of the Committee's antitum and would help position the econ- inflationary objectives over time and omy on a sustainable growth path con- would minimize the risk of setting polsistent with the economy's long-run icy on an overly restrictive course with potential. The members acknowledged undesired consequences for the business the difficulty of judging the precise expansion later. Moreover, a cautious degree of monetary restraint that would approach could lessen the risk that the be needed to attain the Committee's Committee's policy intentions would objectives and in particular the risk be misinterpreted, with some resulting that further efforts to control inflation damage to consumer and business conat this juncture might foster greater- fidence and dislocation in financial than-intended weakening of the expan- markets. Despite their reservations, sion. The Committee could not pre- these members indicated that they could judge how much, if any, additional accept the degree of restraint preferred monetary restraint might be needed in by the majority because of the quite the future. That would depend on fur- small difference in the effects of the ther developments, but for most mem- alternative moves on the economy over bers a sizable move at this point repre- time. sented the most appropriate balance With regard to possible changes in among the competing risks. During this policy during the period until the next discussion, it was noted that recent meeting, a majority of the members developments were having an unsettling favored associating the more substantial effect on financial markets, and a tight- policy adjustment with a symmetric ening move of this magnitude might intermeeting instruction. This prefercontribute to market stability by reduc- ence was based on expectations that a ing expectations of higher inflation further policy action was not likely to and a further near-term policy action. be called for over the near term, Some members also commented that the although a symmetric directive would action would tend to reinforce the recent not prevent an intermeeting adjustment intervention in the foreign exchange if near-term developments differed submarkets. stantially from expectations. One mem- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November \ 99 ber expressed the view that the unusu- has remained substantial. Nonfarm payroll ally large move made it especially employment advanced appreciably further in October, and the civilian unemployment rate important to follow a steady policy edged down to 5.8 percent. Industrial procourse for some period of time and to duction registered a large increase in Octoundertake any further firming only if ber after posting sizable gains on average new information of a surprisingly strong over other recent months, and capacity utilinature were to be received. Another zation moved up further from already high member indicated a preference for an levels. Retail sales have continued to rise rapidly. Housing starts rose appreciably in asymmetric directive toward restraint September. Orders for nondefense capital because such a directive would be more goods point to a continued strong expansion consistent with the likely need in his in spending on business equipment; permits view for further monetary restraint to for nonresidential construction have been contain inflationary forces in the trending higher. Inventory accumulation economy. appears to have continued at a brisk pace in the third quarter. For July and August com- At the conclusion of the Committee's bined, the nominal deficit on U.S. trade in policy discussion, all the members indigoods and services widened from its secondcated that they could support a directive quarter average. Prices of many materials that called for a significant increase have continued to move up rapidly, but broad in the degree of pressure on reserve indexes of prices for consumer goods and positions, taking account of a possible services have increased moderately on averincrease of 3A percentage point in the age over recent months. Most market interest rates have risen discount rate, and that did not include a appreciably since the September meeting. presumption about the likely direction The trade-weighted value of the dollar in of any adjustment to policy during the terms of the other G-10 currencies was intermeeting period. Accordingly, in the essentially unchanged on balance over the context of the Committee's long-run intermeeting period, though it was weaker objectives for price stability and sustain- through much of the period. M2 contracted further in October while able economic growth, and giving care- M3 expanded at a moderate pace, buoyed ful consideration to economic, financial, by continued rapid growth in largeand monetary developments, the Com- denomination time deposits. For the year mittee decided that somewhat greater or through October, M2 grew at a rate at the somewhat lesser reserve restraint would bottom of the Committee's range for 1994 be acceptable during the intermeeting and M3 at a rate in the lower half of its range for the year. Total domestic nonfinancial debt period. According to a staff analysis, the has continued to expand at a moderate rate in reserve conditions contemplated at this recent months. meeting would be consistent with mod- The Federal Open Market Committee est growth in M2 and M3 over coming seeks monetary and financial conditions that months. will foster price stability and promote sustainable growth in output. In furtherance of At the conclusion of the meeting, the these objectives, the Committee at its meet- Federal Reserve Bank of New York was ing in July reaffirmed the ranges it had estabauthorized and directed, until instructed lished in February for growth of M2 and M3 otherwise by the Committee, to execute of 1 to 5 percent and 0 to 4 percent respectransactions in the System Account in tively, measured from the fourth quarter of accordance with the following domestic 1993 to the fourth quarter of 1994. The Committee anticipated that developments contribpolicy directive: uting to unusual velocity increases could persist during the year and that money growth The information reviewed at this meet- within these ranges would be consistent with ing suggests that the growth of the economy its broad policy objectives. The monitoring Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 81st Annual Report, 1994 range for growth of total domestic nonfinan- arrangements with foreign central banks. cial debt was maintained at 4 to 8 percent for These arangements normally have onethe year. For 1995, the Committee agreed on year maturities and, except for those tentative ranges for monetary growth, meawith the Bank of Canada and the Bank sured from the fourth quarter of 1994 to the of Mexico, were due to mature on varifourth quarter of 1995, of 1 to 5 percent for M2 and 0 to 4 percent for M3. The Commit- ous dates in December 1994. tee provisionally set the associated monitor- In the course of their review, the ing range for growth of domestic nonfinan- members discussed sterilized intervencial debt at 3 to 7 percent for 1995. The tion by the Federal Reserve in the behavior of the monetary aggregates will foreign exchange markets. They gencontinue to be evaluated in the light of progress toward price level stability, move- erally agreed that in certain circumments in their velocities, and developments stances such intervention serves a useful in the economy and financial markets. purpose, such as helping to counter dis- In the implementation of policy for the orderly market conditions, but it norimmediate future, the Committee seeks to mally would not be expected to have increase significantly the existing degree of lasting effects on the foreign exchange pressure on reserve positions, taking account value of the dollar in the absence of of a possible increase in the discount rate. In the context of the Committee's long-run other policy adjustments. In the overobjectives for price stability and sustainable whelming number of instances for more economic growth, and giving careful consid- than a decade, the Federal Reserve has eration to economic, financial, and monetary participated jointly with the U.S. Treadevelopments, somewhat greater reserve sury in foreign exchange operations. restraint or somewhat lesser reserve restraint In the view of most members it seemed would be acceptable in the intermeeting period. The contemplated reserve conditions advisable to continue that procedure, are expected to be consistent with modest especially given the System's respongrowth in M2 and M3 over coming months. sibilities for the overall financial health of the economy and ongoing coopera- Votes for this action: Messrs. Greenspan, tion with the Treasury regarding the McDonough, Blinder, Broaddus, Forrestal, nation's broad financial objectives. Jordan, Kelley, LaWare, Lindsey, and Parry and Mses. Phillips and Yellen. Votes Nonetheless, the apparently limited and against this action: None. temporary effectiveness of sterilized intervention counseled a cautious reli- Secretary's note. The meeting was re- ance on such transactions. Against this cessed briefly at this point and the members background, nearly all the members of the Board of Governors convened to conbelieved that the System's reciprocal sider pending Reserve Bank proposals for increases in the discount rate. After the con- currency arrangements, which were a clusion of that meeting, the Presidents of the potential source of foreign currencies Federal Reserve Banks were informed that that might be used for intervention purthe Board of Governors had approved an poses as well as an ongoing symbol increase of 3A percentage point in the disof cooperation with other participating count rate, effective immediately, and the central banks, should be renewed for meeting of the Federal Open Market Committee then resumed. another year. At the conclusion of this discussion, the Committee authorized the System Foreign Currency renewal for further periods of one year Arrangements of the System's reciprocal currency The Committee considered the renewal arrangements with twelve foreign cenof the System's currency ("swap") tral banks and the Bank for Interna- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 201 tional Settlements. The amounts and policy actions to support short-term existing maturity dates of the arrange- foreign exchange objectives set by the ments are indicated in the table that Treasury. Alternatively, the credibility follows: of monetary policy is damaged if the System does not follow interventions with compatible policy actions, the Amount of interventions consequently fail to arrange- achieve their objectives, and the Sysment Term Maturity Foreign bank (millions (months) date tem is associated in the mind of the of dollars equivalent) public with the failed operations. In these circumstances, he did not view Austrian National renewal of the existing swap lines as Bank 250 12 12/04/94 Bank of England .... 3,000 12/04/94 desirable because they are used pri- Bank of Japan 5,000 12/04/94 marily to facilitate market intervention. Bank of Mexico 3,000 20 12/15/95 Bank of Norway 250 12 12/04/94 It was agreed that the next meeting of Bank of Sweden 300 12/04/94 Swiss National Bank . 4,000 12/04/94 the Committee would be held on Tuesday, December 20, 1994. Bank for International Settlements The meeting adjourned at 2:05 p.m. Swiss francs 600 12/04/94 Other authorized European Donald L. Kohn currencies .... 1,250 12/04/94 Secretary National Bank of Belgium 1,000 " 12/18/94 Bank of Canada 2,000 20 12/15/95 National Bank Meeting Held on of Denmark .... 250 12 12/28/94 December 20, 1994 Bank of France 2,000 12/28/94 German Federal Bank 6,000 12/28/94 A meeting of the Federal Open Market Bank of Italy 3,000 12/28/94 Committee was held in the offices of the Netherlands Bank 500 12/28/94 Board of Governors of the Federal Reserve System in Washington, D.C., Votes for this action: Messrs. Greenspan, on Tuesday, December 20, 1994, at McDonough, Blinder, Forrestal, Jordan, 9:00 a.m. Kelley, LaWare, Lindsey, and Parry and Mses. Phillips and Yellen. Vote against this action: Mr. Broaddus. Present: Mr. Greenspan, Chairman Mr. McDonough, Vice Chairman Mr. Broaddus dissented because he Mr. Blinder believed that the Federal Reserve's par- Mr. Broaddus Mr. Forrestal ticipation in foreign exchange market Mr. Jordan intervention compromises its ability to Mr. Kelley conduct monetary policy effectively. Mr. LaWare Because sterilized intervention cannot Mr. Lindsey have sustained effects in the absence Mr. Parry of conforming monetary policy actions, Ms. Phillips Ms. Yellen Federal Reserve participation in foreign exchange operations risks one of Messrs. Hoenig, Melzer, and Moskow two undesirable outcomes. First, the and Ms. Minehan, Alternate independence of monetary policy is Members of the Federal Open jeopardized if the System adjusts its Market Committee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 81st Annual Report, 1994 Messrs. Boehne,5 McTeer, and Stern, Mr. Hilton, Manager, Open Market Presidents of the Federal Reserve Operations, Federal Reserve Bank Banks of Philadelphia, Dallas, of New York and Minneapolis respectively By unanimous vote, the minutes of Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary the meeting of the Federal Open Market Mr. Coyne, Assistant Secretary Committee held on November 15, 1994, Mr. Gillum, Assistant Secretary were approved. Mr. Mattingly, General Counsel By unanimous vote, the Committee Mr. Patrikis, Deputy General Counsel elected Mark S. Sniderman as Associate Mr. Prell, Economist Economist from the Federal Reserve Mr. Truman, Economist Bank of Cleveland to serve until the Messrs. Beebe, Goodfriend, Lindsey, next election at the first meeting of the Mishkin, Promisel, Siegman, Committee after December 31, 1994, Simpson, Sniderman, and with the understanding that in the event Stockton and Ms. Tschinkel, he discontinued his official connection Associate Economists with the Federal Reserve Bank of Cleveland, he would cease to have any official Ms. Lovett, Manager for Domestic Operations, System Open Market connection with the Federal Open Mar- Account Mr. Fisher, Manager for ket Committee. Foreign Operations, System Open The Manager for Foreign Operations Market Account reported on developments in foreign exchange markets since the November Mr. Ettin, Deputy Director, Division of meeting. There were no System open Research and Statistics, Board of Governors market transactions in foreign curren- Mr. Madigan, Associate Director, cies during this period, and thus no vote Division of Monetary Affairs, was required of the Committee. Board of Governors The Manager for Domestic Opera- Mr. Slifman, Associate Director, tions reported on developments in Division of Research and Statistics, Board of Governors domestic financial markets and on Sys- Ms. Low, Open Market Secretariat tem open market transactions in govern- Assistant, Division of Monetary ment securities and federal agency obli- Affairs, Board of Governors gations during the period November 15, 1994, through December 19, 1994. By Messrs. Davis, Lang, Rolnick, and unanimous vote, the Committee ratified Rosenblum, Senior Vice Presidents, Federal Reserve these transactions. Banks of Kansas City, The Committee then turned to a dis- Philadelphia, Minneapolis, cussion of the economic and financial and Dallas respectively outlook and the implementation of Messrs. Gavin and McNees, Vice monetary policy over the intermeeting Presidents, Federal Reserve period ahead. A summary of the eco- Banks of St. Louis and Boston nomic and financial information availrespectively Mr. Kuttner, Assistant Vice President, able at the time of the meeting and of Federal Reserve Bank of Chicago the Committee's discussion is provided below, followed by the domestic policy directive that was approved by the Committee and issued to the Federal Reserve 5. Left before discussion of the economic situation. Bank of New York. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 203 The information reviewed at this most types of stores, but gains were meeting suggested a further pickup in particularly large at durable goods outeconomic growth in recent months. lets. Consumer spending on services Consumer spending, supported by also had grown significantly in October strong expansion of employment and (latest data), with advances widespread income and by buoyant consumer sen- among categories of services. Housing timent, remained robust. Business capi- starts increased appreciably in Novemtal spending and exports were rising ber, when construction activity apparbriskly. Payroll employment remained ently was boosted by favorable weather on a strong upward trend, and industrial in some parts of the country. Multioutput posted further substantial gains. family starts rose in November to their Broad indexes of prices of consumer highest level in four years, while singlegoods and services increased moder- family starts retraced a large part of ately on average over recent months, their October decline. although prices of many industrial mate- Business capital spending remained rials and intermediate supplies contin- on a pronounced upward trend. Shipued to move up rapidly. ments of nondefense capital goods other Nonfarm payroll employment rose than aircraft were up slightly further in sharply in November after an appre- October after having advanced sharply ciable expansion in October. Job gains in the two previous months; shipments in the service-producing sector were of computing equipment were brisk stronger in November than in October, in October, while shipments of other as a pickup in hiring in business services capital goods were little changed. With more than offset slower growth in health regard to transportation equipment, outservices and retail trade. Employment in lays for aircraft continued to trend lower manufacturing recorded another sizable in October, while sales of heavy trucks advance in November, with increases rose appreciably. Recent data on orders widespread by industry. Hiring in for nondefense capital goods pointed to construction was up considerably in continued vigorous expansion of spend- November after a small gain in October. ing on business equipment. Nonresi- Job growth outpaced the expansion of dential construction activity advanced the labor force in November, and the further in October, led by higher spendcivilian unemployment rate declined to ing for institutional and public utility 5.6 percent. structures. The uptrend in permits sug- Industrial production, led by further gested further advances in nonresidenincreases in manufacturing output, regis- tial construction. tered another large gain in November. Business inventory investment was Among major market groups, produc- relatively robust in October. Manufaction of business equipment surged and turing inventories rebounded after a sizable increases were recorded for the small decline in September; a sizable output of materials and construction amount of the October increase occurred supplies. With the growth of production at firms producing computers, office outpacing the expansion of capacity in machinery, and telecommunications November, the rate of utilization of total equipment for which demand had been industrial capacity moved up further strong. For manufacturing as a whole, from an already high level. the stocks-to-shipments ratio remained Retail sales continued to rise rapidly near a historically low level. Wholesale in November. Sales were up solidly at inventories continued to climb at a pace Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

204 81st Annual Report, 1994 in line with sales, and the inventory-to- supervisory workers over the Octobersales ratio for this sector stayed near the November period remained in the modmiddle of its range over recent years. erate range that had prevailed for some Retail inventory accumulation slowed time, although a pickup in earnings substantially in October; much of the growth was evident in a few sectors, slowdown reflected a sharp drop in notably construction and services. Over stocks at automotive dealerships. With the past twelve months, hourly earnings sales up sharply, the inventory-to-sales increased at a slightly faster pace than ratio for the retail sector fell in October they had over the year-earlier period. and remained near the middle of its At its meeting on November 15, range over recent years. 1994, the Committee adopted a directive The nominal deficit on U.S. trade in that called for a significant increase in goods and services widened somewhat the degree of pressure on reserve posiin October from its September level and tions, taking account of a possible rise from its average rate for the third quar- of 3A percentage point in the discount ter. The increase in the deficit from Sep- rate. The Committee did not include in tember's level reflected a small decline the directive a presumption about likely in the value of exports of goods and further adjustments to policy during the services, which resulted primarily from intermeeting period. Accordingly, the reduced aircraft shipments, and a small directive stated that in the context of the rise in the value of imports. Economic Committee's long-run objectives for activity in the major foreign industrial price stability and sustainable economic countries continued to expand rapidly in growth, and giving careful consideration the third quarter, and available indica- to economic, financial, and monetary tors generally suggested further substan- developments, somewhat greater or tial gains in the fourth quarter. somewhat lesser reserve restraint would Despite further sizable increases in be acceptable during the intermeeting the prices of many goods at the early period. The reserve conditions associstages of processing, inflation at the con- ated with this directive were expected to sumer level remained moderate in Octo- be consistent with modest growth in M2 ber and November. Energy prices were and M3 over coming months. unchanged on balance over the two On the day of the meeting, the Board months, while food prices edged higher. of Governors approved a 3A percentage Excluding food and energy items, point rise in the discount rate, to a consumer prices advanced at a slightly level of 43/4 percent. The increase in slower rate over October and November the discount rate was made effective than in earlier months of the year and immediately and was passed through also increased a little less over the fully to interest rates in the market twelve months ended in November than for reserves. Open market operations over the comparable year-earlier period. during the intermeeting period were At the producer level, prices of fin- conducted with a view to maintaining ished goods other than food and energy the tighter policy stance implemented were down over the October-November immediately after the meeting, and the period, but they rose by a little larger federal funds rate remained near amount for the twelve months ended in 5V2 percent. Adjustment plus seasonal November than they had in the year- borrowing, reflecting the usual lateearlier period. The increase in average autumn pattern of ebbing demand for hourly earnings of production or non- seasonal credit, declined over the inter- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 205 meeting period; actual borrowing was appeared to contribute to the dollar's close to anticipated levels. rise. Short-term interest rates rose consid- Growth of M2 resumed in November erably over the period after the Novem- after several months of decline. M2's ber meeting. These rates had increased expansion largely reflected sizable before the meeting in anticipation of a inflows to small time deposits and retail policy tightening move, but the size of money market funds that in part might the move was larger than expected and have been associated with accelerated rates firmed a little further as a result. outflows from bond mutual funds and Over the remainder of the intermeeting reduced inflows to stock mutual funds. interval, short-term rates responded to M3 growth slowed a little in November incoming economic data, for a time as some investors shifted funds from rising in reaction to indications of con- institution-only money market accounts, tinuing strength in economic activity whose opportunity costs had widened and later retracing a portion of these after the November policy tightening, increases in response to favorable news into direct holdings of securities. For the on inflation. Rates on private money- year through November, M2 grew at a market instruments with very short rate at the bottom of the Committee's maturities also were lifted somewhat in range for 1994 and M3 at a rate in the anticipation of the usual year-end pres- lower half of its range for the year. Total sures. Long-term rates declined slightly domestic nonfinancial debt had continover the intermeeting period. The more ued to expand at a moderate rate in favorable inflation data, together with recent months, and through October the relatively aggressive tightening (latest data) this debt measure had action, apparently were viewed by many grown at a rate in the lower half of its market participants as indicating that monitoring range. monetary policy would be sufficiently The staff forecast prepared for this firm to hold inflation in check. The reve- meeting suggested that growth of ecolations in early December of financial nomic activity would slow markedly difficulties in Orange County, Califor- over the next few quarters and then nia and concerns about their potential would average less than the rate of spread had a disruptive effect on finan- increase in the economy's potential outcial markets, notably those for munici- put over the remainder of the forecast pal securities, but aside from the securi- horizon. In the staff's judgment, the ties of the affected communities, the economy currently was operating disruption generally was brief. Most beyond its long-run noninflationary major indexes of equity prices fell, on capacity, and the forecast assumed that balance, over the intermeeting period. monetary policy would not accommo- The trade-weighted value of the dol- date any continuing tendency for aggrelar in terms of the other G-10 currencies gate demand to expand at a pace that increased further over the intermeeting could foster sustained higher inflation. period, with the dollar gaining about Growth of consumer spending was equally against the mark and the yen. expected to decline substantially in The unexpected size of the monetary response to slower income growth, policy move in November, the economic higher borrowing costs, and reductions news received over the period, and the in household net worth associated with growing expectation that policy would lower asset values. Business outlays for be tightened again before long all new equipment were projected to be Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

206 81st Annual Report, 1994 damped considerably by slower growth economy now operating at or even in sales, higher financing costs, and slightly above its noninflationary potendeclining profits. Homebuilding also tial, price and wage pressures were was expected to soften in response to likely to build unless the anticipated higher financing costs, but the rela- slowing occurred relatively soon. Key tively favorable cash-flow affordability measures of inflation including conof housing was anticipated to act as a sumer prices, wages, and producer partial offset to those increased costs. prices of finished goods did not display The projected robust pace of economic any evident uptrend at this juncture, but activity abroad was expected to bolster this could reflect a delay in the adjustexport demand. With the economy hav- ment of inflation to capacity constraints ing exceeded its noninflationary poten- and possibly some greater productivity tial in the staff's judgment, wage and and flexibility in the economy than had price inflation was projected to pick been assumed. up for a period before turning down as In the course of the Committee's dispressures on productive resources eased. cussion, members reported on regional In the Committee's discussion of cur- business conditions, which continued rent and prospective economic devel- to exhibit local variations ranging from opments, members referred to contin- modest expansion in some areas to uing indications of robust expansion robust growth in others. Reflecting in employment, output, and spending widespread strength in new orders, and to very high and rising levels of manufacturing firms outside the defense resource utilization. They saw scant evi- industry typically were operating at high dence at this point of any moderation in levels of capacity utilization, and there the growth of overall economic activity, were numerous anecdotal reports of including little apparent response thus tightening labor markets. As they had at far in interest-sensitive sectors of the earlier meetings, members remarked that economy to earlier policy tightening despite the increases that had occurred actions. Several observed that much of in interest rates, financial conditions the expansionary momentum in the remained generally supportive of vigoreconomy was likely to carry into at least ous economic activity. Some noted that the early part of next year, with potential the financial markets were displaying a inflationary consequences, but a number great deal of resilience and in particular also commented that appreciable slow- that they had on balance weathered ing during the year to a more sustainable fairly readily the recent financial proband less inflationary pace remained a lems of a number of local governments reasonable expectation. It was likely that and private corporations that had expemuch of the restraint from the policy rienced large unanticipated losses on firming actions implemented this year their investments. Banking institutions had not yet been experienced; those remained aggressive in their efforts actions had reversed an accommodative to extend loans to businesses and policy that had been in place through consumers. early 1994, the effects of which prob- In their comments on developments ably were still being felt in the latter part in key sectors of the economy, members of 1994. The members acknowledged noted that consumer spending had that the timing and extent of the slowing increased briskly in recent months amid in the expansion were subject to consid- indications of favorable consumer sentierable uncertainty. However, with the ment that in turn undoubtedly reflected Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 207 the rapid growth in employment and and prices of such facilities tended to income. It was still too early to form firm. In the homebuilding sector, the reliable estimates of retail sales in the latest available data did not indicate current holiday season. The anecdotal any weakening in housing construction reports pointed to seasonal increases despite the rise in mortgage interest ranging from moderate to strong in vari- rates. However, anecdotal reports from ous regions, but some members empha- different parts of the country suggested sized that sales volumes were being but- that the single-family sector might be tressed by unusual promotional efforts, weakening. At the same time, construcincluding relatively large discounts. tion of multifamily units continued to Some members also commented that exhibit strength in a number of areas, consumer debt was growing rapidly and and this sector appeared to be on a that increased debt levels were likely to gradual uptrend as falling vacancy rates exert a retarding effect on consumer brought increases in rents. On balance, spending, especially if consumer loan some modest softening in overall housrates were to be adjusted more fully ing construction was seen as likely in upward to reflect increases in market response to the rise that had occurred in interest rates. Rates on adjustable home mortgage interest rates. mortages were moving higher to catch Inventory investment was cited as up with market rates, and these increases another sector of the economy that probalong with the wealth effects from losses ably would exert a negative influence on suffered on bond and stock holdings economic activity over the year ahead, were likely to damp spending. Up to though inventory developments are now, however, the members saw few always subject to a great deal of uncersigns of any moderation in the growth tainty. The strength of inventory investof consumer spending, including little ment in recent quarters reflected efforts apparent effect from somewhat higher to accommodate rapid growth in final interest rates on normally interest- demand and avoid disruptions to prosensitive spending for motor vehicles duction in a period when supply delivand other consumer durables. ery times were tending to lengthen. Business fixed investment, which was Inventory accumulation might remain contributing substantially to the current elevated for a while longer, but as the strength of the expansion, was likely to projected slowing in the growth of final remain a positive factor in sustaining the demand began to materialize, business overall growth of the economy during firms were likely to curtail the growth the year ahead. Even so, as the expan- of their inventories, perhaps sharply sion matured and growth in final for some period, in order to maintain demand tended to moderate, business desired inventory-to-sales ratios. investment could be expected to soften. The government sector constituted As in the case of consumer spending, another source of considerable uncerhowever, there were few signs of any tainty in the outlook for 1995. Members slowing in the current data or anecdotal referred to major fiscal policy initiatives reports. Indeed, members saw growing that were likely to be considered in the indications of some improvement in new Congress, and they discussed posnonresidential construction activity as sible short- and long-term effects on the brisk economic expansion tended to economy. However, the shape of any absorb increasing amounts of previously legislation was still to be determined vacant commercial and industrial space and it was not possible at this point to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

208 81st Annual Report, 1994 gauge its effects on government or pri- tion where there were pronounced shortvate spending. On the other hand, spend- ages of skilled labor in many local areas, ing by state and local governments was most business firms were strongly resistclearly trending higher and was likely to ing sizable increases in their wages and provide a mild impetus to the overall were making use of "hiring bonuses" expansion; the financial difficulties of and "performance bonuses" instead of some local governments undoubtedly permanently higher wages to attract or would serve to curb their spending but retain workers. At the same time, job were not seen at this point as having insecurities, including the potential loss any significant effect on the growth in of health and pension benefits, appeared overall expenditures by state and local to be holding down labor mobility and governments. demands for higher compensation. With regard to the external sector of However, many members commented the economy, members continued to that rising pressures on capacity, should anticipate strengthening markets for U.S. they persist or intensify, could be exports over the year ahead. Projected expected to foster greater inflation at growth in exports would be stimulated some point. Indeed, there were numerby the further expansion of economic ous reports of business plans to raise activity in major U.S. trading partners prices early in the new year, and a numand by the delayed effects of the weak- ber of members commented that inflaening of the dollar that had occurred on tion probably would worsen somewhat balance over the course of 1994. Some over the near term. The subsequent members cited anecdotal indications of behavior of prices and wages would stronger foreign demand for agricultural depend importantly on fiscal and monand other goods produced in the United etary policy developments, the extent of States. inflationary expectations among busi- Despite the evidence of vigorous nesses and consumers, and the degree of expansion in overall economic activity pressure that further economic expanand very high levels of resource use, sion would exert on capacity in various broad measures of inflation in markets industries and occupations. Given their for finished goods and overall wage projections of some moderation in the inflation had been on the low side of business expansion and assuming approexpectations recently. Anecdotal reports priate fiscal and monetary policies, the continued to point to very strong compe- members generally felt that any added tition in most markets for final goods, inflation emerging in 1995 would likely and business firms continued to encoun- be mild and could subside gradually ter widespread resistance in their efforts during the year. to increase prices as the costs of their In the Committee's discussion of raw materials and other inputs moved policy for the intermeeting period higher. Likewise, no uptrend currently ahead, a majority of the members agreed was discernible in broad measures of on the desirability of maintaining an wages even though labor markets were unchanged policy posture at least widely described as tight and labor through the beginning of 1995. Moneshortages appeared to have increased tary policy had been tightened considfurther recently in some parts of the erably in a series of steps starting in country. While examples of upward February, and much of the restraint pressures on wages could be found in a stemming from those policy moves had number of industries, such as construc- not yet been felt in the economy. This Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 209 was especially true with regard to the expansion and the high level of resource effects of the latest policy moves in utilization argued for further monetary August and November, which accounted restraint to counter inflationary presfor half the total tightening. In the cir- sures; immediate action also would cumstances, a pause seemed warranted moderate inflationary expectations by to give the Committee more time to reinforcing the credibility of the Sysassess the underlying strength of the tem's anti-inflationary effort. All but one economy and the impact of previous of these members indicated, however, monetary restraint. This would provide that they could accept an unchanged a firmer basis for gauging the appropri- directive that was biased toward posate scope and timing of any further sible firming during the intermeeting monetary restraint that might be needed period. to contain inflation. The level of real On the issue of possible adjustments short-term interest rates, which had risen to policy during the period until the next considerably this year and were now meeting, a majority of the members significantly positive, the uniformly expressed a preference for an asymmetsluggish behavior of the monetary ric directive tilted toward restraint. aggregates, and the recent appreciation While most of these members preferred of the dollar might indicate that policy not to tighten policy at this point, they was now better positioned to restrain believed that the need for further moneincipient inflation. It was noted that the tary restraint was highly likely, though it Committee might have gained some would remain contingent on the tenor of leeway to maintain an unchanged policy the new information, including data on without adverse expectational effects in holiday retail sales, that would begin to light of the relatively large policy tight- arrive shortly after the turn of the year. ening implemented just a few weeks ago Should the need for more restraint and the publication of favorable price become apparent, it would be desirable and wage data that probably had allevi- in this view for the appropriate policy ated, at least temporarily, concerns about move to be made promptly to arrest any future inflation. A number of members worsening of inflation and inflationary also commented that financial markets expectations, thereby minimizing the might tend to be a bit unsettled over the cumulative policy tightening that would balance of the year as a result of the be required and the ultimate cost of expected year-end adjustments along bringing inflation under control. The with the uncertainty about the effects Committee always had the option of and incidence of the sizable market adjusting its policy during intermeeting losses incurred by some investors in periods even under a symmetric direc- 1994. In these circumstances, where tive, but the balance of risks in the there did not appear to be an urgent need outlook argued in the view of these for a further policy move, a number of members for a policy reaction to new members viewed conditions in financial information that was best characterized markets as arguing for a steady policy by an asymmetric directive. course pending a reassessment early The other members who favored an next year. unchanged policy preferred a symmetric A few members expressed a prefer- directive. In their view, the information ence for some additional tightening of that would be released in the weeks policy at this meeting. In their view, the immediately ahead was not likely to considerable strength of the economic depart sufficiently from current expec- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

210 81st Annual Report, 1994 tations to warrant a policy tightening At the conclusion of the meeting, the move during the intermeeting period. Federal Reserve Bank of New York was Moreover, current forecasts were sub- authorized and directed, until instructed ject to some risks in both directions. otherwise by the Committee, to execute Those in the direction of appreciably transactions in the System Account in greater-than-projected slowing in the accordance with the following domestic expansion might have a relatively low policy directive: probability, at least over the quarters immediately ahead, but that risk could The information reviewed at this meeting suggests a further pickup in economic not be ruled out and argued for a caugrowth in recent months. Nonfarm payroll tious approach to any further tightening. employment rose sharply in November, and Accordingly, the Committee should wait the civilian unemployment rate declined to until the next scheduled meeting when 5.6 percent. Industrial production registered more information, possibly including a another large increase in November and better assessment of the outlook for capacity utilization moved up further from already high levels. Retail sales have continfiscal policy, would be available for ued to rise rapidly. Housing starts increased evaluating the need for any further firmappreciably in November. Orders for noning of monetary policy. One member defense capital goods point to a continued expressed the view that it would be strong expansion in spending on business desirable to make any further short-run equipment; permits for nonresidential construction have been trending higher. The policy moves in the context of the Comnominal deficit on U.S. trade in goods and mittee's long-run strategy to be considservices widened somewhat in October from ered at the next meeting. Despite their its average rate in the third quarter. Prices of preferences, these members said that many materials have continued to move up they would not dissent from an asym- rapidly, but broad indexes of prices for conmetric directive. sumer goods and services have increased moderately on average over recent months. At the conclusion of the Committee's On November 15, 1994, the Board of discussion, all but one of the members Governors approved an increase from 4 to indicated that they could support a direc- 43/4 percent in the discount rate, and in line tive that called for maintaining the exist- with the Committee's decision the increase ing degree of pressure on reserve posi- was allowed to show through fully to interest tions and that included a bias toward the rates in reserve markets. In the period since the November meeting, short-term interest possible firming of reserve conditions rates have risen considerably while longduring the intermeeting period. Accordterm rates have declined slightly. The tradeingly, in the context of the Committee's weighted value of the dollar in terms of the long-run objectives for price stability other G-10 currencies recovered further over and sustainable economic growth, and the intermeeting period. giving careful consideration to eco- Growth of M2 resumed in November after several months of decline, while M3 nomic, financial, and monetary develexpanded moderately further. For the year opments, the Committee decided that through November, M2 grew at a rate at the somewhat greater reserve restraint bottom of the Committee's range for 1994 would be acceptable or slightly lesser and M3 at a rate in the lower half of its range reserve restraint might be acceptable for the year. Total domestic nonfinancial debt has continued to expand at a moderate rate in during the intermeeting period. The recent months and for the year-to-date it has reserve conditions contemplated at this grown at a rate in the lower half of its meeting were expected to be consistent monitoring range. with modest growth in the broader mon- The Federal Open Market Committee etary aggregates over coming months. seeks monetary and financial conditions that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 211 will foster price stability and promote sus- serious risk of rising inflation. In the tainable growth in output. In furtherance of circumstances, he also feared that a failthese objectives, the Committee at its meeture by the Committee to take restraining in July reaffirmed the ranges it had estabing action could heighten inflationary lished in February for growth of M2 and M3 of 1 to 5 percent and 0 to 4 percent respec- expectations by raising concerns about tively, measured from the fourth quarter of the System's commitment to the objec- 1993 to the fourth quarter of 1994. The Com- tive of sustainable, noninflationary ecomittee anticipated that developments contribnomic growth. uting to unusual velocity increases could persist during the year and that money growth within these ranges would be consistent with its broad policy objectives. The monitoring Temporary Increase in range for growth of total domestic nonfinan- Reciprocal Currency Agreement cial debt was maintained at 4 to 8 percent for with the Bank of Mexico the year. For 1995, the Committee agreed on tentative ranges for monetary growth, mea- At a meeting conducted via a telesured from the fourth quarter of 1994 to the phone conference on December 30, fourth quarter of 1995, of 1 to 5 percent for M2 and 0 to 4 percent for M3. The Commit- 1994, the Committee approved a tempotee provisionally set the associated monitor- rary increase from $3 billion to $4]/2 biling range for growth of domestic nonfinan- lion in the System's reciprocal currency cial debt at 3 to 7 percent for 1995. The (swap) agreement with the Bank of behavior of the monetary aggregates will Mexico; it was understood that all drawcontinue to be evaluated in the light of progress toward price level stability, move- ings, including those under the perments in their velocities, and developments manent tranche of the System's swap in the economy and financial markets. agreement with the Bank of Mexico, In the implementation of policy for the would be subject to a determination that immediate future, the Committee seeks to appropriate terms and conditions had maintain the existing degree of pressure on been met. The U.S. Treasury also reserve positions. In the context of the Comincreased its swap facility with the Bank mittee's long-run objectives for price staof Mexico by $l>/2 billion to $41/2 bilbility and sustainable economic growth, and giving careful consideration to economic, lion, thereby raising the total for offifinancial, and monetary developments, cial U.S. facilities to $9.0 billion. The somewhat greater reserve restraint would increases were in response to recent or slightly lesser reserve restraint might financial developments in Mexico. The be acceptable in the intermeeting period. Committee was informed at this meet- The contemplated reserve conditions are ing that the Bank of Canada would expected to be consistent with modest growth in M2 and M3 over coming months. be considering an increase in its own Can$1.0 billion facility with the Bank of Votes for this action: Messrs. Greenspan, Mexico, and that additional official McDonough, Blinder, Broaddus, Forrestal, financing assistance was being negoti- Jordan, Kelley, Lindsey, and Parry and ated with the other G-10 central banks Mses. Phillips and Yellen. Vote against and the Bank of Spain. this action: Mr. LaWare. Mr. LaWare dissented because he Votes for this action: Messrs. Greenspan, favored an immediate policy tightening McDonough, Blinder, Jordan, Kelley, LaWare, Lindsey, Melzer, and Parry and action. In his opinion, the expansion Ms. Yellen. Vote against this action: remained quite strong, with high and Mr. Broaddus. Absent and not voting: increasing levels of utilization in labor Mr. Forrestal and Ms. Phillips. Mr. Melzer and capital markets, and he saw a voted as alternate for Mr. Forrestal. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

212 81st Annual Report, 1994 Mr. Broaddus dissented because he continued to question the desirability of the System's foreign exchange market intervention and therefore the desirability of maintaining or enlarging the swap arrangements that facilitate them. In his view continued System participation in such operations with the U.S. Treasury presented an unacceptable risk of reducing the System's credibility and its ability to conduct monetary policy effectively. He felt this risk was particularly high in this instance. Moreover, as at the March 22, 1994, meeting of the Committee, he had serious concerns about the appropriateness of the foreign exchange operations this particular enlargement would support. In his view, the expansion of this arrangement was equivalent in many respects to a fiscal policy initiative of a kind that should be explicitly authorized by the Congress. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, January 31- February 1, 1995. The meeting adjourned at 12:45 p.m. Donald L. Kohn Secretary Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

213 Consumer and Community Affairs In 1994 the Division of Consumer and (including the Board's Regulation BB), Community Affairs continued to devote the agencies collectively received more considerable resources to concerns than 6,700 public comments, a record about community development and rein- volume for an interagency regulatory vestment, access to credit by minorities proposal. and low-income households, and pos- Following a review of the comments sible discrimination in mortgage lend- and further analysis of practical conseing. The Board published for comment, quences associated with the proposal, in conjunction with other federal agen- the agencies published a revised version cies that regulate financial institutions, a in October 1994. The public comment revised proposal to provide greater guid- period closed in November, and at ance to institutions on the regulations year's end the agencies anticipated comthat implement the Community Rein- pleting the CRA rules in early 1995. vestment Act. The Community Affairs The proposal is intended to emphasize staffs of the Board and the Federal performance in lending, service, and Reserve Banks made numerous presen- investment rather than an institution's tations to bank executives, community process of addressing its responsibilities groups, and other organizations con- under the law; promote consistency in cerning community investment and fair assessments; and reduce unnecessary lending. compliance burdens for institutions cov- These matters are discussed below, ered by the CRA. along with other actions by the Board in the areas of community affairs and con- Fair Lending sumer protection. The member agencies of the Federal CRA Reform Financial Institutions Examination Council (FFIEC) continued with the fair In 1993 President Clinton directed the lending activities described in their joint relevant federal regulatory agencies to Interagency Policy Statement on Fair reform the implementation of the Com- Lending Initiatives, issued in June munity Reinvestment Act (CRA) by 1993.2 They developed and conducted developing new regulations, supervisory fair lending seminars in Chicago, San procedures, and standards for assessing Francisco, and Washington, D.C., for the CRA performance of financial insti- senior executives of financial institututions.1 In response to the publication tions. The seminars were designed to in December 1993 of proposed amend- enhance the familiarity of industry leadments to the agencies' CRA regulations ers with fair lending regulations and to make lenders better aware of policies and practices that may result in the 1. Participating agencies in the CRA reform effort are the Board, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller 2. The member agencies are the Board, the of the Currency (OCC), and the Office of Thrift FDIC, the National Credit Union Administration Supervision (OTS). (NCUA), the OCC, and the OTS. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

214 81st Annual Report, 1994 unlawful treatment of applicants. The "best practices" that banks can use to seminars drew more than 900 execu- help ensure that loan applicants are tives from banks and thrift institutions. treated equitably. The Reserve Banks The agencies also jointly issued (along sent the video to the senior management with the Department of Housing and of all state member banks and bank Urban Development, the Department of holding companies and made it avail- Justice, and the Federal Trade Commis- able to others upon request. Nearly sion) a policy statement on lending dis- 7,000 copies were distributed in 1994. crimination and a series of questions The video also was used in fair lending and answers on the Fair Housing Act workshops sponsored by Reserve Bank and the Equal Credit Opportunity Act. Community Affairs programs and was The Board and the Community broadcast to bankers on the American Affairs offices at each of the Federal Financial Skylink, the American Bank- Reserve Banks also conducted programs ers Association's satellite communicato facilitate constructive responses by tions network. financial institutions to their communi- Multiple sessions of fair lending ties' credit needs; these programs com- seminars for bankers and others were bined education, information, research, sponsored by the Boston, Richmond, and technical assistance. In response to Atlanta, Kansas City, Dallas, and continuing concerns about discrimina- San Francisco Reserve Banks. The tion in lending, the Community Affairs Minneapolis and Kansas City Reserve programs at the Reserve Banks intensi- Banks jointly sponsored several sessions fied efforts to develop and deliver edu- of a workshop, entitled "Lending in cational and informational programs Indian Country—Cultural and Legal designed to help banks ensure equal Issues," for bankers and Native Ameriaccess to credit. can representatives; and the San Fran- The Cleveland Reserve Bank helped cisco Reserve Bank co-sponsored, with coordinate the Cleveland Residential the National Center for American Indian Housing and Mortgage Credit Project, Enterprise Development, several sesan ongoing community-wide effort to sions of a seminar entitled "Resolving bring together key representatives from Legal Issues When Lending on Indian business, government, and local com- Reservations." munities to identify and remove barriers to equal access to credit. Throughout the HMDA Data and Fair Lending year, task groups focused on critical aspects of the lending process, such as The Home Mortgage Disclosure Act contact with lenders, the activities of (HMDA) requires covered mortgage real estate agents, appraisal issues, and lenders in metropolitan areas to disclose processes in the secondary market. The data regarding home purchase and home program will continue in 1995. improvement loans, including refinanc- The Community Affairs programs of ings. Depository institutions and mortthe Boston, Chicago, and San Francisco gage companies generally are covered Reserve Banks jointly produced a video, if they are located in metropolitan areas Closing the Gap: A Guide to Equal and have assets of more than $10 mil- Opportunity Lending. Based on a publi- lion. Since January 1993, independent cation developed by the Boston Reserve mortgage companies with lower assets Bank in 1993 and designed primarily as are also covered if they originated 100 a training tool, the video features ten or more home purchase loans in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 215 preceding calendar year. One conse- applicants than for Asian and white quence of the expanded coverage, as applicants, even when applicants are in shown by data released in 1994, is that the same income brackets. For neighborthe number of independent mortgage hoods, the rate of loan denial generally companies that reported HMDA data for increased with an increase in the proporcalendar year 1993 increased more than tion of minority residents. three-fold from the previous year—to a For HMDA purposes, the only finantotal of 962 companies. cial characteristic of applicants that Covered lenders collect and submit to lenders report is income, and analysis their supervisory agency geographic shows that income accounts for some, information about the property related but not all, of the variations in loan to a loan or a loan application. They disposition rates among racial groups. report on the disposition of applications Even after controlling for income, white and, in most cases, about the race or applicants for conventional home loans national origin, income, and sex of in all income groups had lower rates of applicants and borrowers. The Board denial than black or Hispanic applicants. processes the data and prepares disclo- The data collected under HMDA do sure statements on behalf of the Depart- not include the wide range of financial ment of Housing and Urban Develop- and property-related factors that lenders ment (HUD) and member agencies of consider in evaluating loan applications. the FFIEC. Consequently, the data alone do not The FFIEC prepared almost 36,000 provide a sufficient basis for determindisclosure statements for the more than ing whether a lender is discriminating 9,650 lenders that reported HMDA data unlawfully. But when the data are comfor calendar year 1993. In August 1994, bined with other information available individual institutions made these dis- to the agencies, they are an important closure statements public. The FFIEC tool for enforcement of fair lending also prepared aggregate reports that laws. contain data for all lenders in a given Mortgage originators—as well as metropolitan statistical area (MSA); institutions in the secondary market for these reports became available in Octo- mortgages, such as the Federal National ber 1994 at a central depository in each Mortgage Association (Fannie Mae) and of the nation's 341 MS As. HMDA data the Federal Home Loan Mortgage Corhave been available to the public on poration (Freddie Mac)—have in recent paper, microfiche, magnetic reels and years initiated a variety of affordable cartridges, and PC diskettes; to enhance home loan programs intended to benefit public access, the FFIEC in 1994 added lower-income and minority households CD-ROM to the available formats. and neighborhoods. A year-to-year com- The HMDA data for 1993 covered parison of the HMDA data suggests more than 15.4 million home loans and these programs may be making a differapplications.3 The 1993 data continue to ence: For calendar year 1992, the numshow rates of credit denial that are ber of conventional home purchase higher for black and Hispanic loan loans extended to lower-income applicants increased 27 percent from the year 3. A summary of the 1993 HMDA data appears before, compared with a 10 percent in Glenn B. Canner and Wayne Passmore, "Home increase for higher income households. Purchase Lending in Low-Income Neighborhoods The changes in lending from 1992 to and to Low-Income Borrowers," Federal Reserve Bulletin, vol. 81 (February 1995), pp. 71-103. 1993 were even larger. Excluding the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

216 81st Annual Report, 1994 data reported by the newly covered new system helps examiners determine mortgage companies, the number of the significance of race in a bank's loans to lower-income households in lending decisions through a regression 1993 rose 38 percent, while loans to analysis of the HMDA data recorded by higher-income households rose only the institution on its Loan/Application 8 percent. Among racial or ethnic Register. Examiners then supplement groups, the number of loans to black the results of the analysis with other households increased 36 percent, and to information drawn from actual loan files Hispanic households 25 percent, com- to identify specific cases that may need pared with an increase of 18 percent for further review and possible discussions white households. with bank management. Assessing Compliance Other Uses of HMDA Data with Fair Lending Laws Since 1990 the HMDA data reported by In evaluating compliance with fair lend- lenders have included information about ing laws, bank examiners assess mort- the race, sex, and income of borrowers gage decisions in the context of the and loan applicants. For loans sold, lending institution's underwriting stan- lenders also identify secondary-market dards. They look at a sample of purchasers by type of entity. These approved and denied applications and expanded data provide opportunities to check whether the institution, in apply- profile the characteristics both of the ing its lending criteria, has implemented borrowers whose loans are purchased by standards consistently and fairly and secondary-market entities and of the whether any exceptions suggest differ- neighborhoods in which those borrowential treatment that warrants further ers reside.4 investigation. Access to all of a lender's Under its statutory responsibility to files on loan applications and to related oversee housing activities, HUD uses information enables the agencies to the expanded HMDA data to help assess overcome many of the limitations of the the effort of government-sponsored enti- HMDA data regarding the assessment of ties like Fannie Mae and Freddie Mac to applicant creditworthiness and of prop- attain HUD goals for supporting morterty characteristics. gages for low- and moderate-income During 1993 the supervisory agencies families and for properties in central began using a computer-based system cities. HUD also makes extensive use of for obtaining customized HMDA re- the HMDA data as one component of its ports. Developed by the Board in con- fair lending examinations. The data sultation with the other agencies, the assist in targeting lenders for further system enables examiners to obtain a investigation and in the investigation of more complete picture of an institu- specific allegations of lending discrimition's mortgage lending record than was nation filed with HUD or with certain readily available to them in the past. Comments by examiners led to improve- 4. See the discussion of data on the secondary ments in the system in 1994. market in Glenn B. Canner, Wayne Passmore, and In 1994 the Federal Reserve began Dolores S. Smith, "Residential Lending to Low- Income and Minority Families: Evidence from the using a new statistical analysis system 1992 HMDA Data," Federal Reserve Bulletin, to aid in the fair lending examination vol. 80 (February 1994), pp. 79-108, and Canner of large-volume mortgage lenders. The and Passmore, "Home Purchase Lending." Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 217 state or local agencies. HMDA data also following actions of lenders, beginning are being used as part of a large-scale in 1996: investigation in three metropolitan areas where HUD is testing for fair lending • Keep quarterly records of HMDA compliance. data, thereby allowing the agencies to In 1994 the FFIEC for the first time catch data collection problems earlier in acquired data on mortgage insurance the year and to release data for the full transactions from the nation's eight pri- year more promptly vate mortgage insurance (PMI) com- • Submit machine-readable HMDA panies. The companies voluntarily pro- data (for example, on a PC diskette or vided the data, covering transactions for magnetic tape) to their supervisory the fourth quarter of 1993, for compila- agencies, because the quality of such tion and public release by the FFIEC on data has been superior to the quality of behalf of their national trade associa- submissions on paper. Institutions that tion, Mortgage Insurance Companies of report fewer than twenty-five entries are America.5 For 1994 the PMI companies exempt from this requirement. will submit data for the full year. Along with HMDA data, the PMI data are In addition, the agencies, through the made available for public review at cen- FFIEC, revised their Guide to HMDA tral depositories in each MSA, and are Reporting—Getting It Right! to conform available on magnetic tape, PC diskette, its listings to the latest boundaries of and CD-ROM through the FFIEC. MSAs, as officially determined by the Office of Management and Budget. Accuracy of Data The important uses of the HMDA data Community Development make accuracy a critical issue. The FFIECs processing software is pro- During 1994 the Board issued regulagrammed to identify errors in the data tions that clarified and enhanced the submitted by lenders for correction capacity of state member banks and before disclosure statements and MSA bank holding companies to make comreports are prepared. During the years munity development investments. In that lenders have submitted their HMDA December the Board issued final regudata line by line, the quality has im- lations governing community developproved considerably. The proportion of ment investments by state member 1993 loan records containing detected banks; the regulations implement provierrors was less than 0.5 percent, down sions of the Depository Institutions from about 4.4 percent in 1991. Disaster Relief Act of 1992 that amend In other efforts to ensure the accuracy the Federal Reserve Act. Simultaneof HMDA data, the Board in 1994 ously, the Board issued a revised polamended Regulation C to require the icy statement to clarify the community development investment options of bank 5. A study of the data, conducted jointly by holding companies and to streamline the staff members of the Board's Division of Con- application process. sumer and Community Affairs and Division of In conjunction with the Reserve Research and Statistics, is in Glenn B. Canner, Banks, the Board published a revised Wayne Passmore, and Monisha Mittal, "Private Mortgage Insurance," Federal Reserve Bulletin, Directory of Bank Holding Company vol. 80 (October 1994), pp. 883-99. Community Development Corporations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

218 81st Annual Report, 1994 Several Reserve Banks actively assisted governmental, business, and community banks and holding companies in making organizations. community development investments. Community Affairs programs re- The Philadelphia, Richmond, Atlanta, sponded to a growing demand for St. Louis, Kansas City, Dallas, and San technical assistance and advice on com- Francisco Reserve Banks sponsored munity development and reinvestment educational meetings and seminars for matters. Technical assistance helps bankers and others on community devel- financial institutions and their commuopment finance, affordable housing nities develop particular programs to finance, and lending to small and address recognized needs; in many minority-owned businesses. The Boston cases, it helps individual institutions Reserve Bank sponsored training pro- strengthen the programs they undertake grams on the Community Reinvestment in fulfillment of their responsibilities Act for bank directors and senior offi- under the Community Reinvestment cers; most of the other Reserve Banks Act. During 1994 the Federal Reserve's sponsored at least one major conference Community Affairs officers and staff on community development or reinvest- members held more than 500 meetment topics. ings with bankers, community groups, Regarding specialized topics, the business representatives, and others Chicago Reserve Bank helped develop to help them better understand and a seminar to familiarize bankers with participate in community development the financing of exports for small busi- finance. nesses. The Boston Reserve Bank The Federal Reserve's Community co-sponsored a seminar for lenders Affairs programs in 1994 also provided and community representatives concern- other information to bankers, small busiing the new federal Empowerment ness, and community groups to further Zones/Enterprise Communities initia- partnerships for community developtive. Financing earthquake relief was the ment. The Philadelphia Reserve Bank topic of a seminar for lenders presented published Community Improvements, a by the San Francisco Reserve Bank, pictorial guide to more than eighty HUD, and the Federal Home Loan Bank examples of bank-assisted community of San Francisco. The Atlanta Reserve and economic development projects in Bank and the Martin Luther King, Jr., the Philadelphia District. Center for Nonviolent Social Change The New York Reserve Bank pubtogether conducted a series of sem- lished The Credit Process: A Guide for inars for bankers and community rep- Small Business Owners, which features resentatives on building community information on sources and types of partnerships. funding for new businesses, advice on Overall, during 1994 the Reserve preparing business plans and loan re- Bank Community Affairs programs quests (noting what lenders will review), sponsored or co-sponsored more than and a summary of other resources avail- 180 conferences, seminars, and informa- able to small businesses. The New York tional meetings on fair lending, commu- Reserve Bank and other Reserve Banks nity development, and reinvestment distributed more than 100,000 copies topics. Community Affairs staff mem- during 1994. The Atlanta Reserve Bank bers from the Board and the Reserve issued a compendium of financing pro- Banks also made more than 400 presen- grams conducted by each of the six tations at events sponsored by banking, states in its District. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 219 Community Affairs newsletters are ments that revised reporting rules for increasingly important to the Reserve home improvement loans and refinanc- Banks in their effort to keep financial ings. At the same time, the Board institutions informed about community deferred action on issues related to the development and community reinvest- treatment of requests handled under ment. In 1994 the New York Reserve prequalification programs. Questions Bank began publishing Bank Links, and have been raised, for example, about the the Cleveland Reserve Bank published reporting of denials and the data to be its first issue of Community Reinvest- entered in such cases for loan amount, ment Forum. All twelve Reserve Banks loan type, and property location. The now publish community development Board's notice of the amendments in the newsletters, reaching a combined distri- Federal Register advised institutions bution of more than 53,000 bankers, that for 1994 and 1995 they need not community representatives, government report action taken on prequalification officials, bank regulators, and others. requests. Members of the Board's Community The Board also proposed amendments Affairs staff conducted and promoted to conform Regulation C to requireresearch on the community credit deliv- ments for mortgage data collection, ery system. They worked with staff applicable to bank and thrift institutions members of the Board's Division of with assets greater than $250 million, Research and Statistics on the first that were being offered under the CRA major study of the disposition of appli- reform initiative. cations submitted to private mortgage insurers (see note 5). Regulation E In 1994, Community Affairs staff (Electronic Fund Transfers) members taught courses for consumer examiners on community development In February the Board amended Regulafinance and community contacts; for tion E to apply coverage to electronic senior commercial examiners, they con- benefit transfer (EBT) programs estabducted eight training sessions for senior lished by federal, state, and local govcommercial examiners to help them ernments. Under these programs, agenunderstand the financing of affordable cies paying benefits issue access cards housing and of community development and personal identification numbers to projects. recipients. With the cards, recipients can obtain benefits such as food subsidies and payments under the Aid to Families Other Regulatory Matters with Dependent Children and Supplemental Security Income programs The Board took the following other through automated teller machines and actions with regard to consumer and point-of-sale terminals. community affairs regulations. The amendments apply to EBT programs most provisions of Regulation E, including the rules on liability for unau- Regulation C thorized transfers and resolution of (Home Mortgage Disclosure) errors. Thus, recipients of government In addition to the changes to Regulation benefits will receive essentially the C discussed above in regard to HMDA same protections as consumers using data, the Board adopted other amend- deposit accounts for electronic transfers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 81st Annual Report, 1994 This rulemaking directly affects govern- the regulation and lessen its burden on ment agencies that administer EBT pro- business without diminishing consumer grams and indirectly affects depository protections in leasing arrangements. institutions and other private-sector entities. The Board delayed application of the Regulation Z rules until March 1, 1997, as requested (Truth in Lending) by a federal EBT task force that represents all the major federal agencies with In November the Board published for benefit programs. The task force is comment proposed amendments to developing a nationwide system for Regulation Z to implement changes electronic delivery of government bene- made to the Truth in Lending Act by fits and asked for the three-year delay the Riegle Community Development so that agencies could implement these and Regulatory Improvement Act of EBT programs in compliance with 1994. The law imposes new disclosure Regulation E. requirements and substantive limitations In February the Board also published on mortgages bearing high rates or high a proposal to make mostly technical fees. The law also imposes new disclorevisions to Regulation E after a review sure requirements to assist consumers in pursuant to the Board's regulatory comparing the cost of reverse mortgage improvement policy. The proposal's transactions, in which homeowners substantive changes include revisions (typically the elderly) receive periodic to the existing exemptions for transfers disbursements and the creditor relies relating to securities or commodities and on the ultimate sale of the home for for preauthorized transfers to or from repayment. accounts at small institutions. The Board also temporarily amended In November the Board adopted an Regulation Z, on three occasions, as interim rule that, as of December 1, allowed under the Depository Institu- 1994, receipts issued at automated teller tions Disaster Relief Act of 1993. The machines no longer have to uniquely actions declared that conditions for boridentify the consumer's account or card. rowers in disaster-affected communities This change will help protect consumers in California, Texas, Alabama, Georgia, and financial institutions against fraud- and Florida represented bona fide perulent fund withdrawals. At year-end, the sonal financial emergencies; borrowers Board expected to take final action in seeking to "cash out" some equity in early 1995 on whether to make the their home through a new lender could interim rule final. thereby do so more quickly because they fit the requirement in Regulation Z that only in a personal financial emergency Regulation M can these borrowers waive the three-day (Consumer Leasing) right to rescind the transaction. In December the Board published a In January the Board extended the notice requesting comments on whether period for public comment on possible consumers would benefit from greater amendments to Regulation M, which flexibility in waiving the right to a implements the Consumer Leasing Act. rescission period on transactions with The Board expects to publish proposed new creditors to refinance or consolidate amendments by mid-1995 to simplify home-secured loans if no new debt Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 221 is involved. The Riegle Community In July the Board extended the com- Development and Regulatory Improve- ment period on the May proposal. At the ment Act of 1994 directs the Board to same time, the Board published an alterseek comment and then make recom- native approach for APY calculations mendations to the Congress. Currently, that would allow institutions to disclose if the transaction is with the existing an APY equal to the contract interest lender, the right of rescission does not rate on time accounts with maturities apply at all to a refinancing if no new greater than one year that do not comdebt is incurred. But if a new creditor is pound interest but pay interest at least involved in the refinancing, consumers annually. At year-end, the Board have the three-day right to rescind and expected to take final action on the promay not waive the right unless a bona posal early in 1995. fide personal financial emergency exists, even if no new debt is incurred. Interpretations Regulation DD In 1994 the Board continued to offer (Truth in Savings) legal interpretations and guidance In January the Board extended the com- through its official staff commentaries. ment period on a proposal published The commentaries apply and interpret in December 1993 to revise Regula- the requirements of the regulations tion DD. Under the proposed revisions, and are a substitute for individual staff financial institutions would be required interpretations. to use an "internal rate of return" for- In August the Board issued the first mula to calculate the annual percentage commentary to Regulation DD. It incoryield (APY) on deposit accounts; the porates much of the guidance provided yield would thus reflect not only the when the regulation was adopted, and effect of compounding but also the time addresses other questions raised since value of money for consumers who that time. receive interest payments during the In December the Board proposed term of the account. revisions to the commentary to Reg- In May the Board withdrew the ulation Z (Truth in Lending). The December proposal and issued in its proposed revisions would clarify reguplace a proposal specifying that once latory provisions or provide further interest is credited to an account, it guidance on issues of general interest, becomes part of the principal. The pro- such as the treatment of various fees posal also provided a rule applicable to and taxes associated with loans secured accounts in which consumers are given by real estate, including charges by the choice of leaving interest in the third parties, and a creditor's responsiaccount or taking interest by check or bilities when investigating a claim of transfer. Under the proposal, institutions unauthorized use of a credit card. The would have to compound at least as Board also proposed revisions to the frequently as they allowed consumers to commentary to Regulation B (Equal receive interest credited by check or Credit Opportunity). It addressed transfer. The proposed revisions also issues such as credit scoring systems, would have the effect of producing an disparate treatment, special-purpose APY that reflects the time value of credit programs, and marital status money. discrimination. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

222 81st Annual Report, 1994 Economic Effects of the ATMs are the most widely used EFT Electronic Fund Transfer Act service. Nearly two-thirds of all households currently have ATM access cards, In keeping with statutory requirements, and most of the nation's depository the Board monitors the effect of the institutions offer consumers access to Electronic Fund Transfer Act on compli- ATMs. Access to ATMs has been ance costs and consumer benefits related enhanced by the operation of shared to EFT services. During 1994, the Board networks. Almost all ATM terminals in amended Regulation E with regard to operation today participate in one or electronic benefit transfer (EBT) pro- more shared networks. The monthly grams and receipts from automated average number of ATM transactions teller machines (ATMs) (see Regula- increased about 8 percent in the past tion E, above, under Other Regulatory year, from about 642 million in 1993 to Matters). about 694 million in 1994. During the EBT programs have not yet expanded same period, the number of ATMs rose much beyond the pilot-program stage, about 15 percent, to 109,000. and reliable estimates of compliance Direct deposit is used by more than costs are not available. At the time half of all U.S. households. Direct the amendments bringing EBT pro- deposit is particularly widespread in the grams under the liability rules of Regu- public sector, involving more than half lation E were approved, government the number of all social security payprogram agencies expressed concern ments and two-thirds the number of all about the potential cost. However, the federal salary and retirement payments. one EBT program that operates under Direct deposit is less common in the Regulation E liability rules has recorded private sector, but it has grown substanloss rates no greater than those of tially in recent years. The proportion of financial institutions for electronic households receiving a direct deposit of fund transfers and lower than loss any kind grew about 5.4 percent per rates for paper-based benefit programs. year during the 1990s. If compliance costs for EBT pro- Point-of-sale systems account for a grams are similar to those of elec- small share of EFT services, but their tronic transactions at financial institu- use continued to grow rapidly in 1994. tions, coverage under Regulation E The number of transactions on point-ofshould not significantly inhibit the sale systems rose about 43 percent from growth of EBT programs. the preceding year, to 52 million per Aside from regulatory changes that month; the number of point-of-sale potentially benefit consumers receiving terminals rose about 75 percent, to public benefits or reduce compliance 343,000. burdens, the economic effects of the The incremental costs associated with Electronic Fund Transfer Act increased the EFT act are difficult to quantify because of continued growth in the use because no one knows how industry of EFT services. During the 1990s the practices would have evolved in the proportion of U.S. households using absence of statutory requirements. The EFT services has grown at an annual benefits of the law are also difficult to rate of about 2.5 percent. About 84 per- measure because they cannot be isolated cent of households now have one or from consumer protections that would more EFT features on accounts at finan- have been provided in the absence of cial institutions. regulation. The available evidence pro- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 223 vides no evidence of serious consumer degree to which foreign banking organiproblems with electronic transactions at zations conduct activities covered by this time. In 1994 about 90 percent of consumer protection laws and reguladepository institutions examined by fed- tions varies, but often these institutions eral agencies were in full compliance conduct far fewer such activities than a with Regulation E. Statistics indicate typical state member bank. that the institutions not in full compli- During the 1994 reporting period, ance generally had fewer than five viola- from July 1, 1993, to June 30, 1994, tions. The violations primarily involved Federal Reserve examiners conducted failure to provide all required disclo- 865 examinations for compliance with sures to consumers. the consumer laws: 658 for state mem- The Board's database of consumer ber banks and 207 for foreign banking complaints and inquiries is another organizations. source of information on potential prob- The examinations are conducted by lems. In 1994, sixty-one of the com- the consumer affairs unit within each of plaints processed involved electronic the twelve Federal Reserve Bank examtransactions. The System forwarded ination departments. The Compliance thirty-four complaints that did not Section of the Board's Division of Coninvolve state member banks to other sumer and Community Affairs is responagencies for resolution. Investigation of sible for reviewing and coordinating the remaining twenty-seven complaints compliance activities, providing Reserve did not show any violation of the act or Banks with the information and assisregulation. tance they need, and ensuring that the Reserve Banks take a uniform approach to compliance examinations. Compliance Examinations An important aspect of the Federal The Federal Reserve System has main- Reserve's compliance program is examtained a program of specialized exami- iner training. Federal Reserve examiners nations of state member banks for attend several training sessions for compliance with consumer protection CRA, fair lending, and consumer comlaws since 1977. Passage of the Fed- pliance during their career. New exameral Deposit Insurance Corporation iners attend the Board's three-week Improvement Act of 1991 expanded the basic consumer compliance school; Federal Reserve's authority to enforce examiners with eighteen to twenty-four consumer laws beyond state member months of field experience attend the banks to include certain types of foreign Board's week-long advanced complibanking organizations.6 The Federal ance school, two-week fair lending Reserve began conducting compliance school (new in 1994), and one-week examinations of foreign banking organi- class in advanced CRA examination zations in the first quarter of 1992. The techniques.7 As in the case of the twoweek fair lending school, new classes are incorporated into the training pro- 6. The Federal Reserve System is responsible for enforcing consumer laws in the case of state- gram when needed. chartered agencies and state-chartered uninsured branches of foreign banks, commercial lending 7. The Board did not offer the advanced CRA companies owned or controlled by foreign banks, examination techniques class during 1994 because and organizations operating under section 25 or of the ongoing CRA reform effort. The class will 25(a) of the Federal Reserve Act (Edge Act and be offered again after a new CRA regulation is agreement corporations). adopted. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

224 81st Annual Report, 1994 Examiner training is supplemented sumer Leasing Act, and the Electronic by the Reserve Banks through regular Fund Transfer Act—have remained at departmental staff meetings and through levels similar to those reported for 1993. special training sessions. In addition, A small decline in the level of complithe Board's resident examiner program ance with the Truth in Lending Act was provides examiners (sixteen of them in reported and a slight improvement was 1994) with the opportunity to get a Sys- noted for compliance with the Expetem perspective through working at the dited Funds Availability Act. This sec- Board for several weeks; they observe tion summarizes these compliance data how the division works, how policies for the reporting period July 1, 1993, to are developed, and how Board staff June 30, 1994.8 members work with other agencies that supervise financial institutions. Equal Credit Opportunity Act During 1994 the Federal Reserve Sys- (Regulation B) tem conducted two basic consumer compliance schools for sixty-two students, The level of full compliance with the three advanced consumer compliance Equal Credit Opportunity Act (ECOA) schools for forty-four students, and two remained relatively stable at approxifair lending schools for seventy-one mately 61 percent in the 1993 and students. 1994 reporting periods.9 The agencies The FFIEC is the interagency coordi- reported that 72 percent of the institunating body charged with development tions examined in 1994 that were not in of uniform examination principles, stan- full compliance with Regulation B had dards, and report forms (see note 2 for between one and five violations (the membership of the FFIEC). In 1994 the lowest frequency category), compared member agencies of the FFIEC collabo- with 77 percent in 1993. The most frerated to revise examination procedures quent violations involved the failure to to reflect changes in consumer laws and take the following actions: regulations. They adopted changes to examination procedures related to the • Provide a written notice of adverse Real Estate Settlement Procedures Act action that contains a statement of the and the treatment of loans with subor- action taken, the name and address of dinate liens. The FFIEC agencies also the creditor, an ECOA notice, and the agreed to revised examination proce- name and address of the federal agency dures reflecting technical changes in the that enforces compliance Expedited Funds Availability Act and • Notify the applicant of the action regulations governing exception-based taken within the time-frames specified check holds. in the regulation Agency Reports on Compliance 8. Not all the federal agencies that supervise with Consumer Regulations financial institutions use the same method to compile compliance data. However, the data support Data from the member agencies of the the general conclusions presented here. FFIEC and from other federal super- 9. The percentage of institutions in full compliance with the regulations included in this report is visory agencies indicate that compliance calculated using a straight average of the percentwith the consumer regulations—the age of institutions in compliance as reported by Equal Credit Opportunity Act, the Con- the five financial regulatory agencies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 225 • Give a statement of reasons for tation, the Small Business Adminisadverse action which is specific and tration, the Packers and Stockyards indicates the principal reasons for the Administration (Department of Agricredit denial or other adverse action. culture), and the Securities and • Follow the prescribed form of the Exchange Commission—reported sub- ECOA notice stantial compliance among the entities • Request information for monitoring they supervise. purposes about race or national origin, sex, marital status, and age on credit applications primarily for the purchase Electronic Fund Transfer Act or refinancing of a principal residence. (Regulation E) The Board issued two written agree- The five financial regulatory agencies ments involving violations of Regula- reported that 90 percent of examined tion B. The OTS issued seven formal institutions were in compliance with enforcement actions involving Regula- Regulation E, the same level of complition B. The FDIC issued nine formal ance reported for 1993. The following enforcement actions involving consumer five rules were the most frequently viocompliance regulations without dis- lated provisions of Regulation E: tinguishing which of those actions involved Regulation B. • Provide, at the time a consumer The Federal Trade Commission contracts for an EFT service or before (FTC) continued its enforcement efforts the first transfer is made, a written under the ECOA and issued a new con- statement outlining the terms and consumer brochure on mortgage credit dis- ditions of the electronic fund transfer crimination. The FTC worked with other service government agencies and with creditor • Provide a notice of the procedures and consumer organizations to increase for resolving alleged errors at least once awareness and'compliance with regard each calendar year to the ECOA. The FTC obtained a con- • Provide to customers a statement of sent decree resolving allegations that a all required information at least quarfinancier of mobile homes discriminated terly, or monthly if EFT activity on the basis of marital status. In addi- occurred tion, the FTC worked with the Depart- • Investigate and resolve alleged ment of Justice to obtain a consent errors promptly decree resolving allegations that a mort- • Follow required procedures after gage company discriminated on the determining that no error occurred. basis of race and national origin. The Farm Credit Administration re- The OTS issued one formal enforceported a substantial level of compliance ment action involving Regulation E. The with the ECOA. The most frequent vio- FTC reported ongoing litigation with lations it found involved the failure to one telemarketing company that allegprovide applicants with timely notifica- edly failed to obtain written authorization of action taken on loan applications tion from consumers for preauthorized and the failure to obtain monitoring transfers. The Securities and Exchange information. Commission examines broker-dealer The other agencies that enforce the organizations for compliance with the ECOA—the Department of Transpor- EFT act; it found no violations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

226 81st Annual Report, 1994 Consumer Leasing The Board issued one written agree- (Regulation M) ment involving violations of Regulation Z. The OTS issued twelve formal The FFIEC agencies reported substanenforcement actions. Under the Intertial compliance with Regulation M, agency Enforcement Policy on Regulawhich implements the consumer leastion Z, 529 institutions supervised by ing provisions of the Truth in Lendthe Board, the FDIC, the OCC, and the ing Act. As in the 1993 reporting OTS refunded $6.8 million on 137,504 period, more than 99 percent of examaccounts in 1994; in 1993 roughly ined institutions were found to be in $5.9 million was refunded on 28,786 full compliance with the regulation. accounts. The large increase in the num- The violations noted by the agencies ber of reimbursed accounts is attributinvolved the failure to adhere to specific able to the FDIC's requiring one bank to disclosure requirements detailed in the make restitution on a large number of regulation. credit card accounts. The FTC updated a publication on The FTC issued a complaint against vehicle leasing and issued a publication a department store for several credit for businesses explaining recent amendreporting and collection practices ments to the Consumer Leasing Act, alleged to violate Regulation Z. It also regarding required disclosures for radio cited the store for violating Regulation lease advertisements. Z rules that apply when a consumer declares some charges on a credit card bill to have been unauthorized. In such Truth in Lending Act cases, according to the FTC, the store (Regulation Z) imposed improper requirements on The FFIEC agencies reported that consumers; held consumers liable even 48 percent of examined institutions were when the department store did not in full compliance with Regulation Z, conduct a reasonable investigation of compared with 49 percent in 1993. The claims; and failed to inform cardholders Board, the NCUA, the FDIC, and the in writing of its reasons when it con- OTS showed decreases in compliance, cluded that there were no unauthorized while the OCC reported an increase. charges. Agencies indicated that of the examined financial institutions not in full com- Community Reinvestment Act pliance, 56 percent were in the low- (Regulation BB) frequency category (between one and five violations), down from 62 percent The CRA requires the Board to assess in 1993. the CRA performance of state mem- The most frequently observed viola- ber banks during regular compliance tions of Regulation Z were the failure to examinations and to take the CRA accurately disclose the finance charge, record into account, along with other the annual percentage rate, the amount factors, when acting on applications financed, and the number, amounts, and from state member banks and bank timing of payments scheduled to repay holding companies. an obligation; and the failure to disclose The Federal Reserve System mainthat the creditor has a security interest in tains a three-faceted program for enforcthe property being purchased or in other ing and fostering better bank perforidentified property. mance under the CRA: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 227 • Examination of institutions to • Provide next-day availability for assess compliance required items • Dissemination of information on • Provide two-day availability for community development techniques to local checks bankers and the public through Commu- • Adequately train employees and nity Affairs offices at the Reserve Banks provide procedures to ensure com- • CRA analyses performed while pro- pliance cessing applications from banks and • Follow special procedures for large bank holding companies. deposits • Post the availability policy at loca- Federal Reserve examiners review the tions where employees accept deposits. performance of state member banks in community revitalization and other rele- The OTS issued two formal enforcevant areas to assess CRA compliance. ment actions involving Regulation CC. When appropriate, examiners suggest ways to improve CRA performance. Unfair and Deceptive Acts For the reporting period of July 1, or Practices (Regulation AA) 1993, through June 30, 1994, the Federal Reserve conducted 643 CRA The three financial regulatory agenexaminations.10 During the period, 5 cies with responsibility for enforcing institutions were rated as being in Regulation AA's Credit Practices Rule ''substantial noncompliance" with the reported that the majority of banks CRA; 14 were rated as "needs to examined were in compliance. During improve" in meeting community credit the 1994 reporting period, slightly less needs, 493 as "satisfactory," and 131 as than 99 percent of examined banks were "outstanding." found to be in full compliance with the regulation. The most frequent violation involved the failure to provide a clear Expedited Funds Availability Act and conspicuous disclosure to a guaran- (Regulation CC) tor on a credit obligation. The FFIEC agencies reported a slight improvement in the level of compliance Applications with Regulation CC for the 1994 reporting period: 75.1 percent of examined During 1994, the Federal Reserve Sysinstitutions were in full compliance with tem acted on eighty-seven bank and the act, compared with 74.1 percent bank holding company applications in 1993. The agencies reported that of that involved CRA protests or adverse the institutions not in full compliance, CRA ratings.11 In addition, the System 75.5 percent were in the low-frequency reviewed seventeen applications dealing category (between one and five viola- with fair lending and other issues related tions). The following five rules were the to compliance with consumer regulamost frequently violated provisions of tions. In 1993, ninety-eight applications Regulation CC: involved CRA issues and four involved compliance issues. 10. Foreign banking organizations and Edge Act and agreement corporations (see note 6) accounted for 207 of the institutions examined for 11. Twenty-five applications that involved the compliance with consumer laws; they are not sub- CRA and other compliance issues were pending as ject to the CRA. of year-end 1994. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

228 81st Annual Report, 1994 Among the eighty-seven applications proved Barnett's applications knowing acted on in 1994 that involved CRA the conclusion of a Justice Department concerns, thirty-two involved adverse investigation of compliance with federal CRA ratings, fifty were protested on fair lending statutes by Barnett and CRA grounds, and five involved both several of its subsidiaries. At the time adverse ratings and protests. In compari- the Board acted, however, the Justice son, the previous year's ninety-eight Department was not able to provide the applications involved forty with adverse Board with the evidentiary materials CRA ratings, forty-five that were pro- compiled in its investigation, and the tested, and thirteen with both adverse department had not filed a formal action ratings and protests. in court. The Board found that, on the During 1994 the Board acted on basis of the facts of record available applications involving two bank holding to it, the convenience and needs factor, companies that were subject to fair lend- including the CRA records of Barnett's ing investigations by the Department of subsidiary banks, and the managerial Justice. The first (also protested on CRA factor were consistent with approval. grounds) involved Shawmut National Corporation (Hartford and Boston) seek- Consumer Complaints ing to acquire New Dartmouth Bank (Manchester, New Hampshire). In April The Board and the Federal Reserve the Board reconsidered an earlier action Banks investigate complaints against and approved Shawmut's application.12 state member banks and forward to Among the new facts reviewed by the appropriate enforcement agencies com- Board in its reconsideration were a resoplaints that involve other creditors or lution of the Justice Department's allebusinesses. The Federal Reserve also gations involving discriminatory lendtracks complaints about unregulated ing practices by Shawmut's mortgage practices. company, lending data demonstrating the effectiveness of Shawmut's initia- Complaints about State tives to improve its lending record to Member Banks minority and low- and moderate-income borrowers, the results of Shawmut's In 1994 the System received 2,518 comsubstantial efforts to improve the accu- plaints: 2,150 by mail, 350 by teleracy of its HMDA data, and the respon- phone, and 18 in person. The Federal siveness of its management to CRA- Reserve investigated and resolved the related issues. 1,177 complaints that were against state In September the Board approved member banks. The System also applications by Barnett Banks, Inc. received 2,143 oral and written inquiries (Jacksonville, Florida), to acquire Loan about consumer credit and banking America Financial Corporation (Miami policies and practices. In responding Lakes, Florida) and certain Florida to these complaints and inquiries, staff assets of Glendale Federal Bank, FSB members at the Board and at the (Glendale, California). The Board ap- Reserve Banks gave specific explanations of laws, regulations, and banking practices and provided printed materials 12. In November 1993, by a vote of three to on the general issues. three, the Board did not approve the Shawmut Of the 1,177 complaints against application (see Board of Governors, 80th Annual Report, 1993, p. 215). state member banks, about 64 percent Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 229 involved loan functions: of these, one- involving real estate loans (54). Each of eighth (8 percent of all complaints) these categories accounts for a small alleged discrimination on a prohibited number (4 percent or less) of all conbasis, and the rest (56 percent of all sumer complaints received by the complaints) concerned credit denial on System. nonprohibited bases (such as length of Many of the complaints about credit residency) and other unregulated lend- denials based on credit history indicate ing practices (such as release or use of that applicants underestimated the credit information). importance lenders give to a poor credit Approximately 23 percent of the history or to a lack of borrowing expe- 1,177 complaints involved disputes rience when assessing the applicant's about interest on deposits and general creditworthiness. Complaints in the deposit account practices. The remain- miscellaneous category covered a wide ing 13 percent concerned disputes about range of issues, including failure by the electronic fund transfers, trust services, lender to close on a mortgage loan by and miscellaneous bank practices. the agreed settlement date and property appraisal values. Unregulated Practices Complaints Referred to HUD Under section 18(f) of the Federal Trade Commission Act, the Board monitors In 1994 the Federal Reserve referred complaints about banking practices not twenty-four complaints to HUD in subject to existing regulations to focus accordance with a June 1992 memoranon those that may be unfair or decep- dum of understanding between HUD tive. Two categories each accounted for and the bank regulatory agencies that up to 5 percent of the 1,653 complaints encourages cooperation in the investigareceived in 1994: denial of credit card tion of complaints alleging unlawful disapplications based on credit history (89) crimination in housing. Investigations and miscellaneous unregulated practices completed by the Federal Reserve in Consumer Complaints to the Federal Reserve System Regarding State Member Banks and Other Institutions, by Subject, 1994 State member Other Subject Total banks institutions' Regulation B (Equal Credit Opportunity) 84 56 140 Regulation E (Electronic Fund Transfers) 27 26 53 Regulation Q (Interest on Deposits) 4 14 18 Regulation Z (Truth in Lending) 151 194 345 Regulation BB (Community Reinvestment) ... 6 5 11 Regulation CC (Expedited Funds Availability) 25 45 70 Regulation DD (Truth in Savings) 25 24 49 Fair Credit Reporting Act 41 72 113 Fair Debt Collection Practices Act 16 12 28 Fair Housing Act 8 3 11 Flood insurance 6 0 6 Holder in due course 1 2 3 Real Estate Settlement Procedures Act 1 9 10 Unregulated practices 782 871 1,653 Total. 1,177 1,341 2,518 1. Complaints against these institutions were referred to the appropriate enforcement agencies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

230 81st Annual Report, 1994 fourteen of the twenty-three complaints and community organizations, financial revealed no evidence of discrimination; institutions, academia, and state and nine investigations were pending at local government. Council meetings are year-end. open to the public. Among the topics the council considered during 1994 were reform of the CRA, mandatory arbitra- Consumer Advisory Council tion, fair lending matters, sale of mutual The Consumer Advisory Council met in funds and other uninsured investment March, June, and November to advise products by insured depository instituthe Board on its responsibilities under tions, the waiver of consumers' right of the consumer credit protection laws and rescission for certain loans, and Truth in on other issues dealing with financial Savings proposals regarding the calculaservices to consumers. The council's tion of the annual percentage yields on thirty members come from consumer deposit accounts. Consumer Complaints to the Federal Reserve System, by Function and Resolution, 1994 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' 32 2 14 9 0 0 7 Information furnished to complainant2 97 7 59 19 3 3 6 Bank legally correct No reimbursement or accommodation 537 53 279 129 17 10 49 Reimbursement or accommodation— goodwill3 91 2 50 26 4 0 9 Bank error No reimbursement 54 6 36 8 0 0 4 Reimbursement 91 2 50 26 4 0 9 Factual dispute 4 39 3 13 20 0 0 3 Possible bank violation5 12 4 6 10 0 1 Matter in litigation 6 11 1 6 2 0 2 0 Customer error 23 0 12 9 0 0 2 Pending, December 31 98 16 57 12 0 3 10 Total, state member banks Number 1,117 98 663 267 27 19 105 Percent 100 9 53 24 2 2 10 Complaints referred to other agencies 1,341 76 734 321 34 13 163 Total 2,518 174 1,397 586 61 32 268 1. The staff was unable, after follow-up correspon- 4. Involves a factual dispute not resolvable by the dence with the consumer, to obtain sufficient information Federal Reserve System or a contractual dispute that can to process the complaint. be resolved only by the courts. Consumers wishing to 2. When it appears that the complainant does not un- pursue the matter may be advised to seek legal counsel or derstand the law and that there has been no violation on legal aid or to use small claims court. the part of the bank, the Federal Reserve System explains 5. After the Federal Reserve determined that a state the law in question and provides the complainant with member bank had possibly violated a law or regulation, other pertinent information. the bank took corrective measures voluntarily or as indi- 3. The bank appeared to be legally correct but chose to cated by the Federal Reserve. make an accommodation. 6. Parties are seeking resolution through the courts. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 231 All three council meetings featured individuals for the program, (3) training discussion of issues related to CRA in home ownership (covering motivareform, including such alternative mea- tion and intellectual and emotional sures of local-investment performance preparation, budget and financial manas a market-share test, an asset-based agement skills, home selection criteria, test, and a loan-to-deposit ratio standard insurance needs, and the purchase profor streamlined examinations of small cess), and (4) a commitment to work banks. The council also discussed the with the prospective homebuyer, one on role of examiners in the performance one, until a home has been purchased, evaluation. The council members agreed regardless of how long it takes. on the need for an interagency program Roundtable discussions, known as the of training for examiners developed by Members Forum and held at each counthe FFIEC with input from the public. cil meeting, gave council members the They concluded that interagency coop- opportunity through the year to offer the eration is crucial in (1) developing a Board their views on visible signs of an context within which examiners should economic recovery within their indusassess an institution's performance and tries or local economies. (2) developing a method for coordinating the collection and sharing of baseline data. Testimony and Legislative In March the council's Depository Recommendations and Delivery Systems Committee reviewed the Board's proposal to modify In February the Board testified before certain requirements for calculating the House Committee on Banking, an annual percentage yield (APY) and Finance and Urban Affairs on matters recommended that it be withdrawn (see relating to CRA reform; in March the the discussion of Regulation DD above, Board testified before the same commitunder "Other Regulatory Matters"). The tee on the sale of mutual funds by banks. committee suggested that, instead, cov- Also in February the Board submitted ered financial institutions consider giv- written recommendations to the commiting an appropriate advertising notice tee on proposed legislation governing stating that some minor variations in the credit and charge cards. APY could occur as a result of periodic Regarding the CRA reform proposal, interest payments. the Board testified about the following In June the council's Community steps the agencies were taking to com- Affairs and Housing Committee identi- municate more clearly with banks and fied key elements of successful pro- thrift institutions regarding agency grams that provide counseling on home expectations for CRA performance: ownership. This project was undertaken in part because the CRA reform pro- • Creating a more numerically driven posal identifies home ownership coun- system for assessing CRA performance seling by financial institutions as an in three elements: lending, services, and activity that would count as a positive investments factor under the service test. Committee • Requiring the collection of data on members found that key elements were the number, amount, and geographic (1) ongoing efforts to draw individuals location of small business, small farm, into the programs, (2) credit report and some consumer loans to use in the reviews and other activities to prequalify assessments Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

232 81st Annual Report, 1994 • Providing for streamlined review of proposed legislation on credit and small institutions charge cards. Because the legislation • Permitting institutions to submit was driven, in part, by concerns about their CRA plan in advance for approval the level of credit card rates, the Board by their regulator as an alternative to wanted the committee to have some curbeing evaluated under the general rent background on credit card pricing assessment scheme and profitability. • Specifying the regulatory sanctions that might result from noncompliance Recommendations with the regulation. of Other Agencies The Board also discussed interagency Each year the Board asks the agencies guidelines regarding bank sales of with enforcement responsibilities under mutual funds and other nondeposit Regulations B, E, M, Z, CC, and AA for investment products. Under the guide- recommendations of changes to the lines, banks must take the following regulations or underlying statutes. In actions: 1994 the FTC and the OCC made recommendations. • Standardize the basic disclosures The FTC sees an expansion of leasing that banks provide customers—they transactions in the marketplace and must at a minimum indicate that the encourages the Board to continue its product is not insured by the FDIC, that regulatory review of lease requirements it is not a deposit or other obligation of under Regulation M. In addition, the (and is not guaranteed by) the selling FTC believes that a review of Regudepository institution, and that it is lation Z would help ensure that the subject to investment risks, including requirements are up-to-date, clear, and possible loss of the principal amount simple without diminishing important invested consumer protections, including those • Ensure that sales and other activi- regarding creative financing. ties relating to nondeposit investment The OCC believes that the Congress products are conducted in a physical should consider alternatives to current location distinct from the area where consumer protection laws that could retail deposits are taken, except in very provide disclosures at least as useful limited situations where physical con- as the current ones but less burdensome siderations prevent it to depository institutions. The OCC • Bar tellers and other employees in encourages the Board likewise to conthe deposit-taking area from making sider changes to the implementing reguinvestment recommendations or accept- lations that would achieve the same end. ing orders for nondeposit investment The OCC believes that the Congress products. Tellers and other employees should also consider modifications to not authorized to sell nondeposit invest- the referral requirements in the ECO A. ment products may refer customers only For example, mandatory referrals could to individuals who are specifically be limited to particular prohibited bases, trained to sell nondeposit investment the Department of Justice could relieve products. a particular agency of the mandatory referral requirement, or referral could be In February the Board submitted com- waived if detected violations stem from ments to the House committee regarding self-assessments. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

233 Litigation During 1994 the Board of Governors Board sought to freeze the assets of an was a party in twenty-two lawsuits, the individual pending administrative adjusame number as in 1993. Seven law- dication of a civil money penalty assuits were filed in 1994, two of which sessed by the Board. On September 17, raised questions under the Bank Hold- 1991, the court issued an order tempoing Company Act. A total of nine cases rarily restraining the transfer or disposiwere pending at year-end 1994. tion of the individual's assets. The order has been extended by agreement. Bank Holding Company Act— First National Bank of Bellaire v. Review of Board Actions Board of Governors, No. H-93-1708 (S.D. Texas, filed June 8, 1993), was an Scott v. Board of Governors, No. 94- action to enjoin possible enforcement 0104 (D. District of Columbia, filed actions by the Board of Governors and January 21, 1994), was a petition for other bank regulatory agencies. On review of a Board order approving the March 8, 1994, the District Court application of Society Corporation, granted the agencies' motion to dismiss. Cleveland, Ohio, to merge with Key- Board of Governors v. Oppegard, No. Corp, Albany, New York (80 Federal 93-3706 (8th Circuit, filed November 1, Reserve Bulletin 253). The case was dis- 1993), was an appeal of a District Court missed with prejudice on December 7, order that appellant Oppegard comply 1994. with a previous order that required com- National Title Resource Agency v. pliance with a Board order for removal, Board of Governors, No. 94-2050 (8th prohibition, and civil money penalty. Circuit, filed April 28, 1994), is a peti- On July 6, 1994, the Court of Appeals tion for review of a Board order, issued affirmed the District Court order (29 under section 4 of the Bank Holding F.3d 627). Company Act, approving the applica- In CBC, Inc. v. Board of Governors, tion of Norwest Corp., of Minneapolis, No. 93-1458 (U.S. Supreme Court, filed Minnesota, to acquire Double Eagle March 17, 1994), petitioners sought Financial Corp., of Phoenix, Arizona, review of a civil money penalty and its subsidiary and thereby engage assessed against a bank holding comin title insurance agency activities and pany and three of its officers, directors, real estate settlement services (80 Fed- and shareholders for failure to comeral Reserve Bulletin 453). On Jan- ply with reporting requirements. The uary 10, 1995, the court affirmed the Board's order was affirmed by the Tenth Board's order. Circuit Court of Appeals on November 30, 1993 (13 F3d 404), and the petition for certiorari was denied on Litigation under the Financial June 6, 1994(114 S. Ct. 2163). Institutions Supervisory Act Board of Governors v. MacCallum, In Board of Governors v. Ghaith R. No. 94 Civ. 5652 (WK) (S.D. New York, Pharaon, No. 91-CIV-6250 (S.D. New filed August 3, 1994), was an action to York, filed September 17, 1991), the freeze assets of an individual pending Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

234 81st Annual Report, 1994 administrative adjudication of a civil Groups. On June 26, 1992, the Court of money penalty assessed by the Board. Appeals affirmed the District Court On August 3, 1994, the court issued an order in part, but it also held that the order temporarily restraining the trans- bank examination privilege was not fer or disposition of the individual's waived by the agencies' provision of assets. The order was lifted on Decem- examination materials to the examined ber 22, 1994, upon completion of the institution. The case was remanded for underlying enforcement action. further consideration of the privilege In Cavallari v. Board of Governors, issue (967 F.2d 630). On August 6, No. 94^183 (2d Circuit, filed Octo- 1992, the District Court ordered the matber 17, 1994), a former outside counsel ter held in abeyance pending settlement to a national bank seeks review of a of the underlying action. Board order of prohibition. The case, In Zemel v. Board of Governors, No. which was consolidated with a petition 92-1056 (D. District of Columbia, filed to review enforcement orders issued by May 4, 1992), the plaintiff alleged disthe Comptroller of the Currency {Caval- criminatory practices under the Age Dislari v. OCC, No. 94^151), is pending. crimination in Employment Act. The In DLG Financial Corp. v. Board of court granted the Board's motion for Governors, No. 94-891 (U.S. Supreme summary judgment on November 29, Court, filed November 14, 1994), appel- 1994. lants seek review of an order of the Fifth In re Subpoena Duces Tecum, Misc. Circuit Court of Appeals (29 F.3d 993) No. 92-0365 (D. District of Columbia, affirming two actions: an order, obtained filed August 25, 1992), was a subpoena by the Board in connection with a pend- enforcement case in which plaintiffs ing enforcement action, that freezes sought bank examination reports and appellants' assets; and the District other supervisory material in connection Court's dismissal of appellants' claims with a shareholder derivative suit. On seeking an injunction and damages February 25, 1993, the District Court against the Board and the Federal denied enforcement and upheld the Reserve Bank of Dallas relating to the claim of privilege by the Board and the same enforcement action. The case is FDIC. The case was appealed, and on pending. December 28, 1993, the Court of Appeals for the D.C. Circuit remanded the matter to the District Court for Other Actions further findings on the privilege issue (11 F.3d 217). On November 23, 1994, In In Re Subpoena Served Upon the the District Court ordered the produc- Board of Governors of the Federal tion of a limited amount of factual mate- Reserve System, Nos. 91-5427, 91-5428 rial to the plaintiff. (D.C. Circuit, filed December 27, 1991), In Adams v. Greenspan, No. 93-0167 the Board appealed an order of the U.S. (D. District of Columbia, filed Jan- District Court requiring the Board and uary 27, 1993), the plaintiff, a former the Office of the Comptroller of the Cur- employee, alleged a violation of the rency to comply with a subpoena for the Civil Rights Act of 1964 and the Reharelease, to a private litigant, of confiden- bilitation Act of 1973 concerning termitial examination material. The subpoena nation of employment. The case was was issued in a shareholder derivative dismissed after settlement on Novemsuit against the Fleet/Norstar Financial ber 18, 1994. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 235 In Amann v. Prudential Home Mort- Scott v. Board of Governors, No. 94gage Co. et ai, No. 93-10320 WD 4117 (10th Circuit, filed April 28, 1994), (D. Massachusetts, filed February 12, is an appeal of dismissal of action 1993), plaintiff alleged fraud and breach against the Board and others for damof contract arising out of a home mort- ages and injunctive relief for alleged gage. The action was dismissed on constitutional and statutory violations June 21, 1994. caused by issuance of Federal Reserve Bennett v. Greenspan, No. 93-1813 notes. The action was dismissed on (D. District of Columbia, filed April 20, July 21, 1994. 1993), is an employment discrimination Jackson v. Board of Governors, No. action. A jury verdict for the plaintiff 94-16789 (9th Circuit, filed Septemwas rendered on October 13, 1994. The ber 22, 1994), is an action for violation Board's motion for a new trial on the of a prisoner's civil rights. The action issue of damages was denied on Jan- was dismissed on December 1, 1994. uary 9, 1995. In re Subpoena Duces Tecum, No. In Kubany v. Board of Governors, 94-MS-214 (D. District of Columbia, No. 93-1428 (D. District of Columbia, filed June 27, 1994), is a subpoena filed July 9, 1993), the plaintiff chal- enforcement case in which the plaintiff lenged a Board determination under in a class action suit alleging securities the Freedom of Information Act. On fraud seeks examination reports and July 19, 1994, the court granted the internal Board memorandums. The Board's motion to dismiss. Board's opposition to the subpoena In re Subpoena Duces Tecum, Misc. was filed on July 8, 1994; the case is Nos. 93-261 and 93-260 (D. District of pending. • 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, No. 94-4020 (10th Circuit, filed January 14, 1994), is an appeal of a dismissal of 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. On September 16, 1994, the court denied the appeal (36 F.3d 1105). Beckman v. Greenspan, No. CV 94-41 BCG-RWA (D. Montana, filed April 13, 1994), is an action against the Board and others seeking damages for alleged violations of constitutional and common law rights. The case is pending. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

237 Legislation Enacted The Riegle-Neal Interstate Banking and deposits of insured depository institu- Branching Efficiency Act of 1994, the tions in the United States or control of Riegle Community Development and 30 percent or more of total deposits in Regulatory Improvement Act of 1994, any state in which both an insured and the Bankruptcy Amendments of depository institution affiliated with the 1994 directly affect the Federal Reserve applicant and any bank to be acquired System or the institutions it regulates. maintain a home office or branch. States may impose caps different from 30 percent if they do not discriminate against out-of-state institutions. In determining Riegle-Neal Interstate Banking whether to approve an application under and Branching Efficiency Act this provision, the Board must consider of 1994 the applicant's record under the Community Reinvestment Act (CRA) and The Riegle-Neal Interstate Banking and applicable state community reinvest- Branching Efficiency Act of 1994, Pubment laws. Federal or state antitrust lic Law 103-328, was enacted on Seplaws will continue to apply to proposed tember 29, 1994. It covers interstate acquisitions. acquisitions by bank holding companies; interstate bank mergers; interstate The Board may approve acquisitions branching by domestic and international of troubled banks without regard to banks; related aspects of reporting, reg- deposit caps, state laws restricting ulatory examination, and preemption acquisitions of recently organized banks, of state law; and miscellaneous other or performance under federal and state matters. community reinvestment laws. Interstate Bank Holding Companies Interstate Bank Mergers The act amends the Bank Holding Com- The act amends the Federal Deposit pany Act to permit the Board of Gover- Insurance Act to permit mergers beginnors, as of September 29, 1995, to allow ning June 1, 1997, between adequately bank holding companies that are capitalized insured banks with different adequately capitalized and managed to home states. States may exclude themacquire banks outside their home states, selves from this provision before that generally regardless of state laws to the date by expressly prohibiting mergers contrary. States may, however, restrict with all out-of-state banks. Interstate acquisitions of banks in existence for mergers may be approved before June 1, less than five years. 1997, if the home state of each bank The act prohibits an interstate acquisi- involved has passed a law expressly tion under this provision if it would give permitting such mergers and the law to the applicant, together with its affili- applies equally to all out-of-state banks; ated insured depository institutions, con- such laws may contain conditions that trol of more than 10 percent of the total do not discriminate against out-of-state Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

238 81st Annual Report, 1994 institutions, are not preempted by fed- transaction could have done so in the eral law, and do not apply after May 31, absence of the transaction. 1997. Effective June 1, 1997, a national Interstate merger transactions that in- bank may not acquire, establish, or opervolve a branch of an insured bank but ate branches outside its home state or not the entire bank are also authorized if outside states where it already has a permitted by the state in which the branch except as permitted by the interbranch is located. state banking statute. Any national bank The federal and state deposit caps that relocates its main office to another applicable to interstate expansion by state after May 31, 1997, may retain and bank holding companies also apply to operate branches within its former home interstate bank mergers other than merg- state only to the extent that (1) it would ers involving only affiliated banks. be authorized to acquire, establish, or States may restrict interstate mergers of operate them if it had had no branches in banks in existence for less than five that state, or (2) the branches had been years. Federal or state antitrust laws will acquired in an interstate merger, or continue to apply to proposed merger (3) the branches had been acquired after transactions. May 31, 1997, in transactions assisted In determining whether to approve an by the Federal Deposit Insurance Corpoapplication for initial entry into a state, ration (FDIC). the responsible federal banking agency States retain the right to supervise, must consider the CRA records of the regulate, and examine the operations applicant and of any bank that would be of the banks they charter, including an affiliate of the resulting bank; the the establishment and maintenance of agency must also consider the record of branches. In addition, branches of an the applicant under applicable state out-of-state national bank will be subcommunity reinvestment laws. In pro- ject to the host state's laws regarding posals not involving initial entry, the community reinvestment, consumer proagencies may review community rein- tection, fair lending, and intrastate vestment performance in accordance branching to the extent that such laws with earlier practices. apply to branches of banks chartered by The responsible federal agency may that state; however, such state laws will approve an interstate merger of a not apply when preempted by federal troubled bank without regard to deposit law or when the Office of the Comptrolcaps; performance under federal and ler of the Currency (OCC) finds (after state community reinvestment laws; public notice and comment) that such adequacy of capital or management laws would have a discriminatory effect skills; or state laws that restrict mergers on the national bank branch. State laws of recently organized banks, prohibit in- applicable to a branch of a national bank terstate branch acquisitions, or exclude will be enforced by the OCC with the state from interstate mergers. respect to that branch. A bank resulting from an interstate The regulatory agencies may permit merger may, subject to approval of the an out-of-state bank to establish de novo appropriate federal banking agency, con- branches in any state that adopts legislatinue to operate the banking offices it tion expressly permitting all banks to operated before the merger and may establish such branches and the out-ofacquire or establish additional branches state bank complies with the requireanywhere any bank involved in the ments (other than deposit caps) that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 239 apply to the interstate acquisition by sectors of the economy, including intermerger of an existing branch. Any such national trade finance. The act also proout-of-state bank shall have the same hibits a branch or agency of a foreign authority to establish, acquire, and oper- bank from managing, through a branch ate other branches that it would have if or agency located outside the United it had not established such a de novo States, any activity that a domestic bank branch. is not permitted to manage at a branch The Riegle-Neal act also amends the or agency located outside the United Home Owners' Loan Act to clarify the States. Regulations of the Board and fact that it does not affect certain state the FDIC under this provision are to be constitutional provisions exempting uniform. homesteads from foreclosure or forced The act clarifies the fact that foreign sale. bank branches, agencies, and commercial lending companies are subject to the same federal and state consumer protec- Interstate Branching by tion laws as national or state banks International Banks doing business in the same state. The The Riegle-Neal act amends the Inter- CRA would continue to apply to any national Banking Act to permit foreign branch that results from the acquisition banks, subject to the approval of the of an insured bank or branch by a for- Board of Governors and other appropri- eign bank in a state in which the foreign ate bank regulators, to establish and bank did not previously have a branch, operate branches or agencies regulated except for branches that accept only under federal or state law outside their those deposits permissible for Edge Act home states to the extent permitted corporations. national or state banks with the same home state as the foreign bank. The Examinations Board and, as appropriate, the OCC The act provides a moratorium on fees must determine that the foreign bank's under the International Banking Act for capital resources are equivalent to the examinations of branches, agencies, resources required of a domestic bank affiliates, and representative offices and must consult with the Secretary of commenced before July 25, 1997. the Treasury (Treasury) regarding capi- State bank supervisors may examine tal adequacy. The foreign bank shall also in-state branches of out-of-state insured comply with the state's requirements for state banks and undertake the same establishing a de novo interstate branch enforcement actions that would be perand shall have the same authority to mitted if the branches were banks charestablish, acquire, and operate other tered by their state. State bank superbranches that it would if it had not estabvisors from two or more states may lished such a de novo interstate branch. enter into cooperative agreements to The act requires the FDIC and the facilitate supervision of state banks with OCC to review their regulations under interstate branches. section 6 of the International Banking Act to ensure that foreign banking orga- Deposit Production nizations do not receive unfair competiand Community Reinvestment tive advantages over domestic ones, keeping in mind the importance of The act requires the federal banking improving the availability of credit to all agencies to prescribe uniform regula- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

240 81st Annual Report, 1994 tions prohibiting the use of interstate that applying host state laws to an interbranching authority primarily for de- state branch as if it were a bank charposit production, including guidelines to tered by such host state would have a ensure that out-of-state branches meet discriminatory effect. The act provides the credit needs of their communities. If certain exceptions to the requirements the loan-to-deposit ratio of an out-of- regarding public notice and comment. state bank in the host state is less than The act also amends the Consolidated half the ratio for all host-state banks, the Farm and Rural Development Act so regulations must require a determination that loans guaranteed under section as to whether such branches are meeting 31 OB are no longer subject to state usury credit needs. The act specifies a variety laws, although states may exclude themof business, financial, and regulatory selves from the provision within three factors that the agency must consider in years of enactment of the act. making its determination. The act permits the FDIC to file The act amends the CRA to require certain tort suits in regard to a failed separate state-by-state performance depository institution for which it has evaluations of insured depository insti- been appointed conservator or receiver tutions with branches in two or more even if the state's statute of limitations states and separate evaluations for multi- for such suit expired up to five years state metropolitan areas in which the before the FDIC's appointment. bank has branches. The act establishes procedures for Reports community input when an interstate bank proposes to close a branch in a The Board must conduct seven annual low- or moderate-income area, but the surveys of retail services provided by procedures may not affect the authority insured depository institutions and of of an interstate bank to close a branch or the fees charged for such services and the timing of the closing. report the results to the Congress. Treasury must study the strengths and weaknesses of the U.S. financial ser- Preemption of State Laws vices system and the adequacy of the The act does not affect the authority of a existing regulatory structure to prevent state or subdivision to use any consti- unfair, discriminatory, or anticompetitutional method of taxing a branch, tive practices. Treasury must develop domestic or foreign bank, bank holding recommendations for improvements that company, or affiliate (including nondis- avoid risk to taxpayers and control criminatory franchise taxes or other non- systemic risk. property taxes), nor does it affect certain federal limitations on state usury laws. Silver Coins The federal banking agencies must solicit and consider public comments The act authorizes 2.8 million $1 silver before concluding that federal law pre- commemorative coins to be produced in empts the application to a national bank five series for the benefit of five organiof any state law regarding community zations. The coins will be legal tender, reinvestment, consumer protection, fair and their sale price will include a $10 lending, or the establishment of intra- surcharge to benefit the Organizing state branches. These requirements also Committee for the Special Olympic apply to any determination by the OCC Games, the National Community Ser- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 241 vice Trust, the National Fund for the their areas or populations by helping to Botanic Garden, the endowment of the fulfill their unmet needs for loans and Robert F. Kennedy Memorial, and the equity investments. These new commu- Association of Graduates of the Military nity development institutions, either Academy. alone or in partnership with a community partner, may apply to the new fund for assistance on projects that are consis- Riegle Community Development tent with the requirements of the act. and Regulatory Improvement Act The fund may provide up to $5 milof 1994 lion to any community development The Riegle Community Development financial institution and its subsidiaries and Regulatory Improvement Act of over three years and may provide an 1994, Public Law 103-325, was enacted additional $3.75 million over the same on September 23, 1994. Title I-A is the period for a subsidiary or affiliate set up Community Development and Financial to serve an investment area or targeted Institutions Act of 1994; title I-B is the population outside the state and metro- Home Ownership and Equity Protection politan statistical area already served. Act of 1994. The fund provides technical assistance, Title II-A is the Small Business Loan equity investments, deposits, credit Securitization and Secondary Market union shares, loans, and grants. Equity Enhancement Act of 1994; title II-B investments by the fund in any commuencourages the enhancement access to nity development institution may not capital for small businesses. exceed 50 percent of the institution's Title III relates to paperwork reduc- equity and must be in the form of transtion and regulatory improvement. ferable nonvoting shares. The fund may Title IV is the Money Laundering Sup- sell its equity investments and loans at pression Act of 1994. Title V is the any time. Other than technical assis- National Flood Insurance Reform Act of tance, all assistance must be at least 1994, and title VI deals with oversight 50 percent matched. hearings and technical amendments. The act authorizes a minimum of $382 million over four years, with twothirds of the funds (after administrative Title I-A expenses) earmarked for the new com- Title I-A, the Community Development munity development financial instituand Financial Institutions Act of 1994, tions and one-third for the section 114 establishes the Community Develop- program under which depository instiment Financial Institutions Fund as a tutions receive credit against deposit wholly owned government corporation insurance premiums for private investunder an administrator appointed by the ment in targeted activities in qualified President and confirmed by the Senate. distressed communities. The goal of the act and the fund is to The fund must develop standards of create a national network of financial financial responsibility for assisted instiinstitutions accountable to residents of tutions other than federally insured or their investment area or targeted popula- examined depository institutions or their tion, including metropolitan, rural, and holding companies. Before it awards Native American communities. The new assistance to, or imposes sanctions on, community development institutions are any federally supervised depository to aid the economic advancement of institution or its holding company, the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

242 81st Annual Report, 1994 fund must consult with the appropriate rates and at the maximum interest rate bank regulatory agency. The fund may allowed under the Competitive Equality not sanction any such institution if the Banking Act. The consumer has a threeagency objects on grounds of safety and year right of rescission if the disclosures soundness or of enforcement procedure are not made three business days before and proposes an alternative sanction. consummation of the transaction. Before requesting information directly A pattern or practice of lending based from such an institution, the fund shall on the value of collateral without regard attempt to obtain it from the appropriate to the consumers' ability to repay is agency, but in no case may the fund prohibited. Other restrictions on highrequest examination reports. rate or high-fee mortgages are that the The act also authorizes $10 million interest rate on them may not rise by for the Community Development Credit virtue of default on the loan; they may Union Revolving Loan Fund for the not require balloon payments if their 1995-98 period. term is less than five years, nor negative amortization, nor more than two payments consolidated and paid in advance Title I-B from loan proceeds; and they may not Title I-B, the Home Ownership and be payable directly to a home improve- Equity Protection Act of 1994, amends ment contractor. With certain excepthe Truth in Lending Act to provide tions, no such mortgage loan may be additional protection to consumers who subject to a prepayment penalty, includare subject to unfair terms on home ing any method of computing a refund equity or second mortgage loans on of unearned scheduled interest less principal residences through home favorable to the consumer than the improvement contractors, banks, or actuarial method. Inclusion of any of the finance companies. The act does not above terms is deemed a failure of apply to first mortgages, reverse mort- required disclosure and creates the gages, or open-end credit plans. right of rescission. The act authorizes For the types of loans it targets, the the Board to exempt from these proact defines those that are "high-rate" or hibitions specific mortgage products "high-fee." A high-rate loan has an that strengthen home ownership and interest rate that is more than 10 percent- equity protection and to prohibit age points higher than yields on compa- unfair, deceptive, or abusive practices rable Treasury bonds; a high-fee loan in connection with mortgage loans or assesses points and fees in excess of refinancings. 8 percent of the loan amount or $400, Title I-B amends the Truth in Lendwhichever is the greater (subject to ing Act, adding to its civil liability proadjustment by the Board of Governors visions the requirement that a lender's after two years). For such loans, the act failure to comply with title I-B's requires specific disclosures that the bor- required disclosures (including the use rower could lose his or her home for of terms deemed a failure of required failure to meet the loan obligations and disclosure) creates an obligation to is not obligated to sign the agreement. refund all finance charges and fees paid The act also requires disclosure of finan- by the mortgagor. Under the amendcial details of the loans, including, for ments, the disclosure provisions may be variable rate loans, disclosure of the enforced by state attorneys general, monthly payment at current interest although the responsible federal agency Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 243 may intervene, remove the case to fed- have been extended to small businesses. eral district court, and file an appeal. Under the act, a small-business-related The act also eliminates holder-in-due- security is (1) rated in one of the four course protection for assignees of such highest categories by at least one nationmortgages, thereby subjecting them to ally recognized rating agency, (2) repreall claims and defenses assertable aginst sents an interest in one or more promisthe originator, unless the assignee can sory notes on, or leases of, personal prove that a reasonable person exercis- property that are either the obligation of ing due diligence could not have discov- a small business or secured by such an ered that the mortgage was a high-rate interest, and (3) has payments of princior high-fee mortgage. pal that are related to payments or pro- The act also regulates disclosure with jected payments on the underlying notes respect to reverse mortgages, defined as or leases. nonrecourse mortgages against a princi- To facilitate the development of a pal dwelling in which payment of princi- forward trading and delivery market in pal, interest, and shared appreciation or such securities, the act exempts from equity is not due except upon default, margin regulations certain agreements transfer of the dwelling, death of the for delayed delivery of the securities. consumer, or the consumer's ceasing to The act authorizes national banks, occupy the residence as a principal federal savings associations, and feddwelling. Included in the required finan- eral credit unions to purchase smallcial disclosures are three estimates of business-related securities for their own the total cost of the mortgage, each account without limitation on amount based on a different loan term, the long- but subject to regulations on minimum est of which is to be specified by the issue size. The act also extends to such Board of Governors. securities the provisions of the Second- The Board of Governors must issue ary Mortgage Market Enhancement Act regulations implementing this subtitle except in states that pass legislation to by March 22, 1995. In addition, the exclude themselves from the provisions Board must assess the adequacy of con- that apply to state law. sumer protections under the Truth in The act specifies certain accounting Lending Act with respect to open-end procedures to be followed by depository credit transactions and whether an index institutions and federal banking agenmore appropriate than Treasury securi- cies. Among these provisions is the ties is available for the floating rate dis- requirement that statements filed with closure trigger in that act. In addition, the agencies must apply generally the Board shall conduct hearings within accepted accounting principles to the three years and regularly thereafter on transfer with recourse of small business the adequacy of consumer protections loans or leases. In addition, qualified and related issues in the market for insured depository institutions must prohome equity loans. vide reserves against estimated liabilities from with-recourse transfers of such loans or leases that are accounted for as Title II-A sales; such institutions are permitted, Title II-A, the Small Business Loan however, to include only the retained Securitization and Secondary Market amount of recourse in their risk- Enhancement Act of 1994, removes weighted assets for capital adequacy impediments to securitizing loans that purposes. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

244 81st Annual Report, 1994 For purposes of prompt corrective ing states must file with the fund, and action, the capital condition of an the conditions of reimbursement to the insured institution is to be calculated states. without regard to the accounting principles or capital requirements for securi- Title III tized small business loans. The federal banking agencies, which are permitted Title III, Paperwork Reduction and to create alternative provisions that Regulatory Improvement, enacts do not increase the amount of capital changes to current law to reduce the required for transfer with recourse of regulatory burden on insured depository small business loans and leases, have institutions and their customers and calls 180 days from enactment to promulgate for studies in areas where the regulatory final regulations for such transfers. burden might be further reduced. One The Board of Governors and the provision specifies that the federal bank- Securities and Exchange Commission ing agencies shall make new regulations (SEC) must evaluate, among other take effect at the start of the calendar things, the effect of the act on busi- quarter following publication unless nesses generally, on businesses in low- dictated otherwise by an act of the income and moderate-income areas or Congress, or provisions of the Adminisowned by minorities and women, and trative Procedure Act, or the findings on community development efforts. of the agency (including, in the case of The study is to be reported to the Con- the Board, the exigencies of monetary gress within two, four, and six years of policy). enactment. In addition, each federal banking agency and the National Credit Union Administration Board must establish an Title II-B independent appeals process for mate- Title II-B, Small Business Capital rial supervisory decisions and create Enhancement, encourages states to safeguards to protect appellants from implement programs that help banks and retribution. Material supervisory deterother depository institutions provide minations do not include the appointsmall businesses with access to loans. It ment of a conservator, receiver, or liquiauthorizes $50 million to be adminis- dating agent or a decision to take prompt tered, if appropriated, by the Commu- corrective action. The agencies must nity Development Financial Institutions also each appoint an ombudsman and Fund. develop alternative processes for resolv- Effective January 6, 1996, a state with ing disputes. a legal financial commitment to a capital In the two years commencing Sepaccess fund of at least $0.50 per resident tember 23, 1994, the federal banking may apply to participate in, and be par- agencies must review their regulations tially reimbursed by, the fund. Partici- and written policies to improve effipating states may enter into partici- ciency, reduce unnecessary costs, elimipation agreements with appropriate nate unwarranted constraints on credit financial institutions (as determined availability, and remove inconsistent, after consultation with the relevant fed- outmoded, and duplicative requireeral banking agency). The act specifies ments, particularly with regard to reguthe permitted scope of the participation lations for real estate lending. In that agreements, the reports that participat- regard, the act directs the Board of Gov- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 245 ernors to seek ways to simplify the dis- efficiency for filers and users. Also, the closures on variable rate mortgages that agencies must, in a manner consistent it requires under the Truth in Lending with safety and soundness, develop a Act to make them more meaningful to single form for the filing of core inforconsumers and to report to the Congress mation that is to be submitted to more within two years of completing its work. than one agency, simplify the instructions for such reports, and eliminate Unified Regulations, Examinations, all unwarranted supplemental noncore and Call Reports information. The act also eliminates the The federal banking agencies are to requirement for the publication of Call make uniform their regulations and Reports, although the reports remain guidelines implementing common stat- otherwise available to the general utes and supervisory policies, eliminate public. duplicative requests for information in connection with applications and no- Holding Companies tices, and harmonize their requirements For qualified transactions, the act experegarding publication and notice. More- dites the formation of a bank holding over, within two years of enactment, the company by replacing the application to agencies are to establish a system for the Board with a thirty-day notice to the determining in most situations which Board. The transaction qualifies for the federal regulator shall be the lead notice process if the existing bank is agency responsible for managing a uni- adequately capitalized, proportionate fied examination of each insured deposi- ownership is preserved (except for the tory institution and its affiliates. The exercise of dissenting shareholders' agencies must report annually to the rights), the holding company meets the Congress on this system and their Board's capital standards, and the holdprogress in implementing it. ing company neither acquires another The act also specifically liberalizes bank nor engages in any activity other the conditions, laid down in the Federal than controlling the bank as a result of Deposit Insurance Act, that permit the the reorganization. extension of the period between full, For acquisitions of shares in certain on-sight examinations of insured institu- companies so closely related to banking tions from the normal twelve months to or to managing or controlling banks as long as eighteen months; it adds a as to be considered a proper incident limitation, however, that prohibits an thereto, the act replaces the current extension of time between examinations application procedure with a sixty-day for any institution that is subject to a notice procedure. The Board may, by formal enforcement proceeding or order regulation, provide shorter notice periby its primary regulator or the FDIC. ods and may extend the notice period The federal banking agencies must for an additional ninety days in the case jointly develop a system in which of activities not previously approved by Reports of Condition and Income (Call regulation. And the act eliminates the Reports) and bank holding company requirement that bank holding compareports can be filed with the agencies nies obtain Board approval in advance and made available to the public elec- for mergers or acquisitions of savings, tronically and make recommendations associations by subsidiary banks; under to the Congress within one year of the Bank Merger Act, these transacenactment for legislation to enhance tions are already subject to review by Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

246 81st Annual Report, 1994 the primary regulator of the surviving Federal Reserve Act, the Real Estate bank. Settlement Procedures Act of 1974, the The act similarly exempts from reg- Truth in Lending Act, and the Truth in istration with the SEC the formation Savings Act. of bank or savings association holding companies if the rights of the security Title IV holders and the underlying assets and liabilities are unchanged (except for The goal of title IV, the Money Laundernominal changes from dissenter's rights ing Suppression Act of 1994, is to reor fractional shares). duce the number of transactions reports by depository institutions by 30 percent, Payment of Interest on Reserves mainly by requiring Treasury to exempt The Board of Governors, in consultation institutions from reporting on transacwith the FDIC and the National Credit tions that have little or no law enforce- Union Administration, must study ment value. Under the act, Treasury may whether an effective monetary policy also exempt transactions with qualified requires insured institutions to maintain business customers that maintain active reserves; consider whether paying a transaction accounts; the criteria for market rate of interest on reserves, either qualification, to be determined by Treato the institutions or to the deposit insur- sury, may include descriptions of types ance funds, would be appropriate; and of qualifying business or a list of specalculate the income lost by institutions cific businesses that fail to qualify. Treanow required to hold non-interest- sury must report to the Congress within bearing reserves and the effect of the 180 days of enactment on the progress requirement on their ability to compete made toward the goal and must further with nonbank providers of financial report to the Congress on progress after services. The results of the Board's the end of each of the first five calendar study—as well as an estimate to be years following enactment. prepared jointly by congressional and The act adds checks, drafts, notes, executive branch research on the money orders, and other similar negobudgetary effect of such interest tiable instruments drawn on or by a forpayments—are to be reported to the eign financial institution to the list of Congress within 180 days of enactment. monetary instruments subject to record keeping and reporting requirements. Other Provisions Among its additional provisions, title Title III reduces, from two thirds to a IV calls on the federal banking agencies, majority, the number of the directors of Treasury, and law enforcement agencies national banks required to reside in the to sharpen and streamline their procestate, territory, or district where the bank dures for sharing information; requires is located. In other provisions, title III money transmitting businesses to regismakes modifications, not mentioned ter with Treasury; adds casinos with above, to the Bank Secrecy Act, the revenues in excess of $1 million (includ- Bank Service Corporation Act, the ing those operated under the Indian Depository Institutions Management Gaming Regulatory Act) to the defini- Interlocks Act, the Expedited Funds tion of financial institution for purposes Availability Act, the Fair Credit Report- of the money laundering statutes; ing Act, the Federal Deposit Insurance expands the application of civil penal- Act, the FDIC Improvement Act, the ties and adds criminal penalties with Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 247 regard to certain money laundering coverage within forty-five days' notice. activities; encourages states to enact Within one year of enactment, lenders uniform laws regulating nondepository that require any escrowing on a loan businesses that cash checks, transmit that requires flood insurance must also funds, and so on; and orders a study by require the escrowing of flood insurance the Comptroller General of the United premiums on that loan. States concerning the role of cashiers The act provides for reasonable fees checks in money laundering schemes. to be collected by lenders and loan servicers in making certain determinations regarding the flood-related requirements Title V of a particular loan and likewise estab- Under title V, the National Flood Insur- lishes penalties for violations of the act ance Reform Act of 1994, federal agen- by lenders or sellers. cies that accept applications for funds to restore flood-damaged structures cannot Bankruptcy Amendments of 1994 waive the requirement that current applicants who have received such assistance The Bankruptcy Amendments of 1994, in the past must have been covered by Public Law 103-394, were enacted on flood insurance at the time of the loss October 22, 1994. This law makes for which they now seek assistance. numerous adjustments to the balance In addition, to assure that areas of among the various classes of debtors, flood hazard are identified, that maps of owners and management in bankruptcy such areas are readily available, and that proceedings. mortgages on structures built in those One provision of particular interest areas carry the proper flood insurance, amends the definition of "swap agreetitle V, among other provisions, estab- ment" under the Bankruptcy Code. The lishes procedures for more extensive code provides special protection for cercoordination among regulatory agencies, tain rights of participants in swap agreepublic and private lenders, and the Fed- ments, including the rights of terminaeral Emergency Management Agency tion, set-off, and netting in forward and tighter flood-related requirements foreign exchange contracts. in property sales, loan originations, and The amendment adds spot foreign loan servicing. exchange contracts to the coverage As of September 23, 1995, the Fed- afforded forward contracts. Because eral National Mortgage Association and netting agreements among market parthe Federal Home Loan Mortgage Asso- ticipants usually include spot foreign ciation must have procedures in place to exchange contracts as well as forward assure that loans they purchase carry contracts, this provision confirms the flood insurance if the loans relate to understanding of market participants property in designated flood hazard that closing out, setting off, and netting areas for which national insurance is such spot contracts is valid under the available. Bankruptcy Code. • As of the date of enactment, lenders and loan servicers must buy flood insurance coverage at the expense of the borrower for any property in an area that is or has become a designated flood hazard area if the borrower fails to obtain such Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

249 Banking Supervision and Regulation During 1994 the U.S. commercial bank- sharply reduced the trading revenues of ing system reported record earnings most money center banks from their for the third consecutive year, as gen- exceptionally high levels of 1993. These eral economic conditions continued to developments underscored the imporimprove both domestically and abroad. tance of sound risk management prac- These robust earnings reflected con- tices at banks and other participants in tinued progress by the industry in re- financial markets. ducing nonperforming loans and their The expansion of the securities activirelated costs, while generally maintain- ties of U.S. banks for trading and for ing net interest revenues. In addition, investment purposes and the increasing renewed growth in commercial lend- complexity of financial products typiing and continuing strong demand fied by derivative instruments necesfor consumer loans produced a solid sitated the Federal Reserve's placing expansion of bank loan portfolios greater emphasis on risk management and ended a multi-year period of credit practices at banks and bank holding constraint. companies. Through its own efforts and In this generally favorable environ- through activities conducted in cooperament, the number and assets of failed tion with other U.S. and foreign supervicommercial banks continued to decline, sory authorities, the Federal Reserve reaching the lowest levels since the early took important steps in 1994 to augment 1980s. Similarly, the number and assets its oversight of market risks. The Fedof problem banks continued to decline eral Reserve adopted a new Trading sharply. These trends, combined with Activities Manual, and issued other progress by the industry to strengthen its advisories to its examiners and reguasset quality while maintaining its over- lated institutions to strengthen indusall capital ratios, reflect favorably on the try practices and clarify supervisory industry's condition and its ability to standards. meet the nation's financial needs. The Federal Reserve, along with other Despite the industry's general banking agencies, took steps to adjust strength, pockets of weakness persisted, and strengthen the risk-based capital particularly in Southern California. The standards during 1994 in the areas of majority of commercial bank failures market risk and interest rate risk. The for 1994 occurred in Southern Cali- Board also addressed issues related to fornia where many banks continued to mutual funds, structured notes, and nethave asset quality problems. ting arrangements for capital purposes; In addition, rising market interest and it continued the process of implerates throughout most of 1994 increased menting the Foreign Bank Supervision pressure on bank net interest margins Enhancement Act of 1991, including the and had particularly adverse effects on development and implementation of a the market values of the industry's trad- comprehensive program for supervising ing and investment portfolios. Rising foreign banking organizations in the rates and other market uncertainties also United States. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

250 81st Annual Report, 1994 Scope of Responsibilities for Supervision Enhancement Act of 1991 Supervision and Regulation increased the Federal Reserves's authority over the establishment, examination, The Federal Reserve is the federal and termination of branches, agencies, supervisor and regulator of all U.S. bank commercial lending subsidiaries, and holding companies and of staterepresentative offices of foreign banks chartered commercial banks that are in the United States. members of the Federal Reserve Sys- The Federal Reserve also exercises tem. In overseeing these organizations, important regulatory influence over the the Federal Reserve primarily seeks to entry into, and the structure of, the U.S. promote their safe and sound operation banking system through its administraand their compliance with laws and tion of the Bank Holding Company Act, regulations, including the Bank Secrecy the Bank Merger Act for state member Act and consumer and civil rights laws.' banks, and the Change in Bank Control The Federal Reserve also examines the Act for bank holding companies and following specialized activities of these state member banks. Also, the Federal institutions: electronic data processing, Reserve is responsible for imposing fiduciary activities, mutual fund activimargin requirements on securities transties, government securities dealing and actions. In carrying out these responsibrokering, municipal securities dealing, bilities, the Federal Reserve coordinates securities clearing activities, and securiits supervisory activities with other fedties underwriting and dealing through eral and state regulatory agencies and special subsidiaries. with the bank regulatory agencies of The Federal Reserve also has responother nations. sibility for the supervision of (1) all Edge Act and agreement corporations, (2) the international operations of state Supervision for Safety member banks and U.S. bank holding and Soundness companies, and (3) the operations of foreign banking organizations in the To ensure the safety and soundness of United States.2 The Foreign Bank banking organizations, the Federal Reserve conducts on-site examinations, 1. The Board's Division of Consumer and visitations, and inspections and off-site Community Affairs is responsible for coordinating surveillance and monitoring; it also the Federal Reserve's supervisory activities with regard to the compliance of banking organizations undertakes enforcement and other superwith consumer and civil rights. To carry out this visory actions. responsibility, institutions are examined by specially trained Reserve Bank examiners. The Examinations and Inspections chapter of this REPORT covering consumer and community affairs describes these regulatory The on-site review is an integral part of responsibilities. Compliance with other statutes ensuring the safety and soundness of and regulations, which is treated in this chapter, is financial institutions. Examinations of the responsibility of the Board's Division of Bankstate member banks, of branches and ing Supervision and Regulation and the Reserve Banks, whose examiners check for safety and agencies of foreign banks, and of Edge soundness. Act and agreement corporations, as well 2. Edge Act corporations are chartered by the as inspections of bank holding compa- Federal Reserve, and agreement corporations are nies and their subsidiaries, entail (1) an chartered by the states, to provide all segments of appraisal of the quality of the instituthe U.S. economy with a means of financing international trade, especially exports. tion's assets, (2) an evaluation of man- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 251 agement, including internal policies, Federal Reserve guidelines call for controls, operations, and procedures, annual inspections of large bank holding (3) an assessment of the key financial companies and smaller companies with factors of capital, earnings, asset and significant nonbank assets. Small comliability management, and liquidity, and panies (those with assets of less than (4) a review for compliance with appli- $150 million) that do not appear to have cable laws and regulations. problems are selected for inspection on a sample basis, and medium-sized com- State Member Banks panies ($150 million to $500 million in At the end of 1994, 980 state-chartered assets) that do not appear to have probbanks belonged to the Federal Reserve lems are inspected on a three-year cycle. System, an increase of 8 from year-end The inspection focuses on the opera- 1993. These banks represented about tions of the parent holding company and 9 percent of all insured commercial its nonbank subsidiaries. In judging the banks and held about 21 percent of all condition of subsidiary banks, Federal insured commercial bank assets. Reserve examiners consult the examina- Federal Reserve examination guide- tion reports of the federal and state lines are fully consistent with section 10 banking authorities that have primary of the Federal Deposit Insurance Act as responsibility for the supervision of amended by section 111 of the Federal these banks. In 1994, the Federal Deposit Insurance Corporation Improve- Reserve inspected 1,926 bank holding ment Act of 1991 and by the Riegle companies. Altogether, Federal Reserve Community Development and Regula- examiners conducted 1,984 bank holdtory Improvement Act of 1994. ing company inspections and state In conformance with legislated and examiners conducted 51 independent internal examination guidelines, state inspections. During 1994, Reserve Bank member banks were examined as re- officials held 348 meetings with the quired in 1994. Altogether, the Reserve boards of directors of bank holding com- Banks conducted 693 examinations panies to discuss supervisory concerns. (some of them jointly with the state agencies), and state banking depart- Enforcement Actions, ments conducted 316 independent Civil Money Penalties, and required examinations. Reserve Bank Significant Criminal Referrals officials held 291 meetings with directors of large state member banks and In 1994 the Federal Reserve Banks recthose that displayed significant weak- ommended, and members of the Board's nesses as required under Federal staff initiated and worked on, 174 for- Reserve examination guidelines. mal enforcement cases involving 399 separate actions such as written agree- Bank Holding Companies ments, cease and desist orders, removal At year-end 1994 the number of bank and prohibition orders, civil money holding companies totaled 6,019, a penalties and prompt corrective action decline of 92 from the preceding year. directives. Of these, 56 cases involving These organizations controlled about 117 actions were completed by year- 7,805 insured commercial banks and end. Of particular note was the compleheld approximately 94 percent of the tion of a formal action, in conjunction assets of all insured commercial banks with the Securities and Exchange Comin the United States. mission and the Commodities Futures Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

252 81st Annual Report, 1994 Trading Commission, addressing the Federal Reserve also was the lead deficiencies of a money center bank's agency on three examinations of large leveraged derivatives business. Multiregional Data Processing Servicers All final enforcement actions issued examined on an interagency basis with by the Board of Governors and all writ- the Federal Deposit Insurance Corpoten agreements executed by the Federal ration, the Office of the Comptroller of Reserve Banks in 1994 are available to the Currency, and the Office of Thrift the public. Besides formal enforcement Supervision. actions, the Federal Reserve Banks completed 128 informal enforcement Fiduciary Activities actions, such as memoranda of under- The Federal Reserve has supervisory standing, commitment letters, and board responsibility for institutions that hold resolutions. more than $5.7 trillion of discretionary In 1994 the staff of the Division of and nondiscretionary assets in various Banking Supervision and Regulation fiduciary capacities. This group of instiforwarded 529 criminal referrals to the tutions includes 291 state-chartered Fraud Section of the Criminal Division member banks and trust companies and of the Department of Justice for inclu- 71 nonmember trust companies that are sion in its significant referral tracking subsidiaries of bank holding companies. system. On-site examinations are essential to ensure the safety and soundness of financial institutions that have fiduciary Specialized Examinations operations. These examinations include (1) an evaluation of management, poli- The Federal Reserve conducts special- cies, audit and control procedures, and ized examinations of banking organiza- risk management, (2) an assessment of tions regarding electronic data process- the quality of trust assets, (3) an assessing, fiduciary activities, government ment of earnings, (4) a review for consecurities dealing and brokering, munic- flicts of interest, and (5) a review for ipal securities dealing, securities clear- compliance with laws, regulations, and ing, and securities underwriting and general fiduciary principles. During dealing through so-called section 20 1994, Federal Reserve examiners consubsidiaries. The Federal Reserve also ducted 186 on-site trust examinations of reviews state member banks and bank state member banks and trust compaholding companies that act as transfer nies, which held approximately $3 trilagents. lion in fiduciary assets. Electronic Data Processing Government Securities Dealers Under the Interagency EDP Examina- and Brokers tion Program, the Federal Reserve The Federal Reserve is responsible for examines the electronic data processing examining the activities of state member (EDP) activities of state member banks, banks and foreign banks that are govern- U.S. branches and agencies of foreign ment securities dealers and brokers for banks, Edge Act and agreement corpora- compliance with the Government Secutions and independent data centers that rities Act of 1986 and regulations of the provide EDP services to these institu- Department of the Treasury. Forty-three tions. During 1994, the Federal Reserve state member banks and four state conducted 330 EDP examinations. The branches of foreign banks have notified Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 253 the Board that they are currently govern- securities subsidiary. This limit was subment securities dealers or brokers that sequently increased in September 1989 are not exempt from Treasury's regula- to 10 percent. In January 1993 the Board tions. During 1994 the Federal Reserve adopted an optional indexed revenue test conducted twenty-eight examinations of for calculating the 10 percent limit that broker-dealer activities in government reflects the changes in the level and securities at state member banks and structure of interest rates since 1989. foreign banks. In January 1989 the Board approved applications by five U.S. bank holding companies to underwrite and deal in cor- Municipal Securities Dealers porate and sovereign debt and equity and Clearing Agencies securities, subject, in each case, to The Securities Act Amendments of 1975 reviews of managerial and operational made the Board responsible for superinfrastructure and other conditions and vising state member banks and bank requirements specified by the Board. holding companies that act as municipal Four of these organizations subsesecurities dealers or as clearing agenquently received authorization to undercies. The Board supervises forty-six write and deal in corporate and soverbanks that act as municipal securities eign debt securities, and two received dealers and three clearing agencies that comparable authority for equities. act as custodians of securities involved At year-end 1994 thirty-six bank in transactions settled by bookkeeping holding companies had so-called section entries. In 1994, the Federal Reserve 20 subsidiaries authorized to underwrite examined all three of the clearing agenand deal in ineligible securities. Of cies and twenty-four of the banks that these, sixteen could underwrite any debt deal in municipal securities. or equity security; four could underwrite any debt security; and sixteen could Securities Subsidiaries underwrite only the limited types of debt of Bank Holding Companies securities approved by the Board in Section 20 of the Banking Act of 1933 1987. The Federal Reserve uses special- (the Glass-Steagall Act) prohibits the ized procedures for reviewing operaaffiliation of a member bank with a com- tions of these securities subsidiaries; it pany that is "engaged principally" in conducted thirty such inspections in underwriting or dealing in securities. 1994. The Board in 1987 approved proposals by banking organizations to underwrite Transfer Agents and deal on a limited basis in specified Federal Reserve examiners also conduct classes of bank "ineligible" securities examinations of state member banks and (that is, commercial paper, municipal bank holding companies that are regrevenue bonds, conventional residential istered transfer agents. Among other mortgage-related securities, and securi- things, transfer agents counter-sign and tized consumer loans) in a manner con- monitor the issuance of securities, regissistent with section 20 of the Glass- ter their transfer, and exchange or con- Steagall Act and with the Bank Holding vert such securities. During 1994, Fed- Company Act. At that time, the Board eral Reserve examiners conducted onlimited revenues from these newly site examinations at 93 of the 195 banks approved activities to no more than and bank holding companies registered 5 percent of total revenues for each as transfer agents with the Board. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

254 81st Annual Report, 1994 Surveillance and Monitoring Edge Act and Agreement Corporations The Federal Reserve monitors the finan- Edge Act corporations are international cial condition and performance of indi- banking organizations chartered by the vidual banking organizations and the Board to provide all segments of the banking system as a whole to identify U.S. economy with a means of financing areas of supervisory concern. Auto- international trade, especially exports. mated screening systems are used to An agreement corporation is a stateidentify organizations with poor or dete- chartered company that enters into an riorating financial profiles and to iden- agreement with the Board not to exertify adverse trends affecting the banking cise any power that is impermissible for system as a whole. Information from an Edge Act corporation. In 1994, the these systems is then used in decisions Federal Reserve examined all seventy to allocate examination resources or take six Edge Act and agreement corporaother appropriate supervisory actions. tions, which held about $31 billion in Among the automated systems used by total assets at year-end. the Federal Reserve to monitor banking organizations is an examination rating Foreign-Office Operations model, which is used to track the over- of U.S. Banking Organizations all financial condition of individual The Federal Reserve examines the interorganizations. national operations of state member To assist supervisory staff in evalu- banks, Edge Act corporations, and bank ating individual bank holding compa- holding companies, principally at the nies, the Federal Reserve produces and U.S. head offices of these organizations, distributes the quarterly Bank Holding where the ultimate responsibility for Company Performance Report, which their foreign offices lies. In 1994, the provides detailed financial information Federal Reserve conducted full-scope on the condition and performance of and targeted-scope examinations of ten each bank holding company. The Fed- foreign branches of state member banks eral Reserve also produces several and thirty-one foreign subsidiaries of aggregate reports on the national and Edge Act corporations and bank holding regional performance and condition of companies. All of the examinations the banking industry. abroad were conducted with the coop- Automated monitoring systems rely eration of the supervisory authorities of heavily on the information in regulatory the countries in which they took place; reports filed by banking organizations. when appropriate, the examinations To ensure the timeliness and accuracy of were coordinated with the Office of the the reports, the Federal Reserve main- Comptroller of the Currency. Also, tains the Regulatory Reports Monitoring examiners made 5 visitations to over- System to track domestic and foreign seas offices to obtain current financial banking organizations that file late or and operating information and, in some inaccurately. instances, to evaluate their compliance with corrective measures or test-check their adherence to safe and sound International Activities practice. The Federal Reserve is responsible for U.S. Activities of Foreign Banks supervising the international activities Foreign banks continue to be significant of various banking entities. participants in the U.S. banking system. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 255 As of year-end 1994, 277 foreign banks The Federal Reserve has acted to from 61 countries operated 494 state- ensure that all state and federally licensed branches and agencies of which licensed branches and agencies receive 33 are insured by the Federal Deposit an on-site examination at least once dur- Insurance Corporation, as well as 73 ing each twelve-month period. These branches and agencies licensed by the examinations are coordinated with other Office of the Comptroller of the Cur- state and federal regulators to eliminate rency, of which 8 have FDIC insurance. duplication whenever possible. FBSEA These foreign banks also directly owned requires Federal Reserve approval for 12 Edge Act corporations and 4 com- the establishment of branches, agencies, mercial lending companies. In addition, commercial lending company subsidithey held an equity interest of at least aries, and representative offices by for- 25 percent in 85 U.S. commercial banks. eign banks in the United States. Altogether, these U.S. offices of foreign In 1994, applications by 21 banks banks control approximately 21 percent from 13 foreign countries were apof U.S. banking assets. These foreign proved to establish branches, agencies, banks also operated 139 representative and representative offices. offices. An additional 100 foreign banks operated in the United States solely Representative Offices through a representative office. FBSEA gave the Board supervisory The Federal Reserve has broad responsibility, including examination authority to supervise and regulate authority, over the activities of repreforeign banks that engage in banking sentative offices of foreign banks. As and related activities in the United of year-end 1994, 246 representative States through branches, agencies, comoffices of foreign banks were registered mercial lending companies, representawith the Federal Reserve System. tive offices, Edge Act corporations, banks, and certain nonbanking companies. The Federal Reserve conducted or Joint Program for Supervising the U.S. participated with state and federal regu- Operations of Foreign Banking latory authorities in the examination of Organizations 736 such offices during 1994. A cooperative effort among the state and Before the December 1991 passage of federal banking supervisory agencies the Foreign Bank Supervision Enhance- has been developed over the past two ment Act of 1991 (FBSEA), the Federal years to provide a more comprehensive Reserve had residual authority to exam- framework for supervising the U.S. ine all branches, agencies, and com- operations of foreign banking organizamercial lending subsidiaries of foreign tions (FBOs). This program has taken banks in the United States. The Interna- supervisory concepts and methods in use tional Banking Act of 1978 instructed for more than a decade and adapted the Federal Reserve to use, to the extent them to a framework that will process possible, the examination reports of and distribute supervisory information other state and federal regulators. to all U.S. supervisors in a logical, uni- FBSEA amended the International form, and timely manner. Banking Act and increased the Federal The program consists of two major Reserve's authority with respect to these parts. The first segment of the program, foreign bank operations, including rep- which is focused primarily on those resentative offices. FBOs that have multiple U.S. entities, is Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

256 81st Annual Report, 1994 intended to better coordinate the efforts Technical Assistance of the various domestic supervisory In 1994 the System provided staff memagencies through the development of a bers for a number of technical assistance supervision strategy for the total U.S. missions and training sessions on bank operations of individual FBOs. As part supervisory matters at numerous central of this process, the U.S. banking agen- banks in countries of the former Soviet cies will communicate more fully with Union, in Eastern Europe, and in the each other regarding the individual U.S. Caribbean and Latin America. operations which they examine and supervise. Supervisory Policy The second part of the program consists of a review of the financial and The Board amended its guidelines on operational profile of each FBO in order risk-based capital and leverage and to assess the general ability of an FBO released for public comment some other to support its U.S. operations and to proposals in that area. The Board also determine what risks, if any, the FBO issued several other statements of guidposes through its U.S. operations. This ance, some in association with the Basle process, which is separate and distinct Supervisors' Committee. from the supervisory process conducted by the FBO's home country supervisor, Risk-Based Capital Standards is intended to reach basic conclusions regarding the strength of support that The risk-based capital requirements individual FBOs can provide to their adopted by the Board in 1989 remained U.S. operations. Together, the two pro- in effect in 1994. These requirements cesses will provide critical uniform implement the international risk-based information to the U.S. supervisors that capital standards that were proposed by will be used in determining the extent to the Basle Committee on Banking Reguwhich supervisory follow-up action is lation and Supervisory Practices (Basle warranted for one or more U.S. offices Supervisors' Committee) and endorsed of an FBO. by the Group of Ten (G-10) countries in July 1988. The standards include a Examination Manual framework for calculating risk-adjusted Over the past two years, the U.S. state assets and assigning the assets to broad and federal banking agencies have categories based primarily on credit risk. worked together to develop a manual Banking organizations are expected to for conducting individual examinations maintain capital equal to at least 8 perof the U.S. branches and agencies of cent of their risk-adjusted assets. FBOs. To supplement the risk-based capital It is expected that the manual will standards, the Board in 1990 also issued serve as a primary, comprehensive refer- leverage guidelines setting forth minience source for examination guidelines mum ratios of capital to total assets to and procedures for both examiners and be used in the assessment of an instituthe foreign banking community in the tion's capital adequacy. United States. The manual is to be available to the public in the first quarter of Amendments 1995 and will be updated periodically to During 1994 the Board adopted amendreflect new or revised supervisory poli- ments to its risk-based and leverage cies and procedures. capital guidelines in the following areas. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 257 Securities available for sale. The banks and bank holding companies to Board adopted a final amendment, effec- limit the amount of certain deferred tax tive December 31, 1994, that generally assets that may be included in (that directs state member banks and bank is, not deducted from) tier 1 capital for holding companies to not include in risk-based and leverage capital purregulatory capital the "net unrealized poses. The capital rule was developed holding gains (or losses) on securities in response to SFAS 109, "Accounting available for sale," the common stock- for Income Taxes," and is consistent holders' equity account created by with recommendations set forth by the the Financial Accounting Standards Federal Financial Institutions Examina- Board's issuance of Statement of Finan- tion Council. Under the amendment, cial Accounting Standards No. 115, deferred tax assets that can be realized "Accounting for Certain Investments only if an institution earns taxable in Debt and Equity Securities" income in the future are limited for (SFAS 115). Net unrealized losses on regulatory capital purposes to the marketable equity securities (that is amount that the institution expects, equity securities with readily determin- based on its projection of taxable able fair values), however, are to con- income, to realize within one year of the tinue to be deducted from tier 1 capital. quarter-end report date or 10 percent This amendment has, for purposes of of tier 1 capital, whichever is less. calculating the risk-based and leverage Deferred tax assets that can be realized capital ratios, the effect of valuing from taxes paid in prior carryback years available-for-sale securities at amortized would generally not be limited. This cost, rather than at fair value. amendment is to become effective April 1, 1995. Bilateral netting. The Board adopted a final rule, effective December 31, Concentration of credit risk and risks 1994, expanding the recognition of of nontraditional activities. On Decembilateral netting arrangements for risk- ber 15, 1994, the Board, together with based capital purposes. This final the other banking regulatory agencies, amendment implements a recent revi- issued a final rule implementing porsion to the Basle Accord permitting tions of section 305 of the Federal the recognition of such arrangements. Deposit Insurance Corporation Improve- Under the amendment, state member ment Act of 1991 (FDICIA). The final banks and bank holding companies with rule amends the risk-based capital stanqualifying, enforceable netting arrange- dards by explicitly identifying concenments may net (that is, offset) the posi- trations of credit risk and certain risks tive and negative market values of arising from nontraditional activities, as interest and exchange rate contracts in well as an institution's ability to manage determining the current exposure por- these risks, as important factors in tion of the credit equivalent amount of assessing an institution's overall capital such contracts included in risk-weighted adequacy. This amendment is to become assets. effective on January 17, 1995. Deferred tax assets. On December 14, Proposals 1994, the Board adopted a final rule During 1994 the Board issued for public amending the risk-based capital and comment several proposals with regard leverage guidelines for state member to its risk-based capital standards. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

258 81st Annual Report, 1994 Recourse. On May 25, 1994, the ing bilateral netting arrangements. The Board, along with the other regulatory comment period for the proposal ended banking agencies, published in the Fed- in October 1994. A final amendment is eral Register a notice of proposed rule- expected in 1995 after revisions to the making (NPR) and an advance notice of Basle Accord have been endorsed. proposed rulemaking (ANPR) requesting public comment on various recourse Country transfer risk. Following an issues. The proposed rulemaking would announcement by the G-10 governors in lower the risk-based capital requirement July 1994 that they intended to modify for assets sold with low levels of the Basle Accord in 1995 with regard recourse. The advance notice of pro- to country transfer risk, the Federal posed rulemaking outlined an alterna- Reserve Board, in conjunction with the tive approach to deal comprehensively Office of the Comptroller of the Curwith the capital treatment of recourse rency, on October 14, 1994, proposed a transactions and securitizations. The revision to their respective risk-based comment period ended on July 25, 1994. capital standards. The revision, like the Subsequently, on September 23, proposed modification to the accord, 1994, the Riegle Community Develop- would retain the OECD-based group of ment and Regulatory Improvement Act countries as the principle criterion for was enacted. Section 350 of the act preferential risk-weight status but would requires the federal banking agencies to exclude for five years any country that issue regulations limiting the amount of reschedules its external sovereign debt. risk-based capital an insured depository The modification to the accord and the institution can be required to hold for risk-based capital standards was proassets transferred with recourse to the posed to ensure that membership in the maximum amount of recourse for which OECD-based group of countries cointhe institution is contractually liable. cides with relatively low transfer risk The regulations are required to be in in order for a country to be eligible for effect by March 22, 1995. A more spe- preferential capital treatment. The Board cific proposal responding to comments expects to issue a final revision someon the ANPR and taking into account time in 1995 after a final revision to the subsequent staff analysis is also ex- Basle Accord is endorsed. pected to be issued in 1995. Interest rate risk. Section 305 of Derivatives transactions. On August FDICIA requires the bank regulatory 24, 1994, the Board issued a proposal agencies to incorporate interest rate risk for public comment based on proposed in the risk-based capital framework. revisions to the Basle Accord address- Accordingly, in September 1993 the ing various issues relating to the capital Board issued a proposal for incorporattreatment of off-balance sheet derivative ing such risk into the assessment of transactions. The Board's proposal capital adequacy. The approach taken in would revise and expand the set of con- the proposal sought to balance the regversion factors used to calculate the ulatory burden associated with more potential future exposure of derivative precise measures of interest rate risk contracts and recognize the effects of and the commercial banking industry's bilateral netting arrangements in the cal- favorable experience in adapting to culation of potential future exposure for changing rate environments. The Board derivative contracts subject to qualify- has been working with the other bank- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 259 ing agencies to analyze the public com- interagency statement. It is anticipated ments and refine the proposal. The that the examination procedures will be banking agencies expect to publicize a updated as additional information about revised and enhanced approach to sec- industry practices is obtained from tion 305 later in 1995. examiners and as the federal banking agencies issue additional guidance on the subject. Retail Sales of Nondeposit On January 3, 1995, the banking Investment Products agencies that were party to the inter- The federal banking agencies issued a agency statement entered into an joint statement on February 15, 1994, "Agreement in Principle" with the "Retail Sales of Nondeposit Investment National Association of Securities Deal- Products," which provides comprehen- ers (NASD). The agreement calls for the sive guidance regarding such sales on interagency coordination of the supervithe premises of depository institutions. sion and examination of bank-affiliated The interagency statement, which uni- broker-dealers subject to the joint jurisfies and supersedes the separate state- diction of a banking agency and the ments issued by the banking agencies NASD. The agreement is intended to in 1993, is designed to ensure that avoid duplication of supervisory efforts, adequate disclosures are made to con- lessen the burden on the broker-dealers sumers regarding the investment charac- and enhance the overall supervisory teristics and risks of nondeposit invest- process. ment products. The disclosures are also intended to make sure that consumers Structured Note Guidance understand that these investments are not insured by the federal government Recognizing the growing use of strucor the issuing banking organization. tured notes by banking organizations, The interagency statement applies to the Federal Reserve issued guidance on depository institutions, including state these instruments to examiners through member banks, and branches and agen- a supervisory letter. The guidance cies of foreign banks under the Board's emphasized the need for examiners to supervision. It emphasizes the impor- ensure that banking organizations that tance of adopting comprehensive poli- hold structured notes do so according to cies and procedures governing sales their own investment policies and proceprograms. Specifically, it addresses dis- dures and with a thorough understandclosure and advertising; separation of ing of the risks and price sensitivity of sales programs from deposit-related these instruments under a broad range of activities; compensation, training, and market conditions. As experience has supervision of employees; and sales shown, some of these instruments can practice and suitability issues. The state- expose investors to significant losses as ment also addresses third-party arrange- interest rates, foreign exchange rates, ments, including the responsibilities and other market indexes change. While of third parties that conduct retail sales alerting the industry and Federal programs on depository institution Reserve examiners to the potential risk premises. in structured notes, the statement also In May the Federal Reserve issued acknowledged that these instruments finalized examination procedures that can be appropriate investment products address the guidelines contained in the for banks where adequate risk manage- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

260 81st Annual Report, 1994 ment systems are in place and where the reducing regulatory burden while requirinstitution fully understands its overall ing appraisals when necessary to protect risk profile and the risk profile of its the safety and soundness of financial individual investments. institutions or otherwise advance public policy. The final rule increases to $250,000 the threshold at or below Derivatives Activities which appraisals are not required pursu- The Federal Reserve and the Basle ant to title XI of Financial Institutions Supervisors Committee (BSC) have a Reform, Recovery, and Enforcement number of initiatives under way to Act (FIRREA), expands and clarifies ensure that institutions involved in existing exemptions from the agencies' derivative and capital markets activities appraisal requirement, and identifies follow safe and sound management additional circumstances in which appractices, maintain adequate capital lev- praisals are not required. The final rule els, and report the results of these activi- also amends existing requirements govties in a transparent manner. In 1994, the erning appraisal content and the use of BSC issued guidance on sound man- appraisals prepared by other financial agement practices for derivative activi- services institutions. ties and moved forward on proposals On October 27, 1994, the agencies to revise the capital requirements for issued conforming revisions to their equity, commodity, and long-dated appraisal and evaluation guidelines. derivative contracts. Also, the Federal These guidelines address supervisory Reserve is continuing to work with the matters relating to appraisals and evalu- BSC to develop an international super- ations used to support real estate-related visory reporting framework for off- financial transactions and provide guidbalance-sheet derivatives. These activ- ance to examining personnel and federities also included consultation with ally regulated institutions about prudent international working groups on various appraisal and evaluation policies, pracinitiatives regarding the adequacy of tices, and standards. derivative activities' disclosures and During 1994 the Board, in conjuncappropriate application of accounting tion with the other banking and thrift standards for both public and super- regulatory agencies, issued orders visory purposes. In 1995, the Federal granting relief from certain real estate Reserve and the BSC plan to expand appraisal requirements for areas affected these initiatives and develop additional by three different major natural disasguidance on derivatives. In addition, the ters. The relief was granted to areas Federal Reserve is working with other affected by the January 1994 California agencies to develop possible approaches earthquake, the July 1994 flooding in for improving the accounting and disclo- the southeastern United States, and the sure standards for derivative activities. October 1994 flooding in and around Houston, Texas. The Board acted under provisions of the Depository Institutions Real Estate Appraisals Disaster Relief Act of 1992. On June 7, 1994, the Board and the other banking agencies issued a final National Information Center rule amending their appraisal regulations. The amendments furthered federal In 1994 the Board's Division of Bankfinancial and public policy interests by ing Supervision and Regulation assumed Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 261 overall responsibility for the National members with supervisory or regulatory Information Center (NIC). The NIC, a responsibilities at the Reserve Banks, database shared by the Reserve Banks the Board of Governors and state bankand maintained at the Board of Gover- ing departments. The program covers nors, comprises structure data for banks, the four disciplines of bank supervision: nonbanks, and holding companies; bank examinations, bank holding comfinancial information, such as Call pany inspections, surveillance and Report data for banks and FR-Y report monitoring activities, and the applicadata for bank holding companies; and tions process. The program provides supervisory information. The NIC data- cross training at basic, intermediate, base enables end-users to analyze insti- and advanced levels. Classes may be tutional structures, together with appli- conducted in Washington, D.C., or at cable financial information, and any regional locations and may be held supervisory data associated with the jointly with regulators of other financial institution. institutions. Training is extended to staff Critical steps were taken to imple- members of the Division of Banking ment the Supervisory Information Sys- Supervision and Regulation as well as to tem (SIS) as part of the NIC mainframe staff members of other divisions whose environment during 1994. The SIS sys- activities involve the System's supervitem also contains supervisory data on sory and regulatory processes. Students institutions regulated by other banking from supervisory counterparts in foragencies, such as state nonmember eign countries also attend on a spacebanks and national banks. A significant available basis. The objective of the proimprovement to the SIS was the addi- gram is to provide students with an tion of international data for U.S. hold- increased awareness and knowledge of ing companies and foreign banking the total supervision and regulation proorganizations with activities in the cess, including the interrelationships of United States. Board and Reserve Bank the four functional areas, thus providing staff developed a new software release a higher degree of potential substitutof the systems during 1994, completed ability among staff members. user documentation that outlined proce- The System participates in Federal dures for the input of supervisory data, Financial Institutions Examination and conducted training seminars for staff Council (FFIEC) training and, to a members throughout the System. limited extent, in the training offered During 1994 the Board continued to by certain other regulatory agencies. implement an executive information tool Activities include developing and implefor the personal computer called the menting basic and advanced training in Federal Reserve Examination Database various emerging issues as well as in (FRED). This application enables end- such specialized areas as trust activities, users to conduct on a personal computer international banking, electronic data complex institutional analyses employ- processing, activities of municipal secuing all of the information contained rities dealers, off-balance-sheet risk, within the NIC. payment systems risk, white collar crime, preparation and presentation of testimony, income property lending, Staff Training management, and instructor training. It The Supervisory Education Program is also co-hosts the World Bank Seminar charged with effectively training staff for students from developing countries. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

262 81st Annual Report, 1994 During 1994 the Federal Reserve con- for training their examiners in Federal ducted a variety of schools and semi- Reserve and FFIEC schools. Through nars, and Federal Reserve staff partici- this program 672 state examiners were pated in several courses offered by trained; 390 in Federal Reserve courses, co-sponsored agencies, as shown in the 278 in FFIEC programs, and 4 in other accompanying table. courses. The Federal Reserve continued In 1994 the Federal Reserve trained its joint core supervision schools with 3,402 persons in System schools, 1,219 the FDIC with respect to the three core in schools sponsored by the FFIEC, and schools attended by newly hired exami- 176 in other schools for a total of 4,927 nation and inspection staff. students including 130 representatives Every staff member wishing to obtain from foreign central banks. The number an examiner's commission is required to of student days of training in 1994 was demonstrate mastery of the core curricu- 25,036, compared with 26,938 in 1993 lum and other specialty areas by passing and 20,555 in 1992. the Core Proficiency Examination. In The Federal Reserve System also 1994, fifty-seven staff members took the gave scholarship assistance to the states examination and fifty-two passed. Training Programs for Banking Supervision and Regulation, 1994 Number of sessions Program Total Regional Schools or seminars conducted by the Federal Reserve ETS I, Introduction to examinations ETS II, Financial institution analysis 17 ETS III, Loan analysis 15 13 ETS IV, Bank management 6 1 Effective writing for banking supervision staff 24 26 Management skills 20 9 Conducting meetings with management 27 17 Real estate lending seminar 9 2 Senior lending seminar 4 1 Senior forum for current banking and regulatory issues 4 Bank operations Bank holding company applications Bank holding company inspection 10 Basic entry-level trust 1 Advanced trust 1 Consumer compliance examination I 2 Consumer compliance examination II 3 Advanced CRA examination techniques ' V Fair lending Advanced EDP examination 1 EDP continuing education 1 Capital markets seminar 7 7 Section 20 securities seminar 4 ' V Seminar for senior supervisors of foreign central banks ' 2 Other agencies conducting courses2 Federal Financial Institutions Examination Council 67 19 Federal Deposit Insurance Corporation or Office of the Comptroller of the Currency 1 Federal Bureau of Investigation3 7 NOTE. ETS is Examiner Training School; CRA is the 3. Co-sponsored by the Federal Reserve, Federal Community Reinvestment Act; EDP is electronic data Deposit Insurance Corporation, Office of Thrift Superviprocessing. sion, Office of the Comptroller of the Currency, and the 1. Conducted jointly with the World Bank. Resolution Trust Corporation. 2. Open to Federal Reserve employees. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 263 Federal Financial Institutions visory Policy Statement on Securities Examination Council Activities." The guidance clarifies that, consistent with SFAS 115, collateralized In November 1994 the Federal Reserve mortgage obligations (CMOs) may be and the other federal banking agencies reported as held-to-maturity assets at announced, under the auspices of the amortized cost. The FFIEC also issued FFIEC, improvements to disclosures of guidance on issues arising from the off-balance-sheet derivatives that are adoption, for regulatory reporting purreported in bank Call Reports. Under the poses, of SFAS 114, "Accounting by enhanced framework, banks will report Creditors for Impairment of a Loan." gross or notional amounts of derivative The guidance clarifies that SFAS 114 contracts, broken down by class of sets forth an estimation technique for instrument (for example futures, for- calculating part of the general loan loss wards, swaps, and options), type of risk allowance, and thus, allowances calcuexposure (for example interest rate, for- lated under SFAS 114 may continue to eign exchange, equity, and commodity), be included in tier 2 capital, subject to maturity, and use of the instruments (for current limitations. The guidance also example trading and other than trading). reaffirms existing supervisory policies Information will also be collected on the on nonaccrual of interest income and gross positive and negative fair values classification of certain collateralized of derivatives broken down by type of lending arrangements. risk exposure and use of the instru- During 1994 the FFIEC also revised ments. In addition, information will be the supplement to the Report of Assets collected on the net credit exposure and Liabilities of U.S. Branches and (reflecting legally enforceable bilateral Agencies of Foreign Banks (FFIEC 002) netting contracts) and the potential to reflect SFAS 115 and to maintain future exposure, and on the earnings consistency with the bank Call Report. effect of derivatives on bank trading revenues and net interest margins. Regulation of the U.S. In November 1994 the FFIEC also Banking Structure announced several deletions to existing items and other revisions to the Call The Board administers the Bank Hold- Report. These deletions, effective as of ing Company Act, the Bank Merger Act, the March 31, 1995, reporting date, and the Change in Bank Control Act reflect the results of a comprehensive for bank holding companies and state review of the information collected in member banks. In doing so, the Federal Call Reports for the purpose of eliminat- Reserve acts on a variety of proposals ing items no longer considered neces- that directly or indirectly affect the sary. Based on this review, more than structure of U.S. banking at the local, twenty items were removed from the regional, and national levels. The Board Call Report. In addition, new items were also has primary responsibility for reguadded to permit the agencies to more lating the international operations of effectively monitor bank investments in domestic banking organizations and the high-risk mortgage securities and struc- overall U.S. banking operations of fortured notes, sales of mutual funds and eign banks, whether conducted directly annuities, and other areas. through a branch or agency or indirectly During 1994 the FFIEC issued clarifi- through a subsidiary commercial lendcations to the December 1991 "Super- ing company. The Board has established Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

264 81st Annual Report, 1994 regulations for the interstate banking to organize bank holding companies; activities of these foreign banks and for approved 108 proposals to merge existforeign banks that control a U.S. subsid- ing bank holding companies; approved iary commercial bank. 296 bank acquisitions by existing bank holding companies; approved 566 requests by existing companies to acquire Bank Holding Company Act nonbank firms engaged in activities By law, a company must obtain the Fed- closely related to banking; and approved eral Reserve's approval if it is to form a 35 other applications. Data on these and bank holding company by acquiring related bank holding company decisions control of one or more banks. Moreover, are shown in the accompanying table. once formed, a bank holding company must receive the Federal Reserve's Bank Merger Act approval before acquiring additional banks or nonbanking companies. The Bank Merger Act requires that all In reviewing an application or notice proposed mergers of insured depository filed by a bank holding company, the institutions be acted upon by the appro- Federal Reserve considers such fac- priate federal banking agency. If the tors as the financial and managerial institution surviving the merger is a state resources of the applicant, the future member bank, the Federal Reserve has prospects of both the applicant and the primary jurisdiction. Before acting on a firm to be acquired, the convenience and proposed merger, the Federal Reserve needs of the community to be served, considers factors relating to the financial the potential public benefits, and the and managerial resources of the applicompetitive effects of the proposal. cant, the future prospects of the existing In 1994 the Federal Reserve acted and combined institutions, the conveon 1,303 bank holding company and nience and needs of the community to related applications or notices. The Fed- be served, and the competitive effects of eral Reserve approved 298 proposals the proposal. The Federal Reserve must Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1994 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 22 0 0 0 4 272 0 298 Merger of holding company 15 0 0 0 9 84 0 108 Retention of bank 0 0 0 0 0 00 0 Acquisition Bank 43 0 0 0 23 230 0 296 Nonbank 126 0 0 0 33 265 142 566 Bank service corporation ... 0 0 0 0 5 03 8 Other 4 0 22 0 1 0 0 27 Total 210 0 22 0 75 851 145 1,303 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 265 also consider the views of certain other persons located in the markets served by agencies on the competitive factors the institution to be acquired. The fedinvolved in the transaction. eral banking agencies are also required During 1994, the Federal Reserve to assess the qualifications of each perapproved 124 merger applications. As son seeking control; the Federal Reserve required by law, each merger is de- routinely makes such a determination scribed in this REPORT (in table 16 of and verifies information contained in the the Statistical Tables section). proposal. When the Federal Deposit Insurance In 1994 the Federal Reserve acted Corporation, the Office of the Comptrol- on 167 proposed changes in control of ler of Currency, or the Office of Thrift state member banks and bank holding Supervision has jurisdiction over a companies. merger, the Federal Reserve is asked to comment on the competitive factors to ensure comparable enforcement of Public Notice of Federal Reserve the antitrust provisions of the act. The Decisions Federal Reserve and those agencies have adopted standard terminology for Each decision by the Federal Reserve assessing competitive factors in merger that involves a bank holding company, cases to ensure consistency in adminis- bank merger, or a change in control, is tering the act. The Federal Reserve effected by an order or announcement. submitted 991 reports on competitive Orders state the decision along with factors to the other federal banking the essential facts of the application or agencies in 1994. notice and the basis for the decision; announcements state only the decision. All orders and announcements are Change in Bank Control Act released immediately to the public; they The Change in Bank Control Act re- are subsequently reported in the Board's quires persons seeking control of a bank weekly H.2 statistical release and in the or bank holding company to obtain monthly Federal Reserve Bulletin. The approval from the appropriate federal H.2 release also contains announcebanking agency before the transaction ments of applications and notices occurs. Under the act, the Federal received by the Federal Reserve but not Reserve is responsible for reviewing yet acted on. changes in the control of state member banks and of bank holding companies. In so doing, the Federal Reserve must Timely Processing of Applications review the financial position, competence, experience, and integrity of the The Federal Reserve maintains target acquiring person; consider the effect on dates and procedures for the processing the financial condition of the bank or of applications. These target dates probank holding company to be acquired; mote efficiency at the Board and the and determine the effect on competition Reserve Banks and reduce the burden in any relevant market. on applicants. The time allowed for a The appropriate federal banking agen- decision ranges from thirty to sixty days, cies are required to publish notice of depending on the type of application. each proposed change in control and to During 1994, 94 percent of the decisions invite public comment, particularly from met this standard. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

266 81st Annual Report, 1994 Delegation of Applications approval waiting period during which the Department of Justice may file a Historically, the Board has delegated court challenge to a bank acquisition certain regulatory functions—including proposal on competitive grounds. On the authority to approve, but not to deny, October 27, 1994, the Board issued certain types of applications—to the interim rules implementing related Reserve Banks, to the Director of the changes to the Board's application pro- Board's Division of Banking Supercedures and requested public comment vision and Regulation, and to the Secon the rules. The comment period ended retary of the Board. The delegation of on December 5, 1994. Final rules are responsibility for applications permits expected to be adopted in 1995. staff members at both the Board and the Reserve Banks to work more efficiently by removing routine cases from the Board Policy Decisions and Board's agenda. Developments in Bank-Related In 1994, 86 percent of the applica- and Nonbanking Activities tions processed were acted on under On July 6, 1994, the Board requested delegated authority. The Board continpublic comment on a proposal to proued its efforts during the year to streamvide an alternative to the current reveline its processing procedures. nue test used to measure whether a section 20 subsidiary is in compliance with the "engaged principally" criterion of Recent Legislation section 20 of the Glass-Steagall Act. The Riegle Community Development Section 20 prohibits a member bank and Regulatory Improvement Act of from being affiliated with a company 1994 (CDR Act) makes certain revi- that is "engaged principally" in undersions to the procedures that bank hold- writing and dealing in ineligible securiing companies must follow to gain ties. Specifically, the Board sought comapproval of bank and nonbank acquisi- ment on whether asset values or sales tion proposals under the Bank Holding volume data, or a combination of both Company Act. Specifically, the CDR measures, should be used as a new alter- Act (1) establishes a prior notice proce- native test. The comment period ended dure that replaces the application pro- September 9, 1994. No final action has cess for all proposals by bank holding been taken. companies to engage in nonbanking During 1994 the Board approved activities; (2) establishes a streamlined several proposals involving securities notice procedure for the formation of a underwriting and dealing activities and new bank holding company as part of a modifications to related firewalls, princireorganization by the existing share- pally pertaining to the cross-marketing holders of a bank; and (3) eliminates the of bank-eligible securities. In addition, need for prior Board approval of certain the Board permitted a foreign bank, "Oakar" transactions whereby a bank through its section 20 subsidiary, to acquires a thrift institution or assets and trade for its own account in derivatives deposits of a thrift institution. based on nonfinancial commodities. The CDR Act also permits the Board, In 1994 the Board also approved a when it has obtained the consent of the mutual holding company to acquire a Department of Justice, to shorten from majority, but less than 100 percent interthirty days to fifteen days the post- est in a savings bank converting from Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 267 mutual to stock form. The Board's object to stock repurchases by holding approval relied on a number of commit- companies that fail to meet certain ments, including the mutual holding standards, including the Board's capital company's agreement to make prior guidelines. In 1994, the Federal Reserve application to the Board for approval to reviewed fifty-three proposed stock waive any dividends declared by the repurchases by bank holding compasubsidiary bank. nies, all of which were acted on by the During the year, the Board approved Reserve Banks on behalf of the Board. several bank holding company applications raising fair lending issues, including two involving investigations by the International Activities of U.S. Department of Justice. Banking Organizations Pending at year-end 1994 were several applications with broad policy The Board has several statutory responimplications involving Texas banks sibilities in supervising the international seeking to convert to a new type of operations of U.S. banking organiza- Texas charter that would permit tions. The Board must provide authopartnership-type tax treatment. rization and regulation of foreign branches of member banks; of overseas investments by member banks, Edge Applications by State Act corporations, and bank holding Member Banks companies; and of investments by bank State member banks must obtain the per- holding companies in export trading mission of the Federal Reserve to open companies. In addition, the Board is new domestic branches, to make invest- required to charter and regulate Edge ments in bank premises that exceed Act corporations and their investments. 100 percent of capital stock, and to add to their capital bases from sales of sub- Foreign Branches ordinated debt. State member banks of Member Banks must also give six months' notice of their intention to withdraw from mem- Under provisions of the Federal Reserve bership in the Federal Reserve, although Act and of the Board's Regulation K the notice period may be shortened or (International Banking Operations), eliminated in specific cases. member banks must obtain Board approval to establish branches in foreign countries. Stock Repurchases by Bank In reviewing proposed foreign Holding Companies branches, the Board considers the re- A bank holding company sometimes quirements of the law, the condition of purchases its own shares from its share- the bank, and the bank's experience in holders. When the company borrows the international business. In 1994, the money to buy the shares, the transaction Board approved the opening of 18 forincreases the debt of the bank holding eign branches of 11 banks. company and simultaneously decreases By the end of 1994, 105 member its equity. Relatively larger purchases banks were operating 724 branches in may undermine the financial condition foreign countries and overseas areas of of a bank holding company and its bank the United States; 79 national banks subsidiaries. The Federal Reserve may were operating 634 of these branches, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

268 81st Annual Report, 1994 and 26 state member banks were operat- general-consent procedures that involve ing the remaining 90 branches. only after-the-fact notification to the In addition, 23 nonmember banks Board. were operating 44 branches in foreign countries. Export Trading Companies In 1982 the Bank Export Services Act Edge Act Corporations amended section 4 of the Bank Holding and Agreement Corporations Company Act to permit bank holding Under sections 25 and 25(a) of the Fed- companies, their subsidiary Edge Act or eral Reserve Act, Edge Act and agree- agreement corporations, and bankers' ment corporations may engage in inter- banks to invest in export trading companational banking and foreign financial nies, subject to certain limitations and transactions. These corporations, which after Board review. The purpose of this are usually subsidiaries of member amendment was to allow effective parbanks, may (1) conduct a deposit and ticipation by bank holding companies in loan business in states other than that of the financing and development of export the parent, provided that the business is trading companies. The Export Trading strictly related to international transac- Company Act Amendments of 1988 tions and (2) make foreign investments provide additional flexibility for bank that are broader than those of member holding companies engaging in export banks because they can invest in foreign trading activities. Since 1982 the Fedfinancial organizations, such as finance eral Reserve has acted affirmatively companies and leasing companies, as on notifications by forty-eight bank well as in foreign banks. holding companies. In 1994 the Federal Reserve approved three new agreement corporations. At year-end, there were seventy-six Edge Enforcement of Other Laws Act and agreement corporations, which and Regulations together had thirty-two domestic branches. Effective January 1, 1993, the The Board is also responsible for the Board, in line with the latest revision to enforcement of various laws, rules, and Regulation K, requires each Edge Act regulations other than those specificorporation that is "engaged in bank- cally related to bank safety and sounding" to maintain a minimum ratio of ness and the integrity of the banking qualifying total capital to weighted risk structure. assets of 10 percent. Financial Disclosure by State Foreign Investments Member Banks Under the Federal Reserve Act and the State member banks must disclose cer- Bank Holding Company Act, U.S. bank- tain information of interest to investors, ing organizations may engage in activi- including financial reports and proxy ties overseas with the authorization statements, if they issue securities regisof the Board. Significant investments tered under the Securities Exchange Act require advance review by the Board, of 1934. By statute, the Board's finanalthough pursuant to Regulation K, most cial disclosure rules must be substanforeign investments may be made under tially similar to those issued by the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 269 Securities and Exchange Commission. inations Section, the Board has, among At the end of 1994, forty-four state other matters, assisted in the investigamember banks, most of which are small tion of money laundering activities and or medium-sized, were registered with provided training in anti-money launderthe Board under the Securities Exchange ing measures to designated staff mem- Act. bers at each Reserve Bank responsible for reviewing compliance procedures under the Bank Secrecy Act. Bank Secrecy Act The Federal Reserve also provided The Currency and Foreign Transactions assistance to law enforcement agen- Reporting Act (the Bank Secrecy Act) cies conducting criminal investigations was originally designed as a means to under the Bank Secrecy Act. create and maintain records of various The Federal Reserve has participated financial transactions that otherwise extensively in the Financial Action Task would not be identifiable in an effort to Force, which in 1994 provided training trace the proceeds of illegal activities. in anti-money laundering measures to More recently, the Bank Secrecy Act numerous foreign governments. has been regarded as a tool in the fight against money laundering. The records Securities Regulation required by the Bank Secrecy Act provide useful data for aiding in the detec- Under the Securities Exchange Act of tion and prevention of unlawful activity 1934, the Board is responsible for regas well as for determining the safety ulating credit in certain transactions and soundness of financial institutions. involving the purchase or carrying of The Federal Reserve monitors com- securities. The Board limits the amount pliance with the requirements of the of credit that may be provided by securi- Bank Secrecy Act by the institutions it ties brokers and dealers (Regulation T), supervises. by banks (Regulation U), and by other During 1994 the Federal Reserve lenders (Regulation G). Regulation X tested and finalized new Bank Secrecy extends these credit limitations, or mar- Act examination procedures for use dur- gin requirements, to certain borrowers ing regularly scheduled and targeted and to certain credit extensions, such as Bank Secrecy Act examinations of credit obtained from foreign lenders by financial institutions under its super- U.S. citizens. vision. Various examinations resulted in Several regulatory agencies enforce the issuance of cease and desist orders compliance with the Board's securities for failure to establish an internal pro- credit regulations. The Securities and gram that ensures compliance with the Exchange Commission (SEC), the requirements of the Bank Secrecy Act. National Association of Securities The Federal Reserve, through its Dealers, and the national securities appointed representative, continued to exchanges examine brokers and dealers provide expertise and guidance to the for compliance with Regulation T. The Bank Secrecy Act Advisory Council, federal banking agencies examine banks a committee created by congressional under their respective jurisdictions for mandate to propose additional anti- compliance with Regulation U. The money laundering measures to be taken compliance of other lenders with Regunder the Bank Secrecy Act; through ulation G is examined by the Board, the Special Investigations and Exam- the Farm Credit Administration, the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

270 81st Annual Report, 1994 National Credit Union Administration, for margin treatment at broker-dealers and the Office of Thrift Supervision, on the same basis as domestic margin according to the jurisdiction involved. securities. In 1994 the foreign list was At the end of 1994, 691 lenders were revised in February, May, August, and registered under Regulation G, and 275 November. The November foreign list came under the Board's supervision. Of contained 688 stocks. these 275, the Federal Reserve regularly In October 1994 the Board announced inspects 203 either biennially or trienni- the adoption of amendments to Regually, according to the type of credit they lation T, effective November 25, 1994, extend. The others are exempted from regarding the payment period for securiperiodic on-site inspections by the Fed- ties purchases and the status of governeral Reserve but are monitored through ment securities transactions. The amendthe filing of periodic regulatory reports. ments are part of the Board's review of During 1994, Federal Reserve examin- Regulation T and respond to the ruleers inspected 102 lenders for compli- making by the SEC concerning setance with Regulation G. tlement of securities transactions and In general, Regulations G and U congressional action concerning governimpose credit limits on loans secured by ment securities. One amendment specipublicly held securities when the pur- fies that customers must meet initial pose of the loan is to purchase or carry margin calls or make full cash payment those or other publicly held equity secu- for securities purchased at a brokerrities. Regulation T limits the amount dealer within two business days of the of credit that brokers and dealers may standard settlement period. This amendextend when the credit is used to pur- ment reflects the October 1993 adoption chase or carry publicly held debt or by the SEC of a rule, to become effecequity securities. Collateral for such tive in June 1995, that will shorten the loans at brokers and dealers must be existing standard settlement period of securities in one of the following cate- five days after trade date to three days gories: those traded on national securi- (T+3). Thus, when the SEC's T+3 stanties exchanges, certain over-the-counter dard settlement period goes into effect, (OTC) stocks that the Board designates Regulation T will be in conformity. The as having characteristics similar to other amendments address transactions those of stocks listed on the national involving U.S. government securities. In exchanges, or bonds that meet certain particular, the amendments lessen the requirements. regulatory burden of Regulation T on The Federal Reserve monitors the participants in the government securities market activity of all OTC stocks to markets by providing exemptions to determine which of them are subject to Regulation T for most transactions the Board's margin regulations. The involving government securities. Board publishes the resulting List of Under section 8 of the Securities Marginable OTC Stocks quarterly. In Exchange Act, a nonmember domestic 1994 the OTC list was revised in Feb- or foreign bank may lend to brokers or ruary, May, August, and November. The dealers posting registered securities as November OTC list contained 4,056 collateral only if the bank has filed an stocks. agreement with the Board that it will Pursuant to a 1990 amendment to comply with all the statutes, rules, and Regulation T, the Board publishes a regulations applicable to member banks list of foreign stocks that are eligible regarding credit on securities. The Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 271 Board processed two new agreements in bank to its executive officers since the 1994. date of the bank's previous report. The In 1994 the Securities Regulation accompanying table summarizes this Section of the Board's Division of information. Banking Supervision and Regulation issued forty-three interpretations of the Federal Reserve Membership margin regulations. Those that presented sufficiently important or novel issues At the end of 1994, 4,115 banks were were published in the "Securities Credit members of the Federal Reserve Sys- Transactions Handbook," which is part tem, a decrease of 223 from the previof the Federal Reserve Regulatory Ser- ous year-end. Member banks operated vice. These interpretations serve as a 36,622 branches on December 31, 1994, guide to the margin regulations. a net increase of 1,058 for the year. Member banks accounted for 38 percent of all commercial banks in the Loans To Executive Officers United States and for 67 percent of Under Section 22(g) of the Federal all commercial banking offices; the Reserve Act, state member banks must figures for year-end 1993 were 39 perinclude in each quarterly Call Report cent of banks and 67 percent of banking all extensions of credit made by the offices. • Loans by State Member Banks to their Executive Officers, 1993-94 Range of interest Period Number Amount (dollars) rates charged (percent) 1993 October 1-December 31 728 23,962,000 3.0-21.0 1994 January 1 -March 31 689 19,485,000 4.0-21.0 April l-June30 821 28,359,000 3.0-21.0 July 1-September 30 844 39,577,000 4.8-21.0 SOURCE. Call Report. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

273 Regulatory Simplification In 1978 the Board of Governors estab- reviews were Board actions in 1994 to lished the Regulatory Improvement modify Regulation E (allowing banks to Project in the Office of the Secretary to truncate account numbers on automated help minimize the burdens imposed by teller machine receipts) and amend regulation. In 1986 the Board reaffirmed Regulation T (exempting from the reguits commitment to regulatory improve- lation most transactions in government ment, renaming the project the Regula- securities). tory Planning and Review Section and assigning supervision of its work to the Requirements for Real Estate Board's Committee on Banking Super- Appraisals vision and Regulation. The purposes of the regulatory im- In June the Federal Reserve and the provement and simplification function other federal banking agencies enacted are to ensure that the economic conse- amendments to the regulations governquences for small business are consid- ing real estate appraisals. Among other ered when regulations are written, to changes, the amendments increased to afford interested parties the opportunity $250,000 the loan transaction amount to participate in designing regulations above which appraisals are required; and comment on them, and to ensure expanded and clarified the type of that regulations are written in simple transactions that are exempt from the and clear language. Staff members con- appraisal requirement; and narrowed the tinually review regulations for their type of transactions for which evaladherence to these objectives. uations are required. In addition, the During 1994 the Board took a variety amendments revised the requirements of actions to reduce the regulatory bur- governing the content of appraisals and den on supervised institutions. These the use of appraisals prepared by other included raising the dollar-amount financial services institutions. threshold above which real estate transactions require a property appraisal, Relaxation of Restrictions relaxing restrictions on bank holding on Bank Holding Companies companies and their subsidiaries and affiliates desiring to market packages of Section 106 of the Bank Holding Comproducts and services to customers, and pany Act prohibits, with certain exceppermitting netting of some exchange tions, tying the sale of bank products to rate and interest rate contracts for capi- one another. In July the Federal Reserve tal requirements. enacted a rule to extend the exceptions At year-end 1994, staff members were by allowing bank and nonbank affiliates reviewing Regulations E (Electronic of bank holding companies to offer Fund Transfers), M (Consumer Leas- package discounts on traditional bank ing), T (Credit by Brokers and Dealers), products available from the affiliates. and U (Credit by Banks for the Purpose The new rule also permits bank holding of Purchasing or Carrying Margin company affiliates to offer a discount on Stocks). Arising from these ongoing securities brokerage services (a nonbank Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

274 81st Annual Report, 1994 product) to a customer who obtains observe a customer's personal identifia traditional bank product from an cation number as the customer enters it affiliate. at an ATM; if the customer leaves the In December the Board further receipt at the ATM, the criminal then extended the exception to permit a bank can manufacture and use a counterfeit holding company or its nonbank subsid- ATM card bearing the valid account iary to offer a discount on any of its number that was printed on the receipt. products or services on condition that In response to the problem, the Fedthe customer obtain any other product eral Reserve in November adopted a or service from that company or from change to its Electronic Fund Transfers any of its nonbank affiliates. Thus, as regulation permitting financial instituof year-end 1994, the rule carried no tions more flexibility in identifying cus- Board-imposed restrictions on tying tomer accounts on receipts from ATMs. when no bank is involved in the arrange- The change will allow institutions to ment and the products are separately truncate the account number printed on available for purchase by the customer. receipts, thereby helping to protect cus- At the same time the Board proposed to tomers and financial institutions against establish a competitive "safe harbor" fraudulent withdrawals. for banks, permitting them to offer a In February the Board also published discount on any product or package for comment some other revisions arisof products if a customer maintains a ing from review of Regulation E. The combined minimum balance in deposits current regulation closely follows the and other products specified by the minimum requirements of the law; most bank. Board action on this proposal is revisions would clarify and simplify the expected in early 1995. text of the regulation, reorganize and consolidate related material, and delete Netting Arrangements obsolete provisions. The commentary would be revised to follow the more In December the Federal Reserve usable format of the commentaries of amended its risk-based capital guide- other regulations. These changes would lines to recognize the risk-reducing reduce burden somewhat by making the benefits of netting arrangements. The regulation and commentary more underamendment provided that, for capital standable; a few of the proposals would purposes, institutions regulated by the also make minor substantive changes. Board could net the positive and negative market values of interest and Government Securities exchange rate contracts subject to a Transactions qualifying, legally enforceable bilateral netting contract in order to calculate In October the Board amended Regulaone current exposure for that netting tion T (Credit by Brokers and Dealers) contract. to effectively exempt from the regulation most transactions involving government securities. Government securities Receipts for ATM Transactions are subject to another regulatory system, Receipts for transactions at automated implemented by the Department of the teller machines (ATMs) have been Treasury; the system was established instrumental in some cases of fraud. In on an interim basis by the Government these cases, criminals have been able to Securities Act of 1986 and made perma- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Regulatory Simplification 275 nent by the Government Securities Act Amendments of 1993. The amendments to Regulation T exclude from the regulation those broker-dealers who limit themselves to transactions in government securities. For general broker-dealers, the amendments create a new bookkeeping account in which to effect customer transactions in government securities without regard to other provisions of the regulation. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

277 Federal Reserve Banks In 1994 the Federal Reserve Banks During 1994 FRAS continued to passed several major milestones on the deploy Fednet, the new national comway to consolidating mainframe data munications network that is replacing processing operations at three data cen- the current FRCS-80 backbone network ters. Four Reserve Banks completed the and the twelve District networks. The shift of applications that process funds unified Fednet network will provide a transfers and book-entry securities trans- standard level of service as well as fers; as a result the three centers now improved reliability, security, and disasprovide that processing for eleven ter recovery capabilities for the Reserve Banks. In addition, the shift of District- Banks and for the depository institutions unique workloads to the centers, com- that use Federal Reserve services. The pleted by four Banks in 1993, was fin- Fednet circuit switching infrastructure ished by six more in 1994; the was installed in 1993. In 1994, all remaining two, New York and San Fran- depository institutions that had Fedline cisco, continued the process. The head dial connections began using national offices of the Richmond and Dallas dial center 1-800 telephone services to Banks are the sites for two of the data access Reserve Bank electronic services. centers, and the third site is the New In addition, the Boston Reserve Bank York Bank's East Rutherford (New Jer- converted internal users, as well as sey) Operations Center. All three are depository institutions that had leasedmanaged by Federal Reserve Automa- line connections, to Fednet services. The tion Services (FRAS). process of connecting all Reserve Banks and depository institutions that have Several centralized applications beleased-line connections is continuing. gan processing under FRAS in 1994. All twelve Reserve Banks finished convert- In other developments, the same-day ing to the new centralized Integrated settlement amendments to Regulation Accounting System and the new billing CC, which became effective in January, application, and four finished converting resulted in a substantial decline in the to the new centralized Planning and number of checks collected by the Control System. Four Reserve Banks Reserve Banks. To support same-day began using two other new centralized settlement and to improve the efficiency applications, one for Fedwire funds of check processing generally, the transfers and the other for the monitor- Reserve Banks in 1994 introduced ing of account balances; in addition, the several new products, including same- New York Bank has implemented these day settlement presentment services two new applications in its local data and image-enhanced electronic check center, and the seven remaining Reserve products. Banks expect to convert to them during This chapter details 1994 results in 1995. Development work continued on Federal Reserve priced services and software for a new centralized auto- reports on examinations, income and mated clearinghouse system and for a expenses, holdings of securities and new national transfer system for book- loans, and major construction activity at entry securities. the Federal Reserve Banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

278 81st Annual Report, 1994 Developments in 1994, the number of checks cleared Federal Reserve Services through the Federal Reserve's commercial check service declined 13.3 per- The Monetary Control Act of 1980 cent, to 16.5 billion (see accomparequires the Federal Reserve System to nying table). For the year, the service establish fees that, over the long run, had revenues of $556.8 million. Operatrecover all of the direct and indirect ing expenses and imputed costs (interest costs of providing services to depository on float, interest on debt, sales taxes, institutions as well as imputed costs and the assessment for insurance from reflecting the taxes that would have been the Federal Deposit Insurance Corpaid and the return on capital that would poration) totaled $589.0 million, for a have been earned had the services been loss on operations of $32.2 million. provided by a private firm. The imputed Net income on clearing balances was costs are referred to as the private-sector $25.6 million.3 adjustment factor (PSAF). Over the past The new settlement provisions, ten years the Federal Reserve System implemented through Regulation CC, has recovered 101.6 percent of its costs, enable a collecting bank to receive including the PSAF. same-day settlement if it presents checks In 1994 the revenue from priced directly to the paying bank by 8:00 a.m. services operations was $734.4 million, (local time of the paying bank). The other income was $32.8 million, and resulting overall decline of 13.3 percent costs were $781.2 million, resulting in in the volume of checks deposited for negative net revenue of $14.0 million collection with the Reserve Banks and a recovery rate of 98.2 percent of consisted of a 35.7 percent decline in costs, including the PSAF.1 In 1993 the fine-sort deposits, which require the System had negative net revenue of depositing bank to presort items by pay- $63.4 million and recovered 92.4 pering bank, and a 4.8 percent decline in all cent of costs. In 1992 the System had other check deposits. net revenue of $25.2 million and recov- At the same time, the Federal Reserve ered 103.4 percent of costs.2 Banks implemented new services designed to facilitate same-day settle- Check Collection ment. For instance, a paying bank may now designate a Federal Reserve Under new same-day settlement rules, office as a presentment point for its which became effective on January 3, same-day-settlement items; the Reserve Banks also offer information prod- 1. See the pro forma statements at the end of ucts that enable those banks to conthis chapter. Other income is the revenue from tinue to provide timely cash maninvestment of clearing balances net of earnings credits, an amount known as net income on clear- agement information to their corporate ing balances. Costs are the sum of operating customers. expenses, imputed costs, imputed income taxes, The Federal Reserve continued to and targeted return on equity. Net revenue is revencourage the use of electronics to enue plus net income on clearing balances, minus cost. improve the efficiency of check process- 2. For 1993, excluding the one-time effect of a ing. During the year, all of the Reserve change in accounting principle, the System had Banks began to offer basic electronic net revenue of $10.7 million and recovered 101.4 percent of costs, including the PSAF. Financial results for 1993 and 1992 have been revised 3. See the pro forma income statement for Fedfrom last year's REPORT. eral Reserve priced services, by service. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 279 check presentment and local truncation to obtain images of checks for their services. information-processing needs. In electronic check presentment, a paying bank agrees to accept as legal presentment an electronic file contain- Funds Transfer and Net Settlement ing electronic information about each The Fedwire funds transfer service check instead of the paper checks, which and the net settlement service together are subsequently delivered to the paying had revenues of $88.0 million and bank. income, after operating expenses and Under local truncation services, the imputed costs, of $2.5 million. Net Reserve Banks microfilm the checks income on clearing balances was drawn on an institution, store the paper $3.6 million. checks for up to ninety days before destroying them, and retain the micro- Funds Transfer film images for seven years. During 1994 nearly 647 million checks were The number of Fedwire funds transfers presented to paying banks electronically, originated increased 3.4 percent, to an increase of approximately 162 per- 73.6 million (72.0 million value transcent over the 1993 level. The Reserve fers and 1.6 million nonvalue messages). Banks also began making it possible for In February 1994 the Board of Goverdepository institutions to request adjust- nors announced a plan to expand the ments of check transactions via elec- operating hours of the Fedwire on-line tronic transmissions. funds transfer service, from ten hours The Federal Reserve continued to (8:30 a.m. to 6:30 p.m. eastern time) develop and test medium- and high- to eighteen (12:30 a.m. to 6:30 p.m. speed imaging technologies for process- eastern time). The additional operating ing both government and commercial hours are expected to aid private-sector checks. During the year, two Reserve initiatives to reduce settlement risk in Banks introduced image-enhanced com- foreign exchange markets; they will also mercial check products that allow pay- eliminate an operational barrier to innoing banks that use truncation or other vation in privately provided payment electronic check presentment products and settlement services. Activity in Federal Reserve Priced Services, 1994, 1993, and 1992 Thousands of items except as noted Percentage change Service 1994 1993 1992 1993-94 1992-93 Commercial checks 16,479,161 19,008,808 19,052,928 -13.3 -.2 Funds transfers 73,611 71,199 69,803 3.4 2.0 Commercial ACH 1,805,095 1,544,848 1,326,632 16.8 16.5 Definitive safekeeping 17 41 -100.0 -58.5 Noncash collection 643 1,020 1,636 -37.0 -37.7 Securities transfers 3,663 3,604 3,266 1.6 10.4 Cash transportation 53 65 282 -18.5 -77.0 NOTE. Activity in commercial checks is defined as the definitive safekeeping, the average number of issues or total number of commercial checks collected, including receipts maintained; in noncash collection, the number of both processed and fine-sort items; in funds transfers, items on which fees are assessed; in securities, the numthe number of basic transactions originated; in ACH, ber of basic transfers originated on line; and in cash the total number of commercial items processed; in transportation, the number of armored-carrier stops. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

280 81st Annual Report, 1994 Initially, the extended hours were to The other two national arrangements, begin in early 1997. The effective date Visa ACH and the National Clearingwas delayed when, in December, the house Association, process and net Board announced a plan to expand the small-dollar transactions associated, format of Fed wire funds transfers. To respectively, with automated clearingallow more time for design of the new house and check payments. The majorformat, it also delayed implementation ity of local arrangements are check of the longer operating day until the clearinghouses. fourth quarter of 1997. The exact date of In 1994 the Reserve Banks processed implementation for the new hours will about 500,000 net settlement entries for be announced one year in advance. local netting arrangements; the value of The expanded format for Fedwire these entries was about $800 billion. funds transfers will reduce manual interventions in the transfers. It also will Automated Clearinghouse eliminate the need to truncate paymentrelated information when forwarding The Reserve Banks processed 1.8 bilpayment orders through Fedwire to lion commercial transactions through other large-value transfer systems. Fur- the automated clearinghouse (ACH) durther, the new format will enable deposi- ing the year, an increase of 16.8 percent tory institutions to include the additional over 1993 volume. The service had information about the originator and revenues of $64.3 million and a loss, beneficiary of a transfer required under after operating expenses and imputed regulations of the Department of the costs, of $6.5 million. Net income on Treasury. The new format must be clearing balances was $2.6 million. implemented by the end of 1997. The Federal Reserve's campaign to institute an all-electronic ACH was completed. All depository institutions Net Settlement that use commercial ACH services had The Federal Reserve provides net settle- established electronic connections by ment services to more than 150 local, July 1993. During 1994, depository private-sector clearing and settlement institutions that use only government arrangements and to 4 such arrange- ACH services were required by Treaments that operate nationwide. These sury to establish electronic connections arrangements enable participants to with the Federal Reserve Banks. An allsettle their net positions either via Fed- electronic ACH provides users with wire funds transfers using special settle- greater security, enhanced contingency ment accounts at Federal Reserve Banks and disaster-recovery capabilities, and or via accounting entries, which are increased efficiency. In particular, the posted to participants' reserve or clear- all-electronic ACH ensures that ACH ing accounts by Federal Reserve Banks. transactions are available to receiving Two of the national arrangements, the depository institutions by the opening of Clearing House Interbank Payments business on the settlement date. System and the Participants Trust Com- Development work continued on softpany, process and net large-dollar trans- ware to support ACH services in the actions associated, respectively, with Federal Reserve's new consolidated data interbank funds transfers and with processing environment. The new softpayments related to the settlement of ware will allow more deposit and delivmortgage-backed securities transactions. ery options. It will also allow customers Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 281 to trace items or files electronically, banks the option of participating in earcheck the status of a file in process, and lier Fedwire securities hours and that obtain limited information from the Fed- would allow them to control their use of eral Reserve's database on other ACH intraday credit during expanded and participants. core business hours. In addition, the Board requested comment on establishing a firm closing time for the Fedwire Noncash Collection book-entry securities transfer service, The number of noncash collection items beginning in January 1996. Comments (maturing coupons and bonds) pro- were due by April 28, 1995. cessed by the Reserve Banks decreased The Federal Reserve Bank of Chi- 37.0 percent, to 643,000. The service cago offers to all depository institutions had revenues of $3.9 million and a loss, the secondary-market purchase or sale after operating expenses and imputed of securities that are book-entry-eligible costs, of $1.2 million. Net income on at the Federal Reserve. clearing balances was $0.2 million. During the year, the Reserve Banks Fiscal Agency Services continued consolidating noncash operations. By late 1996 only two Federal As fiscal agent for the Department of the Reserve sites will conduct noncash Treasury, the Federal Reserve Banks processing—the Cleveland Bank and the provide book-entry services for Trea- Jacksonville Branch of the Atlanta sury debt issues. In 1994 the Reserve Bank. The New York and Chicago Banks processed 9.3 million book-entry Banks will continue to present noncash Treasury securities transfers. items payable through members of the The Federal Reserve continues to clearinghouses located in those two operate Treasury Direct, the safekeeping cities. system for book-entry Treasury securities owned by individuals who use Treasury as custodian. Treasury Direct has Book-Entry Securities grown to more than 1.4 million accounts The Federal Reserve processed 3.7 mil- with a total par value of more than lion transfers of government agency $77.9 billion. During 1994 the Reserve securities during the year, a 1.6 percent Banks processed 2.4 million applicaincrease over 1993 volume. The service tions from Treasury Direct customers to had revenues of $15.2 million and a purchase securities. The Reserve Banks loss, after operating expenses and im- also processed more than 1.4 million puted costs, of $0.4 million. Net income competitive and noncompetitive bids of on clearing balances was $0.6 million. customers seeking to buy securities in In December 1994 the Board re- Treasury auctions. quested comment on the potential bene- In 1994 the Reserve Banks inscribed fits, costs, and market implications of 57 million savings bonds for over-theexpanding the availability of the Fed- counter, payroll, and other types of wire book-entry securities service for transactions. The Reserve Banks have on-line activity beyond the current hours been consolidating their savings bond of 8:30 a.m. to 2:30 p.m. for transfers operations at five sites: the Buffalo and 8:30 a.m. to 3:00 p.m. for reversals. Branch of the New York Bank, the Pitts- The Board also requested comment on burgh Branch of the Cleveland Bank, new service capabilities that would give and the Richmond, Minneapolis, and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

282 81st Annual Report, 1994 Kansas City Banks. Residual processing By year-end 1994, the Reserve Banks is still being performed in the Boston, had installed 51 new high-speed cur- Atlanta, and Chicago Districts. Consoli- rency processors. The Reserve Banks dation should be completed during plan to install a total of 132 of these 1996. processors, with completion expected by The Federal Reserve is helping Trea- year-end 1997. sury implement its Electronic Federal Tax Deposit System, which is designed Float to modernize the collection of federal taxes from businesses and quarterly Federal Reserve float increased in 1994 filers. Under the new system, Treasury to a daily average of $479 million, up will receive tax payments one day from $349 million in 1993, largely sooner and will be able to manage its because of severe weather during the cash flow more efficiently. first quarter of 1994. The cost of Federal Reserve float associated with priced services is recovered each year through Currency and Coin fees for priced services. In 1994 only three Federal Reserve offices—the Minneapolis Bank, its Examinations Helena Branch, and the Pittsburgh Branch of the Cleveland Bank— Section 21 of the Federal Reserve Act continued to arrange transportation of requires the Board of Governors to cash by armored carrier. Two Districts "order an examination of each Federal provided coin-wrapping services, offices reserve bank" at least once per year. in two Districts provided nonstandard The Board assigns the responsibility to packaging of currency, and offices in its Division of Reserve Bank Operations two Districts offered nonstandard fre- and Payment Systems. In 1994 the quency of access to services; all are Board engaged the services of a public priced services. Together, the cash ser- accounting firm to audit, beginning in vices had revenues of $6.1 million and 1995, the year-end balance sheets of two income, after operating expenses and or three Reserve Banks each year, comimputed costs, of less than $0.05 mil- pleting audits of all twelve Banks over a lion. Net income on clearing balances five-year period; the division will conwas $0.3 million. tinue to perform annual financial exami- The Federal Reserve supplies cur- nations of the other Reserve Banks durrency and coin to the public by servicing ing that period. the needs of depository institutions To assess conformance with policies throughout the nation. The value of cur- established by the Federal Open Marrency and coin in circulation increased ket Committee (FOMC), the Division 9 percent in 1994 and exceeded of Reserve Bank Operations and Pay- $400 billion at year-end. ment Systems also annually audits the The Reserve Banks continued to work accounts and holdings of the System closely with Treasury and other agen- Open Market Account at the Federal cies to deter counterfeiting and launder- Reserve Bank of New York and the ing of U.S. currency. Work continued on foreign currency operations conducted a new currency design, and a study is by the Bank. The recently contracted under way to better understand the use public accounting firm, beginning at of U.S. currency outside the country. year-end 1994 and continuing through Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 283 1999, will also certify the balance sheet 1994. Unreimbursed services to Treafor the System Open Market Account sury cost $34 million. and for foreign currency operations for In addition, the profit and loss account participated accounts of the twelve showed a net profit of $2,398 million. Reserve Banks. Copies of these reports The profit was primarily a result of are furnished to the FOMC. realized and unrealized gains on assets The examination program used by the denominated in foreign currencies. division is reviewed annually by a pub- These profits were partially offset by lic accounting firm. losses on the sales of securities from the System Open Market portfolio. Statutory dividends to member banks totaled Income and Expenses $212 million, $17 million more than in The accompanying table summarizes the 1993. The rise reflected an increase in income, expenses, and distribution of the capital and surplus of member banks net earnings of the Federal Reserve and a consequent increase in the paid-in Banks for 1994 and 1993. capital stock of the Reserve Banks. Income was $20,911 million in 1994 Payments to Treasury in the form of (including $734 million in revenue from interest on Federal Reserve notes totaled priced services) and $18,914 million $20,470 million, compared with in 1993. Expenses totaled $1,942 mil- $15,987 million in 1993. The payments lion in 1994 ($1,571 million in operat- consist of all net income after the deducing expenses, $224 million in earnings tion of dividends and of $282 million, credits granted to depository institutions, the amount necessary to bring the surand $147 million in assessments for plus of the Banks to the level of capital expenditures by the Board of Gov- paid-in. ernors) versus $1,798 million in 1993. In the Statistical Tables chapter of The Board of Governors also assessed this REPORT, table 6 details the income $368 million for the cost of currency in and expenses of each Federal Reserve Income, Expenses, and Distribution of Net Earnings of Federal Reserve Banks, 1994 and 1993 Millions of dollars Item 1994 1993 Current income 20,911 18,914 Current expenses 1,796 1,658 Operating expenses' 1,572 1,475 Earnings credits granted 224 183 Current net income 19,115 17,256 Net addition to (deduction from, - ) current net income 2,398 -201 Cost of unreimbursed services to Treasury 34 29 Assessments by the Board of Governors 515 496 For expenditures of Board 147 140 For cost of currency 368 356 Net income before payments to Treasury 20,964 16,530 Dividends paid 212 195 Transferred to surplus 282 348 Payments to Treasury (interest on Federal Reserve notes) 20,470 15,987 NOTE. Components may not sum to totals because of rounding. 1. Includes a net periodic credit for pension costs of $75.6 million in 1994 and $131.4 million in 1993. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

284 81st Annual Report, 1994 Bank for 1994, and table 7 shows a Reserve Banks for the years 1990 condensed statement for each Bank for through 1994. the years 1914 through 1994. A detailed account of the assessments and expendi- Federal Reserve Bank Premises tures of the Board of Governors appears in the next chapter, Board of Governors Construction of the new headquarters Financial Statements. building for the Minneapolis Bank began in 1994, as did expansion and renovation of the current headquarters Holdings of Securities and Loans building of the Cleveland Bank. In addi- Average daily holdings of securities and tion, multiyear renovation programs loans by the Reserve Banks during 1994 continued at the Kansas City Bank's were $354,001 million, an increase of Oklahoma City Branch and the San $33,473 million over 1993 (see accom- Francisco Bank's Branches in Seattle, panying table). From 1993 to 1994, such Portland, and Salt Lake City. holdings of U.S. government securities The Board approved a multiyear increased $33,393 million, and such renovation program for the New York holdings of loans increased $80 million. Bank's headquarters building. It also The average rate of interest on hold- approved projects to renovate the cash ings of U.S. government securities departments at several Reserve Banks increased, from 5.27 percent in 1993 to in preparation for installation of new 5.44 percent in 1994, and the average currency-processing equipment. In addirate of interest on loans increased, from tion, long-range planning studies were 3.08 percent to 4.39 percent. conducted for several Reserve Bank facilities. Table 8, in the Statistical Tables chap- Volume of Operations ter, shows the cost and book values of Table 9, in the Statistical Tables chapter, premises owned and occupied by the shows the volume of operations in the Federal Reserve Banks and the cost of principal departments of the Federal other real estate owned by the Banks. Securities and Loans of Federal Reserve Banks, 1992-94 Millions of dollars except as noted U.S. Item and year Total government Loans2 securities' Average daily holdings3 1992 283,104 282,927 177 1993 320,528 320,347 181 1994 . 354,001 353,740 261 Earnings 1992 17,342 17,336 6 1993 16,896 16,891 6 1994 . 19,259 19,247 Average interest rate (percent) 1992 6.13 6.13 3.43 1993 5.27 5.27 3.08 1994 5.44 5.44 4.39 1. Includes federal agency obligations. 3. Based on holdings at opening of business. 2. Doesjiot include indebtedness assumed by the Federal Deposit Insurance Corporation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 285 Pro Forma Financial Statements for Federal Reserve Priced Services Pro Forma Balance Sheet for Priced Services, December 31, 1994, 1993, and 1992 Millions of dollars Item 1994 1993 1992 Short-term assets (Note 1) Imputed reserve requirement on clearing balances 400.3 624.8 582.8 Investment in marketable securities . 3 602.7 5,623.2 5,245.2 Receivables 60.6 67.4 66.6 Materials and supplies 10.2 9.9 6.5 Prepaid expenses 15.5 17.2 12.3 Items in process of collection 2,316.7 3,458.6 4,062.4 Total short-term assets 6,406.0 9,801.1 9,975.8 Long-term assets (Note 2) Premises 377.6 385.4 378.5 Furniture and equipment 168.4 209.3 176.2 Leases and leasehold improvements .. 8.6 16.8 50.2 Prepaid pension costs 205.4 191.1 150.2 Total long-term assets 760.0 802.5 755.1 Total assets , 7,166.0 10,603.6 10,730.9 Short-term liabilities Clearing balances and balances arising from early credit of uncollected items 4,133.1 7,029.9 8,813.4 Deferred-availability items 2,186.6 2,676.7 1,077.0 Short-term debt 86.3 94.5 85.3 Total short-term liabilities 6,406.0 9,801.1 9,975.8 Long-term liabilities Obligations under capital leases .6 .0 .1 Long-term debt 170.5 202.3 200.5 Postretirement benefits obligation 140.5 122.4 Total long-term liabilities 311.6 324.7 200.6 Total liabilities 6,717.6 10,125.8 10,176.3 Equity 448.4 477.8 554.5 Total liabilities and equity (Note 3).. 7,166.0 10,603.6 10,730.9 NOTE. Amounts in bold are restatements due to errors The priced services financial statements consist of these in previously reported data. Components may not sum to tables and the accompanying notes. totals because of rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

286 81st Annual Report, 1994 Pro Forma Income Statement for Federal Reserve Priced Services, 1994, 1993, and 1992 Millions of dollars Item 1994 1993 1992 Revenue from services provided to depository institutions (Note 4) 734.4 757.3 758.4 Operating expenses (Note 5) 693.0 673.7 622.6 Income from operations 41.4 83.6 135.8 Imputed costs (Note 6) Interest on float 18.6 10.6 14.5 Interest on debt 18.9 21.3 19.8 Sales taxes 10.8 9.4 12.3 FDIC insurance 15.8 64.1 19.5 60.8 20.7 67.3 Income from operations after imputed costs -22.7 22.8 68.5 Other income and expenses (Note 7) Investment income on clearing balances . 241.2 187.8 180.2 Earnings credits 208.4 32.8 170.6 17.2 177.8 2.4 Income before income taxes 10.1 40.0 70.9 Imputed income taxes (Note 8) 3.1 11.8 20.8 Income before cumulative effect of a change in accounting principle 7.0 28.2 50.0 Cumulative effect on previous years from retroactive application of accrual method of accounting for postretirement benefits (net of $31.1 million tax) (Note 9) -74.1 Net income (Note 10) 7.0 -45.9 50.0 MEMO: Targeted return on equity (Note 11) 21.0 17.5 24.9 NOTE. Amounts in bold are restatements due to errors The priced services financial statements consist of these in previously reported data. Components may not sum to tables and the accompanying notes. totals because of rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 287 Pro Forma Income Statement for Federal Reserve Priced Services, by Service, 1994, 1993, and 1992 Millions of dollars Com- Funds Com- Definitive Bookmercial transfer Noncash Cash Item Total mercial safe- entry check and net collection services ACH keeping securities collection settlement 1994 Revenue from operations 734.4 556.8 88.0 64.3 3.9 15.2 6.1 Operating expenses (Note 5) 693.0 536.0 80.4 66.3 4.8 14.7 5.9 Income from operations 41.4 20.8 7.6 -2.0 -.8 .6 .1 Imputed costs (Note 6) 64.1 53.0 5.1 4.5 .4 .9 .1 Income from operations after imputed costs -22.7 -32.2 2.5 -6.5 -1.2 -.4 .0 Other income and expenses, net (Note 7) 32.8 25.6 3.6 2.6 2 .6 .3 Income before income taxes . 10.1 -6.7 6.1 -3.9 -1.1 .3 .3 1993 Revenue from operations .... 757.3 583.2 88.4 58.9 1.5 4.8 14.2 6.3 Operating expenses (Note 5) 673.7 514.4 78.5 66.3 3.9 5.5 13.8 6.2 Income from operations 83.6 68.8 9.9 -7.4 -2.4 -.6 .3 .1 Imputed costs (Note 6) 60.8 47.8 5.9 5.1 .3 .5 .9 .3 Income from operations after imputed costs 22.8 20.9 4.0 -12.5 -2.7 -1.1 -.5 -.2 Other income and expenses, net (Note 7) 17.2 13.7 1.8 1.2 .0 .1 .3 .1 Income before income taxes . 40.0 34.6 5.8 -11.3 -2.7 -1.0 -.2 -.1 » 1992 Revenue from operations .... 758.4 576.0 85.6 60.1 3.1 7.5 13.1 12.9 Operating expenses (Note 5) 622.6 506.3 67.8 58.9 3.8 8.3 11.3 12.3 Income from operations 135.8 69.7 17.8 1.3 -.7 -.8 1.8 .6 Imputed costs (Note 6) 67.3 53.2 6.8 5.1 .4 .8 1.0 .2 Income from operations after imputed costs 68.5 16.5 11.0 -3.8 -1.1 -1.6 .8 .4 Other income and expenses, net (Note 7) 2.4 2.4 .0 .0 .0 .0 .0 .0 Income before income taxes . 70.9 18.9 11.0 -3.8 -1.1 -1.6 .8 .4 NOTE. Amounts in bold are restatements due to errors The priced services financial statements consist of these in previously reported data. The Federal Reserve with- tables and the accompanying notes, drew from the definitive safekeeping service in 1993. Components may not sum to totals because of rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

288 81st Annual Report, 1994 Revenue and Expenses for Commercial Check Collection, by District, 1994, 1993, and 1992 Millions of dollars Expenses of operations and of float Revenue Operating District less revenue Interest expense Operations Total on float 1994 Boston 30.1 30.3 31.1 -1.0 New York 62.1 62.0 3.5 65.5 -3.4 Philadelphia .. 31.3 31.2 3.2 34.4 -3.1 Cleveland .... 32.9 30.5 1.9 32.5 .4 Richmond 52.7 48.9 .2 49.1 3.6 Atlanta 81.7 72.2 .7 73.9 7.7 Chicago 75.4 69.9 .5 71.5 3.9 St. Louis 24.6 22.8 .7 24.6 .0 Minneapolis .. 32.6 29.4 .5 29.9 2.7 Kansas City .. 37.1 34.9 36.0 1.1 Dallas 38.9 38.2 40.0 -1.2 San Francisco 57.6 52.9 53.4 4.2 System total . 556.8 534.0 18.4 552.4 4.4 1993 Boston 34.3 30.1 30.7 3.6 New York 69.7 62.5 1.6 64.1 5.6 Philadelphia .. 31.9 27.3 1.0 28.3 3.6 Cleveland .... 32.4 28.0 1.1 29.1 3.3 Richmond .... 55.2 48.3 .7 49.0 6.2 Atlanta 77.8 67.2 1.2 68.4 9.4 Chicago 79.5 65.6 1.1 66.6 12.9 St. Louis 24.1 20.8 .8 21.6 2.5 Minneapolis .. 32.3 27.6 .2 27.8 4.5 Kansas City .. 37.0 31.4 .9 32.3 4.7 Dallas 43.1 34.0 1.1 35.1 8.0 San Francisco 65.9 55.4 .2 55.6 10.2 System total 583.2 512.7 10.5 523.2 60.1 1992 Boston 35.3 30.8 .7 31.5 3.8 New York .... 69.6 65.0 1.6 66.6 3.0 Philadelphia .. 31.2 27.5 1.1 28.6 2.6 Cleveland .... 32.0 28.4 1.1 29.5 2.5 Richmond 54.9 48.4 1.6 50.0 4.8 Atlanta 76.4 64.0 1.7 65.7 10.7 Chicago 76.6 62.6 1.9 64.5 12.1 St. Louis 24.0 19.9 1.0 20.9 3.1 Minneapolis .. 31.3 26.7 .4 27.1 4.2 Kansas City .. 36.8 30.6 .8 31.4 5.4 Dallas 41.9 35.4 1.4 36.8 5.0 San Francisco 66.2 59.5 60.3 5.9 System total 576.0 504.9 14.1 519.0 57.0 NOTE. Amounts in bold are restatements due to errors (second column, last row of each panel), because the in previously reported data. Components may not sum to statement shown here does not reflect the following items totals because of rounding; moreover, certain expenses included in the income statement by service: imputed related to automation consolidation are reported at the interest on debt, imputed sales taxes, the imputed asses- System level, and therefore the sum of expenses for the ment for Federal Deposit Insurance Corporation (FDIC) twelve Districts may not equal the System total. insurance, Board expenses for priced services, and net The System totals shown for revenue less expense (last income on clearing balances. column, bottom row of each panel) differ from the The priced services financial statements consist of these amounts for check collection income before income taxes, tables and the accompanying notes. shown in the preceding statement, income by service Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 289 FEDERAL RESERVE BANKS NOTES TO FINANCIAL STATEMENTS FOR PRICED SERVICES (1) SHORT-TERM ASSETS short-term liabilities include clearing balances maintained at Reserve Banks and deposit balances arising from float. The imputed reserve requirement on clearing balances Other long-term liabilities consist of obligations on capiheld at Reserve Banks by depository institutions reflects a tal leases. treatment comparable to that of compensating balances held at correspondent banks by respondent institutions. The reserve requirement imposed on respondent balances (4) REVENUE must be held as vault cash or as nonearning balances Revenue represents charges to depository institutions for maintained at a Reserve Bank; thus, a portion of priced priced services and is realized from each institution services clearing balances held with the Federal Reserve through one of two methods: direct charges to an instituis shown as required reserves on the asset side of the tion's account or charges against its accumulated earnbalance sheet. The remainder of clearing balances is ings credits. assumed to be invested in three-month Treasury bills, shown as investment in marketable securities. (5) OPERATING EXPENSES Receivables are (1) amounts due the Reserve Banks for Operating expenses consist of the direct, indirect, and priced services and (2) the share of suspense-account and other general administrative expenses of the Reserve difference-account balances related to priced services. Banks for priced services plus the expenses for staff Materials and supplies are the inventory value of shortmembers of the Board of Governors working directly on term assets. the development of priced services. The expenses for Prepaid expenses include salary advances and travel Board staff members were $2.7 million in 1994, $2.3 miladvances for priced-service personnel. lion in 1993, and $1.9 million in 1992. The credit to Items in process of collection is gross Federal Reserve expenses under SFAS 87 (see note 2) is reflected in cash items in process of collection (CIPC) stated on a operating expenses. basis comparable to that of a commercial bank. It reflects The income statement by service reflects revenue, operadjustments for intra-System items that would otherwise ating expenses, and imputed costs except for income be double-counted on a consolidated Federal Reserve taxes. Total operating expense does not equal the sum of balance sheet; adjustments for items associated with nonoperating expenses for each service because of the effect priced items, such as those collected for government of SFAS 87. Before 1993 the effect of SFAS 87 was agencies; and adjustments for items associated with reported only at the System level and was not allocated to providing fixed availability or credit before items are individual services. Beginning in 1993 the portion of the received and processed. Among the costs to be recovered credit related to the current year is allocated to individual under the Monetary Control Act is the cost of float, or net services. The amortization of the initial effect of imple- CIPC during the period (the difference between gross mentation remains reflected only at the System level. CIPC and deferred-availability items, which is the portion of gross CIPC that involves a financing cost), valued at the federal funds rate. (6) IMPUTED COSTS Imputed costs consist of interest on float, interest on debt, (2) LONG-TERM ASSETS sales taxes, and the FDIC assessment. Interest on float is derived from the value of float to be recovered, either Consists of long-term assets used solely in priced ser- explicitly or through per-item fees, during the period. vices, the priced-services portion of long-term assets Float costs include costs for checks, book-entry securishared with nonpriced services, and an estimate of the ties, noncash collection, ACH, and funds transfers. assets of the Board of Governors used in the development Interest is imputed on the debt assumed necessary to of priced services. Effective Jan. 1, 1987, the Reserve finance priced-service assets. The sales taxes and FDIC Banks implemented the Financial Accounting Standards assessment that the Federal Reserve would have paid had Board's Statement of Financial Accounting Standards it been a private-sector firm are among the components of No. 87, Employers' Accounting for Pensions (SFAS 87). the PSAF (see note 3). Accordingly, the Reserve Banks recognized credits to Float costs are based on the actual float incurred for expenses of $20.1 million in 1994, $42.2 million in 1993 each priced service. Other imputed costs are allocated (revised), and $46.1 million in 1992 (revised) and correamong priced services according to the ratio of operating sponding increases in this asset account. expenses less shipping expenses for each service to the total expenses for all services less the total shipping (3) LIABILITIES AND EQUITY expenses for all services. The following list shows the daily average recovery of Under the matched-book capital structure for assets that float by the Reserve Banks for 1994 in millions of dollars: are not "self-financing," short-term assets are financed with short-term debt. Long-term assets are financed with Total float 763.4 long-term debt and equity in a proportion equal to the Unrecovered float 26.1 ratio of long-term debt to equity for the fifty largest bank Float subject to recovery 737.3 holding companies, which are used in the model for the Sources of recovery of float private-sector adjustment factor (PSAF). The PSAF con- Income on clearing balances 74.0 sists of the taxes that would have been paid and the return As-of adjustments 284.8 on capital that would have been provided had priced Direct charges 144.6 Digitizeds feorvri cFeRs AbeSenE Rfu rnished by a private-sector firm. Other Per-item fees 233.9 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

290 81st Annual Report, 1994 Unrecovered float includes float generated by services (10) ADJUSTMENTS TO NET INCOME FOR PRICE SETTING to government agencies and by other central bank ser- In setting fees, certain costs are excluded in accordance vices. Float recovered through income on clearing balwith the System's overage and shortfalls policy and its ances is the result of the increase in investable clearing automation consolidation policy. Accordingly, to combalances; the increase is produced by a deduction for float pare the financial results reported in this table with the for cash items in process of collection, which reduces projections used to set prices, adjust net income as folimputed reserve requirements. The income on clearing lows (amounts shown are net of tax): balances reduces the float to be recovered through other means. As-of adjustments and direct charges are mid- 1994 1993 1992 week closing float and interterritory check float, which may be recovered from depositing institutions through Net income 7.0 -45.9 50.0 adjustments to the institution's reserve or clearing bal- Amortization of the initial effect of implementing ance or by valuing the float at the federal funds rate and SFAS 87 -10.5 -10.6 -32.5 billing the institution directly. Float recovered through Deferred costs of automation per-item fees is valued at the federal funds rate and has consolidation 13.6 7.4 1.1 been added to the cost base subject to recovery in 1994. Cumulative effect of retroactive application (7) OTHER INCOME AND EXPENSES of SFAS 106 ^__ 74.1 ^_^ Adjusted net income 10.1 25.0 18.6 Consists of investment income on clearing balances and the cost of earnings credits. Investment income on clearing balances represents the average coupon-equivalent (11) RETURN ON EQUITY yield on three-month Treasury bills applied to the total The after-tax rate of return on equity that the Federal clearing balance maintained, adjusted for the effect of Reserve would have earned had it been a private business reserve requirements on clearing balances. Expenses for firm, as derived from the PSAF model (see note 3). This earnings credits granted to depository institutions on their amount is adjusted to reflect the deferral, for automation clearing balances are derived by applying the average consolidation costs, of $13.6 million for 1994, $7.4 milfederal funds rate to the required portion of the clearing lion for 1993, and $1.1 million for 1992. The Reserve Banks plan to recover these amounts, along with a finance balances, adjusted for the net effect of reserve requirecharge, by the end of the year 2000. After-tax return on ments on clearing balances. equity has not been allocated by service because it relates Because clearing balances relate directly to the Federal to the organization as a whole. Reserve's offering of priced services, the income and cost associated with these balances are allocated to each service based on each service's ratio of income to total income. (8) INCOME TAXES Imputed income taxes are calculated at the effective tax rate derived from the PSAF model (see note 3). Taxes have not been allocated by service because they relate to the organization as a whole. (9) POSTRETIREMENT BENEFITS Effective Jan. 1, 1993, the Reserve Banks implemented SFAS 106, Employers' Accounting for Postretirement Benefits Other than Pensions. Accordingly in 1993 the Reserve Banks recognized a one-time cumulative charge of $105.2 million (revised) to reflect the retroactive application of this change in accounting principle. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

291 Board of Governors Financial Statements The financial statements of the Board were audited by Price Waterhouse, independent public accountants, for 1994 and 1993. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Governors of the Federal Reserve System In our opinion, the accompanying balance sheets 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, 1994 and 1993, and the results of its operations and its cash flows for the years then ended 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 audits. We conducted our audits of these statements in accordance with generally accepted auditing standards and 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 audits provide a reasonable basis for the opinion expressed above. As discussed in Notes 1 and 3 to the financial statements, the Board implemented Statement of Financial Accounting Standard No. 112, Employers' Accounting for Postemployment Benefits, effective January 1, 1994, and Financial Accounting Standard No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, effective January 1, 1993. March 3, 1995 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

292 81st Annual Report, 1994 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BALANCE SHEET As of December 31, 1994 1993 ASSETS CURRENT ASSETS Cash $14,949,285 $12,186,714 Accounts receivable 1,898,061 1,555,026 Prepaid expenses and other assets 1,665,345 1,130,894 Total current assets 18,512,691 14,872,634 PROPERTY, BUILDINGS, AND EQUIPMENT, NET (Note 4) 54,839,623 50,121,444 Total assets $73,352,314 $64,994,078 LIABILITIES AND FUND BALANCE CURRENT LIABILITIES Accounts payable $ 5,450,877 $ 5,308,176 Accrued payroll and related taxes 3,920,065 2,718,512 Accrued annual leave 6,223,919 5,871,643 Capital lease payable (current portion) 3,119,522 — Unearned revenues and other liabilities 1,852,614 1,504,663 Total current liabilities 20,566,997 15,402,994 CAPITAL LEASE PAYABLE (non-current portion) 303,358 — ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (Note 3) 16,274,446 15,880,742 ACCUMULATED POSTEMPLOYMENT BENEFIT OBLIGATION (Note 3) 1,320,018 — FUND BALANCE 34,887,495 33,710,342 Total liabilities and fund balance $73,352,314 $64,994,078 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 293 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENT OF REVENUES AND EXPENSES AND FUND BALANCE For the years ended December 31, 1994 1993 BOARD OPERATING REVENUES Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $146,866,100 $140,465,600 Other revenues (Note 5) 9,134,248 5,452,588 Total operating revenues 156,000,348 145,918,188 BOARD OPERATING EXPENSED Salaries 93,823,248 90,339,090 Retirement and insurance contributions 16,147,049 14,945,349 Contractual services and professional fees 7,426,406 5,811,359 Depreciation and net losses on disposals 7,081,892 7,124,330 Travel 4,774,914 4,718,069 Postage and supplies 4,163,095 4,207,146 Utilities 4,158,650 3,744.162 Repairs and maintenance 3,794,986 3,684,542 Equipment and facilities rental 3,348,643 2,287,576 Software 3,017,536 2,878,660 Printing and binding 2,697,789 2,374,942 Other expenses (Note 5) 3,423,987 3,584,471 Total operating expenses 153,858,195 145,699,696 BOARD OPERATING REVENUES OVER EXPENSES 2,142,153 218,492 ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES Assessments levied on Federal Reserve Banks for currency costs 368,187,989 355,947,291 Expenses for currency printing, issuance, retirement, and shipping 368,187,989 355,947,291 CURRENCY ASSESSMENTS OVER (UNDER) EXPENSES — — TOTAL REVENUES OVER EXPENSES BEFORE EFFECT OF CHANGES IN ACCOUNTING 2.142,153 218,492 Less: Effect on prior years (to December 31, 1993) of change in accounting for postemployment benefits (Note 3) 965,000 Less: Effect on prior years (to December 31, 1992) of change in accounting for postretirement benefits (Note 3) 15,066,531 TOTAL REVENUES OVER (UNDER) EXPENSES 1,177,153 (14,848,039) FUND BALANCE, Beginning of year 33,710,342 48,558,381 FUND BALANCE, End of year $ 34,887,495 $ 33,710,342 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

294 81st Annual Report, 1994 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENT OF CASH FLOWS Increase (Decrease) in Cash For the years ended December 31, 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES Board operating revenues over (under) expenses $1,177,153 $(14,848,039) Adjustments to reconcile operating revenues over (under) expenses to net cash provided by operating activities: Effect of change in accounting for postemployment benefits 965,000 — Effect of change in accounting for postretirement benefits — 15,066,531 Depreciation and net losses on disposals 7,081,892 7,124,330 Increase in accrued postretirement benefits 393,704 814,211 Increase in accrued postemployment benefits 355,018 — (Increase) Decrease in accounts receivable, and prepaid expenses and other assets (877,486) 1,320,057 Increase in accrued annual leave 352,276 259,237 Increase (Decrease) in accounts payable 142,701 (3,284) Increase in payroll payable .' 1,201,553 740,461 Increase in unearned revenue and other liabilities 347,951 137,786 Net cash provided by operating activities 11,139,762 10,611,290 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposals of furniture and equipment 27,081 3,723 Capital expenditures (8,404,272) (8,281,471) Net cash used in investing activities (8,377,191) (8,277,748) NET INCREASE IN CASH 2,762,571 2,333,542 CASH BALANCE, Beginning of year 12,186,714 9,853,172 CASH BALANCE, End of year $14,949,285 $ 12,186,714 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 295 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM NOTES TO FINANCIAL STATEMENTS 1993, and the Board was not assessed a contribution for these years. Excess Plan assets will continue to fund future years' contributions. The Board is not accountable (1) SIGNIFICANT ACCOUNTING POLICIES for the assets of this plan. Board Operating Revenues and Expenses— A relatively small number of Board employees partici- Assessments made on the Federal Reserve Banks for pate in the Civil Service Retirement System (CSRS) or Board operating expenses and capital expenditures are the Federal Employees' Retirement System (FERS). The calculated based on expected cash needs. These assess- Board matches employee contributions to these plans. ments, other operating revenues, and operating expenses These defined benefits plans are administered by the are recorded on the accrual basis of accounting. Office of Personnel Management. The Board's contribu- Issuance and Redemption of Federal Reserve Notes— tions to these plans totalled $838,800 and $867,600 in The Board incurs expenses and assesses the Federal 1994 and 1993, respectively. The Board has no liability Reserve Banks for the costs of printing, issuing, shipping, for future payments to retirees under these programs, and and retiring Federal Reserve Notes. These assessments it is not accountable for the assets of the plans. and expenses are separately reported in the statements of revenues and expenses because they are not Board operat- (3) OTHER BENEFIT PLANS ing transactions. Property, Buildings and Equipment—The Board's Employees of the Board may also participate in the property, buildings and equipment are stated at cost less Federal Reserve System's Thrift Plan. Under the Thrift accumulated depreciation. Depreciation is calculated on a Plan, members may contribute up to a fixed percentage of straight-line basis over the estimated useful lives of the their salary. Board contributions are based upon a fixed assets, which range from 4 to 10 years for furniture and percentage of each member's basic contribution and were equipment and from 10 to 50 years for building equip- $3,969,700 in 1994 and $3,831,700 in 1993. ment and structures. Upon the sale or other disposition of The Board also provides certain defined benefit health a depreciable asset, the cost and related accumulated and life insurance for its active employees and retirees depreciation are removed from the accounts and any gain under Federal and Board sponsored programs. The Board or loss is recognized. adopted Statement of Financial Accounting Standards Accounting Changes—Effective January 1, 1994, the No. 106, Employers' Accounting for Postretirement Bene- Board adopted Statement of Financial Accounting Stan- fits Other Than Pensions (FAS 106), effective January 1, dards No. 112, Employers' Accounting for Postemploy- 1993. The Boaru elected to immediately recognize the ment Benefits (FAS 112). Under this accounting method, accumulated postretirement benefit obligation upon the Board records the cost of these benefits during the adoption of FAS 106; as of January 1, 1993, the Board employee's years of service rather than the previous recorded an accumulated postretirement benefit oblipay-as-you-go method. Consistent with this method of gation of $15,066,531. The net periodic postretirement implementation option allowed in FAS 112, prior year benefit cost for 1994 and 1993 included the following financial statements have not been restated. components: Effective January 1, 1993, the Board adopted Statement of Financial Accounting Standards No. 106, 1994 1993 Employers' Accounting for Postretirement Benefits Other Service cost (benefits Than Pensions (FAS 106), using the immediate recogni- attributed to employee tion method. Under this accounting method, the Board services during the records the cost of these benefits during the employee's year) S 260,677 $ 248,662 years of service rather than the previous pay-as-you-go Interest cost on accumulated method. Consistent with this method of implementation postretirement benefit option allowed in FAS 106, prior year financial state- obligation 1,191,123 1,181,104 ments have not been restated. Amortization of gains and losses 6,542 — (2) RETIREMENT BENEFITS Net periodic postretirement Substantially all of the Board's employees participate benefit cost $ 1,458,432 $ 1,429,766 in the Retirement Plan for Employees of the Federal Reserve System (System Plan). The System's Plan is a Although postretirement benefits are recorded using multiemployer plan which covers employees of the Fed- the accrual basis of accounting in accordance with FAS eral Reserve Banks, the Board, and the Plan Administra- 106, the Board's current policy is to fund the cost of these tive Office. Employees of the Board who entered on duty benefits on a pay-as-you-go basis. prior to 1984 are covered by a contributory defined bene- The FAS 106 accumulated postretirement benefit oblifits program under the Plan. Employees of the Board gation at December 31, 1994 and 1993, is comprised of: who entered on duty after 1983 are covered by a noncontributory defined benefits program under the Plan. Contributions to the System's Plan are actuarially determined and funded by participating employers at amounts prescribed by the Plan's administrator. Based on actuarial calculations, it was determined that employer funding contributions were not required for the years 1994 and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

296 81st Annual Report, 1994 1994 1993 As of December 31, Retirees . . .. $11 301 461 $ 9,971,023 1994 1993 Fully eligible active plan Land and improvements ... $ 1,301,314 $ 1,301,314 participants 2,419,656 2,297,911 Buildings 65,171,774 64,891,700 Other active plan Furniture and participants 4,392,114 5,092,539 equipment 45,742,097 43,055,132 18,113,231 17,361,473 112,215,185 109,248,146 Unrecognized net loss (1,838,785) (1,480,731) Less accumulated depreciation 57,375,562 59,126,702 Liability for accumulated Total property, postretirement benefit buildings and obligation $16,274,446 $15,880,742 equipment $ 54,839,623 $ 50,121,444 The liability for the accumulated postretirement benefit obligation and the net periodic benefit cost was deter- (5) OTHER REVENUES AND OTHER EXPENSES mined using an 7-percent discount rate. Unrecognized The following are summaries of the components of losses of $1,838,785 result from applying a discount rate Other Revenues and Other Expenses. of 7 percent as of December 31, 1993, and a larger than estimated 1994 cash outlay. Under FAS 106, the Board For the years may have to record some of these unrecognized losses in ended December 31, operations in future years. The assumed health care cost 1994 1993 trend rate for measuring the increase in costs from 1994 Other Revenues to 1995 was 11.0 percent. These rates were assumed to Data processing gradually decline to an ultimate rate of 6.0 percent in the revenue $4,058,655 $3,152,492 year 2004 for the purpose of calculating the Decem- National ber 31, 1994, accumulated postretirement benefit obliga- Information tion. The effect of a 1-percent increase in the assumed Center 2,739,014 — health care cost trend rate would increase the accumu- Subscription revenue 1,547,628 1,579,653 lated postretirement benefit obligation by $2,113,851 at Reimbursable December 31, 1994, and the net periodic benefit cost by services to $167,400 for the year. The assumed salary trend rate for other agencies . 441,316 319,938 measuring the increase in postretirement benefits related Miscellaneous 347,635 400,505 to life insurance was 5.5 percent. Total other The above accumulated postretirement benefit obliga- revenues $9,134,248 $5,452,588 tion is related to the Board sponsored health benefits and Other Expenses life insurance programs. The Board has no liability for future payments to employees who continue coverage Tuition, registration, and membership under the federally sponsored programs upon retiring. fees $1,116,155 $1,015,507 Contributions for active employees participating in feder- Cafeteria operations, ally sponsored programs totalled $3,510,500 and net 708,394 740,900 $3,353,200 in 1994 and 1993, respectively. Subsidies and The Board provides certain postemployment benefits to contributions ... 676,989 768,186 eligible employees after employment but before retire- Miscellaneous 922,449 1,059,878 ment. Effective January 1, 1994, the Board adopted Total other Statement of Financial Accounting Standards No. 112, expenses $3,423,987 $3,584,471 Employers' Accounting for Postemployment Benefits (FAS 112), which requires that employers providing postemployment benefits to their employees accrue the (6) COMMITMENTS cost of such benefits. Prior to January 1994, postemploy- The Board has entered into several operating leases to ment benefit expenses were recognized on a pay-as- secure office, classroom, and warehouse space for periods you-go basis. A one-time charge for the adoption of FAS ranging from two to ten years and, in December 1994, a 112 of $965,000 was recognized as the cumulative effect capital lease for a new mainframe computer. Minimum of a change in accounting principle in 1994. future commitments under those leases having an initial or remaining noncancelable lease term in excess of one year at December 31, 1994, are as follows: (4) PROPERTY, BUILDINGS AND EQUIPMENT The following is a summary of the components of the Board's fixed assets, at cost, net of accumulated depreciation. 1995 $ 3,045,750 $3,119,522 1996 3,169,926 75,840 1997 3,152,561 75,840 1998 1,748,090 75,840 1999 771,652 75,838 after 1999 116,612 — $12,004,591 $3,422,880 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Financial Statements 297 Rental expenses under the operating leases were $2,987,500 and $1,927,600 in 1994 and 1993, 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 1994 and 1993, the Board paid $197,200 and $371,200, respectively, in assessments for operating expenses of the Council. These amounts are included in subsidies and contributions for 1994 and 1993. During 1994 and 1993, the Board paid $125,900 and $124,500, respectively, for office space subleased 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

300 81st Annual Report, 1994 1. Detailed Statement of Condition of All Federal Reserve Banks Combined, December 31, 1994 Thousands of dollars ASSETS Gold certificate account 11,050,635 Special drawing rights certificate account 8,018,000 Coin 320,320 Loans and securities Loans to depository institutions 222,876 Federal agency obligations Bought outright 3,636,705 Held under repurchase agreement 1,025,000 U.S. Treasury securities Bought outright Bills 177,378,390 Notes 144,143,313 Bonds 42,997,536 Total bought outright 364,519,239 Held under repurchase agreement 9,565,000 Total securities 374,084,239 Total loans and securities 378,968,820 Items in process of collection Transit items 4,109,320 Other items in process of collection 1,089,912 Total items in process of collection 5,199,231 Bank premises Land 167,320 Buildings (including vaults) 878.056 Building machinery and equipment 234,938 Construction account 64,378 Total bank premises 1,177,371 Less depreciation allowance 268,258 909,114 Bank premises, net 1,076,434 Other assets Furniture and equipment 1,136,824 Less depreciation 654,735 Total furniture and equipment, net 482,088 Denominated in foreign currencies ' 22,031,496 Interest accrued 3,841,600 Premium on securities 4,476,244 Overdrafts 318,716 Prepaid expenses 716,595 Suspense account 33,847 Real estate acquired for banking-house purposes 25,360 Other 336,556 Total other assets 32,262,501 Total assets 436,895,941 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 301 1.—Continued LIABILITIES Federal Reserve Notes Outstanding (issued to Federal Reserve Banks) 454,642,232 Less held by Federal Reserve Banks -73,137,090 Total Federal Reserve notes, net 381,505,142 Deposits Depository institutions 30,788,596 U.S. Treasury, general account 7,161,095 Foreign, official accounts 250,119 Other deposits Officers' and certified checks 25,737 International organizations 101,899 Other2 645,963 Total other deposits 773,600 Deferred credit items 4,458,817 Other liabilities Discount on securities 3,842,323 Sundry items payable 85,285 Suspense account 29,022 All other 635,289 Total other liabilities 4,591,919 Total liabilities 429,529,287 CAPITAL ACCOUNTS Capital paid in 3,683,327 Surplus 3,683,327 Other capital accounts3 0 Total liabilities and capital accounts 436,895,941 NOTE. Amounts in boldface type indicate items in the 2. 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. 1. Of this amount $9,165.9 million was invested in 3. 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

302 81st Annual Report, 1994 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1994 and 1993 Millions of dollars Total Boston Item 1994 1993 1994 1993 ASSETS Gold certificate account 11,051 11,053 553 660 Special drawing rights certificate account. 8,018 8,018 511 511 Coin 320 372 15 10 Loans To depository institutions . 223 94 Other 0 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 3 637 4,638 190 274 Held under repurchase agreements 1,025 1,025 0 0 U.S. Treasury securities Bought outright' 364,519 332,015 19,082 19,592 Held under repurchase agreements . 9,565 12,187 0 0 Total loans and securities 378,969 349,960 19,278 19,870 Items in process of collection . 5,199 7,173 293 353 Bank premises 1,076 1,055 93 91 Other assets Denominated in foreign currencies2 . 22,031 22,339 797 793 All other 10,231 10,000 450 460 Interdistrict Settlement Account 0 0 -2,202 -2,195 Total assets 436,896 409,971 19,788 20,553 LIABILITIES Federal Reserve notes . 381,505 343,925 17,747 17,254 Deposits Depository institutions 30,789 34.951 1,214 2,555 U.S. Treasury, general account . 7,161 14,809 0 0 Foreign, official accounts 250 386 5 5 Other 774 397 31 15 Total deposits 38,973 50,543 1,250 2,575 Deferred credit items 4,459 6,210 284 326 Other liabilities and accrued dividends1 4,592 2,489 228 152 Total liabilities 429,529 403,168 19,509 20,307 CAPITAL ACCOUNTS Capital paid in 3,683 3,401 139 123 Surplus 3,683 3,401 139 123 Other capital accounts 0 0 0 0 Total liabilities and capital accounts.. 436,896 409,971 19,788 20,553 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes outstanding (issued to Bank) . 454,642 409,265 22,868 19,706 Less: Held by Bank 73,137 65,339 5,121 2,452 Federal Reserve notes, net. 381,505 343,925 17,747 17,254 Collateral for Federal Reserve notes Gold certificate account 11,051 11,053 Special drawing rights certificate account... 8,018 8,018 Other eligible assets 0 0 U.S. Treasury and federal agency securities. 362,437 324,854 Total collateral 381,505 343,925 Digitized for FRASER For notes see end of table. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 303 2.—Continued NewYork Philadelphia Cleveland Richmond 1994- 1993 1994 1993 1994 1993 1994 1993 4,134 3,753 393 399 660 701 902 899 2,808 2,808 303 303 556 556 652 652 19 19 15 17 21 56 67 11 0 9 17 8 0 0 0 65 0 0 0 0 0 0 0 0 1,344 1,602 142 176 229 312 291 362 1,025 1,025 0 0 0 0 0 0 134,693 114,654 14,256 12,583 22,978 22,303 29,138 25,898 9,565 12,187 0 0 0 0 0 0 146,627 129,477 14,416 12,766 23,207 22,614 29,428 26,325 649 789 332 445 269 275 392 502 137 140 47 47 46 37 134 139 6,267 6,474 737 858 1,449 1,289 1,481 1,537 4,160 4,529 353 306 529 512 902 835 5,853 12,726 2,232 921 -1,332 -3,321 -867 598 170,653 160,707 18,833 16,060 25,400 22,684 33,080 31,553 151,608 134,964 16,733 13,026 22,542 20,161 28,847 28,035 7,105 6,969 1,491 2,248 1,814 1,556 2,782 2,357 7,161 14,809 0 0 0 0 0 0 149 288 5 5 9 8 9 10 261 196 26 7 41 14 70 32 14,677 22,261 1,523 2,261 1,864 1,578 2,862 2,398 551 747 32 432 222 340 447 All 1,843 798 183 114 257 158 332 186 168,678 158,769 18,511 15,832 24,885 22,237 32,487 31,096 988 969 161 114 258 224 296 229 988 969 161 114 258 224 296 229 0 0 0 0 0 0 0 0 170,653 160,707 18,833 16,060 25,400 22,684 33,080 31,553 174,495 157,408 18,463 14,472 26,124 23,474 35,331 34,012 22,888 22,444 1,690 1,446 3,581 3,313 6,484 5,978 151,608 134,964 16,773 13,026 22,542 20,161 28,847 28,035 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

304 81st Annual Report, 1994 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1994 and 1993—Continued Millions of dollars Atlanta Chicago Item 1994 1993 1994 1993 ASSETS Gold certificate account 542 509 1,217 1,186 Special drawing rights certificate account 318 318 1,036 1,036 Coin 46 55 23 32 Loans To depository institutions 28 18 Other...' 0 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 163 189 417 539 Held under repurchase agreements 0 0 0 0 U.S. Treasury securities Bought outright' 16,293 13,507 41,758 38,585 Held under repurchase agreements 0 0 0 0 Total loans and securities 16,484 13,697 42,193 39,124 Items in process of collection 753 775 509 674 Bank premises 64 61 112 113 Other assets Denominated in foreign currencies2 2,073 2,120 2,527 2,531 Allother 423 380 1,069 960 Interdistrict Settlement Account 1,871 2,185 -1,048 1,743 Total assets 22,573 20,101 47,638 47,400 LIABILITIES Federal Reserve notes 18,053 14,960 42,265 41,541 Deposits Depository institutions 3,018 3,617 3,397 4,022 U.S. Treasury, general account 0 0 0 0 Foreign, official accounts 13 13 16 16 Other 29 2 148 81 Total deposits 3,060 3,632 3,561 4,118 Deferred credit items 561 736 496 679 217 132 479 282 Other liabilities and accrued dividends3 21,891 19,461 46,800 46,620 Total liabilities CAPITAL ACCOUNTS 341 320 419 390 Capital paid in 341 320 419 390 Surplus 0 0 0 0 Other capital accounts 22,573 20,101 47,638 47,400 Total liabilities and capital accounts FEDERAL RESERVE NOTE STATEMENT 23,368 19,797 48,257 45,621 Federal Reserve notes outstanding (issued to Bank) 5,315 4,837 5,992 4,081 Less: Held by Bank Federal Reserve notes, net 18,053 14,960 42,265 41,541 NOTE. Components may not sum to totals because of 2. Valued monthly at market exchange rates. rounding. 3. Includes exchange-translation account reflecting the 1. 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 305 2.—Continued St. Louis Minneapolis Kansas City Dallas San Francisco 1994 1993 1994 1993 1994 1993 1994 1993 1994 1993 429 392 230 243 436 409 453 510 1,102 1,392 168 168 186 186 199 199 377 377 904 904 23 22 21 15 22 21 28 42 33 61 89 1 4 20 1 0 0 33 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 145 164 80 106 156 376 138 199 343 542 0 0 0 0 0 0 0 0 0 0 14,497 11,723 8,028 7,600 15,637 12,592 13,786 14,219 34,373 38,761 0 0 0 0 0 0 0 0 0 0 14,731 11,888 8,119 7,710 15,813 12,769 13,924 14,418 34,749 39,303 195 246 380 465 370 583 513 511 544 1,555 30 31 46 35 54 51 157 158 156 151 481 512 589 585 830 795 1,594 1,550 3,207 3,295 334 271 196 181 361 292 343 380 1,111 895 4,308 1,857 -1,897 -1,004 -1,929 1,442 -1,303 -2,831 -3,685 -12,122 20,698 15,387 7,870 8,418 16,154 16,561 16,086 15,115 38,122 35,433 19,229 14,006 6,553 7,048 13,948 14,511 12,917 12,097 31,024 26,323 941 907 612 677 1,336 1,233 2,140 2,021 4,938 6,791 0 0 0 0 0 0 0 0 0 0 3 3 4 4 5 5 10 10 21 21 22 9 15 5 23 11 26 4 80 21 966 919 631 686 1,365 1,249 2,176 2,034 5,039 6,833 158 215 380 435 358 427 332 381 640 1,016 175 99 110 67 205 118 168 112 395 272 20,528 15,238 7,673 8,236 15,876 16,305 15,592 14,623 37,098 34,443 85 74 98 91 139 128 247 246 512 495 85 74 98 91 139 128 247 246 512 495 0 0 0 0 0 0 0 0 0 0 20,698 15,387 7,870 8,418 16,154 16,561 16,086 15,115 38,122 35,433 21,908 16,735 8.043 8,219 15,280 16,022 16,819 16,082 43,685 37,716 2,679 2.729 1,491 1,171 1,333 1,511 3,902 3,986 12,662 11,393 19,229 14,006 6,553 7,048 13,948 14,511 12,917 12,097 31,024 26,323 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

306 81st Annual Report, 1994 3. Federal Reserve Open Market Transactions, 1994 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 28,986 Redemptions 0 Others within 1 year Gross purchases 0 Gross sales 0 Maturity shift 0 Exchanges -639 Redemptions 0 1 to 5 years Gross purchases . 0 Gross sales 0 Maturity shift 776 Exchanges 639 5 to 10 years Gross purchases 0 Gross sales 0 Maturity shift -776 Exchanges 0 More than 10 years Gross purchases Gross sales Maturity shift Exchanges All maturities Gross purchases Gross sales Redemptions Matched transactions Gross purchases Gross sales Repurchase agreements Gross purchases Gross sales Net change in U.S. Treasury securities FEDERAL AGENCY OBLIGATIONS Outright transactions Gross purchases Gross sales Redemptions Repurchase agreements Gross purchases Gross sales Net change in agency obligations Total net change in System Open Market Account oooo 1264 900 1,101 0 0 0 28,709 33,163 28,881 0 0 0 0 147 209 0 0 0 4,063 0 2,316 -1,985 -3,605 -907 0 0 0 0 1,413 2,817 0 0 0 3,447 0 1,607 1,145 3,605 907 0 1,103 1,117 0 0 0 -616 0 709 550 0 0 0 618 896 0 0 0 0 0 0 325 0 0 0 1,264 4,181 6,140 0 0 0 0 616 0 0 440 133 468 124,270 155,625 120,512 132,872 124,125 155,950 120,393 25,818 33,693 38,490 19,741 29,348 37,425 38,115 25,041 -3,550 -2,323 4,232 519 0 0 0 0 0 0 0 0 202 102 108 180 2,600 3,277 3,160 728 3,106 3,636 3,170 878 -708 -461 -118 -330 -4,258 -2,784 4,114 189 NOTE. Sales, redemptions, and negative figures reduce figures increase such holdings. Components may not sum holdings of the System Open Market Account; all other to totals because of rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 307 3.—Continued May June July Aug. Sept. Oct. Nov. Dec. Total 1,395 4,143 0 1,610 0 518 6,109 444 17,484 0 0 0 0 0 0 0 0 0 29,807 39,484 29,559 36,281 29,668 29,361 36,543 29,883 380,326 0 0 0 0 0 0 0 0 0 155 0 0 0 151 450 0 125 1,238 0 0 0 0 0 0 0 0 0 5,413 1,197 1,692 6,131 961 460 1,790 0 0 917 -3.192 -1,626 -4,089 -2,203 0 -5,795 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,530 0 200 2,208 9,168 0 0 0 0 0 0 0 0 0 -3,449 -1,197 -1,692 -5,506 -837 -460 -1,123 0 0 -917 3,192 1,626 2,889 2,203 0 4,192 0 0 0 0 0 0 938 0 0 660 3,818 0 0 0 0 " 0 0 0 0 0 -1,510 0 0 -549 -125 0 -278 0 0 0 0 0 750 0 0 1,603 0 0 0 0 0 0 840 0 0 1,252 3,606 0 0 0 0 0 0 0 0 0 -453 0 0 -76 0 0 -389 0 0 0 0 0 450 0 0 0 0 0 155 4,143 0 1.610 4,459 968 6,309 4,689 35,314 0 0 0 0 0 0 0 0 0 0 0 302 0 0 979 0 0 2,337 135,533 133,075 126,677 169,018 151,029 136,556 148,425 166,648 1,700,836 135,796 133,939 125,181 170,356 151,589 137,242 147,858 166,007 1,701,309 21,517 10,059 28,085 44,948 4,975 17,088 35,456 29,406 309,276 17,112 4,405 35,374 41,199 9,354 15,613 32,561 26,351 311,898 5,691 8,933 -6,095 4,022 -479 778 9,771 8,385 29,882 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 70 58 20 63 31 62 70 37 4,195 580 9,472 8,491 3,620 2,868 8,615 5,090 2,895 1,300 8,702 8,109 4,982 2,838 7,360 5,720 1,230 -778 750 319 -1,393 -32 1,185 -667 6,921 8,155 -5,345 4,341 -1,872 746 10,956 7,718 o o ot 52,696 52,696 -1,002 28,880 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

308 81st Annual Report, 1994 4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities, December 31, 1992-94 Millions of dollars December 31 Change Description 1994 1993 1992 1993-94 1992-93 U.S. TREASURY SECURITIES Held outright' , 372,561 339,583 303,435 32,978 36,148 By remaining maturity Bills 1-91 days 98,129 90,186 79,988 7,943 10,198 92 days to 1 year 87,291 77,749 70,231 9,542 7,518 Notes and bonds 1 year or less 34,978 35,423 37,758 -445 -2,335 More than 1 year through 5 years .. 90,031 79,826 68,750 10,205 11,076 More than 5 years through 10 years 27,552 24,659 18,903 2,893 5,756 More than 10 years 34,845 31,739 27,805 3,106 3,934 By type Bills ... 185,420 167,936 150,219 17,484 17,717 Notes .. 144,143 132,076 118,179 12,067 13,897 Bonds .. 42,998 39,572 35,037 3,426 4,535 Repurchase agreements . 9,565 12,187 7,463 -2,622 4,724 MSPs, foreign accounts . 8,041 7,568 8,424 473 -856 MSPs, in the market 0 0 0 0 0 FEDERAL AGENCY SECURITIES Held outright' 3,637 4,638 5,413 -1,001 775 By remaining maturity 1 year or less 1,737 1,823 2,064 -86 -241 More than 1 year through 5 years .. 1,387 2,105 2,511 -718 -406 More than 5 years through 10 years 488 569 696 -81 -217 More than 10 years 25 142 142 -117 0 By issuer Held outright 3,637 4,638 5,412 1,001 -774 Federal Farm Credit Banks 1,050 1,201 1,296 -151 -95 Federal Home Loan Banks 796 1,249 1,766 -453 -517 Federal Land Banks 66 66 66 0 0 Federal National Mortgage Association 1,725 2,005 2,167 -280 -162 U.S. Postal Service 0 0 0 0 0 Washington Metropolitan Area Transit Authority 0 117 117 -117 0 General Services Administration 0 0 0 0 0 Repurchase agreements . 1,025 1,025 631 0 394 NOTE. Components may not sum to totals because of 1. Excludes the effects of temporary transactions— rounding. repurchase agreements and matched sale-purchase agreements (MSPs). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 309 5. Number and Annual Salaries of Officers and Employees of Federal Reserve Banks, December 31, 1994 President Other officers Employees Ibtal Federal Reserve Bank (including Number branches) Salary Num- Salaries Salaries Num- Salaries (dollars) ber (dollars) Full- Part- (dollars) ber (dollars) time time Boston 167,500 58 5,656,800 1,104 198 44,033,572 1,361 49,857,872 New York 217,000 187 22,021,780 3,937 67 159,996,214 4,192 182,234,994 Philadelphia 194,000 57 5,264,675 1,183 56 37,712,521 1,297 43,171,196 Cleveland 173,800 48 4,636,280 1,286 75 40,975,494 1,410 45,785,574 Richmond 168,400 75 6,677,700 1,861 127 58,122,847 2,064 64,968,947 Atlanta 223,600 78 6,957,625 2,229 55 69,370,801 2,363 76,552,026 Chicago 193,000 105 9,613,250 2,270 58 8 U 32^904 2^434 90^939^ 154 St. Louis 199,000 51 4,373,300 996 98 31,313,621 1,146 35,885,921 Minneapolis 184,000 51 4,576,850 1,137 119 37,360,078 1,308 42,120,928 Kansas City 168,600 56 4,956,900 1,533 102 48,428,547 1,692 53,554,047 Dallas 170,400 58 5,136,600 1,440 51 46,427,191 1,550 51,734,191 San Francisco 241,080 89 9,451,900 2,256 83 87,086,917 2,429 96,779,897 Federal Reserve Automation Service 25 2,550,000 452 4 21,577,195 481 24,127,195 Total 2,300,380 938 91,873,660 21,684 1,093 763,537,902 23,727 857,711,942 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

310 81st Annual Report, 1994 6. Income and Expenses of Federal Reserve Banks, 1994 Dollars Item1 Total Boston New York Philadelphia Cleveland CURRENT INCOME Loans 11,451,765 120.337 605,303 162,271 137,807 U.S. Treasury and federal agency securities 19,247,074,249 1,035,627,770 7,062,943,725 741,805,133 1,227,039,616 Foreign currencies 894,500,875 32,311,828 255,017,462 30,174,859 58,356,750 Priced services 734,434,991 39,895,330 101,971,655 39,055,693 45,499,574 Other 23,280,497 438,010 18,225,155 511,054 401,259 Total : 20,910,742377 1,108,393,275 7,438,763,300 811,709,010 1,331,435,006 CURRENT EXPENSES Salaries and other personnel expenses 944,920,187 56,068,356 196,203,006 50,387,881 49,201,442 Retirement and other benefits2 . 187,162,458 16,525,760 55,751,627 15,725,445 13,502,945 Fees 27,575,957 1,242,715 4,992,712 484,548 1,657,240 Travel 42,598,270 2,194,912 5,991,764 2,251,001 2,287,996 Software expenses 49,315,104 1,974,356 10,002,097 2,029,984 1,841,212 Postage and other shipping costs 78,557,899 4,559,126 11,044,154 3,575,590 6,064,350 Communications 9,904,033 454,588 2,012,721 419,309 776,526 Materials and supplies 55,642,796 3,049,682 10,237,995 3,467,055 3,147,270 Building expenses Taxes on real estate 26,681,714 3,614,636 4,347,904 1,867,562 1,465,662 Property depreciation 47,938,118 3,724,751 8,002,578 2,100,187 2,117,727 Utilities 31,645,531 2,724,623 6,320,932 2,976,331 1,877,055 Rent 29,463,710 680,241 12,973,873 354,159 355,762 Other 25,584,876 647,282 5,074,716 1,443,785 759,222 Equipment Purchases 7,748,282 212,500 1,664,397 320,268 273.846 Rentals 30,497,363 559,597 5,275,273 651,514 944,156 Depreciation 129,680,117 4,142,715 20,265,464 5,602,209 4,546,422 Repairs and maintenance 69,539,516 4,546,252 10,908,975 3,378,430 4,058,804 Earnings-credit costs 223,623,378 14,492,606 50,935,940 26,331,165 12,381,212 Other 41,445,945 2,398,038 7,760,585 1,383,971 2,948,146 Shared costs, net3 -8,427 5,189,184 2,100,213 8,299,718 8,245,703 Recoveries -49,955,735 -9,381,171 -6,586,910 -3,099,775 -2,472,694 Expenses capitalized4 -3,266,552 -223,564 -18,008 -185,435 -315.556 Total 2,006,294,540 11937,185 425,262,108 129,764,902 115,664,448 Reimbursements -210,966,197 -10,872,323 -43,915,081 -18,540,342 -19,524,831 Net expenses 1,795,328,343 108,524,862 381,347,027 111,224,560 96,139,617 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 31! 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 343,008 494,320 993,816 2,163,233 4,162,092 1,360,596 297,759 611,223 1,518,935,701 834,211,891 2,199,668,608 737,665,726 425,703,449 794,847,621 749,205,127 1,919,419,883 60,179,649 84,183,313 102,461,570 19,591,450 23,864,206 33,554,134 64,548.577 130,257,077 62,684,004 98,146,246 98,049,361 31,044,338 42,442,616 48,063,890 49,451,009 78,131,275 556,485 369,556 917,915 173,124 313,113 132,808 305,767 936,251 1,642,698,846 1,017,405,326 2,402,091,270 790,637,871 496,485,476 877,959,049 863,808,239 2,129,355,709 99,771,610 84,805,710 99,602,062 42,365,910 45,520,899 56,557,572 55,425,373 109,010,366 26,214,572 24,520,053 27,086,283 13,039,245 11,224,125 17,249,540 14,707,212 27,262,496 11,514,202 1,033,191 900,061 572,218 1,621,141 801,260 1,285,179 1,471,490 5082,791 4,244,869 5,010,872 2,032,010 2,784,300 2,934,677 2,889,822 4,902,256 19,997,993 1,722,141 4,278,412 1,550,692 1,465,044 620,634 1,024,256 2,808,283 7,228,865 10,431,098 9,464,009 3,941,318 5,830,365 6,121,255 4,569,037 5,728,732 1,080,412 1,085,133 792,643 544,558 573,068 794,130 756,087 614,858 6,647,627 5,659,885 5,864,842 3,198,774 2,226,063 3,410,405 3,520,298 5,212,900 2,225,152 1,653,805 4,075,397 466,093 1,142,673 817,788 2,364,443 2,640,599 5,337,327 3,830,213 5,236,287 2,253,537 867,708 3,269,235 4,802,424 6,396,144 3,195,531 2,200,612 2,260,465 1,570,841 965,054 1,450,054 2,495,851 3,608,182 7,724,761 3,419,479 1,979,022 393,176 765,617 360,366 1224,407 232,847 2,596,436 2,527,942 5,532,700 844,645 757,560 888,823 1,891,196 2,620,569 691,813 772,582 1,268,260 227,140 777,422 476,973 442,845 620,236 2,805,054 1,964,123 13,070,025 653,774 1,003,038 824,373 838,056 1,908,380 53,835,370 6,160,159 14,886,073 2,196,948 3,416,960 2,263,032 4,221,544 8,143,221 12,396,989 7,104,438 11,263,207 2,217,237 2,873,420 1,894,915 2,775,780 6,121,069 13,602,462 12,822,589 43,386,374 4,865,480 5,388,886 9,729,331 10,150,839 19,536,494 4,868,700 3,834,591 5,219,182 1,721,992 1,560,621 2,553,768 2,911,279 4,285,072 -77,255,676 14,882,358 -11,187,200 9,767,110 4,839,823 1,837,226 13,407,330 6,865,684 -11.650,370 -2,436,378 -3,076,173 -1,298,992 -890,743 -704,311 -4,365,567 -3,992,651 -985,637 -318,585 -177,022 -49,166 -403,474 -461,510 -95,331 -33,264 196,925,984 191,920,008 246,735,781 93,065,540 94,309,570 126,689,536 126,242,360 215,963,963 -16,949,397 -15,630,676 -20,324,772 -11,155,769 -13,213,124 -16,617,685 -8,164,126 -16,058,071 179,976,587 176,289,332 226,411,009 81,909,771 81,096,446 110,071,851 118,078,234 199,905,892 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

312 81st Annual Report, 1994 6. Income and Expenses of Federal Reserve Banks, 1994—Continued Dollars Item1 Total Boston New York Philadelphia Cleveland PROFIT AND LOSS Current net income 19,115,414,033 999,868,414 7,133,063,119 700,484,451 1,235,295,386 Additions to and deductions from (-) current net income5 Net profit on foreign exchange 2,422,626,091 87,608,162 689,950,602 81,003,004 159,216,132 Other additions 167,302 20,757 42,821 3,411 33,927 Total additions 2,422,793,393 87,628,919 689,993,424 81,006,415 159,250,059 Losses on sales of U.S. Treasury and federal agency securities -24,285,820 -1,237,875 -9,095,296 -955,915 -1,510,117 Other deductions -568,357 -9,425 -71,358 -1,915 -5,063 Total deductions -24,854,177 -1,247,300 -9,166,654 -957,830 -1,515,180 Net addition to current net income 2,397,939,216 86,381,619 680,826,769 80,048,585 157,734,879 Cost of unreimbursed Treasury services 34,077,119 1,582,808 3,234,295 1,977,891 1,964,554 Assessments by Board Board expenditures6 .. 146,866,100 5,334,800 41,453,600 5,139,600 9,693,400 Cost of currency 368,187,068 18,471,633 144,484,979 13,944,751 21,583,556 Net income before payment to U.S. Treasury 20,964,222,962 1,060,860,792 7,624,717,014 759,470,794 1,359,788,755 Dividends paid 212,090,446 7,849,562 58,789,295 8,328,151 14,283,474 Payments to U.S. Treasury (interest on Federal Reserve notes) 20,470,010,815 1,036,570,880 7,546,939,469 703,722,593 1,311,506,031 Transferred to surplus 282,121,700 16,440,350 18,988,250 47,370,050 33,999,250 Surplus, January 1 3,401,205,000 122,966,000 968,644,500 113,722,800 223,528,800 Surplus, December 31 3,683,326,700 139,436,350 987,632,750 161,092,850 257,528,050 1. Components may not sum to totals because of 4. Includes expenses for labor and materials temporounding. rarily capitalized and charged to activities when the prod- 2. The effect of the 1987 implementation of the Finan- ucts are consumed. cial Accounting Standards Board's Statement of Finan- 5. Includes reimbursement from the U.S. Treasury for cial Accounting Standards No. 87, Employers' Account- uncut sheets of Federal Reserve notes, gains and losses on ing for Pensions (SFAS 87), is recorded in the Total the sale of Reserve Bank buildings, counterfeit currency column only and has not been distributed to each District. that is not charged back to the depositing institution, and Accordingly, the sum of the Districts will not equal the stale Reseve Bank checks that are written off. Total column for this category or for Total net expenses, 6. For additional details, see the last five pages of and New York will not sum to Current net income. The the preceding section: Board of Governors Financial effect of SFAS 87 on the Reserve Banks was a reduction Statements. in expenses of $75,646,845. 3. Includes distribution of costs for projects performed by one Bank for the benefit of one or more other Banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 313 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 1,462,722,259 841,115,994 2,175,680,261 708,728,100 415,389,029 767,887,197 745,730,004 1,929,449,817 162,752,518 227,876,525 277,694,924 52,906,366 64,706,751 91,171,971 175,247,308 352,491,827 22,196 2,914 3,849 53 761 5,876 28,434 2,304 162,774,714 227,879,439 277,698,773 52,906,420 64,707,511 91,177,848 175,275,742 352,494,131 -1,950,982 -1,105,682 -2,773,780 -988,263 -530,487 -1,066,735 -893,336 -2,177,351 -15,049 -407,261 -14,980 -6,880 -5,681 -6,959 -11,044 -12,741 -1,966,031 -1,512,943 -2,788,760 -995,143 -536,168 -1,073,694 -904,380 -2,190,092 160,808,682 226,366,495 274,910,012 51,911,277 64,171,343 90,104,154 174,371,362 350,340,039 4,152,969 3,400,380 4,178,104 1,821,363 2,326,810 2,570,802 2,111,552 4,755,590 10,122,800 13,789,600 16,877,600 3,224,000 3,925,500 5,500,400 10,489,600 21,315,200 30,012,475 16,015,448 44,471,199 14,993,718 7,544,729 15,534,956 12,949,921 28,179,703 1,579,242,698 1,034,277,061 2,385,063,370 740,600,296 465,763,333 834,385,193 894,550,293 2,225,503,363 15,506,612 19,776,874 24,284,767 4,764,528 5,684,644 7,930,022 14,637,864 30,254,653 1,495,895,736 993,406,487 2,331,628,353 725,337,918 452,660,839 815,269,571 879,116,729 2,177,906,210 67,840,350 21,093,700 29,150,250 10,497,850 7,417,850 11,185,600 795,700 17,342,500 228,493,650 319,923,400 389,865,100 74,277,000 90,843,950 127,999,350 246,035,500 494,874,950 296,334,000 341,017,100 419,015,350 84,774,850 98,261,800 139,184,950 246,831,200 512,217,450 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

314 81st Annual Report, 1994 1. Income and Expenses of Federal Reserve Banks, 1914-94 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 -4,673,446 594,818 1920 181,296,711 27,548,505 -3,743,907 709,525 1921 122,865,866 33,722,409 -6,314,796 741,436 1922 50,498,699 28,836,504 -4,441,914 722,545 1923 50,708,566 29,061,539 -8,233,107 702,634 1924 38,340,449 27,767,886 -6,191,143 663,240 1925 41,800,706 26,818,664 -4,823,477 709,499 1926 47,599,595 24,914,037 -3,637,668 721,724 1,714,421 1927 43,024,484 24,894,487 -2,456,792 779,116 1,844,840 1928 64,052,860 25,401,233 -5,026,029 697,677 805,900 1929 70,955,496 25,810,067 -4,861,642 781,644 3,099,402 1930 36,424,044 25,357,611 -93,136 809,585 2,175,530 1931 29,701,279 24,842,964 311,451 718,554 1,479,146 1932 50,018,817 24,456,755 -1,413,192 728,810 1,105,816 1933 49,487,318 25,917,847 -12,307,074 800,160 2,504,830 1934 48,902,813 26,843,653 -4,430,008 ,372,022 1,025,721 1935 42,751,959 28,694,965 -1,736,758 ,405,898 1,476,580 1936 37,900,639 26,016,338 485.817 ,679,566 2,178,119 1937 41,233,135 25,294,835 -1,631,274 ,748,380 1,757,399 1938 36,261,428 25,556,949 2,232,134 ,724,924 1,629,735 1939 38,500,665 25,668,907 2,389,555 ,621,464 1,356,484 1940... 43,537,805 25,950,946 11,487,697 ,704,011 1,510,520 1941... 41,380,095 28,535,547 720,636 ,839,541 2,588,062 1942... 52,662,704 32,051,226 -1,568,208 ,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 I960.... 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 315 7.—Continued Payments to U.S. Treasury Dividends Interest on to surplus to surplus paid Franchise Under Federal Reserve (section 13b) (section 7) tax section 13b notes 217,463 1,742,775 6,804,186 1,134,234 1,134,234 5,540,684 48,334,341 5,011,832 2,703,894 70,651,778 5.654,018 60,724,742 82,916,014 6,119,673 59,974,466 15,993,086 6,307,035 10,850,605 -659,904 6.552.717 3.613.056 2,545,513 6,682,496 113,646 -3,077,962 6,915,958 59,300 2,473,808 7,329,169 818,150 8,464,426 7,754,539 249,591 5,044,119 8,458,463 2,584,659 21,078,899 9,583,911 4,283,231 22,535,597 10,268,598 17,308 -2,297,724 10,029,760 -7,057,694 9,282,244 2,011,418 11,020,582 8,874,262 -916,855 8,781,661 -60,323 6,510,071 8,504,974 '. '. '. 297^667 27,695 607,422 7,829,581 227,448 102,880 352,524 7,940,966 176,625 67,304 2,616,352 8,019,137 119,524 -419,140 1,862,433 8,110,462 24,579 -425,653 4,533,977 8,214,971 82,152 -54,456 17,617,358 8,429,936 141,465 -4,333 570,513 8,669,076 197,672 49,602 3,554,101 8,911,342 244,726 135,003 40,327,237 9,500,126 326,717 201,150 48,409,795 10,182,851 247,659 262,133 81,969,625 10,962,160 67,054 27,708 81,467,013 11,523,047 35,605 75,283,818 86,772 8,366,350 11,919,809 166,690,356 18,522,518 12.329,373 193,145,837 21,461,770 13,082,992 196,628,858 21,849,490 13,864,750 254,873,588 28,320,759 14,681,788 291,934,634 46,333,735 15,558,377 342,567,985 40,336,862 16,442,236 276,289,457 35,887,775 17,711,937 251,740,721 32,709,794 18,904,897 401,555,581 53,982,682 20,080,527 542,708,405 61,603,682 21,197,452 524,058,650 59,214,569 22,721,687 910,649,768 -93,600,791 23,948,225 896,816,359 42,613,100 25.569,541 687,393,382 70,892,300 27,412,241 799,365,981 45,538,200 28,912,019 879,685,219 55,864,300 30,781,548 1,582,118,614 -465,822,800 32,351,602 1,296,810,053 27,053,800 33,696,336 1,649,455,164 18,943,500 35,027,312 1,907,498,270 29,851,200 36,959,336 2,463,628,983 30,027,250 39,236,599 3,019,160,638 39,432,450 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

316 81st Annual Report, 1994 7. Income and Expenses of Federal Reserve Banks, 1914-94—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 ,023,678,474 -400,365,922 71,551,000 152,135,488 1984 18,068,820,742 ,102,444,454 -412,943,156 82,115,700 162,606,410 1985 18,131,982,786 ,127,744,490 1,301,624,294 77,377,700 173,738,745 1986 17,464,528,361 ,156,867,714 1,975,893,356 97,337,500 180,779,673 1987 17,633,011,623 ,146,910,699 1,796,593,917' 81,869,800 170,674,979 1988 19,526,431,297 ,205,960,134 -516,910,320 84,410,500 164,244,653 1989 22,249,275,725 ,332,160,712 1,254,613,3652 89,579,700 175,043,736 1990 23,476,603,651 ,349,725,812 2,099,328,4722 103,752,200 193,006,998 1991 22,553,001,815 ,429,322,157 405,729,3202 109,631,000 261,316,379 1992 20,235,027,938 ,474,530,523 -987,787,6872 128,955,300 295,400,692 1993 18,914,250,574 ,657,799,914 -230,267,9192 140,465,600 355,947,291 1994 20,910,742,377 ,795,328,343 2,363,862,097 146,866,100 368,187,068 Total, 1914-94 366,849^86,662 26,780,703,683 6,904,700,849 1,990,264,608 3,616,413,132 Aggregate for each Bank, 1914-94 Boston 19,721,814,195 1,747,859,086 226,881,331 72,417,786 215,736,802 New York 114,987,696,856 5,462,947,836 1,994,078,541 531,626,786 1,080,753,442 Philadelphia 14,037,353,810 1,471,141,310 249,722,297 91,343,418 145,970,429 Cleveland 24,063,149,468 1,711,019,383 344,664,111 140,409,590 227,052,130 Richmond 29,057,482,677 2,259,879,715 406,912,980 113,037,976 322,245,965 Atlanta 15,844,256,263 2,429,002,738 639,722,208 162,670,360 193,196,778 Chicago 50,273,094,107 3,480,599,004 834,386,003 266,659,372 474,256,122 St. Louis 12,083,136,160 1,361,511,006 142,337,562 57,436,872 130,746,943 Minneapolis 6,815,176,737 1,255,824,402 195,585,548 57,803,215 66,812,619 Kansas City 14,923,146,218 1,722,782,334 242,731,626 81,558,909 154,586,951 Dallas 19,577,905,034 1,633,745,271 564,744,325 136,152,773 189,508,731 San Francisco 45,465,175,138 2,901,277,332 1,062,934,317 279,147,551 415,546,220 Total 366,849,386,662 26,780,703,6834 6,904,700,850 1,990,264,608 3,616,413,132 NOTE. Components may not sum to totals because of 3. The $3,811,998,899 transferred to surplus was rounding. reduced by direct changes of $500,000 for charge-off on 1. For 1987 and subsequent years, includes the cost of Bank premises (1927), $139,299,557 for contributions to services provided to the Treasury by Federal Reserve capital of the Federal Deposit Insurance Corporation Banks for which reimbursement was not received. (1934) and $3,657 net upon elimination of sec. 13b 2. Data are revised to reflect services provided to the surplus (1958); and was increased by transfer of Treasury by the Federal Reserve for which reimburse- $ 11,131,013 from reserves for contingencies (1945), leavment was not received. ing a balance of $3,683,326,698 on December 31, 1994. 4. See note 2, table 6. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 317 7.—Continued Payments to U.S. Treasury Transferred Transferred Dividends Interest on to surplus to surplus paid Franchise Under Federal Reserve (section 13b) (section 7) tax section 13b notes 41,136,551 3,493,570,636 32,579,700 43,488,074 3,356,559,873 40,403,250 46,183,719 3,231,267,663 50,661,000 49,139,682 4,340,680,482 51,178,300 52,579,643 5,549,999,411 51,483,200 54,609,555 5,382,064,098 33,827,600 57,351,487 5,870,463,382 53,940,050 60,182,278 5,937,148,425 45,727,650 63,280,312 7,005,779,497 47,268,200 67,193,615 9,278,576,140 69,141,200 70,354,516 11,706,369,955 56,820,950 74,573,806 14,023,722,907 76,896,650 79,352,304 15,204,590,947 78,320,350 85,151,835 14,228,816,297 106,663,100 92,620,451 16,054,094,674 161,995,900 103,028,905 17,796,464,292 155,252,950 109,587,968 17,803,894,710 91,954,150 117,499,115 17,738,879,542 173,771,400 125,616,018 17,364,318,571 64,971,100 129,885,339 21,646,417,306 130,802,300 140,757,879 23,608,397,730 180,291,500 152,553,160 20,777,552,290 228,356,150 171,762,924 16,774,476,500 402,114,350 195,422,234 15,986,764,712 347,582,900 212,090,446 20,470,010,815 282,121,700 3,162,502,473 149,138,300 2,188,893 334,240,881,175 -3,657 3,811,998,8993 126,007,520 7,111,395 280,843 17,629,615,508 135,411 149,531,175 867,219,942 68,006,262 369,116 108,603,281,839 ^33,412 1,024,889,321 157,468,551 5,558,901 722,406 12,239,157,360 290,661 175,423,072 235,746,864 4,842,447 82,930 21,817,908,296 -9,906 270,761,843 175,356,162 6,200,189 172,493 26,285,360,734 -71,517 302,213,808 243,446,192 8,950,561 79,264 13,100,343,576 5,491 346,283,640 417,453,547 25,313,526 151,045 46,008,691,703 11,682 434,344,104 93,146,584 2,755,629 7,464 10,490,001,265 -26,515 89,894,478 88,746,226 5,202,900 55,615 5,434,113,418 64,874 102,139,013 127,696,431 6,939,100 64,213 12,928,933,679 -8,674 143,324,900 205,867,288 560,049 102,083 17,725,549,149 55,337 251,108,678 424,347,165 7,697,341 101,421 41,977,924,647 -17,089 522,084,867 3,162,502,473 149,138,300 2,188,893 334,240,881,175 -3,657 3,811,998,899 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

318 81st Annual Report, 1994 Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks and Branches, December 31,1994 Dollars Acquisition costs Federal Reserve Net Other Bank or Buildings Building ma- book real Branch Land (including chinery and Total2 value estate3 vaults)' equipment BOSTON. 22,073,501 86,496,803 6,304,076 117,874,379 93,337,982 NEW YORK 20,354,440 98,090,019 46,600,282 165,044,740 133,018,170 Buffalo 887,844 2,693,268 2,767,406 6,348,518 4,076,438 PHILADELPHIA 2,251,556 54,371,039 5,903,704 62,526,299 47,273,050 CLEVELAND 2,298,643 19,392,191 6,967,450 28,658,284 21,991,102 Cincinnati 2,246,599 14,027,505 8,238,036 24,512,139 11,507,150 Pittsburgh 1,658,376 9,721,591 4,351,756 15,731,723 12,082,351 RICHMOND 6,683,808 62,159,743 18,248,290 87,091,841 74,194,784 Baltimore 6,476,335 27,138,811 3,842,189 37,457,335 28,531,403 Charlotte 3,129,645 27,402,251 4,737,485 35,269,381 31,088,523 ATLANTA... 1,209,360 15,497,334 4,319,451 21,026,145 15,870,536 13,086,575 Birmingham.. 3,197,830 2,285,364 2,056,693 7,539,887 5,510,358 Jacksonville.. 1,665,439 16,910,785 2,851,236 21,427,459 18,430,309 '48,365 Miami 3,717,791 12,214,933 2,719,389 18,652,113 13,713,980 Nashville 592,342 1,692,767 2,360,915 4,646,024 2,375,406 New Orleans. 3,371,446 4,894,869 2,602,700 10,869,015 7,645,806 CHICAGO. 4,565,008 113,679,679 20,287,785 138,532,472 104,017,798 Detroit 797,734 4,468,358 5,149,902 10,415,994 8,228,700 ST. LOUIS... 700,378 15,689,558 5,298,206 21,688,142 17,893,469 Little Rock... 1,148,492 2,460,257 1,003,022 4,611,771 3,503,279 Louisville 700,075 2,859,819 1,131,238 4,691,132 3,624,622 Memphis 1,135,623 4,216,382 2,280,473 7,632,478 5,075,611 MINNEAPOLIS 9,524,866 36,836,953 7,851,532 54,213,351 35,591,897 Helena 1,954,514 9,064,373 501,857 11,520,744 10,677,318 KANSAS CITY.. 1,829,420 16,261,220 11,638,819 29,729,459 21,081,258 149,948 Denver 3,187,962 5,457,054 3,185,925 11,830,941 8,715,060 Oklahoma City... 646,386 7,952,791 861,305 9,460,482 7,622,491 Omaha 6,534,583 10,987,009 1,401,083 18,922,675 16,401,411 1,412,500 DALLAS 29,102,860 110,804,261 11,969,538 151,876,659 145,114,050 10,533,831 El Paso 262,477 1,425,210 404,946 2,092,633 1,850,112 Houston 2,205,500 4,161,578 1,150,965 7,518,043 6,801,918 San Antonio . 482,284 2,735,961 1,669,052 4,887,297 3,631,392 SAN FRANCISCO... 15,599,928 67,649,956 18,105,346 101,355,230 80,090,925 Los Angeles 3,891,887 50,756,229 8,847,166 63,495,282 53,566,199 Portland 415,924 6,226,586 2,267,971 8,910,481 8,140,590 128,644 Salt Lake City 494,556 5,005,637 2,441,387 7,941,581 6,890,668 Seattle 324,772 5,745,131 2,619,622 8,689,525 7,267,888 Total 167^20,184 942,433,273 234,938,201 1,344,691,658 1,076,434,008 25,359,862 NOTE. Components may not sum to totals because of 2. Excludes charge-offs of $17,698,968 before 1952. rounding. 3. Covers acquisitions for banking-house purposes and 1. Includes expenditures for construction at some Bank premises formerly occupied and being held pending offices, pending allocation to appropriate accounts. sale. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 319 9. Operations in Principal Departments of Federal Reserve Banks, 1991-94 Operation 1994 1993 1992 1991 Millions of pieces (except as noted) Loans (thousands) 8 6 8 11 Currency received and counted 20,166 20,768 20,166 19,711 Currency verified and destroyed 7,244 7,376 7,506 6,254 Coin received and counted 6,950 7,690 8,660 9,462 Checks handled U.S. government checks 470 480 493 503 Postal money orders 200 192 181 166 All other 16,479 19,009 19.053 18,743 Government securities transfers ' 13 12r 12r 11 r Transfer of funds 72 70 68 65 Automated clearinghouse transactions Commercial 1,805 1,545 1,327 1,119 Government 574 555 531 521 Food stamps redeemed 4,229 4,198 4,183 3,439 Millions of dollars Loans 22,853 20,760 29,427 64,597 Currency received and counted 277,685 290,989 277,681 265,473 Currency verified and destroyed 76,620 79,599 96,744 77,496 Coin received and counted 1,045 1,143 1,275 1,354 Checks handled U.S. government checks 504,479 534,236 588,311 610,106 Postal money orders 23,764 22,207 20,188 17,716 All other .... 12,079 107 14,066,518 13,241,785 12,164,175 Government securities transfers ' 144,702,226 146,220,304 r 139,675,710 r 116,315,973 r Transfer of funds 211,201,540 207,629,814 199,175,034 192,254,895 Automated clearinghouse transactions Commercial 7,420,499 6,710,035 r 6,530,731 r 5,549,171 r Government 948,984 885,011 859,774 723,426 Food stamps redeemed 21,867 21,661 21,452 17,888 1. Beginning with this Annual Report, "Government made to enable consistent time series reporting for the securities transfers" replaces the previous time series that fiscal area, where complex definitional changes have included "Issues, redemptions, and exchanges of U.S. occurred over the reported years, Treasury and federal agency securities." This change was r Revised. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

320 81st Annual Report, 1994 10. Federal Reserve Bank Interest Rates on Loans to Depository Institutions, December 31, 1994 Extended credit3 Adjustment Seasonal Reserve Bank credit' credit2 First thirty days After thirty days of borrowing of borrowing All Federal Reserve Banks 4.75 5.90 4.75 6.40 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. As of May 20, 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- 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 50 basis points above the discount movement in their deposits and loans. The discount rate rate applicable to adjustment credit. In no case will the on seasonal credit takes into account rates on market rate be less than the basic discount rate plus 50 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 disapplicable to adjustment credit. See section 2O1.3(b) of count rate applicable to adjustment credit may be charged Regulation A. on extended-credit loans that are outstanding less than thirty days. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 321 11. Reserve Requirements of Depository Institutions, December 31, 1994 Requirements Type of deposit' Percent of deposits Effective date Net transaction accounts2 $0 million-$51.9 million 3 12-20-94 More than $51.9 million * 10 12-20-94 Nonpersonal time deposits4 0 12-27-90 Eurocurrency liabilities5 0 12-27-90 NOTE. Required reserves must be held in the form of The Monetary Control Act of 1980 requires that the deposits with Federal Reserve Banks or vault cash. Non- amount of transaction accounts against which the 3 permember institutions may maintain reserve balances with a cent reserve requirement applies be modified annually by Federal Reserve Bank indirectly on a pass-through basis 80 percent of the percentage change in transaction with certain approved institutions. For previous reserve accounts held by all depository institutions, determined as requirements, see earlier editions of the Annual Report or of June 30 each year. Effective December 20, 1994 for the Federal Reserve Bulletin. Under the Monetary Con- institutions reporting quarterly and weekly, the amount trol Act of 1980, depository institutions include commer- was increased from $51.9 million to $54.0 million. cial banks, mutual savings banks, savings and loan asso- 3. The reserve requirement was reduced from 12 perciations, credit unions, agencies and branches of foreign cent to 10 percent on April 2, 1992, for institutions that banks, and Edge Act corporations. report weekly, and on April 16, 1992, for institutions that 1. Under the Garn-St Germain Depository Institutions report quarterly. Act of 1982, the Board adjusts the amount of reservable 4. For institutions that report weekly, the reserve reliabilities subject to a zero percent reserve requirement quirement on nonpersonal time deposits with an original each year for the succeeding calendar year by 80 percent maturity of less than 1 Vi years was reduced from 3 perof the percentage increase in the total reservable liabilities cent to 1 Vi percent for the maintenance period that began of all depository institutions, measured on an annual basis December 13, 1990, and to zero for the maintenance as of June 30. No corresponding adjustment is made in period that began December 27, 1990. The reserve rethe event of a decrease. On December 20, 1994, the quirement on nonpersonal time deposits with an original exemption was raised from $4.0 million to $4.2 million. maturity of 1 Vi years or more has been zero since Octo- The exemption applies only to accounts that would be ber 6, 1983. subject to a 3 percent reserve requirement. For institutions that report quarterly, the reserve re- 2. Transaction accounts include all deposits against quirement on nonpersonal time deposits with an original which the account holder is permitted to make withdraw- maturity of less than 1 Vi years was reduced from 3 perals by negotiable or transferable instruments, payment cent to zero on January 17, 1991. orders of withdrawal, and telephone and preauthorized 5. The reserve requirement on Euroccurency liabilities transfers in excess of-vhree per month for the purpose was reduced from 3 percent to zero in the same manner of making payments to third persons or others. However, and on the same dates as was the reserve requirement on money market deposit accounts (MMDAs) and similar nonpersonal time deposits with an original maturity of accounts subject to the rules that permit no more than six less than 1 V2 years (see note 4). preauthorized, automatic, or other transfers per month, of which no more than three may be checks, are savings deposits, not transaction accounts. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

322 81st Annual Report, 1994 12. Initial Margin Requirements under Regulations T, U, G, and X Percent of market value Short sales, Effective date T only' 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 NOTE. These regulations, adopted by the Board of 30 percent of the current market value of the stock Governors pursuant to the Securities Exchange Act of underlying the option. On September 30, 1985, the Board 1934, limit the amount of credit to purchase and carry changed the required margin on individual stock options, "margin securities" (as defined in the regulations) when allowing it to be the same as the option maintenance such value is collateralized by securities. Margin require- margin required by the appropriate exchange or selfments on securities other than options are the difference regulatory organization; such maintenance margin rules between the market value (100 percent) and the maxi- must be approved by the Securities and Exchange Commum loan value of collateral as prescribed by the Board. mission. Effective June 6, 1988, the SEC approved new Regulation T was adopted effective October 15, 1934; maintenance margin rules, permitting margins to be the Regulation U, effective May 1, 1936; Regulation G, effec- current market value of the option plus 20 percent of the tive March 11, 1968; and Regulation X, effective Novem- market value of the stock underlying the option. ber 1, 1971. 1. From October 1, 1934, to October 31, 1937, the On January 1, 1977, the Board of Governors for the requirement was the margin "customarily required" by first time established in Regulation T the initial margin the brokers and dealers. required for writing options on securities, setting it at Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 323 13. Principal Assets and Liabilities and Number of Insured Commercial Banks in the United States, by Class of Bank, June 30, 1994 and 1993 Millions of dollars, except as noted Member banks Nonmember Item Total banks Total National State 1994 ASSETS Loans and investments 2,791,613 2,045,606 1,584,366 461,240 746,006 Gross loans 1,960,770 1,451,030 1,145,621 305,409 509,740 Net loans 1,955,838 1,448,050 1,143,315 304,735 507,788 Investments 830,843 594,576 438,745 155,831 236,266 U.S. Treasury and federal agency securities 347,977 229,126 175,691 53,435 118,851 Other 482,865 365,451 263,054 102,396 117,415 Cash assets, total 191,828 152,670 113,515 39,155 39,158 LIABILITIES Deposits, total 2,352,622 1,691,911 1,317,001 374,910 660,711 Interbank 38,612 31,384 22,708 8,676 7,228 Other transaction 782,168 581,690 447,626 134,064 200,478 Other nontransaction 1,828,562 1,285,994 1,012,928 273,066 542,567 Equity capital 299,628 222,197 167,131 55,066 77,431 Number of banks 10,646 4,141 3,176 965 6,505 1993 ASSETS Loans and investments 2,589,870 1,887,794 1,469,753 418,042 702,075 Gross loans 1,829,438 1,348,353 1,066,900 281,453 481,085 Net loans 1,822,958 1,344,383 1,064,094 280,289 478,575 Investments 760,431 539,441 402,853 136,588 220,990 U.S. Treasury and federal agency securities 620,802 445,162 335,583 109,579 175,640 Other 139,629 94,279 67,270 27,009 45,350 Cash assets, total 184,692 143,022 111,510 31,512 41,670 LIABILITIES Deposits, total 2,332,011 1,679,328 1,320,692 358,636 652,683 Interbank 45,563 37,562 27,695 9,867 8,001 Other demand 742,565 549,807 431,990 117,817 192,758 Other time and savings 1,832,291 1,294,208 1,025,253 268,955 538,083 Equity capital 276,260 202,190 154,966 47,224 74,070 Number of banks 11,117 4,395 3,426 969 6,722 NOTE. Components may not sum to totals because of rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

324 81st Annual Report, 1994 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-94, and Month-End 1994 Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasury and cial Treafederal agency securities draw- sury Period ing cur- Bought r u H e n e p d l u e r d r - Loans Float' ot A h l e l r2 R F O e e t s d h e er r e a v r l e Total s G t o o l c d k4 c r i e i c r g a t h i t t f e s - s r o t e u a n t n c d - y - Total outright chase ac- ing5 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 ,405 3,642 1,958 1923 134 80 54 723 27 355 0 ,238 3,957 2,009 1924 540 536 4 320 52 390 0 ,302 4,212 2,025 1925 375 367 8 643 63 378 0 ,459 4,112 1,977 1926 315 312 3 637 45 384 0 ,381 4,205 1,991 1927 617 560 57 582 63 393 0 ,655 4,092 2,006 1928 228 197 31 1,056 24 500 0 ,809 3,854 2,012 1929 511 488 23 632 34 405 0 ,583 3,997 2,022 1930 739 686 43 251 21 372 0 ,373 4,306 2,027 1931 817 775 42 638 20 378 0 ,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 foFro Fr RnoAteSs EseRe end of table. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 325 14.—Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with reserves7 Federal Reserve Banks Other Cur- Re- Trea- Other Federal rency quired sury Federal Reserve in clearcash Reserve liacir- ing With Curc t u io la n - h in o g ld s6 - T s r u e r a y - e F i o g r n - Other co a u c n - ts 3 a b n a c l e - s c b a i a p li n i t t d i a e l s 3 R Fe e d se e r r v a e l re a n n c d y qu R ir e e - d9 c E e x s - s9 Banks 4,951 288 51 96 25 118 0 0 ,636 0 1,585 51 5,091 385 51 73 28 208 0 0 ,890 0 1,822 68 5,325 218 57 5 18 298 0 0 ,781 0 0 0 4,403 214 96 12 15 285 0 0 ,753 0 1,654 99 4,530 225 11 3 26 276 0 0 ,934 0 0 0 4,757 213 38 4 19 275 0 0 ,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 ,336 870 392 569 563 0 0 17,899 0 16.400 1,499 28,224 ,325 1,123 642 547 590 0 0 20,479 0 19,277 1,202 27,600 ,312 821 767 750 106 0 0 16,568 0 15,550 1,018 27,741 ,293 668 895 565 714 0 0 17,681 0 16,509 1,172 29,206 ,270 247 526 363 746 0 0 20,056 0 19,667 389 30,433 ,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

326 81st Annual Report, 1994 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-94 and Month-End 1994—Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasury and cial Treafederal agency securities draw- sury Period Other Gold ing cur- Held All Federal stock4 rights rency under Loans Float' other2 Reserve Total certif- out- Total ou B t o r u ig g h h t t l0 r c e h p a u s r e - assets3 ic a a c t - e s i ta n n g d 5 agree- count ment '' 1965 40,768 40,478 290 137 2,248 187 0 43,340 13,733 5,575 1966 44,316 43,655 661 173 2,495 193 0 41 Ml 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 7,154' 0 183 3,440 64 2,743 64,584 10,367 6,852 1970 62,142 62,142 0 335 4,261 57 1,123 67,918 10,732 400 7,147 1971 70,804 69,481 1,323 39 4,343 261 1,068 76,515 10,132 400 7,710 1972 71,230 71,119 111 1,981 3,974 106 1,260 78,551 10,410 400 8,313 1973 80,495 80,395 100 1,258 3,099 68 1,152 86,072 11,567 400 8,716 1974 85,714 84,760 954 299 2,001 999 3,195 92,208 11,652 400 9,253 1975 94,124 92,789 1,335 211 3,688 1,126 3,312 102,461 11,599 500 10,218 1976 104,093 100,062 4,031 25 2,601 991 3,182 110,892 11,598 1,200 10,810 1977 111,274 108,922 2,352 265 3,810 954 2,442 118,745 11,718 1,250 11,331 1978 118,591 117,374 1,217 1,174 6,432 587 4,543 131,327 11,671 1,300 11.831 1979 126,167 124,507 1,660 1,454 6,767 704 5,613 140,705 11,172 1,800 13,083 1980 130,592 128,038 2,554 1,809 4,467 776 8,739 146,383 11,160 2,518 13,427 1981 140,348 136,863 3,485 1,601 1,762 195 9,230 153,136 11,151 3,318 13,687 1982 148,837 144,544 4,293 717 2,735 1,480 9,890 63,659 11,148 4,618 13,786 1983 160,795 159,203 1,592 918 1,605 418 8,728 172,464 11,121 4,618 15,732 1984 169,627 167,612 2,015 3,577 833 0 12,347 186,384 11,096 4,618 16,418 1985 191,248 186,025 5,223 3,060 988 0 15,302 210,598 11,090 4,718 17,075 1986 221,459 205,454 16,005 1,565 1,261 0 17,475 241,760 11,084 5,018 17,567 1987 231,420 226,459 4,961 3,815 811 0 15,837 251,883 11,078 5,018 18,177 1988 247,489 240,628 6,861 2,170 1,286 0 18,803 269,748 11,060 5,018 18,799 1989 235,417 233,300 2,117 481 1,093 0 39,631 276,622 11,059 8,518 19,628 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 21,017 1992 308,518 300,424 8,094 675 3,350 0 30,278 342,820 11,056 8,018 21,452 1993 349,865 336,653 13,212 94 963 r 0 33,394 384,316r 11,053 8,018 22,101 1994 378,746 368,156 10,590 223 740 0 33,441 413,150 11,051 8,018 22,912 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 327 14.—Continued Factors absorbing reservefunds Deposits, other Member bank than reserves, with Federa1 ReserveBanks Other reserves7 Cur- Re- Trea- Other Federal rency sury Federal quired Reserve in cash Reserve clear- liacir- With Curhold- ac- ing bilities c t u io la n - ings6 T su re r a y - e F i o g r n - Other counts 3 a b n a c l e - s ca a p n it d al3 R F B e e a s d n e e r k r v a s e l c re a o n n i c n d y 8 qu R ir e e - d9 ce E ss x 9 - -12 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 1,919 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 l2 72,497 317 2,542 251 ,419 n 0 0 2,669 27,060 6,781 35,268 -1,360 79,743 185 2,113 418 ,275 n 0 0 2,935 25,843 7,370 37,011 -3,798 86,547 483 7,285 353 ,090 0 0 2,968 26,052 8,036 35,197 -1,103 l4 93,717 460 10,393 352 ,357 0 0 3,063 25,158 8,628 35,461 -1,535 103,811 392 7,114 379 ,187 0 0 3,292 26,870 9,421 37,615 -1,265 114,645 240 4,196 368 ,256 0 0 4,275 31,152 10,538 42,694 -893 125,600 494 4,075 429 ,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 !,328 171,935 479 3,661 191 851 0 ,013 5,392 20,413 17,821 39,179 -945 183,796 513 5,316 253 867 () ,126 5,952 20,693 k k k 197,488 550 9,351 480 1,041 0 ,490 5,940 27,141 211,995 447 7,588 287 917 0 ,812 6,088 46,295 230,205 454 5/H3 244 1,027 0 ,687 7,129 40,097 247,649 395 8,656 347 548 0 ,605 7,683 37,742 260,456 450 6,217 589 1,298 0 ,618 r 8,486 36,713 n.a. n.a. n.a. 286,965 561 8,960 369 242 0 1,963 8,147 36,695 307,759 636 17,697 968 1,706 0 3,945 r 8,113 25,467 r 334,706 508 7,492 206 372 0 5,897 r 7,984 26,181 r 365,299 377 14,809 386 397 0 6,332 r 9,292 28,614 r 403,762 335 7,161 250 876 0 4,239 11,959 26,550 \r yy r Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

328 81st Annual Report, 1994 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-94, and Month-End 1994—Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bankcredit outstanding Spe- U.S. Treasuryand cial Treafederal agency securities draw- sury Period Other Gold ing cur- Held All Federal stock 4 rights rency under Loans Float' other2 Reserve Total certif- out- Total ou B t o ri u g g h h t t l() r c e h p a u s r e - assets3 ic a a c t - e s i ta n n g d 5 agree- count ment l' 1994 Jan. ... 345,608 336,432 9,176 122 2,440 0 33,940 382,110 11,053 8,018 22,160 Feb. ... 342,824 337,739 5,085 48 687 0 32,031 375,590 11,053 8,018 22,232 Mar. ... 346,937 341,487 5,450 463 543 0 33,372 381,315 11,052 8,018 22,324 Apr. ... 347,126 347,126 0 234 208 0 34,171 381,739 11,053 8,018 22,382 May ... 354,047 348,342 5,705 240 550 0 32,080 386,917 11,052 8,018 22,461 June ... 362,203 351,564 10,639 701 636 0 32,799 396,339 11,052 8,018 22,534 July .... 356,858 352,738 4,120 458 22 0 33,659 390,997 11,052 8,018 22,604 Aug. ... 361,198 352,947 8,251 494 540 0 32,030 394,262 11,054 8,018 22,660 Sept. ... 359,326 356,816 2,510 504 339 0 33,482 393,651 11,054 8,018 22,730 Oct. ... 360,072 356,057 4,015 264 571 0 34,837 395,744 11,053 8,018 22,786 Nov. ... 371,029 362,864 8,165 144 346 0 31,349 402,868 11,051 8,018 22,842 Dec. ... 378,746 368,156 10,590 223 740 0 33,441 413,150 11,051 8,018 22,912 NOTE. For a description of figures and discussion of 5. Includes currency and coin (other than gold) issued their significance, see Banking and Monetary Statistics, directly by the Treasury. The largest components are 1941-1970 (Board of Governors of the Federal Reserve fractional and dollar coins. For details see "Currency and System, 1976), pp. 507-23. Components may not sum to Coin in Circulation," Treasury Bulletin. totals because of rounding. 6. Coin and paper currency held by the Treasury, as . . . Not applicable. well as any gold in excess of the gold certificates issued n.a. Not available. to the Reserve Bank. r Revised. 7. Beginning in November 1979, includes reserves 1. Beginning in 1960, figures reflect a minor change in of member banks, Edge Act corporations, and U.S. agenconcept; see Federal Reserve Bulletin, vol. 47 (February cies and branches of foreign banks. Beginning on 1961), p. 164. November 13, 1980, includes reserves of all depository 2. Principally acceptances and, until August 21, 1959, institutions. industrial loans, authority for which expired on that date. Beginning in 1984, data on "Currency and coin" and 3. For the period before April 16, 1969, includes the "Required" and "Excess" reserves changed from daily total of Federal Reserve capital paid in, surplus, other to biweekly basis. capital accounts, and other liabilities and accrued divi- 8. Between December 1, 1959, and November 23, dends, less the sum of bank premises and other assets, 1960, part was allowed as reserves; thereafter all was and is reported as "Other Federal Reserve accounts"; allowed. thereafter, "Other Federal Reserve assets" and "Other 9. Estimated through 1958. Before 1929, data were Federal Reserve liabilities and capital" are shown available only on call dates (in 1920 and 1922 the call separately. date was December 29). Beginning on September 12, 4. Before January 30, 1934, includes gold held in 1968, the amount is based on close-of-business figures for Federal Reserve Banks and in circulation. the reserve period two weeks before the report date. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 329 14.—Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with reserves8 Federal Reserve Banks Other Re- Other Federal quired Federal Reserve clear- Reserve liaing With Curac- bilities Other counts 3 bal- ca a p n it d al3 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 8 qu R ir e e - d 9 Ex- 360,919 378 21,541 257 255 0 6,229 9,759 24,003 364,947 365 4,886 191 373 0 6,223 10,337 29,571 369,038 370 6,181 454 316 0 6,624 10,618 29,110 370,701 378 7,965 171 312 0 6,540 10,189 26,934 377,939 361 5,675 174 278 0 6,053 10,836 27,132 382,159 353 9,356 604 286 0 5,681 11,825 27,677 3 3 8 8 6 2 , , 0 24 1 4 0 3 3 5 6 2 8 3 5 , , 6 9 8 9 3 4 1 18 8 8 2 2 28 4 9 4 0 0 5 5 , , 5 3 1 5 2 0 1 1 1 0 , , 3 8 9 6 4 4 2 2 9 6 , , 0 9 6 3 1 2 n1.a. 1n.a. ln.a. 385,516 363 6,848 342 318 0 4,916 12,012 25,138 389,604 363 5,164 223 392 0 4,522 12,584 24,749 396,703 389 5,348 230 302 0 4,347 11,133 26,328 403,762 335 7,161 250 876 0 4,239 11,959 26,550 10. Beginning in 1969, includes securities loaned— 13. 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- 11. 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 12. 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 14. 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

330 81st Annual Report, 1994 15. Number of Banking Offices in the United States, December 31, 1993 and 1994 Commercial banks' State-chartered savings Type of office, Total Member3 Nonmember banks2 number, and change Total Non- Non- Total National State Insured insured4 Insured insured BANKS Number, Dec. 31, 1993 .. 11,751 11,242 4,339 3,360 979 6,613 290 509 0 Changes during 1994 New banks . . 65 65 21 16 5 27 17 0 0 Ceased banking operation5 -58 -56 -20 -19 _ | -25 -11 -2 0 Banks converted into branches6 -545 -523 -237 -191 -46 -286 0 -22 0 Other7 53 13 12 -34 46 -2 3 40 0 Net change -485 -501 -224 -228 4 -286 9 16 0 Number, Dec. 31,1994 .. 11,266 10,741 4,115 3,132 983 6,327 299 525 0 BRANCHES AND ADDITIONAL OFFICES Number, Dec. 31, 1993 .. 55,891 52,865 35,560 27,853 7,707 17,215 90 3,026 0 Changes during 1994 De novo 2,270 2,057 1,279 995 284 776 2 213 0 Banks converted into branches 545 539 349 298 51 190 0 6 0 Discontinued -1,016 -940 -696 -518 -178 -243 -1 -76 0 Other7 416 334 130 98 32 204 0 82 0 Net change7 2,215 1,990 1,062 873 189 927 1 225 o Number, Dec. 31, 1994 .. 58,106 54,855 36,622 28,726 7,896 18,142 91 3,251 0 NOTE. Preliminary. Final data will be available in the 4. Includes one workout national bank. Annual Statistical Digest, 1994, forthcoming. 5. Includes five banks that converted into thrift 1. Includes nondeposit trust companies, private banks, institutions. industrial banks, and nonbank banks. Member institutions 6. Includes three banks that converted into thrift instiare those that are members of the Federal Reserve tution branches. System. 7. Includes interclass changes and sales of branches. 2. Formerly called mutual savings banks. 3. 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 331 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1994 Crestar Bank, Richmond, Virginia to merge with Premier Bank and Trust, Elyria, Ohio to ac- NVR Federal Savings Bank, McLean, Virginia1 quire assets and liabilities of the Worthington branch of Jefferson Savings Bank, West Jeffer- SUMMARY REPORT BY THE ATTORNEY GENERAL (12-22-93) son, Ohio The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. (3-18-94) The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE (2-3-94) cantly adverse to competition. The applicant has assets of $10.9 billion; the target BASIS FOR APPROVAL BY THE FEDERAL RESERVE has assets of $521.1 million. The parties operate in (2-16-94) the same market. The banking factors and consid- The applicant has assets of $498.1 million; the erations relating to the convenience and needs of target has assets of $4.9 million. The parties operthe community are consistent with approval. ate in the same market. The banking factors and considerations relating to the convenience First Bank, Creve Coeur, Missouri, through and needs of the community are consistent with First Heritage Interim Bank, St. Louis, Mis- approval. souri to merge with Heritage National Bank, St. Louis, Missouri BancFirst, Oklahoma City, Oklahoma to merge with First City Bank, Tulsa, Oklahoma SUMMARY REPORT BY THE ATTORNEY GENERAL (2-2-94) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (3-8-94) cantly adverse to competition. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (2-9-94) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $710.4 million; the (2-17-94) target has assets of $60.8 million. The parties The applicant has assets of $738.0 million; the operate in the same market. The banking factors target has assets of $40.0 million. The parties do and considerations relating to the convenience not operate in the same market. The banking facand needs of the community are consistent with tors and considerations relating to the convenience approval. and needs of the community are consistent with approval. First Interstate Bank of California, Los Angeles, California to merge with San Diego Trust & Crestar Bank MD, Bethesda, Maryland to Savings Bank, San Diego, California merge with Annapolis Federal Savings Bank, SUMMARY REPORT BY THE ATTORNEY GENERAL Annapolis, Maryland (11-1-94) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (3-8-94) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (2-16-94) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $20.5 billion; the target (3-4-94) has assets of $1.9 billion. The parties do not The applicant has assets of $884.2 million; the operate in the same market. The banking factors target has assets of $329.1 million. The parties and considerations relating to the convenience operate in the same market. The banking factors and needs of the community are consistent with and considerations relating to the convenience approval. and needs of the community are consistent with approval. 1. The institution or group of institutions named before the italicized words is referred to 1st United Bank, Boca Raton, Florida to merge subsequently as the applicant, and the institution with Suburban Bank, Lake Worth, Florida or group of institutions named after the italicized SUMMARY REPORT BY THE ATTORNEY GENERAL words is referred to subsequently as the target. (3-8-94) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

332 81st Annual Report, 1994 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1994—Continued The proposed transaction would not be signifi- Fifth Third Bank, Cincinnati, Ohio to acquire cantly adverse to competition. the assets and liabilities of three Ohio branches of Citizens Federal Bank, Miami, Florida BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3-9-94) SUMMARY REPORT BY THE ATTORNEY GENERAL The applicant) has assets of $124.0 million; the (3-18-94) target has assets of $164.2 million. The parties The proposed transaction would not be signifioperate in the same market. The banking factors cantly adverse to competition. and considerations relating to the convenience BASIS FOR APPROVAL BY THE FEDERAL RESERVE and needs of the community are consistent with (4-12-94) approval. The applicant has assets of $6.9 billion; the target has assets of $44.2 million. The parties operate in Fairfax Bank & Trust Company, Fairfax, Vir- the same market. The banking factors and considginia to merge with Federal Savings Association erations relating to the convenience and needs of of Virginia, Falls Church, Virginia the community are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL No report received. Request for report on the The Sun City Bank, Sun City, Arizona to competitive factors was dispensed with, as autho- acquire the assets and liabilities of the Sun City rized by the Bank Merger Act, to permit the branch of First National Bank of Arizona, Federal Reserve System to act immediately to Phoenix, Arizona safeguard the depositors of Federal Savings Association of Virginia.2 SUMMARY REPORT BY THE ATTORNEY GENERAL (4-8-94) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (3-11-94) cantly adverse to competition. The applicant has assets of $164.8 million; the target has assets of $1.7 million. The RTC has BASIS FOR APPROVAL BY THE FEDERAL RESERVE (4-13-94) recommended immediate action by the Federal The applicant has assets of $28.1 million; the Reserve System to prevent the probable failure of target has assets of $17.9 million. The parties the target. operate in the same market. The banking factors and considerations relating to the convenience First Community Bank, Forest, Virginia to and needs of the community are consistent with acquire the assets and liabilities of the Moneta approval. branch of First Union National Bank of Virginia, Roanoke, Virginia Citizens Trust Bank, Atlanta, Georgia to SUMMARY REPORT BY THE ATTORNEY GENERAL acquire assets and liabilities of the main office (3-18-94) of Southern Federal Savings Association of The proposed transaction would not be signifi- Georgia, Atlanta, Georgia cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE Request for report dispensed with as authorized by (3-31-94) the Bank Merger Act. The applicant has assets of $83.9 million; the target has assets of $10.9 million. The parties do BASIS FOR APPROVAL BY THE FEDERAL RESERVE not operate in the same market. The banking fac- (4-22-94) tors and considerations relating to the convenience The applicant has assets of $118.0 million; the and needs of the community are consistent with target has assets of $14.4 million. The RTC has approval. recommended immediate action by the Federal Reserve System to prevent the probable failure of the target. 2. In such cases hereafter, the entry for the Chemical Bank and Trust Company, Midland, summary report by the Attorney General will read, Michigan to acquire assets and liabilities of the "Request for report dispensed with as authorized Edenville branch of First of America Bankby the Bank Merger Act." Mid Michigan, NA, Bay City, Michigan Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 333 16.—Continued SUMMARY REPORT BY THE ATTORNEY GENERAL The applicant has assets of $12.2 billion; the target (3-18-94) has assets of $165.1 million. The RTC has recom- The proposed transaction would not be signifi- mended immediate action by the Federal Reserve cantly adverse to competition. System to prevent the probable failure of the target. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (5-3-94) The applicant has assets of $530.1 million; the The Peoples Bank & Trust Company, Selma, target has assets of $267.0 million. The parties Alabama to acquire assets and liabilities of the operate in the same market. The banking factors Selma branch of Altus FSB, Mobile, Alabama and considerations relating to the convenience and needs of the community are consistent with SUMMARY REPORT BY THE ATTORNEY GENERAL Request for report dispensed with as authorized by approval. the Bank Merger Act. BASIS FOR APPROVAL BY THE FEDERAL RESERVE Fairfax Bank & Trust Company, Fairfax, Vir- (5-20-94) ginia to merge with Commonwealth Federal The applicant has assets of $278.9 million; the Savings Bank, Manassas, Virginia target has assets of $10.1 million. The RTC has SUMMARY REPORT BY THE ATTORNEY GENERAL recommended immediate action by the Federal Request for report dispensed with as authorized by Reserve System to prevent the probable failure of the Bank Merger Act. the target. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (5-6-94) Chemung Canal Trust Company, Elmira, The applicant has assets of $174.4 million; the New York to acquire the assets and liabilities target has assets of $29.7 million. The RTC has of Bath, Painted Post, and Watkins Glen recommended immediate action by the Federal branches of Columbia Banking, FSA, Roches- Reserve System to prevent the probable failure of ter, New York the target. SUMMARY REPORT BY THE ATTORNEY GENERAL Request for report dispensed with as authorized by Signet Bank/Virginia, Richmond, Virginia to the Bank Merger Act. merge with Pioneer Federal Savings Bank, Chester, Virginia BASIS FOR APPROVAL BY THE FEDERAL RESERVE (6-3-94) SUMMARY REPORT BY THE ATTORNEY GENERAL The applicant has assets of $412.9 million; the (4-29-94) target has assets of $46.7 million. The RTC has The proposed transaction would not be signifi- recommended immediate action by the Federal cantly adverse to competition. Reserve System to prevent the probable failure of BASIS FOR APPROVAL BY THE FEDERAL RESERVE the target. (5-12-94) The applicant has assets of $9.0 billion; the target Wellington State Bank, Wellington, Texas to has assets of $391.8 million. The parties do not merge with First National Bank in Wheeler, operate in the same market. The banking factors Wheeler, Texas and considerations relating to the convenience and needs of the community are consistent with SUMMARY REPORT BY THE ATTORNEY GENERAL approval. (4-29-94) The proposed transaction would not be significantly adverse to competition. Crestar Bank, Richmond, Virginia to merge with Piedmont Federal Savings Association, Manas- BASIS FOR APPROVAL BY THE FEDERAL RESERVE sas, Virginia (6-16-94) The applicant has assets of $35.7 million; the SUMMARY REPORT BY THE ATTORNEY GENERAL target has assets of $36.3 million. The parties do Request for report dispensed with as authorized by not operate in the same market. The banking facthe Bank Merger Act. tors and considerations relating to the convenience BASIS FOR APPROVAL BY THE FEDERAL RESERVE and needs of the community are consistent with (5-13-94) approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

334 81st Annual Report, 1994 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1994—Continued Farmers & Merchants Savings Bank, Manches- BASIS FOR APPROVAL BY THE FEDERAL RESERVE ter, Iowa to acquire assets and liabilities of the (7-6-94) Cedar Rapids branch of United Federal Sav- The applicant has assets of $104.8 million; the ings Association of Iowa, Des Moines, Iowa target has assets of $8.5 million. The parties operate in the same market. The banking factors SUMMARY REPORT BY THE ATTORNEY GENERAL Request for report dispensed with as authorized by and considerations relating to the convenience the Bank Merger Act. and needs of the community are consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (6-24-94) The applicant has assets of $45.2 million; the Mid-Peninsula Bank, Palo Alto, California to target has assets of $2.4 million. The RTC has merge with WesCal National Bank, San Mateo, recommended immediate action by the Federal California Reserve System to prevent the probable failure of SUMMARY REPORT BY THE ATTORNEY GENERAL the target. (7-1-94) The proposed transaction would not be signifi- Hawkeye Bank, Des Moines, Iowa to acquire cantly adverse to competition. assets and liabilities of the Waukonda branch of United Federal Savings Association, Des BASIS FOR APPROVAL BY THE FEDERAL RESERVE Moines, Iowa (7-25-94) The applicant has assets of $138.8 million; the SUMMARY REPORT BY THE ATTORNEY GENERAL target has assets of $32.3 million. The parties Request for report dispensed with as authorized by operate in the same market. The banking factors the Bank Merger Act. and considerations relating to the convenience BASIS FOR APPROVAL BY THE FEDERAL RESERVE and needs of the community are consistent with (6-24-94) approval. The applicant has assets of $242.7 million; the target has assets of $700 thousand. The RTC has recommended immediate action by the Federal Fifth Third Bank of Kentucky, Inc., Louisville, Reserve System to prevent the probable failure of Kentucky (formerly Fifth Third Bank of Centhe target. tral Kentucky, Lexington, Kentucky) to merge with The Cumberland Federal Savings Bank, United Bank of Philadelphia, Philadelphia, Louisville, Kentucky Pennsylvania to acquire assets and liabilities of SUMMARY REPORT BY THE ATTORNEY GENERAL one branch of Ukrainian Federal Savings & (8-8-94) Loan Association, Philadelphia, Pennsylvania The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. Request for report dispensed with as authorized by BASIS FOR APPROVAL BY THE FEDERAL RESERVE the Bank Merger Act. (7-27-94) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $302 million; the target (6-24-94) has assets of $709 million. The parties operate in The applicant has assets of $76.3 million; the the same market. The banking factors and considtarget has assets of $18.7 million. The RTC has erations relating to the convenience and needs of recommended immediate action by the Federal the community are consistent with approval. Reserve System to prevent the probable failure of the target. Southtrust Bank of West Florida, St. Petersburg, Florida to merge with University State Ambassador Bank of the Commonwealth, Bank, Tampa, Florida Allentown, Pennsylvania to acquire assets and liabilities of one branch of Lafayette Bank, Eas- SUMMARY REPORT BY THE ATTORNEY GENERAL ton, Pennsylvania (6-8-94) The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. (6-8-94) The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (8-10-94) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 335 16.—Continued The applicant has assets of $758.3 million; the tors and considerations relating to the convenience target has assets of $19.8 million. The parties and needs of the community are consistent with operate in the same market. The banking factors approval. and considerations relating to the convenience and needs of the community are consistent with Crestar Bank, Richmond, Virginia to merge with approval. Second National Federal Savings Association, Salisbury, Maryland United Bank of Philadelphia, Philadelphia, Pennsylvania to acquire assets and liabilities of SUMMARY REPORT BY THE ATTORNEY GENERAL Request for report dispensed with as authorized by the West Girard branch of Central Pennsylthe Bank Merger Act. vania Savings Association, FA, Shamokin, Pennsylvania BASIS FOR APPROVAL BY THE FEDERAL RESERVE (9-16-94) SUMMARY REPORT BY THE ATTORNEY GENERAL The applicant has assets of $12.1 billion; the target (8-16-94) has assets of $15.6 million. The RTC has recom- The proposed transaction would not be signifimended immediate action by the Federal Reserve cantly adverse to competition. to prevent the probable failure of the target. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (8-22-94) Premier Bank & Trust, Elyria, Ohio to acquire The applicant has assets of $92.1 million; the assets and liabilities of the Avon and Sheffield target has assets of $7.5 million. The parties oper- Lake branches of Charter One Bank, FSB, ate in the same market. The banking factors and considerations relating to the convenience Cleveland, Ohio and needs of the community are consistent with SUMMARY REPORT BY THE ATTORNEY GENERAL approval. (8-16-94) The proposed transaction would not be signifi- Minden Bank & Trust Company, Minden, cantly adverse to competition. Louisiana to acquire assets and liabilities of the BASIS FOR APPROVAL BY THE FEDERAL RESERVE Minden branch of Oak Tree Federal Savings (9-19-94) Bank, New Orleans, Louisiana The applicant has assets of $495.8 million; the target has assets of $21.2 million. The parties SUMMARY REPORT BY THE ATTORNEY GENERAL Request for report dispensed with as authorized by operate in the same market. The banking factors the Bank Merger Act. and considerations relating to the convenience and needs of the community are consistent with BASIS FOR APPROVAL BY THE FEDERAL RESERVE approval. (8-29-94) The applicant has assets of $165.6 million; the target has assets of $5.7 million. The RTC has First Interstate Bank of California, Los Angerecommended immediate action by the Federal les, California to merge with Sacramento Sav- Reserve System to prevent the probable failure of ings Bank, Sacramento, California the target. SUMMARY REPORT BY THE ATTORNEY GENERAL (7-1-94) Bank of Fresno, Fresno, California to merge The proposed transaction would not be signifiwith Mineral King National Bank, Visalia, cantly adverse to competition. California BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (9-22-94) (9-21-94) The applicant has assets of $20.1 billion; the target The proposed transaction would not be signifi- has assets of $3.0 billion. The parties operate in cantly adverse to competition. the same market. The banking factors and considerations relating to the convenience and needs of BASIS FOR APPROVAL BY THE FEDERAL RESERVE the community are consistent with approval. (9-21-94) The applicant has assets of $775.9 million; the target has assets of $187.8 million. The parties do Barnett Bank of Palm Beach County, West no operate in the same market. The banking fac- Palm Beach, Florida to acquire assets and liabili- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

336 81st Annual Report, 1994 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1994—Continued ties of eight branches of Glendale Federal Bank, The proposed transaction would not be signifi- FSB, Glendale, California cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (7-1-94) (9-29-94) The proposed transaction would not be signifi- The applicant has assets of $2.0 billion; the target cantly adverse to competition. has assets of $34.0 million. The parties operate in the same market. The banking factors and consid- BASIS FOR APPROVAL BY THE FEDERAL RESERVE (9-29-94) erations relating to the convenience and needs of The applicant has assets of $2.8 billion; the target the community are consistent with approval. has assets of $413.0 million. The parties operate in the same market. The banking factors and consid- Barnett Bank of Tampa, Tampa, Florida to erations relating to the convenience and needs of acquire assets and liabilities of nine branches the community are consistent with approval. of Glendale Federal Bank, FSB, Glendale, California Barnett Bank of Pasco County, Port Richey, SUMMARY REPORT BY THE ATTORNEY GENERAL Florida to acquire assets and liabilities of two (7-1-94) branches of Glendale Federal Bank, FSB, Glen- The proposed transaction would not be signifidale, California cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (7-1-94) (9-29-94) The proposed transaction would not be signifi- The applicant has assets of $2.6 billion; the target cantly adverse to competition. has assets of $406.0 million. The parties operate in BASIS FOR APPROVAL BY THE FEDERAL RESERVE the same market. The banking factors and consid- (9-29-94) erations relating to the convenience and needs of The applicant has assets of $1.1 billion; the target the community are consistent with approval. has assets of $113.0 million. The parties operate in the same market. The banking factors and considerations relating to the convenience and needs of FCNB Bank, Frederick, Maryland to acquire the community are consistent with approval. the assets and liabilities o/the Damascus branch of Bank of Baltimore, Baltimore, Maryland Barnett Bank of Pinellas County, St. Peters- SUMMARY REPORT BY THE ATTORNEY GENERAL burg, Florida to acquire assets and liabilities of (9-21-94) six branches of Glendale Federal Bank, FSB, The proposed transaction would not be signifi- Glendale, California cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (7-1-94) (10-6-94) The proposed transaction would not be signifi- The applicant has assets of $608.1 million; the cantly adverse to competition. target has assets of $8.9 million. The parties operate in the same market. The banking factors BASIS FOR APPROVAL BY THE FEDERAL RESERVE and considerations relating to the convenience (9-29-94) and needs of the community are consistent with The applicant has assets of $3.2 billion; the target approval. has assets of $317.0 million. The parties operate in the same market. The banking factors and considerations relating to the convenience and needs of Manufacturers and Traders Trust Company, the community are consistent with approval. Buffalo, New York to acquire assets and liabilities of seven branches of Chemical Bank, Barnett Bank of Southwest Florida, Sarasota, New York, New York, located in Orange and Florida to acquire assets and liabilities of one Rockland counties branch of Glendale Federal Bank, FSB, Glen- SUMMARY REPORT BY THE ATTORNEY GENERAL dale, California (6-8-94) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (7-1-94) cantly adverse to competition. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 337 16.—Continued BASIS FOR APPROVAL BY THE FEDERAL RESERVE erations relating to the convenience and needs of (10-12-94) the community are consistent with approval. The applicant has assets of $8.9 billion; the target has assets of $163.8 million. The parties operate in First Bank North, Freeport, Illinois to acquire the same market. The banking factors and consid- the assets and liabilities of the DeKalb branch of erations relating to the convenience and needs of Home Federal Savings & Loan Association, of the community are consistent with approval. Elgin, Elgin, Illinois SUMMARY REPORT BY THE ATTORNEY GENERAL Manufacturers and Traders Trust Company, (8-30-94) Buffalo, New York to merge with Citizens Sav- The proposed transaction would not be signifiings and Loan Association, the successor by cantly adverse to competition. merger to Citizens Savings Bank, FSB, Ithaca, BASIS FOR APPROVAL BY THE FEDERAL RESERVE New York (11-7-94) SUMMARY REPORT BY THE ATTORNEY GENERAL The applicant has assets of $208.6 million; the (6-8-94) target has assets of $13.5 million. The parties do The proposed transaction would not be signifi- no operate in the same market. The banking faccantly adverse to competition. tors and considerations relating to the convenience and needs of the community are consistent with BASIS FOR APPROVAL BY THE FEDERAL RESERVE approval. (10-12-94) The applicant has assets of $8.9 billion; the target ValliWide Bank, Fresno, California to merge has assets of $449.0 million. The parties operate in with Bank One Fresno, National Association, the same market. The banking factors and consid- Fresno, California erations relating to the convenience and needs of the community are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (10-18-94) Commercial Bank of Florida, Miami, Florida to BASIS FOR APPROVAL BY THE FEDERAL RESERVE acquire the assets and liabilities of five Florida (11-14-94) branches of Cartaret Federal Savings Bank, The applicant has assets of $540.0 million; the Newark, New Jersey target has assets of $166.0 million. The parties compete in the same market. The banking factors SUMMARY REPORT BY THE ATTORNEY GENERAL Request for report dispensed with as authorized by and considerations relating to the convenience the Bank Merger Act. and needs of the community are consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (10-14-94) Banco Popular de Puerto Rico, Hato Rey, The applicant has assets of $258.0 million; the Puerto Rico to acquire the assets and liabilities of target has assets of $131.2 million. The RTC has the Ridge wood branch of The Chase Manhatrecommended immediate action by the Federal tan Bank, New York, New York Reserve System to prevent the probable failure of the target. SUMMARY REPORT BY THE ATTORNEY GENERAL (9-29-94) The proposed transaction would not be signifi- Fifth Third Bank, Cincinnati, Ohio to merge cantly adverse to competition. with Mutual Federal Savings Bank of Miamisburg, Miamisburg, Ohio BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11-22-94) SUMMARY REPORT BY THE ATTORNEY GENERAL The applicant has assets of $11.3 billion; the target (10-18-94) has assets of $26.0 million. The parties operate in The proposed transaction would not be signifithe same market. The banking factors and considcantly adverse to competition. erations relating to the convenience and needs of BASIS FOR APPROVAL BY THE FEDERAL RESERVE the community are consistent with approval. (10-28-94) The applicant has assets of $7.2 billion; the target Crestar Bank, Richmond, Virginia to merge with has assets of $86.1 million. The parties operate in Jefferson Savings and Loan Association, FA, the same market. The banking factors and consid- Warrenton, Virginia Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

338 81st Annual Report, 1994 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1994—Continued SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (10-18-94) (11-28-94) The proposed transaction would not be signifi- The applicant has assets of $140.7 million; the cantly adverse to competition. target has assets of $174.0 million. The parties operate in the same market. The banking factors BASIS FOR APPROVAL BY THE FEDERAL RESERVE and considerations relating to the convenience (11-23-94) and needs of the community are consistent with The applicant has assets of $12.2 billion; the target approval. has assets of $294.6 million. The parties operate in the same market. The banking factors and considerations relating to the convenience and needs of Humboldt Bank, Eureka, California to acquire the community are consistent with approval. assets and liabilities of three branches of U.S. Bank of California, Sacramento, California Integra Bank/North, Titusville, Pennsylvania SUMMARY REPORT BY THE ATTORNEY GENERAL to acquire the assets and liabilities of the Brad- (10-27-94) ford branch of Bucktail Bank & Trust Com- The proposed transaction would not be signifipany, Emporium, Pennsylvania cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11-23-94) (11-30-94) The proposed transaction would not be signifi- The applicant has assets of $136.0 million; the cantly adverse to competition. target has assets of $30.5 million. The parties operate in the same market. The banking factors BASIS FOR APPROVAL BY THE FEDERAL RESERVE and considerations relating to the convenience (11-23-94) and needs of the community are consistent with The applicant has assets of $2.8 billion; the target has assets of $5.2 million. The parties operate in approval. the same market. The banking factors and considerations relating to the convenience and needs of Integra Bank/Pittsburgh, Pittsburgh, Pennsylthe community are consistent with approval. vania to merge with Lincoln Savings Bank, Carnegie, Pennsylvania Chemung Canal Trust Company, Elmira, SUMMARY REPORT BY THE ATTORNEY GENERAL New York to merge with Owego National Bank, (9-21-94) Owego, New York The proposed transaction would not be significantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (11-3-94) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (12-2-94) cantly adverse to competition. The applicant has assets of $7.7 billion; the target has assets of $264 million. The parties operate in BASIS FOR APPROVAL BY THE FEDERAL RESERVE the same market. The banking factors and consid- (11-28-94) erations relating to the convenience and needs of The applicant has assets of $444.7 million; the the community are consistent with approval. target has assets of $39.1 million. The parties operate in the same market. The banking factors and considerations relating to the convenience First of America-West Michigan, Grand Rapand needs of the community are consistent with ids, Michigan to acquire assets and liabilities of approval. the Grand Rapids branch of Great Lakes Bancorp, FSB, Ann Arbor, Michigan First Security Bank, Fort Upton, Colorado to SUMMARY REPORT BY THE ATTORNEY GENERAL acquire assets and liabilities of seven Colorado (11-4-94) branches of World Savings & Loan Association, The proposed transaction would not be signifi- Oakland, California cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (10-18-94) (12-5-94) The proposed transaction would not be signifi- The applicant has assets of $1.2 billion; the target cantly adverse to competition. has assets of $11.9 million. The parties operate in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 339 16.—Continued the same market. The banking factors and consid- SUMMARY REPORT BY THE ATTORNEY GENERAL erations relating to the convenience and needs of (10-18-94 The proposed transaction would not be the community are consistent with approval. significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE Vail Bank, Vail, Colorado to acquire assets and (12-20-94) liabilities of the Vail branch of Colorado Com- The applicant has assets of $22.1 billion; the target munity First State Bank, Vail, Colorado has assets of $625.0 million. The parties do not SUMMARY REPORT BY THE ATTORNEY GENERAL operate in the same market. The banking factors (10-27-94) and considerations relating to the convenience The proposed transaction would not be signifi- and needs of the community are consistent with cantly adverse to competition. approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (12-7-94) Centura Bank, Rocky Mount, North Carolina The applicant has assets of $75.0 million; the to merge with Cleveland Interim Bank, the suctarget has assets of $6.0 million. The parties oper- cessor to Cleveland Federal Bank, a Savings ate in the same market. The banking factors Bank, Shelby, North Carolina and considerations relating to the convenience SUMMARY REPORT BY THE ATTORNEY GENERAL and needs of the community are consistent with (12-14-94) approval. The proposed transaction would not be significantly adverse to competition. Dakota County State Bank, Mendota Heights, Minnesota to merge with The Phalen Bank, BASIS FOR APPROVAL BY THE FEDERAL RESERVE St Paul, Minnesota (12-22-94) The applicant has assets of $4.2 billion; the target SUMMARY REPORT BY THE ATTORNEY GENERAL has assets of $87.9 million. The parties do not (12-14-94) operate in the same market. The banking factors The proposed transaction would not be signifiand considerations relating to the convenience cantly adverse to competition. and needs of the community are consistent with BASIS FOR APPROVAL BY THE FEDERAL RESERVE approval. (12-13-94) The applicant has assets of $46.0 million; the First Community Bank, Inc., Princeton, West target has assets of $14.2 million. The parties Virginia to merge with Ameribank, Inc., Welch, operate in the same market. The banking factors West Virginia and considerations relating to the convenience and needs of the community are consistent with SUMMARY REPORT BY THE ATTORNEY GENERAL approval. (11-23-94) The proposed transaction would not be signifi- Crestar Bank, Richmond, Virginia to merge with cantly adverse to competition. Independent Bank, Manassas, Virginia BASIS FOR APPROVAL BY THE FEDERAL RESERVE (12-22-94) SUMMARY REPORT BY THE ATTORNEY GENERAL (10-18-94) The applicant has assets of $693.7 million; the The proposed transaction would not be signifi- target has assets of $77.8 million. The parties do cantly adverse to competition. not operate in the same market. The banking factors and considerations relating to the convenience BASIS FOR APPROVAL BY THE FEDERAL RESERVE and needs of the community are consistent with (12-14-94) approval. The applicant has assets of $12.2 billion; the target has assets of $90.3 million. The parties operate in SouthTrust Bank of West Florida, St. Petersthe same market. The banking factors and considburg, Florida to merge with Plant State Bank, erations relating to the convenience and needs of Plant City, Florida the community are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL First Interstate Bank of California, Los Ange- (12-8-94) les, California to merge with Bank of A. Levy, The proposed transaction would not be signifi- Ventura, California cantly adverse to competition. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

340 81st Annual Report, 1994 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1994—Continued BASIS FOR APPROVAL BY THE FEDERAL RESERVE each case, the summary report by the Attorney (12-28-94) General indicates that the transaction would not The applicant has assets of $827.7 million; the have a significantly adverse effect on competition target has assets of $42.4 million. The parties because the proposed merger is essentially a coroperate in the same market. The banking factors porate reorganization. The Board of Governors, and considerations relating to the convenience the Federal Reserve Bank, or the Secretary of and needs of the community are consistent with the Board of Governors, whichever approved the approval. application, determined that the competitive effects of the proposed transaction, the financial Mergers Approved Involving Wholly Owned and managerial resources and prospects of the Subsidiaries of the Same Bank Holding banks concerned, and the convenience and needs Company of the community to be served were consistent with approval. The following transactions involve banks that are subsidiaries of the same bank holding company. In Assets Date of Institution' (millions approval of dollars) WesBanco Bank Wheeling, Wheeling, West Virginia 397 3-1-94 Merger WesBanco Bank Wellsburg, Inc., Wellsburg, West Virginia 55 Omnibank Southeast, Denver, Colorado 208 3-18-94 Merger Omnibank Denver, Denver, Colorado 22 Omnibank Leetsdale, Denver, Colorado 22 United Jersey Bank Hackensack, New Jersey 6,176 4-12-94 Merger United Jersey Bank-Central, South Brunswick, New Jersey 3,496 United Jersey Bank-South, NA, Cherry Hill, New Jersey 1,236 Centura Bank, Rocky Mount, North Carolina 3,937 4-19-94 Merger Mid-South Bank and Trust Company, Sanford, North Carolina 232 Wilmington Trust of Pennsylvania, West Chester, Pennsylvania 131 4-29-94 Merger Wilmington Trust Company (one branch only), Wilmington, Delaware 4,600 First State Bank of Taos, Taos, New Mexico 145 5-2-94 Merger First State Bank of Santa Fe, Santa Fe, New Mexico 23 Bank of Fresno, Fresno, California 526 5-23-94 Merger Merced Bank of Commerce, Merced, California 64 First Virginia Bank-Shenandoah Valley, Woodstock, Virginia 184 5-24-94 Merger First Virginia Bank of Augusta, Staunton, Virginia 86 First Virginia Bank-Planters, Bridgewater, Virginia 119 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 341 16.—Continued Assets Date of Institution' (millions approval of dollars) The Bank of Mid-Jersey, Bordentown, New Jersey 421 5-24-94 Merger Mount Holly State Bank, Mount Holly, New Jersey 127 Fleet Bank of New York, Albany, New York 9,607 6-1-94 Merger Fleet Bank, Melville, New York 2,795 M&I Marshall & Ilsley Bank, Milwaukee, Wisconsin 2,829 6-28-94 Merger Valley Bank Milwaukee, Milwaukee, Wisconsin 454 M&I Greater Milwaukee Bank, Milwaukee, Wisconsin 94 M&I Wauwatosa Bank, Wauwatosa, Wisconsin 257 Omnibank Southeast, Denver, Colorado 224 7-11-94 Merger Omnibank Arvada, Arvada, Colorado 50 Omnibank University Hills, Denver, Colorado 32 Sun Bank of Ocala, Ocala, Florida 525 7-18-94 Merger Sun Bank of Gainesville, Gainesville, Florida 185 Omnibank Southeast, Denver, Colorado 224 8-4-94 Merger Omnibank Arapahoe, Englewood, Colorado 21 Rocky Mountain Bank, Billings, Montana 24 9-6-94 Merger Powder River Bank, Broadus, Montana 24 Security State Bank, Harlem, Montana 19 Rocky Mount Bank of Plains, Plains, Montana 27 First State Bank of Stevensville, Stevensville, Montana 26 WhiteHall State Bank, Whitehall, Montana 15 Old Kent Bank, Elmhurst, Illinois 1,600 9-14-94 Merger Edgemark Bank-Lombard, Lombard, Illinois Merchandise National Bank, Chicago, Illinois Edgemark Bank-Rosemont, Rosemont, Illinois (combined assets) 289 First Community Bank, Inc., Princeton, West Virginia 452 9-14-94 Merger The Flat Top National Bank of Bluefield, Bluefield, West Virginia 184 Peoples Bank of Bluewell, Bluewell, West Virginia 45 First Federal Savings Bank, Bluefield, West Virginia 20 Barton County State Bank, Lamar, Missouri 49 9-23-94 Merger Citizens State Bank of Nevada, Nevada, Missouri 52 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

342 81st Annual Report, 1994 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors—Continued Assets Date of Institution] (millions approval of dollars) United Jersey Bank, Hackensack, New Jersey 11,754 9-30-94 Merger Valley Savings Bank, Closter, New Jersey 382 Capital City Bank (formerly Havana State Bank), Havana, Florida .. 29 10-25-94 Merger Capital City First National Bank, Tallahassee, Florida 361 Capital City Second National Bank, Tallahassee, Florida 51 City National Bank, Tallahassee, Florida 81 Industrial National Bank, Tallahassee, Florida 57 Gadsden National Bank, Quincy, Florida 38 First National Bank of Jefferson County, Monticello, Florida 24 Compass Bank, Pensacola, Florida 91 11-3-94 Merger Compass Bank, FSB Jacksonville, Florida 459 F&M Bank-Massanutten, Harrisonburg, Virginia 90 11-18-94 Merger F&M Bank-Broadway, Broadway, Virginia 64 Old Kent Bank, Grand Rapids, Michigan 4,500 11-21-94 Merger Old Kent Bank of Big Rapids, Big Rapids, Michigan Old Kent Bank of Cadillac, Cadillac, Michigan Old Kent Bank-Central, Owosso, Michigan Old Kent Bank-East, Brighton, Michigan Old Kent Bank of Gaylord, Gaylord, Michigan Old Kent Bank of Grand Haven, Grand Haven, Michigan Old Kent Bank-Grand Traverse, Traverse City, Michigan Old Kent Bank of Hillsdale, Hillsdale, Michigan Old Kent Bank of Holland, Holland, Michigan Old Kent Bank of Ludington, Ludington, Michigan Old Kent Bank of Petoskey, Petoskey, Michigan Old Kent Bank of St. Johns, St. Johns, Michigan Old Kent Bank-Southeast, Trenton, Michigan Old Kent Bank-Southwest, Kalamazoo, Michigan (combined assets). 3,900 Marine Midland Bank, Buffalo, New York 16,900 11-21-94 Merger Six New York, New York, branches of Hongkong Shanghai Banking Corporation 441 Integra Bank/South, Uniontown, Pennsylvania 2,400 12-2-94 Merger Branch of Integra Bank/Pittsburgh, Burgettstown, Pennsylvania 13 WesBanco Bank Wheeling, Wheeling, West Virginia 445 12-6-94 Merger WesBanco Bank Elm Grove, Elm Grove, West Virginia 155 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 343 16.—Continued Assets Date of Institution ' (millions approval of dollars) Westamerica Bank, San Rafael, California 1,675 12-8-94 Merger Pacific Valley National Bank, Modesto, California 171 United Jersey Bank, Hackensack, New Jersey 12,463 12-14-94 Merger Palisade Savings Bank, FSB, Ridgefield Park, New Jersey 324 1. Each proposed transaction was to be effected under include the acquisition of only certain assets and liabilithe charter of the first-named bank. The entries are in ties of the affiliated bank. chronological order of approval. Some transactions Mergers Approved Involving a Nonoperating 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 simply 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 summary report by the Attorney General indicates effects and that the financial factors and considerthat the transaction will merely combine an exist- ations relating to the convenience and needs of the ing bank with a nonoperating institution; in conse- community were consistent with approval. quence, and without regard to the acquisition of Assets Date of Institution' (millions of dollars)2 approval The Middleburg Bank, Middleburg, Virginia 1-5-94 Merger The Middleburg National Bank, Middleburg, Virginia 118 United Bank of Philadelphia, Philadelphia, Pennsylvania 77 5-4-94 Merger New Bank Philadelphia, Philadelphia, Pennsylvania Merchants Bank Vicksburg, Vicksburg, Mississippi 8-24-94 Merger Merchants Bank, NA, Vicksburg, Mississippi 171 New Pace American Bank Lawrenceville, Lawrenceville, Virginia ... 10-28-94 Merger Pace American Bank Lawrenceville, Lawrenceville, Virginia 58 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

346 81st Annual Report, 1994 Board of Governors of the Federal Reserve System December 31,1994 Members Term expires ALAN GREENSPAN, of New York, Chairman' January 31, 2006 ALAN S. BLINDER, of New Jersey, Vice Chairman ' January 31, 1996 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 JANET L. YELLEN, of California January 31, 2008 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 Lynn Fox, Deputy Congressional Liaison Maureen P. English, Assistant Director Bob Stahly Moore, Special Assistant Irene Shawn McNulty, Assistant Director to the Board Winthrop P. Hambley, Special Assistant ~ ^ o to the Board DIVISION OF BANKING SUPERVISION Diane E. Werneke, Special Assistant AND REGULATION to the Board Richard Spillenkothen, Director Stephen C. Schemering, Deputy Director LEGAL DIVISION Don E. Kline, Associate Director J. Virgil Mattingly, Jr., General Counsel William A. Ryback, Associate Director Scott G. Alvarez, Associate General Frederick M. Struble, Associate Director Counsel Herbert A. Biern, Deputy Associate Richard M. Ashton, Associate Director General Counsel Roger T. Cole, Deputy Associate Director Oliver Ireland, Associate General j es I. Garner, Deputy Associate Director am Coumel William C. Schneider, Jr., Project Director, Kathleen M. O'Day, Associate General National Information Center Counsel Howard A. Amer, Assistant Director Robert deV. Frierson, Assistant General Counsel G emld _A E_d ward. s? Jr A.s sista.n t _.Director ^ . . . . . „ , JTames D. Goetzinger, Assistant Director Kathenn e THT. AW17hUeatley, Assistant General , _ ° . o w TT T A Counsel Stephen M. Hoffman, Jr., Assistant Director OFFICE OF THE SECRETARY Laura M. Homer, Assistant Director William W. Wiles, Secretary James V- HouPt' Jr- Assistant Director Jennifer J. Johnson, Deputy Secretary Jack p- Jennings, Assistant Director Barbara R. Lowrey, Associate Secretary 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 June 24, 1998, respectively, Digitizedu fnoler sFs RthAeS seErvRic e of these members of the Board shall http://frasheavr.es ttelormuiinsafteedd .soorogn/e r. Federal Reserve Bank of St. Louis

Directories and Meetings 347 Board of Governors—Continued DIVISION OF INTERNATIONAL FINANCE OFFICE OF STAFF DIRECTOR Edwin M. Truman, Staff Director FOR MANAGEMENT Larry J. Promisel, Senior S. David Frost, Staff Director Associate Director Portia W. Thompson, Equal Employment Opportunity Programs Adviser Charles J. Siegman, Senior Associate Director Dale W. Henderson, Associate Director DIVISION OF HUMAN Donald B. Adams, Assistant Director RESOURCES MANAGEMENT Thomas A. Connors, Assistant Director David L. Shannon, Director Peter Hooper III, Assistant Director John R. Weis, Associate Director Karen H. Johnson, Assistant Director Anthony V. DiGioia, Assistant Director Catherine L. Mann, Assistant Director Joseph H. Hayes, Jr., Assistant Director Ralph W. Smith, Jr., Assistant Director Fred Horowitz, Assistant Director David H. Howard, Senior Adviser OFFICE OF THE CONTROLLER DIVISION OF RESEARCH George E. Livingston, Controller AND STATISTICS Stephen J. Clark, Assistant Controller Michael J. Prell, Director Darrell R. Pauley, Assistant Controller Edward C. Ettin, Deputy Director David J. Stockton, Deputy Director Martha Bethea, Associate Director DIVISION OF SUPPORT SERVICES Robert E. Frazier, Director William R. Jones, Associate Director George M. Lopez, Assistant Director Myron L. Kwast, Associate Director David L. Williams, Assistant Director Patrick M. Parkinson, Associate Director Thomas D. Simpson, Associate Director Lawrence Slifman, Associate Director DIVISION OF INFORMATION Martha S. Scanlon, Deputy RESOURCES MANAGEMENT Associate Director Stephen R. Malphrus, Director Peter A. Tinsley, Deputy Marianne M. Emerson, Assistant Director Associate Director Po Kyung Kim, Assistant Director Flint Brayton, Assistant Director Raymond H. Massey, Assistant Director David S. Jones, Assistant Director Edward T. Mulrenin, Assistant Director Stephen A. Rhoades, Assistant Director Day W. Radebaugh, Jr., Assistant Director Charles S. Struckmeyer, Assistant Director Elizabeth B. Riggs, Assistant Director Patricia White, Assistant Director Richard C. Stevens, Assistant Director Joyce K. Zickler, Assistant Director John J. Mingo, Senior Adviser DIVISION OF FEDERAL RESERVE BANK Glenn B. Canner, Adviser OPERATIONS AND PAYMENT SYSTEMS Clyde H. Farnsworth, Jr., Director DIVISION OF MONETARY AFFAIRS David L. Robinson, Deputy Director Donald L. Kohn, Director Louise L. Roseman, Associate 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 Vincent R. Reinhart, Assistant Director John H. Parrish, Assistant Director Normand R.V. Bernard, Special Assistant Florence M. Young, Assistant Director Digitized fort oF RthAeS BEoRa rd http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

348 81st Annual Report, 1994 Board of Governors—Continued OFFICE OF THE INSPECTOR GENERAL Brent L. Bowen, Inspector General Barry R. Snyder, Assistant Inspector Donald L. Robinson, Assistant Inspector General General Federal Open Market Committee December 31,1994 Members ALAN GREENSPAN, Chairman, Board of Governors WILLIAM J. McDONOUGH, Vice Chairman, President, Federal Reserve Bank of New York ALAN S. BLINDER, Board of Governors 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 EDWARD W. KELLEY, JR., Board of Governors JOHN P. LAWARE, Board of Governors LAWRENCE B. LINDSEY, Board of Governors ROBERT T. PARRY, President, Federal Reserve Bank of San Francisco SUSAN M. PHILLIPS, Board of Governors JANET L. YELLEN, Board of Governors Alternate Members THOMAS M. HOENIG, President, Federal Reserve Bank of Kansas City THOMAS C. MELZER, President, Federal Reserve Bank of St. Louis CATHY E. MlNEHAN, President, Federal Reserve Bank of Boston MICHAEL H. MOSKOW, President, Federal Reserve Bank of Chicago JAMES H. OLTMAN, First Vice President, Federal Reserve Bank of New York Officers DONALD L. KOHN, MARVIN S. GOODFRIEND, Secretary and Economist Associate Economist NORMAND R.V. BERNARD, DAVID E. LINDSEY, Deputy Secretary Associate Economist JOSEPH R. COYNE, FREDERICK S. MISHKIN, Assistant Secretary Associate Economist GARY P. GILLUM, LARRY J. PROMISEL, Assistant Secretary Associate Economist J. VIRGIL MATTINGLY, JR., CHARLES J. SIEGMAN, General Counsel Associate Economist ERNEST T. PATRIKIS, THOMAS D. SIMPSON, Deputy General Counsel Associate Economist MICHAEL J. PRELL, MARK S. SNIDERMAN, Economist Associate Economist EDWIN M. TRUMAN, DAVID J. STOCKTON, Economist Associate Economist JACK H. BEEBE, SHEILA E. TSCHINKEL, Associate Economist Associate Economist Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 349 Federal Open Market Committee—Continued JOAN E. LOVETT, Manager for Domestic Operations, System Open Market Account PETER R. FISHER, Manager for Foreign Operations, System Open Market Account During 1994 the Federal Open Market Com- Federal Open Market Committee Meetings mittee held ten meetings (see Minutes of in this REPORT.) Federal Advisory Council December 31,1994 Members District 1—MARSHALL N. CARTER, Chairman and Chief Executive Officer, State Street Bank and Trust Company, Boston, Massachusetts District 2—J. CARTER BACOT, Chairman and Chief Executive Officer, The Bank of New York, New York, New York District 3—ANTHONY P. TERRACCIANO, Chairman, President, and Chief Executive Officer, First Fidelity Bancorporation, Newark, New Jersey District 4—FRANK V. CAHOUET, Chairman, President, and Chief Executive Officer, Mellon Bank Corporation and Mellon Bank, N.A., Pittsburgh, Pennsylvania District 5—RICHARD G. TILGHMAN, Chairman and Chief Executive Officer, Crestar Financial Corporation, Richmond, Virginia District 6—CHARLES E. RICE, Chairman and Chief Executive Officer, Barnett Banks, Inc., Jacksonville, Florida 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 BankShares, Inc., Victoria, Texas District 12—RICHARD M. ROSENBERG, Chairman and Chief Executive Officer, Bank of America, San Francisco, California Officers RICHARD M. ROSENBERG, President EUGENE A. MILLER, Vice President HERBERT V. PROCHNOW, Secretary Emeritus JAMES E. ANNABLE, Co-Secretary WILLIAM J. KORSVIK, Co-Secretary Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

350 81st Annual Report, 1994 Federal Advisory Council—Continued Directors MARSHALL N. CARTER ANTHONY P. TERRACCIANO ANDREW B. CRAIG, III The Federal Advisory Council met on Feb- from each of the twelve Federal Reserve ruary 10-11, May 12-13, September 8-9, Districts, is required by law to meet in Washand November 3-4, 1994. The Board of ington at least four times each year and is Governors met with the council on Febru- authorized by the Federal Reserve Act to ary 11, May 13, September 9, and Novem- consult with, and advise, the Board on all ber 4, 1994. The council, which is composed matters within the jurisdiction of the Board, of one representative of the banking industry Consumer Advisory Council December 31,1994 Members BARRY A. ABBOTT, ESQ., Director, Howard, Rice, Nemerovski, Canady, Robertson, Falk & Rabkin, 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 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 S. BROOKS, Deputy Borough President, Office of the Bronx Borough President, Bronx, New York CATHY CLOUD, Enforcement Program Director, National Fair Housing Alliance, Washington, D.C. ALVIN J. COWANS, President and Chief Executive Officer, McCoy Federal Credit Union, Orlando, Florida MICHAEL D. EDWARDS, President, Prairie Security Bank, Yelm, Washington MICHAEL FERRY, Staff Attorney, Consumer Unit, Legal Services of Eastern Missouri, Inc., St. Louis, Missouri ELIZABETH G. FLORES, Senior Vice President and Community Reinvestment Officer, Laredo National Bank, Laredo, Texas NORMA L. FREIBERG, Community Activist, New Orleans, Louisiana LORI GAY, Executive Director, Los Angeles Neighborhood Housing Services, Los Angeles, California GARY S. HATTEM, Managing Director, Community Development Group, Bankers Trust Company, New York, New York 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 KATHARINE W. MCKEE, Associate Director, Center for Community Self-Help, Durham, North Carolina Digitized for FRASER EDMUND MIERZWINSKI, Consumer Advocate, U.S. Public Interest Research Group, http://fraser.stlouisfed.org/ Washington, D.C. Federal Reserve Bank of St. Louis

Directories and Meetings 351 Consumer Advisory Council—Continued ANNE B. SHLAY, Associate Director, Institute for Public Policy Studies, Temple University, Philadelphia, Pennsylvania JOHN V. SKINNER, President and Chief Executive Officer, Jewelers Financial Services, Inc., Irving, Texas REGINALD J. SMITH, President, United Missouri Mortgage Company, Kansas City, Missouri LOWELL N. SWANSON, President (Retired), United Finance Company, Portland, Oregon JOHN E. TAYLOR, President and Chief Executive Officer, The National Community Reinvestment Coalition, Washington, D.C. MICHAEL W. TIERNEY, Program Director, Local Initiatives Support Corporation, Washington, D.C. LORRAINE VANETTEN, Vice President and Community Lending Officer, Standard Federal Bank of Troy, Troy, Michigan GRACE W. WEINSTEIN, Financial Writer and Consultant, Englewood, New Jersey LILY K. YAO, President and Chief Executive Officer, Pioneer Federal Savings Bank, Honolulu, Hawaii ROBERT O. ZDENEK, Senior Program Officer, Annie E. Casey Foundation, Greenwich, Connecticut Officers JEAN POGGE, Chairman JAMES L. WEST, Vice Chairman Vice President, Development President, Jim West Deposits, South Shore Bank, Financial Group, Inc., Chicago, Illinois Tijeras, New Mexico 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 24, June 23, and November 3, 1994. 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 31,1994 Members MALCOLM E. COLLIER, Chairman and Chief Executive Officer, First Federal Savings Bank, Lake wood, Colorado WILLIAM A. COOPER, Chairman and Chief Executive Officer, TCF Bank Savings, fsb, 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 of the Board, First Federal Savings Bank, Sheridan, Wyoming KERRY KILLINGER, Chairman, President, and Chief Executive Officer, Washington Mutual Savings Bank, Seattle, Washington Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

352 81st Annual Report, 1994 Thrift Institutions Advisory Council—Continued 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, Downey Savings and Loan Association, Newport Beach, California STEPHEN D. TAYLOR, President and Chief Executive Officer, American Savings of Florida, F.S.B., Miami, Florida JOHN M. TIPPETS, President and Chief Executive Officer, American Airlines Employees Federal Credit Union, DFW Airport, Texas Officers BEATRICE D'AGOSTINO, President CHARLES JOHN KOCH, Vice President The members of the Thrift Institutions unions, savings and loan associations, and Advisory Council met with the Board of savings banks, consults with, and advises, Governors on January 28, June 3, and the Board on issues pertaining to the thrift December 16, 1994. The council, which industry and on various other matters within is composed of representatives from credit the Board's jurisdiction. Officers of Federal Reserve Banks and Branches December 31,1994 Chairman' President Vice President BANK or Branch Deputy Chairman First Vice President in charge of Branch BOSTON2 Jerome H. Grossman Cathy E. Minehan Warren B. Rudman Paul M. Connolly NEW YORK2 Maurice R. William J. McDonough Greenberg James H. Oltman David A. Hamburg Buffalo Joseph J. Castiglia Carl W. Turnipseed3 James M. Mead Edward G. Boehne PHILADELPHIA Donald J. Kennedy William H. Stone, Jr. A. William Reynolds Jerry L. Jordan CLEVELAND2 G. Watts Sandra Pianalto Humphrey, Jr. John N. Taylor, Jr. Charles A. Cerino3 Cincinnati Robert P. Bozzone Harold J. Swart3 Pittsburgh Henry J. Faison J. Alfred Broaddus, Jr. RICHMOND2 Claudine B. Malone Jimmie R. Monhollon Baltimore Rebecca Hahn Ronald B. Duncan3 Windsor Charlotte Harold D. Kingsmore Walter A. Varvel3 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 353 Officers of Federal Reserve Banks and Branches- Continued Chairman' President Vice President BANK or Branch Deputy Chairman First Vice President in charge of Branch ATLANTA Leo Benatar Robert P. Forrestal Donald E. Nelson3 Hugh M. Brown Jack Guynn Birmingham Shelton E. Allred Fred R. Herr3 Jacksonville Samuel H. Vickers James D. Hawkins3 Miami Dorothy C. Weaver James T. Curry HI Nashville Paula Lovell Melvyn K. Purcell New Orleans Jo Ann Slaydon Robert J. Musso CHICAGO2 Richard G. Cline Michael H. Moskow Robert M. Healey William C. Conrad Detroit J. Michael Moore Roby L. Sloan3 ST. LOUIS Robert H. Quenon Thomas C. Melzer John F. McDonnell James R. Bowen Little Rock Robert D. Nabholz, Jr. Karl W. Ashman Louisville Laura M. Douglas Howard Wells Memphis Sidney Wilson, Jr. John P. Baumgartner MINNEAPOLIS Gerald A. Gary H. Stern Rauenhorst Colleen K. Strand Jean D. Kinsey Helena Lane W. Basso John D. Johnson KANSAS CITY Burton A. Dole, Jr. Thomas M. Hoenig Herman Cain Richard K. Rasdall Denver Barbara B. Grogan Kent M.Scott3 Oklahoma City Ernest L. Holloway David J. France Sheila Griffin Harold L. Shewmaker Omaha DALLAS Cece Smith Robert D. McTeer, Jr. Roger R. Tony J. Salvaggio Hemminghaus El Paso Alvin T. Johnson Sammie C. Clay Houston Judy Ley Allen Robert Smith III3 San Antonio Erich Wendl James L. Stull3 SAN FRANCISCO James A. Vohs Robert T. Parry Judith M. Runstad Patrick K. Barron Los Angeles Anita Landecker John F. Moore3 Portland William A. Hilliard A. Kenneth Ridd Salt Lake City Gerald R. Sherratt Andrea P. Wolcott Seattle George F. Russell, Jr. Gordon R. G. Werkema3 NOTE. A current list of these officers appears each Oriskany, New York; Jericho, New York; East Ruthermonth in the Federal Reserve Bulletin. ford, New Jersey; Columbus, Ohio; Charleston, West 1. The Chairman of a Federal Reserve Bank serves, by Virginia; Culpeper, Virginia; Columbia, South Carolina; statute, as Federal Reserve Agent. Indianapolis, Indiana; Milwaukee, Wisconsin; and 2. Additional offices of these Banks are located at Des Moines, Iowa. Lewiston, Maine; Windsor Locks, Connecticut; Utica at 3. Senior Vice President. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

354 81st Annual Report, 1994 Conference of Chairmen Conference of First Vice Presidents The Chairmen of the Federal Reserve Banks are organized into the Conference of Chair- The Conference of First Vice Presidents of men, which meets to consider matters of the Federal Reserve Banks was organized in common interest and to consult with, and 1969 to meet periodically for the consideradvise, the Board of Governors. Such meet- ation of operations and other matters. ings, attended also by the Deputy Chairmen, James H. Oltman, First Vice President of were held in Washington on June 1 and 2, the Federal Reserve Bank of New York, and on December 1 and 2, 1994. served as Chairman of the Conference in The members of the Executive Commit- 1994, and Tony J. Salvaggio, First Vice tee of the Conference of Chairmen during President of the Federal Reserve Bank of 1994 were Burton A. Dole, Jr., Chairman; Dallas, served as its Vice Chairman. Ethan Jerome H. Grossman, Vice Chairman, and S. Harris, of the Federal Reserve Bank of James A. Vohs, member. New York, served as its Secretary, and On December 2, 1994, the Conference Joanna O. Kolson, of the Federal Reserve elected its Executive Committee for 1995, Bank of Dallas, served as its Assistant naming Jerome H. Grossman as Chairman, Secretary. Cece Smith as Vice Chairman, and A. Will- On October 11, 1994, the Conference iam Reynolds as the third member. elected Tony J. Salvaggio, First Vice President of the Federal Reserve Bank of Dallas, as its Chairman for 1995, and Sandra Conference of Presidents Pianalto, First Vice President of the Federal Reserve Bank of Cleveland, as its Vice The presidents of the Federal Reserve Banks Chairman. are organized into the Conference of Presidents, which meets periodically to consider matters of common interest and to consult Directors with, and advise, the Board of Governors. Robert T. Parry, President of the Federal The following list of directors of Federal Reserve Bank of San Francisco, served as Reserve Banks and Branches shows for each Chairman of the Conference in 1994. On director the class of directorship, the direc- March 8, 1994, the Conference elected tor's principal organizational affiliation, and Robert T. McTeer, President of the Federal the date the director's term expires. Each Reserve Bank of Dallas, as its Vice Chair- Federal Reserve Bank has a nine-member man, to replace Richard F. Syron, who board: three Class A and three Class B direcresigned as President of the Federal Reserve tors, who are elected by the stockholding Bank of Boston. Robert L. Feinberg, of the member banks, and three Class C directors, Federal Reserve Bank of San Francisco, who are appointed by the Board of Goverserved as its Secretary. Rena DeSisto, of the nors of the Federal Reserve System. Federal Reserve Bank of Boston, served as Class A directors represent the stockholdits Assistant Secretary until March 31, 1994, ing member banks in each Federal Reserve and Helen Holcomb, of the Federal Reserve District. Class B and Class C directors repre- Bank of Dallas, served as its Assistant Secre- sent the public and are chosen with due, but tary for the balance of the year. not exclusive, consideration to the interests On November 17, 1994, the Conference of agriculture, commerce, industry, services, elected Robert T. McTeer, President of the labor, and consumers; they may not be offi- Federal Reserve Bank of Dallas, as its Chair- cers, directors, or employees of any bank or man for 1995-96 and Thomas M. Hoenig, bank holding company. In addition, Class C President of the Federal Reserve Bank of directors may not be stockholders of any Kansas City, as its Vice Chairman. bank or bank holding company. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 355 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. Annually, the Board of Governors designates one of the Class C directors as chairman of the board and Federal Reserve Agent of each District Bank, and it designates another Class C director as deputy chairman. Federal Reserve Branches have either five or seven directors, a majority of whom are appointed by the parent Federal Reserve Bank; the others are appointed by the Board of Governors. One of the directors appointed by the Board is designated annually as chairman of the board of that Branch in a manner prescribed by the parent Federal Reserve Bank. For the name of the chairman and deputy chairman of the board of directors of each Reserve Bank and of the chairman of each Branch, see the preceding table, "Officers of Federal Reserve Banks, Branches, and Offices." Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

356 81st Annual Report, 1994 Term expires Dec. 31 DISTRICT 1—BOSTON Class A 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 David A. Page President and Chief Executive Officer, 1996 Ocean National Bank of Kennebunk, Kennebunk, Maine Class B Edward H. Ladd Chairman, Standish, Ayer and Wood, Inc., 1994 Boston, Massachusetts Joan T. Bok Chairman, New England Electric System, 1995 Westborough, Massachusetts Stephen L. Brown Chairman and Chief Executive Officer, 1996 John Hancock Mutual Life Insurance Company, Boston, Massachusetts Class C 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 John E. Flynn Executive Director, The Quality Connection, 1996 East Dennis, Massachusetts DISTRICT 2—NEW YORK Class A 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 Officer, 1995 Manufacturers and Traders Trust Company, Buffalo, New York J. William Johnson Chairman and Chief Executive Officer, 1996 The First National Bank of Long Island, Glen Head, New York Class B 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 Inc., 1995 New York, New York Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 357 Term expires Dec. 31 DISTRICT 2, Class B— Continued Sandra Feldman President, United Federation of Teachers, 1996 New York, New York Class C 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., Rochester, New York 1995 David A. Hamburg President, Carnegie Corporation of New York, 1996 New York, New York BUFFALO BRANCH Appointed by the Federal Reserve Bank Richard H. Popp Operating Partner, Southview Farm, 1994 Castile, New York Charles M. Mitschow Chairman, Western Region, Marine Midland Bank, 1994 Buffalo, New York George W. Hamlin IV President and Chief Executive Officer, The 1995 Canandaigua National Bank and Trust Company, Canandaigua, New York Louise C. Woerner Chairman and Chief Executive Officer, HCR, 1996 Rochester, New York Appointed by the Board of Governors Donald L. Rust Plant Manager, Tonawanda Engine Plant, 1994 General Motors Powertrain Division, General Motors Corporation, Buffalo, New York F. C. Richardson President, Buffalo State College, Buffalo, New York 1995 Joseph J. Castiglia President and Chief Executive Officer, Pratt & 1996 Lambert, Inc., Buffalo, New York DISTRICT 3—PHILADELPHIA Class A 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 Terry K. Dunkle Chairman, United States National Bank, 1996 Johnstown, Pennsylvania Class B James A. Hagen Chairman, President, and Chief Executive 1994 Officer, Consolidated Rail Corporation (CONRAIL), Philadelphia, Pennsylvania Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

358 81st Annual Report, 1994 Term expires Dec. 31 DISTRICT 3, Class B— Continued David W. Huggins President and Chief Executive Officer, RMS 1995 Technologies, Inc., Marlton, New Jersey J. Richard Jones President and Chief Executive Officer, 1996 Jackson-Cross Company, Philadelphia, Pennsylvania Class C 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 Joan Carter President and Chief Operating Officer, United 1996 Medical Corporation, Haddonfield, New Jersey DISTRICT 4—CLEVELAND Class A 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 Alfred C. Leist Chairman, President, and Chief Executive Officer, 1996 The Apple Creek Banking Company, Apple Creek, Ohio Class B 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 Thomas M. Nies President, Cincom Systems, Inc., Cincinnati, Ohio 1996 Class C G. Watts Humphrey, Jr. President, GWH Holdings, Inc., 1994 Pittsburgh, Pennsylvania A. William Reynolds Chairman, GenCorp, Fairlawn, Ohio 1995 Robert Y. Farrington Executive Secretary-Treasurer, Ohio State 1996 Building and Construction Trades Council, Columbus, Ohio CINCINNATI BRANCH Appointed by the Federal Reserve Bank Marvin J. Stammen President and Chief Executive Officer, Second 1994 National Bank, Greenville, Ohio Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 359 Term expires Dec. 31 DISTRICT 4, CINCINNATI BRANCH Appointed by the Federal Reserve Bank—Continued Jerry W. Carey President and Chief Executive Officer, 1995 Union National Bank and Trust Company, Barbourville, Kentucky C. Wayne Shumate Chairman and Chief Executive Officer, 1996 Kentucky Textiles, Inc., Paris, Kentucky Phillip R. Cox President, Cox Financial Corporation, 1996 Cincinnati, Ohio Appointed by the Board of Governors Raymond A. Bradbury Chairman (Retired), Martin County Coal 1994 Corporation, Inez, Kentucky Eleanor Hicks President, M.I.N.D.S. International, Cincinnati, Ohio 1995 John N. Taylor, Jr Chairman and Chief Executive Officer, 1996 Kurz-Kasch, Inc., Dayton, Ohio PITTSBURGH BRANCH Appointed by the Federal Reserve Bank David S. Dahlmann President and Chief Executive Officer, 1994 Southwest National Corporation, Greensburg, Pennsylvania Helen J. Clark Chairman, President, and Chief Executive Officer, 1995 Apollo Trust Company, Apollo, Pennsylvania Randall L. C. Russell President and Chief Executive Officer, Ranbar 1996 Technology, Inc., Glenshaw, Pennsylvania Wesley W. von Schack Chairman, President, and Chief Executive Officer, 1996 DQE, Pittsburgh, Pennsylvania Appointed by the Board of Governors Jack B. Piatt Chairman, Millcraft Industries, Inc., 1994 Washington, Pennsylvania Robert P. Bozzone Vice Chairman of the Board, Allegheny Ludlum 1995 Corporation, Pittsburgh, Pennsylvania Sandra L. Phillips Executive Director, Pittsburgh Partnership for 1996 Neighborhood Development, Pittsburgh, Pennsylvania DISTRICT 5—RICHMOND Class A 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

360 81st Annual Report, 1994 Term expires Dec. 31 DISCTICT 5, Class A—Continued Robert M. Freeman Chairman and Chief Executive Officer, Signet 1996 Banking Corporation, Richmond, Virginia Class B L. Newton Thomas, Jr Senior Vice President (Retired), ITT/Carbon 1994 Industries, Inc., Charleston, West Virginia R. E. Atkinson, Jr Chairman, Dilmar Oil Company, Inc., Florence, 1995 South Carolina Paul A. DelaCourt Chairman, The North Carolina Enterprise 1996 Corporation, Raleigh, North Carolina Class C Claudine B. Malone President, Financial & Management Consulting, Inc., 1994 McLean, Virginia Henry J. Faison Chairman, Faison Associates, Charlotte, 1995 North Carolina Stephen Brobeck Executive Director, Consumer Federation of 1996 America, Washington, D.C. BALTIMORE BRANCH Appointed by the Federal Reserve Bank F. Levi Ruark Chairman, President, and Chief Executive Officer, 1994 The National Bank of Cambridge, Cambridge, Maryland Thomas J. Hughes President and Chief Executive Officer, Navy 1994 Federal Credit Union, Vienna, Virginia Richard M. Adams Chairman and Chief Executive Officer, United 1995 Bankshares, Inc., Parkersburg, West Virginia Morton I. Rapoport President and Chief Executive Officer, 1996 University of Maryland Medical System, Baltimore, Maryland Appointed by the Board of Governors 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 Michael R. Watson President, Association of Maryland Pilots, 1996 Baltimore, Maryland CHARLOTTE BRANCH Appointed by the Federal Reserve Bank Dorothy H. Aranda President, Dohara Associates, Inc., 1994 Hilton Head Island, South Carolina Vacancy 1994 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 361 Term expires Dec. 31 DISTRICT 5, CHARLOTTE BRANCH Appointed by the Federal Reserve Bank—Continued David B. Jordan Vice Chairman, Chief Executive Officer, and 1995 Director, Security Capital Bancorp, Salisbury, North Carolina Jim M. Cherry, Jr President and Chief Executive Officer, 1996 Williamsburg First National Bank, Kingstree, South Carolina Appointed by the Board of Governors Harold D. Kingsmore President and Chief Executive Officer, Graniteville 1994 Company, Graniteville, South Carolina James O. Roberson President and Chief Executive Officer, Research 1995 Triangle Foundation of North Carolina, Research Triangle Park, North Carolina Dennis D. Lowery Chief Executive Officer and Chairman, 1996 Continental Ltd., Charlotte, North Carolina DISTRICT 6—ATLANTA Class A D. Paul Jones, Jr Chairman and Chief Executive Officer, Compass 1994 Bane shares, Inc., Birmingham, Alabama W. H. Swain Chairman, First National Bank, Oneida, Tennessee 1995 James B. Williams Chairman and Chief Executive Officer, SunTrust 1996 Banks, Inc., Atlanta, Georgia Class B Victoria B. Jackson President, DSS/ProDiesel, Nashville, Tennessee 1994 J. Thomas Holton Chairman and President, Sherman International 1995 Corporation, Birmingham, Alabama Andre M. Rubenstein Chairman and Chief Executive Officer, Rubenstein 1996 Brothers, Inc., New Orleans, Louisiana Class C Hugh M. Brown President and Chief Executive Officer, BAMSI, Inc., 1994 Titusville, Florida Leo Benatar Chairman and President, Engraph, Inc., 1995 Atlanta, Georgia Daniel E. Sweat, Jr. Program Director, The Atlanta Project, 1996 Atlanta, Georgia BIRMINGHAM BRANCH Appointed by the Federal Reserve Bank Marlin D. Moore, Jr. Chairman, Pritchett-Moore, Inc., 1994 Tuscaloosa, Alabama Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

362 81st Annual Report, 1994 Term expires Dec. 31 DISTRICT 6, BIRMINGHAM BRANCH Appointed by the Federal Reserve Bank—Continued Columbus Sanders President, Consolidated Industries, Inc., 1994 Huntsville, Alabama J. Stephen Nelson Chairman and Chief Executive Officer, First 1995 National Bank, Brewton, Alabama Julian W. Banton Chairman, President, and Chief Executive 1996 Officer, SouthTrust Bank of Alabama, N.A., Birmingham, Alabama Appointed by the Board of Governors Shelton E. Allred Chairman, President, and Chief Executive Officer, 1994 Frit Incorporated, Ozark, Alabama Patricia B. Compton President, Patco, Inc., Georgiana, Alabama 1995 Donald E. Boomershine President, Better Business Bureau of Central 1996 Alabama, Inc., Birmingham, Alabama JACKSONVILLE BRANCH Appointed by the Federal Reserve Bank 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 Royce B. Walden Vice President, Ward Bradford & Company, 1995 Orlando, Florida William G. Smith, Jr. President, Capital City First National Bank, 1996 Tallahassee, Florida Appointed by the Board of Governors Samuel H. Vickers Chairman, President, and Chief Executive Officer, 1994 Design Containers, Inc., Jacksonville, Florida Lana Jane Lewis-Brent President, Paul Brent Designer, Inc., 1995 Panama City, Florida Joan Dial Ruffier General Partner, Sunshine Cafes, Orlando, Florida 1996 MIAMI BRANCH Appointed by the Federal Reserve Bank Roberto G. Blanco Vice Chairman and Chief Financial Officer, 1994 Republic National Bank of Miami, Miami, Florida E. Anthony Newton President and Chief Executive Officer, Island 1995 National Bank and Trust Company, Palm Beach, Florida Pat L. Tornillo, Jr. Executive Vice President, United Teachers of Dade, 1996 Miami, Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 363 Term expires Dec. 31 DISTRICT 6, MIAMI BRANCH Appointed by the Federal Reserve Bank—Continued Steven C. Shimp President, O-A-K/Florida, Inc., 1996 Fort Myers, Florida Appointed by the Board of Governors Dorothy C. Weaver President, Intercap Investments, Inc., 1994 Coral Gables, Florida R. Kirk Landon Chairman and Chief Executive Officer, 1995 American Bankers Insurance Group, Miami, Florida Michael T. Wilson President, Vinegar Bend Farms, Inc., 1996 Belle Glade, Florida NASHVILLE BRANCH Appointed by the Federal Reserve Bank William Baxter Lee III Chairman and President, Southeast Services 1994 Corporation, Knoxville, Tennessee John E. Seward, Jr President and Chief Executive Officer, The Paty 1994 Company, Piney Flats, Tennessee James D. Harris President and Chief Executive Officer, Brentwood 1995 National Bank, Brentwood, Tennessee Williams E. Arant, Jr President and Chief Executive Officer, First 1996 National Bank of Knoxville, Knoxville, Tennessee Appointed by the Board of Governors James E. Dalton, Jr President and Chief Executive Officer, Quorum 1994 Health Group, Inc., Brentwood, Tennessee Vacancy 1995 Paula Lovell President, Lovell Communications, Inc., 1996 Nashville, Tennessee NEW ORLEANS BRANCH Appointed by the Federal Reserve Bank Kay L. Nelson Managing Director, Nelson Capital Corporation, 1994 New Orleans, Louisiana Angus R. Cooper Chairman and Chief Executive Officer, 1994 Cooper/T. Smith Corporation, Mobile, Alabama Thomas E. Walker President and Chief Executive Officer, Bank of 1995 Forest, Forest, Mississippi Howard C. Gaines Chairman and Chief Executive Officer, First National 1996 Bank of Commerce, New Orleans, Louisiana Appointed by the Board of Governors Jo Ann Slaydon President, Slaydon Consultants and Insight 1994 Productions and Advertising, Baton Rouge, Louisiana Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

364 81st Annual Report, 1994 Term expires Dec. 31 DISTRICT 6, NEW ORLEANS BRANCH Appointed by the Board of Governors—Continued Lucimarian Tolliver Roberts President, Mississippi Coast Coliseum 1995 Commission, Pass Christian, Mississippi Victor Bussie President, Louisiana AFL-CIO, 1996 Baton Rouge, Louisiana DISTRICT 7—CHICAGO Class A Stefan S. Anderson Chairman, President, and Chief Executive Officer, 1994 First Merchants Bank, N.A. and First Merchants Corporation, Muncie, Indiana Arnold C. Schultz Chairman and President, Grundy National Bank, 1995 Grundy Center, Iowa David W. Fox Chairman and Chief Executive Officer, The 1996 Northern Trust Corporation and The Northern Trust Company, Chicago, Illinois Class B 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 A. Charlene Sullivan Associate Professor of Management, Krannert 1996 Graduate School of Management, Purdue University, West Lafayette, Indiana Class C Duane L. Burnham Chairman and Chief Executive Officer, Abbott 1994 Laboratories, Abbott Park, Illinois Richard G. Cline Chairman and Chief Executive Officer, NICOR Inc., 1995 Naperville, Illinois Robert M. Healey Member, Illinois State Labor Relations Board, 1996 Chicago, Illinois DETROIT BRANCH Appointed by the Federal Reser\>e Bank Charles R. Weeks Chairman, President, and Chief Executive Officer, 1994 Citizens Banking Corporation, Flint, Michigan Norman F. Rodgers President and Chief Executive Officer, Hillsdale 1995 County National Bank, Hillsdale, Michigan William E. Odom Chairman and Chief Executive Officer, Ford 1996 Motor Credit Company, Dearborn, Michigan Charles E. Allen President and Chief Executive Officer, Graimark 1996 Realty Advisors, Inc., Detroit, Michigan Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 365 Term expires Dec. 31 DISTRICT 7, DETROIT BRANCH—Continued Appointed by the Board of Governors 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 Florine Mark President and Chief Executive Officer, The WW 1996 Group, Farmington Hills, Michigan DISTRICT 8—ST. LOUIS Class A Henry G. River, Jr. President and Chief Executive Officer, 1994 First National Bank in Pinckneyville, Pinckneyville, Illinois Douglas M. Lester Chairman and President, Trans Financial 1995 Bancorp, Inc., Bowling Green, Kentucky W. D. Glover Chairman and Chief Executive Officer, 1996 First National Bank of Eastern Arkansas, Forrest City, Arkansas Class B Sandra B. Sanderson-Chesnut President and Chief Executive Officer, 1994 Sanderson Plumbing Products, Inc., Columbus, Mississippi Richard E. Bell President and Chief Executive Officer, Riceland 1995 Foods, Inc., Stuttgart, Arkansas Warren R. Lee President, W. R. Lee & Associates, Inc., 1996 Louisville, Kentucky Class C Robert H. Quenon Mining Consultant, St. Louis, Missouri 1994 John F. McDonnell Chairman, McDonnell Douglas Corporation, 1995 St. Louis, Missouri Veo Peoples, Jr Partner, Peoples, Hale & Coleman, 1996 St. Louis, Missouri LITTLE ROCK BRANCH Appointed by the Federal Reserve Bank Barnett Grace Chairman and Chief Executive Officer, First 1994 Commercial Bank, N.A., Little Rock, Arkansas Mark A. Shelton III President, M. A. Shelton Farming Company, 1995 Altheimer, Arkansas Mahlon A. Martin President, Winthrop Rockefeller Foundation, 1996 Little Rock, Arkansas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

366 81st Annual Report, 1994 Term expires Dec. 31 DISTRICT 8, LITTLE ROCK BRANCH Appointed by the Federal Reserve Bank—Continued James V. Kelley Chairman, President, and Chief Executive 1996 Officer, First United Bancshares, Inc., El Dorado, Arkansas Appointed by the Board of Governors Robert Daniel Nabholz, Jr. ..Chief Executive Officer, Nabholz Construction 1994 Corporation, Conway, Arkansas Betta Carney President and Chief Executive Officer, World 1995 Wide Travel Service, Inc., Little Rock, Arkansas Janet M. Jones President, The Janet Jones Company, 1996 Little Rock, Arkansas LOUISVILLE BRANCH Appointed by the Federal Reserve Bank Thomas E. Spragens, Jr. President, The Farmers National Bank, 1994 Lebanon, Kentucky Malcolm B. Chancey, Jr. ....Chairman and Chief Executive Officer, Liberty 1995 National Bank & Trust Company of Kentucky, Louisville, Kentucky Robert M. Hall Owner, East Fork Growers, Seymour, Indiana 1996 Charles D. Storms President and Chief Executive Officer, 1996 Red Spot Paint and Varnish Company, Inc., Evansville, Indiana Appointed by the Board of Governors Laura M. Douglas Legal Director, Louisville & Jefferson County 1994 Metropolitan Sewer District, Louisville, Kentucky Daniel L. Ash Consultant, Wenz-Neely Company, 1995 Louisville, Kentucky John A. Williams Chairman and Chief Executive Officer, 1996 Computer Services, Inc., Paducah, Kentucky MEMPHIS BRANCH Appointed by the Federal Reserve Bank 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 Katie S. Winchester President and Director, First Citizens National 1996 Bank, Dyersburg, Tennessee Benjamin W. Rawlins, Jr. ...Chairman and Chief Executive Officer, Union 1996 Planters Corporation, Memphis, Tennessee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 367 Term expires Dec. 31 DISTRICT 8, MEMPHIS BRANCH—Continued Appointed by the Board of Governors Sidney Wilson, Jr Owner, Wilson Automotive Group Inc., 1994 Jackson, Tennessee John V. Myers President, Better Business Bureau, 1995 Memphis, Tennessee Woods E. Eastland President and Chief Executive Officer, 1996 Staple Cotton Cooperative Association, Greenwood, Mississippi DISTRICT 9—MINNEAPOLIS Class A William W. Strausburg 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, MFC 1995 First National Bank, Houghton, Michigan Jerry B. Melby President, First National Bank, 1996 Bowbells, North Dakota Class B Duane E. Dingmann President, Trubilt Auto Body, Inc., 1994 Eau Claire, Wisconsin Dennis W. Johnson President, TMI Systems Design Corporation 1995 and TMI Transport Corporation, Dickinson, North Dakota Clarence D. Mortenson President, M/C Professional Associates, Inc., 1996 Pierre, South Dakota Class C 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 David A. Koch Chairman and Chief Executive Officer, Graco, Inc., 1996 Golden Valley, Minnesota HELENA BRANCH Appointed by the Federal Reserve Bank Nancy M. Stephenson Executive Director, Neighborhood Housing 1994 Services, Great Falls, Montana Donald E. Olsson, Jr. President, Ronan State Bank, Ronan, Montana 1994 Ronald D. Scott President and Chief Executive Officer, The First 1995 State Bank of Malta, Malta, Montana Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

368 81st Annual Report, 1994 Term expires Dec. 31 DISTRICT 9, HELENA BRANCH—Continued Appointed by the Board of Governors Lane W. Basso President, Deaconess Medical Center of 1994 Billings, Inc., Billings, Montana Matthew J. Quinn President, Carroll College, Helena, Montana 1995 DISTRICT 10—KANSAS CITY Class A Charles I. Moyer Chairman and Chief Executive Officer, 1994 First National Bank of Phillipsburg, Phillipsburg, Kansas William L. McQuillan President, Chief Executive Officer, and Director, 1995 City National Bank, Greeley, Nebraska Lawrence W. Menefee Chairman and Chief Executive Officer, Union 1996 Colony Bank, Greeley, Colorado Class B Frank J. Yaklich, Jr. Deputy Project Manager, Manufacturing 1994 Sciences Corporation, Denver, Colorado W. W. Allen Chairman and Chief Executive Officer, Phillips 1995 Petroleum Company, Bartlesville, Oklahoma Charles W. Nichols Managing Partner, Davison & Sons Cattle 1996 Company, Arnett, Oklahoma Class C 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 Colleen D. Hernandez Executive Director, Kansas City Neighborhood 1996 Alliance, Kansas City, Missouri DENVER BRANCH Appointed by the Federal Reserve Bank Richard I. Ledbetter President and Chief Executive Officer, 1994 First National Bank of Farmington, Farmington, New Mexico Clifford E. Kirk President and Chief Executive Officer, First 1994 National Bank of Gillette, Gillette, Wyoming Peter I. Wold Partner, Wold Oil & Gas Company, 1995 Casper, Wyoming Peter R. Decker President, Peter R. Decker & Associates, 1996 Denver, Colorado Appointed by the Board of Governors Barbara B. Grogan President, Western Industrial Contractors, Inc., 1994 Denver, Colorado Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 369 Term expires Dec. 31 DISTRICT 10, DENVER BRANCH Appointed by the Board of Governors—Continued Sandra K. Woods Vice President, Environmental Health and 1995 Safety Systems, Coors Brewing Company, Golden, Colorado Floyd R. Correa President, Correa Enterprises, Inc., 1996 Albuquerque, New Mexico OKLAHOMA CITY BRANCH Appointed by the Federal Reserve Bank John Wm. Laisle President and Chief Executive Officer, MidFirst 1994 Bank, SSB, Oklahoma City, Oklahoma C. Kendric Fergeson Chairman and Chief Executive Officer, The 1995 National Bank of Commerce, Altus, Oklahoma Dennis M. Mitchell President, Citizens Bank of Ardmore, 1995 Ardmore, Oklahoma Gordona Duca President and Owner, Gordona Duca, Inc., 1996 Realtors, Tulsa, Oklahoma Appointed by the Board of Governors Victor R. Schock President and Chief Executive Officer, Credit 1994 Counseling Centers, Tulsa, Oklahoma Barry L. Eller Sr. Vice President and General Manager, 1995 MerCruiser, Stillwater, Oklahoma Ernest L. Holloway President, Langston University, Langston, Oklahoma 1996 OMAHA BRANCH Appointed by the Federal Reserve Bank Donald A. Leu President and Chief Executive Officer, Consumer 1994 Credit Counseling Service, Omaha, Nebraska Thomas H. Olson Chairman, First National Bank, Sidney, Nebraska 1994 Robert L. Peterson Chairman, President, and Chief Executive Officer, 1995 IBP, Inc., Dakota City, Nebraska Bruce R. Lauritzen President, First National Bank of Omaha, 1996 Omaha, Nebraska Appointed by the Board of Governors A. 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 LeRoy W. Thorn President, T-L Irrigation Company, 1996 Hastings, Nebraska Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

370 81st Annual Report, 1994 Term expires Dec. 31 DISTRICT 11—DALLAS Class A Vacancy 1994 Eugene M. Phillips Chairman and President, The First National 1995 Bank of Panhandle, Panhandle, Texas Gayle M. Earls President and Chief Executive Officer, Texas 1996 Independent Bank, Dallas, Texas Class B 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 J. B. Cooper, Jr Farmer, Roscoe, Texas 1996 Class C Cece Smith General Partner, Phillips-Smith Specialty Retail 1994 Group, Dallas, Texas Roger R. Hemminghaus Chairman, President, and Chief Executive Officer, 1995 Diamond Shamrock, Inc., San Antonio, Texas James A. Martin Second General Vice President, International 1996 Association of Bridge, Structural, and Ornamental Iron Workers, Austin, Texas EL PASO BRANCH Appointed by the Federal Reserve Bank Hugo Bustamante, Jr. Owner and Chief Executive Officer, CarLube, Inc. 1994 and ProntoLube, Inc., El Paso, Texas Wayne Merritt Chairman and President, Texas National Bank 1995 of Midland, Midland, Texas Ben H. Haines, Jr. President and Chief Operating Officer, 1996 First National Bank of Dona Ana County, Las Cruces, New Mexico Veronica K. Callaghan Vice President and Principal, KASCO Ventures, 1996 Inc., El Paso, Texas Appointed by the Board of Governors Alvin T. Johnson President, Management Assistance Corporation 1994 of America, El Paso, Texas W. Thomas Beard III President, Leoncita Cattle Company, Alpine, Texas 1995 Patricia Z. Holland-Branch ..President and Director of Design, PZH Contract 1996 Design, Inc., El Paso, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 371 Term expires Dec. 31 DISTRICT 11, DALLAS—Continued HOUSTON BRANCH Appointed by the Federal Reserve Bank Tieman H. Dippel, Jr Chairman and President, Brenham Bancshares, Inc., 1994 Brenham, Texas J. Michael Solar Managing Partner, Solar & Fernandes, L.L.P., 1995 Houston, Texas Walter E. Johnson President and Chief Executive Officer, 1996 Southwest Bank of Texas, Houston, Texas Judith B. Craven President, United Way of the Texas Gulf Coast, 1996 Houston, Texas Appointed by the Board of Governors Isaac H. Kempner III Chairman, Imperial Holly Corporation, 1994 Sugar Land, Texas Judy Ley Allen Partner and Administrator, Allen Investments, 1995 Houston, Texas Robert C. McNair Chairman and Chief Executive Officer, Cogen 1996 Technologies, Inc., Houston, Texas SAN ANTONIO BRANCH Appointed by the Federal Reserve Bank 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 Juliet V. Garcia President, University of Texas at Brownsville, 1996 Brownsville, Texas Douglas G. Macdonald President, South Texas National Bank, 1996 Laredo, Texas Appointed by the Board of Governors H. B. Zachry, Jr Chairman and Chief Executive Officer, 1994 H. B. Zachry Company, San Antonio, Texas Carol L. Thompson President, The Thompson Group, Austin, Texas 1995 Erich Wendl President and Chief Executive Officer, Maverick 1996 Markets, Inc., Corpus Christi, Texas DISTRICT 12—SAN FRANCISCO Class A William E. B. Siart President, First Interstate Bancorp, 1994 Los Angeles, California Carl J. Schmitt Chairman and Chief Executive Officer, 1995 University Bank & Trust Company, Palo Alto, California Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

372 81st Annual Report, 1994 Term expires Dec. 31 DISTRICT 12, Class A— Continued Richard L. Mount Chairman, President, and Chief Executive Officer, 1996 Saratoga Bancorp, Saratoga, California Class B William L. Tooley Chairman, Tooley & Company, Investment 1994 Builders, Los Angeles, California E. Kay Stepp Principal and Owner, Executive Solutions, 1995 Portland, Oregon Gary G. Michael Chairman and Chief Executive Officer, 1996 Albertson's, Inc., Boise, Idaho Class C Judith M. Runstad Partner, Foster Pepper & Shefelman, 1994 Seattle, Washington Cynthia A. Parker Executive Director, Anchorage Neighborhood 1995 Housing Services, Inc., Anchorage, Alaska James A. Vohs Chairman and Chief Executive Officer (Retired), 1996 Kaiser Foundation Health Plan, Inc. and Kaiser Foundation Hospitals, Oakland, California Los ANGELES BRANCH Appointed by the Federal Reserve Bank William S. Randall President, Southwest Region, First Interstate Bank, 1994 Phoenix, Arizona Antonia Hernandez President and General Counsel, Mexican 1994 American Legal Defense and Educational Fund, Los Angeles, California Steven R. Sensenbach President and Chief Executive Officer, Vineyard 1995 National Bank, Rancho Cucamonga, California Thomas L. Stevens, Jr. President, Los Angeles Trade-Technical College, 1996 Los Angeles, California Appointed by the Board of Governors David L. Moore President, Western Growers Association, 1994 Newport Beach, California Anne L. Evans Chairman, Evans Hotels, San Diego, California 1995 Anita Landecker Western Regional Vice President, 1996 Local Initiatives Support Corporation, Los Angeles, California PORTLAND BRANCH Appointed by the Federal Reserve Bank Stuart H. Compton Chairman, Pioneer Trust Bank, N.A., Salem, Oregon 1994 Elizabeth K. Johnson President, TransWestern, Inc., Scappoose, Oregon 1995 Cecil W. Drinkward President and Chief Executive Officer, Hoffman 1996 Construction Company, Portland, Oregon Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 373 Term expires Dec. 31 DISTRICT 12, PORTLAND BRANCH Appointed by the Federal Reserve Bank—Continued Gerry B. Cameron Chairman and Chief Executive Officer, 1996 U.S. Bancorp, Portland, Oregon Appointed by the Board of Governors William A. Hilliard Editor (Retired), The Oregonian, Portland, Oregon 1994 Carol A. Whipple Owner/Manager, Rocking C Ranch, Elkton, Oregon 1995 Ross R. Runkel Professor of Law, Willamette University, 1996 Salem, Oregon SALT LAKE CITY BRANCH Appointed by the Federal Reserve Bank June M. Morris Chief Executive Officer, Morris Air Corporation, 1994 Salt Lake City, Utah Roy C. Nelson President, Bank of Utah, Ogden, Utah 1995 Daniel R. Nelson Chairman and Chief Executive Officer, 1996 West One Bancorp, Boise, Idaho Nancy Mortensen Vice President - Marketing, ZCMI, 1996 Salt Lake City, Utah Appointed by the Board of Governors Gerald R. Sherratt President, Southern Utah University, 1994 Cedar City, Utah Richard E. Davis President and Chief Executive Officer, 1995 Salt Lake Convention & Visitors Bureau, Salt Lake City, Utah Constance G. Hogland Executive Director, Boise Neighborhood 1996 Housing Services, Inc., Boise, Idaho SEATTLE BRANCH Appointed by the Federal Reserve Bank Thomas E. Cleveland Chairman, Enterprise Bank, Bellevue, Washington 1994 Constance L. Proctor Partner, Alston, Courtnage, MacAulay & Proctor, 1995 Seattle, Washington Tomio Moriguchi President, Uwajimaya, Inc., Seattle, Washington 1996 John V. Rindlaub Chairman and Chief Executive Officer, Seafirst 1996 Corporation, Seattle, Washington Appointed by the Board of Governors William R. Wiley Senior Vice President, Science & Technology 1994 Policy, Battelle Memorial Institute, Richland, Washington Emilie A. Adams President and Chief Executive Officer, Better 1995 Business Bureau Foundation, Seattle, Washington George F. Russell, Jr Chairman, Frank Russell Company, 1996 Tacoma, Washington Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

374 81st Annual Report, 1994 Maps of the Federal Reserve System i 9 "1 BOSTON MINNEAPOLIS 1I 2 • 7 o • NEW YORK CHICAGO • • OM PHILADELPHIA 12 CLEVELAND 10 4 S • SANFRANCISCO KANSAS CITY • ST. LOUIS RICHMOND 8 5 6 • 11 • ATLANTA DALLAS ALASKA HAWAII LEGEND Both pages Facing page • Federal Reserve Bank city • Federal Reserve Branch city • Board of Governors of the Federal — Branch Boundary Reserve System, Washington, D.C. NOTE The Federal Reserve officially identifies Bank serves the Commonwealth of Districts by number and by Reserve Puerto Rico and the U.S. Virgin Islands; Bank city (shown on both pages) as well the San Francisco Bank serves Amerias by letter (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 1994. 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 375 1-A 2-B 3-C 4-D 5-E ME Pittsburgh • ' ^ 1 •Cincinnati •Charlotte Buffalo NJ NY CT R] BOSTON NEW YORK PHILADELPHIA CLEVELAND RICHMOND 6-F 7-G 3-H •Nashville Birmingham Jl \ I Detroit* J Louisville __/ "-• TN Jacksonville • Memphis y Little) New Orleans Rock/ Miami* ATLANTA CHICAGO ST. LOUIS 9-1 • Helena MINNEAPOLIS 10-J 12-L Omaha* CO \ MO Denver KS Oklahoma City Portland KANSAS CITY 11-K Salt Lake City •Los Angeles San Antonio DALLAS SAN FRANCISCO Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

376 Index Agriculture, U.S. Department of, Packers Bank Secrecy Act Advisory Council, 269 and Stockyards Administration, 225 Banking offices, changes in number, 330 American Financial Skylink, 214 Banking structure, regulation of, 263-67 Annunzio-Wylie Anti-Money Laundering Banking supervision and regulation Act of 1992, 104 Derivatives activities, 260 Assets and liabilities Enforcement actions, 251, 268 Banks, by class, 323 Examinations, 252 Board of Governors, 292 International activities, 254, 267 Federal Reserve Banks, 302 National Information Center, 260 Association of Graduates of the Military Real estate appraisals, 260 Academy, 241 Retail sales of nondeposit investment ATM transactions, fraud prevention, 274 products, 259 Automated clearinghouses, 280 Scope of responsibilities, 250-56 Staff training, 261 Bank examiners, training, 223 Structured notes, guidance on, 259 Bank Export Services Act, 268 Supervisory policy, 256 Bank for International Settlements, 41 U.S. banking structure, 263 Bank Holding Company Act, banking Bankruptcy Amendments of 1994, 247 structure regulation, 264 Banks Bank Holding Company Performance Assets and liabilities, by class of bank, Report, 254 323 Bank holding companies Banking offices, changes in number, 330 Applications, 227 Number, by class of bank, 323 Delegation, 266 Barnett Banks, Inc., 228 Timely processing. 265 Basle Accord, 258 Banking structure, supervision, 263 Basle Committee on Banking Regulation Change in regulatory restrictions on bank and Supervisory Practices, 256 products, 273 Board of Governors {See also Federal Community development investment, Open Market Committee and Federal 217 Reserve System) Interstate banking, 237 Investments in bank premises, policy Banking supervision and regulation, statement, 101 249-71 Riegle-Neal Interstate Banking and Compliance examinations, 223 Branching Efficiency Act of 1994, Consumer and community affairs, 237 213-32 Risk-based capital guidelines, Equal opportunity, rules regarding, 107 supervisory policy, 101, 102, 257 Federal Reserve Banks, 277-90 Stock repurchases, 267 Federal Reserve decisions, public notice, Supervision and regulation of, 250, 251 265 Bank Links, FRB New York, publication, Financial statements, 291 219 Legislation affecting, 237-47 Bank Merger Act Litigation, 233-35 Bank mergers, interstate, 237 Members and officers, 345 Banking structure regulation, 264 Policy actions, record of, 99-113 Mergers and consolidations, 331 Recommendations from other agencies, Bank Secrecy Act, 269 232 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 377 Board of Governors—Continued Community Reinvestment Forum, FRB Regulatory simplification, 273-75 Cleveland, publication, 219 Salaries, 293 Compliance Testimony and legislative Consumer leasing, 226 recommendations, 231 Consumer regulations, reports from other Book-entry securities, 281 agencies, 224 Bureau of Engraving and Printing, 282 Examinations of banks, 223 Business spending and investment, 11, 13, Expedited Funds Availability Act, 227 30,51-54,76-78 Fair lending laws, 216 Comptroller of the Currency, Office of the, California, Orange County, bankruptcy, 24 226 Call Reports, 101, 263 Condition statements of Federal Reserve Capital accounts Banks, 300-305 Banks, by class, 318 Conferences of chairmen, presidents, and Federal Reserve Banks, 301, 302, 304 vice presidents of Federal Reserve Cash flows, Board of Governors, statement, Banks, 353 294 Consolidated Farm and Rural Development Centralized accounting systems, Federal Act, 240 Reserve Banks, 277 Consumer Advisory Council, 230, 349 Chairmen, presidents, and vice presidents Consumer and community affairs, 213-32 of Federal Reserve Banks Bank and bank holding company Conferences, 354 applications, 227 List, 352 Community development, 217 Salaries of presidents, 309 Community Reinvestment Act reform, Change in Bank Control Act, banking 213 structure, regulation, and supervision, Complaints, 228 265 Compliance examinations, 223 Check clearing and collection, 278 Consumer Advisory Council, 230 Policy statement to amend Regulation J, Electronic Fund Trasfer Act, 222 103 Fair lending activities, 213 Volume of operations, table, 319 HMDA data and fair lending, 214 Closing the Gap: A Guide to Equal Regulatory matters, 219 Opportunity Lending, video, 214 Testimony and legislative Commodities Futures Trading Commission, recommendations, 231 251 Consumer Leasing Act, Regulation M, Community Affairs and Housing amendment, 220 Committee, Consumer Advisory Consumer leasing, compliance, 226 Council, 231 Consumer price index, 20, 60, 84 Community affairs seminars, 214 Consumer spending in 1994, 8 Community Development and Financial Core Proficiency Examination, 262 Institutions Act of 1994, 241 Country transfer risk, risk-based capital Community development investment, 217 Community Improvements, FRB standards, 258 Philadelphia, publication, 218 Credit markets in 1994, monetary policy, Community Reinvestment Act 29-34, 65, 89 Bank and bank holding company Credit Process: A Guide for Small Business applications, 227 Owners, FRB New York, publication, Compliance, 226 218 Deposit production via interstate Credit Practices Rule (Regulation AA), 227 banking, 239 Currency and coin, 282 Reform, 213 Currency and Foreign Transactions Training programs, 218 Reporting Act of 1970, 269 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

378 81st Annual Report, 1994 Deferred tax assets, requirements, Employment in 1994, 16 risk-based capital standards, 257 Empowerment Zones/Enterprise Deposit use in interstate branching, 239 Communities, seminar, 218 Depository Institutions Disaster Relief Act Equal Credit Opportunity Act, 221, 224 of 1992, 102, 260 Equal opportunity, Board rules regarding, Depository Institutions Disaster Relief Act 107 of 1993, amendment to Regulation Z, Examinations, inspections, regulations, and 220 audits Depository institutions, reserves and related Consumer affairs compliance, 223 items, 324 Federal Reserve Banks, 282 Deposits Federal Reserve supervisory Banks, by class, 323 responsibilities, 250 Direct, services, 222 Interstate banking, 239 Federal Reserve Banks, 302, 324 Specialized Derivatives activities and transactions, 258, Electronic data processing, 252 260, 263 Fiduciary activities, 252 Direct deposit services, 222 Government securities dealers and Directors, Federal Reserve Banks and brokers, 252 Branches, list, 353 Municipal securities dealers and Directory of Bank Holding Company clearing agencies, 253 Community Development Securities subsidiaries, 253 Corporations, publication, 217 Transfer agents, supervision, 253 Discount rate, 25-29, 110-13, 320 U.S. offices of foreign banks, charges for Discrimination in lending, policy statement, inspections, 254 109 Expedited Funds Availability Act, Dividends, Federal Reserve Banks, 312, compliance, 227 314 Export Trading Company Act Amendments Earnings of Federal Reserve Banks (See of 1988, 268 also Federal Reserve Banks), 283, 310 Export trading companies, 268 Economy Business, 11-14 Fair lending activities, 213 Developments in other countries, 35 Federal Advisory Council, 348 Government spending, 15 Federal agency securities Household, 8-11 Federal Reserve Bank holdings and Labor markets, 16-20 earnings, 302, 324 Overview of 1994, 3-22 Federal Reserve open market Performance, 1993 and 1994, 48, 74 transactions, 306 Price developments, 20-22 Repurchase agreements, 301, 302, 306, Projections, 46, 72 308 Edge Act corporations and agreement Federal Deposit Insurance Corporation, corporations, 268 225, 226 Electronic benefit transfer programs, Federal Deposit Insurance Corporation amendments to Regulation E, 219 Improvement Act of 1991, 223, 251 Electronic data processing, supervision, 252 Federal Financial Institutions Examination Electronic Federal Tax Deposit System, Council, 213, 215, 217, 224-27, 263 282 Federal funds rate, 25-29 Electronic fund transfers Federal Home Loan Bank of ATM transactions, fraud prevention, 274 San Francisco, 218 EFT Act, economic effects, 222 Federal Open Market Account (See Federal Fedwire, 279 Open Market Committee) Policy statements, 100 Federal Open Market Committee Regulation E, amendment, 219 Authorizations and directives, 115-20 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 379 Federal Open Market Federal Reserve Banks—Continued Committee—Continued District Banks—Continued Federal Open Market Account, 115, 306 Philadelphia, Community Examinations, 282 Improvements, publication, 218 Meetings, minutes of, 115-212 Richmond, Community affairs Members and officers, list, 347 programs, 214 Federal Reserve Banks, 277-90 San Francisco Assessments for expenses of Board of Bank premises, 284 Governors, 312, 314 Community affairs programs, 214 Bank premises, 300, 302, 318 Disaster relief seminar, 218 Branches Dividends paid, 312, 315, 317 Bank premises, 318 Examinations, inspections, regulations, Capital accounts, 301, 302 and audits, 250, 282 Interest rates, 110-113, 320 Chairmen, presidents, and vice presidents International activities, 254 of Federal Reserve Banks Loans and securities, 300, 302, 308, 310, Conferences, 354 324, 326, 328 List, 352 Officers and employees Salaries of presidents, 309 List of officers, 352 Condition statement, 300-305 Number and salaries, 309 Deposits, 301, 302 Operations, volume, 319 Directors, list, 353 Payments to the U.S. Treasury, 315, 317 District Banks Premises, 284 Atlanta Presidents and first vice presidents, 309, Community affairs programs, 214 352 Community partnership seminar, 218 Priced services, 278-82, 285-90, 324 Boston Salaries, 309 Community affairs programs, 214 Specialized examinations, 252-54 Empowerment Zones/Enterprise Surveillance and monitoring, 254 Communities, seminar, 218 Federal Reserve notes Chicago Condition statement data, 301, 302-305 Community affairs programs, 214 Cost of issuance and redemption, 295, Financing exports seminar, 218 312 Cleveland Federal Reserve System (See also Board of Bank premises, 284 Governors) Community Reinvestment Forum, Fees, Federal Reserve services to publication, 219 depository institutions, 278-82, Residential Housing and Mortgage 285-90, 310, 324 Credit Project, 214 Automated clearinghouse, 280 Dallas, Community affairs programs, Book-entry securities, 281 214 Check clearing and collection, 278 Kansas City Currency and coin, 282 Bank premises, 284 Financial statements, pro forma, Community affairs programs, 214 285-90 Minneapolis Fiscal agency services, 281 Bank premises, 284 Float-related, 282 Community affairs programs, 214 Funds transfer, 279 New York Net settlement, 279, 280 Bank Links, publication, 219 Noncash collection, 281 Bank premises, 284 Pricing of, 310 Credit Process: A Guide for Small Private-sector adjustment factor, 278 Business Owners, publication, Securities, U.S., 281 218 Volume of services, table, 279 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

380 81st Annual Report, 1994 Federal Reserve System—Continued Germany, economy in 1994, 37 Loans to executive officers, 271 Glendate Federal Bank, FSB, 228 Map, 374 Gold certificate accounts of Reserve Banks Membership, 271 and gold stock, 302, 326, 328 Security and loan holdings, 284 Government securities, 252, 274 Staff training, 261 Government Securities Act of 1986, 252, Staff, technical assistance to member 275 banks, 256 Government spending, 15, 53, 78-82 Supervision and regulation, Group of Ten, 36, 256 responsibilities, 250, 256-63 Federal spending, 15, 53, 78-82 Hearings, rules of practice, 107 Federal Trade Commission, 225, 226 Home Mortgage Disclosure Act Fednet, 277 Data disclosure requirements, 214-17 Fedwire, policy statements, 108, 110 Policy statement, 99 Fees {See Federal Reserve System: Fees) Regulation C, amendments regarding Fiduciary activities, supervision, 252 mortgage data requirements, 219 Financial Accounting Standards Board, Home Ownership and Equity Protection Statements of Financial Accounting Act of 1994,242 Standards Household spending, 8, 30, 48-51, 74-76 No. 87, Employers' Accounting for Housing and Urban Development, U.S. Pensions, 289, 310 Department of, 218, 229 No. 106, Employers' Accounting for Postretirement Benefits Other than Income and expenses Pensions, 290 Board of Governors, 293 No. 114, Accounting by Creditors for Federal Reserve Banks, 283, 310 Impairment of a Loan, 263 Income growth during 1994, 9 No. 115, Collateralized Mortgage Industrial production, 12 Obligations, 263 Integrated accounting system, Federal Financial Action Task Force, 269 Reserve Banks, 277 Financial markets, relation to monetary Interest rate risk, capital standards, 258 policy, 23 Interest rates, Federal Reserve Banks, Financial statements 25-29, 110-13,320 Board of Governors, 291 Internal rate of return formula, Regulation Pro forma, Federal Reserve priced DD, proposal, 221 services, 285-90 International Banking Act of 1978, 239, Fiscal agency services, 281 255 Float, 282 International activities, 35-41, 55, 267 Foreign bank representative offices, Divestiture and cessation plans, policy supervision of, 255 statement, 103 Foreign banking organizations Edge Act corporations and agreement Compliance examinations, 223 corporations, 254 Examination manual, 256 Foreign-office operations of U.S. banking U.S. operations of, 255 organizations, 254 Foreign currencies Interstate branching laws, 239 Federal Reserve income on, 310 Trade deficit, 35 Operations and transactions, 40, 94 Transactions, 38 Foreign economies during 1994, 36 U.S. activities of foreign banks, 254, Foreign exchange and investments, 41, 255, 263 55-58, 92, 268 International Monetary Fund, 38 Funds transfers {See also Federal Reserve Interpretations of regulations, 221 System: Fees and Regulations: E), Interstate banking, 237 310,319 Interstate branching, 239 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 381 Investments Litigation involving the Board of Business, 1994, 11, 13, 76-78 Governors—Continued Federal Reserve Banks, 300, 302 Other actions—Continued Public welfare, 102 Duces Tecum, Subpeona, 234, 235 State member banks, 323 Federal Reserve System, subpoena, 234 Japan, economy in 1994, 36 Jackson, 235 Justice, U.S. Department of, 225, 266 Kubany, 235 Richardson, 235 Kennedy, Robert F, Memorial, 241 Scott, 235 King, Martin Luther, Jr., Center for Zemel, 234 Nonviolent Social Change, 218 Review of Board actions National Title Resource Agency, 233 Labor markets, 16, 58-60, 82-84 Scott, 233 Legislation enacted, 237-46 Loan America Financial Corporation, 228 Bankruptcy Amendments of 1994, 247 Loans Community Development and Financial Banks, by class, 323 Institutions Act of 1994, 241 Federal Reserve Banks Home Ownership and Equity Protection Depository institutions, 300, 302, 310, Act of 1994, 242 326, 328 Money Laundering Suppression Act of Holdings and income, 300, 302, 326, 1994, 246 328 National Flood Insurance Reform Act of Interest rates, 320 1994, 247 Volume of operations, 319 Paperwork reduction and regulatory improvement, 244 Margin requirements, 322 Riegle Community Development and Member banks Regulatory Improvement Act of Assets and liabilities, 323 1994, 241 Banking offices, changes in number, 330 Riegle-Neal Interstate Banking and Number, 323 Branching Efficiency Act of 1994, Reserve requirements, 321 237^1 Members Forum, Consumer Advisory Small Business Loan Securitization and Council, 231 Secondary Market Enhancement Act Mexico of 1994, 243 Bank of, reciprocal currency agreement Lending in Indian Country—Cultural and with, 41,211 Legal Issues, seminar, 214 Economic developments, 35, 38 Litigation involving the Board of Monetary aggregates, growth in 1994, 3, Governors Financial Institutions Supervisory Act 24, 31-34 Cavallari, 234 Monetary policy CBC, Inc., 233 Credit markets, 29-31, 89 DLG Financial Corp., 234 Developments in 1993, 62-69 First National Bank of Bellaire, 233 Developments in 1994, 86-95 MacCallum, 233 Financial markets relative to, 23-34 Oppegard, 233 Projections for 1994-95, 72 Pharaon, Ghaith R., 233 Reports to the Congress Other actions February 22, 1994, 43-69 Adams, 234 July 20, 1994, 69-95 Amann, 235 Money laundering Beckman, 235 Annunzio-Wylie Anti-Money Bennett, 235 Laundering Act of 1992, 104 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

382 81st Annual Report, 1994 Money laundering—Continued Policy actions and statements Money Laundering Suppression Act of Board of Governors, 99-113 1994, 246 Bank related and nonbanking Surveillance, 269 activities, 266 Mortgage loans to minorities, 214 Federal Open Market Committee Mortgage rates, 30 Domestic open market operations, Municipal securities dealers, supervision, authorization, 115, 123 253 Domestic policy directive of Mutual savings banks, 330 December 1993, 117 Foreign currency directive, 119, 126 National Association of Securities Foreign currency operations, Dealers, 259, 269 authorization, 117, 124 National Center for American Indian Foreign currency operations, Enterprise Development, 214 procedural instructions, 120, 126 National Community Service Trust, 241 Reciprocal currency agreement, Bank of National Credit Union Administration, 213, Mexico, 211 270 Statements and other actions, 108-10 National Flood Insurance Reform Act of Discrimination in lending, 109 1994, 247 Fedwire funds transfer format, 110 National Fund for the Botanic Garden, 241 Fedwire operating hours, 108, 110 National Information Center, 260 Netting systems, 107, 109 Netting arrangements Overnight overdrafts, 108 Bilateral, requirements, risk-based capital Payments system risk, 108, 109 standards, 257, 258 System foreign currency arrangements, Change in risk-based capital guidelines, 200 274 Price developments, 20, 60-62, 84-86 Contracts, 263 Priced services, Federal Reserve, 278-82, Policy statement, 107, 109 285-90, 310 Settlement, 279, 280 Private-sector adjustment factor, Federal New Dartmouth Bank, 228 Reserve priced services, 278 Noncash collection services, 281 Profit and loss, Federal Reserve Banks, 312 Nondeposit investment products, retail Publications sales, 259 "Securities Credit Transactions Nonmember depository institutions Handbook," Federal Reserve Assets and liabilities, 323 Regulatory Service, 271 Banking offices, changes in number, 330 Closing the Gap: A Guide to Equal Number, 323 Opportunity Lending, video, 214 Officers of Federal Reserve Banks and Directory of Bank Holding Company Branches, 351 Community Development Orange County, California, bankruptcy, 24 Corporations, 217 Organizing Committee for the Special List of Foreign Stocks, 270 Olympic Games, 240 Over-the-Counter Marginable Stocks, Overnight overdrafts, policy statement, 108 list, 270 Real estate appraisals, requirements, 260, Paperwork Reduction and Regulatory 273 Improvement, 244 Recourse issues, risk-based capital Payments system risk, policy statement, standards, 258 108, 109 Regulation of the U.S. banking structure Personal consumption, 8 Bank Holding Company Act, 264 Planning and control system, Federal Bank Merger Act, 264 Reserve Banks, 277 Change in Bank Control Act, 265 Point-of-sale system services, 222 Recommendations to the Board, 232 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 383 Regulations Regulations—Continued B, Equal Credit Opportunity Act Y, Bank Holding Companies and Change Compliance reports, 224 in Bank Control—Continued Proposed revisions, 221 Risk-based capital guidelines, 101, C, Home Mortgage Disclosure 102 Data requirements, 219 Z, Truth in Lending Release of data in machine-readable Compliance, 226 form, 99 Depository Institutions Disaster Relief D, Reserve Requirements of Depository Act of 1993, 220 Institutions Proposed revisions, 221 Change in balances subject to Riegle Community Development and requirements, 99 Regulatory Improvement Act of E, Electronic Fund Transfers 1994, 220 Automated teller machine AA, Unfair and Deceptive Acts or requirements, 100 Practices Compliance, 225 Credit Practices Rule, compliance, 227 Electronic benefit transfer programs, BB, Community Reinvestment Act 100, 219 Compliance, 226 H, Membership of State Banking CC, Expedited Funds Availability Act Organizations in the Federal Compliance, 227 Reserve System DD, Truth in Savings Investments in bank premises, 101 Decrease in number of accounts Risk-based capital guidelines, 101, 102 subject to, 106 J, Collection of Checks and Other Items Internal rate of return formula, 221 by Federal Reserve Banks and EE, Netting Eligibility for Financial Funds Transfers through Fedwire Institutions Uniform Commercial Code, Netting provisions, 107, 109 conformity with, 103 Regulatory burden, 106, 273-75 K, International Banking Operations Regulatory Reports Monitoring System, Divestiture and cessation plans, 103 254 M, Consumer Leasing Reserve requirements of depository Compliance, 226 institutions Consumer Leasing Act, 220 Change in transaction balances subject to O, Loans to Executive Officers, requirements, 99 Directors, and Principal Table, 321 Shareholders of Member Banks Reserves and related items, 324 Lending limits increased, 104 Residential Housing and Mortgage Credit S, Reimbursement to Financial Project, 214 Institutions for Assembling or Residential investment, 10 Providing Financial Records Resolving Legal Issues When Lending on Retention of records of transactions of Indian Reservations, seminar, 214 $3,000 or more, 104 Retail Sales of Nondeposit Investment T, Credit by Brokers and Dealers Products, supervisory policy, 259 Securities purchased from Riegle Community Development and broker-dealer, 104 Regulatory Improvement Act of 1994, Y, Bank Holding Companies and Change 101, 105, 220, 241-47, 251, 258, 266 in Bank Control Riegle-Neal Interstate Banking and Anti-tying provisions, 105, 273 Branching Efficiency Act of 1994, Regulatory burden reductions, 106 237-41, 237 Riegle Community Development and Risk-based capital guidelines Regulatory Improvement Act of Amendments, 101-03, 256 1994, 105 Change in netting arrangements, 274 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

384 81st Annual Report, 1994 Risk-based capital guidelines—Continued State member banks—Continued Proposals, 257-59 Loans to executive officers, 271 Supervisory policy, 256-59 Number, by class of bank, 323 Reports of Condition, 101 Safety and soundness, supervision of, 250 Risk-based capital guidelines, Salaries supervisory policy, 101, 102, 257 Board of Governors, 293 Safety and soundness supervision, 250 Federal Reserve Banks, 309 Supervison and regulation of, 250, 251 Same-day settlement, 278 State laws under the Riegle Act, 240 Secondary Market Enhancement Act of Structured notes, guidance, supervisory 1994, 243 policy, 259 Securities Supervision and regulation, Federal Available for sale, reporting Reserve System, responsibilities, 250 requirements, risk-based capital Supervisory Information System, 261 standards, 257 System to Estimate Examination Ratings Book-entry services, 281 (SEER), 254 Brokerage services, discount, 273 Broker-dealers, purchases from, 104 Testimony and legislative Credit, 322 recommendations, Board of Federal Reserve services, 281 Governors, 231 Government transactions, 274 Thrift Institutions Advisory Council, 350 Regulation, 263, 269 Thrift Supervision, Office of, 225, 226, 270 Subsidiaries, supervision, 252 Training Activities Manual, 249 Tax-exempt market, 24 Training, Federal Reserve System staff, U.S. government, holdings by Federal 223, 261 Reserve, 284, 300-308 Transfer agents, supervision, 253 Securities and Exchange Commission, 225, Transportation, U.S. Department of, 225 251,269 Treasury Direct, 281 Securities Exchange Act of 1934, 269 Treasury securities Bank holdings, by class of bank, 323 Shawmut National Corporation, 228 Federal Reserve Banks Silver coins, Reigle Act, 240 Holdings, 300, 302, 308, 324, 326, Small business 328 Small Business Administration, 225 Income, 310 Capital enhancement, 244 Open market transactions, 306 Loan securitization, 243 Repurchase agreements Special drawing rights, 300, 302, 324, 326, Tables, 300, 302, 306, 308, 324, 326, 328 328 State member banks Treasury, U.S. Department of the, 281 Applications, 227, 267 Truth in Lending Act, compliance, 226 Assets and liabilities, 323 Banking offices, change in number, 330 Unfair and Deceptive Acts or Practices Banking structure, supervision, 263 Compliance, 227 Community development investment, 217 Compliance Complaints, 228, 229, 230 Fair lending laws, 216 Examinations and audits, 223 Financial disclosure, 268 Foreign branches, 267 Investments in bank premises, policy statement, 101 FRB1/1-12500-O595C Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis